BANK OF ALBANIA STATEMENT
On the financial system stability in Albania H1 2009

In accordance with the requirement stipulated in Article 69 of the Law No.8269, dated 23.12.1997 "On the Bank of Albania", as amended and Article 8 of the Law No.9962, dated 18.12.2006 "On Banks in the Republic of Albania", to inform the Council of Ministers, the Parliament of the Republic of Albania and to draw the attention of the financial institutions and of the public at large on the financial system situation in the country and on the potential risks that might jeopardise its stability, Bank of Albania releases the following periodical statement. 

The relationships of the financial activity with the domestic and external economic developments and these latter’s interaction with the internal situation of the financial system itself determine the stability of the financial system and particularly of the banking system Concerning all these elements, there are concluded the following highlights over the first half of 2009:

In terms of the global economy, the financial crisis escalated its impact during the first half of the period leading to an economic fall for the countries with advanced economy. The global economic activity, during the first quarter of year, deteriorated considerably. According to the data provided in the International Monetary Fund Report "World Economic Outlook"[1], the global; economy fell by about 6.4 percent, almost at the same rate with the last quarter of 2008. The advanced economies countries suffered the highest drop. The combined economic downturn in these countries pointed to 7.9 percent, relative to 7.9 percent in the last quarter of 2008. The economy of the United States of America, decreased at annual basis by about 6.4 percent in the first quarter of year. The decrease of household consumer and of the investments in the private sector affected this performance. Debt reduction process, the decrease of financial and non-financial assets’ value and the considerable rise of unemployment rate influenced the decline of household consumer. This latter increased by 8.5 percent at the end of first quarter 2009, relative to 7.2 percent at the end of 2008. The fall of private sector investments owed to the reduction in sales, to the considerable drop of the financial result and to the cut of finances. The European economy showed similar development, where the economy of European Union zone marked an average fall of about 2.4 percent in the first quarter of 2009, as compared to the forth quarter of 2008. The unemployed rate in the European Union zone rose to 8.6 percent at the end of first quarter. In the Euro zone, this indicator was higher pointing to 9 percent. On the other side, the economic situation of emerging countries deteriorated during first quarter 2009 and their economic downturn deepened at 4.2 percent, relative to 3.9 percent in the last quarter of 2008. Nevertheless, some indicators referring to the balance -sheets of business companies and to the relative stability of housing markets development, particularly in the United States of America and in United Kingdom, transmitted during this period the first signs on the slowdown of this deterioration.

The indicators on the mitigation of the global economic crisis augmented and by a more stable performance in the second quarter of year. The financial markets manifested more swiftly the improvements, where the sufficient liquidity supply and the free monetary policy implemented by the central banks of the advanced economy countries, from some months, encouraged the reduction of interest rates at money markets, supported the securities investments of business lines debt and led to a recovery of the capital markets, as shown by the robust increase of the main trading platforms for equities. However, bank lending continued to contract during this period, although at a lower declining pace, while the soundness of banks was still a concern. In the framework of real sector development, there was concluded the lowest downturn of the industrial output, a stable fall of goods inventories of the business lines, and the increase of business and consumer confidence index in the United States of America and in the European Union. Financial markets conditions also were improved and investors showed a higher will to invest in debt securities of the emerging countries governments. The International Monetary Funds, owing to these developments, forecasts recently that global economy shall decrease at 1.4 percent for the year 2009, while it shall be grown at 2.5 during 2010, by picking up at 0.6 percentage points the outlook on global economy growth for the year 2009, published in April. Gross Domestic Product in the advanced economy countries is projected to fall by 3.8 percent in 2009, prior to the gradual recovery with a growth of 0.6 percent in 2010. However, the unemployment rate in advanced economy countries persists to increase. Due to the negative impact that unemployment has on consumer costs, its increase represents a risk that may appear later and destabilise the economic recovery. Emerging countries are expected to attest an economic growth during the second half of 2009, but with highlighted differences among them. The IMF projections regarding the economic growth of the regional countries in Asia are increased at 5.5 percent for year 2009 and at 7.0 percent in 2010. China and India are forecasted to provide the main contribution on this development. Regarding the regional countries of Latin America, the economic growth projection for 2009 is deteriorated by 1.1 percentage point, mainly due to the fact the production in these countries is damaged owing to the reduction of international trade at a higher rate than the expectation at the beginning of year. On the other side, these countries are expected to benefit from the increase of the raw materials’ prices, thus the projection for 2010 rose by 0.7 percentage points. Regarding the East European countries, the IMF projection is dropped by 1.3 percentage points for the year 2009 while it is increased by 0.2 percentage points for year 2010. The reasons mainly relate to the reduction of public and private investments in these countries, as well as to the increasing rate of unemployment.

