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.

On the other hand, the further decline of capital and money market interest rates observed since January 2015 carries the risk of a renewed increase in imbalances on the Swiss mortgage and residential real estate markets over the medium term. First, compared to alternative assets, investments in real estate appear to have become more attractive for banks, commercial investors and households. In the residential investment property segment in particular, additional demand from investors searching for yield might push prices up further. Second, the unprecedented interest rate environment creates additional incentives for banks to incur higher interest rate and credit risks. They might be tempted to increase both maturity transformation and lending to compensate for the additional pressure on margins and to stabilise short-term profitability. Such strategies would further increase banks’ exposure to large interest rate shocks and to a correction on the mortgage and real estate markets. Given these risks to financial stability, banks and authorities should remain alert and, if necessary, take measures to contain such risks. In particular, should momentum on the mortgage and residential real estate markets pick up again, additional measures might become necessary. In this regard, particular attention should be paid to the investment property segment. This segment is more likely to be materially affected by the additional demand from investors searching for yield in the current environment. Furthermore, the measures taken so far have predominantly addressed the segment of owner-occupied residential real estate.