In particular, it is essential from Malta’s point of view that the presence of subsidiaries of cross-border banks that are systemically important to a host country be given due weight in determining participation in the college of supervisors. International experience has also shown that state intervention may be necessary to resolve problems in the financial sector. The state is often the only entity in a democracy that has the political legitimacy, financial strength and credibility to support ailing institutions and, hence, restore confidence in the financial system as a whole. In extreme situations, which require the injection of public funds, the cost to the public purse can be very high. This is an additional reason why maintaining fiscal discipline in the shape of balanced budgets over the economic cycle is important. This would allow a buffer to be built up that could be used in exceptional situations if required, without jeopardising the sustainability of public finances. Finally, safeguarding the health of the financial sector in these challenging times also calls for prudent behaviour on the part of the market players themselves. Though not under any identifiable threat, Maltese banks should build on their existing strengths by reinforcing their capital base through the retention of a greater proportion of earnings; and, as domestic economic conditions are expected to weaken, loan loss provisioning levels may also need to rise. BIS Review 155/2008  5  The current crisis will not be over until confidence and trust are restored, and the credit channel starts to function fluidly again.
And as the editorial of the November issue of the Institute’s journal Financial World goes on to explain, “It is the mood that has fundamentally changed and this change is why, though governments may pump money into banks, share prices are still weak. It is why central banks are cutting rates but Libor is staying put. It is also why, despite public money to provide liquidity to markets, to guarantee bond issues and even to take stakes in banks, stock markets continue to drop like so many stones.” Perhaps this is happening because, as former ECB Executive Board member and Italian Economy Minister, Tommaso Padoa Schioppa aptly put it, this is not a crisis in the system, it is a crisis of the system. As tales of woe beyond our shores multiply, it is appropriate to take stock of what this systemic shock could mean for Malta. First, some background. Our financial system has changed beyond recognition in recent years, driven by a combination of domestic market reforms and international integration. The liberalisation process of the 1990s saw the gradual removal of interest rate restrictions, the easing of capital controls and the privatisation of most of the financial sector. The legal framework was entirely overhauled, bringing it in line with EU standards and laying the foundations for the growth of new areas of financial activity, such as investment services and trusts. EU membership in 2004 opened up the Maltese financial market to service providers from other member states.