## _cr1479 - EXECUTIVE SUMMARY ## Source details **Canonical URL:** [_cr1479 - EXECUTIVE SUMMARY](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr1479.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr1479.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr1479.pdf.json) --- ### Macro context and vulnerabilities - Real GDP growth: 0.7 percent in 2013. - Output gap: economy fell below potential in 2012 and output gap increased in 2013. - External/current account and fiscal pressures: - External current account deficit remains high. - Public debt-to-GDP ratio estimated at 71 percent in 2013 (including government domestic payment arrears and guarantees), with a large share short-term. - External linkages: strong trade, banking, and migration links to the euro area increase vulnerability. - Policy buffers: depleted; government requesting Fund program support. ### Financial sector soundness — Key vulnerabilities and metrics - Nonperforming loans (NPLs): - NPL ratio: 3.4 percent at end-2007 → 24.2 percent in Sep-2013 (24.2 reported; elsewhere summarized as "more than 24 percent"). - NPL ratio net of provisions: 9.1 percent (Sep-2013 net of provisions stated earlier). - Total provisions represented 62.3 percent of NPLs at end-September 2013. - Net NPLs amount to 55 percent of bank capital. - BOA estimate: government arrears may have contributed 5–6 percentage points to the NPL ratio. - Profitability and capitalization: - Return on equity (ROE): -1.7 percent (Sep-2013). - Regulatory capital as percent of risk-weighted assets: Sep-13 17.8. - Regulatory Tier 1 capital as percent of risk-weighted assets: Sep-13 14.8. - Capital as percent of total assets (Regulatory capital): Sep-13 9.2. - Liquidity and funding: - Liquid assets as percent of total assets: Sep-13 29.2. - Deposit funding covers 83 percent of banking system funding; 30 percent of deposits up to 1 month. - Euroization and currency exposure: - Foreign currency-denominated loans to total loans: Sep-13 63.7. - Half of loans in foreign currency are to unhedged borrowers. - Financial sector structure: - Banks represent over 90 percent of total financial system assets, equivalent to about 90 percent of GDP in 2012 (alternative figures: banks account for 94 percent of financial system activity; equivalent to 88 percent of GDP in 2012). - Largest five banks hold about three-quarters of system assets and deposits. - Subsidiaries of foreign banks represent about 90 percent of total banking sector assets (also cited as about 93 percent). - Investment funds: two funds with total net-asset value €316.7 million as of October 2013; more than 22,000 investors (mostly individuals). - Insurance sector assets: around 1½ percent of total financial system assets. - SCAs hold less than 1 percent of financial system assets. - Voluntary private pension market ('third pillar') holds less than 0.1 percent of financial system assets; net asset value about US$3.4 million for three pension funds at end-September 2013; membership 7,784. ### Financial market and liquidity risks - Government securities concentration: - One-third of bank assets consist of government securities. - Banks’ holdings represent two-thirds of total government debt. - Investment funds: - Funds invest mostly in longer-dated government securities, are inadequately supervised, lack functioning secondary market liquidity, and clients appear to treat units as substitutes for bank accounts—creating systemic liquidity risk and potential spillovers to banks. - Around half of the major Lek fund valued on a hold-to-maturity basis. - Money markets and collateral: - Illiquid lek money markets; activity concentrated in overnight and 7-day unsecured interbank segments. - Small volume of collateralized transactions due to lack of standard MRA framework and settlement risks (no simultaneous delivery). - BOA liquidity framework: - Banks must hold liquid assets covering 15 percent of short-term liabilities in each currency with an aggregate requirement of 20 percent (requirement recently lowered from 20 percent per currency and 25 percent overall). - BOA does not offer foreign currency standing facilities; ELA announced and conditionally available in lek and foreign currency but BOA’s foreign currency capacity limited. ### Stress tests — Scenarios and outcomes - Adverse macro scenarios (cumulative GDP decline equal to two standard deviations = 12.3 percentage points over two years): - U-shaped recession: negative growth of 3.9 percent and 3.2 percent in 2014 and 2015, respectively. - V-shaped severe recession: decline in GDP of 6.9 percentage points in 2014 followed by no growth in 2015. - Results: - U-shaped: 6 banks (representing 21 percent of banking system assets) become undercapitalized. - V-shaped: 10 banks (representing 78 percent of banking assets) face capital shortfalls. - Aggregate estimated shortfall relative to a 12 percent capital adequacy threshold: - U-shaped: 0.5 percentage points of 2013 GDP. - V-shaped: 1.5 percentage points of 2013 GDP. - Sensitivity analyses: - A 30 percent depreciation of the lek: 6 of 16 banks, representing 25 percent of system assets, would be undercapitalized. - Duration-adjusted haircuts on government securities (excluding T-bills and floating rate instruments) cause losses equivalent to 8 percent of initial valuations; equivalent losses are 4.3 percent when compared to the overall securities portfolio (including T-bills and floating rate instruments). - Concentration risk: defaults of largest borrowers have strong effects; credit risk exacerbated by high loan concentration. - Liquidity stress tests: - Run-off rates and asset haircuts produced deposit withdrawals equivalent to 18 percent of the initial stock within the first six months. - Domestic-currency liquidity: except for a small institution, all banks could confront persistent and sizable withdrawals without ELA from BOA. - Foreign-currency liquidity: one-week horizon — only one small bank would need BOA support; two-month horizon — two banks (accounting for less than 5 percent of system assets) would need BOA support. - Tests assumed banks could obtain liquidity from BOA standard lending facility using sovereign securities as collateral; ELA unnecessary until eligible collateral exhausted. - Contagion: - Direct domestic interbank contagion limited: domestic interbank exposures are smaller than regulatory capital for each bank. - Foreign bilateral exposures concentrated: failure of the largest foreign counterpart would cause undercapitalization in 9 banks. ### Risk Assessment Matrix — top risks (levels and likely impacts) - Surges in global financial market volatility (2007–exit risks): - Overall Level of Concern: High; Likelihood: Medium. - Impact: spikes in interest rates or lek depreciation → higher NPLs; complications rolling over Eurobond in 2015. - Re-emergence of euro-area stress or exit of a foreign bank: - Overall Level of Concern: Medium; Likelihood: High. - Impact: reduced parent support, deleveraging, cutbacks in lending; limited BOA foreign currency LLR capacity. - Deterioration in domestic market sentiment / sovereign market access loss: - Overall Level of Concern: Medium; Likelihood: High. - Impact: rupter of sovereign funding → lek depreciation, interest spike, bank solvency pressure, redemption pressure on investment funds. - Protracted slower growth in advanced/emerging economies: - Overall Level of Concern: Medium-High; Likelihood: Medium. - Impact: weaker trade/remittances → higher NPLs and capitalization pressure. ### High-priority policy recommendations - Nonperforming loans (NPLs) remediation: - Create an interagency working group to clarify tax issues preventing write-offs. - Issue guidelines to facilitate NPL sales. - Develop measures for stronger financial reporting by corporate borrowers. - Expand definition of related parties. - Strengthen banks’ credit policies and underwriting standards. - Initiate an asset quality review. - Investment funds and sovereign exposure: - Establish regulation with minimum liquidity and capital standards for investment funds immediately. - Require funds to have adequate liquidity contingency arrangements with banks. - Require full mark-to-market of funds’ assets and clear unit valuation methodology. - Support secondary market development by rationalizing bond issuance and expanding assets eligible to meet BOA liquidity requirements and collateral in BOA operations. - Reduce sovereign concentration in banks: - Rationalize government bond issuance; separate BOA allocation from market allocation and reduce non-competitive allocation to retail. - Assess primary dealer system readiness. - Strengthen cash forecasting and cash management within the General Directorate of Treasury. - Euroization and foreign-currency lending: - Increase minimum loan-to-value ratios for loans in foreign currency. - Implement higher liquidity requirement on foreign currency deposits relative to lek deposits. - Require more conservative LTV and debt-to-income ratios for borrowers without foreign-currency income. - Require banks to hold additional capital for exposures to unhedged foreign-currency borrowers. - Improve consumer education and protection on FX lending risks. - Supervision and regulatory capacity: - Undertake major reform of AFSA to ensure financial and operational independence and turn it into an effective regulator of investment and pension funds and the insurance market. - Enhance risk-based supervision and expand consolidated supervision. - Formalize cooperation with home supervisors; establish MOUs where absent. - Increase supervision staff, enhance legal protection for supervisors, and implement more intrusive credit risk assessments. - Enhance FSAG role and operationalize macroprudential oversight (e.g., consider systemic capital surcharges). - Liquidity market development and monetary policy operations: - Promote market-wide adoption of a standard MRA and develop a collateralized money market. - Implement central securities depository interfaced with real-time payments by mid-2014 to eliminate settlement risks. - Expand BOA collateral eligibility to all tradable Albanian government securities with appropriate haircuts. - Use liquidity requirement primarily for prudential risk management rather than macroeconomic stimulus. - Differentiate the liquidity requirement on foreign currency deposits from lek deposits (higher for foreign currency). - Financial sector safety net and crisis preparedness: - Amend ADIA law to ensure greater autonomy and full legal protection for current and former staff; ensure initial capital of 50 million lek is funded. - Develop cooperative resolution strategies and agreements among home and host supervisors. - Strengthen BOA resolution powers and maintain P&A/bridge bank preparedness; require Recovery and Resolution Plans for systemic and medium banks. - Enhance contingency planning across FSAG members, adopt a clear crisis communication strategy, and consider establishing a resolution fund financed by systemic banks. - During problem bank resolution, monitor and block large insider/related-party transactions. - Deposit insurance improvements: - ADIA to enter information-sharing arrangements and increase cooperation with BOA. - Consider extending coverage and aligning with E.U. draft Directive on deposit insurance regarding small enterprise coverage. - Diversify ADIA investment portfolio and adopt ALM and internal investment controls. ### Microprudential and supervisory technical priorities - Implement Basel II (standard approach) and SREP by planned timelines (Basel II implementation expected by end-2014/2015). - Revise regulations on credit risk, problem loan management, and Supervision Operations Policy (SOP) to a risk-based approach. - Improve internal audit effectiveness and require risk-focused audit plans. - Enhance legal protection and staffing for supervisors; fill vacancies. - Formalize cooperation and MOUs with home supervisors, including Austria (home of largest bank). - Undertake asset quality review and require banks to improve stress-testing methodologies. ### Insurance sector and AFSA reforms (selected recommendations) - Institutional/legal reforms for AFSA: - Empower AFSA to sponsor and present new insurance laws to Parliament. - Exempt AFSA from Law on Public Administration; allow competitive compensation for staff. - Create technical positions for insurance supervision and enable AFSA to retain independent consultants (actuaries, IT specialists). - Amend AFSA Law to strengthen operational independence and legal protection. - Market and prudential reforms: - Enact pending Insurance Law and MTPL amendments; introduce risk-based by-laws and regulations. - Introduce risk-based early warning claims and solvency requirements. - Establish minimum MTPL reserving standards and restore Compensation Fund funding. - Develop ALM rules and life insurance regulations; consider national earthquake insurance program. - Strengthen AML/CFT supervision scope to include insurance; create designated AFSA AML unit and inspection manuals. - Build actuarial, reinsurance, and supervisory capacity; improve ability to enforce rulings and reduce court suspensions of AFSA decisions. ### Deposit insurance (ADIA) — operational and compliance priorities - ADIA current status: - Coverage: 2.5 million ALL per depositor (about US$25,000); covers 95 percent of depositors and about 58 percent of system deposits. - Premium: flat rate 0.5 percent of insured deposits. - Fund assets: about 3.7 percent of insured deposits (projected 3.68 percent by Dec 31, 2013); ADIA investment portfolio almost 20 billion ALL (end-Sep-2013). - ADIA share of 12-month T-bill portfolio: close to 10 percent of outstanding T-bills. - Recommendations: - Amend ADIA law to state Public Policy Objectives and enhance autonomy from BOA. - Fully implement MOU with BOA for information sharing and early warning access. - Provide legal protection to former employees and those acting at ADIA’s direction; authorize ex ante defense cost payments. - Empower ADIA to make advance or interim depositor reimbursements; treat resolution preparatory expenses as administrative expenses under Article 121 of the LOB. - Complete SCA integration into DIS and secure government initial funding of 50 million ALL for SCAs coverage. ### Key statistics (selected exact figures cited) - Real GDP growth (2009–2019 series excerpt): 3.3, 3.8, 3.1, 1.3, 0.7, 2.1, 3.3, 4.2, 4.5, 4.5, 4.7. - Consumer Price Index (avg.) (2009–2019): 2.3, 3.5, 3.4, 2.0, 1.9, 2.7, 2.8, 3.0, 3.0, 3.0, 3.0. - Public Debt (percent of GDP, 2009–2019): 59.5, 58.5, 60.3, 62.4, 70.5, 71.7, 71.2, 68.8, 65.4, 61.4, 57.1. - NPLs (gross) as percent of total loans (selected): Dec-07 3.4; Dec-08 6.6; Dec-09 10.5; Dec-10 14.0; Dec-11 18.8; Dec-12 22.5; Sep-13 24.2. - NPLs net of provisions as percent of regulatory Tier 1 capital (selected): Dec-07 12.0; Dec-08 27.2; Dec-09 29.9; Dec-10 38.1; Dec-11 56.6; Dec-12 61.8; Sep-13 54.7. - Return on equity (ROE): Sep-13 -1.7. - Regulatory capital as percent of risk-weighted assets: Sep-13 17.8. - Foreign currency-denominated loans to total loans: Sep-13 63.7. - Investment funds NAV: €316.7 million as of October 2013 (two funds). - ADIA fund: almost 20 billion ALL (end-Sep-2013); projected 3.68 percent of insured deposits by Dec-31-2013. - Deposit insurance coverage limit: 2.5 million ALL (about US$25,000). - ADIA initial capital commitment for SCAs: 50 million ALL (government agreed in 2012 amendments; funding not yet provided). _Italic: Source: IMF staff estimates and text from _cr1479 (IMF staff report excerpts)._ ### EXECUTIVE SUMMARY ___________________________________________________________________________ 5 ### _cr1479 - EXECUTIVE SUMMARY ### Executive summary — Key findings - Albania weathered the 2008 global crisis relatively well, but: - "the economy is weak, macroeconomic imbalances are large, and the financial sector faces several risks." - "Policy buffers are depleted and a large share of short-term public debt poses rollover risks." - "With strong trade and financial links to the euro area, the economy is also vulnerable to external risks." - Banking sector vulnerabilities: - "Capital-to-asset ratios are sizable but banks hold large amounts of government bonds that expose banks to sizeable losses in case of a sovereign debt re-pricing." - Rapid increase in nonperforming loans (NPLs) has deteriorated bank balance sheets. - "Sharply declining profitability leaves little room to cope with shocks." - "The strong financial links between financial institutions and the sovereign pose additional challenges." - "High financial euroization is another source of vulnerability." - Investment funds and systemic risk: - Recently established investment funds have increased systemic risk: - "They are inadequately supervised and regulated, invest mostly in longer-dated securities and their clients appear to consider these funds as substitutes for bank accounts." - "Given the lack of a functioning secondary market for government bonds, the funds face high liquidity risk." - "Given the close links with banks, redemption pressures may spill over into deposit runs on banks." - Stress-test results: - "In extreme macroeconomic scenarios, banks suffer simultaneous losses from credit, market, and sovereign risks, and at least six banks (representing 21 percent of the assets of the banking system) become undercapitalized, although the aggregate capital shortfall is limited." - Sensitivity tests: "a lek depreciation would deteriorate the quality of loan portfolios and that credit risk is exacerbated by the high concentration of loan portfolios." - Liquidity stress tests: "banks are amply liquid, however, and are able to confront large deposit withdrawals—mitigating systemic liquidity risks somewhat." - "Direct contagion risk through bilateral domestic interbank exposures is also limited." ### Executive summary — High-priority policy recommendations - Tackle rapidly rising NPLs (actions encouraged): - "create an interagency working group to clarify the tax issues that are preventing banks from writing off loans, propose remedial measures and monitor progress;" - "issue guidelines to facilitate NPL sales;" - "develop measures to achieve stronger financial reporting practices;" - "expand the definition of related parties;" - "adopt measures to further strengthen banks’ credit policies and underwriting standards;" - "initiate an asset quality review." - Lessen systemic risks from large holdings of government securities by banks and investment funds: - "Establishing a regulation with minimum liquidity and capital standards for investment funds is an immediate priority, and these funds should be required to have adequate liquidity contingency arrangement with banks." - "Their assets should also be fully marked to market." - Support development of the secondary