PRESS RELEASE
Speech by Adrian Fullani, Governor of the Bank of Albania at a forum on “Lending to the economy and the long-term stability of the banking system”, 4 March 2013

Dear Guests,

It is my pleasure to welcome you to this forum and say a few words about its significance. The Bank of Albania considers that an open and ongoing communication with the banking industry and business community is a prerequisite to ensure a greater macroeconomic and financial stability in the country. These meetings serve as platforms to present incentives and strategic decisions that affect directly the economic and financial activity of both components represented in this meeting. This is an open forum, where the Bank of Albania's analysis, conclusions and decision-making will be juxtaposed with other groups' analyses and conclusions.

What I expect from this meeting is a good understanding and an assignment of responsibilities to provide Albania's economic activity with a new stimulus by recovering credit to economy. Hence, allow me to speak on the main topic of today's forum: lending to economy and banking system's long-term stability. Besides professional discussion on the topic, this meeting also aims to launch Bank of Albania's new initiative, which I would call Bank of Albania's credit revival package.

Let me now elaborate this topic further, by dividing my speech into three main sections:

1. Highlights on recent economic and financial developments in Albania;
2. A retrospective view of the confrontation of our economy with the global crisis; and
3. A package of measures we propose to revive lending to economy.

Albanian economy in 2012

2012 was a challenging year for Albania's economic development. Albanian economy recorded positive growth and its economic and financial balances were stable. Economic growth, however, has pursued a clear slowing path over the past four years and the concerns behind this performance remain present.

As we have continuously stated, Albania's economic activity suffers from lack of final demand for goods and services. Consumers and businesses, in particular, appear reluctant to consume and invest due to higher uncertainty and tighter lending standards. Lack of this demand is reflected in incomplete utilisation of productive capacities, yielding, in turn, a low economic growth, a sluggish labour market, financial constraints to businesses, and deteriorating loan quality.

Though non-performing loans increased to 22.5% as a percentage of total loans as at end-2012, the banking sector appears stable. Capitalisation and liquidity figures remain at good levels. Profit is distinctly higher than in 2011.

Loans and deposits grew higher but at slower paces than in 2011. The decelerating lending was considerable, as it grew by merely 2.1% in the past year. Only lending in lek provided a positive contribution, while lending in foreign currency shrank on a year earlier. Banks increased their prudence in lending, leading to a relatively tightening credit supply. The tightening of the regulatory and prudential regulations at European level made a considerable impact, which was passed on to a refrained lending activity throughout the countries that have European banks in place. This phenomenon, which is technically recognised as deleveraging or reduced 'risk appetite', has brought about a phenomenon which according to McKinsey is known as 'balkanization' of the European financial system.

This phenomenon, either open or hidden, is rather damaging for the development perspectives of the countries in the region and for the European integration process. From our viewpoint, the banking system should be avant-garde in this process, by exposing the country's competitive advantage at parent banking groups and attracting foreign investors.

In its analyses, the Bank of Albania has identified the decline in demand as the main concern facing the Albanian economy. Mandated by law to maintain price stability, we assess that the low economic growth may prevent us from achieving our mandate in the medium run. We have, therefore, emphasised that Albania's economic policies should be stimulating.

We also deem that the fiscal policy faces lack of room for fiscal stimulus and it should increase its orientation toward consolidating the long-term stability of public finances. Under these circumstances, we have fully steered our policies and instruments toward boosting consumption and investments in Albania. Bank of Albania's monetary policy has been more and more stimulating. It has lowered the key interest rate for six consecutive times to record low of 3.75%. We have also continued to supply the banking system with the required liquidity to support the public and private sectors' activity. In parallel, our communication with the public has aimed to guarantee economic agents and financial markets for maintaining an easing monetary policy in the future.

Overall, our monetary policy has been successful in preserving macroeconomic balances; however, its effect on stimulating the economy has been more limited. The financial market and the banking system have not fully reflected the key interest rate cuts in their main products - loans, deposits and Government securities - while the Albanian consumers and businesses have slightly responded to monetary stimulus and lower interest rates. To our opinion, this performance reflects two main problems that our economy and macroeconomic policies are facing. These two problems are: 1. structural vulnerabilities of the Albanian economy; and 2. the restriction of conventional instruments of economic control, of monetary and fiscal policies, in boosting the aggregate demand and economic growth.

Addressing them in a differentiated way requires the formulation and implementation of necessary structural reforms to support entrepreneurship, enhance productivity, improve competition and support economic growth. In addition, it points out the need for taking unconventional measures to boost lending and support the economy.

