2  BIS central bankers’ speeches  As is clear from the hypothetical question, LIBOR is meant to capture a bank’s cost of unsecured borrowing. This means that the reference rate will reflect not only a risk-free component, but also counterparty credit risk related to the specific borrower. This turns out to be important for two reasons. First, the growing popularity and liquidity of LIBOR indexed contracts led to an expanded use of LIBOR to circumstances in which the credit risk of large banks was not clearly relevant. For example, a speculative position about the future of short-term rates is predominately based on one’s view about the path of short-term interest rates, rather than how bank counterparty risk might change and affect borrowing costs. Despite this shortcoming, LIBOR remained popular because the benefit of its deeper market liquidity was viewed as more important than the added complication that LIBOR included an element of counterparty risk.4 Second, variations in LIBOR submissions across the submitting banks at a point in time for a given maturity should mainly reflect differences in the counterparty credit risk, since the riskfree component is common to all submitters. This is important because it means that variations in submissions may be interpreted as reflecting variations in underlying counterparty risk. This is particularly important when the LIBOR submissions process is transparent and the market is under stress, which was the case during the financial crisis.

From a broader perspective, the financial industry, both in our region and globally, is under pressure from four powerful currents: Rapid development of information technology, which has created opportunities for financial innovation and has challenged classical banking models. New payment and credit instruments, new financial market actors, and new business models, such as digital and electronic banking and payments, boost the penetration of financial services. Conversely, they challenge not only classical actors of the financial sector but also its regulators. Globalisation, which has expanded the scope of market actors and regulators. This phenomenon significantly exposes emerging economies to volatility in the regulatory framework or in the risk appetite in advanced economies. Re-regulation, currently underway in the financial system in Europe and globally. This process is aimed at enhancing security in the banking sector, lowering the probability of systemic crisis, and enhancing the capacities of authorities for managing them. However, it imposes additional costs on the banking sector and places it under less favourable conditions vis-à-vis other market participants. Very low interest rates that characterise many segments of the global financial market. 3/4  BIS central bankers' speeches  These rates reflect the accommodative monetary policy stance adopted by major central banks, the decline in global productivity and unfavourable demographic developments in advanced economies. These have a toll on the balance sheets of broader segments of the financial market such as banking sector, pension funds and insurance companies. From a nearer-term perspective, Albania needs to improve financial literacy, across the board.