Fostering financial stability through the SSM Framework in Malta : an analysis

Abstract

Regulation and supervision had to be revamped as a result of the financial crisis of 2008, where certain credit institutions were shaken to the core and created a negative systemic effect as a result. The banking sector in the EU had to be strengthened through heightened control and monitoring in order to avoid a take-two of the crisis. Credit institutions are major players in the financial system of a country, and their soundness must be ensured in order to keep the financial system stable. The research defined financial stability and explored the manner in which the interaction between micro- and macro-prudential regulation and supervision fosters financial stability. The Author explored both perspectives in view of their complementary nature. In addition, the research attempted to establish how the culture within banks can influence the whole sector and in turn the whole economy in Malta. The study concluded that micro-prudential regulation emanating from the SSM framework is considered significant in ensuring that banks are in good financial health, meaning that it helps lenders to withstand adverse economic scenarios. Looking at banks’ collective financial position attained by the help of the SSM framework signals the framework’s contribution to the financial stability of a country. The study further concluded that there is only so much supervisory authorities can control; ultimately it all depends on the integrity of the management bodies of banks, as well as on the culture therein. The Author holds that the benefits of regulatory requirements banks are subjected to outweigh the costs in the context of ensuring their robustness and financial health, which in turn help to foster financial stability.