Bankieri No.9 - October 2013

No. 9 October 2013 Publication of Albanian Association of Banks

FINANCIAL STABILITY

Always mainstream

1, 2, 3...

DERRKUCI ÇUFO MËSON TË KURSEJË

Albanian Association of Banks cooperates again with Bank of Albania for the printing of the new educational package on financial education dedicated to the scholars frequenting the I, II and III class of elementary school.

No. 9 October 2013

Contents

Publication of Albanian Association of Banks

BANKIERI is the official publication of the Albanian Association of Banks which mainly focus the Albanian banking industry. Bankieri provide readers with valuable information on the financial industry's developments

FINANCIAL STABILITY

Always mainstream

in general, and of commercial banks in particular.

EDITOR’S DESK Financial Stability - always mainstream

by Elvin MEKA

p.5

No. 9, October 2013

FRONTLINE Financial Stability - an all-time objective

by Klodion SHEHU Banks meet the new Prime Minister – A very important roundtable Financial stability and economic growth: A binomial?!

by Sulo HADËRI

Publication of Albanian Association of Banks

p.6 Editorial Team:

p.8

Elvin Meka Editor-in-Chief

p.9

Junida Tafaj (Katroshi) Coordinator Anduena Manushi Editor

JOURNALIST’S CORNER

Interest Rates, State Budget and the Economy - “The Good, the Bad and the Ugly” by Gjergj EREBARA

p.11

INTERVIEW UNION BANK - A six- pillar banking philosophy Interview with Gazmend KADRIU

Bankieri

Gert Hoxha Photographer Design & Layout: Ladybird Creations

p.13

BANKING SYSTEM

Printed by:

Editorial Board:

Fighting Against Economic Stagnation

by Kaan PEKIN

p.14

Depository Bank – A partner for a comprehensive management of pension and investment funds

by Elma LLOJA

Seyhan PENCABLIGIL AAB Chairman & CEO of Banka Kombëtare Tregtare

p.17

Ioannis KOUGIONAS AAB Vice Chairman & CEO of NBG Bank Albania

EXPERTS’ FORUM Resolution of Non-Performing Loans in Montenegro

by Nebojša ÐOKOVIC

p.19

Public-Private Partnerships (PPP) and the Financial Reporting by Hysen ÇELA and Kledi KODRA

p.23

Periklis DROUGKAS AAB Executive Committee Member & CEO of Alpha Bank Frédéric BLANC AAB Executive Committee Member & CEO of Societe Generale Albania

ECONOMIST CORNER Macro-prudential measures and financial stability in the light of Basel III by Adrian CIVICI

Christian CANACARIS AAB Executive Committee Member & CEO of Raiffeisen Bank Albania

p.26

Bozhidar TODOROV AAB Executive Committee Member & CEO of First Investment Bank

Banks' activity

p.30

Endrita XHAFERAJ Secretary General, Albanian Association of Banks

Junior Achievement of Albania

p.35

Hysen ÇELA Chairman of Albanian Institute of Authorized Chartered Auditors (IEKA)

p.36

Adrian CIVICI President & Head of Doctoral School European University of Tirana

SOCIAL CAPITAL

BALKAN NET Interbalkan news

TECH TOPICS Winbank – all-in-one package

by Frida KRIFCA

p.39

FINANCIAL AUDITORIUM Securitization - A revolutionary vehicle for managing and transferring risk

p.42

Spiro BRUMBULLI Chief of Cabinet, Ministry of Finance Enkeleda SHEHI Chairwoman of Albanian Financial Supervision Authority

ALBANIAN ASSOCIATION OF BANKS Bulevardi: “Dëshmorët e Kombit”, TWIN TOWERS Tower I, Floor 6, A3, Tirana Tel: +355 4 2280 371; Fax: +355 4 2280 359 E-mail: bankieri@aab-al.org; www.aab.al

EDITOR’S DESK

FINANCIAL STABILITY – ALWAYS MAINSTREAM The stability of national financial system is now an integral part of the stability of the global financial system, notwithstanding the stage of development and the deepness of each financial system in the world. Such reality makes the financial stability mainstream, everywhere and an all-time objective.

by Dr. Elvin MEKA1 Editor-in-Chief

B

ack in 2002, Messrs. Dean LeBaron and Romesh Vaitilingam wrote in their famous book, “Dean LeBaron’s Treasury of Investment Wisdom - 30 Great Investing Minds”, in the concluding chapter, “future focus II: ten key global issues”: …One of the essential features of this era is the extraordinary amount of connectivity that we have—on a personal level, corporate level, governmental level. We are able to intertwine almost everything that we do in ways we have never been able to do before. …We have a global financial interconnectivity that we have never had before. We have a common banking system, the capacity for money to flow electronically around the globe, instantly, in unrestrained amounts, and with no transparency. …But when one of our global members gets into trouble, whether Korea, Indonesia, Russia, or Brazil, the others feel, perhaps quite rightly, that a major rescue package at any cost must be contained. It is rather like a patient with a potentially contagious disease. But it seems the only way to stop it is to put the diseased patient back into the population. The way you would normally take care of a diseased patient is by quarantine.

It seems to be an early warning alert about the outbreak of the last financial crisis of 2007-2008.

Such crisis brought in the limelight the hot issue of financial stability, given the real financial “tsunami”, the demise of Lehman Brothers caused to the international financial system. The crisis unfurled the astonishing international interconnectivity and cemented the fact that various risks’ management was no more an issue within national boundaries, rather it is global phenomenon. So, the stability of national financial system is now an integral part of the stability of the global financial system, 1

notwithstanding the stage of development and the deepness of each financial system in the world. Such reality makes the financial stability a permanent mainstream, everywhere.

In the myriad of risks faced by the Albanian financial system, the systemic risk is the most dominant one, given the outsized banking intermediation and the inexistent securities market (both equity and bonds) in Albania. The prominence of this type of risk is always evident in periods of crisis in countries with significant bankbased systems, so, we may say that it is quite an endemic phenomenon within our banking system.

By being a quasi-unique provider of business (external) financing and credit, the Albanian banking system has magnetized nearly all risks in the economy, which weigh considerably on banks’ balance sheets. So far, the banking system has been successful in mitigating the most prominent components of systemic risk, like liquidity crunch, insufficient capital and oversized leveraging. Also, Bank of Albania has been instrumental in applying some countercyclical measures, as part of its macroprudential supervision.

Nevertheless, mitigating the weight of above components does not mean an outright downsize of the systemic risk within banking system.

Deleveraging is not an option for the Albanian banking system, given its actual level and the banking model used; collateral enforcement is a quite complex and time-consuming process.

Therefore, the stakeholders, including regulators, may consider out-of-the-box solutions, which aim a balanced financial system, financial deepening and market participants’ transparency.

Head of Department of Finance, EUT-UET

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FRONTLINE

FINANCIAL STABILITY - an all-time objective

Macro-prudential policies aim at addressing the increasing systemic risk in two dimensions: (1) its development stretched over time, and linked with economic cycle stages, and (2) inter sectorial extension, which relates to financial institutions’ exposures on the same/similar products or instruments, as well as their concentration degree.

by Mr Klodion SHEHU Head of Financial Stability Department Bank of Albania

T

he global financial crisis of 2008 emphasized further the importance of the financial system stability. Maintaining financial stability implies the need to assess and mitigate the systemic risk, or the risk that the financial system as a whole could lose partly or completely, its ability to provide financial services, thus adversely affecting the activity of economic agents and that of the economy as a whole. The assessment of financial system systemic risk represents a tough objective, due to some special characteristics of the financial system, which relates to its tendency to: a) increase the effect of different economic shocks, b) be part of a selffeeding mechanism of expanding exposures to risks, and c) enter into complex financial relations, which increase the system’s sensitivity to various shocks. For example, the economic slowdown could escalate further should the banking or financial system choose to pursue those policies, which will tighten lending.

Other way around, the straight connection between lending and real estate value (which often serves as collateral for bank loans), tend to increase the financial system’s ex-

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posure toward the riskof a potential bubble in the real estate market. The established financial relations by the financial system are not only direct or visible links instead they can also be in the form of hidden guarantees, or exposures in derivatives’ markets.

Therefore, the size of financial system’s exposure to risks and potential losses may be actually greater that expectations by regulators.

Restricting the systemic risk is the objective of macro-prudential policies. Macro-prudential policies aim at addressing the increasing systemic risk in two dimensions: (1) its development stretched over time, and linked with economic cycle stages, and (2) intersectorial extension, which relates to financial institutions’ exposures on the same/similar products or instruments, as well as their concentration degree. During the last 2-3 years, there has been a significant progress, in EU and beyond, in identifying several instruments addressing the rapid expansion and concentration in lending activity, thus ensuring that banks have sufficient liquidity to cope with different shocks, and avoid risky behavior by financial institutions, which in turn, increases their costs through higher capital requirements for certain specific activities. Such instruments might have a countercyclical nature and could be

applied differently for systemically important financial institutions. Furthermore, these standards require building up an institutional framework for a clear identification of authority/authorities that will have macro-prudential competencies, in accordance with legislation, and market structure &development.

In Albania, the banking sector avoided the direct impact of global financial crisis, but nevertheless it felt its pinch through enhanced prudential policies by banking groups, economic slowdown in the country, as

Under these conditions, and due to a decrease in the base interest rate at very low levels, any discussions about future monetary policy are more likely to consider, extensively, these consequences on the financial stability.

well as changes in consumer behavior toward banking services. The economic slowdown, combined with the decline of businesses and consumer sentiment, with regard to the future performance of the economy, was accompanied by a weakened demand for private funding, resulting in significant slowdown in banks’ lending.

The impaired quality of bank loan portfolio followed the revenue slowdown and borrowers worsening liquidity situation, thus prompting tightening bank lending conditions, especially for businesses. Thus, the banking sector ability to create a sustainable positive financial result has been consistently weakened. However, household deposits represent the main prevailing source of financing, whereas the size of liquid assets and capital ratios are in good (sound) levels.

Bank of Albania (BoA), as the country’s supervisory, regulatory and monetary authority, has harmonized its actions in several ways.

With regard to micro-prudential supervision, BoA has intensified its operational activities to identify, clearly and completely, the range of problems dealing with loan quality. Supervisory policies have set minimum requirements for the type and size of liquid assets and capital, depending on risk profile of each banking institution.

Together with the banking industry and other public authorities, which monitor financial market, some necessary legislative amendments for improving collateral enforcement in the loan workout phase, are already identified and proposed. BoA has, in close cooperation with supervisory authorities of countries of origin, ensured a better assessment of financial situation of holding banking groups.

As regards the macro-prudential policies, BoA has worked for assessing systemic risk through appropriate methodologies, including the development of various surveys to recognize banking industry perception, in assessing debt burden of businesses and households, as well as assessing the value of real estate extensively.

The capability of the banking sector to weather risks of unfavorable macroeconomic framework is evaluated through regular exercise of stress testing, not only from Bank of Albania, but since two years in a row, from an active involvement of large banks. Last year, BoA has also implemented some temporary

countercyclical measures, in order to encourage lending, such as: facilitating capital requirements for a certain annual increase in loan portfolio by end-2014, as well as some incentives in terms of early loan restructuring.

Since the beginning of 2012, the Financial Stability Advisory Group, an inter-institutional body, was formally set up. This body is chaired by the Minister of Finance while Bank of Albania assumes the secretariat’s role. In this context, several procedures, strengthening the capacity of participating authorities in addressing systemic risks, are therefore discussed and supported. Regarding the monetary policy, and in the frame of weak inflationary pressures, BoA has pursued an easing monetary policy, by decreasing the base interest rate at historical low levels of 3.5%, and providing interbank market with necessary amounts of liquidity. Under these conditions, and due to a decrease in the base interest rate at very low levels, any discussions about future monetary policy are more likely to consider, extensively, these consequences on the financial stability.

