The Bank of Albania estimates that during the last period of 2019, the banking sector showed positive developments in its activity, based on the performance of financial performance and risk exposure indicators. With the improvement of financial intermediation activity, the banking sector contributed to the economic growth of the country. In general, these developments, prior to the impact of the pandemic, confirmed:
- A sustainable framework of economic developments at home and abroad.
- The normal performance of financial markets in the country
- More suitable financing conditions for individuals and businesses. .
- Good financial system performance
- Controlled exposure of the banking sector to risks.
Assessment on the impact of the COVID-19 pandemic
When assessing the condition and stability of the financial system, as well as its capacity to cope with risks, the view should be from the future. In this process, an overall assessment of the effects that the current coronavirus pandemic may have on the economy and the stability of the financial system is needed.
This pandemic and the measures taken by the Government to protect the lives of citizens and eliminate in the shortest possible time the coronavirus emergency, are inevitably associated with changes in the activities we perform in daily life. These changes also include economic activities where the impact, although temporary, will be significant. More specifically, private and public enterprises (with the possible exception of those providing vital basic services), depending on their ability to adapt even partially, may suffer from a chain of trade relations and will feel on average a marked decline in sales of goods and services. This will lead to declining revenues and difficulties in meeting the financial liabilities of the activity related to fixed and variable costs. This situation will also affect employees and household incomes as a whole, as a decline in corporate activity could lead to a reduction in income or wage cuts. In a chain effect and insofar as it is not offset by household savings and state safeguards, this may further weaken their consumption and, subsequently, also make it difficult to meet financial obligations. The latter may also include difficulties in repaying loans taken in financial institutions, leading to a decline in credit quality in these institutions and a negative impact on the financial result.
It is necessary that, as far as possible, public authorities take prompt and important action to disrupt the free flow of the above scenarios and to support enterprises, households and the financial system in mitigating and coping with the negative effects that accompany these scenarios.
This is also the attitude of international financial institutions and structures of the European Union, towards a situation that is considered unprecedented. The International Monetary Fund and the World Bank have made available financial funds and special instruments for their use, in order to quickly attract low- and middle-income countries. The European Commission has announced a special € 37 billion financial package to deal with the economic and financial effects that accompany the outbreak in member states. The focus is on households and small and medium-sized businesses, which may be in dire need of liquidity needs. Finally, the European Commission stated that it would support the suspension of the Stability and Growth Pact requirements for fiscal responsibility, enabling member governments to increase spending to address the situation. In the monetary sphere, the European Central Bank, at its meeting on March 12, maintained the accommodative monetary conditions and increased to 120 billion euros the monthly package of liquidity injection through the purchase of securities, aiming to mitigate interest rate volatility. A few days later, this was followed by a second package worth 750 billion euros. Earlier, her sisters in the US and the UK had taken similar measures. These swift actions provided hope and helped halt and partially correct the deep losses suffered by the most important financial markets. From the point of view of banking supervision in the European Union, the European Central Bank and the European Banking Authority have supported the need for flexibility in regulatory treatment by supervisory authorities, to enable banks to become a more effective channel of liquidity delivery to the economy. in the current situation.
In Albania, public authorities have taken several measures aimed at mitigating the impact of the pandemic on the economy, expressing the need for a proportionate and dynamic approach to the developments of the situation and the unknowns that accompany it.
The initial financial package presented by the Government, aims to provide financial support to strengthen the capacity of health structures, to mitigate the financial consequences that this situation may bring to real agents of the economy, and therefore to the economic growth of the country. The package provides support to the needy and provides basic income for employees in small businesses and the self-employed, in cases where their economic activity has been interrupted due to Government decisions. In parallel, the Government has provided state guarantees for new business borrowing from the banking sector in order to meet their short-term liquidity needs. The latter offers opportunities for entrepreneurs to maintain the workforce in the short term, but also to prepare in advance for a resumption of activity in the most appropriate way when the situation allows. Further, some facilitations in meeting the reporting deadlines have been made public. Finally, the declaration of a state of natural disaster by the Government makes addressing the pandemic situation an absolute priority for state structures, accelerates the expansion, detail and focus of aid policies, and provides mechanisms that ensure greater synergy between entities. public and private, necessary to cope with the situation.
The Bank of Albania has undertaken its actions in the areas of institutional administration, communication with supervised entities, especially with banks, and within the policies it implements.
As an institution, the Bank of Albania has activated its emergency plan from the defined structures, where in the center are placed the health security of the personnel and the uninterrupted continuation of the critical functions of the central bank. For the first, it acted in accordance with the instructions of the Institute of Public Health and the Government, limiting the interaction with outsiders, building the framework for the identification and treatment of potentially infected personnel, demanding the maximum implementation of hygiene and physical distancing, as well as improving the capacity of sanitation and disinfection in the premises of the institution. To improve the conditions of physical distancing and reduce the possibility of infection, a part of the staff is authorized to work from home. In parallel, the continuation of the critical functions of the institution is ensured, in order to fulfill the legal and contractual obligations. The focus has been on the central bank's actions in the open market, the transactions of supplying commercial banks with physical money, the proper functioning of payment systems and relations with contractors.
Even in terms of communication with banks, the initial focus has been the same: activating emergency plans aimed at protecting the health of staff and following the critical actions of financial institutions. As the pandemic situation is unprecedented, the Bank of Albania shared with the banks a special Instruction regarding the actions of an organization in this case. In parallel, the communication with the banks continued to detail the manner of organizing their work and agreed on the manner of cooperation in the provision by the Bank of Albania of supporting functions. Until the drafting and approval of this report, the workloads have been adjusted to the more limited business hours and, within these conditions, the processes have run normally.
Within its policies, the actions of the Bank of Albania are focused on the field of monetary policy, and that of banking supervision and financial stability. Monetary policy aims to support the liquidity situation of the financial system and the well-functioning of money markets. Banking Supervision and Financial Stability aims at this period of prohibition of a significant part of economic activity in the country, to mitigate the impact of the situation on the quality of the loan portfolio, to free banks' resources from activities that can be postponed and the good state of liquidity and capitalization of banks is maintained, so that the basis for a revival of activity at the end of the pandemic is solid.
Although the pandemic will be temporary, it remains unknown when and at what pace the economy will emerge from its effects. For this reason, the Bank of Albania, in consultation with banks and other supervised entities, will work to conceive other actions of a regulatory nature that will respond to developments. It should be noted that all actions that have been taken and will be taken, will always be oriented by the main objective, that of maintaining the stability of the banking sector. In this process, the capacities of the banking sector will be continuously evaluated and for this purpose the resistance test exercises will be used.
For the end of 2019 and in relation to the conventional risks, the results of the resistance test exercises for the state of capitalization and liquidity, showed the very good state of these capacities. But the pandemic situation, for the dynamic effects it is bringing to the country's economy, seems to represent an unconventional risk nature. Dealing with such a situation contains unknowns, which need to be adequately captured by the current capacity assessment models of the financial system and the banking sector. For these reasons, it is necessary that banks:
- increase the priority and frequency of these exercises, adapting the nature, severity and complexity of the scenarios; assess the adequacy of the capacities they possess, to withstand the eventual shocks that those scenarios produce, not only in the short term but also in the longer term;
- ensure a speedy and effective decision-making process to strengthen these capacities. The focus should be on taking actions that not only maintain but also further improve the state of capital reserves and liquidity;
- strengthen communication with the Bank of Albania, for the analysis of developments and results.