OPERATIONAL FRAMEWORK OF BANK OF ALBANIA
In order to achieve its final objective Bank of Albania sets the operational framework of monetary policy instruments used to intervene in the money market. The instruments employed for such a purpose include: the instruments used in the open market operations, standing facilities and other liquidity providing instruments.
The monetary policy of the Bank of Albania entered a new phase at the end of year 2000, when Bank of Albania decided to discontinue the use of direct instruments of monetary control. For a relatively long time of about 8 years, the implementation of monetary policy was conducted through two main instruments, which in itself consisted of two administrative decisions of the Bank of Albania. Explicitly, these decisions consisted in: (1) limiting the excessive growth of the lending activity of the commercial banks and (2) setting an obligation for the state owned banks (or the banks in which the state had a share of capital) to respect the minimum level of interest rates announced by the Bank of Albania for term deposits in Lek.
In the third quarter of 2000, banks were not responding to the continuous decrease in the administrative rate set by Bank of Albania. These developments urged a redesign of the entire operational framework. Thereafter it was decided that the monetary policy of the Bank of Albania was going to be implemented through the use of the indirect instruments. More specifically, it was decided to set as a base reference rate, the interest rate of the repurchase (reverse) agreements with one week maturity. These transactions were to be conducted through regular weekly tenders.
Following, it is a description of the indirect instruments used by Bank of Albania in order to implement its monetary policy.
I. OPEN MARKET OPERATIONS
Open market operations are conducted through the purchase or sale of securities by the Bank of Albania. These transactions play the main role in the transmission of monetary policy in the banking system. The purpose of using open market operations is the short term liquidity management of the banking system, aiming at stabilizing market interest rates.
Open market operations are exclusively decided by Bank of Albania, which determines the type of instrument that will be used as well as the relevant terms and conditions of their execution. According to the purpose of their use, open market operations are divided into: main market operations, fine-tuning operations and structural operations. Repurchase and reverse repurchase agreements are used as the main open market operation and as fine tuning operation. Outright sale or purchases of the securities are instruments used in structural operations.
(REVERSE)REPURCHASE AGREEMENTS (R)/REPO)
Repurchase Agreements are instruments of the open market operations by means of which Bank of Albania sells securities, to commercial banks, committing to repurchase them respecting the predetermined conditions. The aim of these instruments is to temporary reduce liquidity in the banking system. While the reverse repurchase agreements consist in open market operations by means of which Bank of Albania buys securities, from commercial banks, committing to resell them under the predetermined conditions. This instrument is used in order to temporary inject liquidity in the banking system.
The securities traded through (reverse) repurchase agreements, are purchased in advance in the primary or secondary market by Bank of Albania or by commercial banks. The securities subject of these agreements are, Treasury Bills of Albanian Government and Treasury bonds with remaining maturity not more than 365 days. In these transactions, an asset is sold while the seller simultaneously obtains the right and obligation to repurchase it at a specific price on a future date.
The minimal requested amount to transact through (reverse) repurchase agreement is Lek 10 (ten) millions and could be raised only by multiples of the same amount.
The difference between the purchase and repurchase price of the security in these agreements corresponds to the interest due on the amount of money borrowed or lent over the term of the operation. In other words, the repurchase price of the security comprises the respective interest to be paid.
MAIN OPPEN MARKET OPERATION
The main open market operation is realized through a seven days maturity (reverse) repurchase agreement which is the main instrument for the implementation of monetary policy by Bank of Albania. The purpose of using this kind of instrument is the short term liquidity management of the banking system, aiming at stabilizing market interest rates. The interest rate of one week maturity (reverse) repurchase agreement sets the monetary policy stance.
The main features of the (reverse) repurchase agreements can be summarized as follows:
They are executed through multiple price tenders with fixed offered amount or through fixed price tenders.
The tenders for these types of agreements are held weekly as standard type tenders.
The interest rate is fixed by Bank of Albania’s Supervisory Council. This rate acts as a floor (reverse repurchase agreements) or ceiling (repurchase agreements) rate for multiple price tenders.
