The Albanian Recovery and Resolution framework

Natasha AhmetajSecond Deputy Governor

Bank of Albania

1. Albania Overview

Inflation rate: 2.2% (2008) vs. 1.5% (oct.2016)

Real GDP growth rate: 7.5%(2008) vs 3.21% (q2 2016)

Unemployment rate: 13.05% (2008) vs 15.5% (q2 2016)

Public debt/GDP: 54.6% (2008) vs 69.8% (q2 2016)

Policy rate: 6.25% (2008) vs 1.25% (q3 2016)

2. Financial stress

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

01/2

000

05/2

000

09/2

000

01/2

001

05/2

001

09/2

001

01/2

002

05/2

002

09/2

002

01/2

003

05/2

003

09/2

003

01/2

004

05/2

004

09/2

004

01/2

005

05/2

005

09/2

005

01/2

006

05/2

006

09/2

006

01/2

007

05/2

007

09/2

007

01/2

008

05/2

008

09/2

008

01/2

009

05/2

009

09/2

009

01/2

010

05/2

010

09/2

010

01/2

011

05/2

011

09/2

011

01/2

012

05/2

012

09/2

012

01/2

013

05/2

013

09/2

013

01/2

014

05/2

014

09/2

014

01/2

015

05/2

015

09/2

015

01/2

016

05/2

016

Banking sector Money market FX market Financial Stress Index

3. Albanian banking sector: implication by establishment of SSM

50.70%

3.7%

17.0%

28.5%

Asset share

Significant supervised entities (A)

Less significant institutions (B)

Not under SSM jurisdiction-Domestically Owned

Not under SSM jurisdiction-Other

7 banks

3 banks

4 banks

2 banks

4. Why resolution regime

Systemic Risk present in Albania

Concentration in the banking sector

The need to comply with international standards (World Bank, ECB gap analysis).

5. Systemic Risk, Albania Credit risk remains high indicating difficulty for their resolution and

the need to closely monitor this process.

Liquidity risk in the banking activity is assessed as low. The low value of loans to deposits ratio, continuation of deposits growth and the high presence of liquid assets above the minimum regulatory requirements, show a very good situation of liquidity in the banking sector.

The banking sector is significantly exposed to the market risk(including the exchange rate risk and interest rate risk).

The considerable size of banking sectors’ investments in Government debt securities, dictates the need to improve the size and the depth of the market.

The significant presence of foreign banks in Albania and the exposure of the banking sector to non-residents, underpins the need for close monitoring of international developments.

6. Concentrated banking sector

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

DB Largest Bank in Albania

Market share

800

900

1,000

1,100

1,200

1,300

1,400

1,500

1,600

1,700

03/1

3

06/1

3

09/1

3

12/1

3

03/1

4

06/1

4

09/1

4

12/1

4

03/1

5

06/1

5

09/1

5

12/1

5

03/1

6

06/1

6

09/1

6

HH

inde

x

ALL Deposits Fx Deposits Deposits

High competition No concentration Moderate concentration High concentration<1000 1000-1500 1500-2500 > 2500

High market share of the largest banks 4 banks with market share above 10% each Close to moderate concentration of deposits

7. Draft law “On recovery and resolution of banks in the Republic of Albania”

World Bank DPL deadline-end of 2016

FinSAC involvement

Working Group, BoA-FinSAC (+RRP)

Current RR Law draft statusPresented at the Parliament- 23 November 2016

To be approved by 15 December 2016.

Criteria and the relevant Weights

Individual Indicators

Indicators Equal weightsWeights according to

entropySIZE 20%

-Total assets (to residents) 20% 20%

INTERCONNECTEDNESS 20%

- Intra-financial system assets 10% 9.6%

- Intra-financial system liabilities 10% 10.4%

SUBSTITUTABILITY20%

-Loans to households 10% 9.2%

-Loans to non-financial corporates 10% 10.8%

COMPLEXITY20%

- Investment securities 4% 5.4%

- Marketable securities 4% 4.7%

- Claims on non-residents 4% 4.1%

- Liabilities to non-residents 4% 4.6%-Number of branches (territorialextension)

4% 1.1%

LOCAL SENSITIVITY20%

- Deposits of individuals 20% 20%

8. Identifying Systemically Important banks Approach (D-SIBs) : EBA Guideline on “CRITERIA FOR THE ASSESSMENT

OF O-SIIS” (2014) Indicator-based measurement approach

9. Systemic banks in Albania

2544

2141

1039 1032

640548

470342 336

248221 157 129 87 48 21

0

500

1000

1500

2000

2500

3000

Bank A Bank B Bank C Bank D Bank E Bank F Bank G Bank H Bank I Bank J Bank K Bank L Bank M Bank N Bank O Bank P

