Speech of the Governor of the Bank of Albania, Mr. Ardian Fullani, at the Forum with the financial system players, which focused on supervision and financial stability, and the functioning of money and financial market, Tirana International Hotel, 3 April

Publication date: 03.04.2008


Good morning,

Dear bankers, dear participants,

This is a big and remarkable day for all of us. Today's meeting, although pre-announced, coincides with an event of special importance. The invitation to the NATO is a privilege which brings trust, certification and safety for new investments in Albania.

At the same time and above all, it bears the responsibility for achieving the standards and actualizing the structural reform. Today's invitation to the NATO is a guarantee for the further integration into the European family.

In its recent endeavours to enhance the financial market efficiency and to guarantee the banking system stability, the Bank of Albania introduces today a new initiative, which will have at its core the establishment of a periodic communication channel between the central bank and the banking system. Indeed, our communication with the banking system has been constant and at all levels, and we have discussed a wide variety of topics and issues and the perspective related with the banking activity in Albania.


guvernatori ne takimin 3

I would like to highlight that the novelty in this new initiative relates with the necessity to have a permanent and well-structured dialogue, both in terms of content and time factor. In more concrete terms, this will be a periodic forum which will have at its centre the analytical discussion of many questions and challenges we should together address in the proper way and time.

The financial market is an argument we have been mentioning a lot recently. In many of my public speeches, in the Supervisory Council statements, in the reports and papers of the Bank of Albania, in many of the formal and informal contact of the Bank of Albania with groups of banks or particular banks, special emphasis has been placed on different elements which influence on the financial market deepening and expansion. The same may be said for the system's financial stability as well.

However, I think that the novelty of this forum stands in the fact that within the bankers' house we will diagnose and identify together the right therapy to guarantee a safe future. Moreover, the period between the two meetings will correspond with a constant dialog at experts' levels in order to increase the level of assimilation of duties and conclusions to be concluded in each forum.

This is the reason why I publicly invite you to be active, forward-looking, and come with concrete future-oriented proposals. The Bank of Albania rightly understands that like any private business the banking community business aims at maximizing its profit.

However, I would like to re-highlight the fact that the following are the same crucial:

  • The constant improvement of bank's governance;
  • The introduction of new products;
  • The functioning of the interbank market;
  • The increase of funds circulation through the system;
  • The building of full technological capacities;
  • The absorption of skilful human capacities;
  • The recognition of and protection from the various risks;
  • The increase of ALL denominated lending;
  • The strengthening of internal control; and
  • The publication of the results of your activity.

I do not hesitate to repeat once again that the banking system stability and the financial market stability are crucial for the Bank of Albania. In this context, I invite you to consider these two priorities of the Bank of Albania as the main priorities of your activity.

During 2007 the Albanian economy has generally had positive developments. The stable economic growth was in line with the objectives of consumer price stability and budget deficit. The lek, our national currency, was stable.

Year 2007 was a good one for the banking system as well. The banking system's net result for 2007 is reported about 42 per cent more than in 2006. The banking system's assets increased by ALL 118.6 billion or 19 per cent higher than as of end 2006. The banking system's outstanding loans grew by ALL 94.5 billion or 47.7 per cent higher than the end 2006.

The banks have increased the electronic products provided to their clients. There are now 11 banks in the Albanian banking system that use the transactions electronically. Worth mentioning is also the expansion of internet banking in three other banks in the system. Another testimony of the enhancement of banking competition and the increase in the volume of financial transactions through the banks is the expansion of the banking network with new branches and agencies. During 2007, the number of branches and agencies within the territory of the Republic of Albania increased by 103, out of which 43 were opened in Tirana.

For the first time during 2007 were evidenced modern elements of the banking system consolidation through the merger of two banks.

Another important achievement relates with the establishment of the Credit Register which is considered as an important element for guaranteeing the banking system stability.

