Malta needs a development bank to fill national financing gaps that commercial banks are not bridging, according to the Central Bank Governor.

Such a bank would provide long-term financing for public projects, make it easier for the Government to use underutilised assets in its possession and extend credit to sectors starved for liquidity, Josef Bonnici said.

Prof. Bonnici had already mooted the possibility of establishing such a bank a year ago but yesterday he cranked up the call and said the Central Bank would be submitting proposals to the Government.

He made the suggestion the pivotal focus of his annual address at the Institute of Financial Services dinner, suggesting the proposed bank could be backed by a Government guarantee and borrow money on the basis of the country’s sovereign rating.

He felt that “a promotional or development bank would be on similar lines as in many EU countries, particularly Germany, where such banks undertake very successfully, at a regional level, a role in promoting the economy and assisting the Government in social and environment projects”.

However, he cautioned that the authorities had to ensure any eventual bank adhered to EU state aid regulations and that its promotions did not distort market competition.

Prof. Bonnici’s calls for the creation of a development bank came at the tail end of his speech in which he voiced support for the EU-wide decoupling of deposit-taking banks from riskier investment banking and warned against increasing wages unless productivity also rose.

With the financial crisis forcing many countries to undergo internal devaluations, Prof. Bonnici cautioned that Malta risked finding itself on the back foot once the recovery got under way in earnest.

“Malta cannot afford to be oblivious to the impact these realities exert on its competitiveness,” Prof. Bonnici said, insisting that labour markets had to be flexible to be healthy.

He cited Slovenia as a case in point: the country had raised its minimum wage by 23 per cent in 2010, despite the International Monetary Fund’s warning to the contrary.

The warnings, he noted, had turned out to be well-placed.

“A major reason for Slovenia’s increased fiscal gap and loss of competitiveness can be laid at the door of this large increase in minimum wage.”

Cost-of-living increases should not be imposed by legislation but, instead, be part of collective agreements, he said.

Prof. Bonnici praised local banks for their steady, conser­vative practices, which had shielded them from the recession’s worst effects.

But he also argued that the banks should be more willing to borrow Eurosystem funds and re-lend them as low-cost credit to encourage private sector restructuring investment.

The banks should also be wary of falling into a trap of competing against one another on higher deposit interest rates, he said.

Higher returns meant higher risk and “the deposit guarantee scheme should not be exploited to hide this basic fact of finance”, Prof. Bonnici said.

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