Speech by the Governor of the Bank of Albania, Mr. Ardian Fullani, at the Euromoney 5th Regional Finance and Investment Conference for South East Europe, ''Increasing the effectiveness of supervision and monitoring on financial intermediaries (With a part

Publication date: 27.10.2005


Dear participants,

I am pleased to be holding this speech on such an important topic, like that of supervision of financial intermediaries. I will start with some general remarks about competition, market infrastructure and the corporate governance, and the role they play in the effective supervision of these institutions, and I will also mention the experience we have in Albania on the issue.

Banks are the typical institutions that one can think of when meeting with the concept of "financial intermediary". This is not only due to the public appearance and interaction of such institutions, but it is rather affected by the weight the banking system has on the financial market as a whole, particularly in the developing countries. Consequently, the awareness among the public of the function that banks play in the development of the economy, by channelling funds from the savers to the interesting borrowers, is relatively easy to be seen and understood. By understanding the role of banks, the relevant public segments find it easier to increase the financial knowledge about other financial intermediaries that operate in the market. These institutions, which have the ability to intermediate among those that supply the money to those that can better use it, nowadays compose almost the entire mosaic of a developed financial market. One can mention non-bank financial institutions, savings and loans associations, different types of funds etc., whose sometimes complex operations rely on a very traditional concept of intermediation.

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As the financial market develops, many issues come forward as challenges for the market players, market regulators and authorities in the country. These issues encompass the ability of the market players to structure themselves from within and the capacity that they will show at adjusting their business toward the increased interaction with other more developed markets and institutions. In more simple words, this is nothing but finding the equilibrium on tightening the competitive environment. Competition is desirable and aimed at, because it forces the market players to run their operations in a way which is as effective and efficient as possible, with generally very positive effects on the quality and costs of services and products offered to the public. But one should be aware of certain risks that associate competition, whose magnitude and possibility of materialisation is linked to the current situation of the market. The positive effects of competition are fully materialised in the medium to long-term periods. It is then, when the market has identified its viable institutions that have been able to adjust to new market conditions, and when the scale of extension of new competitive products and services to the public maximizes. In the short-term, in some instances, the effects of a sudden and harsh competition can prove to have totally different effects. Financial institutions can close down part or the entire of their business, large public communities can be deprived of financial services in those areas that are considered "remote" related to the economic development, prices of products can be increased instead of going down, as the financial institutions will use the asymmetric information advantage in the changing market situation. Hence, it is important that competition finds the market and the authorities appropriately prepared and that the process as a whole goes fast enough as to keep "the competition train" in the proper railway that is known and assessed by the authorities and the regulators.

The process of adjustments to the changing environment by the market players will be affected by the current composition of the market. Under the conditions of an asymmetric composition, the process of adjustment may become more difficult. The differences in market share, in the scale of extension of products and services to the public, in the financial performance of the institutions may exacerbate rather than fade gradually away. We shall be, in this case, entering a self-fulfilling vicious circle, that will increase deficiencies in the market. The dependence of the developments on the financial indicators, and on the intermediation capacity of the financial market, will be on a single institution or a handful of them. On the other side, it would be very fortunate that the dominant institution(s) is active enough as to push for a competitive behaviour in the market, but the opposite could be quite true. Big institutions, can serve of their size to keep a passive attitude toward the market needs for development or on the worst case, abuse their position. It is thus, very important for the regulator to set up a regulatory framework that would support a supervisory practice that aims at identifying factors which hamper a sound and competitive environment in the market place. Asymmetric composition of the market makes the need for communication and cooperation with other supervisory entities a "must". At the same time, a consistent and productive dialogue process should be kept with all the relevant market players, in order to get their viewpoints on current or expected market developments with impact on competition conditions.

Everyone's task is significantly made easier, if you have responsible management in the financial intermediaries. This is important despite the regulatory framework that exists for different market segments; in fact the opposite holds true, having responsible management helps at covering the deficiencies that exist in the respective regulatory frameworks. Ensuring and protecting an open environment of investment, setting up requirements about the management of financial intermediaries but leaving them the proper responsibility of running the institution, asking for control systems in these institutions, setting up rules and procedures for the transparency and accountability of the institution management and building a constructive communication relationship are preconditions which help the sound governance at the level of financial intermediaries.

In Albania, the characteristics of the market development of the financial intermediaries are those of a typical developing country. There have been positive developments in these last years regarding the type, the quality of services, the soundness of financial indicators, and the competition of the financial intermediaries. We believe that these developments are the outcome of a suitable supervisory framework, which on its side, developed in parallel with the market. The Bank of Albania is responsible for supervising the banking sector, some types of non-bank financial institutions, savings and loans associations, foreign exchange bureaus. The insurance market and the securities market are supervised by two other different supervisory authorities. The level of interaction among the different segments of the market players is increasing rapidly, and so has the cooperation among the many supervising authorities. There is a discussion going on regarding the possibility of integrating the supervisory authorities of the insurance market and that of the securities market. The reasons relate to the need of integrating in a market which does not have enough activity and strengthen the supervisory work. Later on, when the standard of supervision reaches that of the Bank of Albania on the banking sector, more considerations will be given to setting up a single supervisory authority for the whole financial market.

Our supervisory framework of the banking system provides for a competitive environment in the market place. There are no restrictions on investments in the banking sector, regarding the nationality of the capital, the type of the institution (subsidiary or branch), the number of the institution in the market etc. Moreover, we still treat subsidiaries and branches of foreign banks the same way, that is, the financial supervisory indicators have the same meaning for both of them. As part of our licensing procedures we request data on the capital source, shareholders activity and sustainability of that activity, etc. We provide and require cooperation with other supervisory authorities, domestic or foreign, as part of our licensing and supervisory process, abiding strictly to requirements of confidential information usage. We have also requirements regarding the regulatory capital and capital adequacy, exposures to single entities and operations of the banks with the related persons, anti-money laundering requirements, the management of banks (and other licensed institutions) etc. Our approach of supervisory practice includes on-site inspections and off-site analysis. Changes have also occurred on the technology infrastructure which is used by banks on the payment area. There is now a modern system in function for real time gross settlement of payments, as well as another one for the small-value payments. Both systems are integrated with each other and the banks networks. As a result of such an environment, we have today 16 operating banks, in good financial conditions and with supportive shareholders. The role and the weight of the banking sector in the market place are increasing and the quality of products and services is progressing quickly. We do have a supervisory framework for other licensed institutions as well, which is also in the process of change and modernisation.

At the beginning of this year, the Albanian financial market underwent an assessment process performed by the World Bank and the International Monetary Fund, otherwise recognized as FSAP, whose results were realistic and generally positive. On the banking sector, the findings were very good, especially those related to the supervisory framework and the financial strength of the system. There were also given certain recommendations, which we found right and for which we are going to work to their accomplishment. A summary of that report can be found in the website of these institutions.

Finally, I want to say that the efforts that we make on an individual country level need to be harmonised and combined through a process of regional dialogue and communication. We have tried to be active in this direction, as well. In the beginning of April this year, we organized an international workshop on "Stress-Testing", along with the International Monetary Fund, whose participants came from almost all the countries in Central and Eastern Europe. We shall continue on this path, as we think it is important to reach a common understanding on the supervisory issues, to achieve harmonisation of supervisory standards through the entire region with those of the EU area, to provide fair and stable market conditions for our entities and to make our markets and institutions more risk averse.

Thank you.