Liberalisation and integration into the EU have underpinned the rapid growth of the Maltese financial sector. The number of banks rose from 16 in 2004 to 23 in September this year. During the same period, the total assets of the banking system more than doubled to EUR45.1 billion. Nor was growth restricted to the banking sector. The number of local and foreign-based collective schemes climbed from around 70 in 2004 to nearly 400 today, partly reflecting legislative changes that spurred the formation of professional investor funds. Total assets under management have also increased exponentially to over EUR8 billion. More moderate growth was recorded in the insurance sector, though the captive insurance business is growing fast. These developments in Malta mirrored, to a certain extent, those abroad. Financial liberalisation, deregulation and the expansion of cross-border capital flows have driven the rapid growth of the financial sector globally. Indeed, until the start of the turmoil last year, the global financial system had benefited from a long period of economic expansion, relatively easy monetary conditions and innovation. As a result, the size of the financial industry relative to the economy increased considerably. In the United States it grew to a point where it represented nearly 25 per cent of the stock market capitalization, while financial assets in Britain in 2007 were equivalent to almost nine times the GDP. Such a favourable combination of circumstances could not last.
Conversely, our financial institutions gained access to the single European market, a factor which encouraged additional inward foreign investment into the sector. At the same time, the last exchange controls were removed. The adoption of the euro last January was a further step in the integration process into the single market. Financial transactions across the euro area can now take place without incurring exchange rate risks. Furthermore, Maltese banks now have access to the Eurosystem facilities available to credit institutions within the euro area. These include a variety of instruments designed to provide short-term liquidity, as well as standing deposit and lending facilities. At the same time, euro adoption entailed a reduction in the minimum reserve requirements that Maltese banks had to comply with, resulting in the release of additional funds into the banking system. Euro adoption also led to improvements in the financial infrastructure supporting the Maltese economy. In November 2007, Malta formed part of the first group of countries that joined TARGET2, the payment system used by the Eurosystem for the settlement of large value  BIS Review 155/2008  1  interbank transfers in euro. Maltese banks can use TARGET2 to carry out transfers with other banks in Malta and throughout the euro area rapidly, safely and effectively. The Single Euro Payments Area (SEPA), launched in January this year, is a further step towards closer financial integration and aims at making retail payments across the euro area as easy as they currently are within national boundaries.