Ardian Fullani: Financial stability issues and cooperation at a regional level
Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the Bank of Albania's 6th
International Conference, "Regional financial markets and financial stability - a concept between
national sovereignty and globalisation", Tirana, 31 October 2006.
* * *
Dear participants,
Ladies and gentlemen,
When we thought about the topic of this annual conference, there was no doubt about the need to
dedicate it to financial stability issues and the cooperation at a regional level. The current time seem to
be appropriate because of the developments in the national financial markets and economic
developments, as well as in the speed with which the region is moving ahead in adopting best
international standards in good governance, market openness and integration, technological
improvements and multilateral cooperation.
In my speech today, I will touch upon similarities and differences, but also uncertainties and risks that
our financial markets are experiencing in the path toward modernisation and integration in the global
financial markets, and will try to address the importance of regional cooperation in better facing these
challenges. I will conclude with some thoughts about practical regional cooperation, which I am
sharing with you, hoping to generate further discussions.
At a regional level, our countries are experiencing nowadays a higher growth rate of the financial
markets, compared to that of the economic growth. As a consequence, the weight of the financial
sector in the national economies, strictly from a quantitative perspective, is growing. At the same time,
expansion is accompanied with changes in the market ability to better accommodate market
participants needs for funding, diversification and risk appetite. Undoubtedly, institutional participants
in the financial markets find themselves with a larger number of possibilities for business
developments and financial specialization.
In addition, general public interest in using financial market products and services has increased
dramatically based on the benefit they perceive from improved efficiency in everyday life activities.
These developments highlight the importance of financial markets for our economic well-being, from a
qualitative perspective. Let's also recall that economic improvements trigger and support changes in
social and cultural aspects of our life, bringing our nations closer to international values and principles,
and to each other.
As expected, because of the historical background, our countries have differed in the speed and in the
depth, with which they have moved along the transition phase in the last decade. While we had many
similarities in adopting the first basic and urgent reforms including price liberalization, enterprise
restructuring and privatization in some economic areas, we were more distinctive in completing other
reforms that would allow for institutional building capacities, which on the other hand, would make
these changes root deeper in our societies.
Today, our countries enjoy stable macroeconomic environments. We are experiencing low inflation
levels, stable exchange rates, a more prudent and responsible fiscal policy associated with limited and
manageable budget deficits. National Central Banks have established their independence and are
perceived in public as respectable and reliable authorities. There are also common efforts to fully open
our economies and to attract foreign capital. As we are in the process of fully opening our markets, we
are benefiting from increased competition, improved productivity and efficiency, and increasing quality
of services for our citizens.
But, we are also facing several uncertainties and risks. Markets remain segmented and their
infrastructure faces difficulties in supporting new and imposed developments. Market infrastructure
deficiencies exacerbate their shallowness and make it difficult for various market participants to act in
order to meet their business objectives and manage their risks. The technological improvements have
to fully show their effect in meaningfully reducing costs of financial services. Regulatory gaps in
different areas of local financial markets create the conditions for regulatory arbitrage and may
adversely affect the supervisory work.
Therefore, erroneous and costly decisions are unavoidable. The financial situation of single market
participants, due to market segmentation, is highly affected by their capacity to find financial support in
the international financial markets. In reality, this leads to an increasing gap among so called "big" and
"small" or among foreign and locally owned financial institutions. Real economy development is an
additional source of risk for financial markets.
Such interaction should be carefully watched to better understand financial market trend in the future
and identify financial imbalances in a country and regional level. Indeed, we are all experiencing a
construction "boom", where residential house prices have increased considerably. In some countries
this is fuelled by credit expansion but in the whole region there different views whether this is
affordable. At the same time, the pace of general credit expansion, particularly for consumption and in
foreign currency is alarming and is forcing us to think of several "what if" scenarios and take preventive
actions.
It is our task as monetary and supervisory authorities, to provide a proper environment for a balanced
and stable development of our financial markets. This is not an easy task for us, especially when there
is no simple indicator to measure our success in achieving financial stability, and when we realize that
this is a multifaceted issue that we do not fully control, and even can not fully predict. Above all,
pursuing the target for financial stability is a never ending race, where the "finish line" is continuously
moving ahead of us.
We have to find and implement appropriate policies, knowing that these policies represent a trade-off
between making the system more resilient on one side and affecting its short-term efficiency on the
other. In this challenge we must bring in the financial market industry through consistent
communication and promote the adoption of the international standards in good governance a
proportionate or risk-based supervision.
Based on our legal responsibilities, we have to approach these challenges in a national level. But, due
to increasing liberalization of both labour and capital movement, and herd behaviour of financial
market participants, we understand that that is not sufficient. We have nowadays in our countries the
same financial institutions and the same behaviour of such financial institutions in response to a
centralized business development policy, growing cross-border interaction among businesses and
households, similar trends in social life.