Despite these developments, the banking and financial system must face important challenges, which in near term, consist in addressing non-performing loans and preserving the appropriate levels of capitalization and liquidity, along the entire process. Finally, should practical discussions about rapid repay-

In the medium term, the supervisory & regulatory framework, as well as macroprudential policies must reflect developments in the international standards. In this way, the emphasis must be put on improving institutional framework and identifying some specific instruments, which would be used to restrain financial risks.

ment of overdue state obligations to businesses be materialized, they are expected to make a significant contribution toward improving business climate in the country. In order to get the maximum impact on repayment of non-performing loans, which businesses owes to banks, it might be useful giving priority to those subjects who have one or more overdue loans to banks, alongside with some tools (mechanisms) to ensure, primarily, the repayment of such debt, besides other businesses’ obligations. Financing such process would require additional financial resources from the government, thus leading to a higher public debt and deficit. Funding for this process could come either from domestic sources or foreign ones, but in the second case, the pressure on government debt interest rate will be avoided, so domestic interest rates will be maintained at the same path (close to) as the base interest rate, and bank lending capability to private sector wouldn’t be compromised. In the medium term, the supervisory &regulatory framework, as well as macro-prudential policies must reflect developments in the international standards. In this way, the emphasis must be put on improving institutional framework and identifying some specific instruments, which would be used to restrain financial risks, especially for systemic important banks, aiming at using them asymmetrically as possible, in accordance with the development cycle of the economy and banking activity.

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AAB-SPECIAL

BANKS MEET THE NEW PRIME MINISTER – A very important roundtable Banking sector has made some important proposals to the new Prime Minister, H.E. Edi Rama, and does expect the new government to consider and address them carefully, with the final aim of restoring credit growth and revitalizing the economy.

n 25 July 2013, the Prime MinisterIPrime designate, H.E. Edi Rama (now Minister) met with directors

of banks and Bank of Albania, in a round table, as a follow-up of the philosophy of a trialogue between Bank of Albania, banking system and the Government to discuss the economic policies for Albania’s fast, sound and stable growth, as well as to unfurl major issues, concerning the banking community.

At the meeting, banks welcomed and encouraged the continuous and proactive dialogue between the parties towards the achievement of common goals. As Mr. Adrian Fullani, BoA’s Governor put it, the banking sector is not only the greatest and the most efficient driver of economic growth in Al-

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bania, but also the custodian of Albanian household savings and the determiner of funds’ destination in the economy.

But, in the frame of current developments in the economic environment, one of the most important issue to be considered is the vital equilibrium of financial stability in the country, which should remain a constant priority and in concert with stimulating development policies. On the other hand, given the economic slowdown and credit contraction, and despite the fact the banking system has worked well to preserve its soundness and its incessant enlargement, banks have brought into the Prime Minister’s consideration a list of topics and recommendations for immediate

improvement to boost the credit growth and re-vitalize the national economy, as follows: 1. Undertaking of fiscal reforms and consolidation of the tax regime, as prerequisites to fight informality and fiscal evasion by fair taxation of the business and collecting what is currently due and by reducing cash circulation and moving towards electronic channel.

2. Redrafting of a clear, comprehensive and consistent tax legal framework in order not to leave free rooms for misinterpretation and abusive practices from the tax administration especially in relation to sensitive items for the banking sector such as provisioning, write off and write

down principles for banks.

3. Collateral execution should be performed through a fair and real legal independent process where the “rule of law” is recognized and respected as a fast and efficient solution from all the parties.

4. The full liberalization of the bailiff offices, in order to work under the conditions of free market competition; in this view changes are needed as regards the payment method of these services, towards a proportioned fee, payable in proportion to the amount of obligations collected by the bailiff offices; 5. Stimulus of the Albanian businesses by paying the companies that have receivables from the state either in the form of VAT reimbursements or unpaid obligations and carry out of the infrastructure investments under the responsibility of the government; 6. Easy access for banks to reliable information through the electronic platforms such as the electronic registry of the Office of the Registration of Immovable Properties (ORIP) and Social Insurance (not real declared incomes); 7. The development of real estate market, by making it liquid and price adjustable through digitalization, fast registration and development of private auctions so that banks should be capable to dispose their assets once they have collect it.

8. Formalization of Property Rights through a complete registration of properties, as clear titles and registration of properties will support the ability of the banks to grand secure loans.

9. New amendment of the Law on Securing Charges, which by its recent amendment wrongly has made impossible now the placement of securities owned by individuals and other intangible properties such as “receivables”, “invoices”, taking into account that such collateral type was consider as one of the most used in the banking practice.

Finally, banks expressed to the Prime Minister their support for the implementation of the abovesuggested actions that will contribute in the revitalization of the activity of banking sector in Albania, as an essential part of the economy in the country.

FRONTLINE

FINANCIAL STABILITY AND ECONOMIC GROWTH: A BINOMIAL?!

Financial stability is a “public good” in itself, but not to be confused with rigidity. On the other hand, the stability means that fluctuations and excessive risk-taking should be avoided, as they could lead to instability.

by Prof. Dr. Sulo HADËRI Dean, Faculty of Economy Tirana University

he notorious echo of grave situT ation in the northern European state-island Iceland, during the

global financial crisis, has not yet vanished. Problems with banks and financial instability that followed the difficult economic situation triggered mass protests, which in turn called for resignation of country’s central bank directors, fresh parliamentary elections and government reshuffle. On 26 January 2009 Iceland’s prime minister resigned and on 1 February 2009 and the newly appointed Prime Minister announced the rescue plan to save Iceland from financial ruin, by having as top priority replacing the central bank board, which failed to prevent the collapse of the banking system and joining EU. This example from a small, but developed, economy is quite meaningful to understand the magnitude of consequences from the financial instability. Currently, the financial stability has come to the limelight,

especially after the recent world financial crisis of 2007-2010, as a consequence of grave implications it may have on the economy and their spillover effects. One of the most important lessons of the latest crisis is that the frenzy growth of financial sector has serious implications, which put at risk both the developed world and developing countries, thus making necessary and paving the way for debates whether policymakers need to rethink some of the principles of economic management.

Typically, the debate on financial stability and its impact or relation with economic growth is an old debate. Economic development and the way it has been financed, is addressed by two schools of thinking: (1) the first supporting the view that the pursuit of monetary and financial stability policies is not in line with the development, (2) the other supporting the view that pursuing financial stability policy is

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Monetary policy is entirely effective to repair damages caused by financial instability, because it can prevent negative macroeconomic consequences of financial instability, through interest rates (by reducing them), or via the credit channel. the best way to achieve a balanced economic development. The debate between these two schools of thinking has a long history and they have long dominated each other, depending on the situations experienced by different economies. Let’s recall that the Federal Reserve System was created in response to the situation of bank panic of 1907 to promote financial stability.

The average citizen with general economic knowledge would support the view that financial stability supports and promotes economic growth, but in reality this is not necessarily the case.

Such relationship does not get substantial attention in the economic literature, whereas defining the actual financial stability meaning remains quite controversial, transmission channels are not sclearly defined and a lack of convincing empirical evidence, linking financial stability with growth, is obviously lacking. However, if the level of financial development is really associated with economic growth, we still do not know whether the financial stability is also accompanied by (economic) growth. On the other hand, the idea that financial instability usually tends to delay growth or stop it, has got a bit of support, because an unstable financial system, which is exposed to bankruptcy or fails to perform the effective intermediation function, will be developed slowly and therefore the economic growth will slow down. However, economic growth is associated with in-depth financial development. So, it can be said that the financial instability delays economic growth and it is therefore accepted that stability is

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best to create an environment that fosters economic growth.

Financial stability is a “public good” in itself, but not to be confused with rigidity. The economy needs flexible prices, flexible structures, and the bankruptcy of financial institutions, which do not fulfill their role properly or are ill-managed and have governance problems. On the other hand, the stability means that fluctuations and excessive risk-taking should be avoided, as they could lead to instability. Precisely, these views shape the role central banks must play, in supporting sustainability in the financial sector, but it should be a “discreet” support, intended to balance risks. This is why central banks have been increasingly emphasizing the financial stability and are turning it into a monetary policy’s objective. Furthermore, the trend to include the objective of financial stability into monetary policy and how they should react to financial instability, has taken momentum, recently.

Prices’ stability and employment objectives remain, undoubtedly, vocal at reducing the potential for any financial instability. However, in the field of financial and economic thinking, as well as in many other areas, there are no given recipes and the ever-evolving debate is whether central banks should pre-

empt asset price bubbles, or simply repair damages after they burst; whether dynamic monetary policy is too easing, whether supporting tools of market liquidity to return to equilibrium aggregate demand, are relevant or not, and so on. It is worth emphasizing that, monetary policy is entirely effective to repair damages caused by financial instability, because it can prevent negative macroeconomic consequences of financial instability , through interest rates (by reducing them), or via the credit channel. Monetary policy could help in restoring financial stability, by contributing to the flow of information, through reduction of uncertainty in the market, thus easing monetary policy. But in achieving this effect, it is necessary that the monetary policy to take timely, convincing and flexible decisions. Another important task, in the context of ensuring sustainable growth, remains the deepening of financial education and investor protection.

It seems that, there is a clear trend central banks will put more emphasis on the objective of financial stability, supervision and regulation, at the macroeconomic level. In this regard, a strengthening coordination between central banks and other authorities, either at domestic or cross border level, is more than necessary.

JOURNALIST’S CORNER

INTEREST RATES, STATE BUDGET AND THE ECONOMY - “The Good, the Bad and the Ugly” It is not the first time Albania faces a situation where some borrowers go bankrupt. The way of managing the bankruptcy process will determine banks’ willingness to lend, hence the Bank of Albania’s power to influence the market.

by Mr Gjergj EREBARA

January 2012, the base interest Iit nrate in Albania was 4.5 %, today stands at 3.5 %. The average loan

interest rates in ALL, for the period January - July 2012 was 11.4 %, compared to 10.9% of the same period this year. If the base rate is reduced by 1%, frankly speaking, an aggressive drop, hoping at reducing loans’ interest rates, and thus increasing lending, the real effect is marginal only, as it is not the case talking about volume increase. As Bank of Albania is pursuing an aggressive dynamic policy of lowering interest rates, the volume of new loan in ALL is not increasing, instead, it is decreasing. During the sevenmonth period of this year, the stock of banks’ new loans was 15% less than a year ago, when interest were higher.

But there is an area where interests have really declined: one-year Treasury Bills. Since the beginning of 2012 they offered a yield over 7%, but during recent auctions, they were quoted, at the unbelievable level of 4.3%. Such drastic reduction of public debt’s interest rates comes in a time when the government borrowing volume has been increased.

Practically, it seems that public debt is in high demand, despite the fact that the budget deficit and public borrowing is increased. At first glance, it appears that monetary policy has a modest or minimal effect on lending in ALL, whereas it is impacting public debt, significantly.

But this is an illusory picture and monetary policy is not the appropriate tool to interpret it. The relevant explanation is the risk degree.

It is not the first time Albania faces a situation where some borrowers go bankrupt. The way of managing the bankruptcy process will determine banks’ willingness to lend, hence the Bank of Albania’s power to influence the market.

Such risk, displayed in the form of increasing non-performing loans and difficulties in collateral enforcement, has caused loan interest rates to remain high, the loan volume to shrink and interest rates on public debt, as the last safe shelter against risks, to keep decreasing. Albania faced a similar situation in 1998, when non-performing loans were not collected, due to lack of political will. In April 1998, banks were prohibited to lend, by way of regulation, therefore for investing in T-

Are we experiencing the same situation, as in 1998 (a bit different this time, as there is no regulatory act to declare banks unable to lend, but banks are “declaring” the Albanian economy “unable” to borrow)?

Bills became the only source of income. It took many years, to writeoff bad loans form state banks’ balance sheets, with a taxpayers’ cost of US$ 200 million, before the credit market resumed its activity.

The base interest rate is only a fraction of the cost, borrowers just pay when they borrow; the bulk, is comprised of risk premium, which is not affected by the base interest rate. Are we experiencing the same situation, as in 1998 (a bit different this time, as there is no regulatory act to declare banks unable to lend, but banks are “declaring” the Albanian economy “unable” to borrow)?

An economy without lending is an economy without investment (or an economy with primitive capital accumulation). Lack of investments mean no economic growth and the solution is three-dimensional: (1) strengthening of the rule of law, by facilitating the collateral enforcement process, thus encouraging banks to fresh lending, (2) reducing public debt, to release funds for lending purposes to private economy and the most delicate (3) reducing risks within economy, which automatically lowers the risk/cost of bank lending.

In total, Albania is expected to face a somewhat long period of stagnation or anemic growth, if it does not respond vigorously and addresses the above three major challenges.

