Lek appreciated on average by 2.3 percent against the euro in 2016 and 2017, while it appreciated by around 7 percent during the first half of 2018. Our analyses indicate clearly differing explanations for the pre and post 2018 appreciation. The 2016–2017 lek appreciation has been largely in line with improving fundamentals in the economy. Some of these structural improvements include: Declining current account deficits, on account of improved exports; Increased capital inflows, on account of high FDIs; Reduced financial market risk premia and increased confidence in our financial institutions. 2/3  BIS central bankers' speeches  On the contrary, the rapid appreciation we experienced in 2018 has been largely a FX market driven phenomenon. News of a sudden and sustained influx of foreign currency induced onesided expectations in the FX market. These expectations were reflected in an accelerated supply of foreign currency and delayed demand for it, generating a vicious cycle of continued appreciation. The Bank of Albania did not react upon the real appreciation trend of the past two years. While minor miss-alignments were still present, we assessed the trend was largely driven by improving fundaments. Thus, it allowed us to focus our monetary policy on achieving our 3 percent inflation target. We also did not react upon the recent financial market driven appreciation, in full consistence with our monetary policy and exchange rate regimes. We expected for the market to self-regulate and contain these shocks. However, this did not prove to be the case and the exchange rate appreciation accelerated.

Vehicular finance This uncertainty stems from changes not just in instruments and markets, but also in institutions – ie in the nature and structure of financial intermediaries. This is the age of what I call Vehicular Finance. The key intermediaries are no longer just banks, securities dealers, insurance companies, mutual funds and pension funds. They include hedge funds of course, but also Collateralised Debt Obligations, specialist Monoline Financial Guarantors, Credit Derivative Product Companies, Structured Investment Vehicles, Commercial Paper conduits, Leverage Buyout Funds – and on and on. 5 These vehicles can fit together like Russian dolls. By way of illustration – and, I fear, slipping for a moment into alphabet soup – SIVs may hold monoline-wrapped AAA-tranches of CDOs, which may  2  See chapter on “Risks in the international financial system”, in Bank of England Financial Stability Review, December 2004, p. 50. 3  See chapter on “Shocks to the UK financial system”, in Bank of England Financial Stability Report, April 2007, p. 16. 4  For example, hedging of Power Reverse Dual Currency Notes might in certain circumstances amplify movements in the yen; and hedging of Range Accrual Notes, for which the gamma exposure can flip sign, might amplify yield curve movements. The general question of the potential for dynamic hedging of short option positions to amplify market movements was discussed in Tucker P M W (2005), “Where are the risks?”, Speech at The Euromoney Global Borrowers and Investors Forum, London, June 2005, Bank of England Financial Stability Review, December 2005, pp 73-77.