To complement the institutional framework, a Financial Intelligence Analysis Unit was established to strengthen the anti-money laundering regime and to combat the financing of terrorism. As part of the authorities’ efforts to create a reputable financial centre, in late 2002 the IMF / World Bank were requested to conduct a Financial Sector Assessment Programme (FSAP). The assessment concluded that Malta’s financial system appeared to be healthy and well supervised, with a comprehensive legal framework and strong adherence to most international standards and codes. At the same time, the report also noted that, mainly because of the predominance of two large banks, the system was highly concentrated and exposed to the country’s narrow economic base. Malta as an international financial centre EU membership in 2004 proved to be an important catalyst in the further development of the financial services industry. Malta now benefits from the greater credibility conferred by EUcompliant legislation and access to passporting rights in the vast European market, which allows licensed financial institutions to exploit previously unavailable avenues for growth. Malta has also capitalized on its other strengths. Its small size facilitates access to the single regulator, allowing for a swift licensing process and the possibility of custom-made solutions. The financial services industry is supported by a modern telecommunications infrastructure and a plentiful supply of experienced, English-speaking tax professionals, legal and accounting firms and other service providers. Labour and rental costs are competitive, while Malta’s geographical position enables it to serve as a finance hub in the Mediterranean region.

For this purpose, it will be important for the banks to build on their strengths and minimise their weaknesses. With regard to the former, our banks start from a relatively strong position since their fundamentals have not been weakened by the financial crisis. The existence of a sound regulatory system, effective risk management practices and prudent lending policies have combined to minimise the banks’ exposure to bad or dubiously-valued assets. Investment portfolios are in fact highly diversified, with minimal holdings of asset-backed securities, while the domestically-oriented banks’ measured approach to credit is reflected in loan-to-deposit and residential loan-to-value ratios that average around 79% and 73%, respectively. One of the lessons learned from the crisis is that a bank’s funding model is crucial. The reliance by a number of international banks on wholesale funding proved to be a major source of weakness in time of stress. In contrast, Maltese banks have traditionally relied on retail deposits to fund their lending operations, a source of liquidity that has proved more reliable. This explains the banks’ high liquidity ratios, currently averaging 46%. The steady supply of liquidity, combined with a sustained demand, have permitted the credit channel to remain intact, despite the ongoing global turmoil. As a matter of fact, bank lending to the private sector grew by 9.7% in the twelve months to April 2009, compared with 8.7% in the preceding twelve months. Another lesson concerns the importance of a strong capital base.