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INTERVIEW

UNION BANK A six - pillar banking philosophy The most important point is that, we have managed to create a bank which satisfies our internal requirements, from shareholders to other stakeholders, for a serious, stable and ever growing bank.

Mr Gazmend KADRIU Chief Executive Officer Union Bank

BANKIERI: WHAT

IS THE PHILOSOPHY OF THE BANK, SINCE ITS

INCEPTION ABOUT EIGHT YEARS AGO, AND WHAT MAKES IT UNIQUE IN THE MARKET?

As with any commercial bank, the primary reason for creation/existence of Union Bank is a profit generation, required by shareholders. Hence, there are no differences between banks in this regard, but what distinguishes them has mainly to do with the philosophy of the bank and ways, pursued to achieve the goal. In case of Union Bank, such philosophy is expressed through six pillars, set out in our strategic document, as follows: (1) Employees + (2) Communication: We are honored by each person who chooses Union Bank as the workplace where s/he could make her/his professional contribution and will set her/his growth objectives as an individual.

The bank shows its respect for the employees through an open communication culture, at all levels. This is reflected in the objectives’ setting, bonuses, salary review, annual evaluations, internal career, etc., which witness the highest transparency in every important aspect that affects our employees. Our wonderful staff deserves this.

(3) Customer Service + (4) Sales: The bank has a declared objective: “Bank number one for customer service in Albania”. Should any bank in Albania results in better service, than us, we deem that have not achieved this major objective of the bank, yet. We put customer service as the mean to increase sales, as quite distinctive mean, in a market where products and offerings are more or less similar & comparable.

(5) Profit + (6) Risk: The ultimate objective, “profit” factor, is not seen and addressed separately from the risk. Profit is often a matter of short-term horizon, whereas risk, although less apparent in the actual moment, is extremely obvious later on. We simply do not allow sacrificing the risk in the long-term for the sake of profit in a given period.

BANKIERI: WHAT IS BANK’S MAIN ACHIEVEMENT SO FAR? The most important point is that, we have managed to create a bank which satisfies our internal requirements, from shareholders to other stakeholders, for a serious, stable and ever growing bank. Achievements are measured through to the above-mentioned six strategic pillars: - Employees/Communication is, ultimately, measured by their ongoing employment with the bank. We are very proud of extraordinary stability of our staff and the very low turnover rate. Typically, almost all heads of various managing levels continue to work with bank.

- Sales/Customer Service is not measured by our internal analyses rather it is subject to judgment of those who are in a position to compare banks: individuals and specialized companies, which undertake various market analyses. Their evaluations make us feel satisfied.

- Risk/Profit is measured by various indicators of the risk, which is present in the market. We are especially proud to manage, diligently, having a clean ethical bank, that is to say: we do not take bribes to lend, as we do not give bribes to grab market share.

BANKIERI: WHY SHOULD CUSTOMERS CHOOSE UNION BANK? I do not want to be the one who makes the customer’s list of preferences for choosing our bank. The interested persons could easily ask our existing clients, whether it’s worth being a client of Union Bank. Once persuaded to walking through the bank, they will make a judgment by themselves.

BANKIERI: WHAT

IS THE MAIN OBJECTIVE OF THE BANK IN ITS

OPERATIONS FOLLOWING?

Our first objective is to continue the way we have made so far, so a bank which satisfies the internal high expectations for a serious and stable bank, our employees’ requirements for a decent and pleasant job, our customers’ expectations for superior service. The furthermost objective is satisfying our shareholders requirements for designated profit, primarily through bank’s organic growth, but nor excluding any buyouts of other institutions.

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BANKING SYSTEM

FIGHTING AGAINST ECONOMIC STAGNATION Albanian economy needs a fresh stimulus, which is not already in the domestic economy. This could be done clearly by borrowing fresh money from abroad, or using a funding source, which is not in the domestic system.

by Mr Kaan PEKIN Treasury and FI Group Head Banka Kombëtare Tregtare

he new Albanian Government T has a very challenging task of stimulating the Albanian Econo-

my. Albania needs to establish new economic model to boost economic growth. Future targets actually are well defined by the economic program of the new centre-left government; it is necessary to foster domestic industrial production and the country’s export performance focusing on development of key economic sectors in which Albania could create more comparative advantage than its neighbours. The ultimate target is to secure 300,000 new jobs in the next 4-years. But there are tough constraints on the way and the path reaching the welfare is unknown.

I will first try to touch some of the constraints. State coffer needs urgently more money to pay debts of ongoing projects and unreimbursed VATs to private sector.

Unless that money is paid, it is impossible to break a deadlock hurting the domestic economy. Private sector has already turned back to its historical roots trying to survive, while bartering. State has limited power to raise new funds, budget revenues are falling. For the pe-

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riod Jan-Jul 2013, total budget revenues declined by 2.6% y/y to LEK 185.4bn, which was exclusively due to tax revenues that dropped by 3.2% y/y. Within this, the combined revenue from indirect taxes fell by 5.9% y/y, as VAT revenues decreased by 6% y/y with VAT, collected by the customs, dropping by 7.2% y/y. Moreover, revenues from customs duties and excise fell by 10.2% y/y and 4.9% y/y, respectively. Lower revenues from indirect taxes signal for a continued stagnation in the domestic consumption. Devil is hidden once again in details.

Path wise, IMF strongly suggests its classical prescription. It is tight fiscal policy as the main anchor to economy. IMF alternative packages includes tax hikes either in indirect taxes like VATs, corporate tax and income taxes or their combination with a strong reform in tax administration. But these packages omit serious risk of recession in the Albanian economy and assume that tax revenues would increase like a text-book case if the state straight forward hikes tax rate. I do personally believe that private sector has no power to pay more tax either as a corporate tax or income tax. Tax hikes would only result more tax evasion in private sector despite a reform in tax administration. On the other hand, VAT hike is easier to apply, but it is a threat to public welfare. Moreover, a small percentage hike like 3-4 per cent might

trigger further deterioration in domestic consumption and a decrease in VAT revenues. IMF ignores that its magical 60% debt-to-GDP equation has two contracting edges.

When you try to increase revenues through hikes in taxes to decrease debt, you can hamper GDP growth and debt-to-GDP ratio could worsen further. I hereby favor policies to stimulate growth rather than “anchor fiscal policy” in the times of economic recessions. This could be only possible with the strong political willing of the government to pay less for current expenditures, but more for capital expenditures.

The new government still reviews other alternatives and possible outcomes. One alternative is to pay a significant of business’ debts offering the domestic debt

I do personally believe that private sector has no power to pay more tax, either as a corporate tax or income tax. Tax hikes would only result more tax evasion in private sector despite a reform in tax administration.

securities (T-bills and T-notes) to private sector. Consequently, private sector would bring these government debt instruments to banks to discount them against cash. With the part of the securities banks would be able to get rid of some of the NPLs in their books.

But banks do not have such excess liquidity to discount those securities. Any excess cash in LEK have been already invested in government debt; this should be explained by how the 1-year T-bill average yield came down to 3.847%. Consequently, only a limited amount of those securities could be cashed in. Moreover, if everyone comes to the banks to sell its security that he took from the government, banks inevitably increase discount rates (yields) they ask to buy those securities and debt yields in both primary and secondary market would increase. Banks maybe would not participate in primary T-bills and Tnotes auctions, but they would buy same securities from clients with higher yields. The worst disadvantage of that option is that it cannot provide any fresh breath to the domestic economy, because the money which the banks could offer to private sector via discounting these securities is the one that is already in the domestic system. Such a path to pay the existing debt could not provide a multiplier boosting effect to Albanian economy.

Actually, if you define well the dilemma, you can see the hidden answer in it. Albanian economy needs a fresh stimulus (funding), which is not already in the domestic economy. This could be done clearly by borrowing fresh money from abroad or to use a funding source, which is not in the domestic system. Albanian people have structural FX deposits with Albanian banks. Those are structural because those individuals somehow have local savings in euro; they do not turn their LEK savings into euro. These savings are deposited in the majority of Albanian banks with weighted average opening maturity of 1-year or longer. A significant portion of these euro deposits could not be converted in to form of euro loans to domestic clients, but it is invested abroad to investment rated banks with punitively low interest rates. Some banks are not able to buy more foreign debt of Albanian government

due to regulatory restriction, which hinders the banks’ Albanian foreign debt exposure to 20 per cent of its regulatory capital. If this restriction is removed, banks can invest more in the short to medium term foreign debt (1-3 years) of Albanian government bringing their investments abroad to the country. Such a fresh breath in cash form could provide the stimulus that the Albanian economy needs in the short term.

The above suggestion might have a negative impact in the Albanian banking system in the long

One alternative for the government is to pay a significant of business’ debts offering the domestic debt securities (T-bills and T-notes) to private sector.

Consequently, private sector would bring these government debt instruments to banks to discount them against cash.

run. It is actually an easy way of doing business and it may cause banks to postpone necessary adjustments of their business model. Hereby, I should underline that this is a common problem in whole Europe. Anecdotal evidence suggests a great part of the EUR1trillion the ECB pumped into the banking system in LTROs was invested in sovereign debt. Mr. Jens Weidmann, Bundesbank President noted recently that there is no limit on a bank’s exposure to a single sovereign, whereas the risk they can take on from other counterparties is limited to a quarter of eligible capital. Additionally, sovereign debt attracts low or zero capital requirements for banks. This has made it attractive for banks to invest in government bonds and the “home bias” of buying the local sovereign’s debt has risen in the crisis. Mr. Weidmann calls on lenders to cut holding of government bonds and set aside more capital to reflect their riskiness. But, Mr. Weidmann’s proposal would entail big changes in European banking regulation and take years to agree, it could weigh on ECB policy makers’ minds as they consider another LTRO (cit.FT).

Moral of the above is that Albania looks like having already found the solution of one of the problem in European banking system, but at a cost of losing its most powerful weapon to fight against its domestic economic stagnation.

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BANKING INTERVISTA SYSTEM

DEPOSITORY BANK – A PARTNER FOR A COMPREHENSIVE MANAGEMENT OF PENSION AND INVESTMENT FUNDS The Albanian banking system is now ready and has got proper experience to provide customers with new opportunities for a more effective asset management, whereas clients are ready to choose between new and high quality products, proposed by banks.

by Mrs Elma LLOJA Head of Treasury, FiBank Albania

B

ack in December 2009, the Albanian Parliament endorsed two important laws: “On voluntary pension funds” and “On Collective Investment Undertakings (CIU)”,a quite necessary legal framework for the Albanian economy, reflecting country’s current developments and in accordance with today’s standards, aiming at creating a suitable environment to promote and develop capital markets.

The first law aimed at improving the existing voluntary pension system in Albania, by encouraging citizens towards voluntary savings for increasing their pensions. It is well-known fact that the pension system in Albania consists only of the first and third pillar, as the second one is currently missing. The second and third pillars consist in additional contributions that will ensure a more comfortable life, during old age. The law was part of the Albanian Financial Supervisory Authority’s (AFSA) reform for third pillar pension scheme, which consisted in a change of previous functioning scheme of the third column and governed the

establishment, operation and supervision of voluntary pension funds with defined contributions. The management company took the central stage of the pension scheme, as its task would be managing and investing pension funds in such a way that it could provide optimal revenues, in favor of pension fund members.

Based upon relevant EU directives/ regulations and OECD-IOPS guidelines , the law implements the principle of separating fund management from the pension fund itself, the latter being conceived as a set of assets.

The law brings in the limelight, for the first time, the concept of depository bank, as a very important shack-

The law brings in the limelight, for the first time, the concept of depositary bank, as a very important shackle in the process chain, whose main responsibility is providing custody for fund’s assets and having control over their administration, pursuant to legal prescriptions.

le in the process chain, whose main responsibility is providing custody for fund’s assets and having control over their administration, pursuant to legal prescriptions.

Fibank is one of three banks, licensed to perform the functions of a pension fund depository, am function successfully accomplished, since 2010. According to AFSA, at the end of Q1 2013, there are three licensed and operating management companies for private pension funds, in Albania, with a total number of 7.289 members, with total assets of over ALL 300 million. Certainly, the pension reform in Albania is a right step with benefits for future generations, and the prospective growth of pension funds as institutional investors will further increase the demand for new asset classes in the market, and will develop the capital market, too. The government and regulators should be prepared for these developments and should create conditions where these funds may invest in the Albanian market.