Inflationary pressures were shown low in the first half of 2009, and are expected to remain at such rate even in the second half of year. Global annual inflation fell at 1.7 percent in May relative to about 6 percent of the same period in previous year. In advanced economy countries, inflation declined close to 0 percent, following the fall of oil price at a rather lower rate than the one of preceding year. However, the decrease in a deflationary situation is rather difficult to occur, due to the relative stability of raw materials prices. In terms of inflation performance expectations at global level for 2009 and 2010, they suggest low inflationary pressures due to the presence of unused economic capacities, sufficient to manage the relative growth of the overall demand.

There are some factors which jeopardise the stability and swiftness of the economic recovery. In more concrete terms, the still high rate of unemployment, the instability of income rate for families and business lines, and the unstable performance of housing market, are identified as occurrences that may emerge later and destabilise the recovery of the world economy align with the aforesaid scenarios. At the same time, it is necessary that families, business lines, financial institutions and governments persist with the correcting policies of their balance sheets in a medium term, aiming to set up the right and complementary ratios between savings and costs.

Public authorities should find a balance between the need to maintain the financial impetus in short term, and the preparations for an escalated withdraw from the contingency policies of the economic support. In short-term, public authorities are expected to reveal their willingness to continue with the financial stimulus throughout the year 2009, and perhaps further. In any case, particularly in terms of changing this position, it is requested a timely and direct communication, to provide the adequacy of financial markets and to ensure the stability of funds size and costs, particularly in long term.

The effects of the global crisis were transmitted on the economy and financial system of our country. The first effects, as a global crisis, were felt on the balance of payments, reflecting the relationships of our economy with the world. The increase of unemployment and the reduction of finances in the neighbour countries of Euro zone were followed by the decline of Albanian emigrants’ remittances that live and work in those countries. While the gap between the domestic and external demand was deepened, this was accompanied with an increase of current account deficit and the upsurge of pressure on the exchange rate. At the same time, the banking sector at home shrank the funding volume to the domestic economy as a response to the increased demand for liquidity, due to the fall of deposits in banks and to the picking up of the Government demand to borrow. The intertwined effect of these developments affected negatively the real sector of the economy, mainly the business sector and families as well. In the first quarter of year, business confidence index fell under its historic average, mirroring a more problematic situation. This latter was shown by the lower realisation of fiscal income compared to the schedule, as well as by the decline of loan portfolio quality that banking sector has encountered throughout the period.

In the first quarter 2009, the financial system development at home was impacted from the ceasing of banking sector growth. The other part of the financial market, represented manly from insurance and re-insurance companies, pension funds and the savings and loans associations, recorded a considerable growth of the activity. In terms of banking sector, at the end of June, total assets remained close to its rate as at the end of 2008, pointing to ALL 832 billion. Lending recorded a growth of about 21.5 percent amounting to ALL 419 billion, relative to June 2008. Lending recorded a growth of 21.5 percent, amounting to ALL 419 billion relative to June 2008. For the first half of 2009 lending increased only by 6.3 percent for. In terms of deposits, banking sector recollected, up to the end of June 2009, about 1/3 of deposits’ value lost in the last quarter of 2008 and in the first quarter of 2009. This pace of deposits return was stable and continued also in summer period. The return of public deposits in the banking system is projected to affect positively this latter’s ability to credit the economy. The more difficult situation of the real sector of the economy and the reduction of funding sources during the period, were accompanied by the decrease of loan portfolio quality. At the end of June 2009, non-performing loan accounted for 8.7 percent of the overall loan portfolio value. Banks continued to grow the reserve funds on the possible losses arising from loans, and this latter is followed by a negative impact on financial result of this period. Nevertheless, at the end of first half of year, banking sector recorded a positive financial result at ALL 0.66 billion. Regarding the activity capitalisation rate, this indicator remains stable and at satisfactory levels. At the end of June 2009, capital adequacy indicator was 16.9 percent. The slowdown of high risk coefficient investments, the preservation of a positive financial result, the non-allocation of profit and the capital growth from shareholders influenced to maintain the stability of the activity capitalisation indicator. In terms of liquidity indicators, the banking sector’s liquid assets account for 40 percent of the total assets as at the end of June, fully covering all the banking sector liabilities with maturity term up to one year. The performance of these financial indicators of the banking sector reflected in general the same position during the period June - August 2009 as well.

