Ardian Fullani: Cooling down the liquidity situation in Albania
Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the 6th Vienna Economic
Forum, Regional Cooperation - Challenges and Chances: "20 Years after the fall of the Iron
Curtain", Vienna, 9-10 November 2009.
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The argument the organisers have found is very relevant, particularly when it comes to
central banks of the Western Balkan. Actually, as far as I am informed from my colleagues,
constrained liquidity (especially in foreign currency) and lending tightening are two fragile
points, which may put us in a difficult position in the months to come.
This set of two arguments carries over a dual problem: the short-term one, which puts
banking system stability at risk, while providing its own implications even on the economic
activity and on macro stability in a broader sense.
The second problem is related to the financial support of the country's economic activity in
the future, given the recent years, when lending to the economy has constituted one of the
main contributors in this regard.
So far I deem that we have been effective in short-term management of these problems.
Similarly to the European Central Bank and other central banks of the developed countries,
we (the central banks of our region) have succeeded in supplying the market with ample
liquidity, combining a variety of operational tactics and instruments. It is understandable that
it is easier as concerns liquidity in national currency, whereas as concerns the one in foreign
currency, at least in Bank of Albania's case, we did never consider acting as a lender of last
resort for providing foreign currency assets to the banking system. On the other hand, we
exerted maximum pressure on the parent banks to ensure capital adequacy and sufficient
credit lines to their banks, and for the sake of truth, we have found a spirit of cooperation and
concrete actions in this regard, without any exception.
Today, one year after the onset of the global financial crisis, I would say that all the
measures taken by central banks in certain countries of the region resemble to one-another.
The Bank of Albania considered as indispensable the prudential monitoring of the situation,
taking a number of actions, which significantly dampened the pressure over the banking
system. These actions have helped cooling down the liquidity situation and have been in line
with the operational actions applied by the European Central Bank in response to the crisis.
First, an ad-hoc task force was set up. Its main responsibility still continues to be the daily
monitoring of the situation for each individual bank. Our direct conclusion was that the
analysis should consider all micro-level aspects, each and every cell of the system and its
indicators.
Second, a number of facilities were adopted for the incessant supply of the system with the
required liquidity. The type of auction for the injection of liquidity changed to fixed-price
auctions, the collateral base for repo agreements expanded, the use of the required reserve
increased from 20 to 40 percent, and the spread between the Bank of Albania's key interest
rate and overnight loan dropped from 175 to 75 basis points.
Third, through a special act, the Bank of Albania required higher capitalization of banking
activity from the banking sector, adding to the guarantee of the banking sector's financial
soundness.
Making a generalization, I deem that the measures adopted over this period are unusual,
extraordinary and contrary to the "constitution" of modern central banks as regards the
liquidity, money market and monetary policy transmission channels. However, we well
understood the philosophy that "the purpose justifies the ways". For the sake of financial
stability, all the measures taken are justifiable and have proved effective. So far so good.
However, I think that the current situation makes the central bank more vulnerable from the
viewpoint of monetary policy independence and efficiency. Liquidity by all means, whatever
the size, whatever the maturity, and whatever collateral for an indefinite period of time, would
damage irremediably the monetary policy and the financial stability in a second round.
Preserving balances is more complex, if we take into consideration even the other major
vulnerability related to high degree of euroisation (high share of foreign currency component
to money supply structure) and lack of convertibility of our national currencies.
Taking into consideration even the impossibility of the European Central Bank to serve as
liquidity provider to our countries, I would deem that the spaces available to us in the
framework of current legal and regulatory aspect have already been exhausted (from the
liquidity viewpoint). Otherwise, I would say we have reached a critical point, below which no
space for action is left.
Let me emphasise that now that the crisis highlighted many "vulnerabilities" of this rapid
catching up, the analysis should go beyond just accepting it as valid. This becomes
necessary if we take into consideration the designing of a different economic growth model.
In this context, I am more and more convinced that the global crisis was a development that
advanced in time the need for inevitable steering of many imbalances that our economies
accumulated over the last 10-15 years.