Banking and Finance in Small States: Issues and Policies
Malta: 16 - 20 April 2012
PETER J BALDACCHINO
Summary of Lecture
This presentation first looks at the small country influences on the practice of internal auditing. Five
particular influences will be examined, including the smallness factor itself with its advantages and
disadvantages on companies and institution; the limited corporate controls and governance and
problems of benchmarking; the strength of behavioural relationships affecting the independence of
both internal and external auditors; the confidentiality paradox including the resistance to
whistleblowing; gatekeeping and hat-changing leading to a multiplicity of conflicts of interest and
often ineffective codes of ethics; and the attitudes to change and enforcement leading to particular
differences which the internal needs to keep in mind
Given the above context, the presentation then takes the example of the small island of Malta to
examine the level of internal audit effectiveness taking into account standard-related aspects such as
independence, reporting and follow-up, staffing, training qualifications and skills, quality of service,
scope of service, planning, relationships with user departments, unit objectives and the role of the
audit committee and relationship with the external auditor.
____________________________________________________________________________________________________
Workshop organised by the Islands and Small States Institute of the University of Malta,
in collaboration with the Commonwealth Secretariat, London, U.K. and the Ministry of Foreign Affairs, Malta
Banking and Finance in Small States: Issues and Policies
Malta: 16 - 20 April 2012
MIGUEL BORG
CAPITAL MANAGEMENT IN A BASEL III WORLD
Summary of Lecture
The international response to the financial crisis is centred on the "Basel Committee", an international
forum of banking supervisors located in Basel, Switzerland. The Committee published a revised body
of risk-based regulation, known as "Basel 3", with the aim of setting up more stringent global capital
and liquidity standards. Basel 3, which is considered as the single most effective international
response to the crisis, will influence the risk profile and performance of banks around the world,
including Maltese banks, for years to come. The main provisions of Basel 3, and their potential impact
on the banking industry, will be discussed in the session.
____________________________________________________________________________________________________
Workshop organised by the Islands and Small States Institute of the University of Malta,
in collaboration with the Commonwealth Secretariat, London, U.K. and the Ministry of Foreign Affairs, Malta
Banking and Finance in Small States: Issues and Policies
Malta: 16 - 20 April 2012
MIGUEL BORG
PRACTICAL SESSION: STRESS TESTING EXERCISE
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.
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.
____________________________________________________________________________________________________
Workshop organised by the Islands and Small States Institute of the University of Malta,
in collaboration with the Commonwealth Secretariat, London, U.K. and the Ministry of Foreign Affairs, Malta
Banking and Finance in Small States: Issues and Policies
Malta: 16 - 20 April 2012
MALCOLM BRAY
Summary of Lecture
Financial stability is not easy to define but instability can be easy to detect. The recent global financial
crisis has exposed many vulnerabilities leading to systemic risk. While the relative lack of
sophistication of financial markets in small states has limited the direct hit of the initial wave of the
crisis, the resulting ongoing lull in economic activity is manifesting itself through intensified credit
risk. The latter is in some cases exacerbated by rather limited asset diversification and strong focus on
property. Although recourse to rescheduling may alleviate some of the borrowers’ repayment
problems, systemic risk may arise if this simply reflects the delayed acknowledgment of an impaired
asset. Meanwhile, funding markets have remained rather volatile and in many cases in need of the
heavy support by central banks. Specifically in the euro area, the close interconnectedness between
the public and financial sectors has maintained financial stability conditions rather challenging. Going
forward, permanently higher and better quality capital appears to be a pre-condition for the
stabilisation of financial conditions.
____________________________________________________________________________________________________
Workshop organised by the Islands and Small States Institute of the University of Malta,
in collaboration with the Commonwealth Secretariat, London, U.K. and the Ministry of Foreign Affairs, Malta
Banking and Finance in Small States: Issues and Policies
Malta: 16 - 20 April 2012
LINO BRIGUGLIO
Summary of Lecture
The economic characteristics of small jurisdictions are well documented, and include limited ability to
exploit economies of scale; lack of natural resource endowments and high import content. Other
characteristics relate to limitations of diversification possibilities; dependence on a narrow range of
products; limitations on the extent to which domestic competition policy can be applied; inability to
influence international prices; and in the case of island jurisdictions, high international transport costs
and uncertainties of industrial supplies due to insularity and remoteness. There are features which lead
to inherent economic vulnerability of small jurisdictions. Such vulnerability arises from the fact that
the economies of small jurisdictions are, to a large extent, shaped by forces outside their control.
The term “economic resilience” has been used to refer to a country’s ability to economically cope
with its inherent vulnerability. Recently, there has been considerable debate on this issue with regard
to small jurisdictions, carrying the message that these jurisdictions should not be complacent in the
face of their inherent vulnerability. In other words they should take measures to strengthen their
economic, environmental and social resilience. In addition, the discussion on resilience sheds light as
to why a number of vulnerable small jurisdictions have managed to achieve a notable level of
economic development in spite of their economic vulnerability.
The Islands and Small States Institute of the University of Malta has been instrumental in constructing
indices of economic vulnerability and economic resilience across countries.
The paper will deal with the conceptual matters relating to vulnerability and resilience and will
explain how economic vulnerability and economic resilience can be juxtaposed to assess the risk of a
country being harmed by external shocks.
