If we also take into account capital income, the picture is somewhat different because the highest income group owns relatively more financial assets than other households. Asset and debt positions nevertheless have a clear profile over a life cycle. Younger households often have large mortgages and student loans. These loans are repaid during a working life. Most people save for their old age. The immediate effect of an increase in interest rates will be a reduction in the disposable income of households in a start-up phase, while pensioners record an increase in their disposable income.5 However, such a static analysis of who stands to benefit and who stands to lose from an increase in interest rates does not provide an adequate indication of the distributional effects of monetary policy. Over time, interest rates rise and fall. For example, Norges Bank’s interest rates fell from 12% in 1992 to 3½% in 1997. A typical mortgage rate was as high as 14-15% at the beginning of the 1990s and was down to 5% at the lowest. The households that lose when interest rates are raised are the same households that benefit when interest rates are lowered. Hence, monetary policy does not have systematic distributional effects. Households can hedge against interest rate fluctuations. Fixed-rate loans are now offered widely, at least for a period of up to 3-5 years. By choosing a fixed-rate loan, households with a large net debt have more predictable expenses for servicing their debt. The more long-term distributional effects of monetary policy are completely different.

A credit register will narrow the information gap that exists in the Maltese banking system by reducing asymmetric information between borrowers and lenders. It also improves risk management thereby contributing to a better performing loan portfolio and as a result, a lower cost of capital. Ladies and gentlemen, let me close with a few concluding remarks. As you are well aware, the banking sector across the Euro area is passing through regulatory and supervisory changes that are sometimes viewed as expensive and imposing unnecessary burdens on the sector. This is a short-sighted assessment. Though dividend pay-outs may be lower in the short-run, their sustainability will be strengthened in the longer term. Similarly, higher bank capital does not necessarily lead to lower volumes of loans over the long run. Instead, a higher capital base mitigates balance sheet risk, lowers bank funding costs, hence allowing banks to charge a lower risk premium on their loans, to the advantage of both lenders and borrowers. 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. Some Maltese banks have yet to adopt a number of necessary risk oversight practices that would ultimately benefit the banks and their stakeholders. What needs to be stressed is that reputation is a key asset of Malta’s financial system which cannot be taken for granted. Efforts to safeguard financial sector reputation need to be ongoing and undertaken by all concerned in the financial sector.