REPUBLIC OF ALBANIA MINISTRY OF FINANCE No. 1412/1, date 03.02.2012 REPUBLIC OF ALBANIA BANK OF ALBANIA No.422/1, date 27.01.2012 REPUBLIC OF ALBANIA FINANCIAL SUPERVISORY AUTHORITY No.255, date 09.02.2012 REPUBLIC OF ALBANIA DEPOSIT INSURANCE AGENCY No.110, date 10.02.2012 *** MEMORANDUM OF UNDERSTANDING Between Ministry of Finance (MoF), Bank of Albania (BoA), Financial Supervisory Authority (FSA), and Deposit Insurance Agency (DIA) on cooperation for the development of the financial system as well as on the prevention and management of extraordinary situations in the activity of financial markets and financial institutions operating in the Republic of Albania, which may threaten the stability of the financial system in the country (hereinafter referred to as systemic risks). 1
Institutionalization of Cooperation 1. The MoF, BoA, FSA and DSA (hereinafter referred to as Authorities): a) considering the status and responsibility deriving from the implementation of the Constitution of the Republic of Albania, the Law No. 8269, dated 23.12.1997 On the Bank of Albania, amended; the Law No. 9662, dated 18.12.2006 On Banks in the Republic of Albania, amended; the Law No. 9572, dated 03.07.2006 On Financial Supervisory Authority ; the Law No. 8873, dated 29.03.2002 On Deposit Insurance, amended; and the standards and best practices of the European Union and other international ones in dealing with extraordinary financial situations that may threaten the stability of financial system; b) considering the fact that the institutionalization of cooperation between authorities that steer and supervise developments in the financial system and the preliminary preparation for dealing with extraordinary financial situations that may threaten the stability of the country s financial system, enable their handling with efficiency and professionalism: decided to conclude and enter into this Memorandum of Understanding, to facilitate the process of meeting the objectives of developing the financial system in the country and maintaining its stability. 2. Through this memorandum, Authorities show their willingness to enhance cooperation and formalize it by promoting the activity of the Advisory Group of Financial Stability (hereinafter referred to as FSAG), pursuant to provisions of the Law No. 9572, dated 03.07.2006 On the Financial Supervisory Authority. Based on this willingness and to complement the existing legal provisions, the Authorities will stipulate herein several procedures for improving the functioning of the FSAG. The Authorities shall periodically assess the FSAG s role, in order to identify the need for legal improvements. Principles of Cooperation 3. Cooperation of Authorities, under this memorandum, shall be guided by the following principles: a) development of a financial system that is based on market principles and that supports a sustainable, balanced and regular development of the country s economy; b) prevention of systemic risks, which requires that Authorities, both separately and altogether, ensure an ongoing and comprehensive process of markets supervision, of financial institutions and of relevant 2
technical infrastructure; identify financial risks in due time and prepare necessary legal and regulatory amendments to address them; improve their technical and human capacities by also ensuring their periodical testing through the exercise of simulating extraordinary financial situations; encourage the establishment and strengthening of capacities to deal with extraordinary financial situations in the most important financial institutions themselves, according to market segments; c) accurate assignment of responsibilities, by adopting a legal and regulatory framework that better determines, the proposing, decisionmaking and implementing responsibilities for specific actions of each authority, thus ensuring enhancement of efficiency and accountability of such actions in relation to addressed issues; d) achievement of appropriate transparency, in order to foster the credibility of Authorities and ensure an actual ex-post verification process, through which the stakeholders shall be duly acquainted with the responsibilities of each authority, the accomplished actions and the reasons supporting them; e) cooperation and regular exchange of information, in compliance with the letter and the spirit of the legislation, as well as by regular meetings and communication, so that each authority carries out its responsibilities; f) preference for a steady solution, which implies the goal that the handling of extraordinary financial situations that threaten the stability of the financial system in the country shall support, to the largest extent possible, a market solution, which preserves present and future market competition and prevents wrong incentives on the economic agents activity, with the main objective of maintaining the stability of the country s financial system at lowest cost possible for public funds, wealth and interests; Role and Functions of the FSAG 4. Authorities will discuss and harmonise the necessary actions for identifying, monitoring, and managing extraordinary financial situations that threaten the stability of the country s financial system. In particular, in the framework of their cooperation, the authorities will focus on these main directions: a) reviewing and improving the legal, by-legal and procedural framework for developing the financial markets and institutions, as well as for dealing with extraordinary situations at financial institutions which are important for the stability of the whole financial system (herein referred to as systemic institutions ). For this purpose, the legal framework shall be improved, in order to identify the most effective forms that: 3