The maturity of this instrument is seven days.
The instruments used in fine-tuning operations consist in overnight, one or three months maturity (reverse) repurchase agreements. The purpose of using these instruments is to adjust the fluctuations in the interest rates driven by unexpected fluctuations in market liquidity. The operational features of these (reverse) repurchase agreements could be summarized as follows:
They are executed through quick tenders and/or through bilateral procedures. Their frequency is not standardized.
The tender is of fixed amount and the interest rate is set by the tender’s participants.
Bank of Albania reserves the right to refuse bids, in case the bid rate is deviated from the market interest on the day the tender is held.
The overnight (reverse) repurchase agreement’s maturity is one day; one month (reverse) repurchase agreement’s maturity is of 28 (twenty eight)days and three months (reverse) repurchase agreement’s maturity is of 91 (ninety one) days.
The instrument used to conduct structural operations consists in the outright transactions. The purpose of using these operations is to adjust the market liquidity structure.
The outright transactions refer to the operations where Bank of Albania buys or sells securities outright in the market. Such operations are not reversible and have permanent effect in the money market liquidity. They are employed only in the structural operations.
An outright transaction implies a full transfer of ownership from the seller to the buyer with no reverse transaction. The operational features of outright transactions could be summarized as follows:
They can take the form of liquidity-providing (outright purchase) or liquidity-absorbing (outright sale) operations.
Their frequency is not standardized.
Their execution through quick tenders or bilateral procedures is decided by the Monetary Policy Implementation Committee of the Bank of Albania.
The securities traded in the outright transactions include treasury bills with maturity up to one year with more than seven days to maturity, as well as other highly liquid and credible securities (debt instruments) approved by Bank of Albania’s Supervisory Council. However, up to now, apart the Albanian Government’s treasury bills no other security is approved for these transactions.
II. STANDING FACILITIES
Standing facilities are instruments available to banks at their own initiative without restriction under normal circumstances. They consist of instruments providing and absorbing overnight liquidity. The interest rates on these instruments provide the corridor in which the money market interest rates can fluctuate.
a. Type of instrument
The overnight deposit is a short-term investment instrument available to commercial banks for investing their overnight excess liquidity at a predetermined interest rate. Under normal circumstances, the interest rate of the deposit facility provides a floor for the overnight market interest rate.
b. Legal nature of the instrument
Commercial banks can use the overnight deposit to place unlimited amounts of liquidity with the Bank of Albania. On the other hand, Bank of Albania, in accordance with its aims, reserves the right to reject the request of commercial banks for overnight deposits with no obligation to provide any explanation. Bank of Albania does not provide collateral for the overnight deposits.
c. Access conditions
All commercial banks and foreign bank branches that have an account with the Bank of Albania and exercise their activity in Albania, may access overnight deposit facility. To access the facility, commercial banks have to submit their requests within the deadline set by Bank of Albania.
d. Maturity and interest term
The maturity of this instrument is overnight. The interest and the full amount have to be paid to the bank on the next working day. The interest on the overnight deposit is pre-determined and it is calculated on a 365-day basis. The interest paid to the commercial banks is 1.75% lower than the interest rate of the repurchase agreements with a maturity of one week, determined by the Supervisory Council of the Bank of Albania.
a. Type of instrument
The overnight loan is a short-term debt instrument available to the commercial banks. It is a fully collateralized loan, which is used to satisfy commercial banks overnight liquidity needs. Under normal circumstances, the interest rate on the loan facility provides a ceiling for the overnight market interest rate.
b. Legal nature of the instrument
The Bank of Albania provides overnight collateralized loans upon the request of commercial banks. The collateral on these loans consists of securities valuated under pre stabilized conditions. Assuming the satisfaction of the debt obligation, the ownership of the asset is retained by the debtor (the bank which needs liquidity) during the term of the contract. In case the debtor fails to satisfy the obligation, the ownership of the asset passes to Bank of Albania. Bank of Albania, in accordance with its aims, holds the right to refuse the banks' request for overnight loan providing no further explanations.