Let me now briefly dwell on the structural vulnerabilities and then focus on Bank of Albania's initiative designed to address the second challenge.

Albanian economy in the face of the global crisis

Like all developing and emerging economies, the Albanian economy has undergone a rapid economic growth on its path to catching up EU economies. This growth has been mostly supported by rapidly increased consumption in economy and has been financed by using previous savings or foreign financing sources. The main beneficiaries of this demand are construction and services, i.e., the sectors that use labour force intensively and ensure the increase of wages and employment, which are, however, less export-oriented. On the other hand, industry and agriculture slowed down, suffering from lack of attention by the banking system, a higher degree of investments and expertise, and longer time needed for return on investments. This tendency has left Albania with a small base of export-oriented industries or of those competing with import products.

The global crisis served as an important testing for this growth model. It highlighted its limits to face external shocks and its restrictions in an ever challenging global environment. In simpler words, the global crisis highlighted the importance of maintaining sound balances in both public and private sectors. It also depicted that more competitive economies that have successfully competed in global markets are the ones that have higher and more sustainable growth rates. It is my pleasure to state that this lesson has been learned by the Albanian economy at both consumer and producer level. More specifically, Albanian households have been more reluctant to spend and more inclined to save.

In a longer-term horizon, this is undoubtedly positive. First, it guarantees the health of individual household balances, and second, it creates a sufficient fund of financial savings to boost credit and investments in the country.

In a shorter-term horizon, it induces lack of demand and makes economic growth difficult.  On the other hand, the Albanian business learned that the domestic market has restricted abilities to generate a sustainable economic growth. As a consequence, it is showing a rising interest in industry and agriculture, as sectors that have a better development perspective and a larger market share.

The above-mentioned situation has important implications for the country's development pace and macroeconomic policies. First, it implies that the country's economic growth potential is lower in the medium term. In other words, the transfer of financial and human resources across sectors, acquisition of technologies and modern business practices, as well as exploration of foreign market penetration, need time and determine the economic growth rate. Moreover, this development is faced with an unfavourable external environment, relatively high cost of funds and lack of domestic demand. Recovery of previous development paces takes time. Second, the higher propensity to save and increased risk premia restrict the ability of monetary policy to generate additional demand in the economy by lowering the key interest rate.

Global economic developments are optimistic. The euro area and the European currency appear more consolidated due to ECB's contribution and nation-wide efforts for fiscal consolidation. However, the optimism is fragile. Central banks of advanced economies have stated clearly that they will continue to apply the quantitative easing, as long as inflation remains below the target and unemployment remains high.   

Actually, the so-far solutions have been in forms never experienced before. In fact, they represent new challenges with regard to implementation and potential risk spillover effects in the long run.   

Under these circumstances, the Bank of Albania, regarding the situation as rather complicated and working intensively, has managed to design a full package of measures. They aim to boost credit and improve micro and macroeconomic balances of financing the economy, about which I will inform you in the following.

Credit revival package

The idea about the package that we are introducing today occurred last year, when we discussed jointly with you and representatives from the Ministry of Justice, about legal amendments needed to promote collateral execution. Since that meeting, our experts have worked intensively to enrich it and bring it to today's form. 

The package consists in three pillars: legal pillar; monetary policy pillar and prudential pillar. I will dwell on them in the following:

1 - Legal pillar

The rapidly increased non-performing loans in the recent years, reflects, inter alia, a number of known and unknown problems about collateral execution. Therefore, together with the banking industry, we have identified and put forward concrete proposals for higher efficiency in the collateral execution process. In consultation with other important stakeholders in this process, legal amendments to the Civil Procedures Code and to the Civil Code have been drafted.

These amendments aim to accelerate the obligatory collateral execution, by avoiding procedural delays that bank debtors cause.

More specifically, the proposed amendments address the following:

• Courts do not take measures to secure charges, in the event the bailiff actions are rejected;
• Courts do not take measures to secure charges and do not suspend collateral execution, in the event the debtor requests the invalidity of the executive title arising from a bank credit;
• Reduction by 50% of the initial price of the immovable property, placing an acceptable average for the debtor and the bank, and making clearer the value (price) of the item with which the second auction begins.

We are informed by the Ministry of Justice that these amendments are in process of finalisation and this legal package will be sent for approval to the Council of Ministers and then to Albania's Parliament. I take this opportunity to iterate the need for these legal proposals to be approved by Albania's Parliament at an earlier time possible. Improvements in the legal framework and collateral execution practice would provide public authorities with new spaces to boost lending in Albania.

