Case study: Albania Volunteers for Economic Growth Alliance (VEGA) Financial Sector Development Program By: Peter Saling The case study is made possible by the generous support of the American people through the United States Agency for International Development (USAID). The contents are the responsibility of VEGA and do not necessarily reflect the views of USAID or the United States Government.
Beginning in September 2011, the Financial Services Volunteer Corps (FSVC) has implemented the Financial Sector Development Program (FSDP), funded by United States Agency for International Development (USAID) under the Volunteers for Economic Growth Alliance (VEGA) Leader with Associate Award. The program supports USAID s development objective to maintain safety and soundness of the financial sector. It does so through technical assistance to Albania s financial sector regulators: the Bank of Albania (BoA), Albanian Deposit Insurance Agency (ADIA), and Albanian Financial Supervisory Authority (AFSA). The program is also working with the BoA, commercial banks and telecommunications firms to promote the use of mobile payments. As part of FSVC s volunteer model, FSDP has benefit from a strategic partnership with the U.S. Federal Deposit Insurance Corporation (FDIC), through which FSVC has provided more than 400 days of pro bono technical assistance valued at more than $1.2 million. This partnership between FSVC and the FDIC has yielded innovative results for Albania s financial regulators while creating new opportunities for the continued development of the agencies. The institutional partnership provides a model for sustainable, cost-effective technical assistance. Background Following the end of isolating Communist rule in Albania in 1991, the newly-elected Albanian government encouraged its citizens to participate in Albania s liberalizing economy for the first time by placing their savings in a series of investment schemes. In 1996-97, these popular investments were proven to be unregulated pyramid, or Ponzi, schemes. At their height, almost two thirds of the Albanian population of 3 million people had invested approximately $1.2 billion, or about half of Albania s annual GDP. The collapse of the investment funds precipitated a period of protracted violence that toppled the Albanian government, killed at least 2,000 people and marked the collapse of Albania s nascent financial system. The pyramid schemes highlighted the need for financial regulation. In addition to conducting monetary policy, the BoA is responsible for licensing and regulating banks, which account for 92% of the assets in Albania s financial system. There are currently 16 banks in Albania, all but three of which are subsidiaries of EU banks. The BoA is the head of Albania s Financial Stability Advisory Group, a group comprised of highlevel staff from financial regulatory institutions responsible for ensuring financial stability in Albania. The banking system comprises 92% of the assets in the Albanian financial system, or roughly 90% of GDP. Subsidiaries of foreign banks comprise 90% of banking assets. Source: Financial System Stability Assessment, World Bank-IMF, 2014 In 2002, the ADIA was established to protect depositors in the event of a bank closure, as well as to provide assurances to the public that their money was safe in the new Albanian financial system. Over time, the ADIA has grown and currently has enough reserves to cover 3.7% of insured deposits, which is adequate to cover 95% of individual depositors, or 58% of system deposits. Current financial projections expect the ADIA to meet its mandated goal of insuring 5% of deposits by early 2017. The equivalent ratio for the FDIC is 1.35%. 2
Volunteer Model FSVC employs a volunteer model of providing technical assistance to fulfill their mission of developing sound financial systems in emerging market economies. FSVC volunteer experts are seasoned professionals, often at the executive level. These volunteer experts provide highly specialized technical assistance to financial institutions, regulators, policy-makers and business owners. FSVC has fielded volunteer experts on more than 2,800 missions in 50 emerging markets over the past 25 years. FSVC is also a founding member of VEGA. Part of FSVC s strategy for recruiting volunteer experts is to establish institutional relationships. FSVC establishes gatekeepers at these institutions individual contacts who can distribute volunteer opportunities and recruit experts in their agency. The short-term nature of its assignments has enabled FSVC to rely on experts who are leaders in their field. This is of extreme importance as Albania applies for European Union membership. EU regulators typically do not have funding or programs for bilateral assistance outside of the European Central Bank (ECB) sponsored twinning program. Under the FSDP, FSVC has provided volunteer experts from Germany, Estonia, Turkey, Hungary, Croatia and the ECB. This is not only critical for providing targeted technical assistance, but also for improving bilateral relations with regulators a recommendation of the joint World Bank (WB) and International Monetary Fund (IMF) Financial Sector Assessment Program (FSAP). In particular, the German banking and