Syst

emic

Ris

k G

rade

(bp)

Size Interconnectedness Substitutability

Complexity Local Sentiment Min.350 bp

*Bank with SRG > 350 basis pointsWeights within each criteria were calculated by entropy method

10. FSI indicators-Systemic Banks

11. Additional capital requirement Capital buffer shall consist of and shall be supplementary to Common Equity Tier 1

capital

Additional higher loss absorbency requirements depends on the Systemic Risk Grade and the “equal expected impact” principle.

Table 1. Capital buffer for systemic banks

Ranking Bank Systemic Risk Grade Buffer rate (rounded)

1 Bank A 2544 2%

2 Bank B 2141 2%

3 Bank C 1039 1%

4 Bank D 1032 1%

5 Bank E 640 1%

6 Bank F 548 0%

7 Bank G 470 0%

12. Main resolution draft-law featuresBank’s restructuring by a resolution authority through the use of special tools at a stage before liquidation by keeping:

its critical functions the value of the bank preservation of financial stability

• Put the remaining parts into normal insolvency proceedings.

Resolution triggers

the bank is considered to be close to an insolvency situation; there is no prospect that any other measure taken by the bank, the banking group or

the shareholder’s or a supervisory measure taken by the SD, could, within a reasonable period restore good financial conditions of the bank and within the supervisory indicators.,

the bank's resolution is necessary in the public interest

Resolution Authority

Bank of Albania

13. Supervision Department vs. Resolution Department

Supervisory Department (SD) Resolution Department (RD)

Approval of recovery plans Information

Authorization of agreement to provide/accept mother group support

Information plus check under resolvability assessment

Order early intervention Information / preparatory for Resolution

Coordination as regards removal of impediments to resolvability

Resolution plans including resolvability assessment and decision on impediments

Determination of failing or likely to fail possibly by RA in addition (Fallback if SD does not act)

Information Decision for resolution actions

Recovery plans already prepared Resolution plans to be developed as the Law comes to force

14. Bank of Albania as a Resolution Authority

GOVERNOR

Supervision Department

FinancialStability

Department

SUPERVISORY COUNCIL

ResolutionDepartment

DEPUTY GOVERNOR

Recovery plans

Early intervention

Resolution process

Systemic Risk

Early Warning

FSAGBank of Albania

Ministry of FinanceFinancial Supervision Authority

Deposit Insurance Agency

Financial Stability Advisory

Committee

information

information

information

information information

information

15. Resolution fundThe Resolution Fund will be operational as the law comes to force, managed by DIA

Target funding level:• 0,5% of total liabilities, calculated as the difference between assets

and capital of all banks licensed in the Republic of Albania, to be reached in 10 years from the entry into force of the law.

• Financed by ex ante contributions of the banks.• If need be, ex post contributions can be raised, through borrowing

from the government, to make up any shortfalls.

Financial resources of the Fund:• Annual contributions from banks• Other resources (Extraordinary contributions from banks; loans,

subsidies, donations; incomes from financial sources investments of the Resolution Fund, etc.)

16. Resolution planning objectives

Ensure continuity of critical functions Avoid significant adverse effect on the financial

system, in particular by preventing contagion, including to market infrastructures, and by maintaining market disciplineProtect public funds by minimising reliance on

extraordinary public financial supportProtect covered depositors and protected investorsProtect client funds and client assets

17. Resolution planning process

18.MREL in the Albanian banking sector

A bank shall, at all times, meet the requirements for the minimal level of regulatory capital instruments and eligible liabilities to be determined by the RD

The RF may be used only where the shareholders and the other creditors have absorbed the losses and a recapitalisation is made in an amount which is not less than 6% of the total liabilities including regulatory capital of the bank under resolution.

Currently, mainly limited to subordinated debt in Albania

19. SRB- third countries RA Some ideas:Through the intermediation of EBA , conclude a non- bindingFramework Cooperation arrangement (FCA)

FCA: processes and arrangements for sharing information and for cooperation on:– development of resolution plans – removing impediments to resolvability – application of resolution tools

Arrangements are not compulsory:– Countries may have bilateral Memorandum of Understanding

(MoU)– European Resolution Colleges (ERCs): similar to Supervisory

Colleges attendance;