Ardian Fullani: EU integration - key challenges for CESEE countries
Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the conference
"Interlinkages with the euro area and long-term convergence dynamics", hosted by the
European Central Bank, Frankfurt, 17 June 2013.
* * *
Mr. Chairman,
Ladies and Gentleman,
Dear Colleagues,
The topic of this Conference is of crucial importance for the economic and financial prospects
of Western Balkan countries. These countries are fully integrated with the EU economy and
the EU financial system. The European Union represents their main trading partner and
banks originating in the EU dominate the financial system in our region. As amply
demonstrated by our experience, prior to and during the recent crisis, developments in the
EU affect immediately both the real and the financial system in the region. The EU and
Western Balkans can be considered partners and, as such, they have a legitimate interest in
the policies and actions of the other. I trust this conference will try to explore the best
mechanisms for mutual consultation and coordination.
CESEE countries have chosen integration with the EU as the main vehicle to deliver
sustainable and long-term economic prosperity to their citizens. I would like to point out that
our countries have consciously chosen the path of EU integration: we have undertaken
painful structural reforms; we have made legal and regulatory reforms around this process;
we have opened our markets to goods, services and capital from the EU. I think it is only fair
for us to expect long-term commitment and solidarity from our partners.
This integration and convergence process has certainly delivered in the past two decades.
GDP growth has outpaced that of the EU and financial intermediation has rapidly improved.
Common economic wisdom based on indicators such as GDP per capita, relative financial
intermediation, relative cost of labour and technology indicate that this process will continue
in the future. CESEE countries still offer attractive investment opportunities: they have, in
general, better demographic dynamics and are geographically closer to Europe than other
emerging markets. This political and economic integration has naturally led to financial
integration.
However, I would like to make three remarks regarding the economic and financial
integration path we are pursuing.
• First, the main focus of national authorities in SEE should be to facilitate the
allocation of capital to more productive sectors, by providing the right incentives,
structural reforms, legal environment, tax policies, and economic stability. This
requires a common understanding with banks operating in the region. Banks are
and will remain profit-maximizing entities. Nevertheless, they should be more
attentive to long-term trends, because they have a stake in the sustainable
development of the economy.
• Second, we have developed a financial system and pursued a financial integration
strategy based on the banks, which account for more than 90% of the financial
system throughout the region. Therefore, recent suggestions about developing
domestic capital markets as an alternative to a bank-based financial system are
useful, but perhaps unfeasible in the short to medium term.
Third, the SEE is and will remain a capital-hungry region, which should be partly
•
intermediated through international banks. This fact should be recognized by both
EU regulators and EU parent banks. A new business model relying purely on
domestically-generated deposits is a wrong answer to the previous extremes of
huge capital inflows.
Currently, key challenges to financial stability in the SEE area comprise non-performing
loans, slow growth of credit to the economy, the problem of fiscal finances, and the exchange
rate stability. Their nature and magnitude are directly related to the growth problem and the
private sector approach to consumption, savings and expectations. These problems were
either created or exposed by the crisis and have exacerbated due to financial stability-related
issues of our partner countries and their approach to the solution of such challenges. More
directly, the banking sector has seen deleveraging due to required financial stability
measures of the European banking authorities. Does this have an impact on credit and
growth? The obvious answer is yes. Whether directly or indirectly and despite their origin,
current financial stability problems are related to slow economic growth, which, in turn, is the
result of shrinking financial intermediation. In principal, these developments have combined
in a vicious circle, which is leading the economy in a slow downward spiral.
There are certain important lessons learned by the crisis. Above all, there is a substantial
change in the perception of policy design and policy implementation by authorities with two
defining trends. First, we are observing a new paradigm - the rethinking of the central bank
policy design and policy implementation. The new model consists first in the idea that
CPIbased inflation targeting might not be enough to preserve macroeconomic and financial
stability, and second, in the use of macroprudential regulation in combination with traditional
monetary policy measures. To be effective, these measures require a strong coordination
with traditional monetary policy and banking regulation and supervision measures. Unless
coordinated, they can do more harm than good. Moreover, given the strong cross-border
financial links between the EU and the SEE, they have over reaching effects across the
borders. In this respect, coordination becomes a multi dimensional effort.
Due to these strong financial and economic linkages of the CESEE with the euro area,
European policies and regulations, macroeconomic and macro prudential intervention have
authentic real-time impact on our economies giving way to new challenges. The coordination
of macroeconomic and macroprudential measures within the euro area will continue to exert
macro stability pressures on the CESEE. Therefore, it is important for the economies of the
CESEE to know, in advance, and understand the EU's legal, institutional and regulatory
developments in the financial system and possibly have an opinion on the potential impact
and unintended consequences that such developments may have on their economies.
I would invite the EU monetary and supervisory authorities to focus on the overall picture and
think about long-term solutions rather than short-term adjustments, which, instead of solving
the problems, recycle the old ones (problems) into new challenges, transforming the nature
and the subject without really addressing the overall stability issue.
