Here again we are different

We’ve been here before and I hate to have to again trot out the same arguments. These pundits (Lawrence Zammit et al) who, every time that the European Central Bank lowers its operational interest rates, write and speak as if they want to order the Central Bank of Malta, and local banks, to do likewise are simply talking bad economics.

When some sectors need a leg-up then, yes, we should be seeing different pricing taking place

First we all go round making a very solid and correct case that Malta’s banking set-up is totally different to that of other European Union states.

Then, within the next fortnight, we expect that “banks servicing the local market need to adjust their interest rates downwards in reaction to the EB decision”.

What does it take us to see that on both the supply and the demand side the Maltese banking market is, again, different to what, in other countries, could be a logical follow-up to what the ECB may, at any point in time, be saying?

First of all, there is simply no legal requirement that our banks dance to the ECB’s tunes in everything.

There is no such thing as EU power that forces our banks to provide credit in ways identical to those practised by banks elsewhere.

Our banks are not exactly banging at ECB president Mario Draghi’s door to participate in his “promise to provide as much liquidity as eurozone banks need”.

They have no problem with accessing local deposits or selling their bond issues and even when they place their own (regulatory or otherwise) deposits with the CBM, they do not expect it to “start charging banks (them) for holding their money overnight”.

Then, on the demand side, which are the local economic sectors that are “starved of credit”?

There are no serious, empirical studies indicating any local banks’ denial of credit to individuals or companies that really deserve it.

I am sure that were such studies to be available they would very quickly have been pushed right up to under the CBM’s or the local banks’ noses and a valid case made.

(Has the Chamber of Small and Medium Enterprises – GRTU or the Chamber of Commerce, Enterprise and Industry, for example, ever undertaken such serious research?)

The serious studies that are available are about the fact that the interest rates applied by the local banks have never, ever really been the factor dissuading those entrepreneurs with good viable proposals from seeking, and effectively obtaining, the credit that they need.

Where Zammit might be right is in his recommending that local banks should possibly practise price discrimination among borrowers and would-be borrowers in perhaps a more national-economy-positive manner.

When some sectors need a leg-up (in the sense that investment and job-creation need boosting up) then, yes, we should be seeing different pricing taking place, always within the context of the usual safe-lending parameters.

But then, of course, this approach should also have its other side to it.

Lending rates to speculative building operators or environment (both natural and moral) deterioration activities should also be made less attractive.

That is the local reality and, again, it is simply different from that prevailing in the rest of the EU.

John Consiglio teaches economics and banking regulation at the University of Malta.