03/12/2021

Resilience and financial stability in pandemic times

Prof. Edward Scicluna, Governor of the Central Bank of Malta addressed the guests at the Institute of Financial Services Malta's annual dinner, which this year commemorates its 60th Anniversary.

In his speech, the Governor made reference to the interdependence between ECB's primary objective of maintaining price stability and the contributory target of financial stability. He explained that these two functions are inherently interlinked, and are a means to an end, with this end, in his own words, 'being the country's material welfare and its sustainability'.

The Governor gave a brief look at the economy and its outlook, highlighting that the policy support coupled with a successful vaccination programme and cooperation by the general public, enabled the country to recover at a rapid pace. This enabled 'Not just more tourists, but also low unemployment rates, higher consumer expenditure, and higher value added in most of all the other economic sectors.' Prof. Scicluna made references to constant headwinds, such as labour shortages, supply bottlenecks, rising energy prices and also the reintroduction of the Growth and Stability Pact rules due in 2023. Notwithstanding, he explained that the Central Bank will be making significant upward revisions to its economic projections mainly driven by domestic demand. He however cautioned that the rising international price pressures will lead to upward revisions to the inflation projections, particularly for 2022.

Prof Scicluna highlighted also some financial stability risks which are being discussed at the euro area level and their prevalence in the domestic financial system. He noted that thanks to the measures undertaken by the State, regulatory authorities, the CBM, the Malta Financial Services Authority, together with the Malta Development Bank, and the banking system's willingness to support their clients, enabled the number of bankruptcies to be limited. At the same time, credit risk remained in check, in part reflecting the banks' own strategies, as well as policy measures introduced by the authorities to reduce legacy stock of NPLs, coupled with provisioning prior to the pandemic. Yet, the Governor cautioned that the Central Bank still expects some residual risk from those firms operating a weak business model that did not adequately adapt to the pandemic, and from those who do not do so, by the time all support measures are completely lifted. In this regard, Prof Scicluna encouraged banks to stay on course with their prudent internal assessments of their loan books in a bid to identify potential risks at an early stage.

He then gave a brief overview of the domestic property market developments, highlighting the issue of concentration in the banks' loan portfolios. Prof Scicluna reiterated that although financial stability risks stemming from the housing market remained contained at a moderate level, he recommended that banks should diversify further their loan books.

The Governor also made a reference to the significant rise in sophisticated cyber incidents, encouraging financial institutions to keep up with the rapid evolution of technology and strengthen their resilience to cyber risks. Prof. Scicluna then addressed the issue of AML/CFT, touching upon the issue of correspondent banking. 'Whatever the FATF recommendations are, nobody can deny the need for the banking sector to continuously show that its frameworks are sufficiently robust to address AML related risks.' He urged all practitioners to do their part and strive to achieve higher standards efficiently, because 'Effectiveness in the FATF dictionary reads results now.'

Prof. Scicluna concluded his address by saying that, given time contraints topical issues such as digital currencies, payment platforms and green financing will be discussed in other fora.

Photo: Kevin Cassar Photography

Back to Archive