The EU Banking Union, in our view, is a very important step towards further integration and
coordination between home and host authorities. We appreciate the fact that the
establishment of the centralized supervisory authority will facilitate the information exchange
between supervisors, creating a more efficient communication between home and host
regulators by reducing the complexity of dealing with multiple national supervisors and
regulatory bodies. The Bank of Albania, as a member of the Vienna Initiative Steering
Committee, advocates the need for EU authorities to comprehensively assess
interconnectedness issues between EU/euro area and non-EU/non-euro economies in order
to design balanced and sustainable policies. In particular, macro prudential measures in the
euro area should also consider the situation and the potential impact on non-EU host
countries. We expect that the ECB, as a leading authority within the SSM, to play an
important and constructive role, whereas non-EU supervisors must be granted the
opportunity to express their views on EU financial policy decisions affecting their domestic
financial stability, before the actual decisions are taken. The effective functioning of
supervisory colleges is also considered a very important issue, where countries with
systemic EU subsidiaries may address their supervisory concerns.
On the other hand, it would help if small countries of the region outside the Banking Union
had a unified view and approach towards EU authorities and expressed their concerns as a
single voice. In this regard, the Bank of Albania, assuming a coordinating role, has invited
other non-EU countries to contribute in formulating a common regional approach towards the
Banking Union and its effects on these countries.
We also argue that it is at the benefit of the ECB, and other monetary and supervisory
authorities and EU authorities to bring the CESEE countries on board of discussions, like a
responsible doctor, who, while providing a strong remedy for his patient, tries to minimize
potential side effects. The ECB must consider the potential side effects of its policies in our
region. This consideration concerns five important issues:
First, the ECB has a large theoretic and empiric expertise on financial stability, monetary and
economic analysis; however, the CESEE countries may have a more precise and direct view
of potential side effects on their economies;
Second, this discussion among the ECB and the CESEE must start early, possibly in the
design process rather than after the implementation of legislation and regulation. This will
allow enough time for CESEE authorities to implement legal and regulative amendments to
complement EU regulation and adapt its institutional structures in timely manner.
The reforming EU deposit insurance and banking resolution mechanisms, for example, will
have legislative and regulative implications for economies of the CESEE due to dominance
of European banking groups in our financial sectors. However, until the ECB and the EU
decide on a solution and legislation is eventually approved, we would not know what the
potential implications (like regulatory arbitrage opportunities), the required legal changes,
and the financial costs are for our banking system and our economies. Information is clearly
in the interest of the CESEE countries as it would remove uncertainty and risk among host
supervisors (non-EU and non-euro area) regarding the effective resolution (including
burdensharing) of multinational European banks;
Third, establishing "Resolution colleges", similar to "colleges of supervisors", might be an
intelligent and efficient way to prepare for extreme situations. These colleges would allow
home and host supervisors to discuss ex-ante regarding possible resolution of multinational
European banks, with the purpose of bridging differences in the process and burden sharing
as much as possible. In principle, some form of supervision could be designed to allow the
ECB to share the responsibility of supervising multinational European banks with the host
supervisors (particularly in case of their systemic importance in host countries).
Fourth, establishing swap lines of liquidity in euro, between the ECB and the host countries'
central banks (or supervisory authorities) - non-EU countries, managing and overcoming
unexpected liquidity risk and other potential constrains faced by multinational European
banks, which might rise directly or as unintended consequences in response to decisions
taken by supervision and financial stability authorities in the euro area. This could be the
case only for those (non-euro area, non-EU) host countries, where the European banks have
a systemic importance. In return, the host countries' supervisors will provide the ECB with
information on the financial situation of the systemic subsidiaries and their respective
supervisory policies;
Fifth, it is about the role of international financial organizations. The IMF, the World Bank,
and the Basel Committee have had and continue to play an important role in shaping the
financial system and building its resilience in our economies. The EFSAP is an excellent
example to illustrate this point, and they have vast expertise in dealing with related issues in
developed and emerging countries. Therefore, I believe that involvement of these institutions
in the discussion process would benefit both EU and CESEE economies.
The euro area and the CESEE economies will be ultimately part of the same political
economic and monetary union. Despite current hardships, the EU political and economic
integration agenda remains committed in this goal. One might even say that despite potential
political, social setbacks caused by the crisis, it (the crisis) is pushing the integration agenda
faster and stronger than before. In this respect, it is necessary to connect the political and
economic integration process together and continue developing both processes at the same
speed. Under current circumstances, regional cooperation and communication becomes a
necessary objective of the CESEE integration process, at least for the banking and financial
market reform. It would be much easier for the EU authorities to adopt and address the
concerns of the CESEE as a single group rather than individually.
In conclusion, it is so important to establish a significant level of communication and
coordination among the central banks and EU institutions, their legal and regulative
framework. Finally, I would recommend complementing it with a similar level of coordination
among other institutions, which play a significant role in macroeconomic and financial
stability in our economies. In particular, there is more need for communication and
coordination among the ministers of finance in the region because fiscal policy is essential
for the macrofinancial stability of the economy and plays a significant role in the successful
implementation of the macroprudential tools. The coordination is not an easy task, especially
when benefits come at the cost of one's partners, but, if we aspire to have far-reaching
results, this is the right manner and the appropriate moment to react.
Thank you!