market by: - "rationalizing bond issuances" - "expanding the range of assets that banks can use to meet the Central Bank of Albania’s (BOA) liquidity requirement by including all tradable government securities with longer maturities" - "expanding the range of collateral accepted in BOA operations." - Address risks from pervasive euro use: - "increase minimum loan-to-value ratios for loans in foreign currency" - "implement a higher liquidity requirement on foreign currency deposits relative to that applied to lek deposits." - Improve supervision of non-banks: - "undertake a major reform of the AFSA to ensure its financial and operational independence and turn it into an effective regulator of the investment and pension funds, and the flagging insurance market." - Strengthen micro- and macroprudential frameworks and supervision: - "enhancing risk-based supervision (including by more intrusively assessing credit risk management in banks)," - "expanding consolidated supervision," - "formalizing cooperation with home supervisors," - "increasing supervision staff and enhancing their legal protection." - "The role of the Financial Stability Advisory Group (FSAG) in macroprudential oversight could be enhanced by focusing its mandate and making some operational changes." - "The BOA has used macroprudential tools to manage the credit cycle, but should remain cognizant that using prudential tools to boost credit has risks to financial stability and that their impact is likely limited..." - Strengthen financial sector safety net and crisis preparedness: - Amend the Law of the ADIA to: - "ensure that the agency has greater autonomy in its operations and investments" - "ensure that its current and former staff has full legal protection." - Strengthen bank resolution framework: - "develop cooperative resolution strategies and agreements among home and host supervisors." - Enhance crisis preparedness and management: - "update detailed contingency plans by all FSAG members," - "strengthen the existing legal framework to enable extraordinary actions in a crisis," - "develop a clear communication strategy." ### Executive summary — Stress-test and resilience findings (summary) - Under extreme adverse scenarios: - At least six banks (representing "21 percent of the assets of the banking system") become undercapitalized. - Aggregate capital shortfall is limited (no numeric aggregate provided in the source excerpt). - Sensitivity findings: - Lek depreciation worsens loan portfolio quality. - High loan-concentration exacerbates credit risk. - Liquidity position: - "Liquidity stress tests confirm that banks are amply liquid" and can withstand large deposit withdrawals. - Contagion: - "Direct contagion risk through bilateral domestic interbank exposures is also limited." ### Table 1 — FSAP Update: High Priority Recommendations (selected entries preserved verbatim) - Bank Supervision and Regulation and NPL issues: - "Encourage prompt clean up of banks’ balance sheets (Box 1). ST/MT BOA/MOF" - "Work with banks to improve bottom up stress tests (¶20). LT BOA/MOF" - "Enhance consolidated supervision (¶30, bullet 1). ST BOA/AFSA" - "Formalize cooperation with relevant foreign bank supervisors (¶30, bullet 2). MT BOA/MOF" - "Strengthen risk-based supervision and amend SOP (¶30, bullet 3). LT BOA" - "Improve the effectiveness of the internal audit function in banks (¶30, bullet 4). LT BOA" - "Enhance legal protection for supervisors and fill authorized staff positions in banking supervision (¶30, bullet 5). ST BOA" - "Strengthen supervision of credit policies and underwriting standards (¶30, bullet 6). ST BOA" - "Initiate an asset quality review in banks (¶30, bullet 6). ST BOA" - Systemic Liquidity and Market Operations: - "Expand collateral eligibility in domestic operations to include all Albanian government lek securities (¶9, bullet 2). MT BOA" - "Develop the collateralized money market, including by encouraging use of standard MRA (¶9, bullet 3). MT BOA" - "Differentiate the liquidity requirement on foreign currency deposits from that on lek deposits (¶9, bullet 4). ST BOA/AFSA" - Government Securities Market: - "Separate the BOA allocation from the portion that is offered to the market and reduce the proportion allocated on a non-competitive basis in primary auctions (¶9, bullet 5). ST MOF" - "Assess market readiness for implementation of a primary dealer system (¶9, bullet 5). MT MOF" - "Strengthen the cash forecasting and cash management function within the General Directorate of Treasury (¶9, bullet 6). MT GDT" - "Assure institutional arrangements and staff resources are compatible with the formulation of a Debt Management Strategy and management of public debt (¶9, bullet 6). ST MOF" - Macroprudential Framework: - "Intensify supervision for systemic banks, and if necessary, introduce systemic capital surcharges (¶28). MT BOA" - Safety Net and Crisis Preparedness and Management: - "Bank Resolution: Develop cooperative resolution strategies and agreements among home and host authorities (¶37). MT BOA" - "Deposit Insurance: Determine which SCAs can become ADIA members; amend ADIA law, provide pledged government resources for a deposit insurance fund for SCAs (¶39). ST BOA/ADIA/MOF" - "Crisis Preparedness: Obtain, to the extent possible, support letters from mother banks agreeing to provide liquidity and solvency support to their subsidiaries (¶40, bullet 1). MT BOA" - "Crisis Management: Establish a framework for extraordinary actions in crisis (¶40, bullet 3). MT FSAG" - Financial Supervisory Authority and Investment Funds: - "Amend the regulatory framework for investment funds, including by establishing minimum liquidity and capital standards and a methodology for unit valuation (¶9, bullet 1). ST AFSA" - "Amend AFSA Law to improve operational independence (¶33). ST AFSA/MOF" ### Background — Financial sector structure (selected facts and figures) - System concentration and ownership: - "Banks represent over 90 percent of total financial system assets, equivalent to about 90 percent of GDP in 2012." - "The largest five banks hold about three-quarters of system assets and deposits." - "Subsidiaries of foreign banks ... represent about 90 percent of total banking sector assets." - Credit allocation and composition: - "Bank credit is concentrated in the corporate sector, which owes about three-quarters of the value of all loans." - "Real estate loans account for about 40 percent of total loans, and overdrafts, equipment purchase, and working capital represented about 25 percent, 17 percent, and 13 percent, respectively, at end-September 2013." - "The share of credit to Small and Medium-sized Enterprises (SMEs) in total loans was 27 percent in September 2013 (down from 37 percent in 2007)." - Nonbank segment size and composition: - "The remainder of the financial system is small (6 percent of financial system assets)." - As of mid-2013, components included: - "11 insurance companies" - "2 investment funds" - "124 Savings and Credit Associations (SCAs) in 2 unions" - "2 independent SCAs" - "3 pension funds" - "21 other non-bank ... financial institutions (NBFIs)." - Insurance sector: - "Albania has one of the smallest insurance markets in Europe, with assets of around 1½ percent of total financial system assets." - Investment funds: - "The first fund began operations in 2012 ..." - "The total net-asset value of the two funds was €316.7 million as of October 2013." - "There are more than 22,000 investors (mostly individuals)." - SCAs and pension funds: - "SCAs hold less than 1 percent of financial system assets." - Voluntary private pension market ('third pillar') "holds less than 0.1 percent of financial system assets." - "There were only three pension funds operating at end-September 2013, with a net asset value of about US$3.4 million and a total membership of 7,784." - NBFIs: - "These hold 2.6 percent of financial system assets and comprise mainly non-deposit-taking lending institutions and leasing, with a share of 43 percent and 27 percent, respectively." *Source: _cr1479 - EXECUTIVE SUMMARY (IMF staff summary provided in the source content).* ### 4. Albania weathered the 2008 global financial crisis relatively well, but the economy is ### 4. Albania weathered the 2008 global financial crisis relatively well, but the economy is ### Macro context and vulnerabilities - Real GDP growth is estimated at only 0.7 percent in 2013. - The economy fell below potential in 2012 and the output gap is estimated to have increased in 2013. - External current account deficit remains high, reflecting persistent fiscal deficits, Foreign Direct Investment (FDI) related imports, and—to some extent—worsening terms of trade. - Spillovers from the euro-zone have weighed on Albania through export, banking, and migration links. - Policy buffers are depleted: public debt-to-GDP ratio estimated at 71 percent in 2013 (including government domestic payment arrears and guarantees), with a large share short-term. - Government is requesting the support of a Fund program to begin tackling vulnerabilities. ### Financial sector risks (overview) - Surges in global financial market volatility (associated with exit from unconventional monetary policies) could: - lead to depreciation pressures and/or increases in domestic interest rates; - expose banks to credit and market risks; - complicate rollover of the outstanding Eurobond due to funding pressures. - Re-emergence of financial stress in the euro area could: - increase deleveraging pressures; - force subsidiaries of affected banks to cut back lending; - reveal limited BOA capacity to act as lender of last resort in foreign currency if liquidity pressures emerge. - Deterioration in domestic market sentiment could trigger significant stress given strong links between the sovereign, the banking sector, and the emerging investment fund sector. - If macroeconomic imbalances and fiscal pressures are not addressed, the sovereign could lose market access, leading to a sharp depreciation of the lek and threatening bank solvency. - Liquidity pressures in investment funds could lead to a run from government bonds, undermining government financing needs. - Resulting higher interest rates would lead to substantial mark-to-market losses on banks given large holdings of government bonds. - Government payment arrears could increase further, leading to additional increases in NPLs for borrowers with exposure to the government. - A protracted period of slower growth in advanced and emerging economies could: - weaken Albania through declines in trade and remittances or weak implementation of domestic reforms; - increase NPLs, requiring additional provisioning and hurting bank profitability; - threaten banks’ capitalization and, if foreign parents cannot provide capital, force deleveraging that would hurt the economic recovery. ### Soundness of the banking sector — Key vulnerabilities - Low bank profitability and rapidly rising NPLs: - NPL ratio increased from 3.4 percent at end-2007 to more than 24 percent in September 2013 (or 9.1 percent net of provisions). - Government arrears recently estimated at more than 5 percent of GDP; BOA estimated government arrears may have contributed 5-6 percentage points to the NPL ratio. - Total provisions represented 62.3 percent of NPLs at end-September 2013. - Net NPLs still amount to 55 percent of bank capital. - Bank profitability declined sharply and turned negative in September 2013 (-1.7 percent). - High financial euroization: - Half of loans in foreign currency are to unhedged borrowers. - Large maturity mismatches exist. - Credit risk for euro loans may be underpriced due to indirect exchange rate risk measurement difficulties. - A sudden stop in FDI would directly affect systemic liquidity in Euros; BOA has limited capacity to act as lender of last resort in foreign currency. - Strong systemic links between investment funds, banks, and the sovereign: - One-third of bank assets consist of government securities. - These holdings represent two-thirds of total government debt. - Investment funds hold mostly illiquid government bonds and present systemic liquidity risk affecting banks. - Significant foreign bank presence: - Financial difficulties in parent countries can affect Albanian institutions via contagion, defunding pressures, or higher NPLs. - Conversion of bank branches to subsidiaries established prudential limits, but deleveraging may continue through shrinking loan books and balance sheets. ### Monetary policy and liquidity framework - Monetary policy is governed by an inflation-targeting framework using a mid-corridor approach and weekly repo operations; treasury bills and bonds with remaining maturity of one year or less are eligible. - Exchange system significantly liberalized in 2009; BOA has not transacted to affect the exchange rate since 2009. - Banks must hold liquid assets covering 15 percent of short-term liabilities in each currency with an aggregate requirement of 20 percent (requirement recently lowered from 20 percent per currency and 25 percent overall to stimulate credit). - BOA coordinates closely with Government to prevent market instability and requires Government to meet its own foreign currency requirements. - Potential systemic liquidity risks from illiquid markets, high euroization, investment funds, and public debt management challenges. ### Specific liquidity and market operation risks - Investment funds: - Diversified ownership of government securities but increased systemic risk due to inadequate supervision and regulation. - Funds invest mostly in longer-dated securities; clients view funds as substitutes for bank accounts. - Lack of a secondary market exposes funds to high liquidity risk; redemption pressures could spill over into bank deposit runs. - Lack of clarity on funds’ liquidity policy and unit value methodology; around half of the major Lek fund is valued on a hold-to-maturity basis (could cause redemption pressures when interest rates rise). - Illiquid lek money markets: - Activity concentrated in interbank overnight and 7-day segments for unsecured funds. - Small volume of collateralized transactions due to lack of standard framework for repo transactions (e.g., Master Repurchase Agreements) and risks in payments and securities settlement (no simultaneous delivery of securities and payment). - Euroization and foreign currency liquidity: - Banks manage short-term foreign currency liquidity primarily through parents and correspondent banks; BOA does not offer foreign currency standing facilities. - BOA announced an Emergency Liquidity Assistance (ELA) facility which is (conditionally) available on similar terms in lek and foreign currency; BOA’s ability to provide foreign currency is limited. - Public debt management and securities markets: - Volatile treasury balances and antiquated management systems pose challenges. - Price signals in primary market undermined by significant BOA and retail investor participation on a non-competitive basis. - Almost no activity in secondary market due to narrow investor base and abundance of liquidity; participants cannot use government securities to manage liquidity positions. - Public debt management capacity threatened by widespread staff reductions in the public sector. ### Policy recommendations and remedial measures - Strengthen regulatory framework for investment funds: - Require unit value calculation to represent proportionate share of aggregate market value of underlying assets. - Introduce capital adequacy requirements aligned with relevant E.U. regulations. - Introduce liquidity requirements consistent with recent E.U. regulatory developments and Albanian market development. - Ensure investment funds have adequate liquidity contingency arrangements with banks. - Require prominent disclosure that investment fund units are not insured by the ADIA. - Enhance operational framework for monetary policy: - Expand collateral eligibility to include all tradable Albanian government treasury securities using an appropriate schedule of haircuts based on maturity and BOA’s risk tolerance. - Use the liquidity requirement primarily to manage prudential risks rather than macroeconomic management. - Develop the collateralized money market: - Promote market-wide adoption of a standard MRA. - BOA should limit liquidity-injecting operations to banks that have executed the MRA with BOA and encourage bilateral MRAs among banks. - Implementation by mid-2014 of a central securities depository interfaced with the real-time payments system is expected to help eliminate settlement risks. - BOA’s Interbank Collateralized Market Platform initiative is encouraged, with the BOA ensuring it does not bear financial risks from private counterparty transactions. - Internalize higher liquidity cost of using foreign currency: - Set foreign currency liquidity requirement higher than for lek to reflect BOA’s cost of holding foreign reserves; achieve without increasing aggregate liquidity requirement by reducing lek requirement while increasing foreign currency requirement. - Enhance markets for government securities: - Separate BOA allocation from the portion to be raised from the market. - Reduce significantly the amount allocated on a non-competitive basis to retail investors. - Gradually restrict retail investors from placing direct bids and facilitate retail participation through intermediaries selected competitively and effectively supervised (requires strengthening AFSA). - Support secondary market development by rationalizing the bond issuance program (focus on key maturities) and expanding assets eligible for BOA liquidity requirement and collateral in BOA operations to include all tradable government securities. - Consider a primary dealer arrangement as market developments warrant over the medium term. - Strengthen public debt management: - Enhance cash forecasting and cash management (including higher minimum cash buffers in the Treasury account). - Upgrade management systems. - Ensure staff reductions do not undermine debt management capacity within the General Directorate of Treasury. *Source: IMF staff report (excerpt).