Issue link: https://maltatoday.uberflip.com/i/1504500
2 NEWS 27.7.2023 THE post-pandemic global economic recovery was somewhat hindered by the war in Ukraine, causing further supply chain disruptions and aggra- vating inflationary pressures. This emerges from an in-depth as- sessment of the domestic and inter- national developments that could impact the stability of the financial system carried in the Central Bank of Malta's 15th edition of the Financial Stability Report. This analysis is sup- plemented by top-down stress tests and sensitivity analyses, to determine the resilience of the financial system. Central banks across the globe tight- ened their monetary policy stance to rein in inflation. In the euro area, key interest rates increased rapidly, whilst the European Central Bank also discontinued its Asset Purchase Pro- grammes, ending a long era of cheap funding. These economic shocks led to high volatility in financial markets with both equity and bond prices de- clining significantly, wiping away pre- vious gains. Amid such challenges, the profit- ability of domestic banks improved. Income from intermediation activities rose on the back of sustained lending and wider margins. In addition, the ECB started to remunerate bank de- posits, while income from the bond portfolios also rose. At the same time, asset quality also improved consider- ably on the back of lower NPLs, with the NPL ratio trending downwards since the height of the pandemic. Credit growth remained mainly spurred by resident mortgages, al- though resident corporate lending also recovered. This was mainly driv- en by the real estate sector as demand picked up after the slowdown report- ed during the pandemic. Concentra- tion in the banks' loan book inten- sified further, while the build-up of cyclical risks persisted. Domestically-relevant insurance companies and investment funds were adversely impacted by the vol- atility in financial markets, affecting their investment income and balance sheet composition. Nonetheless, both insurances and investment funds continued to operate on the back of strong capital and liquidity buffers, which should enable them to with- stand potential shocks from the ongo- ing macroeconomic uncertainty and inflationary pressures. The report recommends vigilance for potential adverse developments impacting financial stability going forward. The slowdown in global economic growth coupled with in- flationary pressures could potentially negatively impact the repayment ca- pabilities of borrowers with conse- quences on banks' asset quality. Furthermore, banks' income from intermediation could be adversely af- fected if loan demand weakens signif- icantly. Against this backdrop, banks should continue to adopt conserva- tive lending practices and maintain healthy liquidity and capital buffers and monitor emerging financial sta- bility risks, such as cyber and cli- mate-change related risks. The publication features a number of boxed articles on diverse topics. One of these articles introduces a do- mestic cyclical systemic risk indicator which is another tool in the Bank's framework in guiding its domestic macroprudential policy decisions. Another explains the rationale behind the introduction in 2023 of the sectoral systemic risk buffer (sSyRB) for domes- tic banks, specially aimed at targeting domestic mortgage exposures. A third article relates to the main results of the Bank Lending Survey where respondents pointed to an in- creasingly challenging environment as cost of funding is on the rise, in- cluding through higher interest rates on retail deposits for some banks dur- ing 2022. Another article presents details on a new framework quantifying expected credit losses of banks to both hypo- thetical inflationary pressures and in- terest rate increases. Other articles tackle the accounting treatment of debt securities holdings under IFRS 9, and the second run of the household stress testing frame- work with a focus on assessing the re- silience of indebted households to in- flationary pressures and interest rate shocks. The analysis identifies some vulner- abilities in low-income households but concludes that overall, Maltese indebted households are resilient to adverse economic shocks. This edition of the report also high- lights experimental indicators on cli- mate change for Malta, following the publication of harmonised euro area indicators by the ECB as part of its broader climate action plan. The Financial Stability Report can be downloaded from www.centralbank- malta.org or obtained in printed form from the Central Bank of Malta. Central Bank report recommends vigilance for potential adverse developments impacting financial stability 11 CENTRAL BANK OF MALTA Financial Stability Report 2022 1. MACROPRUDENTIAL RISK ASSESSMENT After rebounding in 2021 from the very low levels of activity in 2020 due to the pandemic, the global economic recovery continued, at a slower pace in 2022 as the positive effects of further re-opening of high-contact ser- vices sectors were to an extent thwarted by the impact of the outbreak of the war in Ukraine. The latter had far-reaching consequences, causing commodity prices to surge. This led to action by various authorities and governments to try to mitigate inflationary pressures. In this regard, the European Systemic Risk Board (ESRB) published its first ever General Warning in September 2022 to acknowledge increasing systemic risks that may threaten the smooth operation of the financial system and called for closer regulatory and supervisory scrutiny. 1 The Maltese economy was somewhat shielded from the direct consequences of the war, partly owing to the limited economic ties with both conflict countries, but also as a result of Government's intervention to keep energy prices stable. However, Malta was impacted through indirect effects, particularly in respect of infla- tion. At the same time, the MDB introduced schemes to mitigate liquidity issues and provided emergency support measures to economic sectors impacted by the war, including grain and fuel importers. 2 1 ESRB Warning on vulnerabilities in the Union financial system (September 2022). Source: https://www.esrb.europa.eu/pub/pdf/warn- ings/esrb.warning220929_on_vulnerabilities_union_financial_system~6ae5572939.en.pdf?b0d8a80266758fa897151ec70612330b. 2 MDB support measures in response to the Ukraine crisis. Sources: https://mdb.org.mt/en/news-and-media/Pages/MDB-response-to- Ukraine-crisis.aspx; https://mdb.org.mt/en/news-and-media/Pages/MDB-LSGS-A-and-B.aspx Geopolitical developments dampened euro area economic growth and led to a surge in inflation, with the latter prompt- ing a tightening of monetary policy. The domestic non-bank sector was adversely impacted by financial market developments, but continued to operate with strong capital and liquidity buffers. Domestic mortgage lending continued to grow strongly, adding further concentration in the banks' loan books. The domestic banking sector remained resilient backed by adequate capital and ample liquidity buffers. Profitability recovered, while asset quality continued to improve. BANK of Valletta has entered into a new correspondent banking relationship with Citi. e addition of Citi for US Dollar correspondent transactions enhances the current correspondent banking ar- rangements that BOV has with other international banks. It will also provide direct access to US Dollar cash clearing services. Speaking about this collaboration, BOV CEO Kenneth Farrugia explained how the introduction of this new cor- respondent banking relationship is yet another milestone in the Bank's current strategic drive to provide our personal and business customers with the abili- ty to execute international cross border payments. is important development is an en- dorsement of the progress registered by the Bank in strengthening its govern- ance structures and compliance require- ments, that are meeting the expected standards of major players in the global markets such as Citi. "We are thrilled to announce our part- nership with Citi, a financial services provider with vast expertise and a global presence," Farrugia said. "Our objective is to build on this re- lationship and explore other services as we are continually seeking ways to expand our capabilities to meet the evolving needs of our customers, who come to expect speed and accessibility above all else in cross-border financial services." In his comments on this service part- nership, Emilios Kyriacou, Citi Country Officer for Greece, Cyprus & Malta said "we are pleased to announce this new partnership which demonstrates our commitment to supporting BOV's strat- egy. Our global network, mindset and international expertise ensure we are uniquely positioned to help our clients meet their strategic ambitions", Citi is a preeminent banking partner for institutions with cross-border needs, a global leader in wealth management and a valued personal bank in its home market of the United States. Citi does business in nearly 160 coun- tries and jurisdictions, providing corpo- rations, governments, investors, institu- tions, and individuals with a broad range of financial products and services. BOV secures USD correspondent banking partnership with Citi