On the other hand, the Law “On Collective Investment Undertakings (CIU)”, is a another substantial step toward setting out rules for a massive investing of savings in the economy, which is treated through collective investment schemes in securities portfolios. In this law, collective investment schemes are prescribed as a means of investing funds belonging to a users’ group, together with the aim of enjoying benefit advantages,

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The depository bank is an important part of CIU chain, because it just this bank which guarantees that the calculation of net asset value or shares/units in the fund is announced in accordance with law, AFSA regulations, prospectus and fund rules. by being part of a group. These advantages include: • appropriate investment opportunities for individuals, as it offers an opportunity to invest in a diversified basket of securities, professionally managed and with a relatively low cost, • cost sharing between members, and • optimal diversification among a large number of investment options, which theoretically and practically, reduces the investment risk.

This law assigns an essential role for CIU’s management company, by paying special attention regarding investment policies, CIU’s allowed investments and investment restrictions.

Depository - A new and particular component within the Albanian market The pension fund’s and CIU’s management company is legally obliged to ask for the services of a depository

bank, licensed by FSA. This bank has the duty to observe full compliance with legal and regulatory provisions for funds governed by the Albanian law. Fibank - Albania is the first, and so far the only bank licensed by FSA, to perform the functions of the depository bank for investment funds. Hence, Fibank challenge, as the depository bank, is full compliance with all legal requirements, by adapting with specific structures each fund management company may have, and reflected in the diversity of requirements the latter may have. Fibank provides depository services for the two investment funds, managed by Raiffeisen Invest, the first and only licensed CIUs in Albania. Thanks to its modern infrastructure and a wellprepared and committed staff, this challenge is successfully faced and now, Fibank provides custody for 22,500 client accounts of pension and investment funds, with total assets of over ALL 29 billion.

Along with asset custody, management of CIU special asset accounts helps the depository bank even in purchasing and selling assets, on behalf of investors. It should also ensure that each asset is purchased

Investor

Fund regulations

CIU

Depository Bank

Management Board

Depository Services

Investments in Securities

Contract with Depository Bank

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Custody Services

External Auditor

External Auditor

Collective Investment Contract

in compliance with fund’s prospectus and it also includes the assurance that any purchased property is actually in possession and is properly recorded into investor’s account. Simultaneously, the depository bank must take care for a proper transfer of any asset to the new owner, when the investor chooses to sell securities or other types of assets that are put in custody with the bank.

The depository bank is an important part of CIU chain, because it just this bank which guarantees that the calculation of net asset value or shares/units in the fund is announced in accordance with law, AFSA regulations, prospectus and fund rules. The calculation of net asset value and fund’s unit price is done on a daily basis, independently from the management company and may be published by the latter after it is matched with that calculated from the depository bank. The depositary bank acts in the best interests of fund’s unit holders and shareholders of investment companies, only, for which it provides depository services, in respect of such key principle, and has to satisfy continuous reporting obligations to AFSA, for any violations of this law and the respective contract, by the management company.

The Albanian banking system is now ready and has got proper experience to provide customers with new opportunities for a more effective asset management, whereas clients are ready to choose between new and high quality products, proposed by banks. Current legal basis provides and guarantee a transparent and well-controlled process in this regard. The challenge now is that other banks and actors could provide this new form of investment and management to investors, thus offering more options for customers.

EXPERTS’ FORUM

RESOLUTION OF NON-PERFORMING LOANS IN MONTENEGRO The “Podgorica Approach” would provide banks with rather efficient mechanism to resolve problems, as well as helping solvent companies, which have some difficulties in their operations.

by Mr Nebojša ÐOKOVIC´ MSc Advisor to the Association of Montenegrin Banks

T

he problem of non-performing loans (NPL) has been a general characteristic of the banking systems in the Balkan region for the last several years, particularly since the outburst of the global economic and financial crisis in 2008. The problem of NPLs did not bypass Montenegrin banking system, so it found itself in the centre of both managerial structures in commercial banks and monetary authorities and the Government of Montenegro. Non-performing loans had reached their maximum of almost 26% by mid-2011 (after several years of credit boom in Montenegro). In that respect, a programme of their “cleaning” was performed in the second half of the same year along with the significant support of parent banks (majority of banks in Montenegro are majority foreign owned) or factoring companies reducing the level of NPLs below 15%.

However, in mid-2012 NPLs rose again, due to the difficulties some parent banks were faced with at their domicile markets. High level of NPLs automatically limits lending activity of banks, so negative effects of such situation reflect also on the sound companies. Moreover, these compa-

nies have pretty high liquidity problems and their defaults result also on the liquidity of the remainder of the economy.

Montenegrin banking sector is a key creditor; out of 50 largest debtors from the corporate sector whose accounts are frozen, even 61% represent debts to the banking sector.

According to the latest data of the Central Bank of Montenegro, CBCG, total loans and other receivables in the first six months 2013 rose by 4.9% relative to the previous yearend, which primarily occurred due to the changes of the regulation. To wit, due to the IAS implementation,

The key challenge still is lowering of the share of non-performing loans, primarily through the implementation of the project called “Podgorica Approach”, which aims at providing positive effects, in the long-run, on the recovery of Montenegrin economy, to reduce financial stability risks and create qualitative fiscal donors.

the banks returned a portion of written-off loans and other receivables (category) from the off-balance sheet records into the on-balance sheet records. However, moderate credit risk is still present even besides the efforts taken by the banks to restructure loan portfolios. Banks applied measures in the past to improve the quality of loan portfolio by transferring non-performing loans to balance sheets of parent banks, selling and restructuring loans. However, unfavorable economic conditions in the global financial crisis environment influenced that the level of NPLs remained high also in 2013 (18% at end of June 2013, whereas the share of NPLs, pursuant to the amended regulation that entered into force on 1 January 2013, is calculated as the percentage of gross loans and other receivables, without interest and prepayments and accruals, in total loans and other receivables).

Therefore, the key challenge still is lowering of the share of non-performing loans, primarily through the implementation of the project called “Podgorica Approach”. This project, which was inspired by similar arrangement implemented in Turkey under the name “Istanbul Approach”, was initiated by CBCG,in cooperation with the Ministry of Finance and the World Bank, while the Montenegrin Banking Association also gave its contribution. The project aims at providing positive effects, in the long-run, on the recovery of Montenegrin economy, to reduce

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financial stability risks and create qualitative fiscal donors.

The main characteristic of loans granted to corporate sector in Montenegro is that they are secured by properties as the favorite type of pledge and mortgage, which is a mechanism preferred by the majority of banks. The fiduciary transfer of rights of ownership over properties used to be a very popular way to secure loans. However, the majority of banks still opt for mortgage.

With regard to private individuals, bills of exchange and guarantors are also used as collateral along with the aforesaid instruments. The practice showed that the collection through such instruments is rather slow and complicated, often unsuccessful. Moreover, the opening of bankruptcy proceedings did not bring to banks swift and efficient way to re-

In the frame of the project, the first step would be passing of LexSpecialis, or signing multilateral agreement between the Central Bank, banks and the State.

The condition is that all parties are ready to make certain sacrifices. solve problems, so the new project is an attempt to resolve problems in a more efficient manner, by giving the opportunity to both parties (banks and debtors) to accomplish their interests, in cases when the debtor can still do its business and when it has a realistic possibility to repay the loan.

An illustrative example is also the one that shows that some 350 cases of bankruptcy proceedings has been filed annually, during the last three years, and some 200 cases of bankruptcy proceedings closes every year.

The Podgorica Approach project (which is in the final stage of preparation) would provide banks with rather efficient mechanism to resolve problems; it would accelerate obtaining of the court approval for restructuring plans, protect from transaction risk, and it would provide benefits for tax payments regarding debt write-off and sale of property.

Debtors would have equal conditions for negotiations and they would increase cooperation with banks. In addition, they would have improved access to loans and credit rating, tax reliefs, possibility to move forward with business activities and to keep their companies “alive”. The project is about helping solvent companies, which have some difficulties in their operations, i.e. having liquidity problems. The approach envisages that the arrangement is conducted on a voluntary basis, which represents an additional advantage, as it reduces any form of pressure from any party.

The first step would be passing of LexSpecialis, or signing multilateral agreement between the Central Bank, banks and the State. The condition is that all parties are ready to make certain sacrifices. Banks would have to accept the write-off of a portion of interest rate and a reduction in interest rates, as well as to extend the loan repayment period. The State would have to accept write-off or delay of fulfillment of a portion of liabilities, in the form of taxes and contributions by companies. CBCG would have to keep provisions in the same or one better category and provide favorable treatment of provisions of these companies when granting new loans which are key to their recovery.

Montenegrin Banking Association would have an active role through mediation and logistics. Out-of-court restructuring has many advantages.

Since there is no participation of the Court, it requires less formality (flexible approach). Besides, it provides incentives to debtors to report

bankruptcy in timely manner since there are no automated changes in the management of the debtor, there is no appointment of the bankruptcy administrator and there is lower risk from liquidation.

The first step is drafting a list of potential companies/entrepreneurs that could apply Podgorica Approach. The negotiations on restructuring would last 90 days as a maximum. If 75% of creditors (based on the share in total value) agree on the proposed restructuring model, it becomes binding also for other creditors. Should the model being accepted by more than 50% and less than 75% of creditors, the company goes to the arbitrage; the arbitrage decision is binding. If the company owes to one bank only, then the final decision is made by such bank. All participants would benefit in long-run from the successful application of such approach: banks – because they would collect a significant portion of fund, instead of writing-off the receivables; the State would have companies capable of meeting their obligations in future, and the Central Bank would strengthen the financial stability.

The draft Law on voluntary debt restructuring is currently underway and the Working Group consisting of representatives from several institutions is participating in its drafting (CBCG, Commercial Court, several ministries, Montenegrin Banking Association, with the assistance of the World Bank experts). Foreign advisors are engaged with the consent of banks to provide technical assistance to banks in resolving all individual cases.

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EXPERTS’ FORUM

PUBLIC-PRIVATE PARTNERSHIPS (PPP) AND THE FINANCIAL REPORTING1 Although Albania has not a clear guideline on public sector entities’ accounting and reporting, in relation to the property subject to concession agreements, a valuable help in this regard could be the use of the IASB Framework, the lease agreement standard and suggestions by IPSAS Board.

by

Expected future economic benefits or service potential

Although the concession agreement’s provider may control the use of property, to meet the definition of an asset, according to IPSAS 1, as per above-mentioned, the property should bring a stream of expected future economic benefits or services potential for the provider, itself.

IFRIC 12 concludes that the use of property, subject of such agreements regulated by this interpretation, is not controlled by the operator (i.e. does not meet the definition of an asset for the operator). IFRIC 12 covers the private operator accounting only and hence it does not address the flow of benefits to the provider, from the property. The aspect of service potential as future benefits, which may be produced by an asset, is the main difference between the definition of an asset, according to IPSAS 1, and that given by the IASB framework, which focuses on the future economic benefits, only.

“Service potential” is further explained by paragraph 11 of IPSAS 1, as follows: “Assets provide a means for entities to achieve their objectives.

Assets that are used to deliver goods and services in accordance with an entity’s objectives, but which do not directly generate net cash inflows, are often described as embodying 1

Continued from last edition.

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Prof. Asoc. Dr. Hysen ÇELA Chairman of Managing Board, Institute of Authorized Chartered Auditors of Albania (IEKA)

&

IPSAS Board actual proposals, which could be also applied as practices in Albania, suggest that the concession provider must report the asset in its financial statements, if it is considered that the latter controls the property, for financial reporting purposes. service potential. For example, a road with no-toll charges is considered as an asset for the government, as it provides services in order to achieve government’s objectives, in relation to transport, although it does not produce future economic benefits. Generally, governments enter into such concession agreements to meet service objectives through construction, renovation, or property improvement, subject to the agreement. Thus, the property, subject to the contract, is intended to provide benefits for the provider, relating to their service potential, even if the property does not provide any prospective economic benefit. Although the main motivation of providers in entering into

Mr Kledi KODRA, FCCA Head of Audit Department, PwC - Albania

such an agreement is the economic benefit, e.g. to obtain a preliminary cash flow in exchange for the rights to operate a road, the agreement’s underlying asset will continue to be used afterwards, to achieve government objectives - it will be only operated by the private operator, so that it would offer benefits from its service potential for the provider.

