Ardian Fullani
The spread of the U.S. economy crisis to the international financial markets and the uncertainty for the nature of its effects, the institutions’ map, the types of instruments and its extent, do theoretically increase the risk of its impact on the financial system at home. Basically, this crisis has not provided its impact on the banking activity in Albania.
The Albanian system’s immunity to this crisis arises from certain factors, namely:
ՠThe relatively low exposure of the Albanian financial system to international financial institutions;
ՠThe low integration level in general; and
ՠThe well-capitalized activity of European banking groups and their branches operating in Albania.
In general, we consider that no risks that may be materialized or which may harm abruptly and severely the activity of the financial system are identified. However, I would like to dwell on the risk analysis of the banking sector.
Scenario-based risk analyses confirm that the banking sector has the capacity to cope with the various risks that may arise as a result of the unwelcome shifts in the exchange rates and interest rates.
Prudent monitoring of assets’ quality is required and time is ripe to pay greater attention to the performance of liquidity indicators.
Assets’ quality, which is mainly affected by the quality of loan portfolio, remains a constant risk to the banking business in general. The reduced quality of assets does not only impair the institution’s income, but also harms its liquidity position. In the case of the Albanian banking sector, the loan portfolio quality has been decreasing, although at gradual rates, and the situation is presented as entirely manageable. The rapid growth of credit and the challenges certain sectors of the economy that have been lent significantly may be faced with, are factors that will continue to exert pressure on the loan quality in the near future. Hence, it is crucial for you to implement a policy of rapid detection of non-performing loans and promptly create reserve funds. It is for this reason that the Bank of Albania will increase the frequency of controls and the efficiency in monitoring and checking this process.
The Bank of Albania, through its Supervision Department, has prudently and constantly monitored the developments’ dynamics in the banking sector, part of which are also the recent developments related to interest rates on market products. We consider these interest rates as aggressive, providing their impact on the profit margin and representing a potential risk to the structure of balance sheet.
This summer provided evidence for the fact that competition in terms of gaining market shares is a determinant element of the Albanian banking system’s behaviour. It also holds true that we are dealing with one of the core principles in the functioning of free market economy: COMPETITION. However, given the fact that the other market principles, namely profit maximization, are not on the same wavelength, the balances between them may be distorted and consequently, different risk elements may be present. I repeat from the previous forum that it is necessary for you to consider the macroeconomic consequences of your behaviour at an industrial or institutional level, since they are important factors which ensure the long-term stability of your institutions and the system in general.
The difference between large and small-size banks, when public confidence in the system in general is in question, is relative. Each bank has its role and share in the system and the difference between the concept “a small bank” or “a large bank” in the context of systemic risks, is ever-increasingly reducing.
In addition, the U.S. financial crisis was caused by the imprudence of financial institutions to assess the stability of private debt and accurately weigh the effect of macroeconomic developments on the U.S. household budget. Its consequences remind us of the expression “there’s no such thing as a free lunch”.
The process of the banking sector’s data collection and processing has improved over the recent years as a result of investments in modern technological systems. In many cases, however, it is observed that the adoption of these systems is made only partially and hastily. Their full potential is not used and the banks’ personnel may not be fully familiar to their use; hence, weakening the necessary human control on these systems. Consequently, the control process on the institution’s activity is segmented, and the process of data collection, processing and reporting at the required quality and time is hampered. As a result, you being heads of commercial banks and us the system’s regulatory authority, risk to take decisions on data which are not fully accurate and furthermore are “old”. Being present in different banks and in different levels, a final solution should be found to this issue. This situations needs to change and therefore, I require strong commitment from you and your shareholders.
In more concrete terms, I require each bank to promptly:
a) Make a “cost/risk” analysis of all its activities and expand the information technology systems, at least in those areas of the activity where there is greater risk in terms of absence of accuracy in processes;
b) Place all branches and its activity in a “net”;
c) Strengthen the human control structures in all the business processes, in particular in the treasury operations, deposits’ collection, credit extension and execution of transfers and payments;
d) Document and keep track of the entire process, evidencing clearly the responsible structures and people, and regulating the process of delegation of responsibilities.
Going back to the situation in the international financial markets, I would like to highlight that any negligence with regard to the serious assessment of the latest developments in these markets cannot be forgiven to any of us.
The monitoring and assessment of each event, news, action or response from the participants in the different markets should turn into every day routine in our work, in particular when energetic measures need to be taken in line with a given situation. In this context, the possible extension of credit lines from parent banks and the possible increased dependence of the banking sector on them represent an increased element of risk. You must avoid at any cost your dependence on these funds and pay careful attention to preventing the deepening of the spreads that may arise in the type of currency and maturity term. In the context of global economic developments, the uncertainty related to the future prospects in consumer prices and economic growth in the euro area EU countries and the USA, will affect the performance of interest rates in the money and credit markets and the exchange rate performance. These changes may affect the internal market through the exposure of the Albanian financial sector in assets and liabilities denominated in foreign currency. In addition, there is a risk that the challenges the economies of the EU countries and broader are going through be reflected in Albania through the fall in workers’ remittances, deterioration of trade deficit and decrease of foreign direct investments.
Even though the materialization of these risks and their extent are not expected to be significant, you must assess the impact of these scenarios in your development objectives and take the necessary measures to be protected from them. In a broader context, in your relations with the parent banks, remember that you are leading banking institutions operating in Albania and that you are accountable to the Albanian authorities and the Albanian public for the well-functioning of your institution’s business.
Increased vigilance is required from you in order to maintain low exposures in the international financial markets and ensure a well-capitalized and liquid business.
The Bank of Albania will constantly monitor and confirm that you are taking the necessary concrete measures to maintain and improve the capacity to constantly generate a positive financial result, by preserving the assets’ quality and the liquidity indicators. If necessary, being the regulatory authority of the banking sector, the Bank of Albania will orient and support these measures through constant revision and creation of necessary regulatory stimuli.
* Part of the Speech of the Governor of the Bank of Albania, Mr. Ardian Fullani
at the Open Forum with the Albanian banking system’s players, 29 September 2008
