On 11 January 2013
the International Monetary Fund issued a series of documents regarding Albania 16 November 2012 ) entitled “Staff
Report for the 2012 Article IV Consultation.”
Below are two unedited excerpts from the staff report that deal with the
banking system. (Emphasis as per
original.)
[…]
RECENT DEVELOPMENTS: EUROZONE CRISIS TAKING A TOLL
C. Banking System: Stability Amidst Continued Risks
8. The banking system has been resilient
so far, but domestic and external spillover risks are concerns (Figure 4). Unlike many regional
countries, Albania did not experience a big boombust credit cycle, in large
part because of prudent limits on external borrowing prior to the crisis. Banks
today exhibit high liquidity and solvency ratios (Table 5), supported by
continued stringent liquidity and capital requirements. Nonetheless, NPLs have
risen sharply over the last two years and now exceed one fifth of all
outstanding loans, the highest ratio in SEE (80 percent of NPLs are in the corporate
sector—largely in trade, construction and manufacturing). Further, a large pool
of “watch loans”—representing the leading edge of possible new NPLs—could add
another 5–10 percentage points down the road. Provisioning has been adequate,
but bank profitability has suffered, and some banks are shrinking their loan
portfolios to meet capital requirements.
9. Exposure to Greece is a near-term risk.
Greek bank subsidiaries
have made considerable progress in re-aligning lending with their domestic
deposit base and increasing capital (Box 1). However, economic distress in
Greece could adversely affect parents’ ability to inject new capital in their
Albanian subsidiaries, if needed. To address possible risks, the Bank of
Albania (BoA) has applied more stringent capital and liquidity requirements on
Greek banks, and heightened coordination with Greek authorities.
[…]
REPORT ON THE DISCUSSIONS
C. Maintaining Financial Stability in the Face of
Continued Challenges
Background
21. Eurozone spillover risks are a
concern, but significant actions have been taken. The preponderance of foreign subsidiaries
in Albania and banking troubles in Europe raise the specter of potential
spillovers to the country’s banking system. However, the low reliance on
external funding and greater dependence on local deposits prior to the crisis
(the loan-to-deposit ratio of the Albanian banking system has remained below 65
percent in the past decade) has helped to mitigate the risks. Also, regulatory
changes introduced in late 2011 have helped to protect against possible contagion
effects, particularly related to Greece (Box 1 and Figure 4).8
22. Asset quality deterioration has both
cyclical and structural reasons. The increase in NPLs is explained by the economic slowdown, which
has been exacerbated, in part, by the increase in the government’s nonpayment
of supplier’s bills. In addition, banks’ efforts to resolve problem loans have
been hindered by an inefficient collateral execution process, including lengthy
legal procedures, weak judicial enforcement of creditors’ rights and a
regulated floor on real estate prices at auctions, which hinders foreclosure
sales. Banks appear to be relatively well-provisioned against NPLs, but not
surprisingly, the increase in NPLs has adversely affected both their
profitability and their ability to extend credit. If NPLs continue to rise,
some nonsystemic banks may need to bolster capital or shed assets. Given that
the system is dominated by European subsidiaries, it may be ambitious to expect
parents to fully satisfy additional capital needs, if necessary.
Staff advice
– Strictly monitor capital and
liquidity.
Supervisors should be vigilant to ensure that banks continue to proactively
recognize and provision against nonperforming loans and, based on stress test
results, ensure that capital and liquidity levels provide appropriate buffers.
Close coordination with other national regulators about evolving challenges,
including regional deleveraging, should also continue. Following up on the
considerable progress made in recent years with Fund technical assistance, the
priority should be to develop contingency plans for individual banks, and
develop simulations to test the authorities’ preparedness. Staff encouraged the
authorities to request an update on the 2005 FSAP.
– Intensify efforts to arrest the
deterioration in asset quality. Concrete actions to ease collateral execution, reduce delays in
the legal process, and clear unpaid government bills and VAT refunds are
essential. In particular, allowing property prices to adjust to market forces
by removing the regulated price floor at auctions would help facilitate
foreclosures sales,9 while backloading the fees paid to bailiff offices would
create greater incentives for timely execution. Implementation of the
guidelines on loan restructuring, recently issued by the BoA (and prepared in
cooperation with the World Bank), should also encourage increased out-of-court workouts
of nonperforming loans.
Authorities’ views
23. The authorities concurred that the near term
priority is to contain possible Eurozone spillovers. They viewed continued close bank supervision and
cooperation with regional regulatory authorities as having been critical in
containing risks so far and planned to further strengthen these efforts. They
also indicated a readiness to reinforce the regulatory framework and
contingency plans, guided by stress test results. They plan to request an FSAP
update for late 2013.
24. Reducing NPLs is a priority. There was broad agreement about the causes of rising
NPLs and the need to reduce their level. At the same time, the authorities
noted that with adequate capitalization, the increase in NPLs had been rather
manageable so far, and even if it were to increase further, only a handful of
nonsystemic banks would fall below regulatory capital requirements. The
authorities were also confident about the ability of parent banks to bring in additional
capital, if needed. Instead, they expressed concern about the tendency of
European banks to ascribe high risk weights to Albanian government securities.
They saw scope for more aggressive execution of collateral but also underscored
the social sensitivities associated with rapid foreclosure sales.
[…]
Source:
Albania:
2012 Article IV Consultation (2013-01-11)
Mark Pleas
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