Identifying macrofinancial risk regimes in Malta

The withdrawal of public sector intervention from Malta's housing market commenced in the early 1990s, while financial markets were liberalised in 1994. These developments were likely behind the significant expansion in credit and house price appreciation experienced over the past two decades, reflecting a market-driven process of financial deepening. However, contrary to the experience of other countries, Malta has not experienced a financial crisis since. Nevertheless, it has experienced episodes of high financial stress in which leverage and house price growth peaked. This paper builds an early warning system which formalises the stages of the Maltese financial cycle into low, medium and high risk regimes through the estimation of risk thresholds on two measures of cyclical risks. The Maltese economy was in the high risk regime from mid-2006 to 2008, and again from mid2020 up to 2022, and by mid-2024 was in the medium risk regime. The risk thresholds we estimate allow policymakers to identify the build-up of risks ahead of time and conduct a pre-emptive assessment of any macroprudential policy intervention that is warranted, including a calibration of the appropriate policy tool.