non-bank regulators, Bundesbank and BaFin, through FSVC have provided assistance to the BoA and AFSA intermittently over a period of two years, including hosting participants in Frankfurt, Germany. These relationships are critical for the ongoing development of the Albanian regulators and the sustainability of reforms. Impact One of FSVC s key institutional relationships is with the FDIC s Office of International Affairs (OIA). OIA s mission is to coordinates the FDIC's subject matter expertise to address global financial issues of importance to the deposit insurance system and the banking public and to provide the highest quality technical assistance, training and consulting services to foreign deposit insurers, bank supervisors and resolution authorities. One way the FDIC achieves this mission is through its secondment program with FSVC. Beginning in 2007, the FDIC has provided staff to work on FSVC programs full-time for a period of three to twelve months. While on detail to FSVC, the experts remain under the employ of the FDIC, essentially making them long-term volunteer experts. These secondees have a wide range of skills, from examiners to public communications and executives, and are available to provide assistance to key counterparts throughout their assignment. Under the FSDP, the FDIC has provided 12 different experts on 10 different assignments. Seven of these assignments have been carried out by participants in the FSVC-FDIC secondment program. Under the partnership, the FDIC s OIA reviews the project requirements and identifies qualified individuals within the FDIC who can take part in a technical assistance assignment. According to the FDIC, The right people are brought to bear on specific needs and issues within a time-constrained environment for all concerned parties. Cost-sharing arrangements for the expenses to carry out these projects also greatly improves the range, frequency and feasibility of assisting recipients. 3
FDIC Assistance to ADIA In November 2012, Toni Gogu, formerly of the BoA, assumed leadership of the ADIA as the General Director. Mr. Gogu knew from his time as Director of the Legal Department in the BoA that in the event of a bank failure, the ADIA was unlikely to reimburse depositors in a manner orderly enough to preserve public confidence in the financial system. While the ADIA dutifully collected fees and accounted for the reserve fund, it relied on the BoA for information on banks, which did not include depositor information, and had no processes or technical systems for managing a payout. Mr. Gogu sought to put these systems in place and requested assistance. To assist the ADIA, FSVC contacted the FDIC which recommended Frank Hartigan, the then Deputy Regional Director for the FDIC s San Francisco Office. With more than 25 years of experience at the FDIC, Mr. Hartigan had an institutional knowledge of deposit insurance, including the processes and resources needed to manage payouts. Beginning in May 2013, Mr. Hartigan spent six weeks serving as a Senior Advisor to the General Director. He sat in an office adjacent to Mr. Gogu, interviewed each of the ADIA s 17 employees at length, reviewed policy documents and manuals, and surveyed the ADIA s role in the Albanian financial system. Among his recommendations, Mr. Hartigan advised ADIA staff to establish a line of credit to provide liquidity during turbulent times, improve the system for achieving a timely pay out to insured deposit holders and hire additional personnel to strengthen ADIA operations. At the end of the six weeks, he produced a five year strategic plan for increasing the capacity of the ADIA. Importantly, he did so as a volunteer, at no cost to the ADIA. A follow-up visit by Mr. Hartigan in late 2013 found that key, qualified staff had been hired to fill much needed gaps in financial management. The FSAP, completed in 2013, concluded that the ADIA operations were in line with international principles and recommended that the ADIA s mandate be expanded to include savings and credit associations (SCAs) as well. In 2013, FSVC recruited Mark Brenneman, a FDIC information technology specialist, to conduct a series of consultations that led to the ADIA securing $300,000 in funding from the European Bank for Reconstruction and Development (EBRD) for the installation of software that will automate premium collections and payouts following a bank failure, critical to ensuring an efficient process. Mr. Brenneman conducted the initial assessment that became part of the justification to the EBRD, reviewed the ADIA s application and provided guidance on the procurement process through FSVC. FDIC experts advised the BoA and ADIA in preparing for and responding to the FSAP, which forms the strategic foundation for assistance from the WB and IMF. FDIC experts have also provided training for the BoA and commercial banks on risk-based supervision of banking institutions. FDIC Assistance to BoA FDIC volunteer expert Mark Brenneman (center) advises on an automated payout system for the ADIA. The FDIC-FSVC partnership has yielded important organizational results for the BoA as well. Perhaps no project has been more important to the BoA than a July 2012 assignment to develop a high-level strategy for designing the BoA and ADIA s process for closing a bank. FSVC recruited seven experts, including 4
