Bankieri No.16 - July 2015 by Shoqata Shqiptare Bankave

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Bankieri No.16, July 2015 Publication of the Albanian Association of Banks Editorial Shadow banking in Albania The Past, the Present and the Future! Elvin MEKA Frontline Shadow Banking and Opportunities in Banking Sector in Albania Athanasios PaLoUdis A glimpse light on shadow banking Teuta BaLeta, Rinald GURi

SHADOW BANKING

IN ALBANIA

Banking System The shift in the credit risk control is a move in the right direction Arjan KADAREJA Internal Ratings-Based models, an opportunity to be considered Altin KADAREJA Experts’ Forum Perspectives on the valuation of real estate properties in the current market Anton LEZHJA Internal Audit. Its role in mitigating the bank fraud Stavri PASHKO Economist Corner Banks and the financial system in front of money laundering Adrian CIVICI

Bankieri is the official publication of Albanian Association of Banks which mainly focus the Albanian banking industry. Bankieri provide readers with valuable information on the financial industry’s developments in general, and of commercial banks in particular.

Albanian Association of Banks Street ‘Ibrahim Rugova’, SKY TOWER, 9/3, Tirana Tel: ‘+355 4 2280371/2 Fax: +355 4 2280 359 E-mail: bankieri@aab-al.org; www.aab.al

Editorial Team:

Printed by:

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ICC Academy AAB Activities

Gazmend KADRIU AAB Vice Chairman & CEO of Union Bank

Seyhan PENCABLIGIL AAB Executive Committee Member & CEO of Banka Kombëtare Tregtare

Frédéric BLANC AAB Executive Committee Member & & CEO of Societe Generale Albania

Bozhidar TODOROV AAB Executive Committee Member & CEO of FIBank Albania

Information Security Zone Information System for Reporting and Compensation (ISRC) in Deposit Insurance Agency 32 Blerta KOÇI The importance of cyber security and ALCIRT’s role 35 Rovena BAHITI Financial Auditorium Practicing the art and science of project management in today’s business Bianca DURO

Editorial Board: Christian CANACARIS AAB Chairman & CEO of Raiffeisen Bank Albania

Periklis DROUGKAS AAB Executive Committee Member & CEO of Alpha Bank Albania

Social Capital Banks' activities

Elvin Meka Editor–in-Chief Eftali Peçi Coordinator Junida Tafaj (Katroshi) Collaborator Andis Rado Photographer Design & Layout: PIK Creativ

Endrita XHAFERAJ Secretary General, Albanian Association of Banks Hysen ÇELA Chairman of Albanian Institute of Authorized Chartered Auditors (IEKA) Adrian CIVICI President of European University of Tirana

Spiro BRUMBULLI Chief of Cabinet, Ministry of Finance

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Enkeleda SHEHI Chairwoman of Albanian Financial Supervision Authority

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Bankieri

Editorial

Shadow banking in Albania

The Past, the Present and the Future! The shadow banking is not the “black cat” for the financial system, instead it could support the country’s economic growth, but it is unavoidably associated with its own risks, too.

by Prof. Asoc. Dr. Elvin MEKA1 Editor–in-Chief

hadow banking has been one of the most quoted phrase within global financial system, among financial market practitioners and academia, especially after the outbreak of the last financial crisis of 2007-2008, given the particular role, the “shadow banking” system played in originating such crisis. The term “shadow banking”, as iconized by Mr Paul McCulley, an US economist and former managing director of PIMCO, the well-known global investment management firm, includes financial services and credit to clients, be they businesses or individuals, by way of nontraditional and nonbank distribution channels, which are provided by entities which are not subject to regulatory oversight, as well as the financial activity of regulated intermediaries, which is not subject to oversight. However, its definition is not exhaustive, as according to GLOBAL FINANCE: “Financial Stability Board (FSB) has a very wide definition of shadow banking, including all nonbank financial intermediation in aggregate”, and it “defines it as the Monitoring Universe of Non-Bank

Financial Intermediation (MUNFI)”. When it comes to Albania, shadow banking is not a new phenomenon, although the Albanian “shadow banking”, used to be quite rudimentary and had almost nothing to be compared with the standard definition of it. Nevertheless, we know quite well the repercussions and effects of such activity, during the last decade of the last century. Now it belongs to the past and fortunately it had no interconnectedness with the formal commercial banking system. As for the present, the situation is far more different and positive, in every aspect of discussion, be it regulatory, operational, the public and institutional approach towards risk and its respective management, etc. On the other hand, what we can see being developed now is a rise of the informal lending and borrowing and a quiet substitution of bank deposits with other alternatives, coming from collective investments schemes, which seems to be a pragmatic choice for individuals, who are naturally looking for higher yields, in an environment with continuously low and ultralow interest rates. What is country-specific for Albania is that the modern and standard shadow banking is being developed in total absence of any organized form of the securities market, which would enable regulators to collect more information about it, let alone the fact of enabling them to monitor, supervise, regulate and enforce it, thus mitigating and containing the systemic nature of risks, triggered and

produced by such activity. So, the future could bring numerous challenges, not only for regulators of the Albanian financial system, but also for commercial banks, given the challenging nature and the steady growth of shadow banking, in a time when commercial banks will be much less interested in long-term loans for regulatory reasons, the EU integration process for Albania, and the digital revolution and new technologies, especially big data and business intelligence, which are reshaping totally the financial landscape, globally. Indisputably, the shadow banking is not the “black cat” for the financial system, instead it could support the country’s economic growth, but it is unavoidably associated with its own risks, too. That’s why the Albanian regulators of financial system and markets, must consider the famous quote of Desiderius Erasmus, the well-known Dutch humanist, that: “Prevention is better than cure!!!”

Deputy Dean & Head of Department of Finance, UET-EUT

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Frontline

Shadow Banking and Opportunities in Banking Sector in Albania With the right approach and attitude all banks operating in Albania can work more in order to gain leverage and also institutionalize the money market in Albania, because in the long run that will make it easier to control the countryâ&#x20AC;&#x2122;s economy, adjusting interest rates and also controlling the money supply.

by Mr Athanasios PALOUDIS, Head of Branch Network & SME Division TIRANA BANK

ecause of indefinite number of reasons, most people borrow from time to time. They may want to buy a home or land, seek to invest in an education or a business, or even invest on their children education, or need to cover the costs of a health emergency or perhaps starting up a business. When they lack the money to do so, they turn to someone who will lend it to them - a bank, a friend or family member, an informal lender. In some parts of the world many people may sometimes rely on credit cards in the place of loans. Whenever they do not turn to a bank, there is where we see the shadow banking taking place. The term "shadow banking" has been attributed to 2007 remarks by

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economist and money manager Mr Paul McCulley to describe a large segment of financial intermediation that is routed outside the balance sheets of regulated commercial banks and other depository institutions. Shadow banks are defined as financial intermediaries that conduct functions of banking without access to central bank liquidity or public sector credit guarantees. The shadow banking system can broadly be described as credit intermediation involving entities and activities outside of the regular banking system. Intermediating credit through non-bank channels can have important advantages and contributes to the financing of the real economy; but such channels can also become a source of systemic risk, especially when they are structured to perform bank-like functions (e.g. maturity and liquidity transformation, and leverage) and when their interconnectedness with the regular banking system is strong.

Therefore, appropriate monitoring of shadow banking helps to mitigate the build-up of such systemic risks. The common denominator is that these activities flourish outside the

In the developing world, the shadow-banking sector provides grease to keep economies functioning smoothly. Small businesses get the loans they need; savers get investments yielding more than inflation and in economies with underdeveloped financial systems, shadow banking fills a vacuum. Thus is case with Albania, too.

regular banking system and often beyond the control of regulators and monetary policy. Together they show how hard it is to restrict risky lending without causing harm. For instance, in the developing world, the shadow-banking sector provides grease to keep economies f u nc t ion i ng smo ot h ly. S m a l l businesses get the loans they need; savers get investments yielding more than inflation, and in economies with underdeveloped financial systems, shadow banking fills a vacuum. Thus is case with Albania too, it is not an exception to these practices and financial behavior. Recently from the survey held from Gallup International and World Bank says that 56% of Albanian adults used outside bank channels to borrow during 2013-2014, a very high percentage even when compared to the regional one which was around 36%. The poll shows that 43% of the Albanians borrowed their emergency loans from their relatives, 10% from their employer and 25% of them used their savings. The survey also shows that 25% of the Albanian used their borrowed money to cover health emergencies, 12% for education, 9% to buy a new house and 4% to invest in starting up a business. The survey shows that, in Albania, funding during the past two years is not provided by banks and financial sector, unlike other developed or OECD countries. However we can say that the shadow banking system can be viewed as a parallel systemone that is a complement to and not a substitute for traditional banking. In such economies lies the opportunity for expanding the financial inclusion of these people. These falls into two broad categories: expanding account ownership among the unbanked and

increasing the use of accounts among those who already have one. The challenge in each case is for the private sector to design appropriate financial products that meet the needs of the unbanked and make using an account at least as easy, convenient, and affordable as the alternatives. By providing a regulatory framework conducive to expanding account ownership-through such actions as licensing bank agents, introducing tiered documentation requirements, requiring banks to offer basic or low-fee accounts, and allowing the evolution of new technologies such as mobile money-governments can both help lower the cost of financial

The challenge in each case is for the private sector to design appropriate financial products that meet the needs of the unbanked and make using an account at least as easy, convenient, and affordable as the alternatives.

services and help reduce the distance to financial institutions by making it cost-effective for them to locate outlets in more remote areas. One promising opportunity to expand financial inclusion among the unbanked is to digitize payments by moving cash payments into accounts. Shifting to digital payments has many potential benefits, for both senders and receivers. It can improve the efficiency of making payments by increasing the speed of payments and by lowering the cost of disbursing and receiving them. It can enhance the

security of payments and thus lower the incidence of associated crime and it can increase the transparency of payments and thus reduce the likelihood of leakage between the sender and receiver. Shifting to digital payments can also provide an important first entry point into the formal financial system, which can lead to significant increases in saving and the substitution of formal for informal saving. In short, the benefits of digital payments go well beyond convenience. If provided efficiently and effectively, digital payments can transform the financial lives of those who use them. Payments for the sale of agricultural products offer another opportunity for increasing account ownership among the unbanked. In developing economies overall, 23% of unbanked adults-440 million peoplereceive payments in cash for the sale of agricultural products. Many people who receive payments for the sale of agricultural products are part of an agricultural value chain. This means that one actorâ&#x20AC;&#x201D;such as an agricultural commodity buyer-can have an outsize influence on how such payments are received. Just as with wages and government transfers, digitizing agricultural payments could therefore contribute to rapid expansion in account ownership. As it can be seen the opportunities which lay ahead of us in order to tackle and solve this problem are plenty. With the right approach and attitude all banks operating in Albania and Tirana Bank in particular can work more in order to gain leverage and also institutionalize the money market in Albania, because in the long run that will make it easier to control the countryâ&#x20AC;&#x2122;s economy, adjusting interest rates and also controlling the money supply.