However, I would like to emphasize that year 2007 and the first months of 2008 correspond with a relatively complex situation in terms of global developments. We are currently being faced with high price rises of raw materials and foodstuffs, in addition to a high and increasing demand of developing economies. The financial markets continue to reflect the negative effects of the credit crisis generated by the US economy. In contrast with the initial assessments, it seems that its spreading is larger, contaminating a considerable number of large financial institutions. The central banks have been constantly injecting liquidity, while the Federal Reserve has aggressively dropped the key interest rate in order to avoid the recession of the economy.

Due to some factors which relate to the development characteristics of the financial activity within the country, the difficult situation in the international markets is not expected to have a real and considerable effect on the domestic financial markets. However, the situation in the international financial markets remains unstable and its impact over the domestic financial market might change. Therefore, it is crucial for these developments to be monitored and analyzed carefully by the financial institutions and the regulatory authorities in the country.

The prolongation and the possible aggravation of the situation in the international financial markets may have a reduced influence on the Albanian financial market in some respects as follows:

  • The increase of the risk related with the rapid lending, in particular in foreign currency, as a result of the increased volatility of the exchange rate and the frequent change of interest rates.
  • The increased exposure of the financial system to sectors of economy that are negatively affected by the slowdown of regional and global economy.
  • The combination of difficulties in the international financial markets with the unfavourable dynamics of global energy prices and prices of foodstuffs raw materials.

Dear participants,

The issues I have mentioned so far come naturally to help me to dwell on issues related with financial stability, and then with the financial market efficiency.

I think it would not be a novelty to repeat what I have been constantly saying: "The main objective of the Bank of Albania is consumer price stability". However, I think that monetary policy and financial stability are inseparably related to each other. It is difficult for me to establish which weighs more nowadays. However, I am convinced that any investment made today to guarantee the financial stability will turn into greater efficiency of monetary policy.

I will try to refer to the main issues I would like to have your attention on:

Credit to economy

Lending in foreign currency is now a sensible reality. Consumer loan is lent in foreign currency as well. Financing the consumption of households in foreign currency is like selling foodstuffs without an expiry date. Based on the observations of our experts it seems that banks are running to gain their market share and very often, they do not pay the right attention for the quality. The data confirm our concern for the increase of non-performing loans. In gross terms, the indicator of non-performing loans to total loans' portfolio was 3.6 per cent as of end January 2008. Lek interest rates remain high. Referring to credit of up to one year maturity, according to the data for January 2008, there is a difference of 7.3 per cent to the ALL denominated deposits rate of the same maturity term. While the same indicator for the foreign currency is 4%. We are currently witnesses of a very aggressive marketing strategy for credit products in foreign currency, while with the exception of a single case, it is totally inexistent for ALL denominated credit.

I may continue and mention other observations of this kind. From the various meetings we have had with the representatives of the banking system, I have more or less been acknowledged of the reasons that according to you explain this situation. I would like to highlight that among them there are objective reasons I agree with, but I have disagree and comment on many issues and express the objection of the Bank of Albania to some of them.

From our viewpoint, we believe that you are still underestimating the exchange rate risk. Despite the perception of the public for a cheaper foreign currency credit I think that it is dangerous for the same philosophy to be part of you; moreover when gaining market share becomes a prevailing philosophy. We believe that you are currently spreading the risk to individuals and creating moral hazard issues.

Taking this opportunity I would like to ask you the following questions: How is it possible that consumer loans are extended in foreign currency? How is it possible that mortgage loans are extended in foreign currency? Do you know that most employed have their income denominated in ALL? Which bank has measured the exposure to this risk? Have you ever taken any measures to be protected by this risk?

I hope you will address these issues in your discussion since I believe time is ripe for us to dwell on these issues and avoid fictional statements.

In light of these developments, the Bank of Albania has prepared a package of regulative amendments which interweaves administrative measures with prudence and supervision examination measures. Without dwelling on their details I would like to bring into your attention the fact that the changes in the regulation "On credit risk management", in the cases when the client is not protected from the exchange rate risk, will include the following obligations for the banks:

  • The establishment of reserve funds for credit losses;
  • The increase of the capital when the limit set to foreign currency exposure is not observed.

