Ardian Fullani: Press conference at the presentation of the First
Financial Stability Report of the Central Bank of the Republic of Kosovo
Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the presentation of the First
Financial Stability Report of the Central Bank of the Republic of Kosovo, Priština,
20 December 2010.
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Dear Mr. Gërguri,
Dear Members of the Governing Board of the Central Bank of the Republic of Kosovo,
Dear Mr. Yilmaz,
Dear guests,
It is always a great pleasure for myself and my colleagues to come to the Central Bank of the
Republic of Kosovo. I would like to express my positive consideration that this institution is
now well-shaped and is growing stronger at a stable and rapid pace. This development is an
outcome of the clear vision of the governing structures and the commitment of the central
bank's staff in implementing the best standards relevant to the area. This time I am invited to
testify another achievement of this institution, the first release of the Financial Stability
Report.
I have the conviction that the public authorities, economic operators in Kosovo and the public
will appreciate the contribution of the central bank with respect to the identification and
management of risks facing the financial system's activity.
In my speech I will first provide a general assessment of the great deal of importance given
to financial stability issues and the central bank's role in this regard. Then I will share our
experience at the Bank of Albania with the institutional approach to financial stability
assessment function.
The global crisis, which originally emerged as a financial system crisis, very soon
transformed into a real economy crisis. Due to the high integration of financial markets as a
result of the presence of financial institutions engaged in cross-border activities and the
manifold interinstitutional exposures, a financial system crisis can spread rapidly across
many countries. On the other hand, due to the exceptional role in financial intermediation, a
financial system crisis may hit the real sectors of the economy, placing the economic
mechanism in a negative spiral that tends to reinforce itself.
These developments will likely result threatening to the sustainability of the entire financial
system and be followed by severe social consequences that are costly to public wealth.
This two-year experience triggered an accelerated identification process of the mechanisms
and measures that aim at preventing and handling similar situations in the future. At a
broader economic context, these measures aimed at reforming the international monetary
framework and reduce imbalances in the global macroeconomic framework.
G-20 policy-makers, the Basel Committee, the Financial Stability Board and the international
financial institutions have set out some measures, which in fact have only one aim: reduce
systemic risk and create the conditions for its proper management.
At a global level, these measures envisage:
a) Reforming the supervisory superstructure by establishing institutions that focus on
assessing systemic risk;
b) Setting higher quantitative and qualitative capital and liquidity requirements for
systemically-important financial institutions, hence reduce their appetite for
excessive risk-taking;
c) Determining the mechanisms that reduce procyclicality in financial activity, mainly by
creating reserve funds (in the form of capital or provisions) that may be used for
countercyclical purposes;
d) Strengthening the capacity of national authorities to address systemic financial
crises.
For this purpose, legal changes need to be made in order to regulate the harmonization of
interinstitutional relationships at home and abroad. I would summarize the following:
• Actions between supervisory authorities of different countries,
• Actions between public authorities at home, and
• The implementation of actions that enable a smooth exit from the market of those
financial institutions that cannot be recovered.
Central banks play an important role in this process, which in some respects is unique and
exclusive. In the monetary area, it should be guaranteed that the liquidity injection and
collateral evaluation procedures are complete and adequate.
In the meantime, the sustainability of systemically-important infrastructure, more precisely
the payment systems', must be monitored and guaranteed. Moreover, if the central bank is
also responsible for the licensing and supervision of the banking sector, there should be a
modern supervisory framework that prevents and reduces systemic risk in accordance with
the new international standards.
Public authorities should be prepared to act in situations of financial emergency, aiming at
preserving public confidence in the financial system and ensure that there is a limited and
efficient use of public resources. In the context of the role of a central bank that carries out
an independent monetary policy, the integration of financial stability considerations into the
monetary policy decision-making is particularly important.
Countries of our region share similar features in terms of the financial system and the
economic structure. Banks make up the bulk of activity and they are regulated and
supervised by central banks. We almost share similar banks operating in our banking sector.
Hence, the developments are similar and the dynamics of the emergence and performance
of risk is often alike.
Though we do share similarities, we also have certain differences, mainly related to the
monetary area and the capacity to implement an independent monetary policy.
Both similarities and differences are important in order to understand the role of our
institutions in the assessment and availability of actions taken to safeguard financial stability.
Despite the arsenal of these actions, central banks cannot carry out this mission alone.
Central banks are in possession of a full arsenal of measures and instruments, but their
implementation, albeit timely and complete, cannot have full effect unless they are
coordinated and supported by other agents' actions.
It is thus essential that all economically-important agents, public authorities, the public at
large and the media are fully aware of this matter. Apart from legal definitions, this
awareness requires receiving comprehensive, regular and timely information on the events
that may jeopardize financial stability and identifying the necessary protective actions. The
regular release of reports dedicated to financial stability is the key instrument that meets this
obligation.