three FDIC experts and the recently retired head of the FDIC s Department of Resolutions and Receiverships, who was responsible for overseeing bank closures during the recent United States financial crisis. These seven volunteer experts provided a combination of training and consultations on the state of Albania s legal, regulatory and policy framework for bank resolutions. The consultations took place in the context of the rising rates in non-performing loans and a growing Eurozone crisis. The project resulted in a report that provided the framework for the Albanian regulators strategic plan for managing a bank closure, including identifying critical weaknesses and addressing how to close these gaps. Critical to the sustainability of reforms, collaboration has extended beyond the USAID-funded program. In April 2013, the BoA signed a memorandum of understanding (MOU) with FDIC Chairman Martin Gruenberg. The MOU highlights areas for cooperation between the regulators, including allowing BoA and ADIA staff to shadow a FDIC-managed bank closure and agreeing to provide on-site assistance in the event of an Albanian bank closure. Essentially, the FDIC will provide invaluable on-the-job training to ADIA staff. Speaking to the impact of their work, the FDIC says, Albanian authorities have consistently welcomed, incorporated and built upon the input provided by FDIC experts, advancing their regulatory capabilities and programs in good measure to help carry out their legal responsibilities and mandates. While the FSDP is funded for activity only in Albania, FSVC and the FDIC have leveraged the program for regional impact as well. Partnering with the USAID-funded Partnership for Financial Stability, FSVC recruited and FDIC provided an expert for a series of workshops in Tirana and Podgorica, Montenegro, on the resolution of problem loans. Commercial bankers and regulators from Albania, Montenegro and Kosovo participated in the workshops aimed at developing tools for the resolution of problem loans, an endemic problem in the local banking sectors. Through FSVC, the FDIC also provided assistance to the AFSA to organize a regional conference in 2012 on the role of independence in financial regulation, which was attended by representatives from Kosovo, Estonia, the ECB and others. The conference served as the kick off to an effort by the AFSA to pass amendments to the governing law to increase the financial and political independence of the AFSA. The amendments were approved by Parliament in late 2013 and their implementation is leading to institutional reform and strengthening. Lessons Learned FSVC s model of developing institutional partnerships to provide volunteer expertise over a protracted period represents an innovative approach to technical assistance. A review of this model provides several lessons learned that are applicable for a broader application. Institutional relationships provide an added element of sustainability. By consistently using volunteers from one organization, the program is able to build relationships that lead to sustainable institutional linkages. The MOU between the BoA and the FDIC is an example of this. While the modality of the technical assistance may change once FSVC is no longer funding experts participation, the two regulators have a channel for ongoing assistance. The partnership has also encouraged the ADIA to participate in the International Association of Deposit Insurers (IADI), which sets global standards for deposit insurance schemes, through which they have begun to develop relationships with other regulators around the globe. These relationships are critical to creating sustainable development. The volunteer relationship must also have value for the institution providing volunteers. In pitching an institutional volunteer program to an institution, FSVC must appeal to more than a sense of 5
charity. In the case of the FDIC, the OIA receives funding from the FDIC primarily for participation in IADI and to host international institutions to shadow bank examinations. FSVC is able to leverage the impact of OIA at no additional cost to the FDIC. For the OIA whose mission is to address issues of global financial important to the deposit insurance system they are able to expand the profession into new markets and strengthen the global financial sector as a whole. The benefits to these organizations need not be commercial, and, in fact, all FSVC volunteer experts sign a conflict of interest agreement. Institutional relationships are cost effective for both sides. As noted above, the partnership with a USAID-funded program costs the FDIC only the time of their experts, thus expanding their outreach and impact without requiring a change in their underlying budget. For FSVC, which operates on a USAID grant, recruitment for each assignment typically requires identifying several experts in a specific field, reaching out to them, negotiating their availability and then planning a curriculum. When using an FDIC expert, FSVC spend 5-10 hours recruiting as the FDIC conducts the search and the expert is typically able to adapt FDIC learning materials for the program. That saves up to 25 