Ardian Fullani: Competition versus risk-taking in the banking sector in
SEE countries
Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the conference on
"Competition versus risk-taking in the banking sector in SEE countries", organized by the
Central Bank of the Republic of Kosovo, Prishtina, 5 October 2012.
* * *
Honourable Governors,
Dear participants,
Regular regional meetings are a good opportunity to discuss economic and financial
developments in our countries. They help identify the similarities and differences among us,
and the economic and financial policies we need for solving the problems we encounter.
The geographic position and economic relations with the same trade partners are factors that
have led to similar economic and financial developments across our countries. They have
determined the nature and size of contamination from the global economic crisis, in general,
and the euro area crisis, in particular.
The impact of the crisis on our countries has often been the main topic of discussion in such
meetings. Macro-financial difficulties and uncertainties in the euro area render the actual
European crisis the main focus of this meeting as well.
Actual operations and commitments of the European Central Bank consist in a wide range of
instruments that European authorities may use to support financial markets and institutions.
Investors, however, are still waiting on additional decisions which will be more harmonised
and stronger politically. The economic situation, especially in Greece and Spain, remains
difficult, whereas Portugal and Italy have undertaken additional fiscal consolidation
programmes. Unemployment in the EU and the euro area has reached historic levels,
especially amongst the youth. Economic growth is weak and is mainly concentrated in
central countries of the euro area.
Our countries have been affected by this situation for objective reasons. Trade relations,
movement of capital and workers, and the financial system are channels that pass these
problems on to our economies. The form, size and extent of this impact have evolved over
the past four years.
At present, the situation is reflected in the decrease of domestic demand, decline of
economic growth, reduction of available income, loss of confidence and deterioration of
optimism; this is, in turn, reflected in higher savings.
Consequently, these developments have placed the focus of economic policies towards
economic activity and revitalisation of optimism in order to boost investments and
consumption. On the other hand, maintaining financial stability becomes a necessity,
creating thus a binomial of priorities that condition each other and require a simultaneous
solution.
The Albanian economy is increasingly facing the challenge of economic growth. Although the
Albanian economy enjoys consolidated macroeconomic stability and sound financial
foundations, aggregate demand has been weak during the first nine months of 2012. Both
domestic and foreign demand suffer from high uncertainty, relatively tight lending standards,
and limited space for discretionary and stimulating policies.
In the domestic context, the economy continues to face relatively low consumption and
private investments and an absent stimulus by the public sector resulting from the orientation
of the fiscal policy towards maintaining long-term stability of the public debt.
On the other hand, the banking and financial system remains sound and liquid and capital
indicators are at relatively satisfactory levels. The activity of the banking sector continues to
be strongly supported by the increase of publics' deposits. Banks have reinforced their
capital position to boost resilience against risks arising from banking operations. As at the
end of June 2012, the capital adequacy ratio stood at 15.6%. Credit developments, however,
remain a problem that is subject to the performance of economic activity and expectations for
the future.
Slowdown of economic activity and decline of demand for investments and consumption by
businesses and households are determinants of private sector credit and credit quality
performance. On their side, banks have evidently increased their prudence as regards
lending.
Periodic stress tests show that the banking sector is resilient and can withstand any adverse
events to economic performance. However, we are aware that the banking industry is facing
difficult challenges. Besides recovery of economic activity and confidence for the future,
improvement of credit quality requires also the completion of legal issues to enable and
facilitate collateral execution. Selling impaired assets at their real market value is the starting
point of the process for making financial correction and enriching the private sector's balance
sheets and the financial system a whole. Cleaning up balance sheets would promote
economic activity through consumer investments, by ensuring a constantly improved credit
quality.
Currently, the mutual influence of economic activity and credit quality is the main concern to
monetary policy. Efficiency of successive interventions by lowering the key interest rate is
overshadowed by negative expectations.
Consequently, the effects of business and household consumption and investments on
domestic demand are not at the desirable level. In spite of these problems, economic growth
remains in positive territory, but below the potential. According to our estimates, it will remain
positive even in the future. Economic and financial operators' inflation expectations remain
anchored around the Bank of Albania's target.
Good liquidity condition and capitalization of the banking sector, and stability of
macroeconomic indicators have led to harmonised economic policies for maintaining the
status quo. If this situation remains as such in a predictable time horizon, the monetary policy
may remain accommodative over the same period. The recovery of the domestic demand
and economic growth is further related to expectations, which are also affected and
contaminated by our trade partners' condition.
The fiscal policy has aimed at fiscal consolidation and has continued making efforts to
prudentially provide necessary fiscal stimuli.
Currently, if the privatization process is successfully completed, then the fiscal opportunities
for promoting economic growth and for revering any negative expectations are significant.
The way of using privatization receipts should not only support the short-term economic
growth objectives, but should also affect the economic operators' expectations for stable
economic growth in the future. The latter can be achieved by using additional revenues to
reduce debt levels and support reforms for structural changes in the economy.
Dear participants,
Currently, we are of the opinion that the concept of long-term development strategies of a
deeply national character is an important issue for the stable long-term growth in our region.
Lacking a regional perspective does not favour the individual success of small economies in
the global economy.
The process of connectivity and integration of transport infrastructure should continue with
the integration of development strategies, capital markets, the labour and primary
commodities, and energy infrastructure. Our economies are vulnerable and contaminable
from global developments because they are small economies in an economic region
fragmented and dependent on foreign inflows in the form of investments, exports and
remittances.
Increase in the market share, ease in production factors mobility (capital, labour, and raw
materials), integration of financial and payment systems, integration and coordination of
scientific and educational curricula and addressing of challenges from a regional perspective
would make the region an attractive and integrating economic place. This integration would
identify the comparative regional advantages, enhancing at the same time the
competitiveness of each of our economies.
Consequently, it would convert the tendency of the region to be negatively contaminated
from global developments into an opportunity, a positive impact, in order to achieve high and
stable economy growth in the long run.
Thank you!