An in-depth review of different sectors within the Maltese economy found that the financial industry warranted a clean bill of health. This was a key conclusion of the European Commission's in-depth reviews as per Regulation (EU) No 1176/2011 on the prevention and correction of macroeconomic imbalances.
In its report, the Commission concluded that the macroeconomic challenges in Malta "no longer constitute substantial macroeconomic risks and are no longer identified as imbalances. Although indebtedness remains high, risks to the sustainability of private and public sector debt and the stability of the financial sector appear contained, even if they deserve continued monitoring".
More specifically, the analysis in the Review finds that financial stability indicators remain sound. Still, in light of the structural nature of the risks in the sector, a continuation of the current prudent supervisory and risk-taking practices is key. In its review, the Commission concluded that the financial sector does not appear to pose imminent risks to macro-financial stability. "Maltese banks generally benefit from high liquidity and solvency ratios and have remained profitable. Risk management and supervisory practices also appear prudent. The nature of the main risks is structural and as such will likely remain a characteristic of the sector in the future. So far, the authorities are managing these risks in an effective way, as evidenced by the robust performance and soundness."
Positively, the report notes that banks have increased provisions in response to the increasing bad loans. As loans tend to be well-collateralised, the coverage of doubtful and non-performing loans by specific provisions in Malta was historically low. Overall, low loan-to value ratios (LTV) and a conservative valuation of the underlying collateral point to relatively prudent risk-management practices so far. This provisioning practice, linked also to the standard of high collateralisation, has allowed banks to remain profitable even in an environment of deteriorating asset quality.
The report also notes that authorities have taken steps to strengthen provisioning practices. In line with the recommendation made by the European Council, the financial sector supervisor MFSA, together with the Central Bank, has adopted a revision to the Banking Rule 9 – the legislation governing banks' provisioning policies. The new BR09 has been in force since 31 December 2013. Its implementation is expected to contribute to an increase in the coverage ratio by some further 3-4 percentage points.
The Commission concluded that maintaining financial stability is of crucial importance for the channelling of savings into investment opportunities and the overall efficient functioning of the economy. The financial sector also plays an important role in financing the government deficit, which reinforces its role in ensuring macro-financial stability.
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