On July 1, the Central Bank of Malta launched Directive 16 concern-ing the regulation on borrower-based measures. The main purpose of such measures is that of protecting both credit institutions, from the risk of defaults by their customers, and borrowers, from over-stretching themselves with repayments they may not afford in the future.
Although each of the local credit institutions had their own internal policies and guidelines in providing lending for purchases of residential property, and credit institutions were generally prudent in their lending behaviour in this regard, Directive 16 had also the objective of establishing a framework of minimum requirements in lending for such purposes across all credit institutions in Malta.
In its Financial Stability Report, published on August 28, the Central Bank did not issue any warning to the effect that there is a looming danger of a recession or a financial/lending crisis that necessitated the implementation of borrower-based measures.
Indeed, as highlighted in the report, non-performing loans in the domestic banking sector continued to trend downwards and are at low levels, including those for mortgages, partly reflecting the prudent policies of domestic credit institutions that prevent customers from over-stretching themselves, and buoyant labour market conditions that strengthen the financial position of households.
Furthermore, the capital position of banks remains sound and well within the regulatory requirements, while they continue to operate with ample liquidity and remained profitable.
Additionally, in its Summary of Risks, the report highlights that risks to the financial system emanating from domestic macroeconomic developments are benign and not anticipated to rise, in line with both the Central Bank’s and European Commission outlook, both of which expect the Maltese economy to continue to record strong economic growth. In recent years, the domestic property market experienced a strong turnaround which has led to rising property prices.
The median loan is about four times the income of the household and the repayment accounts just over 20 per cent of income
The report shows that although the median property price relative to household income has increased, it nevertheless still remained below its historical average, and is significantly lower than that seen in 2006-2007 when the property market was at its previous peak.
While the report observes that some borrowers have been taking larger loans relative to their income, monthly average repayments of loans relative to income are still very distant from the years 2005 to 2008. This in part has been also attributable to the sharp decline in interest rates, which have made it sustainable for households taking on larger loans.
Overall, the median loan relative to the price of the property purchased is still sustainable at below 80 per cent while the median loan is about four times the income of the household and the repayment accounts just over 20 per cent of income.
The introduction of borrower-based measures through Directive 16 is not expected to impact borrowing by Category I (as defined by the Directive) customers, who are essentially those purchasing their principal place of residence. In its impact assessment, based on credit data for 2018, the bank estimates that only 2.7% of Category I borrowers would have been impacted.
However, these borrowers would have still been able to obtain a loan as the directive allows up to 10 per cent of borrowers from a credit institution to put up a deposit of less than 10 per cent of the value of the property.
The directive is more binding on Category II borrowers, namely those who would become owners of two or more residential properties. In this regard, the directive requests borrowers to put up a higher share of upfront finance, and a shorter maturity of the loan relative to that required from Category I borrowers. However, with respect to Category II borrowers, the directive gives credit institutions more leeway as regards the proportion of borrowers (up to 20 per cent) that may be requested to put up a deposit of less than the minimum required.
In conclusion, the borrower-based measures introduced on July 1 by the Central Bank constituted a pre-emptive policy response aimed at strengthening the resilience of both lenders and borrowers through the setting of minimum lending standards.
They were not a reaction to expectations of a recession or a bank lending crisis, which the Central Bank is not envisaging in its current outlook for the Maltese economy and its financial system.
Sandro Demarco is Deputy Governor Monetary Policy, Central Bank of Malta.