For example, let’s consider a national toll-free road, which is reported as an asset by the provider, based on its service potential. Let’s assume that this road becomes subject of a concession agreement (CA), according to which the operator is entitled to impose charges (toll) for road users, in exchange for receiving the responsibility to carry out repairs and renovations, as well as to make the road functional, according to the provider’s specifications. Should it be proved that, under the contract, the provider has control over the road, and then it will earn the same benefits it had before the execution of such an agreement? This is so, despite the fact that the provider has transferred accountable part of risks and benefits to the operator. Therefore it seems that the road must continue to appear as an asset of the provider, since there is no change in the reporting basis that prescribes it as an asset, so it is the provider’s property, based upon

service potential. Further, it can be argued that, when the provider controls the property, the operator basically operates the property on behalf of the provider, and in this case, it is a service supplier for the concession provider. Economic risks and benefits, taken over by the operator through CA may be similar as those of a seller, in a service contract. They are different from risks and rewards associated with the ownership of that property. However, the economic risks and benefits may be associated with an asset, reported by the private operator, as a result of “access” in this property. For example, the operator may report an intangible asset, under IFRIC 12, as the future flows of funds depend on the public use of service.

IPSAS Board actual proposals, which could be also applied as practices in Albania, suggest that the concession provider must report the asset in its financial statements, if it is considered that the latter controls the property, for financial reporting purposes. The proposed criteria for defining the control by the provider consist in that, the provider controls: (1) what services the operator must provide, as regards the CA’s underlying property, to whom such services must be provided, prices associated with these services, etc., (2) through the ownership or through any other cause, the remaining interest in the property, at when the CA matures. According to the Board, the provider’s control over CA’s underlying property proves that it remains responsible for providing, directly or indirectly, services to the general public, related to that property. Given that the provider bears the risks and rewards it is meant that the latter expects to receive future service potential form the property.

Other accounting aspects

For CAs which meet the proposed control criterions, it is deemed as a best practice to use IPSAS 7 requirements, as regards the timing of recognition of the asset (during its construction or when the asset becomes operational, only) and liability related to this asset, which reflects practically the obligation of the provider to compensate the operator, in relation to the underlying property (asset). Recognition criterions are satisfied during construction, if the value of construction in process, up to that moment, can be measured in a reliable way. This applies when the provider bears the risk of construc-

tion, or where both parties can waive the agreement, in cases when they want to do it without being penalized. Should none of such scenarios are not accomplished therefore the recognition criterions are unlikely to be met, until the construction is complete. Also, specific requirements are prescribed, concerning agreements where construction elements and those of the service can be separated (or not), within the scheduled payment by the provider.

Provider’s financial reporting, in case when the proposed control criterions are not met In case of some CAs, should none of the above proposed control criterions are not met, therefore the provider must not recognize the CA’s underlying property as an asset. Consequently, any payment made for this CA, is related to its service and not for the property, therefore it should be spent according to the realization of the service’s economic benefits. Also, according to IPSAS 17, if the property exists and it is held as an asset by the provider, it should be written-off.

In cases of CA’s, in which the provider controls the use of property during the agreement only (e.g. in the BOO (Build-Own-Operate) concession agreement), IPSAS 13 instructions must be applied for lessee, if the CA meets the terms of a lease agreement. If the provider, during the agreement period, controls the use of property only and such agreement does not meet the terms of a financial lease, therefore the provider must report the property as an asset.

If the agreement includes a newlybuilt property, for purposes of provider financial reporting, the property and the respective obligation will be reported and measured as per above prescribed, when control criterions are met. At the CA maturity, the remaining carrying value of the property will be written-off, thus reflecting the transfer of property to the operator. If the agreement does not meet the terms of a financial lease and the provider is not the property owner, then it will not be recorded as an asset and any payments associated with this ownership/asset would represent an expense of the period.

CAs related with newly-built assets/properties, where the provider does not control the use of the asset/ property during the agreement period, but instead it controls the remaining interest in the asset/ property at agreement’s maturity (e.g. a BOOT concession agreement), the provider report as an additional asset the value that arises from the difference between the expected fair value of the property, at CA’s maturity, and the amount that the provider will be required to pay for the operator, when transferring the property. Such asset gains its value in the accounting, gradually, by way of provider’s payments for the operator, during the whole agreement’s lifetime. In case of CAs, which include the existing properties, in which the provider does not control the use of the property, during the agreement’s lifetime, but instead controls the residual interest at the end of the agreement,

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the Board proposes IPSAS 13 instructions, which apply for the lessor, to be followed, if the agreement meets the criterions of a lease contract. If the agreement does not meet such criterions, the provider writes-off the property as an asset, and recognizes, as an asset, the operator’s obligation to transfer (return) the property, at the agreement’s maturity.

Provisions for income allocation (sharing) In cases of CAs, where the operator expects to earn revenues from fees, directly from third parties, or from users of the public good, usually the provider negotiates the contract to include a provision about sharing these revenues between him and the operator. Thus, if the use of the property exceeds expectations, then the operator will share the success with the provider.

This provision aims at protecting the provider from political risk and pub-

For CAs which meet the proposed control criterions, it is deemed as a best practice to use IPSAS 7 requirements, as regards the timing of recognition of the asset (during its construction or when the asset becomes operational, only) and liability related to this asset, which reflects practically the obligation of the provider to compensate the operator, in relation to the underlying property (asset).

erator with 8 % rate of return.

Revenue sharing provisions are often included as terms of an agreement, together with a minimum guarantee for the operator. For example, an agreement for operating a toll-highway contains a provision for revenue sharing. Such provision requires the provider to receive about 57 % of the revenues, which exceed the prescribed ones. This provision may have another provision embedded, under which the provider will pay 80 % of any negative differences between the forecasted and current revenues. This provision minimizes the demand risk, by providing the operator with a minimum income guarantee, which in case of a successful project, would have the potential to be even bigger. Board’s current proposals state that providers must recognize such income (and receivables), as they are earned, i.e. in line with the principle of the agreement, and after the occurrence of any potential events (e.g. exceeding the threshold of minimum income).

Consolidation Government business enterprises When the operator is a government business enterprise, there will always be some control indicators, as discussed in paragraphs 39 and 40 of IPSAS 6, especially if such enterprise is created to act as an operator in these CAs. Generally, this operator should be consolidated in the provider’s financial statements.

Special Purpose Vehicles (SPV)

The operator in this case is a Special Purpose Vehicle (CPS) and the control indicators, prescribed in paragraph 39 of IPSAS 6 are not valid, in case of relationship between the operator and the provider. However, the contractual terms of these agreements may result, in the presence of several control indicators, prescribed by paragraph 40 of ISPSAS 6. For example, in a SPV created for a tollroad, the following contract provisions may indicate the provider’s controlling power over the operator: • The operator is allowed to borrow, under the contract’s terms, and the provider must give prior approval for any additional debt.

• All fees and charges for the tollroad are subject to approval by the Minister of Transportation and may change at providers’ request.

• The provider may require to layoff any employee who is e.g. disabled, offensive or incompetent, etc.

The provisions of agreement in this example, which could display the fact that the provider receives benefits from the operator’s activities, are as follows: • The operator is required to ensure that the highway will be open to traffic all-times and that traffic flow meets predetermined standards, and meets the provider’s transport objectives.

• The operator shall make payments for the provider, should the project returns exceed a certain limit.

lic criticism, which may arise from being part of a deal, which could be very profitable for a private operator.

For example, the provider, as part of an agreement for the construction of a large parking area, receives a fixed fee for each ticket sold. The provider uses this fee to fund community activities. Also, in an agreement which includes the construction of a tollroad, the provider has the right to receive 40 % out of total income, as the operator’s net flows form the agreement provides a pre-tax rate of return of 6.5 %, over total invested funds. So the provider’s share increases up to 80 % of total collected revenues as the contract’s cash flows provides the op-

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ECONOMIST CORNER

MACRO-PRUDENTIAL MEASURES AND FINANCIAL STABILITY IN THE LIGHT OF BASEL III

Basel III Agreement, published in 16 December 2010, proposes a series of macro-prudential policies, based on a better understanding of systemic risk and financial instability elements.

by Prof. Dr. Adrian CIVICI President & Head of Doctoral School European University of Tirana, EUT - UET

he more is known about causes T and the mechanism that triggered the global financial crisis, the

more emphasis is put on mounting up rules and mechanisms that guarantee financial stability and banking sector. Financial deregulation, commenced in late 80s, increased significantly the instability of the financial system, by reducing its capacity to resist shocks and absorb imbalances. Basel I and Basel II Agreements came in the limelight and were adopted one after the other, to protect banks from systemic risk and to reduce risks that a banking crisis could infect the financial system, as well as the real economy. In 1988, the Basel Committee prepared and published the set of requirements for banks under “Cooke ratio”, where the emphasis was put on credit risk and the amount of capital and assets, banks should hold to withstand possible losses. In 2004, Basel II proposed “McDonough ratio”, which expanded the range of risks and refined the calculating method of risk weighting coefficients.

What are the guarantees we get from Basel III? The financial crisis, which started

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in 2007, proved that arrangements of micro-prudential nature were insufficient to ensure the above objectives. The existing micro-prudential adjustments, failed to eliminate the systemic risk, rather they risked at amplifying it. Despite the admitted consensus that “the financial regulation system should be equipped with efficient mechanisms for detecting managing the systemic risk, in fact, it fell short in defining the nature and the extent of indicators that express such risk”, not to mention determining and measuring the chain reaction effect, that financial services may cause to the entire financial system, real economy and economic growth, social welfare, etc.

Basel I and Basel II unfurled a number of weaknesses, precisely because of their micro-prudential character, such as: 1) the lack of penalizing concentration of portfolios in some specific commitments, moreover, risk weightings encouraged portfolio buildup around lowrisk assets (such as various governments’ T-Bills, mortgage loans, interbank loans, etc.) and massive use of derivatives products, like: CDS (Credit Default Swap), which masked the risk level, in order to justify and bypass the need for additional capital; 2) using only unique global risk indicator, whereas mathematical and econometric models ignored the impact of countryspecific risk, in the frame of global risk and the degree of exposure of

many institutions and markets toward such risk; 3) failure to consider adequately the risk that financial institutions undertook during their activity in the market, especially in loan securitization and off-balance sheet activities, thus overexposing such institutions against liquidity crises; 4) the pro-cyclical nature of capital regulation, to the extent that, the risk was underestimated during dynamic periods and overestimated during recession ones, whereas the asset valuation should be based on their market value. So, the risk assessment was carried out in a given moment and not during a whole cycle timeline, therefore

The macro-prudential regulation package prescribes as the fundamental objective “ensuring the stability of the entire financial system, enforcing regulatory authorities to improve and complete the systemic risk analysis and requiring them to possess necessary instruments to address and handle this risk.”

jeopardizing the efficiency of regulatory policies.

In this context, a new consensus was established within banking and financial environment, “on the need for financial regulation at macro-prudential levels”. The main part of them should be fully integrated immediately into the next agreement, Basel III, leaving an implementation period that extends until 2019. However, among experts and bankers in financial markets a key question mark remains: could macro-prudential measures, under Basel III, be able and sufficient to prevent major financial crisis in the future?

Macro-prudential policies.

The macro-prudential regulation package prescribes as the fundamental objective “ensuring the stability of the entire financial system, enforcing regulatory authorities to improve and complete the systemic risk analysis and requiring them to possess necessary instruments to address and handle this risk.” Unlike micro-prudential vision that privileges individual resistance or partial equilibrium of financial institutions, macro-prudential vision privileges the overall balance and requires achieving global financial stability, aims at detecting and predicting systemic crises, and above all, preventing their transformation into financial crises. Along with their objectives, macro-prudential policies are also characterized by two essential components: 1) their scope of activity, which means the entire financial system, by including the connection between the financial sphere and real economy, 2) the specific type of instruments, their scope and specific ways to use them.

Systemic risk tends to be elevated at times when banks and their customers assess the system as solid and stable.

The more the financial system and the way it “behaves” is known, the more diverse the regulatory and supervisory policies and instruments will be.