Monetary and supervisory authorities in different countries in the region, to a large extent have
responded to such developments with establishing formal cooperation with home country supervisory
authorities, particularly in the area of banking system supervision, by signing bilateral Memoranda of
Understanding (MoU). The fact that our countries are at the borders of the European Union (EU) has
caused an increased presence of EU financial institutions, including banks.
Hence, the MoU's have been signed with these EU countries supervisory authorities. The quality of
cooperation varies in different countries but one can say with reasonable confidence that the
willingness of the host countries to cooperate has not always met the same interest from our
counterparts. To an extent this is expected, because the assets of their banks in our single countries
sometimes represent only a fraction of their total assets. Nonetheless, they should take notice of our
concern that this cooperation is very important for us, particularly in cases where these foreign banks
dominate our local markets.
The liberalisation of the financial markets in Albania has been a desirable move. We consider the
inflow of foreign capital an important factor to upgrade the level of our banking system, improve its
efficiency and the quality of its products, by improving competition conditions in the marketplace. In
most cases, foreign banks have brought with them the expertise and the mentality of modern business
development from the more developed countries they come from. As Mr. Bini Smaghi mentioned in his
key note speech, the increase of foreign presence in our financial market has also triggered new ideas
on how financial institutions and particularly banks intend to adjust their business volume and size to
position themselves better in the marketplace. But this is something where we would like to see a
more active and consistent approach, in both establishing active business development policies and
bringing in good quality and experienced management in applying those policies.
It is indispensable for our supervisory authorities to be informed of the policy of different important
financial or banking groups that operate throughout our region. Host to host cooperation can help in
this regard because some of us enjoy better communication links with the home country supervisory
authority and they can share this information with the rest of the supervisory authorities in the region,
within ethics and transparency principles. In practise, this can turn out to be a very valuable approach,
because these regional foreign banks tend to adopt similar policies in countries with similar
characteristics.
Another area where we could establish a strong cooperation is the discussion that should occur when
any of us is adopting certain measures that are intended to control risks that appear from trends in the
financial business developments. In return, we would be able to adopt similar supervisory policies,
thus reducing damaging regulatory arbitrage possibilities and other risks associated with it.
One implication of the supervision/regulation heterogeneity across counties in the region is the
ineffectiveness of indirect measures to control for credit growth. Therefore finding ways and pushing
homogeneity in this regard would at the same time be also important to compensate the lost
effectiveness of monetary policy and the eventual demand pressures.
There are also a few other ideas that stress the importance of pre-emptive regional cooperation, in
bringing us as a region closer to fulfilling our target of European integration. By setting up and
pursuing coordinated financial market development policies, we help to integrate our national financial
markets into the international financial markets, and pave the way for other economic and social
reforms to follow.
The modalities of such cooperation vary. Ad-hoc periodical meetings of Governors in the region,
supported by more frequent meetings in a technical level to support the discussion agenda, could be
one way of approaching the objective for stronger cooperation. In addition, through a more consistent
communication, we can try to identify particular issues which are relevant for our regional financial
markets, and pose those issues to our counterparties, being common home country authorities, other
supervisory authorities where we turn for assistance, or even professional organizations where our
supervisory authorities participate. I am sure our concerns can be taken more seriously if raised as a
region. Furthermore, we must avail of the efficiency provided by the technology, in sharing our
information.
A joint web-site can be established, where we can find important information, interpretations, or share
its experience regarding supervisory issues or financial stability issues. When mentioning this ways of
cooperation, I am not trying to neglect what is already happening and I am mindful of the fact that
there is a trade-off between the advantages of such cooperation and its costs.
We should also point out that Memoranda of Understanding's can not act as a substitution for
cooperation in practice. It is important we maintain close contacts with our counterparts, on
exchanging regular information on general trends and issues of respective banking systems in normal
times, as it serves to establish confidence for future cooperation, particularly during distress times.
Otherwise, such official cooperation agreements will do little in making a real difference.
Let me conclude by saying that the objective of reaching and maintaining the financial stability is not
an easy task but we could contribute a lot in its achievements by enhancing our efforts to make sure
that financial market institutions are performing soundly in a stable macroeconomic environment. Our
contribution can be much more effective if it is properly coordinated regionally.
Such cooperation will ease our efforts in improving supervision capacities, avoid cross-border
regulatory arbitrage and will serve our efforts to meet our objective of integration in European financial
markets. We can enrich the modalities of such cooperation, keeping in mind that the basis of good
cooperation is established in normal times, through regular contacts.
Thank you.