In terms of insurance and re-insurance companies, total assets for the first quarter of 2009 amounted to ALL16.5 billion, with an increase of 6 percent relative to the last quarter of 2008, or with a growth of 13.4 percent relative to the same period of previous year. Referring to these rates, the insurance companies’ assets account for about 1.5 percent of the country GDP and for about 1.9 percent of the financial system total assets. Capitalisation rate of the insurance companies, measured as a ratio of capital accounts to total assets, results at adequate levels, about 56.5 percent. Profit of the financial year for the insurance companies amounted to ALL 0.5 billion, relative to ALL 0.3 billion accounted for the same period of the previous year. During first half of 2009, the operational activity of insurance companies recorded a growth of the contracts, damages payments, and capitalisation and of the profit rates. Insurance contracts rose by 29 percent during this period, relative to the same period of previous year. The increase of contracts number was accompanied with the growth of premiums income volumes. Gross premiums written pointed to about ALL 4 billion or 27 higher than the same period of previous year. Insurance market continues to be mainly oriented on non-life insurance, whose contribution accounted for about 92 percent of the overall premium volume, while Life insurance accounted for about 8 percent. The gross premiums written of volunteer insurance share about 48 percent of the market, while mandatory insurance premiums about 52 percent of the market. Total gross damages paid by the insurance companies amounted to ALL 0.8 billion or 23 percent higher than the same period of previous year. About 89 percent of gross paid damages stand for motor insurances.

Private pension funds market[2] performed positively in the first half of 2009, as shown by the increase of contributions rate amounting to ALL 0.06 billion. Nevertheless, this market continues to have an almost trivial share in the financial system and in the domestic GDP.

Savings and loans associations[3] recorded a slight growth of their assets of about 2 percent in the first quarter of 2009 relative to the end of year 2008. Total assets of savings and loans associations pointed to ALL 4.4 billion sharing approximately 12.4 percent of non-bank financial institutions’ assets (including insurance and pension funds companies). Their share to GDP is estimated at about 0.4 percent. The lending activity accounts for the main direction of the activity, sharing about 81 percent of the total assets.

In terms of banking sector risks spectrum, it is assessed that risks severity in short term period is being lowered, nevertheless a particular attention on banking activity indicators’ development in a medium term, is required. In short-term period, banking sector situation started to feel a lessening owing to the improvement of the European banking groups’ financial position and to the return of public deposits growing pace. As a result, the funding sources of the activity, through both capital and the borrowing from residents and non-residents, shall be expanded by promoting a slowdown of the reduction pace of lending and investments, and further these latter gradual increases. Nevertheless, in medium-term the activity expansion paces, in terms of profitable investments growth, shall be lower than those of year 2008. The increase of ALL investments of banking sector is expected to persist, due to the higher funding sources denominated in the domestic currency. On the other side, the augmentation of reserve funds to cover the possible losses from loans, shall continue to impact the instability of the financial result. The lower financial result of the activity shall provide a lower support of the activity expansion with internal sources, imposing a stable commitment of banks shareholders.

Public authorities at home affected the lessening of the global financial crisis on the economy at home, in short term. Government, through the significant increase of the fiscal expenditures share designated for investments, mainly in infrastructure, supplied an important impetus for the support of the real sector of economy to come through the global crisis effects. Some sectors of the economy particularly that of transport, construction, tourism and services with the main share on the gross domestic product, are assessed to have benefited more from such a policy. The Bank of Albania has also been attentive in terms of liquidity in the interbank market and the financial situation of banking sector, with the aim to preserve its stability and to lessen the expected decrease of the banking sector’s intermediation role. For this purpose, Bank of Albania has supported the liquidity needs of the banking sector through the employment of the open market operations. In this framework it was continued with liquidity injection of one-week R/Repo of no limit on the injected amount, as well as through the use of Reverse Repurchase Agreements with one-month and three-month maturity term. Following a cut of the interest rate by 0.5 percentage points, in January and the mitigated inflationary pressures at home, the monetary policy paid an important attention to the financial stability, by keeping the key interest rate unchanged, throughout the period. Thus, it was aimed to support the demand for financial assets denominated in the national currency, in the short term. At the same time, Bank of Albania persisted to implement a more cautious supervisory regime on the banking system developments. Such a position grounded the effective management of the banking system liquidity situation, provided an orientation of lending in national currency and affected the maintenance of the financial stability and the activity capitalisation parameters. The situation entered into a qualitative improvement phase after the re-initiation of public deposits increase process at the banking sector. This process, which was developed gradually and in a stable way in the second quarter of 2009, continues at satisfactory paces.