Macro-prudential regulations should necessarily pass through

Macroeconomic Policies (monetary/fiscal/ external)

Price Stability Economic Activity

systemic risk analysis. Full knowledge of its components by macroprudential authorities is an essential element to identify threats to financial stability. In this regard, experts ask for making a clear distinction between “temporary dimensions” and “transversal dimensions” of this risk, which are closely related to each other, in the way of their evolution. Temporary dimensions reflect formation of systemic risk through times, due to pro-cyclical behavior of financial institutions, which is manifested in the emergence of financial cycles. It is important to know how this risk is amplified by the financial system interconnectivities, as well as those between the system and the real economy. Warning signs that alert about such situation are displayed in the form of so-called “paradox of financial instability” , according to which, the more the financial system appears healthy and sound, the more it is at risk. Systemic risk tends to be elevated at times when banks and their customers assess the system as solid and stable.

The low-risk perception situations create and artificial calmness and trust, under which the loan supply is strong, asset prices artificially high and profits skyrocket. So, it seems that the quasi risk-free investment and decision is actually a high-risk undertaking.

The transversal dimension relates to the way the aggregate risk in the financial system is allocated in a given moment, i.e. so the links and interactions with financial institutions with each other. In this case, the basic problem is the very existence of “correlated exposure

Macroprudential Policy

Finacial Stability Systemic Risk

of financial institutions”, in front of risk. Regulatory authorities should consider three critical factors, deemed as the most important in amplifying the risk in the financial system: 1) high levels of leverage effect, which refers to the proportions between financial commitments and the capital level of any bank or financial institution; 2) the exposure and risk-taking propensity of financial institutions. There are many cases when an individual risk seems as a moderate one, but in fact it is not, given the effects it may cause to the whole financial system; 3) the extraordinary complexity of the financial system, which is characterized by a great intertwine interaction between financial institutions, the colossal difference in the level of their involvement and commitment in the market, especially when asset prices rise. All this greatly increases the mutual contagion risk and therefore infecting the whole system.

Features of macro-prudential instruments. These instruments are intended to combine the effects of two dimensions of systemic risk, as well as to adapt better with the two stages that characterize such risk development. During the risk accumulation phase, these “preemptive” measures should increase the resilience of the financial system and control the amplitude of financial cycles by adjusting the loan supply, satisfying capital and liquidity requirements, etc. At the stage of risk materialization, they should mitigate any financial instability element, and adjust and limit panicking. A measure or an instrument is deemed as a macro-

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MakroMacroMonetary Policy

Price Stability Economic Activity

prudential one, at the moment it reduces the probability of forming a systemic financial risk. Specifically, the macro-prudential term finds its maximum application for instruments that address the issue of interconnectivity and interaction between banks, the uniformity of portfolios or the functioning of parallel banking systems.

Macro-prudential supervision.

Basel III package of measures proposes a series of policies and “obligations”, under the countercyclical financial regulation, which is believed to yield positive results in the area of financial stability.

Basel III Agreement, published in 16 December 2010, proposes a series of macro-prudential policies, based on a better understanding of systemic risk and financial instability elements. The first objective is to “reduce the banking system’s tendency to amplify the economic cycles’ fluctuations through an excessive loan supply during the quiet phases and its drastic reduction during tense ones”. Minimum capital adequacy requirements will be raised from 8% to 10.5 %, by introducing a new macro-prudential instrument: a new mandatory flexible countercyclical fund, ranging at 0-2.5 %. Banks build up such countercyclical fund during the upswing phase of the financial cycle,

Prudencialiteti Prudential Macroprudential Policy

Macroprudential Policy

Financial Stability Systemic Risk

Idiosyncratic Risk

in order to use it during negative downward phase, thus eliminating the mutual effects. Banks shall start building this fund when the loanto-GDP ratio exceeds a certain level considered as critical and use such fund when they move into loss territory, or when the loan supply goes significantly south.

Another macro-prudential measure, aimed at better oversight/ supervision of leverage effect at financial institutions, which increases banks’ potential profitability but also increases losses possibility, is the capital level compared to riskweighted assets. Large banks are authorized to set the risk level and weightings, by themselves. Meanwhile, Basel III foresees the introduction of a limiting ceiling over the leverage effect, by limiting the total amount of assets a bank may hold against its capital. Such tool enables limiting the risk of financial institutions, although many banks continue to resist the idea of publishing their leverage effects/ratios.

Basel III anticipates the introduction of two new restrictive liquidity requirements, in order to force banks to use their assets in illiquid long-term investments. Such restrictive requirements ask for banks to maintain a minimum liquidity reserve. The first is a shortterm liquidity percentage, which

requires banks to hold a large amount of liquid assets to cover anticipated needs for a period of one month, whereas the second is a percentage that determines the liquidity in the long-term, with the aim to guarantee that banks hold sufficient reserves to cover their needs for a 12-month period.

Basel III rules are set to be fully implemented by banks until 2019, but Basel Committee recommends that they should begin, as soon as possible, with partial preparation and implementation prior to this date. However, a heated debate, about the side effects and consequences such rules may cause, still evolves within banking, financial and economic environments. Practically, there do exist doubts and uncertainties, in relation to the issues: whether such agreement responds adequately to the problems of inter connectivity, which is at the origin of many financial instability elements; if any “coordination between macro-prudential and monetary policy” is properly forecasted, by going so far at proposals which require a more complete integration of these two policies under the umbrella of central banks, what will be the way of selecting the instruments considered as “most suitable” by macro-prudential authorities and which will be boundaries of their scope of activity, etc.

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SOCIAL CAPITAL

ALPHA BANK Alpha Gym Park The first outdoor gym in Albania has started to operate at the Artificial Park of Tirana thanks to an important project sponsored by Alpha Bank with the kind support of the Municipality of Tirana. For a number of years Alpha Bank has been showing in practice its interest in sports.

Alpha Gym Park was well accepted and frequented regularly from the first date of it operation. During this period a fitness instructor was present to advise the citizens on the proper and most effective way to use the equipments.

Alpha Gym Park is equipped with 10 instruments that can easily be used by everyone. The gym park was designed to provide all the facilities to the people that will exercise with benches to sit and taps to refresh. The employees of the Bank planted as well some trees and during the upcoming weeks will distribute t-shirts and sportive bags to the people that will exercise on the park.

Together we give life!

Alpha Bank Albania, in cooperation with Red Cross Albania, organized on June, 14, for the third consecutive year, the blood donation day, with the participation of the banks’ employees. The 14th of June is the World Blood Donation Day, and the bank chose this day to raise awareness that blood donation is a vital volunteer activity and that everyone should be an active donator.

Mr Periklis Drougkas, CEO of Alpha Bank – Albania, said: “It is important that everyone understands that it is our social responsibility to help the ones in need; I want to thank Red Cross Albania for the awareness campaigns they are undertaking and I want to thank my colleagues for becoming someone’s saviour.‘

BANKA KOMBETARE TREGTARE BKT contributes in increasing the Business Loans in Tirana BKT, in the frame of expanding the cooperation with local government and the corporate social responsibility, aiming at contributing for the economic development, increasing the employment increasing the business loans, has signed New Loan Guarantee Agreement with TiranaMunicipality. Tirana Municipality has offered a fund of 100 million ALL, through such guarantee program, as a mean for guaranteeing the credit risk of micro, small and medium enterprises.

These loans, apart from being offered at a very preferential price level, will be provided not only to the existing businesses and the start-ups, but also to the non-licensed businesses, which intend to formalize their activities.

“Euromoney” reaffirms BKT as “The best bank in Albania” 2013 BKT adds another important award to its international evaluations’ collection.

BKT, with its successful financial management and innovative banking services, is confirmed for the second year in a row as “The Best Bank in Albania”, 2013 by the prominent financial magazine, “Euromoney”. The award was submitted to BKT’s Chairman, Mr Mehmet Usta, and Mr Seyhan Pencabligil, CEO and Board Member, in the gala dinner organized on this occasion in London.

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CREDINS BANK Credins Bank opened the tourist season Credins Bank supported the opening of the tourist season in the coastal town of Saranda and the mountainous town of Permet.

Under the auspices of local leaders, these events attracted many local and foreign tourism operators, who have exchanged ideas and experiences to generate more interest and visitors. The potential for development offered by the stunning Southern coast, the fabulous landscapes of areas as Permeti should serve to foster the Albanian tourism.

Much interest was expressed by operators of tourist services, participants from across the Southern region in the event organized at the premises of Saranda Municipality, for the e-Commerce service offered

by Credins Bank. Implementation of this service will bring the Albanian business close to the furthest customer by accepting payments for bookings/reservations.

CREDIT AGRICOLE Inauguration of the new bicycle station of Credit Agricole Bank Albania Credit Agricole Bank Albania, in cooperation with the non-governmental environmental organization Ecovolis inaugurated the bicycle station near “21 Dhjetori” crossroad, in Tirana. The inauguration event was attended by Mr Luc Beiso, Director General and Mr Ened Mato, Ecovolis Director. This inauguration follows the activities that the Credit Agricole Bank Albania implements in the framework of social responsibility and following the support of the Bank to civil and environmental initiatives for the community.

The station located in “21 Dhjetori” crossroad, an area with a high level of urban pollution, serves as a message to the community in reducing fuel use. This is also transmitted in the message that this bank has displayed in the tables located in the station “Do not burn fuel but calories”. In support of this activity of the Bank, it was its own staff and different associates who cycled throughout the main road and “Mother Teresa” Boulevard.

FIRST INVESTMENT BANK Fibank, was for the fourth consecutive year sponsor of the project “The Seasonal Employment of Students” Cooperation between Fibankand Korça Municipality has turned into a tradition as regarding the project The Seasonal Employment of Students.

The closing ceremony of this project and certification of participant students were organized in the premises of Life Galery in the city of Korca.During this ceremony, students were awarded certificates issued by both these institutions.

This project is annually supported by the bank as it is dedicated to the new generation of this city, future workers in major businesses and institutions, potential Fibank future employees and certainly its best clients. The cooperation with Korca Municipality is estimated as successful for our bank as it creates a sustainable connection with the city of Korca, both for the students participating in the project and for their families and acquaintances.

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INTESA SANPAOLO BANK - ALBANIA Live Art First Exhibition goes live at the National Gallery of Art September 30 – October 10, 2013 Intesa Sanpaolo Bank Albania organized for the first time the Contemporary Art Painting Contest in cooperation with the Ministry of Culture and the National Gallery of Arts, as Official Partners. The contest reached its final phase, when among 26 finalists 3 Prizes were awarded on 30 September, 2013.

The opening ceremony and speech was held by Mr Alexander Resch, the Chief Executive Officer of Intesa Sanpaolo Bank Albania, highlighting that: “Attempting to reinforce the bridges of Albanian contemporary art with the international ones, a global reach with a local touch, Intesa Sanpaolo Bank Albania invites you to this yearly journey through its inspiration quote: Thinking ahead with you!”

This event was honoured by the presence of His Excellency the Prime Minister of the Republic of Albania Mr Edi Rama. In his speech he shared his perspectives on such initiatives and emphasized the importance of this project as an expression of the artistic power of the Albanian young artists and as a very good example of what can be achieved in partnership with private sector.

The exhibition remained open for the public at the National Gallery of Arts till 10 October 2013, and then it will travel in Korça, Vlora, Shkodra and Durrës until end-January 2014.

Albanian Signs Language – enlarging communication opportunities Intesa Sanpaolo Bank Albania sponsored the second publication of the Albanian Sign Language, (book & video) for 500 people who do not hear and use this language in their daily life, as well as for their families, teachers and friends. This was a production of Albanian National Association of Deaf (ANAD) published for the first time in 2004. Not found in the market for almost 10 years, this book is a great help for all those who do not hear but also for all those who would like to learn the signs language to easily communicate with them.

Bank’s representatives were present at the Institute of Deaf Pupils in Tirana, during the activity held on 27 September, to commemorate the International Week of Deaf People (23-29 September) during which they delivered on the part of Bank the gift of 500 books and DVD-s. We believe that Sign Language is a human right. Intesa Sanpaolo Bank Albania sensitivity toward this community joins Intesa Sanpaolo Group efforts in the contribution they give to protect the environment, health, the job, the future and welfare of all the community as well as the social system relationships.

PROCREDIT BANK ProCredit Bank supported ‘’The second scientific conference of students of the Agricultural University of Tirana’’, held in June, that aimed at encouraging further research and scientific works by students.

