I will conclude by returning to my starting point, to the importance and the scarcity of time in dealing with a troubled financial firm. The important role time plays at a failing firm The seeds of any financial failure are generally planted years earlier. The cycle is familiar to us all – in good times, most business strategies thrive. Financial institutions commence an  BIS Review 140/2010  1  activity that has high initial marginal returns; over time the activity attracts more competition, pricing goes down and risk appetite goes up. Overexpansion leads to an inevitable correction, with the losses incurred testifying to the long-term unsuccessful nature of the strategy. U.S. banking, securities and finance companies in the early 1990s experienced the late stage of just such a cycle in which commercial real estate and leveraged buyout lending overexpanded. The result was that many large financial institutions had to be merged into others or unwound. Banking supervisors responded to these problems by requiring banks with large, problematic exposures to implement a three-part program. First, the bank comprehensively identified its problem loans and assigned them to workout specialists. Second, the bank developed and executed a capital plan and strengthened its liquidity. Third and essential to raising new capital, the bank developed a new business plan demonstrating its ability to return to profitability. This program worked, in large part because it was applied timely enough. Stylized facts about time’s role on the value of a failing firm created urgency in implementing the program.

Consumption and private sector investments were weak, whereas foreign demand continued to slow down, given the economic situation in our trading partner countries. The private agents’ uncertainty about the future was reflected in low propensity to spend and weak credit demand. This uncertainty prevented the transmission of the monetary stimulus to the economy. Moreover, banking system conservative policies maintained the lending standards tight, and prevented the normal functioning of the monetary policy transmission mechanism. Against this backdrop, economic and financial stability of the country was preserved. Private agents’ expectations on inflation were anchored around Bank of Albania’s target, showing a good perception of monetary policy signals, and effective communication of the Bank of Albania. The banking system remains sound and well capitalised with ample liquidity to ensure the return of financial intermediation to adequate levels, in spite of credit qualityrelated problems. Average annual inflation continued the decelerating trend in the third quarter, settling at 1.5%. The profile of inflation was determined almost entirely by the contribution of inflation from prices of agricultural products. Beyond the seasonal effect related to satisfying demand with domestic agricultural produce, these prices fell thanks to the drop in import prices for processed foodstuff in the countries of origin. Prices of other consumer goods categories provided low contribution to headline inflation, hence offsetting each other. Low inflation rates, especially in the long-term component, point to the presence of the negative output gap.