* ### 10. Given these vulnerabilities, the mission conducted stress tests to assess the resilience ### _cr1479 - 10. Given these vulnerabilities, the mission conducted stress tests to assess the resilience ### Solvency risk: overview and mechanisms - Stress tests assessed resilience to solvency, liquidity, and contagion risks (Appendix III). - Even in the benign baseline projections, some banks suffer deterioration in capital because previously nonperforming loans deteriorate further in quality, requiring further provisions that cannot be fully paid out of profits. - Credit risk is a main vulnerability: for loans in foreign currency, depreciation and a decline in growth lead to a sharp increase in NPLs; for loans in domestic currency the main effect comes from lower growth (and to a lesser extent from higher domestic interest rates). - Bank loan loss provisions rise with higher NPL ratios, with negative effects on profitability. Direct market gains from positive net foreign exchange positions partially safeguard banks against indirect credit losses induced by lek-depreciation. ### Stress test scenarios and key projections - The stress tests use two extreme but plausible adverse macroeconomic scenarios characterized by a cumulative decline of GDP of two standard deviations (12.3 percentage points) relative to the baseline over two years: - U-shaped recession: negative growth of 3.9 percent and 3.2 percent in 2014 and 2015, respectively. - V-shaped severe recession: a decline in GDP of 6.9 percentage points in 2014 followed by no growth in 2015. - Results (Figure 7): - U-shaped scenario: 6 banks with 21 percent of banking system’s assets become undercapitalized. - V-shaped scenario: 10 banks with 78 percent of banking assets face capital shortfalls. - Overall estimated shortfall (relative to a 12 percent capital adequacy threshold for all banks) is: - U-shaped: 0.5 percentage points of 2013 GDP. - V-shaped: 1.5 percentage points of 2013 GDP. - Sensitivity and scenario notes: - NPLs decline in 2015 in the V-shaped scenario because the decline in GDP is arrested, the exchange rate depreciation is limited, and interest rates decline, improving loan quality compared to 2014. - There is significant dispersion in banks’ performance; several banks maintain CARs over 20 percent. ### Sensitivity analyses - A 30 percent depreciation of the lek: - 6 of the 16 banks, representing 25 percent of the system’s assets, would be undercapitalized. - Concentration risk: - Credit risk is exacerbated by high concentration of loan portfolios; defaults of largest borrowers have strong effects. - Market and sovereign risk: - In adverse scenarios, duration-adjusted haircuts applied to government securities (excluding Treasury bills and floating rate instruments) cause losses equivalent to 8 percent of the initial valuations, with significant impact on bank capitalization. - The losses are equivalent to 4.3 percent when compared to the overall securities portfolio (including Treasury bills and floating rate instruments). ### Liquidity risk - Cash flow-based liquidity stress tests: - Run-off rates and asset haircuts produced deposit withdrawals equivalent to 18 percent of the initial stock within the first six months. - Domestic-currency liquidity tests: - With the exception of a small institution, all banks could confront persistent and sizable withdrawals of funding without ELA from the BOA. - Foreign-currency liquidity tests: - At a one-week horizon, only one small bank would need BOA support. - At a two-month horizon, two banks (accounting for less than 5 percent of the system’s assets) would need BOA support. - Tests assumed banks could obtain liquidity from the standard BOA lending facility using sovereign securities as collateral (with prevailing haircuts); ELA assumed unnecessary until eligible collateral was exhausted. ### Contagion risk - Direct domestic interbank contagion is limited: - Domestic banks are highly liquid with small reliance on interbank transactions; for every bank, the sum of domestic interbank exposures is smaller than its regulatory capital. - As of June 2013, failure of domestic banks could result in undercapitalization of other domestic banks because 5 of the 16 banks had total domestic interbank exposures larger than their excess of capital over the required minimum (assumed at 12 percent for all banks). - Foreign bilateral exposures: - Bilateral exposures to foreign banks tend to be larger and highly concentrated; failure of the largest foreign counterpart would cause undercapitalization in 9 banks. ### Policy recommendations - Supervisory engagement and remediation: - BOA should engage each bank with their individual stress test results, require mitigation measures, improve risk management in specific vulnerability areas, monitor progress, and adopt enforcement measures if necessary—especially for banks most affected in stress scenarios (those with weak profitability, high initial NPL ratios, large share of loans in foreign currency, and large share of longer-dated fixed-coupon government bonds). - For banks undercapitalized in the baseline, authorities could require capital injections to cover the shortfall (estimated at about 0.1 percent of GDP). - For banks well capitalized initially but undercapitalized in adverse scenarios, authorities could require strengthening capital buffers to cover shortfalls (estimated at about 1.5 percent of GDP). - Foreign-currency lending: - Mitigate risk through appropriate pricing mechanisms. - Require more conservative loan-to-value and debt-to-income ratios for borrowers without foreign-currency income. - Require banks to hold additional capital for exposures arising from foreign currency lending to unhedged borrowers. - Strengthen consumer education and protection to ensure borrowers are aware of associated risks. - Tackling NPLs: - Strengthen supervision to ensure quality of new loans. - Clarify tax rules preventing loan write-offs; BOA estimates resolving tax treatment of write-offs could reduce NPL ratio by 5–6 percentage points. - Adopt measures to facilitate NPL sales and accelerate insolvency reforms. - For banks that become undercapitalized, consider capital injections or buffer strengthening as noted above. - Real estate monitoring: - Monitor developments in real estate closely given residential mortgages and construction loans account for 30 percent of portfolios and potential collateral execution could increase property supply, putting downward pressure on prices. - Stress testing practices: - BOA should encourage refinement of banks’ stress testing methodologies; banks often rely on expert judgment and may fail to incorporate macroeconomic scenario shocks fully. ### Box 1: Tackling Nonperforming Loans in Albania (selected recommendations) - Enhance supervision regarding NPL management by: - Amending the regulation on credit risk management to provide detailed requirements on minimum supervisory expectations for NPLs management. - Expanding governance requirements for credit risk and NPL management (e.g., separate credit underwriting and review functions; adopt early warning systems; regularly monitor loan loss provisions; set and monitor collection goals; develop key performance indicators). - Presenting granular prudential standards on NPL management and resolution. - Provide forward guidance on the use of sanctioning powers and criteria for BOA approvals to hold property as collateral to minimize NPL misclassification and accumulation of property on banks’ balance sheets. - Additional measures to clean up bank balance sheets: - Create an interagency working group to clarify tax issues preventing banks from writing off loans (BOA estimates NPL ratio could decline by 5–6 percentage points if tax treatment is resolved). - Issue guidelines to facilitate NPL sales. - Strengthen insolvency reforms, including ensuring private bailiffs are paid on a negotiated or “success fee” basis. - Modify Civil Code articles to regulate courts’ discretion to postpone payments owed to creditors and clarify priority ranking for mortgage claims. - Medium-term actions to improve accounting and auditing: - Encourage stronger financial reporting by larger corporate borrowers. - Introduce more punitive risk weights for unaudited accounts during underwriting. - Adopt prudential regulation requiring banks to consider only borrowers’ official tax statements when underwriting loans. ### Financial oversight and macroprudential governance - BOA responsibilities by law include formulating and implementing monetary and exchange rate policy, managing international reserves, promoting smooth payments system operation, and supervising the banking system, SCAs, and NBFIs. - AFSA supervises insurance companies, pension and investments funds. - A high-level Financial Stability Advisory Group (FSAG) became operational in 2012 and meets quarterly to monitor developments and risks. - Legislative mandates: - BOA Law mandates BOA to secure banking sector stability and report semi-annually to Parliament on financial system risks and propose ways to manage them. - Banking Law of 2011 mandates BOA to take action to mitigate systemic risk. - FSAG institutional recommendations: - Focus FSAG mandate on systemically important financial institutions and risks; reassign financial development mandate to another body. - Ensure FSAG meets on a quarterly basis (as mandated) and BOA assess if more frequent meetings are necessary; technical staff should meet monthly. - Maintain meeting agendas and minutes to track and follow up on important issues. _Italic: Source: IMF staff estimates and text from the provided chapter._ ### 25. The BOA has made significant progress developing tools to monitor the time and ### _cr1479 - 25. The BOA has made significant progress developing tools to monitor the time and ### Systemic risk monitoring - The BOA has made significant progress developing tools to monitor the time and cross-sectional dimensions of systemic risk. - A lack of market data is a challenge. - Authorities should obtain other data for systemic risk monitoring, including: - a representative real-estate price; - information on the loan-to-value ratios and debt-to-income ratios used by banks; - data on bank and non-bank interlinkages. ### Macroprudential tools — past actions and assessment - 2007 measures: - higher risk weights and stricter loan-to-value and debt-to-income ratios were placed on banks surpassing twin limits on the rate of credit growth and NPL levels. - Late 2011 measures to limit contagion risks and international spillovers: - (i) foreign bank branches were converted into subsidiaries; - (ii) liquidity regulations were tightened;21 - (iii) the regulation on related-party exposure was enhanced. - 2013 policies to stimulate credit (with caution advised): - BOA eased liquidity requirements from 25 to 20 percent; - reduced capital requirements for those banks that expand credit growth within a range of 4 percent to 10 percent; - introduced disincentives for banks to hold funds overseas.22 - Risks and limits: - Use of prudential tools to boost credit carries potential risks to financial stability and their impact is likely limited due to difficulty of effective targeting (see IMF’s Global Financial Stability Report of October 2013). - Prudential measures should not be a substitute for more fundamental economic and financial reforms. ### Macroprudential toolkit — recommended enhancements - Time-dimension: - Expand toolkit to include instruments addressing procyclicality of credit (e.g., countercyclical capital buffers).23 - Cross-sectional dimension: - Give special attention to systemically important banks: - Intensified microprudential supervision for these institutions, with special attention to asset classification and provisioning. - Consider systemic capital surcharges, weighing the risk of intensifying deleveraging pressures of foreign-owned subsidiaries. ### Microprudential oversight — banks (findings) - Quality of banking supervision has improved significantly since the 2005 FSAP; framework moving toward alignment with EU standards. - BOA incorporated many Basel guidelines; examples of progress: - increased risk weights for unhedged loans denominated in foreign currency to 150 percent and a limit of such loans to 400 percent of capital; - strengthened licensing framework for de novo banks; - criteria for corporate governance and standards for bank management, internal audit function and several prudential standards established. ### Microprudential oversight — banks (remaining weaknesses and recommendations) - Enhance consolidated supervision: - Ensure a more systematic information protocol between the BOA and AFSA; - Undertake joint on-site examinations of new funds and their affiliated banks; - Require investment funds to have contingency liquidity arrangements with banks (¶9). - Formalize cooperation with relevant foreign supervisors: - MOUs are not in place with all relevant home supervisors (including Austria, home country of the largest bank in Albania). - With 93 percent of the banking sector owned by foreign banks, home supervisors rely principally on BOA for on-site examinations. - BOA encouraged to seek ways to facilitate a more formal exchange of supervisory information.24 - Strengthen risk-based supervision: - Full implementation of Basel II (using the standard approach) is expected by end-2015. - BOA developed a road map (with IMF assistance) and new capital adequacy regulation and guidelines for Pillar 1 and Pillar 2 requirements (with Bank of Italy assistance). - Regulations on credit risk, problem loan management, and the Supervision Operations Policy (SOP) need revision to adapt to a risk-based approach. - Implementation of the liquidity component of Basel III is welcomed. - Improve internal audit effectiveness: - Audit plans and procedures need to become more risk-focused; internal auditors require training in risk-based auditing. - Strengthen legal protection and staffing for supervisors: - Further improvements regarding indemnification from litigation costs are necessary. - Existing vacancies should be filled to support the risk-based approach with expertise in risk management evaluation, Basel II, and other disciplines. - Challenge banks on credit policies and underwriting: - Supervisors need to evaluate underwriting standards more intensively to support quality of new loans. - BOA should foster stronger financial reporting practices by large corporate borrowers. - Additional measures: add risk-based aspects to provisioning regulation (pay attention to related parties), expand definition of related parties, strengthen regulation for managing loans in stages of non-performance. - BOA encouraged to undertake an asset quality review to gauge accuracy of asset quality rating in banks. ### BOA enforcement tools - Current use has been broadly effective to resolve prudential limit shortcomings. - Recommendation: expand use to cover risk management concerns and consider formal enforcement actions (including warnings or orders) against banks that do not resolve fundamental safety and soundness problems. ### Albanian Financial Services Authority (AFSA) — findings and recommendations - Effectiveness severely hindered by a weak regulatory framework. - Institutional weaknesses: - Lack of independence; - Severely constrained financial resources; - Absence of representation in the law-making process; - Acute shortage of qualified personnel. - Sector-specific issues: - Insurance: - AFSA supervisory powers constrained by a rules-based insurance law that prevents quick issuance of by-laws and adoption of risk-based on-site inspection prioritization. - Insurance companies can suspend AFSA rulings by court appeal, undermining AFSA authority. - Investment funds: - Regulatory framework is weak, lacking appropriate liquidity and capital requirements and a clear methodology for determining unit values (¶9). - Priority institutional reforms: - Amend AFSA Law to attract and retain experienced technical staff: - Abolish requirement for Parliament to approve AFSA’s organizational structure; - Remove AFSA from government employee compensation and benefits structure; - Strengthen legal protection of AFSA’s Board and staff. - AFSA has recently proposed key amendments to its law and a new draft Insurance Law addressing most shortcomings. ### Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) - Progress since 2011 assessment: - Steady progress on preventive measures (beneficial ownership and existing clients) and criminalization of terrorist financing. - Remedial action underway to strengthen analytical function of the Financial Intelligence Unit. - October 2013: Parliament adopted a law on measures against terrorist financing; this will be reviewed by the Financial Action Task Force International Cooperation Review Group. - Remaining needs: - Strengthen AML/CFT supervision of the insurance and securities sectors; - Tackle illicit cross-border transportation of currency more effectively. - Authorities encouraged to establish an assessment timetable and request an assessment from MONEYVAL within 18 months of the FSAP mission. ### Financial sector safety net and crisis preparedness — Emergency Liquidity Assistance (ELA) - Institutional framework for ELA generally strong; capacity to provide assistance in foreign currencies limited by BOA’s reserves. - ELA rules: - Only solvent but temporarily illiquid banks can apply; loans must be fully collateralized. - Suggested strengthening measures: - Increase supervisory reach and intrusion on banks receiving ELA to prevent asset stripping (especially where foreign currency loans are involved); - Consider mechanisms (with home country central banks) to incentivize parent institutions to supply funding; - Establish a contingency plan for insufficient BOA foreign currency resources;25 - Establish internal guidelines for reporting ELA use, ensuring reporting does not unduly affect market sentiment;26 - Conduct simulations of stressed scenarios to test operational procedures. - Note: Liquidity stress tests show banks are very liquid in foreign exchange and potential use of ELA in foreign exchange is small (¶14), but a contingency plan would still be useful. ### Bank resolution framework - Framework generally effective: - BOA is resolution authority with comprehensive enforcement powers; can appoint a Conservator and revoke a bank’s license if necessary.27 - A Special Bank Resolution Regime (SRR) provides that BOA’s decision to revoke a bank’s license cannot be reversed by any court. - Advance preparation by BOA and ADIA enables prompt repayment of, or access to, insured depositors’ funds through a Purchase and Assumption (P&A) transaction.28 - BOA requires systemic banks and four medium-sized banks to prepare Recovery and resolution plans (RRP). - Recommendations to strengthen framework: - Supplement MOUs with home supervisors of European banking groups with cooperative resolution strategies among home and host authorities; - Consider P&A as preferred resolution tool for non-systemic banks and conduct periodic bilateral bank resolution simulations with ADIA; - Maintain lists of strong banks as potential acquirers and of possible Conservators for short-notice assignment; - Require all banks to prepare comprehensive financial contingency plans based on proportionality (complexity based on bank size). ### Deposit insurance - System features: - Coverage for deposits of individuals up to 2.5 million lek (approximately US$25,000), which covers 95 percent of depositors and about 58 percent of all system deposits.29 - ADIA’s mandate as a paybox appropriate for financial sector development. - Flat rate deposit insurance premium of 0.5 percent of insured deposits is prudent given ADIA’s recent establishment. - Fund assets equal to about 3.7 percent of insured deposits—sufficient to cover net insured deposits of the smallest 8 of the 16 banks insured by the scheme. - Once the fund reached 5 percent of insured deposits, it may reduce the premiums it collects.30 - Coverage for small enterprises is currently absent and could be aligned with the E.U. draft Directive on deposit insurance regarding scope of coverage. - Recommendations for ADIA: - Become fully compliant with the Core Principles: - Enter into information sharing arrangements with relevant regional deposit insurance agencies; - Enhance cooperation and information sharing with the BOA. - Amend ADIA law to ensure greater autonomy in operations and investments and full legal protection for current and former staff. - Ensure initial capital of 50 million lek is funded (government agreed to provide this funding in 2012 amendments to ADIA’s law). ### Crisis preparedness and management — recommendations - FSAG and contingency planning: - FSAG establishment strengthened crisis prevention and management (¶23). - BOA has effective contingency plans and is authorized to create a bridge bank (preferable to nationalization or taxpayer-funded recapitalization). - Further enhancements recommended: - Obtain support letters from mother banks agreeing to provide liquidity and solvency support where MOUs are not in place. - Enhance FSAG role by focusing mandate and making operational changes (¶24); encourage periodic individual and joint crisis simulations and CP updates; roll up CPs into a national CP coordinated by FSAG. - Establish ex ante framework for extraordinary crisis actions (liquidity/solvency support, asset purchases, loans or guarantees to ailing systemic banks, allowing government to guarantee uninsured depositors and other creditors).31 - Create a resolution fund, paid for by assessments on systemic banks, to help defray future resolution expenses.32 - Amend the Banking Law to limit bridge bank use to resolving systemic situations and ensure MOF preparedness to own and operate bridge banks. - Strengthen communications strategy to ensure public confidence; agree on draft press releases that clearly communicate crisis problems and remedial measures. *Source: _cr1479 - 25. The BOA has made significant progress developing tools to monitor the time and* ### 41. Because public resources are used in crisis situations, the MOF is encouraged to take ### _cr1479 - 41. Because public resources are used in crisis situations, the MOF is encouraged to take ### Crisis management, government support, and safeguards - Because public resources are used in crisis situations, the MOF is encouraged to take the lead in crisis management. - Any solvency assistance from the government should carry strict conditions and caution must be used when exercising such powers. - Preferred solution: parent banks ensure adequate liquidity and capital; if this support is unavailable the authorities should use appropriate measures to ensure that public funds are not up-streamed to the benefit of the parent and detriment of Albania’s taxpayers.33 - Note on legislative approach (footnote 31): Ex ante passing a law carries the risk that such powers may be used inappropriately (such as providing financial support). Having a draft law on the shelf to be passed only when a crisis occurs may be preferable. The suggested measures to be contained in this law are consistent with the Financial Stability Board’s Key Attributes for Effective Resolution. - Resolution fund (footnote 32): A resolution fund is comprised of periodic premiums from banks (similar to ADIA assessments) and follows the bank resolution tenet that the banking industry should bear some of the cost of bank failures. Although the resolution fund should be separate from the ADIA fund, economies of scale may be realized by permitting ADIA to manage the fund. - During problem bank resolution, BOA should monitor closely, and block if necessary, large transactions of insiders, related parties, and intra-group companies.33 ### Structure of the banking system (selected items from Table 2) - Top banks by Total Assets (bn lek and percent of total): - RAIFFEISEN BANK — 301 (25.0 percent of total) — Raiffeisen SEE Region Holding, Austria - NATIONAL COMMERCIAL BANK (BANKA KOMBETARE TREGTARE) — 258 (21.4 percent) — Çalik Finansal Hizmetler A.S., Turkey - INTESA SANPAOLO BANK ALBANIA — 132 (11.0 percent) — Intesa SanPaolo S.p.A., Italy - CREDINS BANK — 101 (8.4 percent) — Individuals, Balkan Financial Sector Equity Holding B.V., Albania, Netherlands (ownership: 72 percent private non-financial) - TIRANA BANK — 89 (7.4 percent) — Pireaues Bank, Greece - Foreign ownership share (column heading: Nationality (bn lek) (percent Foreign of total)): many large banks are foreign-owned (examples above show Austria, Turkey, Italy, Greece, Germany, France, Bulgaria, Malaysia/Switzerland, Saudi Arabia, Kuwait). ### Selected macroeconomic and fiscal indicators (Table 3, 2009–2019; key series and projections) - Real GDP growth (2009–2019): 3.3, 3.8, 3.1, 1.3, 0.7, 2.1, 3.3, 4.2, 4.5, 4.5, 4.7 - Consumer Price Index (avg.) (2009–2019): 2.3, 3.5, 3.4, 2.0, 1.9, 2.7, 2.8, 3.0, 3.0, 3.0, 3.0 - Foreign savings (percent of GDP, 2009–2019): 14.1, 10.0, 9.6, 9.3, 9.0, 10.3, 12.4, 14.8, 13.0, 9.9, 8.2 - Overall balance (percent of GDP, 2009–2019): -7.4, -3.8, -3.6, -3.5, -6.2, -6.7, -4.8, -3.4, -1.3, -0.5, 0.0 - Public Debt (percent of GDP, 2009–2019): 59.5, 58.5, 60.3, 62.4, 70.5, 71.7, 71.2, 68.8, 65.4, 61.4, 57.1 - Current account balance (including official transfers, percent of GDP, 2009–2019): -14.1, -10.0, -9.6, -9.3, -9.0, -10.3, -12.4, -14.8, -13.0, -9.9, -8.2 - Gross international reserves (in billions of Euros, 2009–2019): 1.6, 1.9, 1.9, 2.0, 2.0, 2.1, 2.1, 2.2, 2.2, 2.3, 2.5 - Memorandum: Nominal GDP (in billions of lek, selected years): 1148.1, 1222.5, 1282.3, 1326.5, 1357.9, 1418.0, 1501.6, 1607.4, 1726.0, 1853.5, 1994.4 ### Financial soundness indicators (Table 4, selected series, Dec-2007 – Sep-2013) - Regulatory capital as a percent of risk-weighted assets: Dec-07 17.1; Dec-08 17.2; Dec-09 16.2; Dec-10 15.4; Dec-11 15.6; Dec-12 16.2; Sep-13 17.8 - Regulatory Tier 1 capital as a percent of risk-weighted assets: Dec-07 16.0; Dec-08 16.3; Dec-09 15.3; Dec-10 14.5; Dec-11 14.3; Dec-12 14.6; Sep-13 14.8 - Capital as a percent of total assets (Regulatory capital): 6.2; 7.0; 9.2; 9.1; 8.8; 8.8; 9.2 (Dec-07 through Sep-13 sequence) - Shareholders' equity as a percent of total assets: 7.6; 8.6; 9.6; 9.4; 8.7; 8.6; 8.3 - Nonperforming loans (gross) as a percent of total loans: Dec-07 3.4; Dec-08 6.6; Dec-09 10.5; Dec-10 14.0; Dec-11 18.8; Dec-12 22.5; Sep-13 24.2 - Nonperforming loans net of provisions as a percent of regulatory Tier 1 capital (selected): Dec-07 12.0; Dec-08 27.2; Dec-09 29.9; Dec-10 38.1; Dec-11 56.6; Dec-12 61.8; Sep-13 54.7 - Return on equity (ROE) (annual basis): Dec-07 20.7; Dec-08 11.4; Dec-09 4.6; Dec-10 7.6; Dec-11 0.8; Dec-12 3.8; Sep-13 -1.7 - Liquid assets as a percent of total assets (Liquid-asset ratio): Dec-07 49.8; Dec-08 42.8; Dec-09 27.6; Dec-10 25.9; Dec-11 26.5; Dec-12 29.4; Sep-13 29.2 - Return on assets (ROA) (annual basis): Dec-07 1.6; Dec-08 0.9; Dec-09 0.4; Dec-10 0.7; Dec-11 0.1; Dec-12 0.3; Sep-13 -0.1 - Memorandum: Foreign currency-denominated loans to total loans: Dec-07 72.5; Dec-08 72.6; Dec-09 70.2; Dec-10 69.8; Dec-11 67.9; Dec-12 64.5; Sep-13 63.7 - Total loans as a percent of total assets: Dec-07 39.4; Dec-08 47.6; Dec-09 50.8; Dec-10 49.6; Dec-11 50.5; Dec-12 48.6; Sep-13 46.0 ### Key recommendations and implementation status from the 2005 FSAP (Appendix I) - Consumer protection and foreign currency lending: - Recommendation: Increase awareness of risks inherent in foreign currency borrowing and require banks to discuss exchange rate risks explicitly with borrowers before contracts are signed. - Status: Regulation addressing consumer protection was strengthened to require banks to provide warnings about dangers in borrowing in foreign currency and advise borrowers of the effective interest rate of a loan. - BOA regulation: Credit risk administration now addresses unhedged foreign currency credit exposure and established a limit prohibiting a bank from having such exposure in aggregate exceeding 400 percent of its regulatory capital. Exposures exceeding the limit are deducted from regulatory capital; risk weight for these exposures set at 150 percent. - Bank exit/receivership and resolution preparedness: - Recommendation: Review bank exit/receivership provisions and contingency planning; use “emergency bank failure scenarios.” - Status: The Law on Banks (Chapter VII) establishes BOA power to place a bank in conservatorship or liquidation and to appoint a conservator. In 2010 BOA adopted an operating manual for resolution (assisted by U.S. FDIC). Recent amendments to the Law on Banks grant BOA more powers for systemic risk situations, including purchase and assumption strategies, establishing a bridge bank, and converting foreign branches to subsidiaries. - Insurance supervision: - Recommendation: Include senior experienced finance professionals in ISA leadership; issue and enforce insurance prudential regulations; integrate nonbank regulators into an integrated nonbanking regulator. - Status: AFSA has difficulty retaining staff due to restrictions on remuneration; integration of non-bank regulatory entities into AFSA is complete but not fully effective; little progress on improving quality of insurance supervision despite World Bank and FIRST assistance. - Public debt management: - Recommendation: Improve institutional capacity by articulating objectives, strategies, and decision-making. - Status: According to the Debt Management Performance Assessment (June 2011), Albania has sound debt management practices across many areas. The medium-term debt management strategy is in place and publicly available; areas for improvement include external borrowing planning and operational risk management; decision-making for external market borrowing is cumbersome; no systematic tracking of foreign holdings of domestic government securities. - Credit unions and microfinance: - Recommendation: Encourage bottom-up consolidation/pooling of resources; harmonize regulation and consider separate deposit insurance. - Status: World Bank report (June 2008) provided recommendations; some implemented; ADIA and BOA are developing a plan for integrating SCAs into the deposit insurance scheme; ADIA law amended in 2012 to allow integration but government contribution to begin a separate fund has not been made. - Financial intermediation and Land/collateral reforms: - Recommendation: Facilitate a credit bureau; offer or close Albanian Securities Exchange (ASE); improve accounting; improve land registration titling and judicial procedures for collateral enforcement. - Status: Credit bureau completed. ASE still exists though not operational. Financial reporting legislation improved and aligned with EU acquis. Land Administration and Management Project supports systematic registration of 400,000 properties in 140 priority urban cadastral zones, IT rollout to 5 large offices with another 5 planned; future plan needed to roll out to all 35 offices and complete First Registration in remaining zones (approximately 100 cadastral zones) and digitize about 2,000 zones (~2 million properties). Civil Procedural Code changes (approved April 2013, effective October 1, 2013) target multiple improvements to reduce suspension and modernize execution and auction procedures. - AML/CFT: - Recommendation: Revise AML law in line with FATF Recommendations 2003; increase FIU capacity. - Status: AML law revised; compliance to be assessed in next AML/CFT assessment. FIU staffing increased and analytical function strengthened, but staffing for on-site and off-site inspections remains inadequate. *Source: _cr1479 (excerpted content).* ### Appendix II. Risk Assessment Matrix ### Appendix II. Risk Assessment Matrix ### 1. Surges in global financial market volatility, associated with the exit from unconventional monetary policies - Overall Level of Concern: Staff assessment: High - Likelihood of Severe Realization of Threat in the Next 1–3 Years: Staff assessment: Medium - Expected Impact on Financial Stability if Threat is Realized: (high, medium or low) - Financial market volatility could lead to spikes in interest rates, especially in emerging markets. - The Bank of Albania would face the dilemma of allowing the lek to depreciate or to raise interest rates to counteract depreciation pressures. - NPLs would likely rise further both in the case of increases in interest rates and in the case of lek depreciation, since both would weaken the repayment capacity of borrowers (many of which have unhedged loans in foreign currency). - Financial market turmoil would also complicate rollover of the Albanian sovereign Eurobond in 2015. - Difficulties in rolling over the Eurobond could spill over to the domestic government bond market. Bond price declines would expose banks to losses on bonds held in the trading book. - Mitigating factors: - The BOA may have some room for intervention, since international reserves are at relatively comfortable levels. - Banks have relatively healthy levels of capitalization. ### 2. A re-emergence of financial stress in the euro area, and/or exit of a foreign bank from the market - Overall Level of Concern: Staff assessment: Medium - Likelihood of Severe Realization of Threat in the Next 1–3 Years: Staff assessment: High - Expected Impact on Financial Stability if Threat is Realized: - Stress in European parent banks could reduce their ability to re-capitalize Albanian subsidiaries. - Such deleveraging pressures could lead to an exit of foreign banks. - A loss of depositor confidence or a large withdrawal of parent funding could lead to significant stress. - The capacity of the BOA to act as lender of last resort in foreign currency is limited. - If parent banks are unable to capitalize subsidiaries, banks may be forced to cut back lending. - Mitigating factors: - Level of capital appears adequate, banks are largely funded by domestic deposits and do not depend on parent funding. ### 3. A deterioration in domestic market sentiment, leading to reduced access of the sovereign - Overall Level of Concern: Staff assessment: Medium - Likelihood of Severe Realization of Threat in the Next 1–3 Years: Staff assessment: High - Expected Impact on Financial Stability if Threat is Realized: - Failure to address macroeconomic imbalances could lead the sovereign to lose market access, leading to a depreciation of the lek, a spike in interest rates, and weakening the solvency of banks. - Redemption pressures in investment funds could lead to a run from government bonds. - Pressures in the domestic bond market could complicate rollover of the Eurobond in 2015. - A deterioration in the fiscal outlook would increase risk premia and interest rate increases. - Most public debt is short term and debt roll-over difficulties could arise, raising risk premia. - Given the strong linkages between banks and the sovereign, banks are vulnerable to changes in the value of longer-term debt securities, and the government is vulnerable to the regular rollover of debt by banks. - Government payment arrears could increase further and lead to further increases in NPLs. - Mitigating factors: - The new government is committed to fiscal sustainability. ### 4. A protracted period of slower growth in advanced and emerging economies - Overall Level of Concern: Staff assessment: Medium-High - Likelihood of Severe Realization of Threat in the Next 1–3 Years: Staff assessment: Medium - Expected Impact on Financial Stability if Threat is Realized: - Weak growth in European trading partners could further slow the Albanian economy through declines in trade and remittances. - In the absence of fiscal policy buffers, monetary policy may be eased further and lead to a depreciation of the lek. - Slower growth and attempts to stimulate credit could increase NPLs further. - A depreciation of the lek could threaten the solvency of banks, as many borrowers have unhedged loans in foreign currency. - Mitigating factors: - The share of exports in GDP remains low. - Banks have relatively healthy levels of capitalization. - Stimulus measures could have a positive impact on output in the short term, improving prospects for banks. *Source: Appendix II. Risk Assessment Matrix — _cr1479* ### 50. Macro-economic environment. Albania’s institutional framework supporting the ### 50. Macro-economic environment. Albania’s institutional framework supporting the ### Macro-economic environment - Albania avoided a serious economic slowdown resulting from the financial crisis. - Economic imbalances have become large: - Real GDP growth is low. - External current account deficit remains high, largely reflecting persistent fiscal deficits and worsening terms of trade. - High exposure to the euro zone poses potentially high risks due to large trade, labor market and banking system links. - Economic weaknesses and elevated macroeconomic imbalances have resulted in high levels of public debt: - Public debt estimated at about 71 percent of GDP in 2013. - Budget has high financing needs, including because of the short maturity structure of domestic debt. - Accumulation of unpaid government bills and arrears and poor tax revenue performance contributed to higher public debt. ### Financial stability framework - Responsibilities assigned across BOA, AFSA, ADIA and MOF; BOA plays a leading role as prudential regulator for the banking system. - In 2012 the four regulators became signatories to a Memorandum of Understanding creating a high level financial stability committee, FSAG. ### Public infrastructure and legal framework - Albania is seeking EU membership; reforms to align legislative codes with EU standards are in process. - Corporate law governing corporate activities is not well developed. - Authorities recognize the need to accelerate adoption of legal and prudential means to reduce the stock and flow of NPLs and have begun seeking external inputs to improve capacities and framework. ### Crisis management, recovery and resolution - Legal framework provides BOA, AFSA and ADIA with a range of tools/responsibilities for intervention in crisis situations. - Banking law specifies going concern resolution powers for capital and liquidity inadequacies and for declared insolvency. ### Systemic protection (safety net) - Deposit insurance coverage: - Covers deposits of natural persons up to 2.5 million lek (approximately US$25,000). - Coverage extends to 95 percent of