Ardian Fullani: The link between the legal system and financial markets
Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the Banking Law
Workshop, Tirana, 17 November 2008.
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Dear everyone,
The conviction that two monologues do not make a dialogue not only pushed me to study law
after my economics studies but also to listen to and toss ideas with colleagues from different
professions. I find it especially pleasing when I do this with lawyers, given that there is one
particular person I talk to the most - my spouse.
The dialogue between the banking market and the legal system has always been important
to any country. Nowadays, it has become extremely vital. For our country to continue sailing
towards safe shores of economic development, financial stability and prosperity, I believe
these two oars are required: judicial order and the financial market.
Dwelling briefly on the legislation issues, I would highlight that the economic activity is
mutually dependent on the legal system at home. As one of the distinguished economists
and academics, Mr. Mishkin, says - "The legal system, which as you know, is not only
composed of legislation and rule books, but also of the infrastructure of the civil courts and
the market regulators, represents a fundamental determinant of economic growth, especially
in connection to financial development".
The link between law and finance is inextricable. The financial instruments do not operate in
a vacuum. As long as they serve to people, they are based on legal relationships. A financial
asset is ultimately a claim in the form of paper (contract) or electronic form (account entry). In
any credit relationship, the possibility of default is always looming and this inherent
complication cannot be solved without a precise system of norms that protects both the
creditors and the debtors.
As Shakespeare's Merchant of Venice reminds us, the legal system has to ensure that the
debtor does not walk away from his obligation. At the same time, the lender cannot be too
taxing for the debtor. Hence, as anywhere else in life, the balance (that is, the balance of
justice) should provide for the wellbeing of the financial system, which is based on these
classical relationships, no matter how much modern they are.
Fundamentally, the legal system should ensure that contract and property rights are
sufficiently clear, protected and predictable.
In more concrete terms, the parties should not only be aware of these rights, but also
exercise them freely and fully during the binding of the agreement or in cases of litigations.
For this reason, the independent role of the court, its perception, the efficiency in judgment
and the enforcement of the court decision are essential features, whose deformation has a
direct impact on the functioning of the financial system.
To better illustrate this idea, worth to note is that the motionless of ownership titles, the delay
in ownership-related litigations and the non-execution of the collateral have a direct impact
on the share that mortgage loans in particular and the loans in general have compared to
other countries. This yet unsolved legal issue has yielded the discouragement of the
economy support with banking loans. As long as the banking system manages the people's
deposits, it must be safe and avoid any possible financial losses that may arise from the
legally binding loan relationship. Undoubtedly, it is not easy.
The risk elements that associate this relationship are numerous and different in nature.
Namely, there is a risk which relates to the type of currency, a second one to the
performance of collateral prices, a third one may relate to the operational risk, and so on.
The materialization of a single or a number of risks would put the bank into a difficult position.
However, the Bank of Albania, in its capacity as the supervisory authority, compels the
banking system to create reserve funds for any jeopardized loans. The only direction the
Bank of Albania and the banking system feel powerless relates to the non-execution of the
collateral and the de facto impossibility to provide the disposition of the collateral, in
particular when the collateral is in the form of real estate.
Thus, the banking and financial market need to be built and developed alongside the legal
system. Unless there is certainty in exercising and protecting contracting rights, there could
be no domestic or cross-border financial transactions.
The perception and exercise of these rights, the independent judgement in cases of
litigations, the reasonable time in solving the conflict, the efficiency and velocity in enforcing
the court decision are the greatest warranties to offer not only to the domestic and foreign
investors, but first and foremost to the MARKET itself.
The Bank of Albania has intensified its efforts in this context, in particular in terms of
defending before the Constitutional Court the quality of banking and financial contracts as
executive titles. The same arguments support the legal changes made to the execution of
mortgages and collaterals. These changes are presently being discussed in the Parliament
and the market is looking forward to their finalisation.
Based on this philosophy of market functioning and regulation and believing that the market
and the right are dynamic, the Bank of Albania has supplied the banking market and the
banking right with a new instrument - the Repurchase Agreement. By means of the Law on
Repurchase Agreement and the master contract, the Bank of Albania has initiated a process
which needs to be further developed by the specialists of the area. Personally and
institutionally, we are expecting these efforts to be concluded with the execution of the first
transactions of this kind.
It is for this purpose that I invite all the participants in this workshop, which for the first time
has brought together judges, prosecutors and lawyers from the banking market, to be active
and complement one another.
With the conviction that our initiative will be followed by other similar activities in the future, I
wish you good proceedings.
Thank you for your attention.