Along with the actions on a short-term response against the global financial crisis effects on the domestic economy, public authorities should think about the operations that grow this latter’s stability in medium and long term. After overleaping the short-term effects of the international financial crisis and the improvement of the international situation, public authorities at home should re-evaluate the needed legal and financial operations framework which shall provide the re-establishment of balances in the fiscal, monetary and banking activity to sustain a stable economic growth in short and medium term, and under the conditions of a continuing financial stability.

For that reason, it is expected the fiscal policy takes the respective correcting measures in order to keep unchanged the confidence and interest of the resident and non-resident market agents and investors. At the same time, the monetary policy should asses the possible effects on inflation of the financial incentive, provided to the banking sector and to the economy, and later analyse the spaces available to carry on the financial intermediation of banking sector in the economy at a lower cost.

To provide a longer-term response to the stable economic growth, public authorities should insist on the compilation and implementation of the developing policies, which in a medium term shall provide:

• The establishment of a better balance on the contribution that different sectors give for the economic growth;
• The increase of our economy competitiveness and its further formalisation;
• The augmentation of the economic agents’ funding sources;
• The improvement of the legal framework, the business climate and of the consumer protection;
• The completion of measures framework to handle at a low cost the financial crisis.

In this framework, the domestic output growth remains a priority, mainly through a higher support to small and medium-sized enterprises and the revival of the agricultural and animal production. In terms of this latter it is needed to carry out a complete reform which aims: to settle on the development priorities in this sector, the assurance of quality standards and the increase of elaboration rate of products, as well as the expansion of selling markets. The fiscal policy, through the correct management of the revenues and expenditures, shall provide a better support to these objectives by maintaining the stability of fiscal indicators, as low rates of budget deficits and of public debt. In this way the contribution of foreign investment shall be maximised for the accomplishment of these objectives.

To settle on the best development balances in the financial system, there should be needed to compile policies which shall give impetus to the robust development of the non-banking financial sector and which shall sustain the establishment of capital and debt market for private entities. The accomplishment of these targets shall impose priory the strengthening of the financial report standards; the completion, adequacy and improvement of the legal requirements implementation for the development of a business affairs; and the better protection of creditors and consumer rights of the financial institutions and products. In more practical terms, these measures shall extend the funding sources for the economic growth, by relatively decreasing its dependence from the banking sector.

It is also useful that taking advantages of their experience and from the countries that were affected directly from this financial crisis, the public authorities that are accountable for the adjustment of the financial market at home, including the Government, review and improve the measures framework to efficiently deal with similar situation in the future. The operations taken by public authorities in this view should include the operations for the prevention, the encountering and the elimination of financial crisis consequences. Each public authority should carry out an assessment of its legal, financial, human and technologic capabilities and skill, to compile and implement in time and with quality the aforesaid operations framework. It is needed to establish and maintain a better coordination among public authorities, throughout this process.

The banking industry itself is required to carry out the re-evaluation of development objectives and models in future, with the purpose the growth of activity stability and which may be supported in the due time by amendments in the regulatory and supervisory framework. Due to the possibility that banking sector encounters a period which may be characterised by lower paces of the activity enlargement and of the financial intermediation, it is needed that steering organs of banks undertake an adjusting and reviewing process of the activity, with the purpose: a) to re-assess the development priorities; b) to build up a better balance regarding income sources and costs control; c) to direct their activity toward a high specialisation and to establish the competitive priorities; d) to select a better balance regarding the composition of different products according to the currency, maturity term, etc; to implement more active policies (financial, service, transparency) to approach and maintain the public (customers) close to the institution; e) to strengthen the internal audit structure and risks management.

Bank of Albania is thinking the possibility that, within the needed time frame, to back up these operations through the regulatory and supervisory framework for the maintenance of the financial stability. In this view, it shall be aimed to strengthen the internal mechanisms in the banking activity that hamper the uncontrolled progress of the activity and transmit stimulus for a balanced development, with adequate characteristics of liquidity and capitalisation. At the same time, Bank of Albania shall assess the need for a new supervisory approach for the financial institutions and banks with systematic importance. The transparency of banking activity in its relationships with customers and public in general, shall remain at the centre of Bank of Albania supervisory activity. In general, in this process the Bank of Albania, shall consider the alternations that shall occur in the European standards, by supporting the strong collaboration with other central banks and supervisory authorities.

At the conclusion, we assess that the financial situation of banking sector and of the entire financial system, appears stable and in line with the requirements of the supervisory and regulatory framework. In medium term and further, the stability of the financial system would benefit from public authorities ability to undertake in time the needed legal and financial operations, which support a more balanced development of the economy and of the financial system as well.

---

[1] Reviwed publication, July 2009

[2] Currently three private pension institutions carry out their acivity.

