High level of euroisation endangers financial stability, report warns

TIRANA, Oct. 22 – The high level of euroisation in the Albanian banking system is a potential source of instability, warns the European Commission in its 2013 progress report in Albania.
The degree of euroisation of the financial system has slightly decreased but remains high.
Foreign, mostly euro-denominated loans stood at 61 percent of total credit outstanding in July 2013, down from 64 percent a year earlier, while the share of foreign currency-denominated deposits in the total deposit stock fell from 49 percent to 47 percent in the same period. “Such high euroisation inhibits monetary policy’s effectiveness and could expose banks to currency mismatches or indirect credit risks; it is therefore a potential source of instability in the financial system,” warns the report.
Overall, monetary policy has been prudent, maintaining price stability with inflation within the Bank of Albania’s target range of 2 to 4 percent. However, monetary policy is constrained by the relatively high degree of euroisation of the financial system. The effective management of monetary policy by the bank should be maintained, and the law on the Bank of Albania should be further aligned with the acquis to enhance the bank’s independence.
Since September 2011, the Bank of Albania has cut the key interest rate by 1.75 percent to 3.5 percent in several consecutive interventions, but the moves have only been reflected on lower T-bill yields and interest rates for lek-denominated deposits.
Meanwhile, the IMF the transmission of easier monetary policy into faster credit growth remains hampered by increased risk aversion in the economy and higher NPLs in the banking system.
In general, the Albanian banking system remained well capitalised and liquid. However, banks’ exposure to credit risk has increased, as the ratio of non-performing loans rose further to 24.4 percent in the second quarter of 2013 compared to 21.2 percent a year earlier.