Malta Central Bank Statement

Author: | Published: 19 Oct 2018
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Financial services play an important role in the Maltese economy. In 2017, they directly accounted for more than 6% of gross value added, while also generating activity in other professional services, such as law, accountancy, audit and management.

The banking sector remains at the heart of the Maltese financial system. At the end of 2017, there were 25 banks in Malta, with total assets equivalent to over 400% of GDP. Six core domestic banks mainly provide retail banking services to the Maltese economy, while 14 banks predominantly serve international customers. Five institutions are considered to be 'non-core' domestic banks; these are relatively small.

The Maltese banking system is well-capitalised, with an average total capital ratio of 21.2% at the end of 2017. Indeed, according to the latest edition of the Global Competitiveness Report, published by the World Economic Forum, Malta placed 17th out of 137 jurisdictions regarding the soundness of its banking system. Maltese banks are also highly liquid and profitable, at least when compared to their European peers.

Credit risk diminished further during 2017. Tighter rules on non-performing loans (NPLs) were introduced, which provided incentives for banks to resolve their NPLs and maintain a maximum two-year average NPL ratio not exceeding 6%. These rules, coupled with a robust underlying economic performance, brought about a visible improvement in asset quality. At the end of the year, NPLs accounted for around 3% of the loan portfolio of the total banking system.

In line with developments elsewhere, Maltese banks are facing competition from alternative sources of external finance. Domestic firms are increasingly turning to the capital markets to raise long-term finance. The establishment of the Malta Development Bank, which began operations at the end of 2017, should also open up new channels for the provision of finance to the real economy.

Competitive pressures may also arise from technological developments that may allow payments to bypass the banking sector entirely. Maltese banks need to be aware of risks posed by cybercrime, while the authorities will be stepping up their efforts to combat fraud, tax evasion and money laundering. In this regard, Malta recently transposed the Fourth Anti-Money Laundering Directive.

At the European level, a number of developments will have an impact on the Maltese financial system. European leaders need to do more to complete the Banking Union and, in particular, to set up a European Deposit Insurance Scheme. This will provide greater reassurance to savers across Europe. Risk-reduction and risk-sharing should proceed in parallel.

At the same time, Europe will have to face the reality of the UK's withdrawal from the European Union. Brexit will mean that the EU loses London, a financial centre of global importance. It should also provide greater impetus to deepen capital markets within the EU. As negotiations proceed, it will be important to ensure as smooth a transition as possible to avoid unnecessary risks to financial stability.