This methodology is intended to serve, amongst other things, as a guide for good practice, so that the
policies adopted by some vulnerable small states to build their resilience in order to cope with their
susceptibility to external shocks, could be emulated by others
____________________________________________________________________________________________________
Workshop organised by the Islands and Small States Institute of the University of Malta,
in collaboration with the Commonwealth Secretariat, London, U.K. and the Ministry of Foreign Affairs, Malta
Banking and Finance in Small States: Issues and Policies
Malta: 16 - 20 April 2012
CHRISTIAN CAMILLERI
Summary of Lecture
Interest Rate Risk is a major risk that banks encounter. In his presentation "Managing Interest Rate Risk in
Banks" Mr Camilleri will provide different aspects that banks face when managing this risk. The presentation
will delve into areas such as the components of interest rate risk, the different perspectives of interest rate risk,
techniques for measuring interest rate risk and the risk management framework that must be in place to
effectively manage this risk in small and medium sized banks.
____________________________________________________________________________________________________
Workshop organised by the Islands and Small States Institute of the University of Malta,
in collaboration with the Commonwealth Secretariat, London, U.K. and the Ministry of Foreign Affairs, Malta
Banking and Finance in Small States: Issues and Policies
Malta: 16 - 20 April 2012
SILVIO J 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 smoothrunning 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 freemarket 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.
____________________________________________________________________________________________________
Workshop organised by the Islands and Small States Institute of the University of Malta,
in collaboration with the Commonwealth Secretariat, London, U.K. and the Ministry of Foreign Affairs, Malta
Banking and Finance in Small States: Issues and Policies
Malta: 16 - 20 April 2012
ANTHONY CORTIS
Summary of Lecture
Central banks differ significantly in the scope and nature of their functions, in their history and in the
political and economic conditions in which they operate. Although a single set of "best practices" is
not feasible, generally the same risks prevail and therefore it is not an issue of whether there should be
a risks management framework but how this is implemented. Therefore, central banks, like all other
businesses, require a governance structure to help its decision making process. This presentation aims
to describe the governance of risk management within the Central Bank of Malta and the processes to
achieve a better risk management procedure. In particular, it describes the policies and procedures
and the operational risk frameworks at the Bank, business continuity management and the crisis
management structure. The presentation also aims to highlight the continued process of enhancing
risk management at the Bank within the context of continuing developments, constraints from being a
small central bank.
____________________________________________________________________________________________________
Workshop organised by the Islands and Small States Institute of the University of Malta,
in collaboration with the Commonwealth Secretariat, London, U.K. and the Ministry of Foreign Affairs, Malta
Banking and Finance in Small States: Issues and Policies
Malta: 16 - 20 April 2012
GRAZIELLA GATT
Summary of Lecture
During the recent crisis the financial system has undergone severe stress where banks and other
systemic financial institutions that could not be allowed to fail had to be propped up by the State, at
the expense of taxpayers’ money. Governments and heads of States agreed that this should not be
allowed to happen again. Countries must ensure that sound frameworks exist for the management of
financial crises and for the orderly resolution of banks. In Europe the existing framework shall be
strengthened with the proposed directive for crisis prevention, crisis management and resolution of
banks and investment firms, which is still in consultation phase. Such regulation at the EU and also at
national level must ensure that banks may also be allowed to fail in an orderly manner, without
causing undue stress to the rest of the financial system and the economy.
____________________________________________________________________________________________________
Workshop organised by the Islands and Small States Institute of the University of Malta,
in collaboration with the Commonwealth Secretariat, London, U.K. and the Ministry of Foreign Affairs, Malta
Banking and Finance in Small States: Issues and Policies
Malta: 16 - 20 April 2012
DANIEL MAGRIN
Summary of Lecture
The concept of Strategy has been around for many years and it is widely claimed to be the core factor
that separates winners from losers. Whether it’s about winning a political campaign, winning a soccer
league or running a winning business, the serious players will have a strategy. This presentation puts
the spotlight on Corporate Strategy and it takes the audience through the major steps of the strategy
lifecycle, presenting the most popular tools in strategy formulation. It puts forward the arguments
associated with the more difficult part of the strategy lifecycle – strategy execution, provoking
interesting debate and insight for executive management.
____________________________________________________________________________________________________
Workshop organised by the Islands and Small States Institute of the University of Malta,
in collaboration with the Commonwealth Secretariat, London, U.K. and the Ministry of Foreign Affairs, Malta
Banking and Finance in Small States: Issues and Policies
Malta: 16 - 20 April 2012
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.
____________________________________________________________________________________________________
Workshop organised by the Islands and Small States Institute of the University of Malta,
in collaboration with the Commonwealth Secretariat, London, U.K. and the Ministry of Foreign Affairs, Malta
Banking and Finance in Small States: Issues and Policies
Malta: 16 - 20 April 2012
LILIANA PORTELLI
Summary of Lecture
The presentation will look at the key elements that make up an Operational Risk Management
Framework and how such a framework has been developed by a retail bank in a small island state.
The objectives of each element will be defined followed by an explanation of how the respective areas
may be implemented including consideration of the challenges to gradually integrate risk management
into the bank’s processes.
The session will give a detailed coverage of the approach that has been employed by such banks to
develop Risk Identification and Assessment processes, Risk Monitoring and Reporting including
capturing of relevant Key Risk Indicators and development of an Operational Loss Database and the
selection of appropriate options to Control and Mitigate risks.
Such a framework helps organizations to manage operational risks effectively if adopted at all levels,
and if the organization encourages values reflecting a good risk culture.
____________________________________________________________________________________________________
Workshop organised by the Islands and Small States Institute of the University of Malta,
in collaboration with the Commonwealth Secretariat, London, U.K. and the Ministry of Foreign Affairs, Malta