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15 maltatoday | WEDNESDAY • 14 JULY 2021 COMMERCIAL This article is part of a content series called Ewropej. This is a multi-newsroom initiative part-funded by the European Parliament to bring the work of the EP closer to the citizens of Malta and keep them informed about matters that affect their daily lives. These articles reflect only the authors' view. The European Parliament is not responsible for any use that may be made of the information it contains. THE Central Bank of Malta has just published its 13th edition of the Financial Stability Report (Report) which assesses the de- velopments of the financial sector during 2020 – the year when the COVID-19 pandemic effectively began in Europe. The evaluation is supplemented by top-down stress tests and sensitivity analy- sis to gauge the resilience of the financial system. The Report finds that the Mal- tese financial system remained resilient to the unprecedented economic shock brought about by the pandemic. The assess- ment shows that the strong cap- ital and liquidity positions of Maltese banks – coupled with their prudent business models – enabled these institutions to enable households and corpora- tions weather the effects of the pandemic. Aided by the timely and targeted measures by Gov- ernment, regulatory authorities and the Eurosystem's monetary policy stance, banks have played an important role in supporting the economy during such testing times. The uncertainty caused by the pandemic affected banks' profit- ability as banks acted prudently by booking extraordinary provi- sions. As a result, the coverage ratio for non-performing loans (NPLs) increased, thus mitigat- ing somewhat credit risk. Some deterioration in asset quality was recorded, largely with respect to non-resident exposures. In ad- dition, banks experienced a de- crease in their operating income as a result of both lower interest and non-interest income. Banks continued to grant loans to resi- dents, as the slowdown in mort- gage lending was generally off- set by higher corporate lending, in part driven by loans granted under the Malta Development Bank's COVID-19 Guarantee Scheme. Over the year, resident depos- its grew markedly – particularly during the early months of the pandemic – reflecting a contrac- tion in consumption and higher savings by economic agents. All this led to higher banks' liquidity buffers, which in the main were deposited with the Central Bank of Malta. The fallout from the pandemic also impacted non-bank insti- tutions, with the profitability of domestically-relevant insurance companies declining due to lower investment income and premia. Despite the challenges reported throughout the year, insurance corporations remained highly liquid and their solvency capital ratios remained well above reg- ulatory minima, regardless of the declines reported in the first quarter of the year. The wide-scale global selloff of riskier assets and the ensuing market volatility, particularly in the early stages of the pandemic, spurred some domestically-rel- evant investment funds to shift towards less risky assets, espe- cially bond holdings. During this period, domestically-relevant investment funds did not report significant redemptions and their liquidity profile remained healthy, while leverage was contained. The Report concludes that sup- port measures by the authorities have been crucial in mitigating the adverse effects of the pan- demic, but the unprecedented shock of the pandemic challenged further the profitability of finan- cial institutions given the increase in provisions and loss of other income sources. The stress tests and sensitivity analyses show that the banking system remains re- silient to a wide range of possible economic outcomes. However, banks are encouraged to con- tinue preserving capital and to continue to build their provisions to mitigate any potential rise in credit risk in view of the linger- ing uncertainty surrounding the pandemic. Banks are encouraged to keep the momentum on their viability assessment of their loan portfolios and the corresponding provisioning needs. This edition of the Report also features a number of boxed arti- cles, namely on the categorisation of banks; the bank lending survey results; an update on the method- ology of the credit risk threshold model; and the methodology for selecting domestically-oriented investment funds. Additionally, it contains a box on the non-bank financial sector in Malta as well as an in-depth assessment on the uptake of moratoria. The general risk assessment conducted in this edition of the Financial Stability Report takes into account events occurring up to March 2021. The cut-off date for regulatory and pruden- tial returns is also March 2021. The analysis of moratoria refers to Central Credit Register data as at April 2021, while the forecasts underpinning the macroeco- nomic scenario under the Macro Stress Test is 11 June 2021. The Financial Stability Report can be downloaded from www. centralbankmalta.org. A series of e-packs, available to the public, in both English and Maltese, have recently been launched by the European Par- liament Liaison Office in Vallet- ta. The packs are intended to provide the necessary back- ground, current opinions and events on each topic that has been identified as a key priority during the ongoing Conference on the Future of Europe and on the Citizens' Platform: https:// futureu.europa.eu/?locale=en In an online launch, "Build- ing the Europe that We Want", which hosted Ms Ingrid God- kin, from the Cabinet of Vice President Dubravka Šuica, MEP Josianne Cutajar as one of the 108 representatives to- gether with VP Roberta Met- sola who were chosen to be part of the Conference's ple- naries and Mr Jean Paul Zam- mit and Claire Gafa, from the Malta Association for Com- munity Development, civil so- ciety, youth and together.eu supporters were invited to use the packs and brainstorm ideas and obstacles to participation in the Conference. "Democracy is not static so we must ensure that it contin- ues to evolve" Ms Godkin said in her introductory remarks. She spoke at length on how the guiding principle through- out this Conference should be to keep the citizens at heart and ensuring that every voice is heard and how a specialised feedback mechanism will help decision-makers give feedback back to citizens. In turn MEP Josianne Cuta- jar noted that while EU citizens expect Europe to act upon their needs, citizens' expectations are often not met. "Youth must drive the conversations and the Parliament's task is to set the vision" she said. "I want a more social Europe that leaves no one behind, not even islands on the periphery" she said and went on to tell the young peo- ple present "Go, engage, pro- pose ideas, use the platform". Mr Jean Paul Zammit and Ms Claire Gafa, from the Mal- ta Association for Community Development talked about the more local and grass-root-driv- en need for community and their role in what is always a work in progress. "We aim at grouping togeth- er people who have a need and then work with the whole com- munity and with everyone else who comes in contact with that community." In the context that talking about Europe should be driv- en in the same way a commu- nity is driven by identifying a need, Dr Mario Sammut, Head of EP Office in Malta, led the debate after the presentation of the e-packs, saying that the Conference is an important process where citizens have the opportunity to tell Europe what Europe they want. He expressed the hope that with these e-packs citizens will have a clearer picture and of what and how you can do it. The European Parliament Liaison Office's e-packs on the Future of Europe, are free to download from: https:// w w w . e u r o p a r l . e u r o p a . e u / malta/en/news-events/2021/ e-packs-on-the-conference- o n - t h e - f u t u r e - o f - e u r o p e . html CFOE event in Malta: Building the Europe We Want Financial Stability Report 2020 finds financial system remained resilient