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