[3] The data refre to the first quarter of 2009.

In accordance with the requirement stipulated in Article 69 of the Law No.8269, dated 23.12.1997 "On the Bank of Albania", as amended and Article 8 of the Law No.9962, dated 18.12.2006 "On Banks in the Republic of Albania", to inform the Council of Ministers, the Parliament of the Republic of Albania and to draw the attention of the financial institutions and of the public at large on the financial system situation in the country and on the potential risks that might jeopardise its stability, Bank of Albania releases the following periodical statement. 

The relationships of the financial activity with the domestic and external economic developments and these latter’s interaction with the internal situation of the financial system itself determine the stability of the financial system and particularly of the banking system Concerning all these elements, there are concluded the following highlights over the first half of 2009:

In terms of the global economy, the financial crisis escalated its impact during the first half of the period leading to an economic fall for the countries with advanced economy. The global economic activity, during the first quarter of year, deteriorated considerably. According to the data provided in the International Monetary Fund Report "World Economic Outlook"[1], the global; economy fell by about 6.4 percent, almost at the same rate with the last quarter of 2008. The advanced economies countries suffered the highest drop. The combined economic downturn in these countries pointed to 7.9 percent, relative to 7.9 percent in the last quarter of 2008. The economy of the United States of America, decreased at annual basis by about 6.4 percent in the first quarter of year. The decrease of household consumer and of the investments in the private sector affected this performance. Debt reduction process, the decrease of financial and non-financial assets’ value and the considerable rise of unemployment rate influenced the decline of household consumer. This latter increased by 8.5 percent at the end of first quarter 2009, relative to 7.2 percent at the end of 2008. The fall of private sector investments owed to the reduction in sales, to the considerable drop of the financial result and to the cut of finances. The European economy showed similar development, where the economy of European Union zone marked an average fall of about 2.4 percent in the first quarter of 2009, as compared to the forth quarter of 2008. The unemployed rate in the European Union zone rose to 8.6 percent at the end of first quarter. In the Euro zone, this indicator was higher pointing to 9 percent. On the other side, the economic situation of emerging countries deteriorated during first quarter 2009 and their economic downturn deepened at 4.2 percent, relative to 3.9 percent in the last quarter of 2008. Nevertheless, some indicators referring to the balance -sheets of business companies and to the relative stability of housing markets development, particularly in the United States of America and in United Kingdom, transmitted during this period the first signs on the slowdown of this deterioration.

The indicators on the mitigation of the global economic crisis augmented and by a more stable performance in the second quarter of year. The financial markets manifested more swiftly the improvements, where the sufficient liquidity supply and the free monetary policy implemented by the central banks of the advanced economy countries, from some months, encouraged the reduction of interest rates at money markets, supported the securities investments of business lines debt and led to a recovery of the capital markets, as shown by the robust increase of the main trading platforms for equities. However, bank lending continued to contract during this period, although at a lower declining pace, while the soundness of banks was still a concern. In the framework of real sector development, there was concluded the lowest downturn of the industrial output, a stable fall of goods inventories of the business lines, and the increase of business and consumer confidence index in the United States of America and in the European Union. Financial markets conditions also were improved and investors showed a higher will to invest in debt securities of the emerging countries governments. The International Monetary Funds, owing to these developments, forecasts recently that global economy shall decrease at 1.4 percent for the year 2009, while it shall be grown at 2.5 during 2010, by picking up at 0.6 percentage points the outlook on global economy growth for the year 2009, published in April. Gross Domestic Product in the advanced economy countries is projected to fall by 3.8 percent in 2009, prior to the gradual recovery with a growth of 0.6 percent in 2010. However, the unemployment rate in advanced economy countries persists to increase. Due to the negative impact that unemployment has on consumer costs, its increase represents a risk that may appear later and destabilise the economic recovery. Emerging countries are expected to attest an economic growth during the second half of 2009, but with highlighted differences among them. The IMF projections regarding the economic growth of the regional countries in Asia are increased at 5.5 percent for year 2009 and at 7.0 percent in 2010. China and India are forecasted to provide the main contribution on this development. Regarding the regional countries of Latin America, the economic growth projection for 2009 is deteriorated by 1.1 percentage point, mainly due to the fact the production in these countries is damaged owing to the reduction of international trade at a higher rate than the expectation at the beginning of year. On the other side, these countries are expected to benefit from the increase of the raw materials’ prices, thus the projection for 2010 rose by 0.7 percentage points. Regarding the East European countries, the IMF projection is dropped by 1.3 percentage points for the year 2009 while it is increased by 0.2 percentage points for year 2010. The reasons mainly relate to the reduction of public and private investments in these countries, as well as to the increasing rate of unemployment.