2 - Monetary policy pillar

I mentioned earlier that recently, the Bank of Albania has eased the monetary policy, by undertaking 6 consecutive key interest rate cuts.

Following the last cut in January 2013, the one-week repurchase agreement rate has fallen to record low ( 3, 75%), even when compared to other economies in the region, including most new EU member states as well. The Bank of Albania deems that the monetary conditions are appropriate to ensure the meeting of inflation target in the medium run, providing at the same time the necessary monetary stimulus to support domestic demand. However, from the viewpoint of this meeting, the future of monetary policy is what really counts.

As stated in the last Statement by Bank of Albania's Supervisory Council, the Bank of Albania will continue to pursue a stimulating monetary policy, as long as inflationary pressures remain weak. Furthermore, I would like to ensure the banking system that our operational framework will maintain the same stimulating nature. It aims at preventing banks from any tensions, even sporadic ones, with regard to liquidity adequacy (quantity, price and maturity) in the market.

3 - Prudential pillar

While both first pillars impact indirectly and over an extended period of time, the prudential pillar impacts directly and swiftly on credit revival. It includes a number of measures that will release financial resources to banks and encourage them to channel those resources toward lending. Regulatory changes are at the core of these measures: 

• Reduce bank requirements for liquid assets;
• Change risk coefficients in the investment structure to boost lending.

Reduction of bank requirements for liquid assets may be conducted without undermining the stability of the system, since their level is generally higher than that of international standards and of banks in the region. Moreover, given that banks operating in the country have their origin mostly in Europe, this reduction may take place in the context of declining risk premia in European financial markets. However, it should be monitored and implemented according to each bank's risk profile. This means that though the reduction may be overall, the level of liquid assets requested by currency and in total may be different in different banks.

The risk coefficients of the investment structure will change, so that banks' capital would support shifting of their resources to lending. More specifically, we propose that the risk coefficients used to calculate the banks' capital increase, considering the new flows of bank investments with non-residents.

This increase in risk coefficients may take place also for a part of the stock of bank investments with non-residents, taking into consideration:

• Regulatory requirements for liquid assets;
• Adequate coverage of bank liabilities to non-residents; and
• The time needed so that this shift does not cause any operational overburden to banks.

On the other hand, risk coefficients may decrease in banks for the amount of new credit added to the existing stock, for a certain period of time. In this way, the intended shifting of funds toward lending in the country may take place even in those banks that have a lower capital adequacy ratio.

These measures are not administrative. The decision to conduct funds shifting to private sector credit in the country will be made by the bank itself. As in any other case, the bank should balance all the factors affecting the risk, costs and benefits from such a shift.

The implementation of the above measures requires amending the existing regulatory framework. It will be effective temporarily and after that, banks should gradually return to implementing the existing regulatory framework on the methodology for calculating capital requirement. In this way, banks retain the necessary stimulus to lend prudentially. 

We deem that the need to address non-performing loans is a concerning issue for both the banking industry and the Bank of Albania, not so much for the stability of the system, as for the costs that this phenomenon brings to banking activity, consumers and related services.

Public authorities may also take measures in this regard. I take this opportunity to iterate the need for settlement of public sector's liabilities to private entities. This would positively contribute to settling a part of liabilities that these companies or connected ones have to the banking sector, hence mitigating the level of non-performing loans.

In parallel, this process should be treated at its roots to establish a transparent and stable mechanism for addressing the factors that affect the increase in public sector liabilities to private companies, and for avoiding their increase in the future.

Moreover, the Bank of Albania will amend the regulatory framework to urge banks to support borrowers' requests for credit restructuring right from the moment the credit is regarded as good. If the banks realise this effectively, they will have a lower cost from loan-loss provisioning requirement.

This element would make banks address prudently and proactively their best clients, who may be showing their first signs of credit repayment problems because of factors beyond their control.

To monitor this action, the regulatory framework will require that the restructured loan stays temporarily in this category (or in the substandard category), and that it falls immediately under a lower category, if after the restructuring the loan quality deteriorates.

I emphasize that, after broad consultations with the banks, the Bank of Albania has drafted the relevant instructions to guide them in the debt restructuring process.
Similarly, the Bank of Albania has concluded that a part of the non-performing loans, mainly loss loans, are still in the banks' balance sheets because of a different interpretation by the banking industry and the tax authorities about the commencement and completion of the legal proceedings against a debtor.

Lack of coordinated interpretation about writing off these loans from the banks' balance sheets, leads to consequences in the banks' tax burden and prevents writing off loss loans from the balance sheets, hence swelling the level of non-performing loans and engaging banks' capacities inefficiently.

