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. 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. the tests carried out by the bank should, however, be complemented by parallel tests conducted by individual institutions. in particular, banks should make an in - depth, bottom - up assessment of the potential implications of critical events to identify potential weaknesses at an early stage so as to be in a position to take early corrective measures. this would also serve to reduce the pro - cyclicality of such measures. in recognition of the need for a strong risk management framework, the central bank of malta, in cooperation with the mfsa, has been working with a number of banks on their contingency funding plans and stress testing capacity. a new supervisory regime the lessons that are emerging from the financial crisis will almost certainly change the shape of financial regulation and supervision as we know it. the globalisation of financial institutions and markets, and the associated interdependencies, imply that a regime that has only a narrow institutional and geographic focus will prove inadequate. there is now a heightened recognition of the importance of the macro - prudential dimension of supervision and of the need to have mechanisms in place to address systemic risks, within and across national borders. in this regard, the recommendations contained in the de larosiere report constitute an excellent basis for action. the report distinguishes between micro - prudential supervision ( the supervision of individual institutions ) and macro -

the erm ii period. this would ensure continuity and so assure operators that stability would continue to prevail notwithstanding the lira ’ s participation in a mechanism that permitted relatively wide daily fluctuations. this decision was also dictated by the need to counter harmful speculation at the time about the appropriate level of the exchange rate. lessons learned one lesson that could indeed be drawn from malta ’ s experience is that the discipline imposed by the currency peg was probably the factor that contributed most to the relatively smooth transition to euro area membership, not only in terms of the achievement of the exchange rate criterion, but more so because it helped to focus attention on macroeconomic and structural policies. there was, however, one factor that remained constant as the journey to the euro progressed. that was the small size of the economy and, thus, its vulnerability to shocks. this was compounded by the risk of a speculative attack of the currency, given the combination of still weak economic fundamentals and the dismantling of the capital controls regime which had protected the lira for decades. these realities made the transition from a basket peg to a full euro peg even more challenging. the potential exposure to capital outflows was also a source of preoccupation because the bank was aware that the typical malta enterprise. interest - sensitive maltese investor was likely to be attracted by the availability of a wide choice of financial products overseas offering attractive yields. long before eu accession the bank had anticipated this challenge by adopting a sequenced programme of capital account liberalisation to test investor reactions. in fact, capital controls were only fully lifted on the eve of eu membership in 2004. during the experimental phase, the liberalisation of direct investment and other long - term flows preceded that of flows with a shorter maturity. at this time in particular the bank ensured that its policy interest rate contained a sufficient premium over euro rates so as to make maltese lira assets relatively more attractive. as a result, and despite the persistence of a relatively high current account deficit, the maltese lira did not experience undue selling pressures. this was reassuring, but it was not enough. when it was time to decide on the strategy to pursue in erm ii, therefore, the bank only put forward its proposal to eschew the use of the 15 % fluctuation bands after it had carried out the necessary studies to assess the level of the equilibrium exchange rate. these studies, based on different methodologies, showed that the maltese lira exchange rate was not significantly out of