Monetary Policy Instruments In order to maintain the primary objective of price stability, the Eurosystem has at its disposal

a set of monetary policy instruments that are used to affect market rates, regulate liquidity in the banking system and signal the general stance of monetary policy. The three monetary policy instruments at the disposal of the Eurosystem to achieve its objectives are: Open Market Standing Minimum Reserves Open Market Operations Open market operations are used to steer short term interest rates, manage the liquidity situation in the market and signal the stance of monetary policy. Eurosystem open market operations can be divided into the following four categories: Main refinancing operations (MROs) are regular, liquidity-providing reverse transactions with a weekly frequency and maturity of one week. They are executed by the national central banks (NCBs) on the basis of standard tenders according to a pre-defined calendar. These provide the bulk of refinancing to the financial sector. Longer-term refinancing operations (LTROs) are liquidity-providing reverse transactions with a monthly frequency and normally with a maturity of three months. They are executed by the NCBs on the basis of standard tenders according to a pre-defined calendar. These Operations Facilities

operations are aimed at providing counterparties with additional longer-term liquidity. In these operations the Eurosystem does not as a rule intend to send signals to the market and therefore acts as a rate taker. Fine-tuning Operations are executed on an ad-hoc basis to manage the liquidity situation in the market and to steer interest rates. They aim to smooth the effects of unexpected liquidity fluctuations in the market. Finetuning operations are primarily executed as reverse transactions, but may also take the form of outright transactions, foreign exchange swaps and the collection of fixed-term deposits. They are normally executed by NCBs through quick tenders or bilateral procedures. Structural Operations can be carried out by the Eurosystem through reverse transactions, outright transactions or the issuance of debt certificates. They are executed to adjust the structural position of the Eurosystem vis--vis the financial sector (either on a regular or non-regular basis). Structural operations in the form of reverse transactions and issuance of debt instruments are carried out by the NCBs through standard tenders. Structural operations in the form of outright transactions are executed through bilateral procedures. As for the type of instruments used, reverse transactions are the main open market instrument of the Eurosystem and can be applied to all the above four categories whereas debt certificates may be used for structural absorption operations. In addition the Eurosystem has three other instruments available for the conduct of finetuning operations: outright transactions, foreign exchange swaps and the collection of fixed term deposits.

Eurosystem open market operations are normally conducted in the form of tenders. These can either be standard or quick tenders. The procedures for both types of tenders are identical except for the time frame within which they are conducted and the range of counterparties involved in them. Tenders can be either of a fixed rate (volume) or variable rate (interest) nature. In a fixed rate tender the European Central Bank (ECB) specifies the interest rate in advance and participating counterparties bid the amount of money they want to transact at the announced fixed rate. In a variable rate tender counterparties bid both the amount and the interest rate at which they want to transact with the NCB. Allocation is decided upon the competitiveness of the bids. Standing Facilities Standing facilities are aimed at providing and absorbing overnight liquidity, signalling the general monetary policy stance and binding overnight market interest rates. Standing facilities are administered in a decentralized manner by the NCBs. Subject to the fulfillment of certain operational access criteria, counterparts can, upon their own initiative make use of two standing facilities, namely: The marginal lending facility which may be used when counterparts need to obtain overnight liquidity from the Central Bank of Malta against eligible collateral. Under normal circumstances there are no credit limits or other restrictions on counterparties access to this facility apart from the requirement to provide sufficient underlying assets. The interest rate on the marginal lending facility, set at 75 basis points above the Minimum Bid Rate

normally provides a ceiling for the overnight market interest rate. The overnight deposit facility which may be used to make overnight deposits of excess liquidity with the Central Bank of Malta. Again, under normal circumstances there are no deposit limits or restrictions on counterparties access to this facility. The interest rate on the deposit facility, set at 75 basis points below the Minimum Bid Rate normally provides a floor for the overnight market interest rate.

Minimum Reserves The ECB requires credit institutions established in the euro area to hold deposits on accounts with their NCB. The Eurosystems minimum reserve system primarily pursues the following monetary functions: Stability of money market interest rates as reserve requirements serve as a buffer for banks liquidity shocks, since banks need to fulfil the reserve requirement only on average over the maintenance period. Creation or enlargement of a structural liquidity shortage as reserve requirements ensure a certain level of liquidity deficit in the banking sector for the Eurosystem to operate efficiently as a supplier of liquidity.

