significantly above the regulatory requirements. commenting on consumer credit, the update observes a reduction in the overall nonperforming loans ratio for households. the ratio of non - performing loans for consumer credit transactions decreased while that for mortgages remained stable. as a result of favourable conditions in the labour market, there was also a slight reduction in household loan repayments that were classified as being in arrears. “ euro summit statement ”, brussels 26 october 2011, points 5 and 6. central bank of malta, financial stability report update – june 2011, 17 october 2011. bis central bankers ’ speeches it also noted a slight deterioration in the corporate non - performing loan ratio as an increase in the ratio for certain sectors, particularly construction and real estate activities, was offset by an improved ratio in other sectors. the update noted that credit risk is being partly mitigated by tight credit standards and cautious lending behaviour on the part of the banks. however, it also expressed concern that credit and concentration risks remain elevated while provisioning levels remain inadequate. in that light, the central bank continues to urge the banks to make higher loan loss provisioning – especially for loans related to construction activity – and to strengthen their capital base. these measures would not only enable the banks to meet potential shocks but would also allow them to prepare themselves better for compliance with stricter basel iii regulatory requirements. on the funding side, the resilience displayed by the banking system in the face of adverse international conditions is attributable to the prudent traditional business model that has been a historic characteristic of domestic banks, one that places a strong reliance on retail deposits. this business model has served malta well as the traditional sources of funding have proven to be very stable, including at a time of international tension. it is therefore essential that, while staying abreast of innovations in the financial world and taking on the changes that are required to stay competitive and improve efficiency, the domestic banking sector must also continue to build upon the strengths of the traditional model. by contrast, the financial turmoil of recent years has had a negative effect across many countries, particularly on financial institutions that rely on wholesale funding sources. in response to the rapid drying up of the interbank markets and with liquidity abruptly disappearing in many key financial markets in the euro area, the eurosystem has for the past three years been implementing a broad programme of enhanced credit support. in particular, the eurosystem has been providing liquidity on a fixed rate and full allot

decisions immediately applicable in a particular economy that puts the euro area financial stability in danger ”. 3 where does malta ’ s fiscal situation and more generally the broader maltese economy, fit into all this? malta ’ s fiscal deficit ratio followed a generally downward path during the last decade, though the decline was interrupted during two particular years – 2003 and 2008 – each explained by particular events. more recently, the budget deficit ratio has fallen each year since the high of 4. 6 % that was recorded in 2008. a large outlay was incurred during that year for the restructuring of a government - owned enterprise. this outlay however brought to an end the provision to the same enterprise of further government subsidies, which would otherwise have added to future deficits. the ratio eased to 3. 7 % and 3. 6 % in 2009 and 2010, while the latest government projections, as indicated in the pre - budget document, refer to a deficit of 2. 8 % in 2011 and 2. 2 % in 2012. since 2009 the deficit ratio for malta has been below the euro area ’ s average, but it has to be pointed out that this average is heavily affected by the high deficit levels of the member states facing difficulties ( chart 2 ). thus although the fiscal imbalance is narrowing and returning back to the levels stipulated by the maastricht treaty a strong case can be made for continued caution in malta ’ s fiscal policy and for further measures that would help to ensure the achievement of the government ’ s targets. with a government debt ratio at around 69 % in 2010 and 2011, it has become even more important to bring down this ratio at a faster pace ( chart 3 ). j. c. trichet, “ remarks at the farewell event ”, frankfurt am main, 19 october 2011, p. 3. bis central bankers ’ speeches moreover, despite the weak external environment the economy continues to grow at a sustained rate and, as i referred to earlier, it is considerably easier to undertake further consolidation at a time of ongoing economic growth. reductions in the deficit ratio would also leave more room for manoeuvrability on the fiscal side in the event of an economic slowdown without breaching the european rules. bis central bankers ’ speeches the least painful way to reduce the ratio of the deficit to the gdp is through economic growth. in turn faster growth can be achieved through improvements in productivity. in this respect, consensus needs to be reached on steps that can be taken with minimal social disruption to reduce the