Risk management

The factors I have decided to discuss with you today are related to each other. In my speech I raised our concern for a specific risk; however there is a second risk which relates to risk in general, to the exposure of your business to various risks. Allow me to remind you that you manage the Albanians' savings and as such the exposure does not only affect your capital but also the individuals.

For this reason I require your utmost commitment to seriously assess this issue. I think that the banking system should invest more in human resources and in the adequate infrastructure to know and rightly manage the activity risks. I would like to make clear that the application of the abovementioned will be monitored rigorously and it will become part of the assessment of each bank's activity.

Management and internal control

Good governance is the basis for the stable development of one business and its financial position. It certainly requires people with a high level of integrity and professionalism. To this purpose, we expect your institutions to be more sensitive in this context, in particular in terms of the quality of human resources involved in the decision-making process and risk management. Hence I require you to apply the right motivation in order to provide qualified staff, by establishing the conviction that only those who deserve it will be provided with career and social compensation.

In several cases we have observed the de facto concentration of decision-making in only a few hands, causing the institution dependence to be concentrated in only a few people. To this purpose I think that you should review all the internal procedures you base your day-to-day activity on.

The Bank of Albania has drafted a new regulation "On some basic criteria for the governance of banks and branches of foreign banks and their administrators". This regulation establishes the duties and responsibilities of the governing structure of banking institutions. These structures are responsible for and guarantee the safe and sound functioning of the institutions they manage. This regulation has considered the best international standards and practices of the Basel Committee and the European Union.

From the conceptual viewpoint, this regulation has expanded and it includes:

  • The rules and criteria for an effective governance;
  • The requirements related to reputation, qualification and experience;
  • The evaluation criteria for the approval of administrators;
  • The terms which cause their dismissal;
  • The responsibilities of the governing council and the management;
  • The criteria for the efficiency of the governing council activity;
  • The risk management policies and procedures.

Governance-related issues will be considered with priority by the Bank of Albania during the periodical assessments made to your activity.

The strengthening of structures which control and guarantee the functioning in line with the rules of these procedures should be seen with priority by the banking system. I refer to internal control which should have a more active role. Internal control should be active, responsible and cover every aspect of the bank in order to prevent the development of undesired phenomena.

Lately, the Supervisory Council of the Bank of Albania has approved the regulation "On the internal control system in banks and branches of foreign banks". This regulation considers the internal control in banks as a crucial part of banks' governance. The regulation stipulates the criteria for the organization of internal control aiming at providing an independent, unbiased and responsible functioning.

Public transparency

Good governance implies increased transparency with the clients and the market. Is the Albanian banking system as transparent as we wished it were?

The issue of transparency has been present a lot in my last speeches. I have to admit that there is progress; however, a lot needs to be done. Placing myself in the shoes of an individual who would like to use banking products or services I raise the following questions: How easy is it for me to be oriented properly and quickly to the best option? How easy is it for me as a depositor to know about the bank's financial situation? Which banks offers the cheapest commissions? Where can I find the information which tells me how much my bank has grown during the period? Do I have to wait for another year to learn something or I can find the information I need more frequently?

Are you sure your clients understand that many of your offers now are only with temporary benefits and that at a later time their terms will change?

I do not want to dwell on the details; however, allow me to remind you that after the US credit crises another simple reason is being displayed: although somewhere in the contracts the banks signed with the individuals there was a specific part which focused on the credit terms, most of them were not aware of this information.

With this I imply that there is no need to make transparency for the sake of transparency. I think we will be more protected if we address the abovementioned issues. If a client knows the ultimate consequence of foreign currency denominated credit when his/her income is in lek, he/she will surely hesitate. If a client knows the terms and penalties well, again he will hesitate.

However, being the Governor of the central bank, I take this opportunity to state that the Bank of Albania will encourage the banking system to face the market directly. Before I move to another issue I conclude by stressing once more: Transparency at any cost.