c. Access conditions
All commercial banks and foreign bank branches that have an account with the Bank of Albania and exercise their activities in Albania may use the overnight loan facility. If the bank fails to repay the intra-day credit, it is automatically converted in to overnight loan. Bank of Albania notifies the bank in case of automatic extension of the overnight loan and for the automatic freezing of the collateral. Apart the obligation to have enough collateral, there is no other limit over the amount a bank can obtain through this facility.
d. Maturity and interest terms
The maturity of this instrument is overnight. Bank of Albania receives the interest payment and the initial amount on the first working day following the day of the loan settlement. The interest rate on the overnight loan is announced in advance and is calculated on a 365 day convention. This rate is 0.75% higher than base rate decided by the Supervisory Council.
III. MINIMUM RESERVES
The minimum reserve requirements serve as an instrument aiming at adjusting the banking system liquidity and stabilizing the money market interest rates.
The amount of minimum reserves to be held by each commercial bank is determined in relation to its reserve base applying the required reserve ratio. This ratio is the same for Lek and foreign currency liabilities. Actually the required reserve ratio is 10 per cent.
The Bank of Albania’s minimum reserve system enables banks to make use of the averaging provisions. Banks have the right to use on daily basis, 40 per cent of their required reserve, providing that in the end of the maintenance period, the average of the reserve balance will be not less that the reserve requirement. Required reserves denominated in Albanian currency are remunerated at a rate derived from the base rate, while the holdings of required reserves in foreign currency are remunerated at a rate derived from the base rate of European Central Bank and Federal Reserve.
INSTITUTIONS SUBJECT TO MINIMUM RESERVE REQUIRMENT
Bank of Albania requires all banks and branches of the foreign banks licensed by Bank of Albania, operating within the territory of the Republic of Albania and having accounts on the payment system of the Bank of Albania, to hold minimum reserves. Banks going through liquidation and those, whose license has been revoked, are excluded from the minimum reserve requirements.
DETERMINATION OF MINIMUM RESERVES
a. Reserve base
The reserve base of a bank is composed of deposits denominated in Albanian lek and foreign currency. The foreign currency reserve base consists of dollar and euro liabilities. Euro reserve base includes liabilities in the European currency and in every other currency, except American dollar, converted in Euro using the fix exchange rate of Bank of Albania in the last day of reserve base period.
For banks subject to minimum reserve requirements, the balance sheet data at the end of the month are used to determine the reserve base for the maintenance period starting in the next calendar month.
Bank of Albania requires banks to report the balance sheet accounting data according to the frequency, to the format and within the time limit determined by the statistical reporting framework.
b. Reserve ratio
Actually this reserve ratio is 10 per cent. Bank of Albania may change the minimum reserve ratio upon the decision of the Supervisory Council. Changes in the reserve ratio are announced by the Bank of Albania 30 days prior to the first maintenance period for which the change is effective.
c. Calculation of reserve requirements
The reserve requirement for the holding period of each individual bank is calculated by applying the reserve ratio to the amount of eligible liabilities.
MAINTENANCE PERIOD OF THE MINIMUM RESERVES
Each bank must hold its minimum reserves on the reserve accounts with Bank of Albania. The holding period is one month. It starts on the 24th calendar day of the month following the base reporting period, and ends on the 23rd calendar day of the following month.
AVERAGING PROVISION OF THE REQUIRED RESERVES
During the holding period, banks may use only the required reserve in Lek, provided that the average of the reserve balance on the last day of the holding period does not fall below the required reserve level.
The level of reserves, used on daily basis by the banks is expressed as percentage and it is decided by the Bank of Albania’s Supervisory Council. The ratio is announced 30 days prior to the effective maintenance period. Actually the ratio is 40 per cent of the minimum required reserves.
REMUNERATION OF RESERVES HOLDINGS
Bank of Albania remunerates holdings of required reserves in national and foreign currency. The remuneration is paid on the next business day following the end of the maintenance period.
