Self-fulfilling expectations from economic agents and price setters would, in turn, help deliver the objectives of monetary policy. Economists believed that by stabilizing consumer prices, financial assets would also behave in a stable and predictable way. The crisis painfully reminds us that behavior in financial markets is not always rational and lack of confidence in the markets can spiral out of control, sending shockwaves throughout the economy. Escalating asset prices and their sudden burst affected significantly the behavior and balance sheets of the economic agents and challenged the stability of the financial system. In this respect, the concept of financial stability was seen as a byproduct of monetary stability. Micro-prudential supervision was focusing on the soundness of individual financial institutions, with the belief that this was sufficient to ensure aggregate stability of the financial system. Again, the recent financial crisis made it clear that micro-prudential supervision was insufficient to detect and address buildup of risks in the entire financial system due to externalities, herd behaviors, common exposures and pro-cyclicality in financial system activity. Moreover, financial institutions of systemic importance proved to be “too big to fail” and measures were needed to deal with existing systemic institutions on a global and local level. Recovery and resolution powers of financial institutions are being strengthened. Limiting systemic risk, both in its time and structural dimension, is the objective of macroprudential policy.

As a result, in Albania we have increased our efforts to restructure the economy. The BoA has also sought to increase transparency in the banking system and to strengthen its balance sheets, both through capital increases and through tackling bad loans. The latter has been done through promoting credit restructuring or credit write-offs. In this regards the focus of bank of Albania will include a micro-approach in analyzing the bad debtors of systemic importance. •  International cooperation is a prerequisite for mitigating contagion effects and for successful crisis management. Particularly, the Vienna Initiative has been instrumental in limiting the deleveraging process of the private banking system in our economies. •  Safety nets have to be improved, in order to make them more efficient and sustainable. Several issues remain to be solved. SEE economies have rightly chosen integration in EU as their main goal. It helps to anchor their political systems, their structural reforms, their legal and regulatory environment and their macroeconomic and financial policies. However, the economic growth model has to change. 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. In the financial system of these countries, dominated by banks, the deleveraging process is undergoing under the pressure of the deteriorating loan quality. Credit is made scarce as banks have become risk averse and hesitate to lend to potential borrowers by tightening lending terms.