i. support increased savings and investments by the public and economic entities, enriching the forms of financial intermediation; ii. monitor the risk in financial activity; iii. increase flexibility in resolving the extraordinary financial situations. b) preparing Special Action Plans (SAP) for managing financial situations that may threaten the stability of the financial system, within three months from the signing of this memorandum, and then ensuring their harmonisation and reviewing at a determined frequency; c) assessing systemic risks. For this purpose, according to specific share and importance of financial market segments, Authorities will commit themselves in drafting, within one year from the signing of this memorandum, a systemic risk assessment methodology and a systemic risk map, which afterwards will be re-assessed on an ongoing basis. Accordingly, Authorities will assess the situation and determine the actions strategy for the future; d) maintaining and improving human, technical and financial capacities, by each authority, for coping with extraordinary financial situations that threaten the stability of the financial system in the country. To this end: each Authority will strengthen internal mechanisms which periodically assess the appropriateness of capacities and put forward necessary improvements; and will identify opportunities for establishing necessary financial reserves to strengthen these capacities. 5. In the FSAG s meetings authorities shall be represented by their top managers, or in special cases and with the authorization of the latter, by their deputies, and will be accompanied by supporting staff. Representatives of other institutions, including private ones, that play a role or have an interest in issues addressed by the FSAG, can be invited to participate in the FSAG s meetings. 6. In relation to the cooperation in the FSAG, Authorities will establish joint working groups that will provide the necessary expertise to inform, discuss and resolve the issues under review. If necessary, representatives of other interested institutions, both private and public, will be invited to participate in these working groups. These working groups shall operate on the basis of specified rules, which, among others, shall provide: the purpose of group establishment, method and time of operation; submission at FSAG of periodic reports, containing an assessment on the involving issues and relevant recommendations for addressing them, including the methods of monitoring and implementing such recommendations. 4
7. FSAG s regular meetings shall take place every three months and may be summoned by every member of the FSAG. Meetings shall be chaired by the Minister of Finance. The FSAG shall have a Secretariat, which shall be headed and provided mainly by the Bank of Albania, with participants from the Financial Stability Department, Supervision Department, Monetary Operations Department and other departments, as well as a representative by each other Authority. Each Authority shall send to the Secretariat, at least 20 days prior to the regular meeting, a list of subjects and materials they intend to discuss at the next meeting of the FSAG. In the framework of systemic risk assessment, at the Secretariat s request, the Authorities will provide it with necessary information. The order, nature and quantity of information of each meeting shall be determined by a representative of the MoF, as authorized by the Minister of Finance, and the Head of the Secretariat. The Secretariat shall prepare and circulate the materials of the meeting of the FSAG to all members, at least 5 days prior to the meeting. A member of the Secretariat shall keep the meeting minutes, and then shall circulate them to each member, under a specified procedure. 8. In meetings of the FSAG, each Authority shall express his/her assessment of the issues under review, aiming at converging attitudes and actions. No voting shall take place about issues discussed at FSAG s meeting. In case of opposite standings, the parties positions shall be expressed in a written form. At each meeting, FSAG shall assess the appropriateness of a press-release and its content. 9. A regular meeting of the FSAG shall provide information about: a) performance of existing projects on financial system development, including initiatives for regulatory and legal reforms; b) presentation of the state of the financial system, where: BoA shall present an overview of the financial position and banking sector risks, as well as developments in the systemic risk map; the FSA shall present the financial performance of the institutions it oversees, and an assessment of their exposure to the banking sector; the DIA shall present an operational information on the compensation fund liquidity level; MoF shall present an assessment of the real sector economic situation, trends in the main variables of the budget and debt financing; c) assessment of the capacity/instruments to cope with an extraordinary financial situation, where: BoA shall make an assessment of the appropriateness of available instruments to cope with an extraordinary financial situation in the banking sector and other institutions it oversees; FSA shall make an assessment of the appropriateness of available instruments to cope with an extraordinary financial situation in the nonbank financial sector; the DIA shall make an assessment of its readiness for the immediate fulfilment of deposit compensation procedures; MoF shall make an assessment on the impact and the space existing in the government 5
