Ardian Fullani: Building a sound and efficient Albanian banking system
Opening address by Mr Ardian Fullani, Governor of the Bank of Albania, at the workshop on
"A sound and efficient Albanian banking system; activities and results achieved under the
EU-funded Twinning Project", Tirana, 04 June 2012.
* * *
Dear participants,
The development strategy of the Bank of Albania provides, inter alia, for the swift
approximation of the institutional, legal and operational framework with the best standards of
European Union (EU) central banks, in view of the country's major priority, i.e. accession into
the EU.
The Bank of Albania has been engaged in an EU-funded Twinning Project for strengthening
the institutional capacities, particularly in the areas of banking supervision, statistics,
payment systems and the implementation of monetary policy, capitalising on the extensive
experience and outstanding professionalism of Bank of Italy and Bank of France experts.
This project had set challenging objectives, which had to be achieved within a relatively short
time. Its success depended on the commitment and professionalism of participating
institutions, and on their capability to implement a true cooperation.
Today, I have the pleasure to address this important event, which marks the successful
completion of the twinning project after about 18 months of intensive joint work. I would like
to thank all the experts that have been working for this project at the Bank of Italy and Bank
of France, for their commitment and professionalism. I would like to also thank the
representatives of the EU Delegation to Albania for their support as they monitored the
project.
The twinning project was implemented in 6 modules as follows:
 Coordination of European integration process
Financial literacy

 Supervision and financial stability
 Payment systems
 Statistics
 Inter-bank market
Coordination of the European integration process was implemented with the Bank of France
and consisted in developing and mastering the required instruments for coordinating the
European integration process with a view to preparing meetings at European level and
coordinating Albania's accession process in the EU. The Bank of France provided its
experience in organising meetings at European level and administering the process of
approximating the banking legislation with the acquis communautaire.
Financial literacy was implemented with the Bank of Italy and consisted in drafting a financial
education strategy for the public. Under this module, our research drew on the European
experience and was adapted to Albania's needs. In addition, we established a standard for
conducting surveys and questionnaires to assess the public's awareness and knowledge on
financial literacy and the effectiveness of educational activities.
Thanks to this project, we have a modern infrastructure for compiling macroeconomic
statistics at the Bank of Albania, in particular regarding the balance of payments.
The payment systems regulatory framework was reviewed with a view to amend and fully
align it with the relevant EU directives and practices.
Further development of the inter-bank market was another important component of the
project, given its significance in enhancing the monetary policy transmission mechanism to
the economy.
The supervision philosophy started to change in January 2010 with the establishment of a
new dynamic structure oriented towards risk identification and management. Therefore, in
addition to human resources capacity building for its eventual application, best European
standards had to be identified and acquired in detail. The precious experience of the Bank of
Italy, one of the most prestigious institutions in Europe, helped the Albanian supervision
process conform to the best European models.
I would like now to highlight several key developments:
First, we have migrated from the actual CAMELS evaluation system towards another
evaluation model based on a wider spectrum of individual risks, as envisaged in Basel II and
Basel III standards. That was the most intensive process of this project, which required
maximum engagement of Bank of Albania's experts throughout these 18 months. Eventually,
we produced a new supervision manual with European principles and methodology, broken
down by risks and individual evaluation systems. Bank evaluation improved as qualitative
criteria were taken into account in addition to quantitative data.
Second, the Regulation "On capital adequacy ratio" has been revised in accordance with the
BASEL II and Capital Adequacy Directive. The revision is followed by introduction of the
standard method for credit and market risks and the simple and standard method for
operational risk. Given its significance, the draft-text of the Regulation is being consulted with
the banking industry.
Third, to increase our prudence towards the financial system stability, we adopted new
techniques for a more comprehensive systemic risk assessment, enriched stress test
exercises with the "bottom up" approach and improved models for the indirect credit risk
assessment.
The twinning project concentrated most of its resources on supervision and financial stability.
In addition to constant motivation for improving the regulatory framework, supervision
activities and risk administration, this priority becomes even more necessary given added
challenges related to specific developments over the past years.
The Bank of Albania has undertaken a number of actions to face and overcome these
challenges.
For the fourth consecutive year, the Albanian economy has been under the influence of the
global economic and financial crisis. Its latest stage, the sovereign debt crisis and its
interrelation with the balance sheets of the financial system have placed us on the frontline.
Our two main trading and financial partner countries, Greece and Italy, have been severely
hit by the crisis. Against this unfavourable landscape, the Albanian economy has grown and
has maintained its financial soundness.
Private agents have an overall sound financial position, relatively low debt levels and positive
savings rates. In contrast to other countries in the region, the Albanian financial system has
continued to lend to the economy, although at slower pace and somewhat tighter terms.
Building on an appropriate and flexible regulatory framework, this response has been
determinant to encourage the restructuring of the economy and guide it towards profitable
sectors. Looking ahead, according to the Bank of Albania, the main risks to economic
stability pertain to economic growth.
