The significance of macroeconomic conditions and regulatory requirements on banks’ credit policies : an empirical study on Maltese banks

Abstract

The wave of new regulation following the 2008 global financial crisis has placed significant pressure on banks worldwide to increase the quality and quantity of their capital and place greater attention on risk management. Empirical studies argue that the stricter regulatory requirements have had a significant impact on banks’ lending activities. This study aims to assess the influence of macroeconomic conditions and regulatory requirements on the lending activities of Malta’s core domestic banks. Additionally, research will examine whether the relationship between these factors has changed in the recent years, particularly post the 2008 financial crisis. The objectives of the study were met through thirteen interviews with experts who held diverse experiences in the field. Research indicated a significant relationship between macroeconomics, regulation and bank lending. It was established that Maltese core banks place significant attention on regulation, macroeconomics and their own asset quality in relation to their lending activities. However, overall, regulation in the form of capital requirements was found to be the most binding. Despite this, research illustrated that prior to the financial crisis domestic banks focused primarily on economic activity to guide their lending activities. The research findings offer a number of recommendations for banks, regulators and the business community that could effectively prompt banks to increase their credit supply.