Welcoming remarks by Ms. Elisabeta Gjoni, First Deputy Governor of the Bank of Albania at the high-level seminar on “Deposit Insurance Funding: Key Questions, Diverse Approaches”

Publication date: 12.12.2014


Good morning and thank you for giving me the opportunity to take part and address this international gathering.

It is with great pleasure for the Bank of Albania  (BoA) that the Albanian Deposit Insurance Agency (ADIA) is hosting the seminar 'Deposit Insurance Funding: Key Questions, Diverse Approaches'. I would like to thank all participants from around the world and wish them a warm welcome in Tirana. I hope you will enjoy it. I avail myself of this opportunity to express my gratitude to the International Association of Deposit Insurers, the Federal Deposit Insurance Corporation, and the Albanian Deposit Insurance Agency, who have made possible this event in Tirana.

The topic of this year's seminar is of great interest to the BoA and certainly to other institutions responsible for the financial stability. The BoA looks forward to hearing and learning about the different perspectives and approaches that will be shared in this seminar or the topic. Of course, the topic becomes more sensitive considering the current global financial complexity and its fast-changing landscape.

In my remarks today, I would like to share with you two key aspects:

  • Some insight of recent developments in banking system in Albania and
  • ADIA's perspective in the BoA point of view

Since the inception of the ADIA, the Bank of Albania has been strategically committed to creating and maintaining an efficient and effective deposit insurance scheme in Albania. The BoA is a relatively new institution; it was established in 1992. From the beginning, one of its responsibilities has been to develop a stable and safe banking system. Thus, BoA's efforts towards the new architecture of the banking sector, guided by international standards and consumer protection principles, and in coordination with government, helped set up the Albanian Deposit Insurance Agency. The Parliament approved the ADIA law in 2002 to restore public confidence in the nation's banking system. The Bank of Albania, by law, is the supervisory authority of the Agency. Initially, the Agency was fully under the umbrella of the central bank, and know-how and staff were transferred from the central bank to the ADIA, and a number of rules, even those on operational activity have to be approved by the supervisory authority.

For six years, the Agency has developed and grown normally, and only in 2008 - for the first time - the ADIA was put in focus. The banking system experienced an increased and continuous withdrawal of deposits by panicked customers. Besides several measures taken by the BoA, the financial stability advisory group (FSAG) - (established in 2006 and comprised the Minister of Finance, Governor of the BoA and Chair of the AFSA) - understanding the importance that the deposit insurance scheme has on the financial stability of the country and the role it plays in maintaining the Albanian citizens' confidence in it, proposed to the Parliament to triple the coverage level (from 700 thousand to 2.5 million lek/depositor).

The BoA and ADIA relationship has constantly evolved through the years to become a strong partnership and cooperation, allowing our institutions to fulfil their respective, but complementary, missions.

In Albania, banks dominate the financial system, accounting for 94% of financial system activity, about 88% of GDP. Subsidiaries of foreign banks represent about 93% of total banking assets. Bank credit is funded largely by local deposits.

As a result of legal changes in 2012, all foreign banks operate as subsidiaries. There are 15 foreign-owned bank subsidiaries of major international banks, including banks from neighbouring countries (Greece, Italy, Turkey and the largest bank, Raiffeisen, from Austria). Greek banks account for one-fifth of Albania's banking system.

The BoA supervises the domestic banking system, saving and credit associations (126), and other non-bank financial institutions, and the Albanian Financial Supervisory Authority (AFSA) supervises insurance companies (12), pensions and investments funds.

The Albanian banking sector has maintained its structure and stability during 2014. The volume of activity grew and the financial performance improved. Overall, it remained liquid, well capitalized and capable to withstand various shocks.

The risks to the banking sector as at end of September 2014 decreased compared to the previous year as reflected by the banking stability indicator - which combines the impact on certain major risk dimensions. Though there are improvements in liquidity and profitability, concerns over asset quality remain.

By September 2014, banking sector assets expanded by 3% from the end of last year. Assets continued to be negatively influenced by the low pace of lending, due to the unstable demand for loans and the sale of non-performing loan portfolio by banks. For this reason, banking sector investment in Government securities amounted to around 25% of total bank assets or 60% of total public debt.

The low pace of bank lending remains the major concern for the outlook of the Albanian economy.

