The likelihood of the global financial crisis affecting Malta’s banks is very remote, but even so, ECOFIN yesterday agreed on a framework whereby governments have been given the go-ahead to intervene directly if deemed necessary to assist local financial institutions, said Finance Minister Tonio Fenech yesterday.

Mr Fenech reassured the local banking clientele: “It is very unlikely that Maltese banks will be affected by the crisis because the international problem has been caused by lack of liquidity, meaning that banks are not lending each other funds. This, in turn, means that the general public simply cannot get credit”.

Mr Fenech went on to explain that Maltese banks do business locally. “The liquidity is local, as are the loans that are given out. There is no problem of having assets available,” he said.

Mr Fenech went on to say that Maltese banks have been hoarding capital ever since the first inkling of the financial crisis began to filter through when British institution Northern Rock announced that it was in trouble. “Of course, Lehman Brothers went bust, and it all spiralled down from there,” he said.

Mr Fenech said the roots of the crisis were in the collapse of the US mortgage market. “Banks would sell bundled finance packages to other institutions. When it became apparent that people could not pay off those mortgages, it created a domino effect of toxic assets. Assets that have basically gone bad,” he explained.

He said that as a result, international banks lost confidence in the market and stopped lending each other cash, as is the normal practice. “The US addressed the problem by offering a $700bn rescue package. Europe went about it differently. There are some toxic assets in Europe, but not as much as the US. In fact, the European Central Bank decided to offer short-term loans so European financial institutions would have ready capital with which to do business. The same is happening in the UK through the Bank of England, coupled with a £50bn bailout,” he said.

Mr Fenech said that the liquidity problem was not acute in Europe and this was evidenced by the fact that not all the liquidity on offer by the ECB is being used.

“In addition, the ECB (and therefore the Central Bank of Malta) has slashed interest rates by 50 basis points, meaning that as from 1pm today (Wednesday) a new interest rate of 3.75 per cent kicked in. For Maltese people, this basically means cheaper loans,” he said. The aim for the rest of Europe is for the cut to stimulate market activity.

He explained that the ECOFIN ministers had decided that governments should intervene directly if support is needed and if certain institutions are in crisis. “Yes, there was the moral issue of fat cats taking bad decisions about people’s money in the running of banks, but government support, at the end of the day, is in everyone’s best interest to keep funds safe,” he said.

Mr Fenech said that to give European customers confidence in their savings, a deposit guarantee scheme had been set up. “We looked at the countries around us and went with the e100,000 benchmark,” he said. Mr Fenech also said that the Government of Malta was prepared to lend money to local banks if needs be for liquidity purposes. He also said that any bailouts offered in other countries were indirect insurance for Maltese banks. He also told people with foreign investment funds not to panic. “I do not mean to act as a financial advisor, but British Bank HBOS, for example was in dire trouble yesterday and share prices today have shot up 50 per cent. The key is prudence and patience,” he said. Taking questions from the media, Mr Fenech said that the government’s plans of selling its shares in Bank of Valletta are “At the moment on the shelf, and will probably gather dust for some time. It is not the right time to think about that. We want to inspire consumer confidence at this point,” he said.

TMID pointed out that columnist Alfred Mifsud had titled one of his contributions in this newspaper “Thank God for our boring, boring banks”, and whether he agreed with that assessment. “Our banks are criticised for being over conservative. It seems that in this instance, they were entirely correct in their approach, so yes, they made the right decision in operating on the business models they do,” he answered.