European Central Bank holds seminar for accession countries

On 7 December the European Central Bank (ECB) and the Deutsche Bundesbank (the German central bank) jointly organised the third annual seminar on the accession process. During the seminar, which was held in Berlin, representatives from the Eurosystem (which includes the ECB and the twelve national central banks of the Euro area) and central bank governors of the 12 accession countries discussed key issues relating to the future integration of the central banks of accession countries into the European System of Central Banks (ESCB) and eventually the Eurosystem. The Governor of the Central Bank of Malta, Michael Bonello, participated in the seminar.

The seminar focused on the structure and functioning of the financial sector in accession countries, the impact of capital account liberalisation on their exchange rate strategies and the economic objectives which these countries should meet to catch up with EU Member States. The seminar commended the progress which the accession countries had achieved in reforming their banking sectors, but noted that there was scope for further development as far as the transmission mechanism of monetary policy and the functioning of capital markets were concerned. Participants stressed that policy direction in the accession countries should remain oriented towards safeguarding the independence of central banks and supervisory bodies.

It was also emphasised that where the banking supervision function was not integrated in the central bank, it should be closely linked operationally with the central bank. Moreover, given the high share of foreign ownership in the banking sector of accession countries, cross-border co-operation among supervisors was essential.

With regard to the real convergence issues, the seminar noted that, although the resulting increase in investment flows would facilitate the catching-up process, the additional volatility that could result from these inflows would present accession countries with new challenges, particularly in the area of exchange rate policy. It was necessary, therefore, that further convergence with the EU economies continue to be pursued through economic reform, liberalisation and macroeconomic stabilisation.

During the discussion on the financial structure in accession countries, the Governor of the Central Bank of Malta supported the view that synergies must be developed between the monetary authorities and the regulators of financial services, particularly where the competent authority was a single regulator with responsibility for the supervision of all financial services including banking. Such co-operation was vital in view of the responsibility which central banks have for monetary policy and financial stability. Mr Bonello also spoke about the growing degree of foreign involvement in the banking sector in accession countries, including Malta, and emphasised that while it was understood that foreign-owned banking institutions tend to generate large volumes of cross-border operations, they were also expected to play an important role in strengthening the financial intermediation process in the host country.

During the discussion on capital account liberalisation and exchange rate strategies, Mr Bonello said that it was the intention of the Maltese Authorities to maintain the fixed exchange rate regime up to accession and beyond. During that period, capital controls would continue to be eased while the weight of the euro in the Maltese lira currency basket would be increased. The Governor added that it was the objective of the Authorities to enter ERM II as soon as was practicable after membership with the aim of participating in Economic and Monetary Union once the necessary convergence conditions were fulfilled.