Bonnici tells banks to ease up on high cost of credit

Central Bank Governor warns that some Maltese banks still require necessary risk oversight practices

Central Bank governor Josef Bonnici
Central Bank governor Josef Bonnici

Some Maltese banks have yet to adopt the necessary risk oversight practices that would ultimately benefit customers as well as banks themselves, Central Bank Governor Josef Bonnici said in his annual speech to the Institute of Financial Services.

Speaking on the regulatory and supervisory changes that the European banking sector is passing through, Prof. Bonnici said the long-term sustainability of the changes would mitigate balance sheet risk, lower bank funding costs, and allow banks to charge lower risk premia on their loans.

“The crisis has uncovered various shortcomings in corporate governance in the banking sector, mainly in areas like risk management and internal controls, compensation, corporate structures and transparency,” Bonnici said in his concluding remarks.

“Reputation is a key asset of Malta’s financial system which cannot be taken for granted. Efforts to safeguard the financial sector’s reputation need to be ongoing and undertaken by all concerned in the financial sector.”

But he also called for further improvement in the business environment in terms of access to credit. “The cost of credit in Malta remains on the high side and further easing would help our businesses to invest at a lower cost,” Bonnici said, telling the IFS that the Central Bank’s new credit register would narrow the information gap that exists in the Maltese banking system between borrowers and lenders.

Bonnici said it would be a pity if the low-cost credit conditions being offered by the European Central Bank were not fully exploited in Malta, and rued the lack of participation by core Maltese banks in the ECB’s targeted longer-term refinancing operations (TLTROs), which provide funds at a very low interest rate fixed for four years.

Bonnici said Malta still lacks a consistent supply of long term finance that would efficiently fund a project addressed to SME-funding needs or to finance structural, economic, social and environmental policies in connection with the long-term financing of priority projects.

“If we look at other countries, such as Germany and France, they managed to cater for SMEs as well as for other environmental and infrastructure investment through promotion or development banks. A development bank would contribute to economic growth by funding sectors and projects that are not catered for by commercial banks on their own. The Central Bank looks at such an initiative as a necessary diversification of our financial base. I understand that progress is being made on this initiative and I find this to be a very positive development.”

The Central Bank governor also noted that while Malta had among the lowest labour participation rates in the Euro area, the country had gone a long way in achieving progress on this issue. Over the past ten years, Malta registered the largest increase among EU member states in the female activity rate, which rose from 36% in 2004 to over 50% this year.

“At the same time, we also observe a higher number of foreigners who are contributing to economic activity in a variety of sectors. First, it has to be remarked that an expanding labour force through this route is in itself a sign of Malta’s strong rate of economic growth relative to other areas of the EU.

“Secondly, it reduces the likelihood of skill gaps in the labour market. Though this added flexibility needs to be recognised for the positive effect it has on potential output, the role of retraining programmes by the ETC remains of utmost importance in better matching skills with vacancies and further reducing the rate of unemployment.”