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Albanian Financial Supervision Authority, AFSA1 Ms Teuta BALETA Advisor

Mr Rinald GURI Head of Department of Research, IT and Statistics

ince its onset in 2007-2008, the global financial crisis is not considered as a purely banking crisis. A part of risks, which were materialized later in factors that caused or aggravated the crisis, were "created" and "grew up" in activities or non-bank financial institutions, which have been labeled with the term "shadow banks" or "shadow banking activity". The term itself is dressed with ambiguity, despite it’s increasingly use in literature and discussions about the financial system. Its translation in Albanian, gives another hand to the term’s uncertainty. Typically, the term "shadow bank/activity" would naturally mean an irregular or illegal institution or activity, carried out in underground. Practically, the term "shadow bank/banking activity" is the literal translation of the word in English "shadow bank/banking". In our opinion, the Albanian word "shadow" remains the most accurate translation possible, compared with efforts to use other alternative terms, such as: parallel or unregulated banking system/activities (e) or parallel banks. The term "shadow" implies that we are dealing with an organization (unit/activity) that is not a bank or banking activity, but is established or stands in the shade of banking activity. The term "shadow" becomes more meaningful when considering efforts to define the "shadow bank/banking activity", and this turns to be a difficult task. The term, used for the first time in 2007 by Mr Paul McCaulley, is still in the de-

A glimpse light on shadow banking The shadow banking activity is not necessarily dangerous for the financial system stability as a whole. Like any other financial activity, it has its advantages and helps the smooth functioning of the financial system, especially by adding liquidity, available in the market.

fining mode. The concepts are based on broad and narrow meanings of the phenomenon; they are shaped according to institutions, activities or risks, thus giving us a full range of definitions. Various authors equalize the term with securitization, the non-traditional banking activity, or crediting process by non-bank financial intermediaries. Other authors give a comprehensive definition, by including all financial activities, in addition to traditional banking activities, which require a last rank guarantee, be it private or public, in order to be carried out. Broader definitions of such concept include activities similar to banking, but carried out by financial companies, that are not regulated as banks. Bernanke (April 2012) used this definition: “Shadow banking, as usually defined, comprises a diverse set of institutions and markets that, collectively, carry out traditional banking functions - but do so outside, or in ways only loosely linked to, the traditional system of regulated depository institutions." At the November 2010 Seoul Summit, the G20 decided to strengthen the shadow banking regulation and oversight. The Council for Financial Sustainability (Financial Stability Board, FSB), assumed the task of addressing such issue. This body defined the shadow banking activity as "a credit intermediation system, formed by institutions and activities that operate outside the regular banking system" (2011a). The European Commission’s respective definition is also formed

within such context (Green Paper, March 2012), but rather it defines even the activities, in which they are engaged, such as: accepting funding with deposit-like characteristics, performing maturity and/or liquidity transformation, undergoing credit risk transfer, and using direct or indirect financial leverage, as well as involvement in activities with a nature that could serve as important sources of funding of nonbank institutions, including securitization, securities lending and repurchase transactions. However, the essence of different definitions is clearly the same: lending activity, which is a traditional banking activity that takes place in different forms and from such institutions, beyond the scope of banking regulation. The definition of "shadow bank/ing" concept is closely linked to at least three aspects: (i) the definition of institutions, activities or risks, classified within this category; (Ii) measuring its extent and scope; and (iii) defining the counter - measures by regulators. It is worth noting that the shadow banking activity is not necessarily dangerous for the financial system stability as a whole. Like any other financial activity, it has its advantages and helps the smooth functioning of the financial system, especially by adding liquidity, available in the market. It may constitute a useful part of the financial system, because it performs several functions, such as: providing saving/investment alternatives, along with bank deposits; efficient channeling of resources towards specific

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of AFSA.

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needs, by taking advantage of narrow specialization they feature; providing alternative funding for real economy, when banks and other traditional channels of the market are in difficulties, as well as risk diversification, outside banking system. But shadow banking is accompanied by a number of risks. Some of them may have a systemic nature, given the fact that they are developed outside the perimeter of regulators, and because of their complexity, interconnectivity with the banking system; their extension and spread toward the scope of various regulatory systems, or exceeding the confines of securities markets and investment funds, to seek for higher returns. Some of these risks are: the panic, the extensive and hidden use of financial leverage, avoiding regulation and regulatory arbitration, or consequences and contagion caused by failures of these institutions, toward the banking system. Shadow banks are exposed to the same financial risks as banks, but are not supported with the same level of regulation and supervision, as (commercial) banks. Some shadow banks rely on short-term financing, thus being exposed to the risk of massive and immediate fund withdrawals by customers. Since they do not fall within the perimeter of bank regulation, they use an extensively high financial leverage, by offering secured financing, thus turning into a systemic risk. The circumvention of traditional bank regulation or supervision, transforms the traditional process of credit intermediation into independent The behavior of shadow banking activity Use of financial leverage

Credit risk transfer

Maturity Transformation Liquidity Transformation

Deposit acceptance

legal structures, but fully interacting with each other. This was the typical case that played a significant role in molding the global financial crisis, which began in 2007-2008. In this case, the activities that bypassed the accounting rules and capital requirements just transferred risks outside the scope of banking supervision. In the end, when these institutions were faced with difficulties or bankruptcies, the effects were easily conveyed into the banking system. Contagion or the spillover of harmful effects on the banking system came through several channels, like: borrowing from the banking system or contingent liabilities, linked with the occurrence of event for providing liquidity from the banking system, such as: credit or liquidity lines, or in cases of a massive assetsâ&#x20AC;&#x2122; sale, which have consequences on the prices of financial or real assets. So, as Mr Mark Carney, Governor of Bank of England (2014), said: "Shadow banking ...is huge, fast-growing in certain forms and little understood-a powerful tool for good but, if carelessly managed, potentially explosive." Today, shadow banking activity is considered the greatest threat to the world economy. Therefore, the challenge for the authorities is that the inherent risks of shadow banks must be addressed sufficiently and appropriately. If we refer to the case of Albania, we may argue that the unsophisticated financial system creates less ground for the development of shadow banking activity, but such behaviors are becoming visible (see table below) and could display rapid

growth dynamics. What can authorities do in this case is to study of phenomena, which may be essentially shadow banking activities. The first step is to gather more information on the phenomena, taking place in the financial markets of the country and identify those units/activities that resemble to such activity. Secondly, there is a need for improving the database and exchanging them between regulators of the financial system, to understand the scope and interaction of shadow banking phenomena, as well as the exposure certain different segments of the financial market have, against them. The authorities have the option, based upon the findings of the study phase, to decide whether there is any need to expand the scope of reporting and regulation of shadow banking activity and to what extent, or otherwise going a step further with tougher action, to restrict the spread of shadow banking. Thirdly, given the degree of complexity of shadow banking activity, it is important that legal/regulatory requirements for interaction between customers and financial institutions be strengthened, in terms of the transparency regime. Finally, the task clearly does not belong to a single regulator, instead it will require pursuing a coordinated supervisory approach between regulators, to supervise the dynamics of (shadow) banking activity development, in a way that such phenomenon to serve the financial system diversification, and not the accumulation of excessive risks, and their transformation into systemic ones.

The display of behavior of shadow banking activity in Albania This form of behavior, in the current stage of development of the financial system, is not present, because the trading of debt financial instruments is underdeveloped. This form of behavior, in the current stage of development of the financial system, is an isolated phenomenon, because the securitization process is absent, but there are forms of credit guarantee products, issued by insurance companies. The development of the insurance market beyond traditional mandatory insurance products may cause a rapid development of the phenomenon. It is easily understood that, the revival of bank credit creates conditions for the strengthening of such behavior. This form of behavior, in the current stage of development of the financial system, has begun to be visible, due to the rapid development of the investment fundsâ&#x20AC;&#x2122; market. This form of behavior, in the current stage of development of the financial system, has commenced to be visible, but not in its traditional form. This behavior appears mostly due to lack of development of secondary markets in the country. This form of behavior, in the current stage of development of the financial system, is not present, because such behavior is typical for money market funds (MMF), or bond market funds, which act as MMFs. Albania has neither developed money market instruments, nor funds that invest exclusively, or at least 50% of their portfolio in such instruments, in domestic or foreign markets. But there is a likelihood that the environment could change quickly and such behavior may become present.

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Banking System

The shift in the credit risk control is a move in the right direction The strategy of applying less interest rate discrimination and more credit rationing should have been used from the beginning, but to be successful in long term, the strategy should be implemented with due consideration given to the situation of banksâ&#x20AC;&#x2122; important stakeholders such as depositors and corporations.

by Mr Arjan KADAREJA, PhD, Professor of Banking and Finance canadian institute of technolOgy (cit)

t is well known that, other things equal, the higher the contractually promised interest rates the higher the expected returns on bank loans. But, this is only one side of the story because the other things do not have to be equal. One of other things is the probability of returning the loan, which decreases with the increase in the contractually promised loan rates. This implies that beyond a certain level the increase in loan interest rates is associated with lower expected returns. In what follows, I argue that there has been a shift in banksâ&#x20AC;&#x2122; credit risk management strategy and, more importantly, the new strategy is paying off. A recent history

Following the creation of the Albanian private banking sector, the credit risk

management strategy of relaxed credit standards and relatively high loan interest rates produced, till the end of 2008, a credit boom and high bank profits. However, as shown in Graph 3, the initial boom was followed by exploding Non Performing Loans (NPL-s) with profits (RoE) close to zero in 2011. In addition to well-known factors of lack of experience in credit risk management, the aggressive behavior by some banks to increase their market share and the lack of quality in supervision by the central bank, I think there is another factor which made things worse. That is the apparent credit risk strategy based mainly on interest rate discrimination rather than a combination of quantity restrictions and interest rate discrimination. However, some recent facts suggest that banks might have shifted to the second strategy. A piece of theory

At retail level a bank controls its credit risks mainly by credit rationing rather than by using a range of interest rates or prices. Retail customers are more likely to be sorted or rationed by loan quantity restrictions than by price or interest rate differences.

The optimal credit risk control is somewhat different for wholesale loans, however. It is well known that, beyond some interest rate level, there is an inverse relationship between the expected returns on loans and the contractually promised interest rates. This in turn suggests that, beyond some interest rate level, it is best for banks to do credit rationing rather than seeking to continue price sorting, i.e. by charging higher premiums to higher risk borrowers. Three recent facts

I have documented three important facts which suggest a shift in the bank credit risk management, at least regarding the wholesale loans. Fact 1 - As shown in Graph 1, for the first time ever, there has been a fall in the quantity of bank credit outstanding during 2013 and only a slight marginal increase during 2014. If we take into account the sizable depreciation of ALL Vis a Vis USD, during the last months, the slight increase in credit during 2014 is even smaller. This development suggests that banks have been doing a lot more of credit rationing than before.

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Source: Bank of Albania and author’s calculations

Fact 2 - Since January 2009, the Bank of Albania has been delivering numerous policy rate cuts. This was followed by a gradually falling bank loan average interest rate, as shown in Graph 2. However, there is a visible accelerated fall in bank loan interest rates since the middle of 2013. The bank loan average interest rates have dropped by about 3 percentage points during the last 18 months period (July 2013 - December 2014). That is roughly equal to the fall in the loan interest rates during the entire preceding 6 year period. This suggests less use of the interest rate discrimination by banks during the recent 18 months period. Moreover, this appears to be a strategy shared by most of the banks since the standard deviation of the loan interest rates across banks in 2013 was three times less than its value of 2010 1. This indicates that there is a kind of “convergence” towards an interest rate level, beyond which the credit rationing is heavily applied by most banks. Fact 3 - The last development, but certainly not the least, is the stabilizing and even a slight fall in NPL-s as well as a steady increase in the banking system profits with the RoE reaching a 1

Data Source: Albanian Association of Banks

respectable level of 10.9% at the end of 2014 (Graph 3). This clearly shows that the new “feet on the ground” strategy is working well for the banking system. The strategy is working but other stakeholder’s situation is poor Profits at 10.9% and a first ever fall in NPL-s! This is very good news for banks, but seems to be somewhat in contrast to the fortune of two of the banks’ primary stakeholders, namely depositors and corporations. Let’s consider the depositors first. Since the spread between the credit and deposit rates is close to the long-term average, the accelerated fall in the loan interest rate implies a symmetric fall in bank deposit rates. Indeed, the one year average bank deposit rate reached a historical minimum in December 2014. Under these circumstances, the banks should be aware of the side effects of interest rates falling towards less than inflation territory. The risk is that their main and stable source of financing - namely bank deposits - start to break down as their relationship with depositors becomes difficult. As a first warning sign is the first ever annual fall by 3.34%, in 2014, of ALL denominated bank deposits. How about corporations? First, the

I thank Mimoza Agolli, PhD(c), for the standard deviation data and calculations.

