Banking and Finance in Small States: Issues and Policies
Malta: 11 – 19 April 2011
PETER J. BALDACCHINO
Summary of Lecture
This session will convey useful insights on practical aspects of small-state accountancy mainly derived from University of Malta accountancy empirical research studies, but also from experience in the corporate financial environment.
Small–island state influences, both positive and negative, will be shown to be affecting the practices of the Maltese accountancy profession, in its various fields. Such influences include the smallness factor itself, behavioural relations, the confidentiality paradox, gate-keeping, hat-changing and attitude to change.
The case will be made as to how the above mentioned factors may be impinging on areas of professional practices, such as company accounting and irregularity disclosure, the determinants of auditor appointment and changes, benchmarking, internal controls and even corporate governance in general.
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Workshop organised by the
Islands and Small States Institute of the University of Malta, in collaboration with the Commonwealth Secretariat and the Ministry of Foreign Affairs, Malta

Banking and Finance in Small States: Issues and Policies
Malta: 11 – 19 April 2011
MIGUEL BORG
Summary of Lecture
Banks exist to take risk, and the challenge is to determine the exact risk profile which will not endanger the survivability of the organisation and that ensures an acceptable level of growth in stakeholder value. A holistic Enterprise Risk Management (ERM) framework guarantees the adequate identification, assessment, management and reporting of all the risk exposures.
As part of the ERM framework, credit institutions manage a variety of risks including:
Credit risk, resulting from the default of a counterparty and reduction in the obligor’s creditworthiness.
Market risk, arising from unwarranted movements in factor prices including currency, interest rate, equity and commodity prices.
Operational risk, resulting from inadequate or failed internal processes, people and systems or from external events. This definition includes legal risk, but excludes strategic and reputational risk. (Basel II Article 644)
Liquidity risk, arising from the risk of not being able to fund increases in assets and meet obligations as they come due and at a reasonable cost.
Regulators and Governments around the world are keen to ensure that banks are strong enough to withstand future shocks without needing recourse to public coffers. The resilience of bank balance sheets to financial stress is the key to the future stability of the financial system. And the key to ensuring resilience is for regulators to subject bank balance sheets to regular stress tests.
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Workshop organised by the
Islands and Small States Institute of the University of Malta, in collaboration with the Commonwealth Secretariat and the Ministry of Foreign Affairs, Malta

Banking and Finance in Small States: Issues and Policies
Malta: 11 – 19 April 2011
LINO BRIGUGLIO
Summary of Lecture
The presentation explains the methodology that the University of Malta has developed to assess the risk of being negatively affected by external shocks. Economic vulnerability is associated with inherent exposure to external economic shocks and economic resilience with the nurtured ability to withstand or bounce back from such shocks. In this approach, economically vulnerable countries (mostly small states) are considered to be permanently economically vulnerable because of their small size, but they can adopt policy measures to reduce the risk of being adversely affected by such shocks
The presentation presents the economic resilience index, relating to policy measures, which basically measures the extent of good economic governance in countries, assuming that such governance enables a country to withstand economic vulnerability. The resilience index is coupled with the Vulnerability Index, relating to inherent economic features, which was also constructed by the University of Malta. The juxtaposition of these two indices leads to the classification of countries into four categories:
1. Best case: Low vulnerability scores, high resilience scores (mostly well-governed developed countries)
2. Worst case: High vulnerability scores, low resilience scores (mostly small badly governed countries)
3. Self made case: High vulnerability scores, high resilience scores (mostly small wellgoverned countries)
4. Prodigal son case: Low vulnerability scores, low resilience scores (mostly large badly governed developing countries)
The presentation emphasizes that (1) the fact that small states tend to be more economically vulnerable than small states has been amply proven on the various studies on this issue, including those carried out by the University of Malta and the Commonwealth Secretariat (2) that such vulnerability is inherent and permanent and (3) given this reality donor involvement in the sustainable development of small states should focus on resilience building, mostly to enable small states to adopt sound macroeconomic policies and to enhance market efficiency.
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Workshop organised by the
Islands and Small States Institute of the University of Malta, in collaboration with the Commonwealth Secretariat and the Ministry of Foreign Affairs, Malta

