There were a number of statements in the editorial ‘Good development banking’ (September 1) which for the benefit of readers need to be clarified, corrected or expanded upon.

“These banks [commercial banks] do not normally lend on a long-term basis, except for house loans.”

This is not entirely correct and, I suspect, is an inherited perception that lingers on from way back to the 1980s, or even before.

In line with the basic monetary economics concept, as an economy grows and improves, banks will extend their lending horizons. In Malta too, since after the mid-1980s (i.e. around the time of the demise of banks like the Investment Bank of Malta Ltd and the Investment Finance Bank) the commercial banks have in fact been lending long term to serious, viable, realistic borrowers for even more than just house loans.

And, strange as it may also seem to many, often also on unsecured, or partly secured, basis.

“What matters is whether this bank (i.e. the newly coming Malta Development Bank) will indeed fill the gaps in the local financial market without burdening taxpayers with losses caused by over-generous lending.”

From this editorial a number of questions arise in the light of both this statement, as well as the paragraph that follows it. The exact operating model of the new Malta Development Bank is still not clear to everyone.

Will development bank guarantees still be forthcoming if the commercial banks’ assessment shows unsustainability of a proposed project?

Will it be only a guaranteeing bank, ‘merely’ providing its guarantees (i.e. instead of directly by the State giving EU-banned direct state aid) to provide securing cover to other financial institutions who might not be considering a borrowing request as fully meritorious of their own individual lending?  That is, not “State” aid but “State’s guaranteeing bank’s” aid?

In the following paragraph it is stated that “the funding model to be adopted by the new development bank relies on commercial banks undertaking due diligence, and project-sustainability studies, with the government providing guarantees to the lending”.

This approach carries a number of issues. Will such development bank guarantees still be forthcoming if the commercial banks’ assessment of a project is such as showing unsustainability of a proposed project? This is not a question of just SME or infrastructure proposals.

I appreciate that an idea or project may be split up into short-term needed funding,   followed up by long-term funding as the project gets off the ground.  A bank may indeed be tempted to feel smug and, relying on the development bank’s guarantee of the short-term exposure, will indeed lend, but in some manner or other hiding its reticence or concern about the long-term viability bit of the project.

Will the development bank then still persist in providing the necessary guarantees when it increasingly becomesevident that over a long term a project is not sustainable?

Another issue is the matter of the – as stated - new development bank being “supervised but not regulated”. This needs to be further clarified.  Who will be doing the supervision, and under what sort of structures, official or otherwise, local or even indeed foreign?

One final question: is this bank a result of Malta having lost a lot of its former independent monetary policy powers to the ECB when we joined the EU? Are we now factually in a situation where resort to this type of, as yet, to many, unclear institution will, sooner or later, be imposing upon our financing markets notions or structures, which would not necessarily be the right ones for our own very particular and specific type of financing or banking market?

John Consiglio teaches economics at the University of Malta.