The growth of lending remained below its historical rates - credit growth slowed down considerably in 2013 and shrunk in the first half of the current year. Both supply-side and demand-side factors impacted this performance. Changes in parent bank policies, weakening of bank' balance-sheets at home and tighter lending standards were factors that contributed to credit supply shrinking.

However, there are slight signs of credit growth recovery - more evident during the third quarter of this year. At the end of September, bank lending turned positive - increasing by 2% in annual terms.

The banking system activity continues to be fundamentally financed by deposits, which account for 82% of total assets. Deposits expansion slowed down, recording an annual growth rate of 2.3%. Household deposits, which account 86.7% of total deposits, grew at a lower annualized ratio of 1.8%, from 3.7% in the previous year. Business deposits grew by 6.2%, from 4% a year earlier.

The sound banking sector capitalization remains a distinguished feature of the Albanian banking sector. The capital adequacy ratio of this sector stands at 17.6% - well above the minimum required level of 12%. The largest share of current own funds of banking sector consists of Tier-I capital, providing flexibility against shocks.

Profit in the system showed positive and encouraging values this year. The RoA and RoE were positive, standing at 0.9% and 11%, respectively, due to increased net profit. The system started to show positive values for the indicators since December 2013.

Credit risk and impairments to the bank lending channel are the biggest financial stability challenge for the Albanian banking sector.

The quality of the loan portfolio did not improve during 2014; the NPL ratio stands at 25%. Although provisions for impaired loans were up at 65%, NPLs net of provisions to capital still remained at around 50% and further efforts to foster workouts -particularly as regards collateral execution - thus appear necessary.

The banking sector appears to be well hedged against direct risk from adverse exchange rate and IR movements, but the sensitivity to such changes has increased. The ratio of net open foreign exchange position to the regulatory capital stands at 6.8% and banks long' position suggests limited exposure to the exchange rate risk.

The liquidity position of the banking system remains strong. The banking sector exposure to liquidity risk was low due to an adequate liquidity situation. Deposits remained the main source of funding for the banking sector operations; the loan-to-deposits ratio is around 55%. The liquidity ratio (liquid assets to the short-term liabilities), both in lek and foreign currency, are above the minimum regulatory ratio. At the end of September, the liquid assets accounted for 32.45 of total banking sector assets, about 5 percentage points up from the level at the end of last year.

The monetary policy has remained expansionary in order to support domestic demand and enable the return of inflation and of inflation expectations to target. The key interest rate was cut three times during the year by a total of 75 basis points. The latest cut was in November when the key interest rate was lowered at 2.25%. In addition, the BoA has continued to provide forward guidance to put downward pressure on interest rates and support aggregate demand.

The BoA, through moderate easing monetary policy, along with a set of legal and structural measures to address non-performing loans applied during this 2 recent years, aimed to deal with both supply and demand for credit. Considering the needed time for the transmission of these policies to the economy, they are expected to help establish a more favourable climate for lending. Still, there are challenges ahead for the industry. Margins remain under pressure in this low interest rate environment. Institutions have responded by extending asset maturities, which raises concerns about interest-rate risk. All of these issues continue to be matters of ongoing supervisory attention.

The BoA intends to implement Basel II by 2015 and complement the current focus on compliance with a forward-looking risk-based approach to supervision. We have adopted macro-prudential measures to safeguard financial stability.

Today, financial stability is more important than ever to the work of the BoA. With the lessons from the crisis still fresh, we are in the process of strengthening our financial stability capabilities. We are also cooperating closely with ADIA and other regulators to develop well-planed working protocols and a joint sense of responsibility for financial stability, while respecting the fact that each independent agency has its own specific statutory mandate and governing body.

Together with other key institutions responsible for financial stability in Albania, the Ministry of Finance and the Financial Supervisory Authority, we recognized the ever increasing importance of the role ADIA has in our financial system. As such, in recent years we have ensured that the Agency becomes an active participant in the Financial Stability Advisory Group, along with the three institutions. The Financial Stability Advisory Group, established in 2006, became fully operational in 2012. It meets on a quarterly basis to monitor developments and risks to the financial system. The FSAG shares information, discusses general economic policy, and engages in contingency planning and crisis preparation. The ADIA reports on issues of importance to its operations and solvency in accordance with a MoU entered into by the parties in February 2012. The difficulty of coordinating among different regulators renders the degree to which macroprudential policies can be successful critically dependent on the institutional setup of communication.