Banking and Finance in Small States: Issues and Policies
Malta: 11 – 19 April 2011
SILVIO JOHN CAMILLERI
Summary of Lecture
1. Financial Stability: A Multi-Faceted Concept
It is difficult to define the concept of financial stability, however we tend to associate it with the smooth-running of the currency markets, the banking system, stock markets, and job allocation. Confidence in the financial system is a key!
2. The Financial Stability Board
The Financial Stability Board is a supra-national institution which was established to foster the adoption of effective regulatory and supervisory standards, to recommend improvements in regulatory setups and to engage in contingency planning for crisis management. Members comprise national authorities, financial institutions and central banks.
3. The Role of Prudent Banking Policies
Minsky’s Financial Instability Hypothesis suggests that there are inherent destabilizing forces within free-market economies. Instability arises as a consequence of actions taken during times of financial stability. Therefore regulators should keep an eye on the changes of the financial structure of banks; since they might be prone to take excessive risks during prosperous periods.
4. The Role of Information Flows
Mishkin’s Information Economics Explanation for a Financial Crisis illustrates that a mixture of (ordinary) factors may lead to a worsening of asymmetric information problems. This slows down financial intermediation and real economic activity, resulting in a recession.
A financial crisis results in the sorting out of insolvent firms from healthy firms, through bankruptcy procedures. This reduces the level of uncertainty, so that a recovery can then take place.
5. Select Initiatives
The sub-prime crisis had wide repercussions on the real economy of most countries, and the need for reform became evident. Particular initiatives are aimed at addressing pro-cyclicality in bank capital requirements, increasing the transparency of OTC derivative contracts, encouraging the Implementation of International Standards, and to foster international cooperation in crisis management.
6. Conclusion
Some issues that raise debate include whether large banks may pose a threat to financial stability and whether there should be any restrictions on banking activity to avoid the formation of banks which may be too difficult to supervise.
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Workshop organised by the
Islands and Small States Institute of the University of Malta, in collaboration with the Commonwealth Secretariat and the Ministry of Foreign Affairs, Malta

Banking and Finance in Small States: Issues and Policies
Malta: 11 – 19 April 2011
DAVID G. CURMI
Summary of Lecture
The lecture will give an overview of the following topics:
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The framework of supervision and control of insurance operations in Malta:
Regulated Entities.
The Malta Financial Services Authority
The Insurance and Pensions Supervision Business Unit.
Supervision.
Preventive and Corrective Measures.
Co-operation and sharing of information.
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Regulatory Requirements:
Authorisation
Own Funds
Fit and Proper Persons
Reporting Requirements
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The structure, characteristics and performance of the insurance market in Malta:
Non-life insurance companies
Life insurance e companies
Affiliated insurance companies
Insurance Intermediaries.
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Comparative analysis of the insurance market in Malta in relation to EU benchmarks and to assess the contribution of the insurance market to the Maltese economy.
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Life and Non-Life Insurance Distribution Channels:
Bancassurance
Tied Insurance Intermediaries
Insurance Brokers
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Workshop organised by the
Islands and Small States Institute of the University of Malta, in collaboration with the Commonwealth Secretariat and the Ministry of Foreign Affairs, Malta

Banking and Finance in Small States: Issues and Policies
Malta: 11 – 19 April 2011
DAVID FABRI
Summary of Lecture
Dr Fabri shall brief participants on the role of regulators and the objectives of regulation, and the often complex relationship between regulators and licenced operators on one part and consumers of financial services on the other. He shall focus primarily on the legal status, structure and functions of the Malta Financial Services Authority of which he is the Directors responsible for legal and international affairs. The MFSA shall be placed in the context of other local and foreign regulatory authorities, and the increasing international dimension of regulation and the need for cooperation between regulators across borders shall also be discussed.
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Workshop organised by the
Islands and Small States Institute of the University of Malta, in collaboration with the Commonwealth Secretariat and the Ministry of Foreign Affairs, Malta

Banking and Finance in Small States: Issues and Policies
Malta: 11 – 19 April 2011
GEORGE FARRUGIA
Summary of Lecture
It is a known fact that crime transcends beyond national borders and criminals co-operate and assist each other well beyond national land demarcations. This transnationality has prompted governments to legislate and establish mechanisms to co-operate with each other in the fight against crime. Money launderers look globally to find weak jurisdictions and any country which fails to legislate against such crimes renders itself vulnerable.
A brief description of what is money laundering follows, describing how its effects were felt such that governments realised that it could no longer be tolerated and something had to be done. Thus the 1990s were characterised with a continuous global effort to bring in line all jurisdictions to a common minimum standard. This has brought about the development of
Financial Intelligence Units (FIUs) in almost country.
A discussion follows on what are the advantages and disadvantages of FIUs in small countries. Then the consequences of not having an efficient FIU could be are discussed while the consequences of money laundering and its social and economic effects are detailed later.
In conclusion, the fact that international financial crime is not victimless is stressed, while the importance of good legislation in conjunction with an effective FIU and supervisory and law enforcement are emphasised. International financial crime could not be restrained without the full cooperation between authorities, on a micro level and internationally on a macro level.
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Workshop organised by the
Islands and Small States Institute of the University of Malta, in collaboration with the Commonwealth Secretariat and the Ministry of Foreign Affairs, Malta