I take the opportunity to emphasize that the banking industry and fiscal authorities need to identify the factors leading to different interpretations of the same problem, and to formulate the necessary legal and sublegal amendments for a definite solution. The Bank of Albania is willing and stands ready to provide the needed assistance in this regard.

Role of business

The business-bank relationship is fundamental to economic activity success. This relationship is always conditioned by developments in the surrounding environment. The effects of the economic slowdown have been uneven across the economy sectors, and businesses do not face the same problems.

Nevertheless, today the business activity has declined and their income is downward.  Some businesses need to restructure their activity, not only by decreasing costs and improving efficiency but also by entering new markets and introducing new products.

To achieve this target, the owners' instinct and willingness do not suffice; it needs professional expertise, well-studied projects and additional financing or restructuring of the existing debt. I think that the business-bank partnership is indispensable in this process. Banks are increasingly developing their financial advisory capacities and are also developing banking products to keep close to business needs. Also, they are increasingly active in the business loan restructuring process.

Anyway, both parties have complaints to each other. Businesses complain that banks are tight fisted and often the financing does not correspond to their businesses cycle.

On the other hand, banks claim that businesses submit unreliable projects in their application for loans, and inadequate financial information for decision making.

The Bank of Albania is confident that the bank-business relationship will progress to their  benefit, if they:

• Increase their understanding of the activity profile, market conditions and regulatory requirements, which determine the activity of each of them;
• Enter into cooperation agreements, based on transparent, comprehensive and professional information;
• Act proactively to detect situations that should be reviewed and improve the possibilities to settle liabilities to each-other.

The measures put forward by the Bank of Albania today support the need for a closer bank-business relationship, given Albania's current economic situation. They expand the banks' room for a greater flexibility in the credit restructuring process. However, banks would not finance unsuccessful businesses; neither would they lend to businesses that do not supply transparent and complete information. A closer relationship implies that, in their analyses, banks should utilise more effectively the available information about existing and new borrowers, which may be generated by such sources as the Credit Registry.
 
Banks should establish a stable long-term relationship with businesses to increase consultancy and lending, especially with regard to the small and medium-sized enterprises. 

Conclusions

Concluding, I would emphasize that Albania's current economic and financial situation requires maintaining the paces of financial intermediation and addressing non-performing loans with priority. Collaboration with other public authorities has been successful. We expect concrete actions to settle outstanding payments to private companies and approve the proposed legal amendments on collateral execution. Today, the Bank of Albania proposed several additional measures aimed at bank credit revival. These measures, which will be soon reflected in the regulatory framework, have a countercyclical nature and are generally temporary.

This element, and the needed control mechanisms that accompany such measures, will encourage banks to respect their obligation to lend prudentially and soundly. Given that currently, additional risks are posed to lending, the bank management structures and shareholders should ensure that these short and medium-term risks are covered by adequate capital.  The outcome of these measures would improve, if businesses understood and used them properly. To this end, the business- bank relationship should be based only on transparent and professional collaboration. This should be transmitted better by the media and to the public.

The Bank of Albania will assess the impact of these measures and monitor their implementation on a regular basis. To this end, we stand ready to adapt them to the economic and financial developments, or support them with other measures. The financial system stability will be at the core of each action taken by the Bank of Albania in this regard.

Finally, I would like to remind all the representatives of the private sector, whether in production or financial industry, that due to the effects and impact of the crisis, the public authorities, lawmakers, fiscal and monetary authorities, have made important changes in terms of philosophy, objectives and decision making, far from traditional considerations. These temporary changes aim at mitigating the crisis effects, stabilising the economy, consumption and private investment.

The package I introduced today is a good example to illustrate this change. It is necessary, therefore, for the private sector to adopt such a temporary adjustment.

Ms. Lagarde, Managing Director of the International Monetary Fund, appealed that in the current situation, the goal of the private sector cannot be only profit; it must also be to add value, create jobs, develop new ideas that drive an economy forward and provide stability. Boosted employment and higher income from employment means more consumption and investments, higher consumer demand for goods, services and lending instruments. The economy needs a more responsible private and financial sector to the real economy, a private sector that supports employees and consumers, and a financial sector that adds values instead of destroying them.

Concluding, I would like to share with you an important message: the crisis came in as a global crisis and its solution should come as such. However, each country should do its homework and undertake the necessary structural reforms to overcome it.

People only accept change in necessity and see necessity only in crisis - said Jean Monnet, regarded by many as chief architect of the European unity.

Thank you and success in your work!