A number of signals from the real and financial sectors show that the contraction of
consumers' balance sheets and slowdown of investments, used so far by economic agents
as buffers to the crisis, may imperil the mid-term prospect of economic growth. The
propensity to save and defer investments may affect the competitive advantages and growth
potential of our economy. Deleveraging, mostly driven by regulatory requirements that are
not related to the performance of the economy, may undermine the existing financing
channels, which have been so far an important component for growth.
According to the Bank of Albania, the current situation requires higher attention and courage
by all economic agents to make the right decisions for development and in response to the
challenges arising from the external environment.
In a more general setting, the Bank of Albania believes that implementation of right
macroeconomic policies by harmonising the monetary and fiscal policies, is a prerequisite for
the country's sustainable and long-term development. They should have two main
components: support growth and sustainable development for the country's economy and
boost long-term development through encouraging structural reforms.
In Bank of Albania's view, our economy is flexible and the infrastructure of core services,
financial services and regulatory framework is constantly improving. The labour force is
competitive, in terms of cost, and increasingly qualified. Nonetheless, competitiveness
indicators for the Albanian economy reveal that there is a lot more to be done in this regard,
to face competition both in the region and globally.
The Bank of Albania is committed to maintaining monetary and financial stability through:
a) A prudent monetary policy. We have ensured price stability, complied with the inflation
target and anchored long-term expectations of the economy.
This move has increased the space for harmonising better the short-term stimulation with the
long-term stability of the economy. In response to shocks, we have progressively eased the
monetary policy since 2009. This approach has brought the key interest rates to their record
low to boost consumption and investments. The depreciation of the nominal and real
exchange rate has provided another incentive for the Albanian economy, encouraging
exports and discouraging imports.
We have continuously adjusted our monetary operations to guarantee an increasing supply
of liquidity against an expanded collateral base with longer maturity terms. Given the current
situation of the Albanian economy, we believe that macroeconomic policies should continue
to be stimulating even in the future. The need for stimulating economic policies is conditioned
first by the fact that the Albanian economy is operating below its potential, as the demand
may not guarantee a complete utilisation of capacities. Second, it is enabled by short and
medium-term controlled risks to economic stability.
In the context of harmonisation of fiscal and monetary policies, the Bank of Albania has
supported the increasing orientation of the fiscal policy towards debt consolidation. We
remain ready to respond within a short time to any consolidating initiative of the public sector.
Our easing measures will remain within the legal framework of Bank of Albania's instruments
and in line with the consolidated philosophy of central banks action.
The monetary policy may prove successful only if its transmission mechanism is functional.
In this context, the banking system plays a key role, as the first actor of the transmission
mechanism.
b) A prudent supervisory and regulatory policy. This policy maintains sound balance sheets
of the financial system and the private sector. Thanks to the timely measures to manage
credit, capital and liquidity risks, the Albanian economy has successfully withstood the shock
from global financial markets and has now a consolidated financial stability and a banking
system that is able to credit and support the Albanian economy.
Maintaining banking sector stability is one of the two main priorities of the Bank of Albania. I
take this opportunity to draw the attention of the banking industry executives, to engage
maximally to act in full compliance with the legal and regulatory framework and respect the
standards for sound management of banking activities.
Our objective remains unchanged; maintaining and strengthening public confidence in the
banking sector. To this end, the banking system should:
 Verify constantly the compliance and strengthen the internal audit systems.
 Empower capacities for risk assessment and management.
 Maintain adequate capital and liquidity levels. Thus, the system should monitor daily
the performance of liabilities of a bank, in order to create and maintain the required
liquid assets for these liabilities.
 Factor expected developments in capital requirements. Injection of additional capital
by shareholders should consider the establishment of a security "zone" in the capital
value, against unexpected developments. Therefore, the banks should cautiously
interpret the requests to distribute dividends.
Credit quality remains the main concern of the banking sector. The increase in
nonperforming loans intensifies the banking stress and reduces the contribution to financial
intermediation and economic growth. The Bank of Albania has monitored this situation
closely, focusing on:
 Accurate identification of the problem, through inspection and verification of
procedures for assessing the credit quality and category;
 Relevant contingency funds provided at the required amount and time;
 Encouragement to banks to address the issue by taking strict initiatives for collateral
execution.
In our view, this is the only way to identify and tackle the problem on time, prevent its
spillover and reduce uncertainties for the future.
The banking industry has intensified its requests for the revision of the supervisory regulatory
framework, so as to soften it in relation to the handling of non-performing loans. The Bank of
Albania is open to consider valid and realistic proposals by the banking industry, as long as
they do not weaken the capacity of the banking sector in a situation with unclear
developments.
Focusing more concretely on some recent opinions, we see the request for lower
provisioning values as inappropriate, since we are dealing with an unrealistic improvement of
the position of capitalising the operations.
I take the opportunity to clarify the public opinion that in this regard, the rates we have
applied are in accordance with the experiences of other countries; in some cases, they are
lower.
