That takes us to a third potential explanation for the downward trend in risk weights, one familiar from every other field of self-regulation – the system has been gamed or arbitraged (Blum (2008), Masera (2012)). Under a self-assessed standard, banks may have both the incentive and the ability to shade downwards risk weights, or to switch to lower risk-weighted asset categories, thereby boosting reported capital ratios. The aggregate evidence is consistent with this having occurred secularly and on a significant scale. Firm-specific evidence is also consistent with this hypothesis. A survey by McKinsey in 2012 found that 65% of firms were engaged in “RWA optimisation” of some form (Babel et al (2012)). And the recent US Senate investigation of the J P Morgan “whale” incident is the latest in a long line of identified misdemeanours sourced in model manipulation. In short, while one of the original aims of the Basel Accord was to prevent a race to the bottom, the move to risk-based capital adequacy standards may in fact have accelerated it. What, then, of the second objective of the original Basel Accord - levelling the international playing field? From an economic perspective, a level playing field would imply that banks with equivalent portfolios should hold a broadly equivalent amount of capital. The most compelling test of this hypothesis comes from the hypothetical portfolio exercises (HPE) recently conducted in the UK and internationally. These take a set of common portfolios and ask how much capital banks’ internal models would set against them.

These anchors are strong arguments in the hands of the public at large to exert pressure on public institutions, and to formulate and implement policies that guarantee long-term stability and sovereignty. Unfortunately, as I stated earlier, these anchors are currently being jeopardized by internal factors. Driven by short-term perceived benefits vis-à-vis the real costs of the correction process, the public, the business community, syndicates and stakeholders ask for short-term concessions from the institutions, and particularly from the central bank. Judging on the benefits, they require shifting the focus from the objectives and traditional instruments our institutions have been mandated for. These short-term perceived benefits, seemingly, have the potential to offer a right and moral solution to sovereignty versus stability, but they bear the risk of causing the loss of both in the long run. Political and institutional factors have not addressed yet some important concerns identified by the Bank of Albania to have caused financial stability-related concerns and decelerated economic growth in Albania. I refer here to collateral execution, lowering of perceived risk arising from the severe political situation and lack of consensus, deceleration of reforms required by the European Commission and receiving EU candidate country status, severity of political warfare, and use of the economy and the situation for political gain. Lastly, the Bank of Albania notes that the Albanian economy remains under the pressure of market developments in our main trading partners and their economic and financial policies.