However, EU supervisory regulations and risk requirements for European financial groups, along with the approach in which they are implemented, are posing significant constrains on our economy and the efficiency of monetary policy to respond to economic developments. Faced with new and stringent capital and risk requirements, banks are trying to comply by adjusting their future business plans and the size and composition of their balance sheets in the economies of the region. These tighter regulations approved by European Supervisory and Banking Authorities and, subsequently, implemented by parent banks have already been accompanied by a decreasing level of credit to the economy. Our research shows that further tightening of crediting, due to the legal reforms currently under way, could have an important effect not only on economic activity but also on commercial bank asset quality itself, in particular situation with non-performing loans. A deterioration of economic activity would play out mostly in the same way, leading to worsening of NPL ratio, leading to smaller banks’ profit and tighter capital constrains, along with slower growth. This second channel is seen as arguably more dangerous, with the empirical research pointing out that the elasticities are close to twice as large for a shock of similar size. Such adjustments are imposing significant constrains on our economies. More directly, we have observed a decrease in financial intermediation, by tightened lending procedures even for economies or sectors that were doing ok during the crises.

For more than 15 years now, the European integration, in all its politic, economic and financial dimensions, has been main driving force for the economic and social prosperity of South East European region. EU represents the main trading partner, a large share of FDI, by far the biggest investor in the Banking System. Our countries have undergone through structural reforms, adaptations of regulatory and legislative frameworks, institutional adaptations to adjust to these partnerships. Led by the European integration process, countries of the region have also signed bilateral free trade agreements among them. Our studies at Bank of Albania show that these free 2  BIS central bankers’ speeches  trade agreements have positively affected trade flows among West Balkan countries. However, these studies also suggest that trade flows among Balkan countries are below their potentials. The aims of these bilateral free trade agreements are to create a regional free trade area among West Balkan countries. Authorities in South East European countries have shown signs of consistent regional collaboration; however, they need to make additional efforts to unify and harmonize their legal, institutional, regulatory and infrastructural frameworks. These efforts need to be supported by a clear commitment by EU financial groups to the region’s small open economies. The development of the regional markets for products and factors, investment in education and improvement of human capital, exploitation of economies of scale and comparative advantages, will depend on the availability of credit and investment and the financial support of the banking system.