Beyond the individual soundness of financial institutions, adverse developments and interlinkages within the financial system can generate and propagate risk within and across national boundaries leading to instability and financial crises.
Against this backdrop, financial supervision must not only ensure the prudential soundness of individual institutions but safeguard against systemic risk and financial instability.
Structural adjustments in the European regulation introduced in the aftermath of the financial crises led to the setting up of the European Systemic Risk Board (ESRB), adding a completely new macro-prudential dimension to the financial supervisory framework.
Established under Regulation (EU) No 1092/2010 the ESRB is responsible for the macro-prudential oversight of the EU financial system and the prevention and mitigation of systemic risk.
At the European level the ESRB co-operates with the micro-supervisory authorities (the European Banking Authority; the European Insurance and Occupational Pensions Authority and the European Securities and Markets Authority) to share mutually important information and co-ordinate supervisory initiatives. The ESRBs remit covers banks, insurers, asset managers, other financial institutions and financial market infrastructures. It includes representatives from the European Central Bank, the ESAs, the national central banks and national supervisory authorities among its members. The Central Bank of Malta and the Malta Financial Services Authority are both members of the ESRB.
At the national level the Central Bank and the MFSA collaborate through the Joint Financial Stability Board (JFSB), which has the function of facilitating co-operation between the relevant authorities in matters impacting financial stability. The JFSB is constituted in terms of ESRB Recommendation (ESRB/2011/13) on the macro-prudential mandate of national authorities as transposed in the Central Bank of Malta Act.
Among its responsibilities, the JFSB is empowered to formulate policy recommendations designed to safeguard the stability of the financial system, and to identify and assess macro-prudential instruments, and relevant micro-prudential instruments, required to be implemented to mitigate or control potential systemic and other risks to the system.
Within the context of this institutional framework, the MFSA has developed its capacity to monitor and assess the build-up and impact of potential risk in the financial services sector and support the technical evaluation of systemic and other risks within the ambit of the JFSB, including the implementation of policy recommendations via the relevant micro-prudential instruments.
The regulatory team responsible for the development and exercise of this function, also interfaces with the micro-prudential supervisory functions of the Authority at the operational level, ensuring that all relevant information is shared across all areas of regulation and sector-specific supervision. This type of ongoing interaction ensures that the macro-prudential risk outlook is taken into account in the relevant supervisory risk models and supervisory programmes, while facilitating the flow of qualitative information in the other direction.
The team responsible for macro-prudential oversight and analysis utilises both quantitative and qualitative techniques in order to unveil pockets of vulnerabilities within the financial system (banking, insurance and investment funds sector). Quantitative tools used to carry out this mandate include early warning risk models, stress indices as well as other financial and econometric models and business intelligence technology. Qualitative surveys are also carried out with other supervisory teams in order to integrate within the risk analysis framework analysis of on-site and off sites reviews carried out at a micro-prudential level.