The implementation of the EU macro-prudential policy in Malta

Abstract

The uncontained risks of the global financial crisis made it clear that a global coordinated action was necessary for reforms of macro-prudential rules. Thus, post-crisis a number of measures were taken both at the global level and at the European Union level. In fact, macro-prudential supervision which has the objective of safeguarding the financial system as a whole, gained prominence post-crisis. On July 2013, two legislative instruments, the Capital Requirements Regulation (CRR) and the Capital Requirements Directive IV (CRD IV), entered into force, with the objective to provide one set of harmonised prudential rules for all EU countries. The aim of this study is to analyse 'The Implementation of the EU Macro-Prudential Policy in Malta'. This study also consists of a comparative case study concerning other EA small states so as to identify similarities, differences or both. The following three research questions were formulated in this regard: 1) What institutional set-up was chosen in Malta to implement the EU macro prudential policy? 2) What policy tools are being applied in Malta to implement the EU macro prudential policy? 3) How does Malta's institutional set-up and policy tools differ from that in other similar small Euro Area countries, therefore Ireland, Luxembourg and Cyprus? Given the various models and trends of institutional arrangements, the aim of the first research question was to identify the current institutional arrangement present in Malta, also when compared to the 2011 ESRB recommendations on the macro-prudential mandate of national authorities. Since the CRDIV and CRR involve various available tools to be implemented by Member States, the aim of the second research question was to analyse which from the available tools, Malta is implementing. The aim of the third research question was to compare both Malta's institutional set-up and tools with other similar Euro Area countries The case study method was used for the first two research questions, since their focus is on Malta, which requires analysis of the relevant data in a specific context. Whilst the comparative case study method was used for the third research question to bring into focus similarities and differences between the selected cases. The results obtained from this study as regards to Malta were that in Malta the Central Bank of Malta (CBM) holds responsibility for the formulation and implementation of macro-prudential policy, and it holds the macro-prudential mandate. Micro-prudential policy however, falls within the remit of the Malta Financial Services Authority (MFSA). The established mechanism for cooperation, therefore the Joint Financial Stability Board allows for exchange of information between the CBM, MFSA and the Ministry of Finance which is a non-voting member. Furthermore, Malta is fully compliant with the ESRB recommendations on the national macro-prudential mandate. Moreover, Malta makes use of a range of macro-prudential policy tools under both the CRD IV and CRR and also those that are not covered by EU legislation. The results obtained as regards to the comparative case study were that Malta's institutional set-up is mostly similar to that of Cyprus, whilst Ireland is the most centralised, and Luxembourg the most fragmented with the strongest role for the Ministry of Finance. Furthermore, the three different countries have different financial stability situations, and as regards to macro-prudential policy tools, whilst there are some similarities in the applied tools between Malta and the countries chosen there are also differences. Ireland has the largest range of tools from all four countries, Luxembourg, despite its resilience during the financial crisis, still has applied quite a range of tools, whilst Cyprus, after its economic, financial services, and sovereign debt crisis, is considered to have a narrow range of tools. Despite of Malta's resilience, when compared to these countries, it is considered to have a broad range of tools.