The reserve requirement of each institution is determined in relation to the reserve base. Balance sheet data referring to the end of a given calendar month is used to determine the reserve base for the maintenance period starting in the calendar month two months later. The remuneration rate on reserve holdings corresponds to the marginal rate (verified according to the number of calendar days) of the main refinancing operations during the reserve maintenance period. The ECB discloses online the reserve maintenance period calendar for each year. The Central Bank of Malta also publishes an indicative calendar for minimum reserve requirements, procedures, indicating the time limits for notification and acknowledgment by counterparties to the Central Bank of Malta on the data relevant to minimum reserves.

Financial Stability Article 5 of the Central Bank of Malta Act charges the Central Bank of Malta to ensure the stability of the financial system. In fulfilling this statutory obligation, the Central Bank of Malta plays a key role in maintaining the stability of the domestic financial system, whilst further contributing to that of the Eurosystem. The Central Bank of Malta defines financial stability as a condition where the financial system comprising institutions, markets and infrastructures is able to allocate savings into investments opportunities and facilitate the settlement of

payments efficiently; manage risks that may harm or threaten to harm its performance and consequently that of the economy; and absorb shocks without allowing the formation of cumulative processes that may impair its operations. As the macro-prudential authority, the Central Bank of Malta is also responsible for formulating and implementing macro-prudential policy through a number of tools which are used to contain systemic or systemwide financial risk. Central Bank of Malta Directive No. 11 lays down the objective of macro-prudential policy and the way the Bank intends to implement macro-prudential policy. The main objective of macro-prudential policy is to reduce risks from the financial sector spilling over to the wider economy, which event is termed systemic risk. The Bank also provides advice to Government and to other public sector bodies on various issues related to financial stability. The advice is particularly valuable when Government is formulating positions to be taken at various stages of the decision-making process prior to the introduction of new EU Directives or Regulations related to the financial sector.

Crisis Preparedness

In terms of article 17 of the Central Bank of Malta Act, the Central Bank of Malta is also responsible to provide financial support through its lender of last resort (LOLR) function to safeguard the stability of the banking sector. This function is normally resorted to in exceptional circumstances when there is a perceived threat to the stability of the financial system. The development of a crisis can disrupt the intermediation function of the financial system and impede banks from managing their risks efficiently. The monitoring and assessment of risks that could lead to vulnerabilities however enables the authorities to take timely measures to prevent or reduce the impact of such risks on the financial system. Clear communication strategies and allocation of responsibilities between the authorities concerned become essential. In its role as lender of last resort as well as in its responsibilities for financial stability, the Central Bank of Malta acknowledges its key role in the management of potential financial crisis situations and therefore it continuously develops its operational capabilities in this regard for the timely management and resolution of financial crisis situations.

Cooperation

In view of their shared responsibility for the stability of the financial system the Central Bank of Malta and the Malta Financial Services Authority (MFSA) have entered into a Memorandum of Understanding concerning their cooperation and exchange of information in the field of financial services. Through a separate Memorandum of Understanding the Bank and the MFSA set up a Joint Financial Stability Board (JFSB) to establish mechanisms of cooperation between the Bank and the Authority so as to formulate macro-prudential policy and to contribute to the safeguarding of the stability of the financial system in Malta. JFSB recommendations of a macro-prudential nature are considered for adoption by the Board of Directors of the Central Bank of Malta, while recommendations of a micro-prudential nature are considered for adoption by the Board of Governors of the MFSA. The JFSB also ensures adherence to the recommendations and advice issued by the European Systemic Risk Board (ESRB) and follows up on any other matters of a macro-prudential nature that the local authorities may need to communicate to the ESRB or other international and local authorities as necessary.

regulation as well as on issues related to corporate governance, auditing and financial reporting. The EIOPA is an independent advisory body to the European Parliament and the Council of the European Union. Its core responsibilities are to support the stability of the financial system, transparency of markets and financial products as well as the protection of insurance policyholders, pension scheme members and beneficiaries. The ESMA contributes to safeguarding the stability of the European Union's financial system by ensuring the integrity, transparency, efficiency and orderly functioning of securities markets, as well as enhancing investor protection. In particular, ESMA fosters supervisory convergence both amongst securities regulators, and across financial sectors by working closely with the other ESAs.

