Hence, it is the private sector which has to extend its utmost cooperation to the central bank to implement the monetary policy measures most effectively. This understanding at all levels of the private sector is a must. BIS Review 55/2007  3  The Government’s contribution to inflation fighting The governments are usually faulted for making the biggest contribution to inflation. The blame here is usually directed to the running of a high budget deficit by the government. This criticism against the government is not at all perfectly accurate. What contributes to inflation is not the existence of a budget deficit, but the financing of the deficit through inflationary means, viz, borrowing from the banking sector. Like the government’s deficit, the private sector’s deficits are equally contributory towards the raising of money supply and consequently to inflation. Hence, any blame should be squarely leveled against both sectors. It is natural for any government to make use of the bank funding to fill budget deficits, because it is very convenient and cost effective. But, excessive use of bank funding leads to creation of additional money and through it, to inflation. Hence, governments have to behave responsibly. When inflation sets in as a result of its irresponsible fiscal policy, it is the government which has to suffer the most. The government’s desire for bank financing has normally been equated to a child putting his fingers frequently into an open cookie jar.
Although the size of this particular scheme is limited, one hopes that it can be expanded and emulated by other banks. Such programmes are a prime example of the banking sector fulfilling its role of promoting economic growth by providing the necessary low cost funding, while at the same time contributing to the profits of the bank. It is worth noting also that competitiveness does not depend only on costs; as the crisis has reminded us, financial stability is equally essential. In Ireland for example, it was the poor governance and risky credit practices of commercial banks that drove the country into the crisis, even though the competitiveness indicators were very positive. Generally speaking, Maltese banking is run on a prudential and cautious business model and this is particularly true of the systematically-relevant banks, which manifest for example a low loan-to-deposit ratio. Nevertheless, we have stepped up our efforts, jointly with the MFSA, to ensure that the soundness of the banking system is not only preserved but also enhanced. The Joint Financial Stability Board between the Central Bank and the MFSA has contributed to major initiatives, notably amendments to the Banking Rules 09 and 12. These amendments will improve the overall coverage ratio and strengthen provisioning practices. They also boost bank capital and reserves to mitigate potential risks from lending portfolios. The amendments also address the risks arising from banks’ concentration in the real estate sector.