depositors but only about 58 percent of all system deposits. - ADIA mandate as a paybox is appropriate for sector development and size. - Flat rate deposit insurance premium of 0.5 percent of insured deposits is used; considered prudent given ADIA’s relatively recent establishment. - Absence of coverage for small enterprises is a material weakness, contravening a primary objective of deposit insurance and EU guidance on coverage. ### Market discipline and financial reporting - Need for robust and transparent accounting and auditing environment: - Many borrowers have several sets of financial statements (statutory accounts, management accounts, fiscal accounts). - Many bank customers in Albania do not have audited financial statements. - BOA should encourage stronger reporting practices by larger corporate borrowers. ### Main Findings — Objectives, powers, independence, accountability and cooperation (CPs 1–3) - Comprehensive laws and regulations governing banking supervision exist. - BOA is autonomous de jure and de facto. - Legal protection for supervisors is inadequate: does not protect against costs of defending acts of commission/omission in good faith unless exonerated in court. - Supervisory staffing would be adequate if existing authorized vacancies were filled; full staffing needed for initiatives including risk-based supervision and Basel II. - BOA empowered to cooperate with foreign and domestic supervisors; has effective cooperative arrangements but should enhance cooperation with the supervisor of the institution possessing the largest market share in Albania. ### Ownership, licensing, and structure (CPs 4–7) - Legal framework clear on types of banking and non-banking activities banks may engage in. - Licensing applications currently limited principally to capital increases and approval of Steering Council members. - Framework, policies and processes exist to evaluate new banking licenses and changes in control but are untested. - Transfer of ownership and definitions for controlling interests are defined; requirements for acquisitions presumptive of control could be enhanced to differentiate lower ownership levels. - Definition of indirect ownership in a bank needs strengthening; BOA should formally require reporting of such interests. - Investment by banks in NBFIs and non-financial institutions governed by satisfactory laws with prior approval and notification situations. ### Methods of ongoing banking supervision (CPs 8–10) - Supervisory approach tends to be compliance-based; should move more towards risk-based supervision. - BOA adopted elements of risk-based supervision and prepared next step; new supervisory methodology aligned with Basel 2 planned for implementation mid-2014 together with a new supervisory cycle. - Appropriate mix of on-site and off-site supervision, but weaknesses include: - Business model analysis needs deepening. - Limited expertise on specific borrower businesses; lack of industry benchmarks. - Examination report issuance can take between one and four months; turnaround should be improved. - Extensive reporting requirements provide wide data and risk management information; some manual collation inhibits analysis. - An automated platform being introduced late in 2013 should address the problem. ### Corrective and sanctioning powers of supervisor (CP 11) - Corrective measures mostly based on prudential standards rather than focused on addressing risk management issues. - Risk management issues generally addressed through examinations; where issues linger, formal enforcement actions should be applied. ### Consolidated and cross-border banking supervision (CPs 12–13) - BOA has a satisfactory consolidated supervision program; supervisors aware of banking group structures and risks and maintain contact with foreign supervisors and domestic authorities. - Program can be strengthened by enhancing cooperation with AFSA to identify and supervise risk management issues in investment funds associated with large banking groups. - Cross-border supervision implemented via supervisory colleges and bilateral relationships; formal written cooperation agreements exist with most authorities supervising banks with a presence in Albania. - No agreement with authority supervising the bank with the largest market share in Albania, though communications channels are generally effective. ### Corporate governance (CP 14) - Supervisors adequately determine that banks have corporate governance policies and processes. - BOA can deepen understanding of board dynamics and explicitly challenge banks’ risk appetite. ### Prudential requirements, regulatory framework (CPs 15–25) - Banks expected to have appropriate risk management policies, but collective analysis of risk management is less robust than it could be. - Supervisors determine policy presence and compliance; quality of risk management assessment is more ephemeral. - Implementation of Basel 2 requires examination officers to be able to evaluate risk management in practice; current quality of operations depends on a relatively small group of staff—BOA needs to invest in examiner skills. - Capital and risk coverage: - BOA has adequate capital requirements per Basel 1 (quantity) and definitions of capital components (quality). - BOA does not currently charge capital for operational risk, interest rate risk in banking book and concentration risk; to be addressed when implementing Basel 2. - BOA requires higher capital than prescribed by Basel 1 (more than 12 percent), providing a cushion. - Credit underwriting scrutiny should be enhanced; bankers should receive more regular challenges on credit underwriting policies despite weak corporate borrower financial reporting. - NPL management: - BOA increasing efforts to address root causes outside regulatory perimeter but misclassification persists. - Supervisors required banks in many examinations to reclassify reviewed loans due to misclassifications. - Regulations provide a legal base for problem loan management but lack specific requirements for policies and procedures on pre work out, work out, restructuring, collection, recovery and resolution; BOA guidance via regulation would benefit the sector. - Concentration risk in Albanian government paper is substantial; one systemic bank holds government bonds held-for-trading valued at fair value, with gains/losses affecting P&L without proportional capital charge. - Basel 2 pillar 2 would address this from a capital perspective; BOA should address through FSAG. - Related-party definitions: - Laws/regulations address abuse and conflict of interest from related parties but do not capture informal business practices where relatedness can dominate lending decisions; BOA should review definition of related parties. - Country risk and transfer risk not explicitly addressed in law/regulation; BOA addresses country risk ad hoc, mostly in crises, and needs regulation for regular treatment. - Market and liquidity risk: - BOA implemented market risk regulation for trading book (interest rate risk and FX risk) based on Basel 1 and for interest rate risk in the banking book based on Basel 2. - BOA should assess uncertainty from other sources of interest rate risk and management information system capabilities. - Liquidity regulation from 2009 is a good starting point but needs alignment with Basel 3 requirements, in particular liquidity coverage ratio (LCR). - Greatest liquidity risk is market risk of government paper; liquidity buffer mainly consists of government paper in a superficial market dominated by one systemically relevant bank, though paper can be used for repo agreements. - Operational risk: - BOA implemented qualitative side of operational risk of Basel 2, except self-assessment and capital requirement. - Capital requirements for Basel 2 will be implemented together with pillar 2 during 2014; banks choose between the basic indicator approach and the standard approach; banks expected to be fully compliant by the end of 2014. - Banks have a growing position in property from foreclosures; managing property entails operational risks which should be reflected in the 2014 implementation of Basel 2. ### Internal control, audit, financial reporting, disclosure (CPs 26–28) - Comprehensive rules govern internal audit mandates and internal control systems. - Adoption of risk-based supervision will require enhanced internal audit functions, particularly risk-based audit planning and alignment with international best practice. - External auditors held to high professional and ethical standards; BOA empowered to approve external auditing firms and requires rotation of audit firms periodically. - Disclosure requirements are strict and follow international standards: - Banking system reports in accordance with IFRS. - Regulatory returns currently filed in accordance with NAS; conversion to IFRS for supervisory reporting is underway concurrently with introduction of automated reporting platform. ### Abuse of financial services (CP 29) - Law governing banks and financial institutions is reasonably comprehensive for combating AML/CFT. - BOA has dedicated staff for AML/CFT supervision and coordinates with the FIU through joint examinations, training and other efforts. ### Authorities’ Response - The Bank of Albania appreciates the assessment work by the FSAP Assessment Team. - The assessment identified areas for improvement; several are subject to ongoing efforts. - On CP 18, Bank of Albania believes its position and measures go beyond CP objectives; assessment did not fully consider extremely severe market developments coinciding with the review period. *Source: IMF staff report excerpt on Albania — Macro-economic environment and financial sector assessment.* ### 85. Moreover, the rating of core principle 19 on government bonds reflect the their ### _cr1479 - 85. Moreover, the rating of core principle 19 on government bonds reflect the their ### Government bonds and liquidity - The rating of core principle 19 on government bonds reflects their liquidity, although many of these bonds are eligible for Bank of Albania operations. - The matter is described as complex and "going beyond the reach of bank supervision." - Bank of Albania is aware and is "already planning the actions to be taken in this respect, also in line with the recommendations of the report." ### Related-party transactions and legal definition - The law's definition of relatedness is "fairly broad" and "encompasses all relationships that could be considered during the credit risk evaluation of a connected group of borrowers." - Bank of Albania aims to: - Promote sound credit underwriting criteria based on adequate borrower’s financial information. - Strengthen the legal requirements and enforcement regarding relatedness issues. ### Bank of Albania commitment - "The Bank of Albania remains fully committed to implement all these recommendations, and to use the assessment as a guideline for the action plan to advance the level of supervisory standards towards the best practices, considering that this is also the best contribution to its mandate of guaranteeing the banking and financial stability." ### Summary compliance with the Basel Core Principles — key findings (selected principles) - Principle 1 — Responsibilities, objectives and powers - Comprehensive set of laws and directives exist; "certain provision of the law could be amended to strengthen the legal framework still further." - Principle 2 — Independence, accountability, resourcing and legal protection for supervisors - BOA has significant de jure and de facto independence; concerns about salary scale affecting ability to attract and retain skilled staff. - Legal protections for indemnification improved but "further improvements are needed regarding the indemnification of supervisors in the event of litigation." - Principle 3 — Cooperation and collaboration - Satisfactory domestic and foreign cooperation framework, but arrangements with two important foreign supervisors have not been concluded. - Principle 4 — Permissible activities - Legal framework is clear; amendment to the LOB recommended to provide BOA flexibility to authorize new products. - Principle 8 — Supervisory approach - Current approach "tends to be compliance-based" and should move towards risk-based supervision. - A new supervisory methodology aligned with Basel 2 "is set up and planned to be implemented mid-2014" together with a new supervisory cycle. - Current supervisory cycles do not take systemic relevance into account. - Principle 9 — Supervisory techniques and tools - BOA uses on-site and off-site supervision but weaknesses remain: - BOA does not record a comprehensive and actual risk profile of a bank (quantitative or qualitative). - Alignment between on-site and off-site supervision frustrated by the dual CA(M)ELS methodology. - Early indicator signals can take a year before follow-up; related to fixed inspection cycle. - Business model analysis needs deepening to be more forward looking. - Limited industry expertise to challenge borrower payment capacity. - It sometimes takes "between one and four months to issue an examination report." - Principle 10 — Supervisory reporting - Extensive reporting requirements exist; some information must be collated manually. - "An automated platform is being introduced late in 2013" to facilitate higher quality analytical work. - Principle 11 — Corrective and sanctioning powers of supervisors - Corrective measures are mostly based on prudential standards rather than focused on addressing risk management issues. - Principle 12 — Consolidated supervision - Overall satisfactory program, but a gap exists in supervision of investment fund activities; cooperation with fund’s primary supervisor needed. - Principle 13 — Home-host relationships - Formal written cooperation agreements exist with the preponderance of authorities; no agreement with the authority supervising the bank with the largest market share in Albania. - Principle 14 — Corporate governance - Supervisors assess strategy, policies, and procedures; BSD could be more intrusive in challenging risk appetite alignment. - Principle 15 — Risk management process - Banks expected to have appropriate risk management; collective analysis "is not as robust as it could be." - Implementation of Basel 2 requires examination officers to understand how to evaluate risk management in practice. - Principle 16 — Capital adequacy - BOA has "according to Basel 1 adequate capital requirements (quantity) and definition of capital components (quality)." - Risks and uncertainties identified: - NPL figure could deteriorate and require more provisioning. - "NPL reduction strategy" could lead to more provisioning in the short term. - New loans could become bad due to insufficient underwriting quality. - BOA relaxed asset risk weightings on new lending in 2013 and 2014, which could attract banks with poor underwriting. - Provisioning regulations based on reality may not incentivize prudent conduct; fixed system may overstate needed provisions. - Growing property on banks' balance sheets from foreclosure could lead to market and operational risk. - BOA does not currently charge capital for operational risk, interest rate risk in banking book and concentration risk (Pillar 1 and 2 of Basel 2). - BOA requires a higher capital than prescribed according to Basel 1: "more than 12%," providing a cushion. - Banks are free to pay dividends, so "actual capital position can sharply change after year end." - Quality of capital decreased in the last two years due to subordinated debt and hybrid capital instruments used by a few banks. - Capital quality is defined within "obligatory guidelines"; assessor unclear on legal status of guidelines in times of stress. - Principle 17 — Credit risk - Laws and supervisory activities require banks to have adequate credit risk management covering full credit lifecycle. - Supervisor should enhance scrutiny of credit underwriting policy, procedures and criteria, especially for approval of new, renewed, or restructuring loans. - Three preconditions weakening supervisor’s ability to analyze underwriting policy: 1. non-audited financial information; 2. lack of industry data; 3. a fixed system of provisioning promoting compliance-based supervision. - Principle 18 — Problem assets, provisions, and reserves (selected points) - BOA has increased effort to address root causes of multi-dimensional NPL problem "outside the regulatory perimeter" and addresses problem loan management with bankers. - Identification of problem loans: - Classification rules for related groups: borrower classification is "as high as the classification of the customer with the lowest rating"; documented analyses can justify reclassification, leaving room for interpretation and misclassification. - Examinations have frequently required banks to reclassify loans due to observed misclassifications. - Management of problem loans: - No specific regulatory requirements on policies and procedures for pre-workout, work-out, restructuring, collection, recovery and resolution; BSD guidance via regulation recommended. - BSD issued in November 2013 a guideline on restructuring loans (corporate and retail) and hired a private party to help assess category 2–4 loans and build restructuring repertoires. - A paragraph in regulation on credit risk (LOB 17) was set up to incentivize restructuring for category special mention borrowers; concern that in negative economic conditions this could stimulate restructuring of loans "with no future." - Provisioning: - Regulation requires fixed percentage provisioning by category: standard, special mention, sub-standard, doubtful and loss must provision respectively "1%, 5%, 20%, 50%, or 100%." - Methodology established in 1997 and unchanged since; recommendation to calibrate provisioning against current economic situation and international standards. - Fixed provisioning may veil bank responsibility and contribute to misclassification. - BSD could consider implementing provisioning standards based on an incurred and expected loss model (like IFRS) in the long term, conditional on stronger financial reporting and industry data. - Write-offs: - Banks required to follow local accounting standards based on "IFRS 1998" and a regulation (ROC article 17) that write-off should be assessed "not less than once in 6 months" and decided by the Steering Council. - Local accounting standards require write-off when "the lack of economic benefit is considered other than temporary." - A substantial amount of NPLs have not been written off in the prudential report: "6%-point of 24% NPL according to BOA estimation," while some banks that file financial statements based on current IFRS of the parent did account a write-off. - Tax authorities historically did not recognize write-off as tax deductible, discouraging write-offs; Ministry of