Banking and Finance in Small States: Issues and Policies
Malta: 11 – 19 April 2011
KAROL J. GABARRETTA
Summary of Lecture
The subject matter treated in Mr Gabarretta’s presentation – entitled The New Regulatory
Landscape: Pleasures yet to come? – highlights the initiatives engendered – at EU
institutional level, through inter alia the post-crisis regulatory infrastructure proposed by Mr de Larosiere, and at bank level, through the various proposals to amend the EU’s main legislative instrument for banks, the Capital Requirements Directive (CRD). It goes without saying that all this is happening within an environment where the international financial crisis is still on-going and its ripple effects are still being felt globally within real economies with small island states not being any exception.
The presentation also focuses on the current structure and composition of the local banking sector and provides some key facts as to why the crisis did not to date, have a significant impact on the local players. Mr Gabarretta’s presentation concludes by focusing on some key future challenges which the wide-ranging policy responses and regulatory initiatives will have on local players.
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Workshop organised by the
Islands and Small States Institute of the University of Malta, in collaboration with the Commonwealth Secretariat and the Ministry of Foreign Affairs, Malta

Banking and Finance in Small States: Issues and Policies
Malta: 11 – 19 April 2011
MARIO MALLIA
Summary of Lecture
The biggest financial crisis since the Great Depression started in 2007, and its aftershocks, both financial and economic, are still being felt today. What started off as a crisis of confidence between banks eventually led to a near-meltdown of the global financial system, an economic recession and the euro zone sovereign debt debacle. The crisis in turn led to an internationally-coordinated response with the aim of avoiding a future repetition of the catastrophe and defending financial stability. This response included a thorough re-assessment of traditional risk management techniques; the emergence of the role of Chief Risk Officer
(CRO); and the enactment of international risk-based regulation.
This lecture will examine the principles of risk management in financial institutions in the light of the crisis, with a particular focus on capital and liquidity management and risk governance in the context of small states.
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Workshop organised by the
Islands and Small States Institute of the University of Malta, in collaboration with the Commonwealth Secretariat and the Ministry of Foreign Affairs, Malta

Banking and Finance in Small States: Issues and Policies
Malta: 11 – 19 April 2011
MIRKO MALLIA
Summary of Lecture
During the past two decades financial stability has become an increasingly dominant objective in policymaking. Indeed, financial stability has found a more prominent role in the mandates of Central banks including the European Central Bank and the Bank of England. This has resulted in the publication of financial stability Reports by a number of Central Banks. The ultimate aim of these publications is to highlight risks and exposures present in the financial system. Although this greater emphasis on financial stability has been experienced throughout the past years, it gained particular prevalence in the aftermath of the recent financial crisis. Its centrality also led to the creation of the European Systemic Risk Board (EU) and Financial
Stability Oversight Council (US), which aim to prevent and possibly mitigate systemic risks.
For small states, a stable financial system is even more important as this ensures a healthy and resilient economy. Indeed, small states tend to have limited control on external shocks and these can lead to significant repercussions domestically. For this reason, the presentation will present the concept of financial stability and explain its importance in today’s economy. The presentation will also tackle some specific issues which are of particular importance to safeguard financial stability in Small States.
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Workshop organised by the
Islands and Small States Institute of the University of Malta, in collaboration with the Commonwealth Secretariat and the Ministry of Foreign Affairs, Malta

Banking and Finance in Small States: Issues and Policies
Malta: 11 – 19 April 2011
ANDREW PORTELLI
Summary of Lecture
The presentation is about black swan events, tail events that are highly improbable but exert extreme effects when they occur. Some of the tail events that materialised in the recent past are reviewed, highlighting the risks that emanated from these events. The presentation then focuses on the different risk assessment techniques that can be used by authorities in small states responsible for the macro prudential supervision of their respective financial system.
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Workshop organised by the
Islands and Small States Institute of the University of Malta, in collaboration with the Commonwealth Secretariat and the Ministry of Foreign Affairs, Malta