Crisis management
A crisis can disrupt the intermediation function of the financial system and impede banks from managing their risks efficiently. Risk monitoring and risk assessment enable the authorities to take timely measures to prevent or reduce the impact of events which could lead to vulnerabilities in the financial system. Clear communication strategies and allocation of responsibilities between the authorities concerned become essential.
The prevention and resolution of crises
The Central Bank of Malta has a key role in the management of potential financial crisis situations; therefore, it continuously develops operational capabilities for their timely management and resolution.
Development of the domestic crisis management framework
Financial crises require prompt responses in order to minimise the severity of such crises and potential contagion effects. To ensure the best outcome, a Domestic Crisis Management Framework has been drawn up by the Central Bank of Malta, the Malta Financial Services Authority (MFSA) in its capacity as both the National Competent Authority and the National Resolution Authority, and the Ministry for Finance (MFIN), under the auspices of the Domestic Standing Committee (DSC), to clearly establish the underlying principles and networking procedures for managing financial crises, including guidelines and operational structures for domestic and cross-border cooperation. The DSC, composed of representatives from the Bank, MFSA and MFIN, meets regularly to discuss and exchange views on financial soundness and if necessary to manage potential systemic problems. The objectives of the DSC have been established in a Memorandum of Understanding (MoU), endorsed by the three authorities, on cooperation for the prevention and management of financial crisis situations.
Provision of liquidity to credit institutions
The Central Bank of Malta, in its role of Lender of Last Resort, is responsible, in terms of Article 17 of the Central Bank of Malta Act, to provide financial support through the provision of emergency liquidity assistance to safeguard the stability of the banking sector. This is resorted to only in exceptional circumstances and as a last resort when solvent credit institutions undergo a liquidity strain that is perceived to pose a threat to the stability of the financial system.
Systemic Impact Assessment
Article 3(1) of the Capital Requirements Directive (CRD), defines systemic risk as a "risk of disruption in the financial system with the potential to have serious negative consequences for the financial system and the real economy." The systemic implications of a financial crisis need to be carefully assessed. In view of its role as the national macro-prudential supervisor, the Central Bank of Malta identifies those institutions the failure of which would have serious repercussions on the stability of the financial system, and has in place a framework which assesses the potential disruption to all parts of the financial system and real economy arising from a bank failure. Such framework assists decision making when implementing measures available for mitigating potential impacts of a credit institution in difficulty.
Cooperation agreements
The Central Bank of Malta is a signatory to the 2008 MoU on cooperation between financial supervisory authorities, central banks and finance ministries of the European Union on cross-border financial stability. The Central Bank of Malta, the MFSA and the Ministry for Finance and Financial Services are signatories to the 2005 Memorandum of Understanding on co-operation between the Banking Supervisors, Central Banks and Finance Ministries of the European Union in Financial Crisis situations. This Memorandum was extended by the 2008 Memorandum of Understanding on ‘Cooperation between the Financial Supervisory Authorities, Central Banks and Finance Ministries of the European Union on Cross-Border Financial Stability’ to facilitate the management and resolution of cross-border systemic financial crises.