ardian fullani : achievements and challenges facing the albanian banking sector address by mr ardian fullani, governor of the bank of albania, at the year - end event with the albanian association of banks, tirana, 20 december 2012. * * * dear bank managers, at the end of this calendar and financial year, i take this opportunity to share with you some of the achievements and challenges facing the banking sector, confident that they will serve to guide our actions in the future. as expected, the year 2012 was a very challenging year for the financial and economic activity of the country and of various economic agents. very likely, this year ’ s economic growth will remain positive, but significantly lower than last year. this economic performance is dictated by the weakening of the fiscal and monetary stimuli, as well as the slowdown of private investment and consumption. the slowdown in the latter is, however, accompanied by a reduction of imports. on the other hand, foreign demand has supported higher growth of exports, especially of energy products. this has led to an improved trade balance during 2012, hence marking a decrease in the deficit - to - gdp ratio. the impact of the global economic crisis continues to be present and its prospects to overcome it in 2013 remains our hope, which is not supported by the expectations of international financial institutions and public authorities, especially with regard to the economic situation in the euro area. during 2012, the banking sector marked a positive financial result, overall. net interest income was stable but provisions on credit risk reduced the size of profit. generally, the banking sector maintained control over other costs of the activity. liquidity indicators, shortterm and structural ones, stand at satisfactory levels. all banks complied with the requirements set out in the regulatory framework regarding the size of liquid assets, both in the lek and in major foreign currencies. deposits continued to grow at good rates, although at lower levels than in the last year. due to the credit growth slowdown, the credit / deposit ratio appears at very suitable levels to support the liquidity needs of the sector. indicators of activity capitalization stood at good levels, due to capital increase by some banks and slowdown in risk - bearing assets growth. in the course of the year, the bank of albania applied tighter requirements for liquidity and capitalization of banks in accordance with the risk profile of their activities. in the interbank market, trading volumes and participation increased in the 2012. this performance is influenced by structural liquidity movements

are subject to leverage constraints. 12 large - scale asset purchases can ease these constraints and increase investors ’ risk - bearing capacity, leading to a portfolio rebalancing towards risky assets and to strengthened lending activity for banks. all in all, research has confirmed that central banks are not powerless at the effective lower bound. provided they are willing to explore non - standard policy avenues, they can continue pursuing their price stability mandates even in the most adverse circumstances. the evolution of policymaking the policy response by central banks and governments has evolved along the two main lines suggested by research. as short - term interest rates approached the effective lower bound, central banks on both sides of the atlantic undertook a number of unconventional measures aimed at influencing the whole constellation of rates that are important for the financial decisions taken by households and businesses. forward guidance helped guide market expectations of future short - term rates. qe involved direct intervention by central banks in markets through large scale asset purchases to influence the yield curve beyond the very short term. a large body of empirical research has substantiated the success of these policies in supporting the economy and inflation, both in the euro area and in the united states. 13 but central bank policy moves extended beyond just measures to counteract the impairment of the transmission mechanism caused by financial frictions. the ecb also acted in various ways to prevent self - fulfilling expectations from delivering socially undesirable outcomes by coordinating expectations onto “ good ” outcomes. one such policy initiative was our lender - of - last - resort intervention during the financial crisis. revisiting the bagehot principles set out a century and a half ago in the light of the ongoing crisis, 14 the ecb lent freely to solvent financial institutions against sound collateral, penalised by a haircut. we did so in multiple ways : our liquidity operations moved to a fixed rate full allotment basis with unprecedented maturity of four years, and we widened the eligible collateral accepted in our operations. 4 / 7 bis central bankers'speeches the second occasion came later in 2012 when we had to prevent a self - fulfilling bad outcome that threatened to occur as a result of the sovereign debt crisis. investors had begun pricing redenomination risk into sovereign debt and interbank markets, as they worried about the possible break - up of the euro area. however, as i said earlier, the pricing of such risk led to a breakdown of money markets, a fragmentation of banking systems along national lines and threatened the unity of monetary policy transmission