leveraging better our current economic success address by dr mario vella governor, central bank of malta delivered during the ifs malta annual dinner 01 december 2017 dear president and members of the committee of the institute of financial services ( ifs ) malta, distinguished guests, personally and on behalf of the board of the central bank of malta, i thank you for this annual traditional opportunity to address this distinguished audience and, through it, all stakeholders. also my personal and institutional welcome to the representatives of overseas professional bodies who are with us tonight, the london institute of banking and finance, the global association of risk professionals, and the european banking and financial services training association. you evidently hold ifs malta in high esteem. so do we. mr president, we are pleased to hear about the many initiatives being undertaken in the area of financial services education and commend the institute for its ongoing commitment to the professional development and up - skilling of financial services practitioners. this is definitely a positive contribution to the sustainability of our dynamic sector, and one we commit ourselves to support effectively. the central bank of malta is a long - standing partner of the institute. rest assured that we will continue to offer our support wherever possible. tonight ’ s event has become an important date in the calendar of key stakeholders in our country ’ s economy, particularly but not only in the financial services sector. this dinner, in fact, provides us with an opportunity to meet together and discuss what went well, and page 1 of 10 what went less well, in our economy in a less formal environment than that usually associated with discussions on economic and financial developments. traditionally, the central bank avails itself, through its governor, of the opportunity of this occasion to give an extensive panoramic review of malta ’ s economic performance, of what in our view drove these results, outline the challenges ahead and conclude with policy recommendations. this year we will depart from this tradition. while we will start with an overview of this year ’ s developments and discuss briefly the outlook for 2018, we will use this as a basis for a broader, more thematic, discussion. in recent years, definitely since the european sovereign debt crisis, we have increasingly come to realise that whilst we are a very open economy dependent on foreign trade and investment, our economy has shown a degree of resilience and adaptability that has defied expectations, surprised foreign institutions and, indeed, ourselves too. all forecasters including the international monetary fund, european commission, european central bank and

( within a group ) do not need a licence to lend to each other. to give loans outside the group ( intercompany ) one does need a licence. while it is beneficial to see a diversification of firms ’ financing sources, this change raises some issues. let us start with something we discussed last year. we need to be careful that in the current low interest environment, investors ’ search for yield does not stimulate excessive risk - taking. therefore, we need to complement the rise in corporate bond issuance with a significant effort in improving investors ’ education and compel corporates page 7 of 10 borrowing from the domestic capital market to provide more information to investors about their creditworthiness. secondly, even if we believe that the recent disintermediation process was a matter of choice, reflecting firms ’ current liquidity, this nevertheless begs the question as to what would happen when the economy slows down and internal funds diminish. we believe that if the disintermediation process goes too far, our resilience to future shocks could be hampered. whenever activity slows down, firms will tend to cut back on investment and innovation. moreover as a central bank, we have to be concerned that in such an environment, the transmission of monetary policy, which mainly occurs through the banking channel, could be impaired. this would make it harder for policymakers to react to economic needs. the current situation, with a lot of savings lying unutilised at the central bank, seems to me to be a wasted opportunity to leverage our current success in order to build a better future. at a time when everybody agrees that we need to invest strongly in infrastructure and to upgrade the competences of our workforce – both of which are long - term investments –, it is painful to note that we opt instead to pile our savings in what is essentially the most short - term of investments : deposits with the central bank. the fact that, despite overall excess liquidity, some smaller banks continue to borrow from us through regular monetary operations, is an indication that the domestic interbank market still faces some structural inefficiencies. a more efficient financial system would facilitate the allocation of capital to its most productive uses. this would boost capital stock and total factor productivity and, hence, sustainable economic growth going forward. i believe that the setting up of the malta development bank should help increase the availability of finance to the real economy, while also supporting long - term investment projects. this bank