It is very likely that once the dust has settled, banks everywhere will have to face a much changed operational and regulatory environment. This will entail a number of longer-term challenges. For a start, when established business models no longer work, innovation cannot be far behind. New banking institutions, both physical and virtual, will appear. This will accentuate the degree of competition in the limited retail deposit and loan markets and result in narrower interest rate spreads. In Malta, the traditional dependence on retail funding will also be put to the test. All this will happen against a backdrop of a more stringent regulatory regime. In sum, the challenge will be to meet the higher regulatory standards without stifling the dynamism that has characterised our banking industry in recent years. In the remaining part of my remarks, I will focus on some issues that are likely to become especially relevant in the future. New accounting regime Changes in the regulatory framework are expected to include revisions to accounting rules. Accounting standards are a key aspect of the financial infrastructure and essential for market discipline. In line with the recommendations of the recent de Larosière Report, accounting standards should not distort business decisions or promote pro-cyclical behaviour nor discourage long-term investment. Several standard-setting bodies had already emphasised the need for the exercise of sounder judgement in the estimation of fair values, particularly for instruments that do not trade in active markets. This raises concerns of both a macro- and micro-prudential nature.

Following the launch of the first SEPA payment product for credit transfers last year, the transposition of the Payments Services Directive into national law as from November 2009 will support direct debit schemes, thus opening up the possibility of using such instruments in the SEPA area, including Malta. Given its importance for our banking system, the Central Bank of Malta has launched a Consultative Paper on the National Implementation of the Payment Services Directive. Malta stands to gain from SEPA. Along with the benefits of financial market integration, increased competition and scope for innovation, there is also a strong potential to attract e-commerce payment business and payment factory operations for trans-national corporations. BIS Review 65/2009  5  Investing in SEPA should not, therefore, be viewed as an expense, but rather as a business opportunity that will help banks pre-empt competition law problems, reduce costs and expand in new markets. In time, it may also come to offer new and profitable services, such as e-invoicing and reconciliation. For this to happen, the banks must see to it that their customers understand the advantages offered by SEPA and make use of it. The financial crisis has also highlighted the importance of stress tests, which assess an institution’s ability to withstand both institution-specific credit and liquidity risks as well as systemic risks, including adverse macroeconomic conditions. As stated in the Bank’s Financial Stability Report, the latest stress test results show that the banks generally have adequate capital buffers and sufficient liquidity to withstand extreme, yet plausible shocks.