hours of time typically charged under a USAID grant for the recruitment of paid consultants. Plus, the FSVC grant funds only travel costs for the FDIC experts. Institutional volunteer relationships provide long-term benefits on a short-term assignment. Under FSVC s typical volunteer model, individual volunteers are recruited to conduct 5-10 day technical assistance assignments with partner institutions, with FSVC s in-country representative providing ongoing assistance in the interim. The FDIC partnership enables FSVC to access practicing professionals with combined decades of experience in highly specific fields of financial regulation who are trained by and represent the leading global institutions in their respective fields. In the case of regulatory reform, a series of shorter assignments also gives the counterpart institutions the opportunity to enact reforms and then receive follow-on assistance for achieving ongoing results. For example, to facilitate the development of an automatic payout system for the ADIA, the FDIC expert was able to intervene only at critical decision points in the process and update the work plan for the ADIA to implement themselves. Managing an institutional relationship requires time and effort for the development organization. On their own, the BoA was unlikely to develop a relationship with the FDIC, for reasons of cost and access. As is typical in an emerging market context, the initial requests from the BoA would have proved overwhelming to the small staff of the FDIC s OIA. However, in the current case, FSVC built the initial relationship with the FDIC, which required a significant time investment, until an MOU was signed. Once established, FSVC is able to act as a filter for the BoA s technical assistance requests, fielding requests, refining scopes of work and ensuring that the requests to the FDIC were specific, targeted and built upon previous efforts. Over time, this established trust so that the FDIC could view the BoA and ADIA as credible counterparts. A key for both the FDIC and FSVC has been to establish a gatekeeper, one individual in each institution who is responsible for managing the partnership, thus ensuring that all requests are fielded appropriately. The institutional volunteer model is replicable. For instance, FSVC has also been able to facilitate relationships between the Actuarial Profession, a United Kingdom-based standard bearer for actuarial standards, and the Actuarial Association of Albania, which FSVC established to train a cadre of professionals. A key to success is to ensure the organization is sufficiently large to provide multiple volunteers over a sustained period of time. FSVC s approach to institutional volunteering has proven effective under the Financial Sector Development Program in Albania. FSVC has built mutually beneficial relationships that have leveraged program resources, given them access to highly trained experts in the field and provided added value to the organizations providing the expertise. More importantly, the relationships have yielded significant impacts for the beneficiary institutions. The approach to institutional partnerships is replicable under certain conditions: The relationship takes time and investment to establish; the arrangement must provide some value for the sending organization; and the organization providing expertise must be willing to make a long-term commitment. The sustainable benefits will result when the organization providing and receiving expertise can ultimately form a bilateral relationship that extends well beyond the life of the program. 6
VEGA is the largest consortium of economic growth volunteer organizations in the world building the capacity of emerging market communities, enterprises, and institutions through technical assistance, with an emphasis on innovation, entrepreneurship, and resource mobilization. With 25 members, the alliance has assisted 140 developing and transitional countries, and can mobilize over 100,000 highly skilled volunteers to engage along the entire spectrum of economic growth programs. VEGA supported the research and publication of this case study as part of its commitment to knowledge management and sharing lessons learned among its member organizations and the international development community. VEGAALLIANCE.ORG FACEBOOK.COM/VEGAALLIANCE TWITTER.COM/VEGAALLIANCE The Financial Services Volunteer Corps (FSVC) is a not-for-profit, public-private partnership whose mission is to help build the sound financial systems needed to support robust market economies in transitional and developing countries. FSVC s demand-driven approach helps ensure that its work is highly relevant and valued by key reformers in the countries that seek its assistance. By recruiting currently employed professionals at the peak of their careers to serve as volunteers, FSVC is able to provide technical assistance that is objective, independent, and state-of-the-art. In addition, recipients of FSVC s assistance develop valuable professional relationships with volunteers and establish institutional linkages with sponsoring institutions. These linkages provide significant additional benefit to counterparts over the long term. FSVC.ORG FACEBOOK.COM/FSVC TWITTER.COM/FSVCORG 7