*  *  *  The banking system supervision function is another important aspect of central bank duties. 3. Banking supervision and financial stability  Year 2010 was characterised by increases banking system activity, improved banking soundness and profitability indicators, as well as a good capitalisation of the system. On the other hand, the banking system was characterised by increase in non-performing loan portfolio, reflecting also the active policy of the Bank of Albania in terms of enhancing the transparency of bank balance sheets. Banking system development The banking sector continues to remain the main actor of financial intermediation in Albania. At end-2010, banking system assets doubled compared to a year earlier, accounting for about 81% of GDP. The banking system continued to be financed mainly by public deposits and focused on lending to the private sector. On the other hand, the economy’s below-potential growth and the depreciated exchange rate contributed to increasing non-performing loans, to 14% of total loans. However, this indicator’s growth rates decelerated in 2010. Capital adequacy ratio remained at satisfactory levels, to 15.4%, obviously higher than the 12% benchmark set forth under the regulatory framework. The system’s shareholder equity increased by 10% in 2010. Credit risk remains the main risk to the banking sector. In response to this risk, the banking sector has created adequate provisions to weather big shocks to borrowers’ solvency and market equilibria.

Banking system supervision In early 2010, the Bank of Albania changed its banking supervision organisational framework, orienting and relating it directly to risks associated with the financial activity. In parallel, the Bank of Albania re-conceptualised its supervision focus and strategy in accordance with risks posed to Albania’s banking and financial system. Transparency and publication of information on banking and financial products and services were in focus of supervision in 2010. Encouraging enhancement of private financial agents’ transparency is also reflected in amendments made to regulatory framework during the year. 4  BIS central bankers’ speeches  High commission fees on banking products and services were a sensitive issue that was addressed over the past year and will constitute a priority in the upcoming period. The Bank of Albania, through its analyses, played a key role in discussions about this matter, aiming to tackle it timely and duly. Also, issues related to anti-money laundering, transparency and compliance with prudential regulations were an important part of the supervisory process in 2010. In view of strengthening the supervisory process on banking institutions, the Bank of Albania has signed a number of cooperation agreements with central banks in the region and with European ones, where parent banks have their headquarters. Strengthening the supervisory regulatory framework In 2010, the Bank of Albania finalised drafting of several new regulations and amended some other regulations on banking supervision. This process aimed at compliance with Basel Committee standards and EU Directives, taking into account international best practices and Albanian banking system developments.