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January 2015 government revenue from corporate income taxes has been in free fall (-15.7%), as compared with the corresponding month one year before. This indicates a difficult situation with the profits of the corporate sector. There is another thing. It is true that Consumer Price Index (CPI) inflation has been positive, though mildly so, but Producer Price Inflation (PPI), according to INSTAT data, has been in negative territory for two years in a row (-0.41% in 2013 and -0.45% in 2014). This implies that the corporate sector is facing the so called “debt deflation”, i.e. falling sales revenue associated with constant debt service payments. Conclusion

In conclusion, I think there are some clear facts implying that banks have been using a new “feet on the ground” strategy for credit risk control. This implies less interest rate discrimination and more credit rationing. The strategy, which being optimal should have been used from the beginning, has started to pay off. To be successful in long term, I think the strategy should be implemented with due consideration given to the situation of banks’ important stakeholders such as depositors and corporations.

Banking System

Internal Ratings-Based models an opportunity to be considered

Commercial banks and their top-level management should consider optimizing the use of bank’s capital, and on the other hand, the central bank should consider and prepare the banking sector towards the natural evolution of rating models.

by Mr Altin KADAREJA, MSc, Senior Consultant PROMETEIA s.p.a., Milano, Itali

n 31 March 2015, Bank of Albania approved the regulation "On the Bank's Regulatory Capital", which lays down the structure, components and method of calculating regulatory capital of the bank and sets forth its minimum level, a capital amount that banks are required to provide, in order to cover credit, market and operational risks, respectively. This regulation is part of regulatory framework which addresses capital adequacy, in order to maintain the financial system’s stability, naturally derived from Basel regulatory framework. Particularly, Basel II framework seeks to address the problem of systematic instability due to banks’ bankruptcy, by making capital requirements more sensitive against risk. Although published back in 2001, several risk practitioners (managers, regulators, bankers and professors) are not yet convinced about the achieved results. One of the major issues is procyclicality. Risks in the banking business are highly correlated with the business cycle, as well as risk-weighted assets. In case of

any economic downturn the amount of these assets will rise, thus reducing bank’s capital ratio. This will "force" banks to raise capital, or otherwise, reduce the amount of risk-weighted assets. Given that capital increase is difficult in the short-term, banks will chose between reducing lending, and replacing, or swapping existing exposures with lower risk ones. Therefore, if some banks will act accordingly, then credit to economy will decrease and such tightening of regulatory capital will stimulate the recession, even further. The opposite effect will occur in case of any economic boom, where the amount of risk-weighted assets will decrease, by increasing the capital ratio, and as a result, the bank credit to economy. In both cases, the minimum capital requirements and pro-cyclicality will amplify the business cycle, by deepening the decline, during the recession, and boosting growth during economic expansion, respectively. In this way, it has produced exactly the opposite effect that the regulatory framework of Basel II was aiming to achieve. However, this is a macroeconomic perspective, still to be confirmed. The effective advantages of these regulations are experienced on a microeconomic level. The formula of calculating the regulatory capital includes Tier I and Tier II Capital, with their respective risk-weighted assets. It is exactly the de-

nominator of such formula that reflects the profile of bank’s loan portfolio, in terms of loan risk, and offers the opportunity to change and reduce the level of the required regulatory capital. Risk weighted assets are a function of internal parameters of bank’s credit risk. The calculation of these parameters, in different banks, is based on specific models, which take into account the borrower’s and transaction’s characteristics. However, the generally dominating models consider the borrower’s probability of default, by incorporating the percentage of bank’s loss given amount, along with the bank’s exposure at default, in case of default. All three elements, Probability of Default (PD), Loss Given Default (LGD) and Exposure-At-Default (EAD), compose the basis for the Economic Loss (EL). Basel committee has offered two methods (Standardized and the Internal Rating Based (IRB) for calculating these parameters, often considered by many banking players (regulators and commercial banks), as the Achilles Heel in order to reduce the regulatory capital. When using the Standardized method the risk parameters and weights are taken by external sources to the bank, credit rating institutions and central regulators. When using the Internal Rating Based models, the parameters for calculating the risk-weighted exposures are calculated from internal resources/mod-

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els of the bank. The method of Internal Rating Based models can be applied in two ways: foundation and advanced approach. The difference between the two approaches lies in the way the risk parameters (PD, LGD, EAD) are calculated. According to the foundation approach (FIRB), only the borrower’s probability of default (PD) is calculated with internal models. Other parameters are standardized. Whereas, according to the advanced approach of internal models (AIRB), banks may calculate all three parameters (PD, LGD, EAD), through internal models and use them to calculate risk-weighted assets. In this way, banks can choose out of three methodologies (approaches) - Standardized, Foundation and Advanced Internal Rating Based, considering the tradeoff between the disadvantage in complexity of calculation and the advantage in reducing the required capital. As it can be understood, the more one aims towards the advanced approach the more internal to the bank the methodologies become and the more independence in such calculations the bank needs to prove. Certainly, achieving such levels of independence requires relevant experience, both in time and technical terms. However, what could be of sector interest is the specific analysis of the advantages and the added value that such methods could provide for clusters of different banks. Specifically, two main advantages could be mentioned: Firstly, a higher sensitivity against risk.

These models enable banks to identify, in the most accurate way, the risk profile of their customer. When capital requirements are based upon such methodology, they are more sensitive against credit risk and the economic losses of bank’s loan portfolio. Secondly, the improvement of internal risk-rating systems. When banks get approval to use internal rating methodologies for calculating risk parameters, they should include the use of such parameters in most banking processes and procedures, such as loan administration, capital management, decision making and strategic positioning, etc. This inclusion of risk parameters in bank’s decision making processes not only improves the internal risk-rating systems, but also enables the spread of the risk culture at all levels of bank’s management. In this landscape, it is crystal clear that all banks would prefer the use of advanced methods of internal rating models, with the aim to reduce and optimize as much as possible the required capital requirements. However, this comes at a cost. In order for banks to reach these levels of independence in calculating the parameters, they must seek and obtain the central bank’s approval, and to do so, it requires maximum commitment and considerable investments in implementing such framework of internal rating methods/models. On the other hand, the use of the standardized method is positive, as it limits the pro-cyclicality effect, as the external calculation of parameters is less sensitive than internal

calculation, thus producing a more stable risk weighting. However, the standardized method provides incentives for bank’s clients to perform the so-called "rate shopping", in order to reduce the costs of debt, by forcing banks to provide estimates of artificial risk parameters (because they include external parameters’ calculation), without considering exactly the customer’s risk profile. In conclusion, the Albanian economic situation and the low number of economic crisis have helped the banking sector to avoid strong fluctuations in the regulatory capital and the need for its adaptation. However, commercial banks and their top level management should consider optimizing the use of bank’s capital, and on the other hand, the central bank should consider and prepare the banking sector towards the natural evolution of rating models. Internal risk-rating models are an untapped “fortune” for the Albanian banking market. Surely, the application of effective regulatory framework and their implementation requires proper timing, both in terms of market experience, and the required time period for implementing this methodology. Nevertheless, the advantages of using these models are significant, as recent experiences have shown that the transition from standard methodology to foundation internal ratings approach reduces bank’s regulatory capital by 10 - 20%, while the transition from standard methodology towards the advanced internal ratings approach, does reduce it by 20-30%.

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Experts’ Forum

Perspectives on the valuation of real estate properties in the current market Ever since the real estate market started functioning after the '90s, the comparable sales and the rent capitalization methods have produced widely different results. The wide gap between the values derived under comparable sale and rent capitalization method could be explained, by the existence of additional income sources, that Albanian households have, apart from wages.

by Mr Anton LEZHJA

Director, Valuation and Modelling, Financial Advisory Services Deloitte Albania & Kosova

n the last-year-and-a-half, while being engaged in real estate appraisals throughout the country and in casual discussions with valuation experts and bankers, a number of questions have often came up, related to real estate values in the current market landscape. Like: “How is the market value determined in a dried up market?” or “Why isn’t the capitalization of rent method utilized as the primary valuation method for an apartment, store, or land?” This article, is an attempt to share a few perspectives and thoughts related to these questions, while simultaneously hoping to stimulate a broader discussion on the topic from all players in the real estate sector. The price of any good or service, by definition, manifests the precise intersection between supply and demand. But, is the price-setting mechanism currently working for real estate properties in Albania? We’ve been witnessing a significant reduction in the number of property transactions in the ewhole country, even in the most popular and exclusive areas in major cities. When

no transactions take place at a time when the desire to buy or sell can clearly be evidenced, - for example, by the number of offers to sell or the number of requests to buy - suggests that a notable difference does exist between the buyers’ and sellers’ market positions, and, for all intents and purposes, neither is willing to move toward the others’ direction. The concept of market value is built on the premise of a willing and capable seller and a willing and capable buyer, who agree to enter into an agreement to exchange property, on a specific date. Because a seller is not willing to sell a property, at the price currently offered by the buyers, or because a buyer postpones a transaction under the expectation that prices will decline and therefore it is better off waiting, the notion of market value is overwhelmed. In this way, how would an appraiser assess the market value of a property when the market is very thin or does not even exist? An approach is the appraiser to begin the valuation process by analyzing empirical, fundamental factors from both a microand macro-economic perspective, to arrive at a most probable estimate, that closely resembles the equilibrium “supply meets demand”. 1. From a micro-economic view, the market value is determined by using generally accepted valuation methods, where the most commonly used is the comparable sales method. As per above mentioned, it means.

however, that the comparable sales method is not sufficient to arrive at the market value. Another universally used method for real properties’ valuation is the rent capitalization method, albeit it is not typically applied, or relied upon, for residential properties in Albania. Ever since the real estate market started functioning after the '90s, the comparable sales and the rent capitalization methods have produced widely different results. I will illustrate this with a simple example. A furnished apartment with an average area of 70-80 m2 located in Tirana’s very own city center is rented for around EUR 250-300/month, presumed that it would sell somewhere in the range of EUR 1,000 - 1,200/m2. Without taking into consideration any necessary adjustments to the actual rent price, such as: adjustments for vacancy rates, contribution of furniture to rent, or differences between used area to total area, the rent for m2 would be EUR 3.6-3.8/ month, or EUR 43-45, annually. The ratio between annual rent and the sale price results in what is known as the yield (rate of return on capital). In our example, this would equal 3.8% (45/1,200) to 4.3% (43/1,000). Since yield is also used as an indicator of investment risk, this places Tirana on the same footing as other major metropolitan cities, such as: London, Paris, and Berlin. But that is simply not true, because based on a risk analysis of real estate investments in Tirana it appears that,

Anton Lezhja is an Accredited Senior Appraiser of American Society of Appraisers (ASA) and member of Royal lnstitution of Chartered Surveyors (RICS), of

Albanian Society of Real Property Valuers (SVP), and is a licensed valuator of real estate in Albania and Kosova