Inflationary pressures were shown low in the first half of 2009, and are expected to remain at such rate even in the second half of year. Global annual inflation fell at 1.7 percent in May relative to about 6 percent of the same period in previous year. In advanced economy countries, inflation declined close to 0 percent, following the fall of oil price at a rather lower rate than the one of preceding year. However, the decrease in a deflationary situation is rather difficult to occur, due to the relative stability of raw materials prices. In terms of inflation performance expectations at global level for 2009 and 2010, they suggest low inflationary pressures due to the presence of unused economic capacities, sufficient to manage the relative growth of the overall demand.

There are some factors which jeopardise the stability and swiftness of the economic recovery. In more concrete terms, the still high rate of unemployment, the instability of income rate for families and business lines, and the unstable performance of housing market, are identified as occurrences that may emerge later and destabilise the recovery of the world economy align with the aforesaid scenarios. At the same time, it is necessary that families, business lines, financial institutions and governments persist with the correcting policies of their balance sheets in a medium term, aiming to set up the right and complementary ratios between savings and costs.

Public authorities should find a balance between the need to maintain the financial impetus in short term, and the preparations for an escalated withdraw from the contingency policies of the economic support. In short-term, public authorities are expected to reveal their willingness to continue with the financial stimulus throughout the year 2009, and perhaps further. In any case, particularly in terms of changing this position, it is requested a timely and direct communication, to provide the adequacy of financial markets and to ensure the stability of funds size and costs, particularly in long term.

The effects of the global crisis were transmitted on the economy and financial system of our country. The first effects, as a global crisis, were felt on the balance of payments, reflecting the relationships of our economy with the world. The increase of unemployment and the reduction of finances in the neighbour countries of Euro zone were followed by the decline of Albanian emigrants’ remittances that live and work in those countries. While the gap between the domestic and external demand was deepened, this was accompanied with an increase of current account deficit and the upsurge of pressure on the exchange rate. At the same time, the banking sector at home shrank the funding volume to the domestic economy as a response to the increased demand for liquidity, due to the fall of deposits in banks and to the picking up of the Government demand to borrow. The intertwined effect of these developments affected negatively the real sector of the economy, mainly the business sector and families as well. In the first quarter of year, business confidence index fell under its historic average, mirroring a more problematic situation. This latter was shown by the lower realisation of fiscal income compared to the schedule, as well as by the decline of loan portfolio quality that banking sector has encountered throughout the period.

In the first quarter 2009, the financial system development at home was impacted from the ceasing of banking sector growth. The other part of the financial market, represented manly from insurance and re-insurance companies, pension funds and the savings and loans associations, recorded a considerable growth of the activity. In terms of banking sector, at the end of June, total assets remained close to its rate as at the end of 2008, pointing to ALL 832 billion. Lending recorded a growth of about 21.5 percent amounting to ALL 419 billion, relative to June 2008. Lending recorded a growth of 21.5 percent, amounting to ALL 419 billion relative to June 2008. For the first half of 2009 lending increased only by 6.3 percent for. In terms of deposits, banking sector recollected, up to the end of June 2009, about 1/3 of deposits’ value lost in the last quarter of 2008 and in the first quarter of 2009. This pace of deposits return was stable and continued also in summer period. The return of public deposits in the banking system is projected to affect positively this latter’s ability to credit the economy. The more difficult situation of the real sector of the economy and the reduction of funding sources during the period, were accompanied by the decrease of loan portfolio quality. At the end of June 2009, non-performing loan accounted for 8.7 percent of the overall loan portfolio value. Banks continued to grow the reserve funds on the possible losses arising from loans, and this latter is followed by a negative impact on financial result of this period. Nevertheless, at the end of first half of year, banking sector recorded a positive financial result at ALL 0.66 billion. Regarding the activity capitalisation rate, this indicator remains stable and at satisfactory levels. At the end of June 2009, capital adequacy indicator was 16.9 percent. The slowdown of high risk coefficient investments, the preservation of a positive financial result, the non-allocation of profit and the capital growth from shareholders influenced to maintain the stability of the activity capitalisation indicator. In terms of liquidity indicators, the banking sector’s liquid assets account for 40 percent of the total assets as at the end of June, fully covering all the banking sector liabilities with maturity term up to one year. The performance of these financial indicators of the banking sector reflected in general the same position during the period June - August 2009 as well.