budget, as the last resort, to manage an extraordinary financial situation that threaten the stability of the financial system. The Authorities shall address the problems that may arise from integration of domestic financial markets in international financial markets and the implications it may bring about because of the need/challenge for cooperating with foreign counterparties. Also, each authority shall consult other members on the impact that its institutional policy changes may have on the responsibilities and capabilities of others, in managing the extraordinary situations; i. the above instruments shall include, without limitation, the following operations: : limits on leverage of financial institutions, including capital multipliers reflecting systemic importance of institutions and adoption of countercyclical capital buffers; limiting maturity mismatches in funding; establishing margin requirements for investment in securities; establishing liquidity requirements for particular types of funding by institutions; establishing a capital surcharge on liquidity; adjusting regulatory treatment of nonperforming loans, and limiting credit to particular sectors of the economy or establishing requirements for loans for particular purposes such as loan to value ratios; ii. each authority shall determine the instruments it may apply in the setting of an extraordinary financial situation; d) assessment of the progress achieved to comply with the SAP requirements. In meetings, each member shall inform on challenges and about regulatory, procedural and operational changes it has adopted to mitigate the financial risks and to operate in accordance with the SAP requirements. 10. On an ongoing basis, the FSAG s Secretariat shall organize in line with a particular format and shall maintain, update and circulate at Authorities request, information on systemically important financial institutions, including, at least: legal organization of ownership and management structure; balance sheet data and asset and liability composition; indicators of capitalization, profitability and liquidity; exposures to other financial institutions, to the critical infrastructure and to other market segments; share and impact on the market, on the real economy, their inter-sectoral exposures, market liquidity conditions, etc. Against the setting of an extraordinary financial situation, the existing database would allow authorities to anticipate the need for additional information and/or to narrow its focus. 11. Authorities will assist each-other by providing information on matters of interest as well as for preparing draft-laws or draft-decisions, and passing them on to the Council of Ministers and to the relevant Commissions of the People s Assembly of the Republic of Albania. The authority that receives the information shall use it only for fulfilling its responsibilities and shall not forward it to any third parties, except when otherwise stipulated by Law. For the exchange of information of 6
particular importance, in view of observing the legal provisions, the Authorities will agree in advance on the procedures that determine the type of information to be exchanged, manner of its delivery, its goal and manner of use, as well as its beneficiaries. 12. Against the setting of an extraordinary financial situation that could or that threaten the stability of the financial system in the country, the FSAG shall meet more frequently, and: a) the authorities that supervise the segment of financial system, where risk is identified or developed (hereinafter referred to as the Responsible Authority), will summon the meeting of the FSAG and: i) will focus the content of information on the emerging risk and its potential to be transformed into important systemic risk; ii) will assess the potential and the speed of risk development over time, its restriction or extension to other segments of the financial system and its impact on different markets, as well as other implications; iii) will assess the possibility that this situation may affect public behaviour; iv) will inform other authorities on the actions taken or to be taken in the near future, as well as on the availability and validity of different legal mechanisms to resolve the situation; b) based on the information by the responsible authorities, the other authorities, in consultation with the SAP: i) will assess the magnitude of risk and probability of its spreading; ii) iii) iv) will assess the need for additional information and determine the manner of its collection; will inform other state institutions on developments of the situation, the assessed magnitude of risk and will put forward alternatives to cope with it; will identify, will prepare at an earliest time possible and will submit for approval the legal, regulatory and operational changes to handle the extraordinary financial situation; v) will evaluate the strategy of communication with the public, media and other economic agents, aiming at providing information accurately, in a harmonized way, at the necessary frequency and in appropriate to the development of the situation; 7
vi) will inform foreign counterparties or international financial institutions, and will seek their assistance or cooperation in case of an extraordinary financial situation that has derived from international developments or that has such implications. 13. Besides actions stipulated under paragraph 12, Authorities will consider taking other measures that would contribute to the most effective resolution of the extraordinary financial situation, which threaten the stability of the financial system. Other Provisions 14. Different interpretations that may arise during the implementation of this Memorandum of Understanding shall be resolved through direct communication and good understanding between the parties. Any amendment to this Memorandum shall be in writing and with the agreement of its parties. The amendment shall become effective on the date the amended memorandum is signed by the parties or on another date approved by the signatory parties. Each party shall respond in writing to proposals for amendments submitted by another party, not later than 30 (thirty) days following the receipt of this proposal. 15. This Memorandum shall be drafted in four original copies with equal legal power, one for each party. 16. This Memorandum shall come into force on the date of its signature by the signatory parties. MINISTRY OF FINANCE Ridvan BODE (signed) Minister BANK OF ALBANIA Ardian FULLANI (signed) Governor FINANCIAL SUPERVISORY AUTHORITY Enkeleda SHEHI (signed) Vice Chair (in absence of the nomination for the Chair) DEPOSIT INSURANCE AGENCY Silvana SEJKO (signed) General Director 8