The role of the Central Bank in ensuring financial stability

Abstract

In 2008, the collapse of the Lehman Brothers in the United States triggered an extraordinary surge of volatility across financial markets and a decline of asset prices. The advanced economies of the United States and of various Member States of the European Union were in turmoil, resulting in a number of bankruptcies in the financial sector, a high rise in unemployment and other adverse consequences. In particular, banks and other credit institutions were not financially ready to withstand such shocks and resulted in a number of banks being declared as insolvent. This has resulted in a systemic crisis in which drastic measures had to be taken to ensure the protection of banks and encourage economic activity during these times. During this crisis, the European Central Bank and other relevant EU authorities shifted their focus on financial stability and implemented the necessary macroprudential policies and tools in order to safeguard the European financial sector. With the adoption of the euro and the new changes imposed by the EU authorities, the Maltese banking sector in 2008 was not directly affected by the crisis and fared better than other financial sectors. However, banks were still vulnerable due to the sharp decline in the real economy. However, if the necessary changes recommended and imposed by the EU authorities were not implemented, the Maltese banking sector would have collapsed. The scope of this study is to analyse the various tools and policies implemented by the Central Bank of Malta to ensure stability in the Maltese financial system. Since Malta is a Member State of the EU, the Bank must fulfil its international obligations and must also achieve the objectives set out by the directives and regulations. In order to achieve these goals, the Bank must cooperate with the local entities and authorities, mainly the MFSA, and must also cooperate with the various EU authorities. These primarily include the ESRB, ECB and the EBA. Despite the number of policies implemented to ensure stability, the Bank still faces a number of challenges which can be a threat to the Maltese financial system. However, with the macroprudential policies and tools, and the assistance of the local and European authorities, the financial system is protected from the same events that triggered the financial crisis in 2008.