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under the current market conditions, and also based on mid-term forecasts, the yield is 10%-12%. By capitalizing the prevailing market rent using this yield we’d get property values at the range of 375-430 EUR/ m2, a figure that is fairly close to the average construction costs in Tirana, and 3-4 times less than property sale prices. Such a phenomenon is also observed to persist in other countries of the region for a number of perfectly valid reasons, including people’s crave to own property as opposed to the less desirable psychological condition of living at someone else’s property; the perceived uncertainty related to long-term rent contracts (i.e. the risk that the landlord may suddenly discontinue the rental agreement, or puts the property on sale), or the appeal of securing another source of income, along with wages, etc. 2. In order to appropriately weight the sale comparison and rent capitalisation methods, we should now turn on the macro-economic view, which analyzes the real estate market on the basis of several parameters, the most important of which are: i. the house price to income ratio2 is the basic affrodability measure for housing in a given area. It is generally the ratio of median house prices to median household disposable incomes, expressed as a percentage, or as years of income. This long-term, closely monitored ratio suggests that the home price, which can be afforded by a household, is equivalent to 3-4 times its annual income; ii. the deposits to income ratio is the minimum required downpayment for a typical mortgage, expressed in months or years of income; iii. the affordability index measures the ratio of the actual monthly cost of mortgage to nett household income. It is used more in the United Kingdom, and offers a much more realistic measure of the ability of households to afford housing than the house price to income ratio. However, it is more difficult to calculate, and hence the price to income ratio is still more commonly used by pundits. The above charts show the historical trend of house price to income ratio, during the period 1976 - 2011 and its distribution across Europe in 2015. The long-run average of this ratio equals 3.5 times annual earnings, while in the recent years is has trended toward the 5.0-5.5 times territory. In the chart to the right, the green symbols represent a lower figure and red symbols

represent a higher figure, as compared to the 3.5 average. The average earnings of an Albanian household are estimated to be at ALL 60,000-65,0000 per month (EUR 430-465/month), or EUR 5,143 to 5,571 per year. These earnings include almost entirely wages, as there are no reliable statistical data related to other income sources of a household. By applying the house price to long-term annual income rate, based on a 5-6 years ratio, the average price afforded by a family would range between EUR 25,700-33,400. If the average required space for a typical family would vary between 70-80 m2, then the price per m2, a family would afford, is EUR 367-418. This price range is so close to results under rent capitalization method. The wide gap between the values derived under comparable sale method and rent capitalization method

could be explained, in part, by the existence of additional income sources, that Albanian households have, apart from wages. Conclusion: As long as actual transactions exist, market values of real estate properties will appropriately be determined on the basis of those transactions, regardless of household income sources. To the extent that household income diminish, then the value of real estate properties will begin to get closer to the affordable (intrinsic) values, implied by household wages, and there will be a reduction in the number of transactions. In these conditions, the rent capitalization method will be awarded a greater weight in estimating the market value. However, it is ultimately the job and responsibility of the appraiser to conclude on a reasonable market value of any real estate property.

i) The average household income is defined as gross income from all sources, including wages, incomes from businesses and other activities, incomes from investments, and benefits in kind, such as: consumption of agricultural products ii) Average (median) house price: an average–priced property is defined for purposes of this ratio as a property below which 50% of properties have a lower price and above which 50% of properties have a higher price. Value is defined as the price at which the property would sell after a reasonable marketing period and by a seller who is under no compulsion to sell.

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Experts’ Forum

Internal Audit

Its role in mitigating the bank fraud Internal auditors do have a role in the battle against fraud and theft in their organizations. They make assessments and provide recommendations on the improvement of internal control system.

by Mr Stavri PASHKO Executive Director ALBANIAN INSTITUTE OF INTERNAL AUDITORS (AIIA)

he Albanian banking sector is no stranger to the occurrence of the fraud. Fraud is a permanent and inherent threat (and not only for the banks) that grows in its complexity and extent, due to several factors, such as: organizational structure, company culture and geographic expansion of the business. In its eminent Report to the Nations on Occupational Fraud & Abuse, the Association of Certified Fraud Examiners (ACFE) states that organizations around the world lose an estimated 5 percent of their annual revenues, to occupational fraud. While in our country is difficult to find such statistics, it can clearly be stated that many organizations, mainly banks, have been victims of fraud cases that cause millions of euros in losses. In addition to the lasting impact on profitability, fraud can cause significant reputational damage, sometimes even more severe than the monetary one. Due to the sensitive nature of business, when a fraud case happens, it is not un-

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usual that customers will often run to the nearest branch, to withdraw their deposited money. When a fraud case has occurred, internal auditors are often called upon to respond to many stakeholders, inside and outside the organization. Straight questions such as: “Where were the internal auditors?”, or “How it comes that the internal audit didn’t see this coming?” are part of the post-fraud routine. Internal auditors themselves may run back to their files and working papers to gain some self-assurance that they have exercised due professional care. Often, senior management and board require information and ask explicitly whether the internal audit function has performed recent work in the business perimeter, in the time when the fraud happened. This scenario doesn’t belong to the Albanian business environment, only. Similar reactions and question marks are raised worldwide in organizational environments, when the internal auditor is pictured as Argos, the Greek mythological guardian with thousand eyes that never sleeps. While internal audit involvement in preventing and investigating should not be questioned, consideration should be given to the extent of internal audit’s responsibility. The occurrence of fraud and theft is often facilitated by the weakness found in

the internal control system. Governance models, recognized and used worldwide, emphasize that management is responsible for establishing and looking after the internal control system, which plays a decisive role in preventing and timely identifying potential fraud and theft. According to BoA’s regulation No.63: "On the core management principles of banks and branches of foreign banks and the criteria on the approval of their administrators",

The main purpose of internal audit function is NOT to investigate and detect fraud. Internal audit’s purpose is to provide reasonable assurance that the goals and objectives of the audited business process are achieved and that potential weaknesses in internal controls should be identified and highlighted.

senior management is responsible for undertaking necessary measures and actions to monitor and manage potential risks to the bank’s activities. Due to the extensive presence of liquid assets in the banking sector, fraud is known to be one of the most common operational risks. Undeniably, internal auditors do have a role in the battle against fraud and theft in their organizations. Internal auditors make assessments and provide recommendations on the improvement of internal control system. As mentioned before, a sound internal control system is a great shield, and at the same time, an effective offensive against fraud. The international standards for the professional practice of internal auditing require to internal auditors to consider (among others!) the fraud risk when they plan their internal audit engagements. In cases, when fraud risk is prevalent, internal auditors should perform analytical tests that may be useful in detecting the existence of fraud. In order to carry out such task successfully, internal auditors should have adequate knowledge on fraud dynamics, possible scenarios and recognize red flags that indicate the presence of fraud. Mr Norman Marks, an international expert in governance, internal audit and risk, states that the responsibility of internal auditors may be questioned, after the responsibility of the business line managers have been scrutinized. For example, if the fraud has occurred within the human resources department, it is the head of human resources that is primarily accountable for maintaining the internal controls that will help in deterring and identifying potential fraud. Most common fraud case in this business area is payroll fraud. Fictitious employees are inserted in the payroll database by the fraudsters, usually an employee within the HR function, to issue paychecks or overtime hours for work not performed. If the head of human resources does not establish or does not perform controls to prevent and identify such risk, then he might be considered responsible, as well. The governance model of “Three Lines of Defense” supports the “secondary” role that the internal audit function should take while the senior management has the primary role in preventing and detecting fraud. The internal audit function can be extremely useful and more effective for the organization, if allowed to play the relevant role. Often, senior management and

The occurrence of fraud and theft is often facilitated by the weakness found in the internal control system. Governance models, recognized and used worldwide, emphasize that management is responsible for establishing and looking after the internal control system, which plays a decisive role in preventing and timely identifying potential fraud and theft. board ask internal auditors to spend extensive time for auditing and investigation on fraud, while such responsibility should be distributed through all the lines of defense. Moreover, it is important to emphasize that, while internal auditors should be able to assess the fraud risk as a standard procedure of their work, not all internal auditors have the expertise and knowledge of a professional person whose primary role is fraud investigation, i.e. a fraud examiner. The international standards for the professional practice of internal auditing were not created to prevent or detect fraud. Some banks and other institutions in Albania have understood this and have created specialized units that deal with fraud analytics and investigation. only. Positioned in the third line of defense, internal audit can perform better its activities by using instruments to identify fraud cases that have overpassed the internal controls, established in the business processes. Subsequently, where weaknesses are identified, internal auditors should work closely with management, by providing

recommendations on how to strengthen their lines of defense. The main purpose of internal audit function is NOT to investigate and detect fraud. Internal audit’s purpose is to provide reasonable assurance that the goals and objectives of the audited business process are achieved and that potential weaknesses in internal controls should be identified and highlighted. The fight against fraud and any other irregularity is a fight belonging to everyone inside the organization and not only to internal auditors. COSO framework enforces that everyone in the organization has a certain degree of responsibility over internal controls. Top management should create and promote an ethical climate, within the related organization. This ethical climate may be an efficient and effective weapon against fraud and other unethical business practices. Internal auditors should support top management by providing their knowledge and expertise on internal controls to create effective defenses against fraud and other potential risks.

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Experts’ Forum

Using Scoring While Managing Risk Credit scoring is perhaps one of the most "classic" applications for predictive modeling, to predict whether or not credit extended to an applicant will likely result in profit or losses for the lending institution.

by Mr Ayhan AKAY Risk Management Consultant SBPST Sh.p.k

redit risk is most simply defined as the potential that a bank borrower or counterparty will fail to meet its obligations, in accordance with agreed terms. The goal of credit risk management is to maximize a bank’s risk-adjusted rate of return, by maintaining credit risk exposure within acceptable parameters. Banks need to manage the credit risk inherent in the entire portfolio, as well as the risk in individual credits or transactions. Banks should also consider the relationships between credit risk and other risks. The effective management of credit risk is a critical component of a comprehensive approach to risk management and essential to the longterm success of any banking organization. The credit risk strategy of any bank should provide continuity in approach

Therefore, the strategy will need to take into account the cyclical aspects of any

economy and the resulting shifts in the composition and quality of the overall credit portfolio. Although the strategy should be periodically assessed and amended, it should be viable in the longrun and through various economic cycles. The credit risk strategy and policies should be effectively communicated throughout the banking organization. All relevant personnel should clearly understand the bank’s approach to granting and managing credit and should be held accountable for complying with established policies and procedures. Banks should have in place a system for the ongoing administration of their various credit risk-bearing portfolios. Credit scoring is perhaps one of the most "classic" applications for predictive modeling, to predict whether or not credit extended to an applicant will likely result in profit or losses for the lending institution. There are many variations and complexities regarding how exactly credit is extended to individuals, businesses, and other organizations for various purposes (purchasing equipment, real estate, consumer items, and so on), and using various methods of credit (credit card, loan, delayed payment plan). However, in all cases, a lender provides money to an individual or institution, and expects to be paid back in time with interest commensurate with the risk of default.

Credit scoring is the set of decision models and their underlying techniques that aid lenders in the granting of consumer credit. These techniques determine who will get credit, how much credit they should get, and what operational strategies will enhance the profitability of the borrowers to the lenders. Further, they help to assess the risk in lending. Credit scoring is a dependable assessment of a person’s credit worthiness, since it is based on actual data. A lender commonly makes two types of decisions: first, whether to grant credit to a new applicant, and second, how to deal with existing applicants, including whether to increase their credit limits. In both cases, whatever the techniques used, it is critical that there is a large sample of previous customers with their application details, behavioral patterns, and subsequent credit history available. Most of the techniques use this sample to identify the connection between the characteristics of the consumers (annual income, age, number of years in employment with their current employer, etc.) and their subsequent history. Typical application areas in the consumer market include: credit cards, auto loans, home mortgages, home equity loans, mail catalog orders, and a wide variety of personal loan products.

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The application of scoring models in todayâ&#x20AC;&#x2122;s business environment covers a wide range of objectives. The original task of estimating the risk of default has been augmented by credit scoring models to include other aspects of credit risk management: at the pre-application stage (identification of potential applicants), at the application stage (identification of acceptable applicants), and at the performance stage (identification of possible behavior of current customers). Scoring models with different objectives have been developed. They can be generalized into four categories, as listed below. Marketing Purposes

Identify credit-worthy customers most likely to respond to promotional activity in order to reduce the cost of customer acquisition and minimize customer dissatisfaction. Predict the likelihood of losing valuable customers and enable organizations to formulate effective customer retention strategy. Response scoring: The scoring models that estimate how likely a consumer would respond to a direct mailing of a new product. Retention/attrition scoring: The scoring models that predict how likely a consumer would keep using the product or change to another lender after the introductory offer period is over.

The overall objective of credit scoring is not only to determine whether the applicant is credit worthy, but also to attract quality credit applicants who can subsequently be retained and controlled while maintaining an overall profitable portfolio.

