Domestic financial sector showed strong resilience in 2021: CBM
The domestic financial sector has shown strong resilience in 2021 despite the difficulties faced by some sectors, according to a central bank report published on Monday.
In its fourteenth edition of the financial stability report, the BCM assesses the developments in 2021 that are relevant for national financial stability.
The bank notes in its report that the EU’s macroeconomic environment improved more than a year ago, with vaccination programs helping to reopen economic activity. However, the recovery has been uneven across sectors, partly due to supply bottlenecks, coupled with the emergence of new variants of COVID that have led to the reintroduction of containment measures.
Geopolitical risk has increased further, exacerbated by the Russian-Ukrainian war and its cumulative effect on already mounting inflationary pressures, particularly for energy and commodity prices, with potential ramifications for growth prospects abroad. ‘coming.
While pandemic-related government support measures have been maintained in 2021, public debt levels have continued to rise with potential debt sustainability issues for some jurisdictions, notably due to the strengthening of links between the governments, banks and businesses.
The domestic front
On the domestic front, despite high uncertainty surrounding the global economic climate, banks reported improving asset quality thanks to both the reduction in non-performing loans (NPLs) and increased volumes of loans.
The latter was largely driven by the increase in mortgage lending, as corporate lending was solely driven by the Development Bank of Malta’s COVID-19 guarantee scheme, banknotes.
His report highlights an increased focus on home loans.
Such developments, according to the BCM, reaffirm the need for continued monitoring of the growing concentration risk in banks’ loan portfolios for the timely adoption of targeted policy measures should the need arise.
“Bank profitability has recovered strongly, reflecting a drop in provision charges and, to a lesser extent, an increase in fees and commissions.
“Yet the main source of income for banks remained linked to net interest income. The strong overall performance of financial markets in 2021 had a positive impact on the relevant investment funds at the national level, as their equity holdings rose, which was partly offset by lower bond holdings amid rising inflationary pressures.
“Similarly, nationally significant insurance companies have also benefited from the general recovery of financial markets by increasing their exposure to equities and investment funds. As a result, the profitability of this sector has also improved, coupled with a general increase in premiums, supported, in turn, by the overall economic recovery.”
Overall, the report finds that the domestic financial sector has shown strong resilience in 2021 despite challenges faced by some sectors.
The conclusions are supported by the results of the liquidity and solvency stress tests, which reveal an overall resilient financial system.
“Nevertheless, going forward, risks to financial stability remain, mainly due to the war between Russia and Ukraine, largely through second-round effects, as direct exposure to these two countries is limited.
“Furthermore, inflationary pressures and downside risks to economic growth could impact debt service capacities, which, in turn, could test the resilience of the domestic financial sector. This underscores the importance for credit institutions not to engage in excessive risk-taking and to set aside adequate provisions while maintaining healthy liquidity and capital buffers,” he warns.
And with the ever-changing cybersecurity landscape with the emergence of more sophisticated threats, financial institutions should stay at the forefront of adopting the latest technological advancements to protect against cybersecurity risks, he adds. -he.
Adverse scenario linked to climate risk
The report also presents, for the first time, an adverse climate risk scenario for the macro stress testing framework.
The scenario seeks to assess the impact on banks’ capital of increased transition risks as a result of rising oil prices to discourage its use and achieve net zero emissions by 2050.
The impact of the climate-related test on the banks’ overall capital is not small, but does not indicate specific recapitalization needs.
The interest of the test is to shed light on the banks’ preparation for such a scenario and therefore the importance of assessing the risks linked to exposure linked to high CO2 emissions and the associated climate-related costs.
“The impact of the repercussions surrounding climate change is increasingly on the agenda of institutions as a source of risk to financial stability that could materialize not only in the longer term but also in the short and medium term. .
“With growing evidence of physical effects and accelerating impacts of the effort to transition to a low-carbon economy, financial regulators are rapidly integrating climate and environmental risks into their oversight frameworks,” notes the report.
The report also discusses the launch of the Network of Central Banks and Supervisors for Greening the Financial System (NGFS), two years after the adoption of the Paris Agreement in 2015.
The NGFS currently consists of around 130 central banks and supervisors, which aim to improve the role of the financial system in managing risk and mobilizing capital for green and low-carbon investments.
In one of its most recent publications, the NGFS released a set of scenarios last year consisting of six trajectories of global changes in politics, the energy system and climate.
These six long-term scenarios (with projections up to 2050) are grouped into three categories: the orderly, messy, and hothouse scenarios.
They vary according to the magnitude of physical risks resulting from environmental events such as floods or transition risks associated with new policies and technologies.
The ordered scenarios, called Below 2°C and Net Zero 2050assume that climate policies are implemented in a timely manner and become progressively stricter to smoothly limit climate change below 2°C compared to pre-industrial levels (a more ambitious target of 1.5°C under Net Zero 2050).
The two messy scenarios, consisting of Delayed transition and the Net zero diverging scenarios, include higher transition risk due to delayed or divergent policies across countries and industries.
In the first scenario, carbon prices are expected to rise rapidly after a 10-year lag to allow for a fossil fuel-based economic recovery from COVID-19.
The Net zero diverging Instead, the scenario still achieves the goal of net zero emissions by 2050, but with diverging policies and a faster phase-out of fossil fuels.
Both disordered scenarios incur higher transition costs than the ordered scenarios.
Finally, the two scenarios of the greenhouse world, called Current policies and Nationally determined contributionssuppose some climate regulations are enacted in some jurisdictions, but global efforts fail to prevent major global warming.
This leads to significant physical risks, such as irreversible impacts like sea level rise.
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