Finance aligned the definition in the tax regulation and is "in the process of implementing this practice." - Current IFRS standards state write-off when there is "no reasonable expectations of recovery." BOA states write-off under current tax regulation would have an "enormous negative impact on the profitability of banks." *International Monetary Fund — Albania: Extracts from assessment and Table 1. Summary Compliance with the Basel Core Principles* ### 19. Concentration risk ### 19. Concentration risk ### Concentration risk and large exposure limits - Supervisor assessment: banks have policies and processes to identify and monitor concentration risk, but this is limited and not systematically guided by law and regulation. - Legal/regulatory framework: concentration risk rules are spread across LOB article 63 and 64, regulation on credit risk article 6 and 9, and the regulation on large exposure. - Large exposures: BOA has requirements including limits for individual customers, groups of connected customers and aggregated large exposures. - Systemic concern: one systemic bank has an enormous concentration of government bonds held-for-trading; portfolio is valued at fair value and all gains and losses feed directly into P&L. - Capital treatment: no proportional capital charge has been applied because the holdings are government paper; although no breaches of market risk regulation exist, the material concentration risk should have been addressed and a capital charge should be applicable because of the concentration risk. - Supervisory tool: Pillar 2 would have measures to address this problem. ### Policy recommendations (concentration) - Develop a separate regulation on concentration risk. - Address concentration risk of government paper in the banking system through the FSAG. - Consider how to deal with concentration of market risk because of portfolios of government paper held-for-trading now before introduction of Basel 2, pillar 2. --- ### Transactions with related parties - Legal/regulatory status: BOA has law and regulation addressing abuse and conflict of interest because of related parties and assesses compliance during on-site examinations. - Observed weakness: different sources indicate that relatedness can be more important than financial condition in doing business in Albania; not all kinds of relatedness are captured by the definition of related parties. - Example gap: situations where loan officers grant loans based on relatedness rather than financial conditions are not captured by the current definition. ### Policy recommendations (related parties) - Consider expanding the definition on related parties to capture situations of loan officers granting loans based on relatedness instead of financial conditions. - Consider assessing the extent to which loans are granted based on relatedness instead of financial conditions. --- ### Country and transfer risks - Current practice: BOA addresses country risk issues on an ad hoc basis mostly in times of crisis. - Legal/regulatory gap: neither country risk nor transfer risk are explicitly addressed in law and regulation. - Market practice: foreign parents of Albania subsidiaries require their subsidiary to identify, measure, and control country and transfer risk. ### Policy recommendation (country risk) - Develop a regulation on country risk. --- ### Market risk - Regulation: BOA implemented market risk regulation (quantitative and qualitative) based on Basel 1 for both interest rate risk and FX risk in the trading book. - Concentration: high concentration risk in Albanian government paper in local currency within systemically relevant banks; positions exist both in the trading book and the available for sale portfolio. - Accounting: - Trading book: valued at fair value; changes go directly into profit/loss for local accounting standards and for IFRS. - Available for sale: within local accounting standards valued at acquisition costs and impaired when there is a loss, creating a hidden reserve if market value > acquisition cost. - Limits and capital: - There are no limits regarding banks buying government debt. - Limited capital requirements for these positions based on Basel 1 (on average 2.5% of the position). - BOA requires extra capital for systemic banks because of these positions. - Supervisory recommendation: BOA should consider intervening and mitigate this concentration risk prudently (see principle 19 Concentration risk). ### Policy cross-reference - See Principle 19 and Principle 22 recommendations regarding concentration of government paper in the trading book. --- ### Interest rate risk in the banking book - Supervisory challenge: BOA could not make explicit that they challenge the interest rate risk appetite of a bank. - Measurement: duration is a good instrument to measure interest rate risks; BSD needs to assess uncertainty regarding other sources of interest rate risk and whether management information systems can capture these sources. - Stress testing: BOA could require banks to stress the interest rate position by rotation of the yield or other scenarios. - Current practice: BOA asks banks to do stress tests that take different sources into account, and also requires banks to measure interest rate risk via the methodology prescribed in the obligatory guideline. ### Policy recommendation (interest rate risk) - Identify and evaluate the sources of interest rate risk in the event the Basel II proxy applies to individual banks; develop this in connection with introduction of the SREP in 2014. --- ### Liquidity risk - Regulatory background: liquidity regulation stems from 2009 and has been a good starting point; time to align with Basel 3, in particular liquidity coverage ratio (LCR). - Main liquidity vulnerability: liquidity buffer is mainly government paper in a superficial market dominated by one systemic relevant bank (although it can be used in a repo agreement). - Scenario risk: in a bank run, selling government paper could face no buyers. - Accounting mismatch: held to maturity government paper up to one month could hide losses because of mismatch between daily liquidity management and (local) accounting standards. - Funding structure: deposit holders cover 83% of funding of the banking system, of which 30% is up to 1 month. - BOA mitigation measures since 2008: - Daily and weekly liquidity information from banks as early indicators. - Supervisory assessment of liquidity management framework, including contingency plans. - Existence of ELA as an instrument in times of stress. - Emphasis on a robust safety net for deposit holders and a clear crisis management framework. ### Policy recommendations (liquidity) - Move towards Basel III regarding liquidity risk management. - Refine the liquidity ratio (liquid assets, short term deposits), expand monitoring tools, and assess sources of liquidity risk, moving beyond the prudential standard. - Consider implementing ILAAP. --- ### Operational risk - Implementation status: BOA has implemented the qualitative side of operational risk of Basel 2, except self-assessment and capital requirement. - Capital timetable: capital requirements for Basel 2 will be implemented together with full implementation of pillar 2 during 2014. - Banks' choices: banks can choose between the basic indicator approach and the standard approach; banks expected to be fully compliant by the end of 2014. - Reporting: banks report key operational risk indicators (including IT risk) quarterly and operational risk losses by business lines and type of events yearly (including IT-related losses); banks use low thresholds for amounts they report; no material losses reported. - Supervisory methodology: in current CAMELS, operational and IT risk plus governance are part of Management (M); new Supervisory Manual will separate operational risk and reputational risk. - Off-site activities: 1. Quarterly recording of key operational risk indicators in a database by off-site officers; annually operational risk losses per business line. Unusual items are informally reported to portfolio manager; no formal quarterly reporting lines. 2. Annually around August, off-site officers analyze quarterly and annual reports and report formally to the portfolio manager. - On-site examinations: timing depends on inspection cycle; operational risk is part of full scope examination; examiners assess policies and procedures for compliance, assess nature of reported losses and reconcile reported losses with general ledger. - Emerging risk: banks have a growing, though not yet material, position in property due to foreclosures; banks are allowed to take property on their books (LOB article 70, paragraph 5.1), creating operational risk that should be reflected in Basel 2 implementation in 2014. ### Policy recommendation (operational risk) - Consider expanding outreach to service providers of outsourced activities (including outside Albania) by requiring banks to include in outsourcing contracts that BOA has the right to audit the service provider. --- ### Internal control and audit - Regulatory status: reasonably comprehensive set of rules governing mandate and quality of internal audit and internal control system. - Supervisory implication: with plan to adopt risk-based supervision, authorities need to scrutinize closely the overall effectiveness of the internal audit function. - Recommendation: encourage banks through supervisory process to focus on further enhancements in the effectiveness of the internal audit function as part of risk-based supervision. --- ### Financial reporting and external audit - Interaction: meetings with external auditors are held infrequently to discuss accounting and financial issues and other general interest areas. - Recommendation: more frequent meetings could be beneficial to all parties. --- ### Disclosure and transparency - Standards: disclosure requirements are in accordance with IFRS; external auditors ensure disclosure rules are adhered to. - Reporting regimes: IFRS required for published financial reports and NAS for supervisory purposes. - Transition plan: authorities planning to transition the banking system solely to IFRS standards by 2015 if the transition goes smoothly. - Market disclosure regulation: reasonably complete but may need modifications after Pillar 1 and 2 requirements are finalized with Basel II implementation. ### Policy recommendation (disclosure) - Some modifications to market disclosure regulation (regulation 60) may be needed after conversion to Basel II; supervisor should review regulation relative to Pillar 2 requirements once the risk management framework under Pillar 2 is developed. --- ### Abuse of financial services (AML/CFT) - Legal framework: law governing requirements for banks and other financial institutions is reasonably comprehensive for combating AML/CFT. - Coordination: BOA and the FIU have coordinated through joint examination, training and other ways. - Data usage: data provided to the FIU through suspicious activity reports could be used effectively for analysis in BOA’s AML/CFT supervision program. - Recommendation: explore ways to obtain either summary or institution-specific information on contents of suspicious activity reports submitted to the FIU; an MOU with the FIU would facilitate exchange of such information. --- ### Key statistics and dates referenced - Liquidity regulation originates in 2009. - Crisis and supervisory changes referenced since 2008. - Basel 2 pillar 2 and SREP introduction planned for 2014. - Banks expected to be fully compliant with operational Basel 2 items by end of 2014. - Transition to IFRS planned by 2015. - Average capital requirement on government positions under Basel 1: 2.5% of the position. - Deposit funding: 83% of banking system funding covered by deposit holders; 30% of deposits up to 1 month. - Legal citations: LOB article 63 and 64; LOB article 70, paragraph 5.1; Article 132 of the LOB; regulation on credit risk article 6 and 9; regulation 60; Regulation 42. *Source: _cr1479 - 19. Concentration risk* ### Appendix V. Report on the Observance of Standards and Codes: ### Appendix V. Report on the Observance of Standards and Codes: Core Principles for Effective Deposit Insurance Systems—Summary Assessment ### A. Background - Assessment was conducted as part of the Financial Sector Assessment Program (FSAP) performed by the International Monetary Fund and the World Bank at the request of the Albanian government. - Mission dates: October 28 to November 11, 2013. ### B. Methodology Used for the Assessment - Evaluation applied the Methodology for Compliance Assessment adopted in December 2010 by the Bank for International Settlements and the International Association of Deposit Insurers. - Assessment focused on the Albanian Deposit Insurance Agency (ADIA) as insurer of deposits in 16 banks; ADIA was recently charged with developing rules for insuring deposits in 126 savings and credit cooperative associations (SCAs). - Designed to assess whether criteria are fulfilled in practice and not just in theory. - Based on review of laws, regulations, regulatory and supervisory practices; meetings with Bank of Albania (BOA), Ministry of Finance (MOF), Banker’s Association, two SCAs, and ADIA. ADIA completed a self-assessment. - No failures of an insured institution since ADIA’s establishment in 2002; assessment therefore emphasized legal provisions rather than applied practice or court interpretation. ### C. Institutional and Macroprudential Setting and Market Structure - Financial system concentration and composition: - Banks account for 94 percent of financial system activity, equivalent to 88 percent of GDP in 2012 (up from 76 percent in 2005). - Subsidiaries of foreign banks represent about 93 percent of total banking assets. - NBFI sector about 6.4 percent of financial system assets. - Top banks comprised almost three-quarters of total financial assets as of year-end 2012. - Greek banks account for one-fifth of Albania’s banking system. - Supervisory and institutional arrangements: - BOA supervises domestic banking system, saving and credit cooperatives, and other nonbank financial institutions. - Albanian Financial Regulatory Authority (AFSA) supervises insurance companies, pensions and investment funds. - BOA intends to implement Basel II by 2015. - A high level financial stability advisory group (FSAG) chaired by MOF formed in 2006 and fully operational in 2012, meeting quarterly. ADIA is administered by a Board of Directors appointed by BOA and managed by a General Manager. - BOA has signed Memoranda of Understanding with supervisory authorities in Bulgaria, Germany, Greece, Italy, Kosovo, Macedonia, Montenegro, and Turkey and the regional supervisory authority. - Financial soundness indicators: - Banking system capital adequacy ratio (CAR) as of March 2013: 16.8 percent. - Nonperforming loans (NPLs) reached 24 percent of gross loans. - Banking sector characterized by moderate liquidity risk and adequate capitalization; credit risk is the biggest challenge. - Other financial system details as of mid-2013: - 11 insurance companies, 1 investment fund, 126 SCAs (largely in two unions), 6 pension funds, and 21 other non-bank financial institutions. ### D. General Preconditions for an Effective Deposit Insurance System - Preconditions (stable macroeconomic environment, sound governance of safety-net agencies, strong prudential regulation and supervision, a well-developed legal framework, sound accounting and disclosure regime) are largely in place. - BOA authorized to enter into arrangements with domestic and foreign supervisory authorities; participates in some Supervisory Colleges for largest banks. ### E. Main Findings - Overall conformity: - The deposit insurance framework managed by ADIA broadly conforms to best international practice. - ADIA established in 2002 under Law No. 8873, as amended in 2009 and 2012. - ADIA administers a Deposit Insurance System (DIS) covering deposits in 16 banks and will take responsibility for insuring deposits in SCAs per 2012 amendments. - Funding and fund size: - ADIA does not have a statutory target ratio; Article 24 authorizes reduction of annual insurance premiums if assets exceed 5% of the average of total insured deposits. - Projected fund level as of December 31, 2013: approximately 3.68 percent of insured deposits. - ADIA funded by annual premiums at a rate of 0.5 percent of the average amount of insured deposits held by banks at the close of business of the last calendar quarter of the preceding year; premiums paid quarterly; no risk-based element. - Authority exists to collect advance premiums and, with BOA approval, special contributions to replenish the fund. - ADIA manages an investment portfolio reaching almost 20 billion ALL or approximately 1.4 percent of GDP at end-September 2013. - Current investments focused on Treasury bills up to twelve months; ADIA’s share of the twelve month Treasury bill portfolio is close to 10 percent of outstanding Treasury bills. - Coverage and payout mechanics: - Deposit insurance compulsory for all banks. - ADIA protects only natural persons, up to the maximum of 2.5 million ALL (about US$25,000) per depositor. - Foreign denominated deposits insured to the same amount but paid in ALL; exchange rate set under Article 4 of ADIA’s law as in effect on the date of intervention. - Legal mandate to reimburse depositors within three months of BOA intervention, with ability to extend for up to six additional months. - ADIA insures approximately 95 percent of individual depositors and 58 percent of deposits in the banking system (Table 1 also cites 69 percent of all individual deposits). - Operational strengths and weaknesses: - Strengths: ability to attract qualified staff, efforts to build a computerized data collection system, cordial working relationship with BOA as an entity within the central bank. - Areas for improvement: public awareness program (particularly regarding investment products sold by a member institution), governance framework (many actions require BOA ratification), incomplete implementation of information sharing agreement with BOA (including lack of access to supervisory information relevant to payout preparedness), overly restrictive legal requirements for approved investments, limitations on legal protection for current and former employees and those acting at ADIA’s direction. - ADIA is developing an automated payout system with member banks to allow payout in less than the statutory three months and intends to run a simulation exercise once operational. - Compliance assessment: - ADIA in broad compliance with the Core Principles (one Principle Not Applicable). - Key specific findings from Table 1 include: - Core Principle 1: ADIA’s law does not include its Public Policy Objectives (PPOs); no process for regular review of whether operations meet PPOs. - Core