In addition to activities, ProCredit Bank organized open meetings with students in Tirana and Durres. At the meeting held on 5 September, at ProCredit Bank Head Office, participants were informed about the ‘’Young Bankers” Program, as an essential step in further education of students in the world of the banking system but also as a training and challenge process towards success for employment at ProCredit Bank. Potential candidates for the Young Bankers Program are individuals who have work experience, students who graduate or who are recent graduates, regardless of their field of study, and who want to develop professionally in an ethical and responsible bank.

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RAIFFEISEN BANK Raiffeisen Bank sponsors the reconstruction of the main square and the tourist info centre Raiffeisen Bank in collaboration with Gjirokastra Municipality made possible the reconstruction of the “ÇerçizTopulli” main square, as well as of the tourist info centre.

These projects came in the moment of the peak of season, where hundreds of foreign tourists visit the beautiful city of Gjirokastra. This city is listed in the UNESCO’s world list of heritage since 15 July 2005.

The inaguration ceremony of these reconstructions was held together with several activities organized by Gjirokastra Municipality, on the occasion of 8th anniversary of the entrance of Gjirokastra in UNESCO. It was attended by Mr Flamur Bime, Mayor of Gjirokastra and Mr Christian Canacaris, CEO of Raiffeisen Bank. Mr Canacaris said that he was very happy to cut the ribbon and to see that the contribution will help in the life quality of people of Gjirokastra.

Mr Christian Canacaris, CEO of Raiffeisen Bank awarded the “Citizen of Honor” by Gjiroakstra Municipality On the occasion of 8th anniversary of the entrance of Gjirokastra in UNESCO, Gjirokastra Municipality organized a ceremony at the castle of the city, where Mr Christian Canacaris, CEO of Raiffeisen Bank received the award “Citizen of Honor”

by Gjirokastra Municipality, with the dedication: “For distinguished contribution and continuous support in the development of infrastructural and environmental projects in Gjirokastra and social and public services for the community”. Mr Canacaris expressed his gratitude for the award and that Raiffeisen Bank has been present in almost all the sectors, education, health, culture, tourism in Gjirokastra.

Raiffeisen Bank sponsored swimming pool reconstruction in Saranda In the framework of the collaboration with Saranda Municipality, Raiffeisen Bank has sponsored the reconstruction of the swimming pool of the city. The inauguration ceremony was attended

by Mr Stefan Çipa, Mayor of Saranda and Mr Christian Canacaris, CEO of Raiffeisen Bank that after cutting the ribbon expressed that: “he hoped that swimming, a healthy sport and tradition in the city will be revived with this swimming pool and many other talents will come from Saranda”.

TIRANA BANK Recital Concert for Violin and Cello Tirana Bank embraces arts to support young artists and instrumentalists of classical music. In collaboration with the symphony orchestra of Albanian Radio Television, it supported in 28 June, the recital concert for violin and cello. Some carefully selected musical parts, from the most famous composers of the Romantic era, like: Chaikovsky and Brahms were played in “GjonSimoni” Radio Tirana summer hall. The performance of violinist Nevila Dergjini and cellist Andi Alimemaj, under the guidance of the renowned conductor Gridi Kraja, conveyed special vibes to the audience.

VENETO BANKA Veneto Bank supports the Albanian national team of Beach Volley During 16-18 August 2013 was organized, the Balkan Championship of Beach Volley for Female Youngsters. Veneto Bank was the official sponsor of the Albanian National Team U-20, which was duly represented at this championship by being awarded the bronze medal, after winning a difficult semifinal match against Turkey.

Veneto Bank in the Albanian beaches The project “Summer Tour 2013”, organized during summer by the staff of professors and students of “Marin Barleti” University, aimed at “a clean touristic environment”.

Veneto Banka supported this project and was also present by providing promotional materials in the framework of a social responsibility both for a clean and attractive environment.

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SOCIAL CAPITAL

JUNIOR ACHIEVEMENT®, THE MOST WELL-KNOWN EDUCATION PROGRAM IN THE WORLD FOR EDUCATING YOUNG PEOPLE ABOUT ENTREPRENEURSHIP, NOW IN ALBANIA, WITH THE SUPPORT OF THE ALBANIAN-AMERICAN DEVELOPMENT FOUNDATION (AADF).

Rezarta Godo, Executive Director, Junior Achievement of Albania

W

hat is the profile of Junior Achievement of Albania?

Junior Achievement of Albania, a nonprofit organization founded in 2012, is in charge of implementing the program with the same name, Junior Achievement® (JA) in high schools of Albania. Our goal is to empower young Albanians to be successful in their life and work, as well as to be economically independent.

JA Program is an educational program, initially launched in 1919 in the United States of America, aiming at promoting the employment of young Americans and their training for work. Over the years, this program was further developed and enriched, both in content and variety, following the dynamics and development of the labor market, economic system and technological revolution. Today, JA program provides practical and contemporary knowledge to young people in 122 countries worldwide. Each year, the international network of Junior Achievement includes 402.815 volunteers from the business world, 312.954 teachers and 10.1 million students.

Currently, Junior Achievement® (JA) the program is implemented at high school, as an integral part of the official curricula, as an elective.

The program is offered in 11th and 12th grade. Practically, two modules of Junior Achievement are integrated

in program of the 11th grade: “Business Ethics” and “Skills for Success”, whereas three program modules are integrated in 12th grade: “Students’ Entrepreneurial Companies”, “OneDay Manager” and “Be an Entrepreneur”.

What is the role of business volunteers?

Volunteers in the classroom, coming from business sector, are a common worldwide practice of JA. The volunteer is considered as the backbone of the program. Business involvement in JA program occurs at several levels: a) as business volunteers at classes; b) as typical managers and professionals, who are accompanied by a student during a working day, on the occasion of the national annual event: “One-Day Manager”; c) as youth supporters, by contributing at JA activities, as member of a jury and judge for young talents.

Students, Junior Achievement of Albania

At classes, business volunteers act as mentors and model examples for students of JA program.

Specifically, volunteers support a JA class during one academic year (4-8 hours per month), by advising students during the JA course/s development process, orienting them toward appropriate decisions or appropriate management strategies, as well as channeling their creative energies into innovative ventures.

Also, business volunteers bring, at classes, real life cases from the labor market, share impressions and experiences from the business world, and provide expertise and professionalism.

The role and impact of business volunteers is of particular importance for Albanian students, who find inspiration, security, confidence and courage to undertake bold entrepreneurial initiatives, as well as to be well-prepared for the labor market.

Potential candidates, individuals or corporate in Tirana and other cities, or interested persons for the role of volunteer business We are invited to send letters of interest and resumes at our e-mail address: vullnetari@junior-achievement.org.

Subjects/Modules of Junior Achievement During the 2013-2014 academic year, Junior Achievement program will be implemented in 100 high schools of the country, included in the official curricula as electives, as follows: The 11th grade: Introduction to business I, according to Junior Achievement (1 hour per week, 36 hours per year). Two modules: “Business Ethics” and “Skills for Success” are integrated within such subject.

The 12th grade: Introduction to Business II, according to Junior Achievement (34 hours per year).

Three modules: “Pupils’ companies”, “Be an entrepreneur”, and “One-Day Manager” are integrated within such subject.

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BALKANNET

INTERBALKAN NEWS BOSNIA-HERZEGOVINA Sarajevo

Bosnia’s Central Bank and banking agencies signed the guidelines for preparation of stress tests and use of prudential instruments Balkans.com - 08.07.2013 The Central Bank of Bosnia and Herzegovina (CBBH), FBH Banking Agency and RS Banking Agency signed the guidelines for preparation of stress tests and use of prudential instruments in the CBBH, Federal Banking Agency and Banking Agency of RS at the meeting of Banking Supervision Coordination held on 19 March 2013. The aim of the document is formalization of stress tests preparation, as well as defining of obligations and responsibilities of the CBBH and Banking Agencies in process of stress tests implementation, as well as defining of relations among macro prudential monitoring, continued supervision and process of management and mitigation of risk.

IFC, Sberbank Partner to Boost Trade in Bosnia and Herzegovina Balkans.com - 12.09.2013 IFC, a member of the World Bank Group, has extended trade credit to Sberbank to channel additional financing to the bank’s clients working in import and export in Bosnia and Herzegovina. With the $20 million credit line, Sberbank will increase its product offerings and financial support for corporate customers in Bosnia and Herzegovina engaged in international trade, helping those firms reach new markets, expand operations, and create jobs.

BULGARIA

Sofia Bulgaria’s BDB will cover half of the risk of loans granted by commercial banks to SME’s Balkans.com - 27.08.2013 National Guarantee Fund (NGF), part of the Bulgarian Development Bank launched a new warranty program in which will cover half of the risk of loans granted by commercial banks to small and medium enterprises.

The total capacity of the new initiative is about BGN 360 million. The new program is to facilitate access to

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finance and business to be eased collateral requirements in Bulgaria. SMEs can apply for funding to commercial banks, and they in turn will receive loan guarantees from NGF. Cibank receives 50 million EUR to finance SME’s in Bulgaria Balkans.com - 30.09.2013 The European Investment Bank (EIB) is lending EUR 50 million to CIBANK to finance projects promoted by small and medium-sized enterprises and mid-cap companies in Bulgaria. EIB funds will support projects across the whole country, significantly supporting employment.

This intermediated loan is being provided under the Joint IFI Action Plan for Growth in Central and South Eastern Europe, which is focused on providing better access to long-term finance for Europe’s SMEs in order to mitigate the effects of the financial crisis. The funds will support growth by enhancing long-term competitiveness through increased availability of long-term credit.

CROATIA

Zagreb Foreign currency loans no danger for banks FriedlNews – 05.08.2013 In Croatia, about 100,000 borrowers took out a foreign currency loan in the years from 2000 to 2008. After 2008, interest payments went up suddenly. In spring, the Croat Commercial Court decided that banks did not inform their customers sufficiently. As a result, banks did not fulfill their duties and are now forced to pay compensation.

According to the Commercial Court, banks must convert the loans into the Croat currency within 60 days. The exchange rate has to be the rate of the date when the contract was concluded. Moreover, the interest rate has to be fixed ex post. The decision is not legally binding yet.

Croatia expects budget deficit to reach 5.5% of GDP in 2014 Balkans.com - 27.09.2013 Growing expenditures on interest and on the cost of Croatia’s European Union membership in 2014 will lead to an increase in the budgetary deficit of some HRK 8 billion, with overall expenditures expected to reach HRK 131.7 billion and the budget deficit to amount to HRK 17.4 billion or 5.5 % of GDP next year, Finance Minister Slavko Linic said at a government meeting in Zagreb.

Linic warned that in 2014, costs incurred by interest on the existing public debt would grow by HRK 2.5 billion, while the country’s EU membership costs would go up by HRK 4.7 billion.

GREECE

representation of their interests to SWIFT, SWIFT high quality services and access to appropriate information regarding SWIFT, as well as facilitating the process of joint opinion-making.

Athens

MACEDONIA Bank deposits decreased by EUR 178 million in August, taking the total for household savings and enterprises’ ready cash to EUR 162.2 billion, according to Bank of Greece data. At the same time, credit continued to shrink, at a rate of 3.9 percent, bringing the total of private sector loan debts to EUR 221.8 billion from EUR 222.4 billion in July. The net flow of corporate and household funding was negative as loan repayments exceeded loans issued

by EUR 823 million. This has led to a liquidity squeeze at banks, which as a result cannot extend more credit.

EUR 7.5 billion of EU funds will flow into the Greek economy next year Balkans.com - 27.09.2013 An unprecedented amount of European Union funds – totaling EUR 7.5 billion – will flow into the Greek economy next year, Development Minister Costis Hatzidakis announced on Thursday in Brussels. This concerns projects of the current funding period (200713) amounting to 3.5 billion euros, as well as mature projects that did not make it into the program but will be incorporated in the new funding program for 2014-20 with the prospect of immediate absorption.

Some 4 billion euros in EU funds is expected to enter the country’s economy by the end of the year.