In March 2014, the Financial Stability Advisory Group members, together with ADIA, signed an updated MoU that improves inter-institutional cooperation in support of preventing and addressing systematic risks in the financial system.
In recent years, the Bank of Albania, as the supervisory authority, has supported the Agency in both increasing its capacity to effectively fulfil its mission and becoming a key player for maintaining public confidence in our financial system.

To allow for increased capacity to better fulfil its mission in compliance with best practices in deposit insurance, the Bank of Albania supported the organizational and structural changes the Agency underwent in mid-2013. Among the main changes, we may highlight the creation of the Risk Analysis, Information Technology and Public Relationship functions within the Agency. This supported the implementation of the IT system for the data of deposits and depositors to ensure the functions of the scheme. This strategic function set the foundations for the Agency to fulfil its objectives more effectively in light of the current landscape and expected future developments for the deposit insurance scheme.

Estimated insured deposits are EUR 4.1 billion Euro. That means 66% of individual depositors or 55% of total banking system deposits. The reserve ratio which is the fund balance as a percentage of estimated insured deposits is increased; however, as required by law, the Deposit Insurance Fund must achieve a minimum reserve ratio of 5 per cent, that means EUR 38 million more or 19% of required fund. So, the Agency is well on track towards achieving that goal.

In 2014, a new law on deposit insurance was introduced, allowing for a more effective and efficient insurance scheme. The new law, whose objective was to better link the Albanian deposit insurance scheme with International Association of Deposit Insurers (IADI) core principles, addressed the recommendations by FSAP in late 2013. The new law intends to increase the authority of the ADIA without changing its pay box mandate and make its legal independence more robust.

This new law addresses several aspects for the improvement of the scheme and increases the institution capacity of the Agency.

Investment policies are based on its new law and it is following by an internally approved policy appropriately focused on safety and liquidity over return. The ADIA is managing an investment portfolio that has reached almost (ALL 23 billion), EUR 166 million (or approximately 1.4 per cent of the GDP). As the portfolio grows and considering the currency risk related to foreign currency deposits and other information on its liability structure, the ADIA needs to set up a proper investment horizon and better adopt asset-liability management (ALM) principles.

In addition, the new law increased the administrative independence of the Agency from the Bank of Albania and improved its governance framework, which is followed by reviewing a number of ratification of many of its operations actions by BoA. Among other things, the Agency now approves its own budget, which allows for increased operational agility in fulfilling its mission and ensures legal protection for its employees.

Considering the topic of this seminar, it is worth mentioning that in 2013 the Agency started the negotiation for a EUR100 million stand-by credit line with the EBRD. The funds will be made available in case an insurance event arises, thus allowing for a faster and effective response by the Agency in such cases. The Bank of Albania has been supportive for this initiative with significant improvements in a key element for deposit insurers, such as funding.

As noted, the relationship between the Bank of Albania and the Agency has continuously evolved through the years as partnership and cooperation grew stronger, allowing our institutions to fulfil their respective but complementary missions.

In order to achieve full compliance with the EU directive on deposit guarantee schemes for tailoring the maximum levels of coverage with different types of subjects (banks and credit and savings associations) covered by the scheme, (according to their risks), in 2015, the Savings and Credit Associations will be included in the deposit insurance scheme. The Bank of Albania, as the supervisor of Savings and Credit Associations, and the Agency, as the deposit insurer have joined efforts to ensure a smooth process for the inclusion of such institutions in the scheme.

The ADIA continues working with the BoA on financial education trainings and conferences across Albania to educate the target audience about deposit insurance.

The goal of these trainings is to raise the awareness on the deposit insurance scheme and reduce the operational risk at banks' branches in Albania.

The new law addresses the need to increase the type and amount of information the ADIA receives from the BoA to better prepare the deposit insurer for possible payouts. The intense and ongoing cooperation between the two institutions would ensure a full implementation of the information sharing agreement between the BoA and the ADIA.

I would mention the increased emphasis placed by our institutions on opening and maintaining channels of communication at all levels, which allows for timely sharing of information on banking system.

In conclusion:

The deposit insurance framework in Albania, managed by the ADIA, broadly conforms to best international practice. We have confidence in a continuing commitment to these practices by the ADIA, which will serve the long-run interest of both the depositors and the banking industry.
I look forward to hearing your views on the best way to move ahead on these and the other important issues we have gathered to discuss.

Closing, I would like to thank you once again for the opportunity to speak to you today.

And I wish you all great success!
Thank you!