In terms of insurance and re-insurance companies, total assets for the first quarter of 2009 amounted to ALL16.5 billion, with an increase of 6 percent relative to the last quarter of 2008, or with a growth of 13.4 percent relative to the same period of previous year. Referring to these rates, the insurance companies’ assets account for about 1.5 percent of the country GDP and for about 1.9 percent of the financial system total assets. Capitalisation rate of the insurance companies, measured as a ratio of capital accounts to total assets, results at adequate levels, about 56.5 percent. Profit of the financial year for the insurance companies amounted to ALL 0.5 billion, relative to ALL 0.3 billion accounted for the same period of the previous year. During first half of 2009, the operational activity of insurance companies recorded a growth of the contracts, damages payments, and capitalisation and of the profit rates. Insurance contracts rose by 29 percent during this period, relative to the same period of previous year. The increase of contracts number was accompanied with the growth of premiums income volumes. Gross premiums written pointed to about ALL 4 billion or 27 higher than the same period of previous year. Insurance market continues to be mainly oriented on non-life insurance, whose contribution accounted for about 92 percent of the overall premium volume, while Life insurance accounted for about 8 percent. The gross premiums written of volunteer insurance share about 48 percent of the market, while mandatory insurance premiums about 52 percent of the market. Total gross damages paid by the insurance companies amounted to ALL 0.8 billion or 23 percent higher than the same period of previous year. About 89 percent of gross paid damages stand for motor insurances.

Private pension funds market[2] performed positively in the first half of 2009, as shown by the increase of contributions rate amounting to ALL 0.06 billion. Nevertheless, this market continues to have an almost trivial share in the financial system and in the domestic GDP.

Savings and loans associations[3] recorded a slight growth of their assets of about 2 percent in the first quarter of 2009 relative to the end of year 2008. Total assets of savings and loans associations pointed to ALL 4.4 billion sharing approximately 12.4 percent of non-bank financial institutions’ assets (including insurance and pension funds companies). Their share to GDP is estimated at about 0.4 percent. The lending activity accounts for the main direction of the activity, sharing about 81 percent of the total assets.

In terms of banking sector risks spectrum, it is assessed that risks severity in short term period is being lowered, nevertheless a particular attention on banking activity indicators’ development in a medium term, is required. In short-term period, banking sector situation started to feel a lessening owing to the improvement of the European banking groups’ financial position and to the return of public deposits growing pace. As a result, the funding sources of the activity, through both capital and the borrowing from residents and non-residents, shall be expanded by promoting a slowdown of the reduction pace of lending and investments, and further these latter gradual increases. Nevertheless, in medium-term the activity expansion paces, in terms of profitable investments growth, shall be lower than those of year 2008. The increase of ALL investments of banking sector is expected to persist, due to the higher funding sources denominated in the domestic currency. On the other side, the augmentation of reserve funds to cover the possible losses from loans, shall continue to impact the instability of the financial result. The lower financial result of the activity shall provide a lower support of the activity expansion with internal sources, imposing a stable commitment of banks shareholders.

Public authorities at home affected the lessening of the global financial crisis on the economy at home, in short term. Government, through the significant increase of the fiscal expenditures share designated for investments, mainly in infrastructure, supplied an important impetus for the support of the real sector of economy to come through the global crisis effects. Some sectors of the economy particularly that of transport, construction, tourism and services with the main share on the gross domestic product, are assessed to have benefited more from such a policy. The Bank of Albania has also been attentive in terms of liquidity in the interbank market and the financial situation of banking sector, with the aim to preserve its stability and to lessen the expected decrease of the banking sector’s intermediation role. For this purpose, Bank of Albania has supported the liquidity needs of the banking sector through the employment of the open market operations. In this framework it was continued with liquidity injection of one-week R/Repo of no limit on the injected amount, as well as through the use of Reverse Repurchase Agreements with one-month and three-month maturity term. Following a cut of the interest rate by 0.5 percentage points, in January and the mitigated inflationary pressures at home, the monetary policy paid an important attention to the financial stability, by keeping the key interest rate unchanged, throughout the period. Thus, it was aimed to support the demand for financial assets denominated in the national currency, in the short term. At the same time, Bank of Albania persisted to implement a more cautious supervisory regime on the banking system developments. Such a position grounded the effective management of the banking system liquidity situation, provided an orientation of lending in national currency and affected the maintenance of the financial stability and the activity capitalisation parameters. The situation entered into a qualitative improvement phase after the re-initiation of public deposits increase process at the banking sector. This process, which was developed gradually and in a stable way in the second quarter of 2009, continues at satisfactory paces.

