gent sejko : region's financial and monetary stability, ten years since the crisis outbreak speech by mr gent sejko, governor of the bank of albania, at the regional summit on " region's financial and monetary stability, ten years since the crisis outbreak ", governor's panel " monetary policy and the stability of the banking systems in the countries of the region – a decade after the lehman brothers'bankruptcy ", becici, montenegro, 18 june 2018. * * * dear guests, fellow colleagues, it is a pleasure to be amongst you today and to be able to share opinions on some of the most pressing challenges we are facing at the moment. i would like to focus my remarks on the topic of exchange rates. in particular, i would like to focus on how the monetary policy reaction should be based in the exchange rate movements. i take my premise from the rapid appreciation episode we experienced recently in albania, which forced us to launch an fx purchase program as a last line of defence towards ensuring medium term price stability. to cover this topic, first i intend to briefly discuss on various monetary policy regimes. i will then discuss on the implications of exchange rate movements for inflation targeting central banks. to conclude, i will give you a short overview of recent exchange rate developments in albania and our reaction towards them. 1. the choice and implications of exchange rate regimes a useful starting point on this topic would be to discuss the different options we have. we are fully aware that small open and financially integrated economies have to choose between running an independent monetary policy aiming to preserve macroeconomic stability, usually defined in terms of an inflation target, and fixing the exchange rate. both these options have their benefits and drawbacks. the first option – i. e. that of running an independent monetary policy – means central banks can adjust domestic interest rates and domestic liquidity conditions, in order to preserve macroeconomic stability and to accommodate potential shocks to their economies. furthermore, exchange rate movements and corrections act as a shock absorber to various external shocks. but on the other hand, central banks give up from the option of pursuing exchange rate stability, both as a nominal anchor and as an instrument of promoting international trade. the choice of the second option – i. e. that of fixing your exchange rate – revolves around two main assumptions. the first is that exchange rate stability promotes external trade. the second is that importing credibility from the anchor foreign central bank, such as the ecb,

source of finance for larger companies in the event that markets are disrupted. the scheme has lent £19bn to 68 companies. more importantly, it has also authorised borrowing limits amounting to £80bn to 199 companies accounting for nearly 2. 3 million jobs. the knowledge that this backstop to funding markets is there removes the need for larger companies to run to the banks to insure themselves against market disruption. by standing ready to lend to larger companies, we have protected the space banks have to lend to the wider population of companies. financial response ii : support for bank lending the package of measures to support bank lending has gone much further than just protecting their capacity to lend. [ see slide 4 of accompanying deck ] banks have been given the funding for new lending. the term funding scheme with additional incentives for smes ( tfsme ), provides 4 year funding for banks, at rates very close to bank rate, to match any increase in lending. the scheme provides additional incentives for lending to small and medium sized businesses, with £5 of cheap funding for every £1 increase in such lending. crucially, the government has provided banks with guarantees on new lending. the coronavirus business interruption loan schemes guarantee 80 % of new lending by banks. the bounce back loan scheme all speeches are available online at www. bankofengland. co. uk / news / speeches and @ boe _ pressoffice guarantees 100 % of loans of up to £50, 000 to small businesses. banks are taking little risk with their own funds when they lend now. with the space to lend, the funding to lend, and the credit guarantees to lend, banks have every assistance to help businesses finance cash - flow deficits. and unlike in the financial crisis, the banking system has the strength to lean into this crisis, to refinance existing loans and meet the demand for new ones. banks will face losses in coming months on loans made in the past as some businesses and households struggle to meet repayments. due to the reforms of the past decade, banks have the buffers of their own shareholders ’ capital to absorb those losses on existing loans without cutting back on support for new lending. 6 the final element of the support for bank lending has been to allow banks to use their buffers of capital without fear of regulatory actions. buffers of capital are there to be used in stress to absorb losses while continuing to lend. we expect them to be used as needed. 7 in fact, with government guarantees and