Ad­dress by Dr Mario Vella, Gover­nor, Cen­tral Bank of Malta de­liv­ered dur­ing the ifs Malta An­nual din­ner

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Con­tin­ues from page 17

Chris­tine La­garde has re­cently said that while poli­cies had ad­dressed the mis­takes that led to the cri­sis, there is still much more to do as a “lot of the murkier ac­tiv­i­ties are mov­ing to­ward the shadow bank­ing sec­tor”. This risk is also in­di­cated in the most re­cent IMF Global Fi­nan­cial Sta­bil­ity Re­view as well as the work of the ESRB and ECB re­lated to the non­bank fi­nan­cial sec­tor. The CBM and MFSA par­tic­i­pate ac­tively in this work. The do­mes­tic non-bank fi­nan­cial sec­tor in Malta is linked with the bank­ing sec­tor through cross share­hold­ings. These links need to be stud­ied more rig­or­ously, both at a mi­cro and macro level, as well as across sec­tors. In this re­gard, reg­u­la­tion and su­per­vi­sion must aim at min­imis­ing reg­u­la­tory ar­bi­trage. Ir­re­spec­tive of the set-up or tech­nol­ogy, in­sti­tu­tions trans­mit­ting com­mon types of risks should be treated on the same foot­ing.

It is also op­por­tune to for­mu­late a holis­tic strat­egy for our fi­nan­cial ser­vices sec­tor that takes into ac­count a na­tional risk ap­petite. One must take stock of the risk/ben­e­fit quo­tient of each sub­sec­tor, and the lessons learnt thus far, and put it in a long-term con­text on where to fo­cus go­ing for­ward.

Dur­ing the year, at the re­quest of the Mal­tese Govern­ment, Malta un­der­went an IMF Fi­nan­cial Sec­tor Assess­ment Pro­gramme, which is an in-depth assess­ment of the fi­nan­cial sec­tor. Fur­ther­more, a com­pre­hen­sive up­date of the 2015 Na­tional Risk Assess­ment was car­ried out in 2017 and pub­lished ear­lier this year. It iden­ti­fied po­ten­tial money-laun­der­ing and ter­ror­ism fi­nanc­ing threats and vul­ner­a­bil­i­ties that present risks to Malta’s eco­nomic and so­ci­etal sta­bil­ity. The NRA forms the ba­sis of Malta’s Na­tional AML/CFT Strat­egy. In fact, some of the ini­tia­tives iden­ti­fied in the NRA are al­ready be­ing im­ple­mented.

In ad­di­tion, a Com­mit­tee of Ex­perts on the Eval­u­a­tion of An­tiMoney Laun­der­ing Mea­sures and the Fi­nanc­ing of Ter­ror­ism (MONEVYAL) has just ended a rig­or­ous on-site mis­sion to as­sess Malta’s stand­ing with in­ter­na­tional AML/CFT stan­dards.

The lo­cal au­thor­i­ties are ea­gerly ex­pect­ing the fi­nal re­sults of these eval­u­a­tions as they rep­re­sent a stan­dard­ised global yard­stick against which to bench­mark our state of play. This will leave a wealth of in­for­ma­tion for au­thor­i­ties to ex­ploit as they di­rect ef­forts into strength­en­ing fur­ther the cur­rent in­sti­tu­tional frame­work and op­er­a­tions. All stake­hold­ers are en­cour­aged to seize the op­por­tu­nity to im­prove the rep­u­ta­tion, sound­ness and re­silience of our fi­nan­cial ser­vices sec­tor.

Malta is also ac­tively work­ing to em­brace blockchain tech­nolo­gies, in­clud­ing vir­tual as­sets. 2018 will also be re­mem­bered as the year when Malta was pro­pelled to the fore with the in­tro­duc­tion of a holis­tic leg­isla­tive and reg­u­la­tory frame­work for fin­tech and vir­tual as­sets, as­sert­ing it­self as a dig­i­tal hub. Such tech­nolo­gies pro­vide the ben­e­fits of re­duc­ing trans­ac­tion costs which can be passed on to con­sumers; greater ef­fi­ciency, trans­parency, ad­vance­ment in KYC ca­pa­bil­i­ties and com­pe­ti­tion. While these ben­e­fits are ac­knowl­edged and duly wel­comed, one must also be sen­si­tive to the un­der­ly­ing po­ten­tial risks they might pose as they be­come more main-stream.

The ef­fec­tive im­ple­men­ta­tion of the new leg­is­la­tion and reg­u­la­tion re­quires ex­per­tise not only in the un­der­ly­ing tech­nol­ogy, but also in its le­gal as­pects and all the risks in­volved, such as cy­ber risks. The fast tech­no­log­i­cal ad­vance­ments are also a chal­lenge and stay­ing ahead of the game from a reg­u­la­tory per­spec­tive should be given high im­por­tance for the suc­cess­ful de­vel­op­ment in this new field. Thus, while all the leg­isla­tive ini­tia­tives for this new tech­nol­ogy to suc­ceed au­gur well, the au­thor­i­ties need to re­main vig­i­lant about the im­pli­ca­tions for fi­nan­cial sta­bil­ity stem­ming from the dig­i­tal econ­omy.

