a third of bank deposits were either in interest - free current accounts or in low - interest passbook accounts. twenty years later, that proportion was down to around 5 per cent. not only did this proportion decline, but the relative benefit to banks from any given amount of low - interest deposits has fallen substantially, as the overall interest - rate structure has come down. graph 2 another important development on the liabilities side, which i alluded to earlier, was that an increasing proportion of banks ’ funding was coming from wholesale sources. that was a partly a consequence of the growth of the superannuation system as a recipient of household funds, some of which were then channelled into bank securities ; it was also partly a result of the banks ’ diversification into offshore funding sources. we see, then, that a combination of structural factors, regulatory changes and increased competition has been working to narrow average margins on the liabilities side for quite some time. a similar thing happened on the lending side : after the initial reconfiguration of interest rates that occurred in the early 1990s, competition over the subsequent decade put substantial downward pressure on most lending rates relative to wholesale funding costs. the result of all this is that the major banks ’ net interest margins in the period since deregulation have been trending downwards ( graph 3 ). they roughly halved, from an average of around 4½ per cent in 1980 to a bit over 2 per cent in the latest period. notwithstanding its most recent uptick, the average margin now is well below where it was a few years ago. graph 3 to complete the story, the downward trend in net interest margins hasn ’ t resulted in any structural decline in banks ’ overall profitability ( graph 4 ). in broad terms it has been offset by two factors – namely, reduced non - interest costs, and increased non - interest income as banks diversified their business models and reduced cross - subsidies. the net effect is that banks ’ combined income from all sources has been declining in relation to assets, but this has been broadly matched by a downward trend in the cost - to - assets ratio. graph 4 probably much of this is familiar territory. my reason for going through it is to make the point that a trend towards increased competition in the deposit market, and an increased relative cost of deposits, is not something new. it has been an ongoing consequence of the way market forces have evolved in a deregulated environment. effects of the crisis on the deposit market having

the maastricht criteria. these include convergence of inflation and interest rates, sustainable fiscal positions and exchange rate stability. the exchange rate criterion requires participation in erm ii for a minimum period of two years prior to the adoption of the euro. this is an arrangement whereby the european central bank ( ecb ) and participating national central banks would not allow any currency to fluctuate beyond a given margin from its central euro rate. this margin at present can be as wide as 15 %, but significantly narrower margins are being contemplated, with an often - cited reference value of 2. 25 %. thus, participation in erm ii does not necessarily imply increased currency volatility. indeed the rationale of this mechanism is to test the stability of a currency. as you know, the maltese lira is pegged to a weighted average of three currencies, whose individual exchange rates against the lira can vary. in this regard, it is noteworthy that the fluctuations in the maltese lira / euro rate over the past few years on average have not exceeded 3. 5 %. as for the inflation and interest rate criteria, malta is well within the reference values. the fiscal deficit, on the other hand, represents a significant hurdle as it is currently about double the 3 % of gdp limit. related to the deficit is the size of the public debt, which exceeds the 60 % threshold. the main determining factor in the timing of the adoption of the euro, therefore, is the speed with which fiscal consolidation can be achieved, bearing in mind that the euro area will not technically be in a position to accept newcomers before 2007. if the government embarks on the relatively fast track of fiscal consolidation implied by malta ’ s pre - accession economic programme, we would need to enter erm ii in 2005. should this track be chosen, however, it would be vital that the planned pace of consolidation be maintained. in this way the benefits of an early adoption of the euro would be reaped, and the lira ’ s stay in erm ii would be smooth, with no noticeable shocks in the transition from the current basket system to the single currency. if, on the other hand, there are slippages in the rate of fiscal consolidation, the stay in erm ii would have to be prolonged and the adoption of the euro postponed. this would attract negative attention from the international financial markets, resulting in a reduced credibility of our economic policy and in pressures on the exchange rate and the interest