Measures for addressing financial markets concerns have led to economic activity slowdown of our trade partners and are reflected in progressive deceleration of our exports growth rates. Moreover, higher food, fuels and primary commodity prices are translated into stronger foreign inflationary pressures, expansion of trade deficit and, potentially, weaker domestic demand as a result of negative effects on Albanian households’ financial balances. Additionally, negative developments in the global arena are reflected in added uncertainties in the Albanian economy and negative impact on domestic consumption and investments. In spite of these shocks, the Albanian economy continued to grow in 2011, albeit at lower rates. This growth has reflected structural improvements of the Albanian economy, overall sound balances of economic agents, as well as utilisation of available capacities for macroeconomic stimulus and success to maintain macroeconomic balances. Average annual inflation in the second half of 2011 was 2.9%, down by 1.1 percentage points compared with the first half of 2011. Downward inflation emerged in the second quarter and was then reinforced during the second half of the year. This resulted from reduced contribution of processed food, unprocessed food, and administered prices. In particular, food prices deviated from their seasonal behaviour in December, producing rapid curbing of annual inflation to 1.7%. From the macroeconomic perspective, the downward inflation was influenced by both demand and supply factors, at the same time. On the supply side, slowdown of primary commodities price inflation in global markets and relative stability of the exchange rate were materialised in lower imported inflation.

This calls for a seachange improvement in risk management practices among the clearing houses, as more financial transactions come to be centrally cleared to meet G20 commitments. Otherwise the too-important-to-fail problem simply re-emerges in a different guise.   Liquidity policy: One implication of the model is the importance of banks maintaining buffers of the highest-quality liquid assets. These have a doubly beneficial effect. First, they reduce banks’ need to hoard liquidity in situations of stress. Second, high-quality assets reduce the amplitude of the haircut cycle in the first place, as Table 1 demonstrates. The first reduces the impact of a liquidity event, the second its probability. The upshot is a fall in the chances of a systemic liquidity crisis. The new Basel III liquidity regulation uses a strict definition of what counts as liquid assets. The model underlines the importance of sticking to that definition. The model suggests that financial system robustness would be further enhanced by  4  BIS central bankers’ speeches  targeting liquidity requirements on the most connected banks in the system, as this would lean against the destabilising effects of system-wide concentration. Hot heads make for bad decisions, frozen ears for uncomfortable ones. Financial markets have felt the effects of this change in the weather more dramatically than most. Suitably designed, macroprudential policy can help moderate those swings in temperature, thereby improving the health of the financial system. BIS central bankers’ speeches  5