Fast eco­nomic growth does not hap­pen without shak­ing a so­ci­ety’s eco­nomic, so­cial, cul­tural, po­lit­i­cal and in­sti­tu­tional equi­lib­ria. This “shak­ing” is both a con­di­tion and a con­se­quence of eco­nomic ac­cel­er­a­tion. It is both an ef­fect of eco­nomic, so­cial, cul­tural, po­lit­i­cal and in­sti­tu­tional dis­rup­tion and a cause of eco­nomic, so­cial, cul­tural, po­lit­i­cal and in­sti­tu­tional dis­rup­tion. This is not a moral judge­ment; it is a state­ment of what I be­lieve is a sober un­der­stand­ing of the state of af­fairs.

In the well-known words of the Fore­word to the Sec­ond Edi­tion of Liq­uid Moder­nity, the late Zyg­munt Bau­man, re­marks that “Forms of modern life may dif­fer in quite a few re­spects – but what unites them all is pre­cisely their fragility, tem­po­rari­ness, vul­ner­a­bil­ity and in­cli­na­tion to con­stant change”. Bau­man’s “liq­uid moder­nity” is char­ac­terised by, I quote him, “the grow­ing con­vic­tion that change is the only per­ma­nence, and uncer­tainty the only cer­tainty. A hun­dred years ago ‘to be modern’ meant to chase ‘the fi­nal state of per­fec­tion’ now it means an in­fin­ity of im­prove­ment, with no ‘fi­nal state’ in sight and none de­sired”.

Of course Joseph Schum­peter, al­most 60 years be­fore (and he was not the first one), had al­ready em­pha­sised the cen­tral­ity of the dis­rup­tive process of trans­for­ma­tion that char­ac­terises modern eco­nomic re­al­ity. He de­scribed it as “…by na­ture a form or method of eco­nomic change and not only never is but never can be sta­tion­ary. [...] The fun­da­men­tal im­pulse that sets and keeps […] (it) in mo­tion comes from the new con­sumers’ goods, the new meth­ods of pro­duc­tion or trans­porta­tion, the new mar­kets, the new forms of in­dus­trial or­gan­i­sa­tion […] (as a) process of in­dus­trial mu­ta­tion that in­ces­santly rev­o­lu­tionises the eco­nomic struc­ture from within, in­ces­santly de­stroy­ing the old one, in­ces­santly cre­at­ing a new one”.

When con­fronted with this state of af­fairs – a state of af­fairs that is ad­mit­tedly dis­qui­et­ing and un­set­tling – the worst pos­si­ble re­ac­tion is to re­treat into nos­tal­gic de­nial, and to pre­tend that we are liv­ing in tem­po­rary blips of dis­e­qui­lib­rium, in ex­cep­tional sit­u­a­tions, that will at some un­spec­i­fied point in time re­vert to a bliss­ful state of eco­nomic, so­cial, cul­tural, po­lit­i­cal and in­sti­tu­tional equi­lib­ria. The only rea­son­able ap­proach is to en­deav­our tire­lessly and to the best of our tech­ni­cal abil­ity to nav­i­gate a re­al­ity that is com­plex, char­ac­terised by change and prone to crises. If there is no go­ing back, then go­ing for­ward we can only go for­ward.

Nav­i­gat­ing this re­al­ity re­quires us to be con­stantly vig­i­lant to the risks in­volved, a task that re­quires us to un­der­stand re­al­ity and to deal with it to the best of our tech­ni­cal com­pe­tences. Change brings with it chal­lenges and op­por­tu­ni­ties, which chal­lenges and op­por­tu­ni­ties eas­ily morph into each other, and gen­er­ate fur­ther chal­lenges and op­por­tu­ni­ties.

Of course, the fi­nan­cial sys­tem, like any other, can­not re­duce risk to zero. We will al­ways face in­ap­pro­pri­ate be­hav­iour, but we are con­fi­dent that Malta’s fi­nan­cial sys­tem can with­stand the shocks gen­er­ated by such be­hav­iour, given con­stant vig­i­lance.

Pre­cisely be­cause the econ­omy is every­body’s busi­ness, it is in every­body’s busi­ness that we do not un­der­es­ti­mate the crit­i­cal im­por­tance of the tech­ni­cal com­pe­tences re­quired to un­der­stand and man­age the chal­lenges and op­por­tu­ni­ties that change in­evitably im­plies. It is an as­pect of con­tem­po­rary re­al­ity where words mat­ter, where words are per­for­ma­tive, where they have prac­ti­cal con­se­quences, where – there­fore – it is crit­i­cal that we know what we are talk­ing about.

In this ad­dress to­day, my col­leagues and I have high­lighted some of the is­sues we face as we deal with change within our re­mit and within per­spec­tive of our main in­sti­tu­tional ob­jec­tive, namely to main­tain price sta­bil­ity within the frame­work of our en­thu­si­as­ti­cally com­mit­ted mem­ber­ship of the Eurosys­tem and our par­tic­i­pa­tion in the for­mu­la­tion and im­ple­men­ta­tion of the Eurosys­tem’s mon­e­tary pol­icy.

The Cen­tral Bank of Malta’s Mis­sion State­ment, de­clares that among our in­sti­tu­tional obli­ga­tions, we must “con­trib­ute ef­fec­tively to the sta­bil­ity of the fi­nan­cial sys­tem by iden­ti­fy­ing and as­sess­ing sys­temic risks and im­bal­ances, and mak­ing the ap­pro­pri­ate pol­icy rec­om­men­da­tions”, and that “we must for­mu­late and im­ple­ment a macro-pru­den­tial pol­icy to ful­fil the tasks of the bank as the na­tional macro-pru­den­tial author­ity”. We will con­tinue to do so with all the en­ergy, con­sis­tency and com­pe­tence re­quired.

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