Application Purposes

Bad Debt Management

Many credit problems reveal basic weaknesses in the credit granting and monitoring processes. While shortcomings in underwriting and management of market-related credit exposures represent important sources of losses at banks, many credit problems would have been avoided or mitigated by a strong internal credit process. Decide whether to extend credit, and how much credit to extend. Forecast the future behavior of a new credit applicant by predicting loan-default chances or poor repayment behaviors at the time the credit is granted. Applicant scoring: The scoring models that estimate how likely a new applicant of credit will become default.

Select optimal collections policies in order to minimize the cost of administering collections or maximizing the amount recovered from a delinquentâ&#x20AC;&#x2122;s account. Scoring models for collection decisions: Scoring models that determine when actions should be taken on the accounts of delinquents and which of several alternative collection techniques might be more appropriate and successful. Thus, the overall objective of credit scoring is not only to determine whether the applicant is credit worthy, but also to attract quality credit applicants who can subsequently be retained and controlled while maintaining an overall profitable portfolio. The absence of testing and validation of new lending scoring techniques is another important problem. Adoption of untested lending techniques in new or innovative areas of the market, especially techniques that dispense with sound principles of due diligence or traditional benchmarks for leverage, have led to serious problems at many banks.

Performance Aspect

Predict the future payment behavior of existing debtors in order to identify/isolate bad customers to direct more attention and assistance to them, thereby reducing the likelihood that these debtors will later become a problem. Behavioral scoring: Scoring models that evaluate the risk levels of existing debtors.

References Crook, J. & Banasik, J. Does Reject Inference Really Improve the Performance of Application Scoring Models? Journal of Banking & Finance, Risk Management Group of the Basel Committee on Banking Supervision Basel Committee on Banking Supervision Basel September 2000 Thomas, L. C., Edelman, D. B., Crook, J. N. Credit scoring and its applications. Siddiqi, N. Credit risk scorecards: Developing and implementing intelligent credit scoring.

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Economist Corner

Banks and the financial system in front of money laundering The question in place is: is there any standard model, or known general way, how money is laundered, or any individual case means a different and unique improvisation? In this regard, the answer is standard, already. Money laundering, more or less, follows a standard way, regardless of specific features of different cases.

In its formal meaning, the term "money laundering" comes from the fact that the by Prof. Dr. Adrian CIVICI illegally earned money, whatever the methPresident ods pursued, is called "black finance", European University of Tirana, UET which includes mafia and criminal activity, etc. "Cleaning" serves such money to gain the equal status as the legal money, so not having compromising â&#x20AC;&#x153;stainsâ&#x20AC;?. The term "money laundering" commenced to beoney laundering is the process come part of everyday vocabulary during that consists in concealing or 70s, at the time of the "Watergate" scandal legal deviation of earnings, or in US, whereas it took the real legal meanmoney coming from illegal activities, with ing and content in the early 80s. From a illegal, criminal or mafia nature, such as: historical perspective, there are several drugs, prostitution, arm trade, money explanations for this term. They connect earned from corruption, financial specula- its origin with a Mafia family in Chication and fraud, informality, fiscal evasion, go of '20s, which possessed a wide chain etc. The ultimate aim of money laundering of "Sanitary Cleaning Shops" laundries, is transforming such money into "honest which was used as a legal facade for reand cleanâ&#x20AC;? money, legitimate profits, and cycling money, i.e. to "clean" the money consequently, their normal use in legal earned from illegal activities of all kinds. financial and economic activity. Money The phenomenon was openly discussed laundering is currently a widespread phe- during the trial of Al Capone, who was nomenon, but in the same time, so much at sentenced for tax fraud and money launthe spotlight of national and international dering, despite having numerous crimes authorities. It is worth mentioning that ac- in his CV, as well as during trial processtually, according to the IMF, approximate- es against mobsters, like: Luciano and ly 2 - 5% of global GDP is circulating as Lansky, during the years 1930-40 in US. dirty money. When put into figures, this Also, in the medieval Europe of XIII-XVI means that, US 2.5 to 3.5 trillion (World there existed two currencies: the shining GDP in 2014 was US 75 trillion) are pro- gold and silver coins, which were the main duced by illegal and criminal sources. means of payment and metal coins, which

had a low value and blackened, which were used by ordinary people, which in most cases, were unregistered and without clear statistics about them.

International experiences and specific studies have proven that, if tolerated, money laundering is a negative phenomenon with serious long-term consequences, because: it prevents the development of formal and legal private sector, which is faced with unfair competition; it causes confusion and uncertainty in monetary flows and exchange rates in the money markets; it creates instability in the financial markets and reduces the reputation of banks and financial institutions in general, going up to the point of provoking bankruptcy or serious structural crisis to them. www.aab.al

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The question in place is: is there any standard model, or known general way, how money is laundered, or any individual case means a different and unique improvisation? In this regard, the answer is standard, already. Money laundering, more or less, follows a standard way, regardless of specific features of different cases. Firstly, by "investing" or putting money into circulation, in the form of investments, bank deposits, financial transfers, casino or games of chance cheques, etc., which means "introducing them into the legal financial and monetary system". Secondly, separating or detaching those money from their origin and initial source and distributing or circulating them through various transactions, commonly called as "financial fabrications” or “Waltz of transfers", aiming at concealing and losing the tracks of origin. Such types of operations are made with support from banks, through tax havens, financial companies, insurance companies, investment funds, speculative share transfers, earnings, expenses, casinos and other games of chance, etc. Thirdly, by joining up several “pieces” of such money, now as "clean money" and legitimating them as pure investments, in business areas, such as: real estate, construction, charity funds, investment funds, sports, fashion and media, stock exchange investments, purchasing luxury objects, etc. If we talk about improvisation, we may say that modern methods of money laundering keeps being more sophisticated and complex, thus making their illegal and criminal nature even more complicated. International specialized institutions, such as: the IMF, or other intergovernmental organizations, publish regular studies which explain techniques and methods used in the field of money laundering. Nothing is unknown. The money laundering issue is part of the economic, financial and monetary globalization, operating through well-organized networks. "Fiscal heavens" are, also, a quite specific phenomenon. The international criteria that identify them are three: very low taxes or total absence of taxes; the lack of any transparency of the fiscal sys-

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The monetary and financial institutions and stakeholders are establishing the institutional culture and order to identify and report cases, according to legal criteria, related to money laundering activities. Albania has a special law "On prevention of financing of terrorism". It is a positive fact that in 2015, Albania is no longer part of the group of countries that are under constant monitoring for money laundering and financing of terrorism. tem; and a full banking and fiscal secrecy, by not cooperating with any country, in this regard. There are also distinctions between tax havens and financial havens, banking havens, investment havens, etc.

These include typical "money laundering" countries, which include even some developed countries, which tolerate specific aspects of money laundering. This is so fluid, as each country publishes a list of suspected countries or territories for carrying out such activity. The “hunt” for dirty money is being transformed from capturing dirty money of mafia’s criminal origin and blocking their legal recycling, into finding and revealing hidden profits, profits which come from political clientelism, corruption, tax evasion, transferring public funds to personal activities, etc. In the battle at international scale against the process of money laundering, fiscal heavens and financial sophistications still provide opportunities and playing field to develop such activity. Banks have an important role in the prevention of money laundering. The positive experiences and specific laws that exist in this regard clearly require banks to report to law enforcement agencies or specialized structures the

operations and the identity of respective authors who are doubtful; to declare operations and transfers in which the beneficiary is dubious; to identify non-typical financial and monetary operations, carried out by individuals, organizations or businesses which consist in frequent and unjustified changes of companyâ&#x20AC;&#x2122;s charter, organizational setup, and properties, or financial operations that are not related to their legal activity, as it is known until recently; to discover unjustified operations, in the form of real estate transactions, executed at "strange" prices, fund deposits without any known or justifiable source; to run special control software for "best practices" in their daily activities, etc. There is a widely-discussed theory, in public opinion, and in some cases within institutional or academic environments, that "many countries have benefited from the money laundering process, especially when they are not the country of origin." It is true that "host" or "circulating" countries for dirty money may have

financial benefits, especially the "intermediary operators", i.e. those who carry out the laundering process. About 20 25% of the amount of laundered money is the "reward" for such intermediaries. Certainly, a chunk of dirty money is invested as clean money in these countries and it is assumed that they develop the economy or stimulate consumption in these countries. International experiences and specific studies have proven that, if tolerated, money laundering is a negative phenomenon with serious long-term consequences, because: it prevents the development of formal and legal private sector, which is faced with unfair competition; it causes confusion and uncertainty in monetary flows and exchange rates in the money markets; it creates instability in the financial markets and reduces the reputation of banks and financial institutions in general, going up to the point of provoking bankruptcy or serious structural crisis to them; it reduces fiscal revenues in the country where it takes place, as incomes produced by actions related to money laundering are mostly carried out underground; dirty money converted into legitimate one, is increasingly used in criminal, informal activities or to corrupt the political classes or senior managers; laundered money is used to create clientelist or criminal parallel powers, out of the market, government, law and citizens, thus making a corruption quite powerful; the more easily money is laundered in a country, the greater the incentive for informal action, abuse of power, cronyism, law infringement, etc.; many of major financial scandals that have occurred in the world, like: "Enron" in US, "Parmalat" in Italy, "Prestige oil tanker" with Swiss capital, "Elf issue" in Africa, "Glencore issue" of the steel multinational, etc., have clear cases of money laundering operations. For this reason, the issue of prevention of money laundering is considered the "Achilles Heel" for a healthy and sustainable capitalism. Is Albania immune from the money laundering phenomenon? Albania has some "specifics", when talking about the money laundering phenomenon. Firstly, like many other ex-communist Eastern

Europe countries, it has a bit of more than two-decade timeframe facing such completely new phenomenon, for its experience and tradition. As such, it is, in many cases, "an easy prey" for "old masters" in this field. Secondly, the process of prevention of money laundering is not just a goodwill or political determination, but is closely related to the establishment and strengthening of specific institutions for this purpose, with drafting a series of laws, regulations and specific measures, accompanied with proper qualifications of specialized human resources. Finally, the will for preventing or detecting and punishing money laundering should not be amateurish, selective, temporary, politicized, or ill-funded, which means that specialized institutions in this regard must have maximum legal, political and financial support. The important problem, which has to do with the quality of detecting and preventing money laundering, is going from reasonable doubts to defining the direct connection with the originating job of dirty money. Albania has a good law against money laundering and terrorist financing; it has a special unit of financial intelligence: the General Directorate for Prevention of Money Laundering, which is well-coordinated with its international counterparts and regulators, and cooperates effectively with supervisory authorities, especially he Bank of Albania and Financial Supervision Authority. The monetary and financial institutions and stakeholders are establishing the institutional culture and order to identify and report cases, according to legal criteria, related to money laundering activities. Albania has a special law "On prevention of financing of terrorism". It is a positive fact that in 2015, Albania is no longer part of the group of countries that are under constant monitoring for money laundering and financing of terrorism. This is one of the conclusions of the report of Onsite Team group of ICRG. Albania is considered that it has fulfilled all shortcomings, reported during past years by FATF (Financial Action Task Force), which monitors the implementation of measures against money laundering and financing of terrorism in the world.

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Social Capital

BKT ‘‘Folk Fest’’ Children Festival in Kruja

Alpha Bank Albania

BKT supported the Festival of Songs and Popular Dances for children, which was held in Kruja on 29 May, with the participation of young artists. the event was attended by many wellknown artists, Mrs. Tinka Kurti, actress, Mrs. Edit Mihali, soprano, and many prominent personalities of different fields. This festival aims to promote the true values of Albanian folk song. Such activities during the last years have been held in Kruja, only.

Volunteer Day

On the Volunteer Day, 17 May 2015, the bank organized a marathon at Tirana’s Artificial Lake and the respective sponsorship was made at “Autism speaks Albanian” foundation. In total 60 employees of the Bank run, along with more than 40 other volunteers either from the foundation or celebrities. The slogan of the campaign was “Run for Autism”.

