Financial Stability

Financial Stability

Article 5(1) of the Central Bank of Malta Act mandates the Bank to ensure the stability of the financial system, and to formulate and implement macro-prudential policy. Financial stability reflects the ability of the financial system, comprising institutions, markets and infrastructures, to efficiently supply the necessary credit intermediation and payment services to the real economy to enable it to achieve sustainable growth. Furthermore, it would enable it to allocate savings into investment opportunities and to facilitate the efficient settlement of payments. Financial stability also allows the financial system to absorb shocks and thus manage risks that may harm its performance and, consequently, the economy.

When ensuring financial system stability, the Central Bank of Malta assumes the role of a macro-prudential authority and issues Directives to implement macro-prudential policy and tools in terms of Article 17A of the Central Bank of Malta Act. To fulfil its international obligations in relation to macro-prudential oversight, the Bank normally cooperates with the European Systemic Risk Board, the European Central Bank (ECB) and with other national or international micro and macro-prudential authorities in the exchange of information to ensure effective oversight. The Bank also identifies potential systemic risks and contributes to the formulation of macro-prudential policy and recommendations to mitigate such risks. The Bank publishes its financial stability analysis and findings in its annual Financial Stability Report, which is supplemented by a mid-year update.

At the domestic level, the Central Bank of Malta collaborates very closely with the Malta Financial Services Authority (MFSA), which is the authority responsible for regulating and supervising the financial sector, on financial stability issues and, where relevant, with the Ministry for Finance (MFIN). To foster this collaboration, Article 17B of the Central Bank of Malta Act establishes a Joint Financial Stability Board (JFSB). The primary objective of the JFSB is to ensure effective cooperation between the relevant authorities on matters impacting financial stability.

The Bank also contributes to the maintenance of financial stability within the euro area and the European Union through its participation in the Eurosystem (including the Single Supervisory Mechanism - SSM) and in other EU structures.

The Bank and the MFSA participate in the respective structures of the European System of Financial Supervisors (ESFS), which is composed of the European Systemic Risk Board (ESRB) and the European Supervisory Authorities (ESA), namely, the European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA) and the European Securities and Markets Authority (ESMA). 

The ESRB is responsible for the macro-prudential oversight of the financial system within the European Union to help prevent or mitigate systemic risks that arise from developments within the financial system. Furthermore, the ESRB contributes to the smooth functioning of the internal market and thereby ensures a sustainable contribution to economic growth from the financial sector. The ESRB is also empowered to issue warnings and recommendations in relation to systemic risks. These are addressed in particular to the Union as a whole or to one or more Member States, or to one or more of the ESAs, or to one or more of the national supervisory authorities with a specified timeline for the relevant policy response. The Bank participates in the ESRB and is also represented in the EBA, while the MFSA participates in the ESRB and in all the three ESAs.

The Bank participates as an observer in the Supervisory Board of the ECB, which is the body entrusted with the supervision of credit institutions to be undertaken by the ECB under the SSM. The SSM comprises the ECB and the national competent authorities of participating EU countries. The ultimate aim of the SSM is to ensure the safety and soundness of the European banking system, and to increase financial integration and stability in Europe. Under the new system of supervision, the ECB will directly supervise significant credit institutions. It will work closely with the national competent authorities to supervise all other credit institutions under the overall oversight of the ECB. The ECB may decide at any time to take direct responsibility for a less significant credit institution. The Supervisory Board plans and carries out the ECB's supervisory tasks, undertakes preparatory work and proposes complete draft decisions for adoption by the ECB Governing Council.

Central Bank of Malta Directive No. 11: Macro-prudential Policy