Let me now share with you our experience at the Bank of Albania. According to our concept,
the Bank of Albania has full legal responsibility for safeguarding financial stability.
The Bank of Albania is attributed the exclusive role in terms of licensing and supervising the
banking activity, the right to organize and monitor the operation of the payment systems, the
lender-of-last-resort function to assist banks facing difficulties, the liquidity management
function in the interbank market, and the determinant role in foreign exchange policy.
The Bank of Albania has the obligation to inform the public about the events that may
jeopardize the financial stability. In early 2007, the Supervisory Council of the Bank of
Albania considered a better coverage of developments in the financial system - that is, not
only in the banking sector's alone - as highly important. In addition, it required strengthening
the analysis of interaction between macroeconomic developments and the financial system's
activity.
Our ultimate goal was setting up a more sustainable mechanism that would allow the
conversion of these analyses into proposals for concrete actions, in order to reduce systemic
risk not only through the Bank of Albania's actions but also through measures taken by other
public authorities that have a role in monitoring the developments in the financial market.
From the institutional viewpoint, in September that year, the Supervisory Council of the Bank
of Albania, approved the establishment of the Financial Stability Department, by selecting the
most outstanding human capacities in the area of monetary operations, banking supervision,
research and statistics.
The conclusions derived from the analysis of this department would be regularly discussed at
a higher central bank level, thus providing a useful filtering and enriching mechanism prior to
the decision-making of the Supervisory Council of the Bank of Albania.
For this purpose, in November 2007, the Supervisory Council approved the establishment of
the Advisory Committee on Financial Stability (ACFS), which gathers the high executives of
the Bank of Albania and the heads of the main departments.
According to the regulation on the functioning of the ACFS, representatives of other public
authorities are also invited to attend the meetings in cases when matters of particular interest
are being discussed.
In addition to analyses for internal use, the Financial Stability Department is responsible for
releasing two main products: a) Financial Stability Statement, which is also mandated by law;
and b) Financial Stability Report. From the institutional viewpoint, this process has
progressed. Very soon, the Financial Stability Department became operational and the
Financial Stability Report, which was prepared and released from the first year this
Department was established, has been released regularly and at an ever-increasing quality.
However, we had to face several challenges along this process, which I think exist no matter
if the financial stability's assessment function operates as a single structure within the central
bank or not. Among them I could mention:
a) The necessity to obtain complete information from all the sectors of the economy
and produce complete, reliable and timely statistics;
b) The necessity to establish better communication among different departments within
the central bank, as well as between the central bank and other institutions that may
have a role in monitoring the financial market. This communication creates optimal
conditions for the clear identification and full assessment of the most important
issues that have affected and are expected to affect financial stability during the
periods under consideration. Ultimately, a good level of communication allows
interinstitutional cooperation in addressing the concerns that may jeopardize
financial stability effectively;
c) The need to quantify systemic risk. This objective is obviously not easy but our
endeavours in this regard must be ongoing and begin from the easiest and concrete
approaches;
d) The need to have a balanced content of the Financial Stability Report. In this regard,
we focused on the following considerations:
• First, this report attempts to clearly identify the underlying risks to financial
stability, not only those created as a result of the financial system's activity,
but also those stemming from its interaction with the surrounding economic
environment.
• Second, the Financial Stability Report is an essential element of the monetary
policy decision-making, thus providing a real understanding to macro
prudence (Stability and monetary policy slogan).
• Third, we intend this report to be part of the trialogue philosophy, which
involves the Bank of Albania, the Government and the market, at an
appropriate level of transparency before the media and the public at large.
• Fourth, we intend not only to produce a report that limits to the description of
past event, but also enrich it gradually and to a certain extent with research
analyses and incorporate elements of forecast.
• Fifth, the report should arrive at some conclusions on the issues it addresses,
which enable the identification of relevant recommendations.
• Sixth, the contents of the report should include a main part, which must be
consistent over time for the effect of consistency of analysis and its
comparability, and another part which provides greater degree of freedom to
elaborate on more specific issues that materialize the main analysis.
• Lastly, we have paid special attention to the language used in producing this
report, aiming at using plain and clear language, free of equivoques and
understandable to the professionals of this area and the public at large.
We are fully aware that this process requires constant improvement.
Dear guests,
In conclusion, let me offer the support of the Bank of Albania in cooperating with the Central
Bank of the Republic of Kosovo on matters relating to financial stability. This cooperation
may aim at identifying matters of importance for both institutions, which later may turn into
joint projects.
More concretely, we can cooperate on the assessment of the suitability of stress-test
methodologies or on the process of systemic risk quantification. In a more informal fashion,
the parties may exchange information on the issues to be addressed in the next Financial
Stability Report.
The parties may also discuss the way of transforming the findings in the Financial Stability
Report into concrete actions of the central bank and other public authorities. I am fully
convinced that regular and constant communication on these issues will expand into possible
directions of cooperation.
Once again, I wish you success in your work!
Thank you for your attention.