Blood Donation

For the fifth consecutive year Alpha Bank employees donated blood, in response to Red Cross Albania’s request. The slogan was: “Together we donate life” and the activity was accompanied by a campaign in social media with the message: “I donate 5 minutes of my time. What about you?”

During the second quarter the bank sponsored the following events and activities:

Tirana Municipality - Green city

BBKT aims to become a green bank and in this regad, numerous sponsored projects on improving the environment have been implemented, recently. The recent project with Tirana Municipality is the improvement of the park area between "Kavaja Street" and "Durrësi Street", by planting trees, placing benches and bins, in order to increase the green space and improving city facilities.

• “Dreams and Ideas” Fair, organized on 10 June by the Ministry of Education, was related to the ideas on how the students see the role of the School, as a Community Center. • The next edition of the General Assembly Meeting on 27 April 2015, where Mr. Donald Lu, US Ambassador in Tirana, and Mr. Arben Ahmetaj, Minister of Economy presented the ABI-s and Year Book’s presentation. • Reconstruction of Lushnja main square, by way of placing benches. • Sponsoring of General Directorate of State Reserves with office supplies. • Sponsoring the Elbasan folkloric group at annual FOLK Fest on 10 May 2015, as requested by “Skampa” Cultural Organization and Council of Elbasan District.

Credins Bank’s social responsibility, thus contributing to the enrichment of cultural life in Albania.

CREDINS BANK Tirana Open Credins Bank supported, for the second consecutive year, the “Book and Art” Fair, organized in Tirana. During a whole week Tirana citizens had the opportunity to visit the Book Fair, organized at the premises of the Palace of Congresses, Tulla Center, for all lovers of music, the opera, "Katërt i Radës", at the University of Arts, the Tirana International Documentary Film Festival, etc. The New Music Days The "New Music Days" International Festival arrived at its 18th edition, to promote, support and stimulate the composers of Albanian contemporary music. The musical art is an inseparable part of long-supported

Children.

51st Festival of Children Credins Bank, supported, for the second consecutive year, National Cultural Centre for Children, the Puppet Theatre. The 51st Festival for Children is a large-scale event for children of different age groups, organized under the auspices of National Centre of Culture for

BKT receives two other important awards by EMEA Finance

BKT has been awarded with “The Best Local Bank in Albania” Award and the “Corporate Social Responsibility in Central and Eastern Europe and Commonwealth of Independent States” Award, from the prestigious British magazine: EMEA Finance. BKT has been awarded by EMEA Finance as “The Best Local Bank in Albania” for the fifth consecutive year.

Moving Health Centers Credins Bank continued its support for the development and improvement of country’s medical services. Nine new health centers will be opened to provide medical service to all tourists who will visit our country, providing uninterrupted service throughout the season.

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Social Capital Credit Agricole CAA-EcoVolis, a continuous cooperation The bank continues, for the third consecutive year, the cooperation with EcoVolis, the association of alternative system with bicycle movement, through the bicycle joint-station near "Skanderbeg" Square, under the motto: "Burns calories, not gas". Music Fest in Tirana Crédit Agricole Bank - Albania, in cooperation with the French Alliance of Tirana, For the second consecutive year, organized, for the second consecutive year, the International Music Festival, through the sounds of "Pendentif”, a prominent French pop band, at an event organized at "Mother Teresa" Square.

ICB International Commercial Bank held the first session of blood donation for 2015, in cooperation with Albanian Red Cross to help children with Thalassemia, which was held at the premises of the bank, in 2 April 2015. Also, International Commercial Bank has made its contribution in donations, for the fourth consecutive year, in cooperation with SOS Village where it continues to sponsor the budget for two children form this village, a donation given at Donors’ Day, organized at SOS Village premises on 20 May 20 2015

Intesa SanPaolo Bank Albania Seven Billion Dreams. One Planet. Consume with Care. World Environment Day (WED), established by the UN General Assembly in 1972, gives a human perspective to environmental issues. The 2015 global WED celebrations were organized at the world’s famous Universal Exhibition: “Expo Milano 2015” (01.05.201531.10.2015), where Intesa Sanpaolo Group is the Global Official Partner. The bank organized a two-week internal & external communication & awareness campaign to celebrate the WED 2015. The Bank also promoted a few internal initiatives, such as enticing colleagues to undertake ecologically responsible daily actions, as well as an excursion in a BIO Farm. Donate blood to save a life! Intesa Sanpaolo Bank Albania Voluntary Blood Donors Group organized the recent initiative in 21-22 May 2015 in two of our biggest branches, at Head Office and at “Rr. Barrikadave” one, under the slogan: “The Blood can’t be created in a Lab, it can only be donated. Donate blood to save a life!” Aid for Orphan Children Intesa Sanpaolo Bank Albania employees joined the call for help from the Red Cross Albania, to give aid by donating food and clothing for the orphans in occasion of the International Orphan’s Day, May 20th and the Children Day, June 1st. These packages were donated to 200 children living in communities. The motto of this initiative was Mother Theresa’s saying: “We can’t do great actions, but little things with great love!” Energy saving Initiative Intesa Sanpaolo Bank Albania employees joined the call for help from the Red Cross Albania, to give aid by donating food and clothing for the orphans in occasion of the International Orphan’s Day, May 20th and the Children Day, June 1st. These packages were donated to 200 children living in communities. The motto of this initiative was Mother Theresa’s saying: “We can’t do great actions, but little things with great love!”

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NBG BANK ALBANIA Support for SOS Children’s Villages As part of the commitment towards the community and people in need, NBG Bank Albania purchased tickets for its staff, an event organized to raise funds for SOS Children's Villages in Albania. The event was organized by the Austrian Embassy and the National Theatre of Opera and Ballet, on 13 June, with the participation of Mr. Shkëlzen Doli, the well-known Albanian violinist.

Celebrating with orphan children in community NBG Bank Albania was part of the activity organized by the Red Cross Albania, Tirana Branch, on the occasion of the Children’s Day, June 1st. The activity gathered 100 orphans who live in the community. NBG Bank Albania supported this activity, by donating gifts to children.

PROCREDIT BANK ProCredit Bank-Responsible for the future! An essential ingredient in the development mission of the whole group of ProCredit banks, environmental protection. All ProCredit banks have undertaken a similar and real initiative to reduce the use of plastics, by making available to the public some 600,000 Eco bags that will be distributed free of charge by all ProCredit banks. About 30,000 Eco bags were distributed in the largest supermarkets, bookshops and other clients of ProCredit Bank. In the frame of ProCredit Bank’s initiative: "ProCredit Bank, responsible for the future", a series of events were organized by the bank, as follows: • A special entertaining event for children, coming "Kristaq Rama", a 9-year private school, who received information on environmental protection and various creatures. Later, they watched the theater for children, an outdoor play by the National Theatre Troupe. This joyful atmosphere lasted till the end of the event, when Eco bags were distributed to all teachers who attended the event. • Investments in energy-efficient business units and central offices. • Using Eco hybrid cars, by bank’s business consultants in their daily operations, thus reducing the emission of harmful gases into the atmosphere.

RAIFFEISEN BANK Training civil servants for customer service in the State Police Raiffeisen Bank has supported the initiative of the State Police to train young people, selected by competition for employment at citizens’ service offices and operators of 129. The initiative was introduced by Mr. Saimir Tahiri, Minister of Interiors. The ceremony was attended by Mr. Christian Canacaris, CEO of Raiffeisen Bank

Blood Donation for Thalassemic children Raiffeisen Bank, in cooperation with Albanian Red Cross organized, for the sixth consecutive year, the blood donation campaign for Thalassemic children, with the slogan: "Donating blood, means giving hope, to save life!". Raiffeisen Bank’s employees joined voluntarily this campaign, now a tradition, by donating blood to help these children, whose number, nowdays, reach at 600.

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Social Capital SOCIETE GENERALE Societe Generale Albania Bank and Aleat collaborate together On 14 May 2015, during the “Innovation Week”, an activity organized in Tirana by Ministry of Innovation and the Public Administration, Societe Generale Bank - Albania made a presentation with topic: “Innovation in digital security and customer experience”. The presentation demonstrated innovative services, based on digital authentication and electronic signature of documents with a fingerprint. These services were designed and prototyped using the eAleat, a well-known company which operates the concession for the production of electronic ID cards and passports for citizens of the Republic of Albania and in behalf of the Ministry of Interiors.

TIRANA BANK Support for the children of SOS village Tirana Bank supports SOS families that provide sustainable care, safe and loving family environment for children who have lost their parents, or that cannot live with their biological family. The bank is engaged in "adopting" three children from SOS Village. Sponsoring the life of these children is a long-term cooperation that enables everlasting support of our bank for an individualized care and promotion of development, education, health care, social activities, sports and entertainment for these children.

Donors Day in SOS Children's Village Albania At the event “Donors’ Day”, organized by SOS Children s Villages in Albania in 20 May 2015, Societe Generale Albania gave its contribution, not only in monetary value by sponsoring a part of the event, but also was active at the auction organized by SOS with paintings made by children of SOS village. During the event, SOS Village renewed existing partnership agreements, not only with Societe Generale Albania, but also with other partners and signed new agreements, too.

UBA Donation to the families in south flooded area United Bank of Albania, following the critical situation of families affected by floods in the south Albania, decided to join the initiative of the Albanian Government, by helping the residents located in the suburb villages of Fieri city, by donating equally monetary amounts to 100 affected families, as a sign of humanitarian aid. Support for Albanian orphan children’s integration The bank supported the program submitted by the “National Institute of Integration of Orphan Children in Albania”, held in 20 May 2015, in Tirana. Many distinguished representatives from government, diplomatic corps, businesses and civic society attended the event, aiming to support the cause and once again remind us that: “Beyond pain, there is love”.

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Information Security Zone

by Ms Blerta KOÇI Head of IT Sector ALBANIAN DEPOSIT INSURANCE AGENCY, DIA

he setting up and implementation of the Information System for Reporting and Compensation is one of the most important initiatives, the Albanian Deposit Insurance Agency (DIA) has accomplished during 2014. One of the lessons learned from the global financial crisis of 2008 was the lack of information systems in deposit insurers. The information systems enable an effective and seamless compensation process, which reimburses insured depositors, quickly and accurately. In this context, in order to meet the main objectives of deposit insurance scheme, the compensation of depositors, thus contributing at maintaining the financial stability in the country, DIA put in place the project of electronic reporting & compensation process. Pursuant to the project plan, the setup phase of the system started in July 2013 and was successfully completed in August

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Information System for Reporting and Compensation (ISRC) in Deposit Insurance Agency The Information System for Reporting and Compensation enables DIA to have immediate and any time access to relevant data, thus identifying, in a unique way, the depositors in the system by their personal data. This allows the verification of accuracy of depositors’ personal data in the electronic registers of members of the deposit insurance scheme and the insured amount, DIA has to compensate, in case of any insurance event. 2014, enabling banks to compute the insurance premium, for the first time, in October 2014. The main objective of SIRK is to centralize the electronic information reported from banks to DIA, the calculation of premium for each individual bank and quick and effective compensation, in any case of insurance event. This project is realized with the financial support of EBRD (European Bank for Reconstruction and Development) and with the assistance from the FDIC (Federal Deposit Insurance Corporation), through the technical advice of high profile experts, in defining terms of reference and evaluating its performance. The Information System for Reporting and Compensation enables DIA to have immediate and any time access to relevant data, thus identifying, in a unique way, the depositors in the system by their personal data. This allows the verification of accuracy of depositors’ personal data in the electronic registers of members of the deposit insurance scheme and the insured amount, DIA has to compensate, in case of any insurance event. In this way, the ISRC provides the centralization of the available information to DIA, with regard to deposits and depositors, on an

individual and/or aggregate basis. On the other hand, this system is helpful to DIA, in the sense that enables it to assess the accuracy deposit premium computation, reported by members of deposit insurance scheme.

The reporting system specifies a monthly frequency for reporting data, linked to individual deposit accounts at banks, to ensure a continuous update of system files with data concerning the insurance amount and the premium to be paid by banks, as well depositors’ detailed data, which identify them properly.

