Ardian Fullani: Analysis of economic and financial developments in
Albania
Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the 24th Conference of
Banking Supervisors from Central and Eastern Europe, Tirana, 12 April 2011.
* * *
Distinguished ladies and gentlemen,
Allow me to first wish you a warm welcome in the 24th conference of banking supervisors
from Central and Eastern Europe, which this time is taking place in Tirana. The Bank of
Albania considers this forum as very important and a platform where participants may
exchange their institutions experiences with each-other. This forum is a modern highway that
allows for a rapid convergence of our supervision practices with the best standards.
Let me now continue with a summarised analysis of economic and financial developments in
Albania over the last two years, focusing on some concrete issues requiring more attention
by the banking industry and the supervisory authority in the future.
The Albanian economy was characterised by positive developments during the pre-crisis
period. Annual economic growth was on average 6 per cent, with admirable and stable core
macroeconomic indicators. Growth relied on a firm strengthening of internal demand
components while funded by internal resources, mainly through rapidly increasing loans to
the private sector and loans for investments.
The banking sector, which dominates the domestic financial system, has also undergone a
significant transformation in recent years. This is due to the entrance in the market of
renowned European banking groups, expansion of banking infrastructure and upgrade of
customer services. Financial performance has been good, recording average levels of return
on equity and on assets, respectively over 20 per cent and 1.5 per cent. Over the years, the
banking system has chosen to capitalise the majority of its profit in order to best support its
activity with liquidity and capital.
During this period of a rapid and qualitatively better expansion of the banking activity, the
Bank of Albania found it necessary to revise the supervision philosophy. The main ambition
was its orientation towards sources of risk, in other words to strengthen control over banking
activity. For that reason, at the end of 2006 a new law "On Banks" was adopted. This law
imposed, on the banking industry, more contemporary standards as regards realisation,
direction, and control of the banking activity.
The main concerns consisted in high crediting levels, significant concentration of crediting in
foreign currency, and the absence of sectorial diversification. Consequently, at the end of
2006, the Bank of Albania introduced a number of regulatory amendments aiming at slowing
down crediting growth levels, through imposing higher capital requirements on more
aggressive banks. These measures were further supplemented in 2008, targeting more
directly cases when borrowers had no income in foreign currency.
Another strategic move during this period was integration of banking supervision and
financial stability with monetary policy decision-making. This action is as bold as it is
innovative in establishing more optimum equilibriums between our function of drafting and
implementing the monetary policy and that of maintaining the system's financial stability.
From that moment on, the Financial Stability report would not be merely another book
in the library shelves of the Bank of Albania, but a valuable input to policy
decisionmaking. Therefore, information becomes more complete, including the assessment of
banking activity risks performance. This would mean that our philosophy becomes more
preventive and more farsighted, because the collected information is used to minimise future
risks.
We believe that these actions were the right therapy to buffer the effects of the global
economic and financial crisis on the domestic banking sector and economy that appeared at
the end of 2008. The shocks in the global financial system transmitted insecurity to the
Albanian public and, subsequently, huge amount of deposits were withdrawn from the
banking system.
Additional need for liquidity as well as contraction of crediting during this period had a
negative effect on the situation of financial resources, revenues and capital of the banking
sector.
Under these circumstances, public authorities undertook a series of actions to support the
banking sector, in particular the following:

Approval of a law which increased the insured amount of public deposits;

Decisions of the Supervisory Council of the Bank of Albania to limit bank exposure
against their foreign bank owner groups and suspend the distribution of dividend for
banks during 2008 and 2009;

Implementation of a number of other decisions taken by the Bank of Albania in
relation to the establishment of more easing conditions to provide liquidity in the
inter-bank market; and
 Further improvement of the regulatory supervisory framework, aiming at maintaining
banking activity stability.
Overall, during this stage, the Bank of Albania has played an essential role for the
identification of short-term problems of the banking sector and their immediate addressing.
This process was necessary to identify later longer-term implications on the banking activity
performance and further alignment of the supervisory framework.
Banking activity performance over the past two years, has shown that these measures
proved to be effective and the Albanian banking system overcame with success the global
crisis effects. The withdrawal of publics deposits from the banking sector was staunched at
the end of 2009 Q1 and, from that moment, their return to the banks continues consistently.
The current financial situation continues to be stable, overall, compared with previous
periods, with a firm public confidence and satisfactory condition of liquidity and capitalisation.
The stress tests of the banking sector against unfavourable potential developments
- economic and financial ones - indicate that the banking system is capable of coping with
them.
Banking activity performance during this period has reflected the overall performance of the
economy. During the last two years, albeit a negative output gap, the country's economy has
continued its positive growth in the range of 3.5-4.5 per cent. Other macroeconomic
indicators have ranged within admissible and expectable values.
We believe that this financial and macroeconomic stability reflects the commitment and
coordination of core economic policies, the monetary and fiscal policies, over the time. They
will continue to support the solid economic growth further on, in light of the world's economy
resurgence.
Dear participants, ladies and gentlemen,
The world's financial system faced an extraordinary crisis. Equally extraordinary were the
measures that were taken. Naturally, its effects will continue to be present in the global
economy, while decisionmakers, experts and scholars will continue to analyse the causes
and lessons that may be drawn from it. Taking advantage of being present in this panel of
supervisors, I would like to list some of our conclusions:

Macroprudential supervision policies constitute an essential argument of recent
discussions. The role of the central bank is a part of them, especially in terms of its
preventive role. Randall Kroszner, in his recent document "Challenges for
MacroPrudential Supervision" says: "... central banks should move from their traditional
role of the fire extinguisher (which means that if something goes wrong, central
banks will intervene in the market and provide liquidity to extinguish the fire or
prevent its expansion) to the role of the smoke detector (which means to try and
prevent the fire)..." More specifically this implies the identification of a group of
measurable indicators, which together create warning systems for macro prudential
problems. Stress tests are necessary and they should be more frequent, real, and
transparent and shared with supervisory authorities of other countries. Equally
indispensable are integrity, professionalism and independence that should
characterise the activity of each banking supervisor.

Macroprudential supervisory policies, post-crisis, despite the progress made
recently, need further regulation. For that purpose, specialised international
institutions need to concentrate on a more detailed definition and cooperation in
order to adapt them continuously with markets development. Taking into
consideration regional, demographic, historic and cultural specific characteristics is
also important.

The banking system needs to represent a culture based on best values of ethics,
service and integrity. This should be the primary objective of all banking system
managing structures, which will in turn lead to enhanced responsibility in banking
institutions management. Bank managing structures are responsible for a balanced
management of their institution, where the objective for profit should serve to
identify, analyse and professionally assess risks that accompany relevant actions. In
addition, banking institutions and their staff need to reflect, in their public relations,
the highest standards of security, communication and transparency, care and
support so that this relationship of trust and confidence becomes a characteristic of
mutual developments. The supervisory regulatory framework is being completed
with a view to take these developments even further.

Banking supervisors, in turn, need to pay more attention to examinations and
reports they prepare, integrity and behaviour that characterises the work of each
bank.
 Another great lesson we may draw from the crisis is to avoid at any cost huge
concentrations and dependency on short-term financial funds. A top priority remains
the adoption of prudent practices on risk management.

Composition and capacities of banks managing structures is another challenge for
the banking industry in the future. The last crisis showed that in many cases, board
members represented only short-term interests of shareholders, at the expense of
other interests of the group. Likewise, their expertise and knowledge should be
closely connected to specific activities of the bank.

The market and innovation move faster than the supervisor does. Therefore, any
innovation or new banking product, prior to being marketed, needs to be tested
responsibly, assessing carefully all potential accompanying risks.
In a more national context, it is necessary and actually completely possible for the banking
sector to accelerate the process of crediting revitalisation, a development that supports not
only the economy and the clients, but also the banks.
Crediting should be supported better through a solid growth of funding sources, especially
deposits. In crediting, it is necessary to have a better sectorial distribution and a more
reasonable balance among public and private investment projects, Albanian Lek or foreign
currency denominated credits, therefore orienting crediting towards supporting the national
economy.
In this context, there is sufficient room for banks to support more crediting to small and
medium enterprises and provide more opportunities in Lek crediting. In any case, the
process of analysis, assessment, follow up and evidencing the credit quality should be
pivotal to relevant structures in banks and should be carried out with maximum seriousness
and commitment, conform to supervisory requirements.
In this process, cooperation is needed with clients that are facing temporary difficulties.
However, in the case of non-performing loans, it is necessary to undertake envisaged and
timely actions to execute the guarantees and other forms of collateral, in order to recover
maximum values.
These actions are important while the Bank of Albania deems that the crediting activity of the
banking sector will continue to face a challenging environment and targeted improvements
for the credit quality will require more time to be realised.
In conclusion, let me underline that, movement in the above-mentioned directions make a
complex process which requires a two-way commitment and cooperation. It is with pleasure
that I find that cooperation between us and the banking sector is seeing progress, both in
field of supervision and monetary policy implementation.
I believe this cooperation will grow among supervisors in the South Eastern Europe. On
behalf of the Bank of Albania I would like to assure you that we will offer full cooperation in
this regard.
Taking advantage of this opportunity, I would like to underscore that the Bank of Albania will
always respect the public expectations and will fulfil, on time, its legal responsibilities in terms
of maintaining the banking system and price stability. I thank You for your attention and wish
you success!