Principle 2: Coverage limited to natural persons; flat rate premiums appropriate at this stage. - Core Principle 3: ADIA has a clear paybox mandate (Article 6). - Core Principle 4: ADIA has powers consistent with paybox mandate but many actions need BOA ratification; lacks direct power to compel premium payments and account information. - Core Principle 5: Governance structure: five board members with staggered five year terms; CEO selected by BOA and appointed by Board; board appointments split between BOA, MOF, and Professional Union of Public Accountants; dismissal for specified cause under Article 13; conflict of interest provisions in Article 17. - Core Principle 6: MOU with BOA (2002) not fully implemented; a separate MOU among MOF, BOA, AFSA and ADIA exists regarding FSAG operation. - Core Principle 7: Legal authority to enter agreements with foreign deposit insurers (Article 9) but none have been made; ADIA responsible only for payments within Albania. - Core Principle 8: All BOA-licensed banks are DIS members; 2012 amendments provide for SCAs entry but applications incomplete; government committed initial funding of 50 million ALL which has not been provided. - Core Principle 9: Coverage limit 2.5 million ALL per person per institution; covers 95% of individual depositors, 69% of all individual deposits, and approximately 58% of all bank deposits; no established review process for coverage limits; 2012 amendments clarified set-off rules. - Core Principle 10: Not applicable (transitioning from blanket guarantee). - Core Principle 11: Ex ante fund in place; initial government contribution forms part of ADIA capital; fund projected at approximately 3.68 percent of insured deposits by year-end 2013; back-up funding per Article 20/1 and tri-partite agreement with MOF, BOA and ADIA signed March 2012. - Core Principle 12: Public awareness materials exist (pamphlet, account form disclosures, signs, website); no measured awareness level though a survey instrument is in draft; dedicated public awareness group established. - Core Principle 13: Legal protection only for ADIA employees under Article 16/1; no protection for former employees or those acting at ADIA’s direction; employees must pay for legal defense and seek reimbursement if found not responsible. - Core Principle 14: Procedures exist for dealing with parties at fault via public prosecutor and BOA; ADIA not involved. - Core Principle 15: ADIA not part of BOA’s Early Warning System and does not receive BOA supervisory early warning information; ADIA can contribute to P&A or bridge bank up to amount of insured deposits (Article 7). - Core Principle 16: ADIA involved after BOA determines liquidation; role limited to payout or contribution to P&A/bridge bank; no formal process for ADIA in decision to use its funds in resolution. - Core Principle 17: Automated payout system under development; law amended in 2012 to eliminate set-off for other than overdue loans; no authority for advance or interim payments to depositors in case of delay. - Core Principle 18: ADIA subrogated to depositor claims; judicial processes exist for asset recovery though realization on collateral can be slow. ### Key Statistics and Exact Figures - Mission: October 28 to November 11, 2013. - Banks account for 94 percent of financial system activity; equivalent to 88 percent of GDP in 2012 (up from 76 percent in 2005). - Subsidiaries of foreign banks represent about 93 percent of total banking assets. - NBFI sector: 6.4 percent of financial system assets. - As of March 2013, banking system CAR: 16.8 percent. - NPLs: 24 percent of gross loans. - ADIA fund at end-September 2013: almost 20 billion ALL; approximately 1.4 percent of GDP. - ADIA’s share of twelve month Treasury bill portfolio: close to 10 percent of outstanding Treasury bills. - Deposit insurance coverage limit: 2.5 million ALL (about US$25,000) per depositor. - Premium rate: 0.5 percent of average insured deposits (calculated at close of business of last calendar quarter of preceding year). - ADIA insures approximately 95 percent of individual depositors, 69 percent of all individual deposits, and approximately 58 percent of all bank deposits. - Projected ADIA fund as of December 31, 2013: approximately 3.68 percent of insured deposits. - Government committed initial funding for SCAs: 50 million ALL (not yet provided). - Tri-partite agreement on back-up funding signed March 2012. ### Recommendations (summary from Table 2) - Core Principle 1: Amend ADIA’s governing statute to state Public Policy Objectives; develop process for measuring whether ADIA meets those objectives. - Core Principle 4: Increase ADIA’s autonomy from BOA in daily operations; reduce actions subject to BOA ratification; extend exemption from public procurement rules to work preparing for insured deposit payments and fund transfers. - Core Principle 6: Fully implement the MOU between ADIA and BOA on information sharing. - Core Principle 7: Enter into agreements with relevant deposit insurance authorities to facilitate resolution planning and communication if parent banks face stress. - Core Principle 8: ADIA and BOA should complete process to have all eligible SCAs join DIS; government must provide funding to allow SCAs to be covered. - Core Principle 9: Review list of exclusions from coverage; study appropriate level of insurance coverage for SCAs and possibility of extending coverage to enterprises. - Core Principle 11: Diversify ADIA’s investment portfolio and allow longer maturities; prepare an Investment Policy reflecting risk from insured foreign deposits; adopt asset-liability management principles and internal investment controls; clarify back-up funding availability to support contributions to bridge bank or P&A resolution. - Core Principle 12: Fully implement a Public Awareness Plan including clarifying the uninsured nature of investment products sold by banks. *Appendix V. Report on the Observance of Standards and Codes: Core Principles for Effective Deposit Insurance Systems—Summary Assessment* ### 13. Legal Protection Provide legal protection to former employees and ### 13. Legal Protection Provide legal protection to former employees and ### Key policy recommendations (resolution and depositor protection) - Provide legal protection to former employees and those working at ADIA’s direction and provide rules for ex ante payment of defense costs. - Fully implement the MOU with BOA to allow access to information on member banks, including information in BOA’s examination reports and EWS. - Develop a formal process for ADIA’s involvement in the decision to use its funds in support of bridge bank or P&A resolution decisions. - Provide ADIA the authority to make advance or interim payments to insured depositors. - Treat ADIA’s expenses in preparing for the use of its funds in resolution as an administrative expense under Article 121 of the LOB. ### Context and institutional actors referenced - ADIA (entity with funds and resolution role). - BOA (Bank of Albania, party to an MOU to share bank information and EWS). - Article 121 of the LOB (legal provision referenced for expense treatment). ### Implementation focus - Legal protections and clear rules for ex ante payment of defense costs to support personnel involved in resolution. - Formalized governance and decision processes for use of ADIA funds in bridge bank and purchase & assumption (P&A) actions. - Legal authority for advance or interim depositor reimbursements to improve speed of depositor protection. - Accounting/treatment of preparatory resolution expenses as administrative expenses under existing law. --- ### Appendix VI. Report on the Observance of Standards and Codes: Insurance Core Principles—Summary Assessment ### A. Introduction - Assessment of Albania's compliance with the International Association of Insurance Supervisors (IAIS) Insurance Core Principles (ICP) carried out as part of the 2013 Financial Sector Assessment Program (FSAP). - This is the first external assessment of Albania’s compliance with the ICPs. ### B. Information and methodology used for the assessment - Assessment based on information available during the November 2013 FSAP mission. - AFSA contributed a self-assessment and detailed updates at the individual criterion level. - Comprehensive documentation (laws, by-laws, regulations) was (i) available on AFSA's web-site or (ii) provided to the assessor by AFSA management. - Discussions with AFSA and insurance market participants informed the assessment. - The assessment employs the 2011 version of the IAIS Insurance Core Principles and Methodology revised in October 2012 and takes into account IAIS standards and guidelines. ### C. Institutional and market structure overview — key findings - The Albanian Financial Supervisory Authority (AFSA) has all the responsibility for insurance regulation and supervision in Albania. - The insurance sector in Albania remains small and underdeveloped with gross written premium of about 0.66 percent of GDP. - Insurance consumption is €20 per capita. - Over the last three years, the market experienced little growth in real terms mainly due to weak economic growth, lack of public awareness, low insurance 9.5 fierce price competition among 11 insurers who shared the market of only €64 million in gross premium written (GPW). - By the end of 2012, there were 11 companies in the insurance market: eight non-life insurers, two life insurers and one composite company (INSIG). - Insurance Law requires separation of life and non-life insurance, but state-owned INSIG is allowed to perform both types until privatized. - In 2012, five subsidiaries of Austrian insurance groups accounted for 63.4% percent of non-life premiums and 51.2 percent of life insurance premiums respectively. - Licensed entities also include seven insurance brokerage companies, 17 independent claims adjusting firms and 279 individual licensed agents and 15 authorized actuaries. - Real growth of insurance premiums from 2009 to 2012 was only 3 percent, below cumulative GDP growth of 7.5 percent over the same period. - Insurance penetration (gross written premiums/GDP) dropped from 0.69 percent to 0.66 percent from 2009 to 2012. - In 2012, share of life and non-life insurance in total premium was 10 and 90 percent, respectively. - Motor third-party liability insurance (MTPL) constituted 56.9 percent of total non-life premium. - About 63.7 percent of premiums came from motor lines (both MTPL and casco), 7.7 percent from personal accident and health, 21.2 percent from property, 4.4 percent from general liability and the rest from MAT and financial insurance. - About 59 percent of life insurance premiums came from credit life insurance. - In 2012, total life insurance premiums dropped by 17.3 percent compared to 2011 due to the slowdown of lending by banks and a 25 percent decline in credit life premiums. - Insurance revenues from long-term life products with saving elements were 14.6 percent of a life insurance portfolio totaling EUR 6.3mm. - The current law defines capital and solvency criteria based on the Solvency I regime. - Market solvency ratio (surplus capital with EU Solvency I margin) was above 300 percent (Table 1). - Non-life market net retention ratio (net written premiums/gross written premiums) is in the range of 80 percent. - Reinsurance regulation sets minimum requirements on per risk net retention and quality of reinsurers based on credit ratings, but no detailed procedures to address capital requirements in case of risk accumulation from multiple contracts (e.g., catastrophe/earthquake PML). - AFSA established investment regulations for capital investment and assets covering technical provisions, but specific investment guidelines for life insurance (assets covering mathematical provisions) are not in place. ### Market performance indicators (as presented) - Insurance Penetration (Gross Premiums Written/GDP): 2008 0.65; 2009 0.69; 2010 0.67; 2011 0.62; 2012 0.66. - Insurance Market Assets /GDP: 2008 1.42; 2009 1.42; 2010 1.45; 2011 1.45; 2012 1.51. - Table 1 ratios (2008–2012): - Premium retention ratio (NPW/GPW): 79.5% 82.2% 84.4% 81.6% 76.9% - Claims ratio: 25.7% 36.2% 32.9% 43.0% 34.5% - Expense ratio: 69.0% 73.3% 64.5% 72.7% 65.1% - Combined ratio: 94.7% 109.6% 97.4% 115.7% 99.6% - Operational ratio (1-profit ratio): 84.2% 91.7% 84.8% 107.0% 92.0% - Receivables ratio 1 (receivables/total assets): 9.4% 10.7% 9.1% 8.6% 9.6% - Receivables ratio 2 (receivables/equity): 17.6% 21.7% 16.8% 17.3% 20.4% - Liquidity ratio (cash and short-term investment/total assets): 50.2% 52.6% 56.8% 49.9% 46.9% - Market solvency margin ratio (surplus capital/required solvency I c a): 316.0% 374.4% 439.6% 333.3% 346.0% - Premium leverage ratio (NPW/surplus capital): 71.2% 84.8% 75.2% 73.5% 76.6% - Non-life technical reserves ratio (technical reserves/NPW): 72.5% 77.0% 77.8% 96.3% 98.7% ### Underwriting performance and claims issues - Underwriting performance of non-life sector was not good over the last five years despite a market claims ratio reported as only 45 percent. - Around 70 percent of premiums went to cover insurers' operational expenses. - AFSA’s capacity to assess adequacy of reinsurance arrangements is limited. - AFSA requires cedants to be transparent in reinsurance arrangements and risk management. - The non-life sector recorded an underwriting loss of about AL 644 million, or about 26 percent of the net earned premiums for the first half of 2013. - Eight out of nine non-life insurers recorded combined ratios above 100 percent during the first six months of 2013, despite a market claims ratio of 50 percent. - High expense and commission levels owing to fierce and unfair MTPL competition contributed to underwriting losses. - Inadequate reserving: ratio of IBNR claims reserves relative to MTPL premiums varied greatly across companies writing similar MTPL business. - Industry Compensation Fund is ALL 890 million (EUR 6.5 million) short of funding its technical provisions. - In June 2013, unfunded market liability from uninsured claims was about 60 percent of the total MTPL claims reserve for the entire market. - A typical earthquake portfolio of a small size insurer with minimum capital (EUR 3million) gets exposed to a risk accumulation of about EUR 380 million of earthquake risk mainly in Tirana. ### Insurance supervision challenges (summary) - Legal and regulatory framework is only partially compliant with IAIS requirements. - Supervision has been light, contributing to price wars, decreased premium volume, increased risk exposure and negative profitability. - Consumer impacts: reduced average payment per claim and increased waiting times for indemnification. - AFSA’s effectiveness eroded by lack of real independence, constrained financial resources, absent representation in law-making, and acute shortage of qualified personnel. - Despite significant supervisory fee income, AFSA is prevented by the Law on Public Administration and the Civil Servants Law from aligning compensation with private sector, leading to high staff turnover. - Average tenure of staff in on and off-site supervision unit of FSA is only 1.7 years. - Rigid rule-based Insurance Law prevents AFSA from issuing by-laws to meet evolving supervision needs; a new draft Insurance Law prepared in 2011 is yet to be cleared by Government for Parliament consideration. - AFSA does not prioritize on-site inspections based on risk profile; every company is inspected at least once a year. - AFSA lacks legal mandate and sufficient technical capacity to control adequacy and effectiveness of insurers' corporate governance. - AFSA has been able to observe IAIS ICPs dealing with information disclosure, data sharing and transparency due to a high-quality web-based market data collection system and has been largely transparent and accountable. - Existing legal framework has been eroded by enactment of conflicting laws and regulations; pending legislative amendments proposed by AFSA have not been enacted. - AFSA’s authority is undermined by insurance companies’ ability to suspend its rulings in court by filing appeals. *Source: IMF staff report excerpt (Appendix VI, Insurance Core Principles—Summary Assessment).