Electronic Reporting Rules

DIA’s Information System for Reporting and Compensation functioning is based upon data and information reported from parties involved in this process. For this reason, the definition of clear and accurate reporting rules was identified as a necessity, by DIA structures. Specifically, DIA Steering Committee adopted, in November 2014, a special guideline for banks, in order to enable legal and technical interaction with commercial banks, as the main users of the reporting and compensation information system. The guideline, which was put on a preliminary discussion and consultation table with all banks, prescribes the reporting rules, which consist in two levels: (i) verification of the accuracy of premium amount, which banks report to DIA, and (ii) availability of depositors’ data, in case of insurance event, or in case of any simulation. The reporting system specifies a monthly frequency for reporting data, linked to individual deposit accounts at banks, to ensure a continuous update of system files with data concerning the insurance amount and the premium to be paid by banks, as well depositors’ detailed data, which identify them properly. Also, ISRC enables the reporting of premium calculations for each individual insured depositor, in each bank of the banking system, on a quarterly basis.

In case of any insurance event, or a simulation exercise, the frequency of reporting for insured depositors and the respective amounts is going to be daily, given the particular importance, the depositor’s identification quickness and accuracy, in this regard. In these cases, some other data, regarding loans linked to relevant deposits, which are used as collateral for loans, as well as the net position for depositors are collected, along with the above-mentioned data. Moreover, DIA has the mandate to ask special reporting from banks, requiring data for any particular and unpredictable purpose, at any time, in order to accomplish the public objectives of its activity. Cooperation with members of deposit insurance scheme

Meeting DIA’s established objectives for setting up and effective functioning of the system requires an effective cooperation and coordination between all stakeholders, which are part of the process. The coordination process, aiming at accepting all system’s features and components, is a guarantee for the success of the whole process. In this regard, DIA has collaborated consistently, throughout all the phases of the system implementation, with all banks. Typically, DIA has organized seminars, training sessions and ISRC testing activities with banks, aiming at identifying the main functionalities of this system and the challenges which arise along with further development and improvement of ISRC, from the perspective of the banking sector.

WORKSHOP: "Activating the Automated System for Data Collection and Reporting." In the eve of online reporting by banks the Deposit Insurance Agency as one of the first institutions of deposit insurance in the region that implements a system for data reporting and compensation, organized, in September 2014, the workshop: " Activating the Automated System for Data Collection and Reporting". The workshop aimed at presenting the main functionalities of the system, its impact on the work processes for the Agency and banks, the regulatory changes, following the adoption of the new Law: "On deposit insurance", and to emphasize the obligation of banks to apply immediately the Agency’s requirements for data reporting. Taking into account the fact that some banks in the system had contributed in the testing phase of the system, the workshop was an opportunity for presenting such experiences and challenges, which arise along with further development and improvement of ISRC, from the perspective of the banking sector. The workshop was attended by general managers, heads of Technology Infrastructure departments and Operations departments of commercial banks, as well as high-level delegations from the Deposit Insurance Fund of Kosovo and Montenegro.

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Information Security Zone

The importance of cyber security and ALCIRT’s role Albania is among the countries where the development of telecommunication, internet and computerization of the society is progressing very quickly. The increased use of electronic communication constitutes an added value to country’s economic and social development, but at the same time, it exposes it against the risks of cyber nature, along with state and non-state actors.

by Prof. Asoc. Dr. Rovena BAHITI Director National Agency for Cyber Security (ALCIRT)

e all live in a digital life, which means that we work, learn and play online. The internet is a common source and its security must also be a shared responsibility. For this reason, the cyber security starts from any of us, from every individual employee in the private sector, or in the public administration, from a teacher or a student, from a banker or a policeman, because we all are affected, or might affect the cyberspace security. Not any individual, business or government entity is responsible for the internet security by itself alone. Everyone has a role in securing his/her cyberspace, comprising equipment and networks used in the process. Individual actions have a collective impact, which means that if the internet is used safely, it is going to be safer for everyone. Albania is among the countries

where the development of telecommunication, internet and computerization of the society is progressing very quickly. The increased use of electronic communication constitutes an added value to country’s economic and social development, but at the same time, it exposes it against the risks of cyber nature, along with state and non-state actors. The cases of network and information security breaches are growing rapidly. The cyberattacks can potentially damage severely the exchange of information in public institutions, in telecommunication entities and in financial and banking system, causing financial loss and disruption of vital services. These attacks create new risks and threats to the development of the information society. In this context, it was deemed as necessary to take some steps, at ensure the development of information society. Typically, the setting up of National Agency for Computer Security (ALCIRT), was one of steps taken in response to today’s requirements with regard to security standards. ALCIRT was established by the Council of Ministers Decision No.766, date. 14.09.2011 and with the support of USAID, under a two-year program (New

Cyber-Security Program), which aims to strengthen the capacity of the Albanian Government to prevent and respond to computer incidents, in an adequate way. The project used the expertise of Carnegie Mellon University Software Engineering Institute (SEI), which conducted several workshops and training activities to help key governmental institutions to

The attacks on critical information infrastructure all around the country may have serious consequences on their functionality, causing huge financial losses. Therefore, it is necessary to early identify them and then take strong security measures to keep the security of these infrastructures as vital as possible to enable the wellfunctioning of the society.

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understand the models for cyber security, to build capabilities and skills to withstand operational threats and to develop processes for management of computer incidents. The main activity of the agency (ALCIRT) is to identify, forecast and take measures to protect against threats and cyberattacks, in compliance with rules and legislation in force. ALCIRT represents the authority which coordinates the actions and measures to respond to threats and cyberattacks and serves as a central contact point with NATO and similar institutions (like sectoral and international CIRT-s). Further and continued cooperation with NATO will help our country approaching the other NATO’s member countries in this field. ALCIRT’s current commitments The following section describes briefly some ALCIRT's commitments and its ongoing initiatives to create a safe cyber environment for citizens, businesses and the government. The agency has chaired the Inter-institutional Working Group, under the auspices of Mrs. Harito, Minister of State for Innovation and Public Administration, which is engaged in drafting the Policy Document on Cyber Security. This document, the first of its kind in this area, is based on European best practices and models, in terms of objectives and solutions, taking into account the specific features of Albanian society and economy. In this document, a special attention is paid to critical infrastructures. The attacks on crucial information infrastructure all around the country may have serious consequences on their functionality, causing huge financial losses. Therefore, it is necessary their early identification and then take strong security measures to keep the security of these infrastructures, deemed as most vital for the society, at the highest possible level. Since these systems, in most cases do not belong to governmental sector, but to private one, ALCIRT has continuously promoted the cooperation and exchange of information with this sector, especially the banking sector, to ensure the basic

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safety of these systems. In addition to protecting these systems, their “resilience" is also crucial, which enables business continuity, in case of force majeure, or various cyber-attacks’ occurrence. The protection and the resilience of critical infrastructures and the encouragement of their owners to implement comprehensive security architectures (including risk and emergency management) would guarantee the effectiveness, reliability and continuity of services provided by them. Changes in current legal framework take a special importance, in order to ensure a proper protection for its users, and to increase their confidence on information technology and to encour-

The cyberattacks can potentially damage severely the exchange of information in public institutions, in telecommunication entities and in financial and banking system, causing financial loss and disruption of vital services. These attacks create new risks and threats to the development of the information society. age advanced and safe use of ICT. Following the approval of regulatory and legal framework on which we are still working, the operators of critical infrastructure will need to report on grave cyber incidents. In any case, evidenced or not as cybercrime, a proper analysis will follow, in order to understand causes of its occurrence and the tasks to be performed, such as: rearranging and improving work processes and procedures, amending regulations and legal acts, to fully eliminate their reoccurrence. As the man is the key to success, we will encourage the certification of security professionals, as well as their functional

independence from information technology units and put them directly under CEO’s reporting authority. In this framework, it is strongly recommended taking some specific measures and actions to increase the company’s awareness, regarding potential risks in terms of system and network security, eliminating such risks, including child protection from illegal contents of cyber space. ALCIRT, in cooperation with the Albanian School of Public Administration (ASPA), has organized for the first time a training activity with the topic: "Computer Security for IT employees in Public Administration”, in order to strengthen the institutional capacity through increased technical skills of human resources. The activity started in September 2014 and it will be followed by advanced training modules for security specialists. ALCIRT has started additional activities, like: awareness campaigns, focusing on students of public and private universities majoring in ICT, ensuring their education as current users and future professionals. ALCIRT, has dedicated part of its activities to the general public, establishing an electronic portal (www.cyberalbania. al), aiming at promoting a safe digital society, by using secure internet at home, workplace and school. Also, ALCIRT has built bridges of cooperation with other institutions operating in this area, starting with the Commissioner for the Freedom of Information and Protection of Personal Data, with Electronic and Postal Communications Authority and General Directorate of Police, through cooperation agreements. On the other hand, the collaboration with the Institute of Education Development (IED), consists in inclusion of some topics, addressing the online security, in the pre-university curricula. Finally, I would like to thank the academia and the private sector, especially the AAB Information Security Committee, for the support they have provided for ALCIRT and its initiatives. I fully believe that working together does create a safer, reliable and stable cyber space for citizens, businesses and the government in general.

Financial Auditorium

Practicing the art and science of project management in today’s business Project management aims to improve the performance of a business organization. It is a discipline that combines technical skills, tools and human skills. Many companies engage in a project because they believe that it is vital in order to be competitive in the industry, the changing needs of their customers must be met.

by Ms Bianca DURO Managing Director of Training Institute WIFI Albania1

Modern Project Management: Lifeline of Business Today

The view of business in year 2015 is definitely not a pretty one worldwide. Lethargic economic growth continues, putting additional emphasis on how well organizations execute their strategic initiatives. This, in turn, requires more rigorous project, program, and portfolio management. Yet over the past few years, many findings about how well organizations are delivering on their strategic initiatives have remained largely unchanged. This leads us to ask “how” organizations may still deliver well-managed project and carry on strategic initiatives. The fact that many firms are now facing losses and many deficiencies can only suggest that it’s time for organizations to revisit the fundamentals of project management and, essentially, go back to the basics. Project management is not

a new practice of modern generations. Starting its history since the ancient times, project management has ever been the core process of all small and big endeavors. It has since become an ever perfection-aiming art and science. Nevertheless, in today’s business world, project management has developed to become a premier and key solution in any business operation. Change, the Only Constant Leading to Success

Many of scientific findings have remained stable for the past four years, not showing significant decreases-or increases. Why aren’t these numbers moving? What will cause noticeable change? PMI’s PULSE of the PROFESSION report, shows that successful organizations meet goals two-and-a-half-times more often and spend 13 times less money than their counterparts (Project Management Institute, Chapter Austria, 2015). This reality, reported annually by the Pulse study, demonstrates the value project management delivers-and is fully understood by more than half of all organizations (55%) in this year’s findings. While that would seem to be good news, the number of organizations recognizing and capturing this value remains unchanged

since 2012, so there is more work to be done. Culture - The most effective organizations recognize the need for formal project and program management in their “change the business” initiatives. Creating a culture that embraces project management and increases the business value it delivers involves: • Fully understanding the value of project management, • Requiring actively engaged executive sponsors on projects and programs, • Aligning projects and programs to the organization’s strategy, • Having highly mature project, program, and portfolio management. Talent - A key factor in fostering a culture that values project management is, understanding the importance of skilled talent. According to the 2014 PMI and EIU global survey, Rally the Talent to Win: Transforming Strategy into Reality, only 17 percent of respondents say their talent management strategies are quick to react to changing business conditions, whereas for one-third, effective response takes several years or longer. Such widespread weakness takes its toll: On average, for all companies surveyed, talent deficiencies significantly hamper 40 percent of strategy implementation efforts.

