This expectation is linked in particular to the significant concentration risk to which banks in Malta are exposed stemming from both a direct exposure, and indirectly through collateral, to the construction, property development and mortgage sectors. Taken together, property-related loans account for almost 60% of loans by the banking system to the private sector. Profitability levels are also likely to be affected by slower growth in business volumes and squeezed interest margins due to increased competition for customer deposits. And as the repricing of risk is expected to continue in the near term, further downside pressure on earnings growth will come from write-downs in investment portfolios resulting from fair value adjustments. While a prudent credit risk assessment process has long been a characteristic of banking practice in Malta, the importance of ensuring that the risk potential of assets is adequately understood and controlled bears emphasising at this time of uncertainty. The results of such monitoring need to be translated into appropriate internal ratings, classifications and loss recognition to develop an accurate picture of credit quality. The concentration risk referred to earlier, combined with the prospect of a prolonged period of slow growth, also suggests that banks would do well to strengthen capital buffers further beyond statutory ratios. … and in the likely post-crisis scenario While the immediate priority of the authorities during the ongoing crisis has been to restore calm to the financial markets, considerable attention has also been devoted to drawing lessons and devising remedies.

Unable to adjust lending rates according to the creditworthiness of borrowers, banks resorted to significant collateral requirements and to credit rationing. The heavy reliance on real estate as collateral, the insufficient importance attached to the viability of project proposals, along with the absence of a capital market meant than savings were often not channelled efficiently into productive investment. The resulting misallocation of resources served to compound the distortions that would proliferate in the rest of the economy. A sea change in economic strategy occurred in the late eighties with the introduction of policies to reduce the overbearing state presence. These included a gradual reorientation towards a more market-oriented banking system and a monetary policy that operated more through incentives and less through command. A first reduction in the government’s shareholdings in banks took place during 1990/1991, and this was accompanied by a strengthening of the regulatory framework, including measures to enhance the capital base of banks through profit retention and the issue of new stock. A capital market, in the form of the Malta Stock Exchange, was also created. Supporting economic reforms included a relaxation of the extensive system of import controls, the partial lifting of wage-price controls and an overhaul of the income tax regime. While reforms were incremental, a number of landmarks stand out. In 1994, for example, a comprehensive package of legislation was enacted as part of a strategy to further develop Malta as an international financial centre.