* ### 137. Although Albania adopted the relevant AML/CFT regulatory framework for the ### _cr1479 - 137. Although Albania adopted the relevant AML/CFT regulatory framework for the ### Observations on AML/CFT and Insurance Supervision - Albania adopted the relevant AML/CFT regulatory framework for the financial sector, but "the insurance sector specific AML laws and regulations have not been enacted." - "The AFSA currently neither has a legal mandate nor a specially designated unit (with qualified staff) to supervise the AML related aspects of insurance market operations." - "There is no specific regulation or provision in the existing insurance law regarding anti money laundering." - "There is no designated unit in the AFSA to address the Anti-Money Laundering (AML) issues." - Three AFSA employees received some basic training on AML, but "there are no on-site inspection manuals or guidelines that could be used by the AFSA in conducting market supervision." - The AFSA "received the mandate to address the AML issues only recently." ### Impact on Insurance Market Soundness and Growth - The FSAP assessment identified "a broad series of weaknesses in insurance supervision" that "act as a drag on growth of the insurance industry in Albania." - In the absence of decisive legislative and government action: - "the financial fundamentals of insurance industry in Albania are likely to deteriorate to a point, where non-payment of claims will become a common practice," - "the solvency of most companies in the market will become a major suspect." - Competitive pressures, "unchecked by vigorously enforced regulatory requirements on technical provisions," will depress "the already unsatisfactory rate of return on capital invested in insurance companies," making the industry unattractive to large international insurance groups. ### Institutional Capacity and Independence of AFSA - "Major institutional reform will be needed to achieve AFSA’s financial and operational independence and turn it into an effective regulator of the local insurance market." - Current constraints on AFSA: - Lack of authority to initiate timely changes in main legislation. - Organizational structure (number and positions) and remuneration are decided by the Parliament despite AFSA being fully financed by the market. - "Insufficient institutional capacity due to several restrictions (e.g. inability to restructure the organization and financial limitations)." - Inability to retain qualified technical staff due to organizational and financial limitations. - AFSA officials "are not immune from legal action that might be brought in by disgruntled insurers." - Enforcement is undermined because insurers can challenge AFSA rulings in court; courts "may suspend AFSA's decisions for an indefinite time (sometimes for years)." - On average, "it takes 3-6 months to address severe cases of insolvency and even then, it is not guaranteed that the solvency will be fully restored." ### IAIS Insurance Core Principles (ICP) — Overall Assessment - The detailed IAIS ICP assessment concluded that "Albania’s legal and regulatory framework for the insurance industry is only partially compliant with most IAIS requirements." - The assessment provides ICP-specific findings (summarized highlights below). ### Key ICP Findings (selected) - ICP1 Objectives, Powers and Responsibilities of the Supervisor - Legislation defines supervisory objectives, but AFSA's responsibilities, powers and effectiveness are "only partially satisfactory." - AFSA "cannot directly initiate changes in main legislation." - ICP2 Supervisor - Only protection of information is "largely met." - AFSA's "independence, accountability and professionalism are hindered" by inability to amend legislation, authority to act, and inadequate capacity. - ICP3 Information Exchange and Confidentiality Requirements - Law enables cross sharing of information; ICP3 not specifically addressed by law but MOUs comply with IAIS terms. - ICP4 Licensing - Licensing criteria detailed and in line with ICP; AFSA is responsible authority. - Technical capacity to check full compliance of documentation by applicants is limited. - ICP5 Suitability of Persons - General suitability criteria exist; legislation needs further detail regarding criminal records of shareholders. - ICP6 Changes in Control and Portfolio Transfers - Supervisory approval required for significant ownership (10% or more); legislation does not require a favorable opinion from a qualified actuary and AFSA lacks capacity to assess adequacy of reserves and assets for transfers. - ICP7 Corporate Governance - No requirement that Boards be composed of people with adequate knowledge/skills commensurate with nature, scale and complexity of business. - No clear requirements for risk management function, procedures for day-to-day operations, or management information systems. - AFSA lacks legal mandate and technical capacity to control adequacy and effectiveness of insurers' corporate governance. - ICP8 Risk Management and Internal Controls - Law specifies capital/solvency, technical reserves, investments, reinsurance; companies report quarterly (annually for life). - Current criteria are not risk-based and do not support effective risk management; law does not address catastrophe risk accumulation. - ICP9 Supervisory Review and Reporting - AFSA's ability to supervise is "severely constrained by the lack of qualified personnel." - Only two qualified insurance inspectors and limited actuarial capacity. - On-site inspections are not guided by prior off-site risk examinations. - "There is a high quality reporting and data collection system, which is in line with the international standards." - ICP10 Preventive and Corrective Measures - Law describes preventive and corrective measures but does not provide AFSA with ability for timely interventions, particularly in insolvency cases. - Rule-based supervisory regime makes timely corrective action difficult when evidence is not clear. - ICP11 Enforcement - Enforcement undermined by insurers' ability to challenge AFSA decisions in court; courts can suspend decisions indefinitely. - "On average, it takes 3-6 months to address severe cases of insolvency." - ICP12 Winding-up and Exit from the Market - Procedures are clearly defined and provide adequate protection of policyholders; immediate enforcement may be obstructed by court suspensions of AFSA decisions. - ICP13 Reinsurance and Other Forms of Risk Transfer - Regulation sets 'per risk net retention' rules and minimum credit quality for reinsurers, but does not address risk accumulation from catastrophe risks or PML-based assessment. - AFSA lacks sufficient reinsurance expertise. - ICP14 Valuation - Supervision is rule-based; Solvency margin (EU S1) and valuation are not risk-based. - Valuation of technical provisions does not properly address time value of money; no statutory prescribed discount rates for mathematical life reserves. - Technical provisions are certified by actuaries authorized by AFSA, but in practice actuaries obey management decisions on reserve amounts. - Independent auditors face lack of necessary detailed data for proper assessment of reserves. - ICP15 Investment - Investment regulations address capital investment and assets covering technical provisions and set limitations; specific ALM guidelines for life insurance are not in place. - ICP16 Enterprise Risk Management for Solvency Purposes - Requirements cannot be met until a comprehensive risk-based supervisory approach is adopted; no requirements for risk measurement or internal measurement approaches. - ICP17 Capital Adequacy - Capital adequacy requirements exist under Solvency I (S1), but the regime "does not provide for capital adequacy requirements for solvency purposes to enable (i) proper (risk sensitive) solvency assessment and (ii) timely supervisory intervention." - The total balance-sheet approach is not required; the concept of 'Prescribed Capital Requirement (PCR)' is not observed. - ICP18 Intermediaries - Regulations for licensing intermediaries exist, including fit-and-proper and financial requirements; no training materials for brokers' licensing exams. - On-site inspections of intermediaries are rare and poorly structured (no inspection manuals). - ICP19 Conduct of Business - General business conduct requirements exist (product transparency); additional regulations needed for life products such as unit link insurance and long-term guaranteed savings. - AFSA developed claims settlement guidelines and complaints procedures, but practical enforcement needs improvement to ensure timely payment of claims. - ICP20 Public Disclosure - AFSA discloses ample market information; annual financial statements are made public by insurers, but "more detailed financial information on insurers should be disclosed to the public" per ICP. - ICP21 Countering Fraud in Insurance - "There is no specific regulation or provision in the existing insurance law related to combating insurance fraud." - "There is no fraud database." Regulator has limited capacity to deter, prevent, detect, report and remedy fraud. - ICP22 Anti-Money Laundering and Combating the Financing of Terrorism - Reiterates absence of insurance-specific AML provisions, lack of designated unit, limited training and lack of inspection manuals; AFSA's AML mandate is recent. - ICP23 Group wide Supervision - Current law does not address group-wide supervision; MOUs have been signed with some home/host supervisors. - ICP24 Macroprudential Surveillance and Insurance Supervision - Current regulation does not address potential systemic risks (catastrophe underwriting, aviation, underestimation of life reserves), though AFSA "has already developed" a strategy to deal with these risks. - ICP25 Supervisory Cooperation and Coordination - Regulation does not address group-wide supervision, but effective cooperation exists via MOUs and invitation to supervisory colleges. - ICP26 Cross-border Cooperation and Coordination on Crisis Management - Cross-border cooperation exists, but AFSA lacks mandate to examine contingency plans and operational risk management under current law and lacks capacity to assess insurers commensurate with risk complexity. ### Policy Recommendations (implicit and explicit in the assessment) - Enact insurance sector specific AML/CFT laws and regulations to provide a clear legal basis for AML supervision in insurance. - Establish a designated unit within AFSA with qualified staff to supervise AML-related aspects of insurance market operations and to develop on-site inspection manuals and guidelines. - Grant AFSA the legal authority and operational independence to: - Initiate timely legislative changes, - Restructure its organization and set remuneration to retain qualified technical staff, - Intervene promptly in cases of insurer distress and insolvency. - Build AFSA's technical capacity, including: - Increase number of qualified insurance inspectors and actuarial capacity, - Develop reinsurance expertise, - Strengthen actuarial independence and data availability for reserve assessments, - Introduce inspection manuals and structured on-site procedures for insurers and intermediaries. - Transition from a rule-based to a comprehensive risk-based supervisory (RBS) approach to enable: - Risk-based capital and valuation frameworks, - Enterprise risk management requirements, - Proper solvency assessment and timely supervisory intervention. - Strengthen legal and procedural safeguards to reduce the ability of courts to indefinitely suspend AFSA decisions in ways that threaten policyholder protection and market stability. - Develop ALM regulations and specific investment guidelines for life insurance to address interest, currency and duration matching. - Improve public disclosure requirements to provide more detailed financial information on insurers. - Introduce fraud-combating provisions, a fraud database, and enhanced capacity to deter, detect, report and remedy insurance fraud. - Clarify and legislate group-wide supervision and crisis-management authorities and procedures, and expand MOUs and participation in supervisory colleges where appropriate. *Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr1479.pdf* ### 141. The following detailed technical recommendations were provided by the FSAP mission ### _cr1479 - 141. The following detailed technical recommendations were provided by the FSAP mission ### Institutional and legal reform of the insurance supervisory authority - Reform the current institutional and legal set-up of the insurance supervisory authority by: - (a) empowering it to sponsor and present to the Parliament new insurance laws, by-laws and amendment to the existing laws, if required; - (b) make the AFSA exempt from the Law on Public Administration, which renders the agency an extension of the government, thereby thwarting its ability to fulfill its mandate; - (c) pass the amendments to the AFSA law which would empower the agency to offer competitive compensation terms to its technical staff and thus enable it to attract experienced and qualified insurance professionals from the market; - (d) change the agency’s horizontal administrative structure by creating technical positions responsible only for insurance supervision; - (e) enable the AFSA to retain independent insurance consultants from the industry to urgently address its acute need for highly qualified experienced actuaries and IT specialists. - Introduce a legal mandate for the AFSA to obtain the financial and human resources that may be required to supervise compliance of the insurance market with the AML and CFT regulations (paragraph 149). ### Enactment of pending insurance legislation and adoption of IAIS-aligned standards - Enact the pending drafts of insurance legislation such as the draft Insurance Law and the draft MTPL insurance law to: - bring AFSA regulatory practices and framework closer in line with the IAIS requirements; - introduce risk based by-laws and regulations. - Specific regulatory measures recommended: - Introduce the risk based “early warning” claims performance and solvency requirements which would require companies to (a) timely meet insurance liabilities arising from insurance contracts and (b) maintain a capital buffer over and above the minimum solvency requirement. - Adopt appropriate requirements with regards to (i) corporate governance and sound risk management practices and (ii) adequate management information systems to ensure timely monitoring of insurer’s risk exposures as well as the performance of its senior management. - Develop an internal insurers’ risk rating system for the purposes of efficiently allocating scarce supervisory resources to the most problematic companies and areas of operations. - Develop detailed inspection manuals for thematic regulatory inspections to provide for targeted and quick supervisory action. - Prepare and enact relevant regulations on life insurance which are currently not in place with outsourced technical assistance from highly qualified life insurance experts. - Introduce a nation-wide earthquake insurance program for homeowners compliant with catastrophe risk management requirements (paragraph 143). ### Earthquake risk management and national earthquake insurance program - Prepare and enact relevant regulations on management of earthquake risk which are not current in place and introduce a nation-wide earthquake insurance program for homeowners (paragraph 144). - Rationale: Despite being heavily exposed to earthquakes, the earthquake insurance for homeowners is almost non-existing, thus leaving homeowners and the government financially vulnerable to natural disasters (paragraph 148). - Additional: Annex 1 (attached and integral part of this document) referenced for additional information on the impact of earthquakes on consumers, financial sector and country's economy (paragraph 144). ### MTPL market stabilization, reserving, and Compensation Fund - Undertake immediate MTPL market stabilization measures by: - establishing minimum reserving standards based on market-wide claims performance and ensure proper funding of reserves; - phasing out these special stabilization measures over time in response to visible improvements in the market fundamentals; - conducting all necessary amendments to the MTPL law in consultation with the insurance market (paragraph 145). - Carry out a market-wide study of companies’ MTPL reserving practices to: - understand the industry historic claims development patterns; - draft a by-law on the minimum regulatory requirement to technical provisions (IBNR) for the MTPL line of business; - ensure reserving requirements and the underlying actuarial methodology (a) support implementation of sound claims performance by all insurers in the market and (b) are supported by a detailed reserving supervision manual and relevant automated IT supervisory tools (paragraph 146). - Compensation Fund actions: - AFSA should immediately restore the funding of the Compensation Fund which until now has not been funded by member insurance companies; - insurance companies should be required to immediately finance the outstanding liabilities of the Fund and ensure proper and timely payment of claims arising from uninsured vehicles, as required by the law (paragraph 147). - AFSA and market interaction on Compensation Fund: - AFSA agreed to restore the Compensation Fund by requiring insurance companies to finance outstanding liabilities but suggested a transitional period of three years during which the insurance market would (i) pay all compensation fund claims; and (ii) establish a mechanism for consistent funding of liabilities on an ongoing basis (paragraph 153). - FSAP recommends AFSA detail and specify the transitional proposal in an action plan to ensure (i) full and timely payments of all current liabilities of the Compensation Fund; and (ii) sustainable financing of the Fund in the future (paragraph 153). - The FSAP noted that fines imposed on uninsured motorists are not used to finance the Compensation Fund, although the MTPL Law mentions them as a source; the Law should be amended to specify the share of fines to be allocated to the Compensation Fund and cooperation with government agencies to reduce uninsured drivers is important (paragraph 154). ### Market development measures and fiscal/social risk mitigation - To address social and fiscal impact of natural disasters, mitigate impact of MTPL stabilization on insurers, and support insurance market growth, recommend: - (a) establishment of a national compulsory earthquake insurance program, - (b) introduction of liability insurance requirements for various professional services, - (c) waging VAT requirement for at least non-compulsory insurance products (paragraph 148). - AFSA concurred with these development alternatives but noted such initiatives require government commitment, enactment of respective laws, government support, and extensive technical assistance; the MOF expressed support for the earthquake insurance measure (paragraph 156). ### AML/CFT supervision scope - Recommendation: expand scope to give the AFSA a legal mandate for monitoring all insurance activities for the risk of money-laundering and terrorism financing (paragraph 158). - Current situation noted by AFSA: only life insurance companies and reinsurance companies are subject to Law no. 9917, date 19.05.2008 "On Anti money Laundering and Counter Terrorism Financing" (paragraph 158). ### AFSA response, implementation considerations, and technical assistance needs - AFSA confirmed agreement with the IAIS ICP observance assessment and FSAP recommendations; summary of AFSA comments and assessor clarifications provided (paragraph 150). - AFSA requested specific implementation details for MTPL emergency stabilization (timelines, minimum reserving amounts, funding requirements); FSAP noted these require additional technical analysis and will be developed with World Bank support during preparation of the upcoming DPL program over the next few months (paragraph 151). - AFSA noted limited legal power to supervise pricing practices in a liberalized MTPL market; FSAP observed current real (discounted) prices for MTPL insurance coverage in Albania are about 25 percent of those in the neighboring countries and that the main problem is claims payment performance and overall market capital adequacy. FSAP expects stabilization measures to establish a minimum “floor” for future MTPL rates due to minimum reserve funding requirements but does not imply uniform pricing across companies (paragraph 152). - On risk based supervision: AFSA sees enactment of a risk based supervisory approach as a long process; FSAP clarified recommendation aims to pave the way for gradual introduction through necessary legal framework. Full-scale implementation will be longer-term and may require technical assistance from the Bank or other organizations (paragraph 155). - On consultation transparency: AFSA considers consultation observed but FSAP recommended enhanced process by providing insurers with (a) timely information about forthcoming legislative initiatives; and (b) sufficient time to provide input. AFSA should acknowledge and account for insurers’ inputs through transparent and timely comments and issue a regulation spelling out consultation procedure for future legislative initiatives (paragraph 157). *Source: FSAP mission recommendations and AFSA responses as presented in the document.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr1479.pdf_