The Bank of Albania holds that the current regulatory framework creates the necessary
space for the banking system to assist good clients, who may be facing temporary difficulties
in the current situation. This assistance may come in various forms, including appropriate
restructuring for parties. The Bank of Albania will consider the possibilities and forms so that
this process becomes more stimulating for the bank as well.
As regards the collateral value for reducing the risk-bearing asset value, the Bank of Albania
upholds that concentration of collateral as immovable property and difficulties in executing
collateral and recovering the value for the loss loan void this initiative from the beginning.
Improvements to the legal and regulatory framework, as identified by the joint working groups
with the banking industry, need to be implemented correctly, so that collateral earns its
optimum value.
In the end, the banking industry should prove that it is active in tackling non-performing loans
and releasing resources into the balance sheet to further support the activity. This is the best
form to test the real possibilities, which may later be supported by amendments to prudential
regulatory framework. Our common goal is to stop progression of the value of
nonperforming loans and improve the situation gradually. Some banks, thanks to their prudent
and steady efforts over the past three years in relations with their clients, have managed to
significantly reduce the non-performing loans share. They have continued lending to the
economy at good levels. Organisation and management of their work is an example for other
banks.
The current legal and regulatory framework is comprehensive and in line with the best
international standards, although it may require ongoing improvement. Our consolidated
opinion, however, is that all the stakeholders need to exhaust all the available tools and
gradually make further steps in the legal and institutional framework. More specifically, the
banking industry and the business community need to work more closely. I believe there is
more space for better understanding and more fruitful cooperation. The business community
and the banking system should leave their trenches and cooperate in concrete terms to face
future challenges.
The banking system is ready to increase its support to the economy with loans. This was
confirmed to me in a meeting I had with the management of the largest five banks.
Personally, I urged the banking system for a more active approach to lending.
This is a real challenge and many institutions and groups of interest are involved in it.
Therefore, I would like to invite all other stakeholders to be open-minded and very
cooperative to boost lending to the economy.
First, I would suggest to the business community to be more creative, transparent and formal
in its operation. It should comply with all obligations arising from the contractual relations with
the banking system. This should be broadly understood and accepted. A correction is
necessary in the economy, first of all implying a rebalancing of prices. There may be no
reduction in non-performing loans, increase in lending to the economy, improvement in
business and bank balance sheets, unless collaterals are executed and, subsequently, fix
asset prices are corrected. This process would release huge financial resources that would
be a vital serum of fresh money injected back into the economy. With this fresh money we
must encourage the creation of new and effective initiatives that yield swift return on
investment.
One of the lessons learned from the crisis is that any new healthy money should go to a
healthy business initiative. We need to encourage highly productive sectors of the economy.
This is the only way to ensure revitalisation of the economy and make it a dignified European
partner.
Second, I would like to encourage the banking system to be more dynamic, by looking
continuously for worth-funding opportunities. Offer reliable funding packages by assigning
priority to economic health of the country, which would, in turn, guarantee the long-term
success of your business. Do the utmost to increase the lobbying authority and capacity with
the Albanian executive, parliament and judiciary. Intensify your contacts with business
associations and analyse every claim or request, case by case, even if it comes from a single
business. Take a public stance in any case so that speculations and abuse are reduced to
maximum. Engage all your financial, human and media arsenal for a more solid anchoring of
your expectations with the public. Turn the public into your most powerful anchor.
Third, I would like to call for the Albanian executive to increase the confidence in and support
to the banking system, especially as regards finalising legal amendments on collateral
execution.
Cooperation between public institutions and the banking system may be fruitful also in terms
of introducing specific development programmes and providing financial and concession
support to sectors, branches, important operators, including foreign investors.
Fourth, I would consider as vital a broad-based consensus of the entire political spectrum for
supporting the Bank of Albania's efforts and moves to maintain the country's macro-financial
stability. We remain open to explain continuously, transparently and responsibly our past,
present and future decision-making. We remain firm in our position that a central bank is
successful and enjoys the trust of the public when it makes independent, far-sighted and fully
transparent decisions. In these moments, the unquestionable guarantee that the Bank of
Albania gives to the public for the country's macro-financial stability is paramount.
Fifth, I would like to encourage the Albanian and international media to uphold the good
tradition of accurate and real-time transmission of economic and financial developments in
Albania, including the activity of the Bank of Albania and the financial sector, which occupy a
significant place.
Last but not least, I would like the Albanian public to continue to be discreet and have full
confidence in the financial architecture we have built. We commend its added prudence,
which is reflected in its propensity to increase savings. Therefore, household balance sheets
remain positive, an indicator that sends positive signals for a potentially growing consumption
in the near and distant future. I take this opportunity to reiterate that optimism shapes our
present and our future.
The time has come for the consumers' sentiment to start its take off. This would create the
desired chain reaction for accelerating money velocity and circulation of goods in the
economy, making the economy recover to its pre-crisis parameters.
On my behalf and on behalf of the Bank of Albania, I would like to thank the Bank of Italy and
the Bank of France for the assistance and partnership during the twinning project. At the
completion of this project, the Bank of Albania has upgraded the organisational and
operational framework of its main departments and has approached to its European
counterparties.