Allow me to say once again that the Bank of Albania will require from the governing structures of banks in general to prudently monitor the market developments, strengthen the control systems in their institutions, take measures for the proper diversification of financial sources and the directions of their investment, continuously develop a well-capitalized activity and monitor its risks. The Bank of Albania will strengthen the measures in order to enrich and implement the regulatory framework in terms of improving the risk assessment systems in commercial banks and it will co-operate with the Financial Supervision Authority in order to encourage the complete implementation of these principles in the rest of the financial market.

Dear bankers,

The commitment of the Bank of Albania in developing the money market will be concrete in terms of the operational, regulatory and supervisory framework.

In terms of operational implementation of monetary policy the Bank of Albania commitment will be reflected in the orientation of monetary operations towards the establishment of a proper and adequate liquidity structure which will vitalize the interbank market activity.

The structural excess of liquidity which has characterized the banking system has been followed by a passive behaviour of banks while numerous experiences show a proportional relation between a structural absence of liquidity and the development of interbank market. Despite this goal, I would like to stress that at no case it will compromise the main objective: implement the monetary policy.

To this purpose I require the orientation of operations to a structural liquidity deficit to be viewed as profitable for your institution. The use of this opportunity from the people you need to train and motivate will bring the development of the money market, which in the final analysis will result profitable for you and to the benefit of a more efficient monetary policy transmission.

Providing you with full transparency and theoretical and practical assistance with respect to these operations, I would once more clarify three basic aspects of our work:

  1. First, the monetary policy is and will be signalled through the decision of the Supervisory Council of the Bank of Albania on the key interest rate.
  2. Second, the main instrument for the implementation of monetary policy is and will remain the repurchase agreement of one-week maturity.
  3. Third, the use of instruments of longer maturity term or the type of auction do not bear any kind of monetary policy signal, despite for the fact that they are operational techniques for a more effective implementation of money market interventions.

In order to provide you with more grounds in terms of managing the liquidity and on the other hand, to encourage your active positioning in the money market we are working on extending the use of the required reserve. It will be your professional ability that will transform this facility from one possibility to meet the unexpected demands for liquidity into a concrete option to be positioned in the market based on the well-based expectations.

All these measures have one thing in common: the development of money interbank market. They would not be efficient without your commitment.

In order to avoid any subjective excuse allow me to bring into your attention the draft-law on repurchase agreements through the banks in the system drafted by the Bank of Albania. Currently, this draft-law is in process of approval. The approval of this law requires greater commitment in using this new instrument. In this context we require from you to start the preparations for implementing this law because the excuses will not be welcome. The repo market in the Euro area is the largest interbank market sharing 35 per cent of total trading. Banks, which own the largest part of the Albanian banking system, are part of this market and as such we believe they will be willing and interested in providing assistance for trading through repurchase agreements in the domestic market as well. The market participants should contribute to building a developed and efficient financial market because in this way they increase the chances for determining the price of their products accurately.

I hope this forum will be productive and interactive. I tried to raise some topics and issues which I think we should be faced with considering that our role is concrete and real.

I would like to assure you that the Bank of Albania will be fully committed to take the proper measures for encouraging, improving and enhancing the market and the financial intermediation instruments.

This forum confirms the role of the Bank of Albania and the banking system as two crucial factors in the development of economy in general and the financial system in particular.

Fortunately when each financial institution follows the motives and is cautious for its financial stability, it guarantees long-term prosperity for all the system, high efficiency of economic policies' transmission in general and of monetary policy in particular. Therefore, I invite you to follow these incentives in order to achieve your objectives and at the same time to provide a more qualitative service to the public.

Despite the challenges the public authorities and different economic agents will be faced with the Bank of Albania believes that the accomplishment of the approved policies and the flexibility of the economy will lead to the achievement of a stable economic growth during 2008. The financial system and the banking sector in particular will be playing an active role in the financial intermediation and in supporting the country's economic development, by preserving the stability and the sound financial performance.