Bank of Albania’s Supervisory Council decides the rates of interest for the remuneration of the required reserves. Banks are notified at least 30 (thirty) business days in advance before the holding period start.
Required reserves in Lek are remunerated at 70% of the key policy rate approved by the Supervisory Council of the Bank of Albania on the last day of the base period. The remuneration rate of the required reserves in USD is 0%, while minimum reserve in EUR is remunerated at the same level of ECB overnight deposit.
REPORTING OF THE MINIMUM RESERVE
The minimum reserve data are reported according to a predetermined format, frequency and deadlines. The last day for reporting the required reserve is the 15th calendar day of each month. Bank of Albania checks the accuracy of data reported by the banks.
SANCTIONS UPON NON-COMPLIANCE WITH THE MINIMUM RESERVE OBLIGATION
Non-compliance with the minimum reserve obligations arises if:
Commercial bank's average balance on its reserve account in Lek over the maintenance period is less than its reserve requirement for the corresponding maintenance period.
Commercial bank’s balances on its reserve accounts in Euro and/or American dollar are less than the respective reserve requirements on the first day of the holding period.
In case Bank of Albania verifies a discrepancy of 1.000 (one thousand) Lek (or the equivalent amount on Euro and USD), between the reserve data reported and the data resulted from the reported balance sheet or from bank’s on site inspection.
In the case the bank fails to comply with the reporting deadline, the required reserve level is determined 10 per cent higher than the required reserve level at the preceding maintenance period. In any case this amount can not exceed Lek 700 million (or the equivalent amount in Euro and USD). In the case the real but not the reported level of required reserves, verified by Bank of Albania after the beginning of the holding period, results higher than the level specified above, the bank is subject to the same penalties as in the case of erroneous reporting.
The sanctions currently applied for non-compliance with the minimum reserve obligations:
In the event of non-compliance with Lek minimum reserves:
It is applied a penalty rate of 600 basis points above the Bank of Albania key interest rate on the last day of the reserve base period, but not more than twice the Bank of Albania’s key rate.
In the event of non-compliance with USD minimum reserves:
It is applied a penalty rate of 200 percentage points above the Federal Reserve key interest rate on the last day of the reserve base period, but not more than twice the Bank of Albania’s key rate.
In the event of non-compliance with EUR minimum reserves:
It is applied a penalty rate of 200 percentage points above the European Central Bank key interest rate on the last day of the reserve base period, but not more than twice the Bank of Albania’s key rate.
Besides the financial sanctions, every serious infringement of the minimum reserve requirements regulation, implies a violation of Law on Commercial Banks and is subject to other sanctions provided by this Law.
IV. Monetary Implementation Framework
Monetary policy implementation consists of: (1) adequately sizing the banking system liquidity deficit to ensure the effectiveness of the monetary policy transmission; (2) forecasting the liquidity needs of the banking system arising from the development of the autonomous liquidity factors, over the forecasting horizon; and (3) executing the open market operations.
Central bank liquidity management means supplying the market the amount of liquidity consistent with a desired level of short-term interest rates. This is achieved through open market operations and requires analyzing and forecasting the liquidity situation of the Albanian banking system. This allows the monetary policy stance, signaled by the BoA’s minimum bid rate at the weekly main refinancing operations, to be distinguished from the monetary policy implementation, aimed at steering the short-term interbank rates towards the Bank of Albania’s key interest rate, and minimizing their volatility
FORECASTED LIQUIDITY NEEDS
The Bank of Albania analyzes and forecasts regularly the banking system’s liquidity needs over different time horizons. The liquidity needs of the banking system result from the
minimum reserve requirements imposed on credit institutions and from autonomous factors, which are normally beyond the direct control of the Bank of Albania. Such factors can be banknotes in circulation, government deposits with the Bank of Albania, as well as foreign reserve assets and domestic financial assets.
