The face-off between the Central Bank governor and commercial banks over his desire to see interest rate margins narrow has been simmering for months, made ever more contentious as other stakeholders took a stand for or against Josef Bonnici’s arguments. The problem is that each stakeholder has a valid point – even those that contradict each other.

Can they all be right? Quite possibly.

The commercial banks in Malta have a business model based on retail funding, meaning they pay their customers interest on deposits and then use that money to generate revenue, either by loaning it out or by investing it. Other banks use wholesale funding or loans from the European Central Bank, on which they pay much lower interest rates. In other words, it is much cheaper money.

However, banks’ business models are long term: it is all very well to rely on cheaper money but what if the wholesale markets dry up or the ECB interest rates go up? They would be forced to raise the interest they charge on loans or change the investment model to a riskier one.

The conservative model they use now is boring but it is predictable and it is this stability that has got them through the financial crisis relatively unscathed.

The next issue is whether the interest rates on loans are deterring investment. Three main arguments have emerged: too many businesses are undercapitalised, a culture which needs to be changed; their insistence on providing property as collateral is pushing up the risk premium that banks apply – as well as raising red flags with rating agencies and international monitoring bodies like the IMF and the European Commission; and the high collateral being asked for is very probably more of a deterrent for entrepreneurs than the interest rates, something that could be easily solved through external guarantees such as the EIF’s Jeremie fund.

The governor produced noted that Malta’s lending rates are among the highest of the eurozone. The chairman of Bank of Valletta produced pointed out that the amount of borrowing by Maltese businesses was among the highest. They are both truths; they must both be analysed strategically.

There is no standard interest rate for business borrowing: banks charge lower rates to companies they consider solid. Responsible borrowers cannot understand why the banks should be nudged to lend money to businesses that might fail without pricing that risk appropriately.

Applicants whose requests for loans are turned down are hardly likely to self-reflect and admit that their business models are dubious. The attitude is that banks are there to lend them money, that they should not fork out more than the minimum from their own pockets, an attitude that conveniently overlooks banks’ direct responsibility to their shareholders and customers, their regulatory requirements and the oft overlooked point that banks are not there to give you rope with which to hang yourself. They have a duty to ensure that companies are sustainable, even when the going gets tough.

Which is, in the end, the same argument that holds for the banks. If banks do not make profits and do not retain profits now, if everything goes spectacularly wrong – as it has done in the past – they will not survive. And if that happens, all the SMEs, the entrepreneurs and the responsible borrowers will have much more to worry about than the interest rates they were charged.