The recent IMF report that I mentioned earlier noted the strong performance of Malta’s financial sector but also stressed the importance of strengthening the resilience of the sector. 8  BIS central bankers’ speeches  The elevated levels of credit and concentration risks call for stronger financial buffers, through higher provisioning and retention of profits. Such measures would strengthen the banks’ ability to absorb potential shocks and would also allow them to prepare themselves for compliance with stricter Basel III regulatory requirements. On the positive side, credit risk is being mitigated by prudent credit standards and cautious lending behaviour on the part of the banks. On the funding side, the resilience displayed by the banking system in the face of adverse international conditions is explained by the business model that has been a traditional characteristic of domestic banks, which rely strongly on retail deposits. Another indication of the overall prudent bias of the Maltese domestic banks is evident in the first chart presented earlier, which shows that leverage ratios of Maltese banks are considerably lower than in euro area in general. While the euro area average has declined on account of widespread deleveraging, the ratio remains significantly higher than the Maltese ratio, which has been quite stable. A further indication of the traditional funding model is the loan to deposit ratio, as shown in Chart 8, which is significantly low when compared with the major economies. This business model has served the domestic banking sector well.
Flexible inflation targeting means in practice that the aim is not to bring inflation back to the target as quickly as possible if it deviates from 2 per cent. But a precondition for being able to be flexible is that there are expectations of inflation still returning to target in the longer run. The inflation target has been the nominal anchor in the Swedish economy for so long that it is easy to assume that inflation expectations automatically stay around 2 per cent. But, as developments after 2011 have shown, long-term inflation expectations are not immune to influence. A long period of sub-target inflation caused expectations to creep further and further below 2 per cent. It therefore became increasingly urgent for the Riksbank to focus on reversing the trend and bringing inflation up to the target. This turned out to require major monetary policy efforts over a long period of time. An insight gained in recent years that therefore needs to be highlighted is that confidence in the inflation target cannot be taken for granted. The main task of monetary policy is to maintain the nominal anchor in the economy and the expectations and demands placed on monetary policy should take this as a starting-point. But on condition that confidence in the anchor is not jeopardised, monetary policy has a certain amount of scope to allow deviation from the inflation target to take a back seat in favour of other considerations.