Exclusive partner of PMI- Chapter Austria in Albania

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Process - For the past several years, research has confirmed that organizations can clearly benefit from maturing their project, program, and portfolio management processes, and that process maturity leads to success. Latest findings reveal high-performing organizations are supporting project, program, and portfolio management through the use of standardized project management practices throughout the organization. In addition, their projects are highly aligned to the strategy of the organization. “I do not differentiate strategy implementation and project success,” said Daniel Svoboda, PMP, Program Manager, Key Bank. “Every project that a company does should align with the strategy in some way.” Knowledge Transfer - From capturing and sharing lessons learned to easing the impact of losing experienced staff, knowledge transfer represents a critical-but often undervalued-organizational competence. Recent study finds few organizations are highly effective with knowledge transfer. For knowledge transfer to become routine but effective, it must be culturally imbedded. Research also shows that high-performing organizations recognize the need to focus on talent development and training to achieve superior project performance and execute strategic initiatives. Risk Management - Risk management is at the heart of project management. Any number of risks can befall a project and drive it off course, often through no fault of the project team. Research reveals that 64 percent of organizations report the frequent use of risk management practices, down from a high of 71 percent in 2012. While this number has declined and is something we will continue to monitor, the study does find that 83 percent of high performers report frequent use of risk management practices, compared to only 49 percent of low performers. Organizational Agility - Organizational agility is the ability of a business to respond and adapt quickly in response to changes in the market or other parts of its external environment. The use of the agile/incremental/iterative tools and techniques of project management is vitally important in such scenarios as they impact projects and programs, and the use of these tools and techniques is on the rise.

In the banking sector, many banks are continuing to roll out huge projects around cost efficiencies, risk management and front office integration, which means the spiked demand for project managers is showing no sign of abating. Project managers have been riding on the crest of unprecedented demand as banks battle regulatory change, integration challenges and the ongoing quest for operational efficiency. “A lot of the project management work is still being driven by integration challenges after the post-crisis merger activity,” says Mark Weller, director of Hays Projects & Change. “But there are also regulatory pressures, with compliance projects around Basel, FSA, Know Your Customer (KYC) and AML regulations. Investment banks, in particular, are recruiting people to run credit and market risk change projects, as well as front office integration initiatives.” Understandably, considering the relatively finite nature of these projects, much of the recruitment has been aimed at contractors. But, because of ongoing need for PMs and a relative shortage of experienced candidates, banks are increasingly hiring for permanent staff, he suggests. Project management aims to improve the performance of a business organization. It is a discipline that combines technical skills, tools and human skills. Many companies engage in a project

because they believe that it is vital in order to be competitive in the industry; the changing needs of their customers must be met. The need for management is also necessary, so that the organization's process can be made more efficient to match the changes in the global environment. Managers and other employees, who participate in management training, learn the techniques to use in improving their skills. If you are a manager and you took a project management course, you will be taught the basics of management and improve specific skills, like: cost estimation, scheduling and risk management. You will also gain by acquiring knowledge on leadership and other people management. Once you get certified in management, you will be highly valued by the company you are working for and usually you can demand for a better pay because of your specialized skills. Firms with employees who underwent management training also benefit because then they will have better control on their projects and the company develops improved customer relations. Their project delivery quality will be much better which will then lead to more profits for the company. Different divisions of the company will learn to coordinate with each other, realizing higher return on investment for the amount of money invested by the firm for the further development of their employees.

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ICC Academy A new global standard in professional education

About ICC Albania

ICC Albania is the National Committee of the International Chamber of Commerce in Albania. It has been established in October 2012 by several founding partners, among which are the Albanian Association of Banks, Boga & Associates, Banka Kombetare Tregtare and Albtelecom & Eagle Mobile. Currently it counts 24 members, of which: 9 banks, 5 law firms, 3 insurance companies, 6 businesses, the Union of Chambers, the Albanian Association of Banks. www.icc-albania.org.al About the International Chamber of Commerce (ICC) ICC was founded in Paris in 1919, as the world business organization, whose primary aim is to offer service to businesses, by promoting trade and investment, open markets for goods and services and free movement of capital. Today, the global network of the ICC includes over 6 million companies, chambers of commerce, business associations, in more than 130 countries. www.iccwbo.org

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n a global economy, driven by innovation and knowledge, professional education is now the bedrock of business competitiveness. Too often, companies of all shapes and sizes are held back by skills shortages in the workforce. The ICC Academy addresses practically this problem! The International Chamber of Commerce (ICC), the world business organization, has launched the ICC Academy project in March this year, in Singapore setting a new standard for professional education. What is ICC Academy? The Academy will initially offer a faculty in banking including almost 70 online courses and two global certificates in trade finance. This wide range of specialized programs, will leverage ICCâ&#x20AC;&#x2122;s position as a world leader in defining commercial rules

and standards, to support international commerce. How are ICC Academy courses, delivered? The ICC Academy courses are delivered via a dynamic digital platform, by using innovative tools for combining digital learning with group-based project work, enabling the ICC Academy to reach the largest numbers of potential participants around the world. The ICC Academy provides rigorous, relevant and applicable business education, encouraging individuals to reach their highest potential with respect to professional competency and ethical conduct. How to register? Registration will be possible in the respective sessions at the official website www. icc.academy. Registrations for the courses will be accessible in Fall 2015.

Associate Membership Open to all professionals regardless of job, industry and experience level. Associate membership gives you the knowledge, resources and training you need to do your job now and at every stage of your career. While we encourage every member to continually expand their business education, we don’t expect, or need, all Associates to become ICC Academy certified members. Each person joins with different goals and aspirations, and we value all our members. Overview Entry level to the ICC Academy

Benefits Access to: • Professional Networking Communities • Exclusive Publications and information • Career Development Path • Special membership savings (to training, events, etc.)

Certified Membership

Senior Membership

Open to Associate Members, including students, who are interested in taking their careers to the next level by gaining general, introductory knowledge in their profession.

Open to certified ICC Academy members who believe in continual professional development.

Increasingly, more and more businesses, governments, and multilateral institutions prefer to recruit people with ICC Academy certifications.

Overview Professional level to the ICC Academy

Overview Senior membership level indicates advanced professional competency.

Benefits

Recognition in the market-place for level of competency + standard benefits available at Associate Member status level.

Recognition in the market-place for advanced level of competency + standard benefits available at Associate Member status level.

How to become a full Professional MEMBER Pass the Global Trade Certificate or 3 years Associate Membership, earning 30 points per year.

How to become a full Senior MEMBER Pass the Certified Trade Finance Professional examination or 5 consecutive years at MEMBER, level earning 30 points per year.

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AAB

AAB Activities

AKTIV ITET

o is u T nit y th e s u s w a s d W IF s c mmu entative 2n S zed with o o f c e h e e s T i h h , t e n T r a g . k na sin an s r ep or g was otel T ir a p addres ome 4 0 ber B nc y m e a m H .S y a ge SK Y nd roadm pliance tment of un dr a m r a L o a s c p y l too one L De s on need s and AM he Anti M t an d t n , an d ent. y me of Pa f Albania ed the ev o d Bank nia atten ba in A l

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VITETE

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nal of Inter m u r o F t The Firs nia s in Alba r o it d Au Internal

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AB publish ed, for the first time, entitled: "C the specia SR Report l edition 2 014 â&#x20AC;&#x201C; Ba which was nking for promoted S o ciety ", d u ri ng a cerem Rogner. T ony held a he purpos t Hotel e o f this report s ome of th is to intro e proje c ts duce w hich cove education, r health , environme s o n cial, t, cultural an undertake d sportive n b y b ank s is s d u u es, ri ng 2014, in of C S R , h o ping to ins the fr ame p ir w e o rk m ce re m o n y ore such in w a s atte n the future. d T e h d b y p e rs e economic o n ali ti e s and bankin in th e g s ystem, and foreig p o litic s, bus n represen inesses tations in A lbania.

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"Banking for Socie ty" - toge for life, ther health, en vironmen t... A

v ation entitled of Bank of A We e k lbania : "Innov 2 015, a to o k p l ation in t the w a s or a ce th e the ban ganized k ac tiv it y ing sec un d e r Innova tor". Th th e a u s tion an e activit p d Publi of t h e B y c Admin ices of the M a n k of A in is ister fo t r a lbania, tion an te c h n o r d th e G This ac logies o v er n o tivit y, p th at th p r o duc r e b ank romote t s an d in d th e n g s e c to ser v ice A AB C e w r u s s hair ma f o r th e e s to p n d rovide Albania event, r n citize egardin eli vered an o ns . T he g the in pening to the d cr e a sp e e ch evelopm at th e ent in in sing attention s e v er a l b ank s paid by n o vation â&#x20AC;&#x2122; r ep r e b ank s p r o duc a n d s techno en t s or pr logy, an ojects in tatives prese d nted th this fie eir late ld. st

Auditors f o te tu ti Forum, n Ins rnal Audit e Albania te th In d l n a a u n AAB internal st An tion of the ized the 1 a n u a it s rg d o n ) a A (AII fession pment al audit pro the develo rn n o te d in e f s o u foc state ld on 18 forum he sion in the e s h fe T ro r. y p to it c aud king se ttended b al, was a anian ban n lb o A ti a e n e th rn in agem t a Inte nior Man otel Tiran e H S t d a n e a n Ju Albania, CEOs sector in auditors, g l in a k n r n a te in inistry of f the b lbania, M tatives o A n f e o s k re n p re rnational om Ba sovo, inte tatives fr o n K e s f re o p re Bank Central Finance, ancy etc. u s of con lt s ie n a p m co

TIVITET E

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TRAININGS

Training tailored for HR professionals with 3+ years of experience, in cooperation with WIFI Albania. The training course was attended by 10 participants of member banks and it was HR Strategic delivered by Mrs Larissa Management Winter an HR international 1-2 April 2015 expert.

The course provided an overview of bank corporate financing facilities, managing corporate exposures and corporate insolvency, the methods and techniques used by banks in dealing Corporate with distressed corporate Restructuring debt, etc. The training, 21-22 April 2015 organized in cooperation with WIFI Albania, was attended by 10 participants of 4 member banks.

AAB enabled the attendance of representatives from member banks in the training seminar, organized by Lincoln Center. The training was delivered by Mr David Turner, a trainer with international experience.

Negotiation in the sale process 7-8 May 2015

AAB, in cooperation with ICC Albania, organized a seminar on Bank Guarantees. The seminar was delivered by Mrs Andrea Hauptmann, Director for Bank Guarantees at Raiffeisen Bank International and Chairman of ICC Working Group on Banking Guarantees. The event was Seminar on attended by 17 representatives Bank Guarantees from banks in Albania and Kosovo, well as representatives of 14-15 May 2015 as business, trade financing specialists, lawyers and representatives from the Ministry of Finance.

The two-day training was conducted by Mr Udo Scheder, an international Financial Advisor, organized in cooperation with WIFI Albania, was attended by 8 participants of 4 member banks. The session on organizational aspects course covered Risk Management the integration of the credit risk 23-24 April 2015 management into the overall bank’s organization, along with addressing the analysis of some case studies of manufacturing, tourism and trading companies

The training course was organized in cooperation with BACEE and was attended by 16 participants from member banks. The agenda looked at the key areas for high quality risk management, risk reporting and the use and Operational Risk presentation of risk indicators, 17-18 June 2015 and the management for large exposures.

AAB, in cooperation with ICC Albania, organized a seminar on Letter of Credit, which was delivered by Mr Peter Thiel, Vice. Director WZG Bank in Dusseldorf, Germany. Ten representaSeminar on tives from banks in Albania Letter of Credit and Kosovo, as well as 27-28 April 2015 business and government representatives, attended this activity.

AAB in cooperation with the General Directorate of Prevention of Money Laundering (FIU) organized, at “Vlora International Hotel”, a training seminar for employees of banks’ branches of Southern Albania. The training was delivered by Mr Ndue Maluta, from BKT and Vice Chairman of AAB Compliance Committee, Mr Agim Ismaili and Mr Artan Shiqerukaj from FIU.

On the implementation of the law On Prevention of Money Laundering and Financing of Terrorism

26 June 2015

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