The Albanian Recovery and Resolution framework Natasha Ahmetaj Second 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 1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0 01/2000 05/2000 09/2000 01/2001 05/2001 09/2001 01/2002 05/2002 09/2002 01/2003 05/2003 09/2003 01/2004 05/2004 09/2004 01/2005 05/2005 09/2005 01/2006 05/2006 09/2006 01/2007 05/2007 09/2007 01/2008 05/2008 09/2008 01/2009 05/2009 09/2009 01/2010 05/2010 09/2010 01/2011 05/2011 09/2011 01/2012 05/2012 09/2012 01/2013 05/2013 09/2013 01/2014 05/2014 09/2014 01/2015 05/2015 09/2015 01/2016 05/2016 Banking sector Money market FX market Financial Stress Index
3. Albanian banking sector: implication by establishment of SSM 4 banks Asset share 7 banks Significant supervised entities (A) 28.5% Less significant institutions (B) 50.70% Not under SSM jurisdiction- Domestically Owned 17.0% Not under SSM jurisdiction-other 3 banks 3.7% 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 High market share of the largest banks 4 banks with market share above 10% each Close to moderate concentration of deposits 1,700 1,600 30.0% Market share 1,500 25.0% HH index 1,400 1,300 1,200 1,100 20.0% 15.0% 1,000 900 10.0% 800 03/13 06/13 09/13 12/13 03/14 06/14 09/14 12/14 03/15 06/15 09/15 12/15 03/16 06/16 09/16 5.0% ALL Deposits Fx Deposits Deposits 0.0% DB Largest Bank in Albania High competition No concentration Moderate concentration High concentration <1000 1000-1500 1500-2500 > 2500
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 status Presented at the Parliament- 23 November 2016 To be approved by 15 December 2016.
8. Identifying Systemically Important banks Approach (D-SIBs) : EBA Guideline on CRITERIA FOR THE ASSESSMENT OF O-SIIS (2014) Indicator-based measurement approach Criteria and the relevant Weights SIZE 20% INTERCONNECTEDNESS 20% SUBSTITUTABILITY 20% COMPLEXITY 20% LOCAL SENSITIVITY 20% Indicators Individual Indicators Equal weights Weights according to entropy -Total assets (to residents) 20% 20% - Intra-financial system assets 10% 9.6% - Intra-financial system liabilities 10% 10.4% -Loans to households 10% 9.2% -Loans to non-financial corporates 10% 10.8% - 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 (territorial extension) 4% 1.1% - Deposits of individuals 20% 20%
9. Systemic banks in Albania 3000 2544 Systemic Risk Grade (bp) 2500 2000 1500 2141 1039 1032 1000 500 0 640 548 470 342 336 248 221 157 129 87 48 21 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 Size Interconnectedness Substitutability Complexity Local Sentiment Min.350 bp *Bank with SRG > 350 basis points Weights 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 features Bank 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 Authorization of agreement to provide/accept mother group support Order early intervention Coordination as regards removal of impediments to resolvability Determination of failing or likely to fail Information Recovery plans already prepared Information Information plus check under resolvability assessment Information / preparatory for Resolution Resolution plans including resolvability assessment and decision on impediments possibly by RA in addition (Fallback if SD does not act) Decision for resolution actions Resolution plans to be developed as the Law comes to force
14. Bank of Albania as a Resolution Authority SUPERVISORY COUNCIL GOVERNOR FSAG Bank of Albania Ministry of Finance Financial Supervision Authority Deposit Insurance Agency Financial Stability Advisory Committee information DEPUTY GOVERNOR Supervision Department information information Resolution Department information information Financial Stability Department information Recovery plans Early intervention Resolution process Systemic Risk Early Warning
15. Resolution fund The 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 discipline Protect public funds by minimising reliance on extraordinary public financial support Protect covered depositors and protected investors Protect 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- binding Framework 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;