The main objective of macro-prudential policy is to reduce the build-up of risks in the financial sector and significant spill-overs to the real economy, thus mitigating systemic risk.
The Central Bank of Malta, as the macro-prudential authority, is responsible for formulating and implementing macro-prudential policy through a number of tools, which are used to contain systemic or system-wide financial risk, in line with its macro-prudential policy strategy. In the formulation of macro-prudential policy, particular importance is given to Recommendations issued by the European Systemic Risk Board (ESRB). The European Central Bank (ECB) may, by virtue of Council Regulation (EU) No 1024/2013, if deemed necessary, apply higher requirements for capital buffers than those implemented domestically and apply more stringent measures aimed at addressing systemic or macro-prudential risks at the level of credit institutions.
The implementation of macro-prudential policies domestically is undertaken with due consideration to micro-prudential implications and in close collaboration with the Malta Financial Services Authority (MFSA). With this objective in mind, the Central Bank of Malta Act establishes the Joint Financial Stability Board (JFSB), which meets regularly to discuss such policy issues. The Ministry for Finance (MFIN) also participates as an observer in JFSB meetings, which facilitates cooperation between the relevant authorities in matters impacting on financial stability, including macro-prudential policy and, where relevant, micro-prudential instruments. It has the function to:
(a) formulate policy recommendations designed to safeguard the stability of the financial system and which may be communicated to a relevant public authority or public institution;
(b) identify and assess macro-prudential instruments and, where relevant, micro-prudential instruments, required to be implemented to mitigate or control potential systemic and other risks to the financial system;
(c) give advice on whether and how an authority or public institution should act in respect of a credit or financial institution, if the issue appears to be relevant to the stability of the financial system.
Any such recommendation, advice or assessment made by the JFSB shall be taken into consideration by a public authority or public institution in Malta in the execution of its functions. Furthermore, it shall be the duty of such public authority or public institution to seek the opinion of the JFSB prior to exercising any functions in matters which may impact financial stability.
To attain its objectives, the JFSB discusses issues relating to, or impacting, the financial system, including both domestic policies and developments in the European Union, particularly those in connection with regulation and standards, and macro-prudential instruments. The JFSB formulates policy recommendations designed to safeguard the stability of the financial system and also follows up on recommendations or warnings of the ESRB, and on any other matters of a macro-prudential nature that may need to be communicated by the Bank, the MFSA and the Government to the ESRB, the ECB and/or any other relevant authorities. Recommendations of a macro-prudential nature issued by the JFSB are forwarded to the Board of Directors of the Central Bank of Malta to be considered for adoption, while recommendations of a micro-prudential nature are forwarded to the Board of Governors of the MFSA.
Apart from its direct involvement in the formulation of macro-prudential policy, the Bank also provides advice to Government and to other public sector bodies on various issues related to financial stability. The advice is particularly valuable when Government is formulating positions to be taken at various stages of the decision-making process prior to the introduction of new EU Directives or Regulations related to the financial sector.