This is illustrated by the following, simplified balance sheet:
Assets ( liquidity supply)
Liabilities ( liquidity needs)
|Open market operations
|Marginal lending facility
|Net Liquidity effects from autonomous factors
Furthermore, since not all the banking system’s liquidity in excess of minimum reserve holdings is available for trading due to binding credit and counterparty limits, the Bank of Albania analyzes the liquidity distribution across banks to estimate the excess liquidity not available for trading.
The result of this analysis allows the Bank of Albania to calibrate open market operations for satisfying the liquidity needs of the banking system in a way that, after taking into account its forecast of the autonomous liquidity factors, banks can fulfill their reserve requirements, on average, over the reserve maintenance period without systematic recourse to the standing facilities. If the central bank provides more, or less, liquidity than this benchmark, then banks will have to use the standing facilities, at the end of the maintenance period. This will push the short-term money market rate towards the relevant standing facility rate, as soon as the imbalance becomes obvious.
In line with the practice adopted by most central banks, whose monetary policy operational framework is similar to the one adopted in Albania, as of the first maintenance period of 2018, the Bank of Albania publishes, on a weekly basis, its own forecast of the development of the autonomous liquidity factors until the next main refinancing operation (MRO). The Bank of Albania will also publish its estimate of the benchmark MRO allotment i.e. the MRO allotment necessary to allow the pro rata reserve requirement fulfillment by the end of the MRO, taking into account the autonomous factors forecast and any liquidity imbalance. In other words, it means under or over proportional fulfillment of reserve requirements, accumulated from the beginning of the maintenance period.
Furthermore, the Bank of Albania will provide with ex post data the evolution of liquidity conditions.
The regular publication of these figures should:
Guide rational bidding in the weekly main refinancing operations from market participants. These participants may benefit from the central bank’s information on the items on central bank’s balance sheets that make up the autonomous factors and can better compare their own position with the expected market conditions;
Help market participants to better understand market developments;
Facilitate market participants in position taking ;
Contribute to the transparency and accountability of the Bank of Albania’s monetary policy implementation framework.
PUBLICATION OF EXPECTED LIQUIDITY DEVELOPMENTS
Expected liquidity developments will be illustrated by the figure of the forecasted average autonomous liquidity factors for a nine-day period, starting from (and including) the day of publication. It will also be illustrated by its forecast of the average non-tradable liquidity over the same nine-day horizon.
Autonomous Liquidity Factors are the items on the Bank of Albania’s balance sheet, which are not under its direct control, such as government deposits and cash in circulation, or are not directly related to monetary policy implementation and its instruments, such as the foreign reserve assets and domestic financial assets.
Autonomous Liquidity Factors correspond to Daily Current Account + Deposit Facility – Marginal Lending Facility – Main Refinancing Operations – Long Term Operations – Other Operations.
However, due to market segmentation and due to the trading limits between banks as well as for precautionary reasons, not all current account holdings in excess of the reserve requirements may be considered available for trading and for redeployment in the system. There is a structural demand of excess reserves beyond the minimum necessary to fulfill reserves requirements. Whenever such conditions are present, the Bank of Albania will also publish its estimate of the forecast average non-tradable liquidity for the forecasted period. Such non-tradable liquidity can be assimilated to a liquidity-absorbing autonomous liquidity factor.
Together with the expected liquidity developments as represented by the forecast of the autonomous factors and the non-tradable liquidity, the Bank of Albania provides the banks with the benchmark allotment amount, which is the neutral liquidity allotment necessary to ensure a pro rata fulfillment of reserve requirements by the maturity of the MRO, taking into account the autonomous factors and non-tradable liquidity forecasts.
The benchmark allotment is the amount that as a rule, in normal conditions, the Bank of Albania aims at injecting via its MRO. The benchmark calculation can be replicated by market participants based on the formula provided in the technical annex and the forecast provided by the Bank of Albania.
Fulfillment of the pro rata reserve requirement means that average current account holdings from the beginning of maintenance period should correspond with reserve requirement obligations.
Banks can calculate the benchmark allotment amount using the formula provided in the technical annex and the forecast provided by Bank of Albania.