ardian fullani : the development of the financial market and money market in albania speech by mr ardian fullani, governor of the bank of albania, at the general assembly of the dealers association, tirana, 25 october 2007. * * * mr. chairman distinguished guests, it is a great pleasure to be here amongst old and new friends and colleagues. i have dearly welcomed the reorganization and reactivation of the albanian association of dealers, and the attempts made by its new board to affiliate aci - financial market association. i am confident that this reactivation will promote, above all, the market development, education and professional training of new members. i deem that the meetings of the dealers association is a good opportunity to share with you some thoughts and concerns regarding the development of the albanian financial market in general and the money market in particular. i would like to emphasize that the interbank money market is the starting point to the transmission mechanism, driven by base interest rate change. currently it is the most important channel of transmitting monetary policy decisions to the economy. i have to remind you that where you realize the profit, the bank of albania implements the monetary policy, whose efficiency depends directly on your capability to maximize profit in this market. this policy is based on the assumption that market participants are rational and their primary purpose is profit maximization under the conditions of a competitive environment. the current development of the interbank market in albania does not fulfil these assumptions yet and therefore, it makes the work of the bank of albania difficult in carrying out this essential function. year 2002 recorded the start of the interbank market, the same year when the indirect instruments were introduced by the bank of albania to conduct its monetary operations. the bank of albania has attended the developments of the interbank money market in the last five years. during this period the trading volume has been fifteen folded, climbing from a daily average of 130 million lek in 2002 to a daily average of around 2 billion lek in 2007. also there has been an increase in the maturity of the traded funds, from only trading overnight back in 2002 to trading up to three months in 2007. also there has been an increase in the maturity of traded funds, from only trading overnight back in 2002 to trading up to three months in 2007. from the beginning of this year, we have been able to publish the fixed interest rate indexes, tribor and tribid, which is hoped to promote the development of the interbank money market. however

. it will guarantee the prevention of credit risk, which is cited by commercial banks as one of the primary causes for the existence of limits in the lending relations among banks. this law will also prevent the legal risk the banks are faced with when using repurchase contracts. drafting of the regulatory framework and putting into application the custodian principle of delivery versus payment. in order to minimize the payment settlement risk and facilitate the intermediation in all types of transactions involving securities, such as collateralized loans, repurchase agreements, and outright purchase and sale of government papers, it is being worked on to put into practice the principle of delivery versus payment. reducing the frequency of government treasury bill auctions. in collaboration with the ministry of finance, we have agreed on less frequent and increased size auction schedule of the government treasury bills. this less frequent auction schedule will limit the opportunity of banks to “ be liquid ” based on distributing their treasury bill investment in such a way that liquidity is generated by maturing these government papers. increasing the investment base of investors. in cooperation with the ministry of finance and the financial supervisory authority, it is agreed upon increasing the investors ’ base, eligible to directly invest in the auctions of government papers. the new agreement signed between the bank of albania and the ministry of finance provides the necessary regulative framework for giving an end to the monopoly that the banking system has had in investment in the primary market of government papers, leaving space to natural and legal persons, foreign and domestic individuals. i do not feel well to assert that this step became indispensable, under the conditions of high commissions applied by commercial banks in providing this service, making the clients reluctant to this kind of investment. earnestly believing in the efficiency and development driven by competition, i am convinced that increasing the number of operators licensed to trade government papers has also become a necessity. primary rate for favorable clients. being convinced that the monetary policy efficiency is enhanced through transparency, the bank of albania aims at including even this rate to the entirety of orientation rates used by commercial banks. this package is designed to increase incentives for you to find new profit opportunities and secure the necessary liquidity at a fair price in the secondary security markets. these measures are oriented toward promoting the activity, so that you will not wait for the client to ask for the government papers but search and find this client yourself. and the very first step you should make in this direction is : abandon the traditional pension fund security portfolio classification as