Stress Tests Stress testing is a tool used to assess the resilience of an institution to extreme yet plausible shocks to the macroeconomic and financial markets. Stress tests are part of the financial stability and risk management

toolkit used for detecting vulnerabilities. The European Banking Authority (EBA) is required, in cooperation with the European Systemic Risk Board (ESRB), to initiate and coordinate EU-wide stress tests to assess the resilience of financial institutions to adverse market developments. The EBA was established by Regulation (EC) No. 1093/2010 of the European Parliament and of the Council of 24 November 2010. The EBA has officially come into being as of 1 January 2011 and has taken over all existing and ongoing tasks and responsibilities from its predecessor the Committee of European Banking Supervisors (CEBS). Building on the experience of two previous EU-wide stress tests undertaken by the CEBS, the EBA conducts stress tests on a wide sample of banks. This exercise is undertaken in coordination with national supervisory authorities, the ESRB, the ECB and the European Commission. The Central Bank of Malta Act (Cap. 204) was originally published by means of Act XXXI of 1967. Since then, there have been a number of amendments to the Act, affecting the Bank, its competencies, as well as its organisation. The Act is arranged as follows: Articl es Part Preliminary 1-2 I Part Establishment and 3 - 18

II Part III Part IV Part V

Conduct of Affairs of Bank Financial Provisions 19 22 23 24 25 29

Collection of Information Relations with Government Relations with Part 30 Credit and Financial VI 33 Institutions Part 34 Payment Systems VII 35 Relations with the Part 36 Competent VIII 38 Authority Relations with Part 39 International and IX 41 other Organisations Part 42 Currency X 55 Part 56 General XI 61 Transitional Part 62 Provisions for the XII 63 Maltese Lira Schedule The Central Bank of Malta is a body corporate established under Article 3 of the Act. In terms of Article 4 of the Act, the primary objective of the Central Bank of Malta is to maintain price stability. The Central Bank of Malta is a fully independent body in

terms of Article 5(2) of the Act, Article 7 of the ESCB Statute, and Article 130 of the Treaty on the Functioning of the European Union. It enjoys institutional and financial independence, while its Governors enjoy a high degree of personal independence. By virtue of Article 5 of the Act, the Bank has the following tasks: to implement monetary policy; to hold and manage reserve assets; to ensure the stability of the financial system; to promote a sound and efficient payment system; to provide for the circulation of euro bank notes; to provide for the circulation of euro coins issued for and on behalf of the Government; to advise the Government generally on financial and economic matters; to compile and publish statistics as may be necessary to carry out its tasks. The Central Bank of Malta acts as banker and adviser to government, but may not provide financing, credit or overdrafts to the Government of Malta or to any public undertaking, as required by the monetary financing prohibition laid down in Article 27 of the Act as well as Article 123(1) of the Treaty on the Functioning of the European Union. The Central Bank of Malta also maintains direct relations with credit and financial institutions. The legal

basis of this relationship and its implications are included in Articles 30 to 33 of the Act. In accordance with the provisions of these articles, the Bank: may act as banker to credit and financial institutions; may accept deposits from credit and financial institutions; may appoint credit institutions as agents in exceptional circumstances; shall seek co-operation and shall co-operate with credit and financial institutions; and is to oversee and regulate the operation of, and participation in, payment systems. In implementing monetary policy, in accordance with the Statute of the European Central Bank, the Bank is further authorised to require credit institutions to open and maintain reserve deposit accounts and report thereon. The Act also empowers the Bank to require reporting agents, which include credit and financial institutions, to submit such statistical or other information as it may require for the fulfilment of its duties in terms of the Act itself. The Bank has also issued a number of Directives. Penalties As provided in Article 56 of the Act, the Minister of
Central Bank of Malta

Finance has issued the

Central Bank of Malta (Penalties for Offences (Cap. 204.05),

providing for administrative penalties in respect of infringements of the Act or Directives issued under it.
Regulations