Along with the actions on a short-term response against the global financial crisis effects on the domestic economy, public authorities should think about the operations that grow this latter’s stability in medium and long term. After overleaping the short-term effects of the international financial crisis and the improvement of the international situation, public authorities at home should re-evaluate the needed legal and financial operations framework which shall provide the re-establishment of balances in the fiscal, monetary and banking activity to sustain a stable economic growth in short and medium term, and under the conditions of a continuing financial stability.

For that reason, it is expected the fiscal policy takes the respective correcting measures in order to keep unchanged the confidence and interest of the resident and non-resident market agents and investors. At the same time, the monetary policy should asses the possible effects on inflation of the financial incentive, provided to the banking sector and to the economy, and later analyse the spaces available to carry on the financial intermediation of banking sector in the economy at a lower cost.

To provide a longer-term response to the stable economic growth, public authorities should insist on the compilation and implementation of the developing policies, which in a medium term shall provide:

• The establishment of a better balance on the contribution that different sectors give for the economic growth;
• The increase of our economy competitiveness and its further formalisation;
• The augmentation of the economic agents’ funding sources;
• The improvement of the legal framework, the business climate and of the consumer protection;
• The completion of measures framework to handle at a low cost the financial crisis.

In this framework, the domestic output growth remains a priority, mainly through a higher support to small and medium-sized enterprises and the revival of the agricultural and animal production. In terms of this latter it is needed to carry out a complete reform which aims: to settle on the development priorities in this sector, the assurance of quality standards and the increase of elaboration rate of products, as well as the expansion of selling markets. The fiscal policy, through the correct management of the revenues and expenditures, shall provide a better support to these objectives by maintaining the stability of fiscal indicators, as low rates of budget deficits and of public debt. In this way the contribution of foreign investment shall be maximised for the accomplishment of these objectives.

To settle on the best development balances in the financial system, there should be needed to compile policies which shall give impetus to the robust development of the non-banking financial sector and which shall sustain the establishment of capital and debt market for private entities. The accomplishment of these targets shall impose priory the strengthening of the financial report standards; the completion, adequacy and improvement of the legal requirements implementation for the development of a business affairs; and the better protection of creditors and consumer rights of the financial institutions and products. In more practical terms, these measures shall extend the funding sources for the economic growth, by relatively decreasing its dependence from the banking sector.

It is also useful that taking advantages of their experience and from the countries that were affected directly from this financial crisis, the public authorities that are accountable for the adjustment of the financial market at home, including the Government, review and improve the measures framework to efficiently deal with similar situation in the future. The operations taken by public authorities in this view should include the operations for the prevention, the encountering and the elimination of financial crisis consequences. Each public authority should carry out an assessment of its legal, financial, human and technologic capabilities and skill, to compile and implement in time and with quality the aforesaid operations framework. It is needed to establish and maintain a better coordination among public authorities, throughout this process.

The banking industry itself is required to carry out the re-evaluation of development objectives and models in future, with the purpose the growth of activity stability and which may be supported in the due time by amendments in the regulatory and supervisory framework. Due to the possibility that banking sector encounters a period which may be characterised by lower paces of the activity enlargement and of the financial intermediation, it is needed that steering organs of banks undertake an adjusting and reviewing process of the activity, with the purpose: a) to re-assess the development priorities; b) to build up a better balance regarding income sources and costs control; c) to direct their activity toward a high specialisation and to establish the competitive priorities; d) to select a better balance regarding the composition of different products according to the currency, maturity term, etc; to implement more active policies (financial, service, transparency) to approach and maintain the public (customers) close to the institution; e) to strengthen the internal audit structure and risks management.

Bank of Albania is thinking the possibility that, within the needed time frame, to back up these operations through the regulatory and supervisory framework for the maintenance of the financial stability. In this view, it shall be aimed to strengthen the internal mechanisms in the banking activity that hamper the uncontrolled progress of the activity and transmit stimulus for a balanced development, with adequate characteristics of liquidity and capitalisation. At the same time, Bank of Albania shall assess the need for a new supervisory approach for the financial institutions and banks with systematic importance. The transparency of banking activity in its relationships with customers and public in general, shall remain at the centre of Bank of Albania supervisory activity. In general, in this process the Bank of Albania, shall consider the alternations that shall occur in the European standards, by supporting the strong collaboration with other central banks and supervisory authorities.

At the conclusion, we assess that the financial situation of banking sector and of the entire financial system, appears stable and in line with the requirements of the supervisory and regulatory framework. In medium term and further, the stability of the financial system would benefit from public authorities ability to undertake in time the needed legal and financial operations, which support a more balanced development of the economy and of the financial system as well.

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[1] Reviwed publication, July 2009

[2] Currently three private pension institutions carry out their acivity.

[3] The data refre to the first quarter of 2009.