Banking system and supervision  The Albanian banking system has faced numerous challenges over the recent years and has succeeded in overcoming them, always maintaining sound parameters of liquidity and capitalisation. Even in 2011, banking system activity was conducted in an unfavourable context of international financial markets and the sluggish demand for loans and economic growth at home. Regardless of these factors, banks in Albania remained well capitalised and healthy. Economic growth slowdown was reflected in moderate performance of crediting and increase in non-performing loans, whereas bank liquidity condition improved. During 2011, prudence for monitoring the banking system was heightened for early identification of potential risks, and the regulatory framework was consolidated. Stress-test results show that the banking system remained stable and resilient to large shocks on macroeconomic indicators and parameters. Following, I would like to focus on several main indicators of the banking system in 2011, as this system remains the main actor of financial intermediation in Albania. Banking system highlights At end-2011, the banking system assets accounted for about 85% of GDP, from about 81% at end-2010. Financial profit of the banking system was downward, with a significant increase in provisioning expenses playing a determinant role. In the framework of absorbing any potential losses from credit risk, the banking sector increased the provisioning by about 52.4% from a year earlier. By contrast, net operating profit was up by about 7.7%, which shows that the banks have generally achieved a stable net profit and volume from their core activities.

Besides the mitigation of imported inflation, the cancelling out of the effect of regulated price increases in the previous year and the lack of any further increase in them are factors impacting on the downward trend of the annual inflation rate. From the viewpoint of macroeconomic factors, the annual inflation volatility was induced by supply-side factors, while the demand-side inflationary pressures remained low. Anchored inflation expectations prevented transmission of supply shocks to the cost structure of the Albanian economy, dwarfing the effect of the supply shocks only on the first round effects. On the other hand, below-potential growth of the Albanian economy led to an incomplete utilization of production capacities, generating moderate pressures on wages and production costs in the economy. Also, the sluggish aggregate demand reduced businesses’ ability to dictate prices in the economy and hence their profit margins remained at historically low levels. These developments were also reflected in the performance of core inflation, which fluctuated around the lower half of the Bank of Albania’s target band. Finally, the Bank of Albania prudentially supplied the economy with liquidity and monetary expansion was in line with the economy’s needs for monetary assets, thus preventing the generation of inflationary monetary impulses. Bank of Albania’s monetary policy maintained its expansionary nature in 2011, responding to the performance of inflationary pressures balance and taking into account the contained fiscal stimulus.