KOSOVO

Pristina Kosovo to commence processing electronic payments for social schemes 25.07.2013 Central Bank of the Republic of Kosovo commenced, for the first time, the process of transmission, transfer and final settlement of about 153.000 payment transactions for four social schemes of the Ministry of Labor and Social Welfare (MLSW), through Gross Payments Scheme for Interbank Electronic Clearing System (IECS). The process of transfer and electronic data processing payments for the above four categories of MPMS social schemes, through IECS, is characterized by a high degree of standardization and automation of payment method, thus being a quick, easy and secure process.

National group of SWIFT Members and Users established in Kosovo 30.08.2013 After the recognition of Kosovo by SWIFT, Central Bank of the Republic of Kosovo and commercial banks in Kosovo established the National Group of SWIFT Members and Users known as SWIFT Group of Kosovo. Such national group will provide all member institutions with proper

Skopje

Macedonian central bank “equal or close to” EU standards in many areas Balkans.com - 11.07.2013 The European Central Bank (ECB) and the National Bank of Macedonia (NBRM) completed a cooperation program, aimed at helping the NBRM to advance its preparations for joining the European System of Central Banks (ESCB) once the country has acceded to the European Union. The needs analysis report concludes that the NBRM already has practices and policies that are equal or close to EU standards in many areas and presents recommendations for further improvement, in particular in areas where progress needs to be made towards attaining EU levels.

IFC and FYR Macedonia’s Ohridska Banka have partnered to expand access to finance Balkans.com - 23.08.2013 IFC, a member of the World Bank Group, and Ohridska Banka have partnered to expand access to finance and spur international trade among small businesses in Macedonia. IFC extended a US$ 10 million trade credit line to Ohridska Banka under the Global Trade Finance Program (GTFP). With IFC support, Ohridska Banka will be able to provide additional financing to its trade clients, particularly small and medium enterprises with growth potential that are active in the energy, metallurgical, mining, textile, food processing, and transport sectors.

MONTENEGRO Podgorica

Montenegro borrows 60 mln euro from Deutsche Bank, Erste to cover KAP loan guarantees SeeNews – 15.07.2013 Montenegro has secured a EUR 60 million (US$ 78.2 million) credit from Deutsche Bank and Erste Bank to finance obligations stemming from the activation of guarantees assumed by the state for a loan taken out by local aluminum smelter KAP. Montenegro’s threeyear loan has a grace period of 18 months and carries a fixed annual interest rate of 6.42%. The Montenegrin government owns 29.3% of KAP and Russia’s En+ Group holds an identical stake. A court in Podgorica launched bankruptcy proceedings against loss-making KAP earlier this month.

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Montenegro’s banking system adjustment is at an advanced stage after a massive downsizing Balkans.com - 04.09.2013 Montenegro’s recovery from the collapse of the lending boom in 2008 has been slowed by the debt overhang that remains in the private sector. The authorities undertook sizable fiscal adjustment in 2012, but the level of debt continued to rise, reaching 52 percent by end year. Montenegro’s banking system adjustment is at an advanced stage after a massive downsizing following the collapse of the credit bubble, but banks continue to struggle with a large stock of nonperforming loans (NPLs). Banks have aggressively sold off NPLs to factoring companies, but the latter have moved slowly with resolution or restructuring of these problem assets, leaving private balance sheets still impaired.

ROMANIA

said that SMEs are the driver of economic development and the basis for the growth of GDP and lowering the unemployment rate. Opening of the 14th fair of innovation, cooperation and entrepreneurship “Inokoop” in Zrenjanin, Ljajic said that the private sector in Serbia today employs 45% of the total number of employees, and that the total GDP accounts for only 30%.

Serbia Will Probably Cut Main Interest Rate as Inflation Eases 09.09.2013 Serbia’s central bank will probably cut its main interest rate after two months of keeping borrowing costs unchanged after consumer-price growth slowed and the dinar weakened to its lowest level in 11 months. The Narodna Banka Srbije will lower the one-week repurchase rate to 10.75 percent from 11 percent, according to 11 of 24 economists in a Bloomberg survey.

TURKEY Bucharest Istanbul

Romania plans to raise at least EUR 1 billion from a second bond issue Balkans.com - 06.09.2013 Romania plans to raise at least EUR 1 billion from a second bond issue this year in a move to cover its budget deficit. The country aims to raise EUR 2.5 billion on the international markets this year, issuing USD 1.5 billion at a fresh low yield of 4.5 percent in February. The yield of Romania’s 2019 Eurobonds rose yesterday by two basis points to 4.16 percent, up from a fresh low of 3.4 percent in May. Romania to Lower Key Rate for Third Meeting, Survey Shows

by Irina Savu – 29.09.2013 The Banca Nationala a Romaniei will cut the rate to 4.25 percent from 4.50 percent, according to 14 of 18 economists in a Bloomberg survey. Policy makers, who kept borrowing costs unchanged for more than a year after a surge in inflation, resumed rate cuts in July, with consumer-price growth poised to slow within their target of 1.5 percent to 3.5 percent this month.

The central bank cut borrowing costs by a total of 75 basis points in July and August after halting rate reductions last March as a drought stoked inflation.

SERBIA Beograd

SMEs are the driver of economic development Balkans.com - 02.09.2013 Serbia’s Deputy Prime Minister and Minister of Foreign and Internal Trade and Telecommunications Rasim Ljajic

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Turkey has been immune to economic crises- World Bank Balkans.com - 13.09.2013 The Turkish economy will adapt to the changing conditions of the global economy, resulting from the latest decision of the U.S. Federal Reserve (Fed) to end the high liquidity party, said the country director for Turkey of the World Bank, Martin Raiser, speaking at a conference on the International Forum on Financial Systems yesterday.

The country faced its own crisis in the past and the latest global economic burst had a very limited effect on Turkey.

Turkey will easily adapt to the changing circumstances of the global economy. Turkey grew 4.4 percent in the second quarter of the year, which was higher than expected.

Turkey: Central bank keeps rates unchanged with “cautious” stance Balkans.com - 19.09.2013 Turkey’s central bank kept its three main interest rates unchanged on 17 September, as it seeks to find a way between holding up the level of the battered lira and keeping economic growth buoyant ahead of a series of crucial elections. The Central Bank of the Republic of Turkey (CBRT) kept the benchmark one-week repurchase rate at 4.5%. The overnight lending and borrowing rates, which mark the upper and lower ends of his interest-rate corridor, were kept at 7.75% and 3.5% respectively.

TECH TOPICS

WINBANK – ALL-IN-ONE PACKAGE

Such banking services are provided with a single goal, to always support customers, adding value to their time and supporting them in their everyday life and especially while they are conducting their business.

by Ms Frida KRIFCA1 Manager, Marketing and PR Department Tirana Bank

W

ith the rapid growth of technology and wide spread of internet use, consumers are now more than ever shifting their preference regarding the point of service from the traditional ‘brick and mortar’ branches to other alternative channels, mainly online banking. This shift is gaining more ground and is becoming a reality in Albania, a country in which the majority of population has now access to the internet. Alternative channels provide customers a full range of services, mostly the same as those offered through any traditional branch. For many reasons, such as convenience and/or control, usage of alternative channels such as online banking and mobile applications are expected to gradually become the main channel, customers will choose to perform their banking transactions.

Tirana Bank’s commitment to offer its customers the option of choosing from a series of alternative channels was further proven in 2012 when Tirana Bank Online, became part of the successful and awarded brand winbank and was renamed to winbank Web Banking. winbank is the electronic banking division of Piraeus Bank, responsible for bank’s 1

alternative channels, such as winbank, Web Banking, winbank Mobile Banking, winbank Phone Banking and winbank for Cards. winbank has been established as a leading and awardwinning innovator in the electronic banking market while it also keeps a very strong portfolio of services, compared to other banks worldwide. winbank platform allows customers to perform complete banking transactions, on a 24/7 basis, making their lives easier, and most importantly, access to winbank services is provided free of charge. winbank platform enjoys worldwide reputation and has been repeat-

Winbank provides a higher degree of convenience that enables customers accessing the bank at all times and places. Its platform gives customers access to almost any type of banking transaction at the click of a mouse and every other means of communication.

edly awarded with several prizes. Piraeus Bank’s mobile banking service was announced as “Best in Mobile Banking” in Europe for yet another year. Moreover, Piraeus Bank’s web banking service was acknowledged as the “Best Web Site Design” in Europe, the same applies for Piraeus Bank’s Cyprus. Web banking service was acknowledged as the “Best Integrated Consumer Bank Site” in Europe. Additionally, Piraeus Bank web banking service was acknowledged as the “Best Consumer Internet Bank” in Greece for yet another year; the same title was earned by Piraeus Bank Cyprus. for its web banking service in Cyprus.

As the e-banking marketplace has evolved so have the services, offered by winbank. The main areas in which winbank is constantly working on keeping its competitive advantage are: ease of access, convenience, enhanced functionality and, of course, security. winbank provides a higher degree of convenience that enables customers accessing the bank at all times and places. Its platform gives customers access to almost any type of banking transaction at the click of a mouse and every other means of communication. Indeed, the internet use as a new alternative channel for distributing financial services has become a competitive necessity, instead of just a way to achieve competitive advantage with the advent of globalization and tough competition. This

Ms. Frida KRIFCA has held this position up to September 30, 2013 and after that date she left for another position outside, Tirana Bank.

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winbank serices: • WINBANK WEB BANKING - Banking via Personal Computer (PC/Mac), using ANY browser • WINBANK MOBILE BANKING – The client performs his/her banking transactions via the Mobile Phone • WINBANK MOBILE APPS – Download on your iPhone or Android mobile phone winbank Mobile Albania App and perform banking transactions while on move! If you are a winbank Web Banking subscriber you do not need to register again; simply use the same security codes (User ID & PIN) to access winbank Mobile App. • WINBANK PHONE BANKING - Banking via Telephone round-the-clock!

The client calls, on a 24/7 basis, and interacts with a live agent to perform all of your transactions.

• WINBANK for CARDS – the client “connects” to his/her credit cards and views all available details related to them, any time of the day WITHOUT the need for a registration.

• WINBANK CREDIT CARD ALERTS – the client stays informed instantly and constantly while preventing credit card fraud, by activating security alerts. This service notifies the client via SMS and/or E-mail about his/ her credit card transactions, card renewal/replacement, change of card limit, monthly statement, etc. is why winbank, apart from the ease of access ability of users to access information and services by all means of communication, is constantly maintaining its high quality service, with respect of technology use by offering various services and applications. winbank, along with a wide network of Tirana Bank ATMs, gives the opportunity for all its customers to conduct all their banking services at any time, without having to wait in line or visit one of the branches of Tirana Bank. In addition, with winbank applications, such as ATM/Branch locator service, customers can locate the nearest ATM/Branch to them.

Privacy and security is an important dimension that may affect users’ intention to adopt e-based transaction systems. However, winbank has

its innovation and platform to overcome its customers concerns on security and privacy issues. Through its infrastructure, winbank provides secure and reliable financial transactions. Access to servers is controlled by special firewalls, which allow visiting customers’ access to particular services and deny access to systems and databases with classified bank information. Furthermore, from the beginning until the end of the connection (online session) with winbank web banking service, all information and personal data are being encrypted through encryption protocol.

Winbank’s platform functionality guarantees customers with secure transactions. If winbank Web Banking session is idle for seven minutes, the system automatically logs off. For en-

hanced security, winbank Web Banking requires an extra PIN, an additional mandatory code that must be present before executing Third Party Payments, remittances and other monetary transactions. Furthermore, for security reasons, two levels of authorizations can be implemented, as per customer request. Through winbank, it is possible for a customer to select the accounts which he or she does not want to have access via winbank Web, Mobile, App and Phone banking. winbank has all of the required data and software to execute secure transactions. Customers do not have to purchase additional software, store any data on their computer, backup any data or wait for software upgrades or new versions.

Quality designs, graphics and colors and the propensity to portray good image of the bank enhances efficient use of navigation. winbank provides an aesthetic design, which makes its platform visually attractive, enjoyable and user friendly. Proof of that is the fact that winbank design implementation has been awarded as the “Best Website Design” in Europe.

Service quality attributes in ebanking industry are important, since human-internet interaction is the main service delivery and communication channel. Offering high quality services to satisfy customers’ needs is another competitive advantage of winbank. It provides transactions within Tirana Bank accounts, Piraeus Bank Group accounts and most importantly to accounts of different local and international banks.

Services offered by winbank assist not only the individual but business customers, as well. The abovementioned services give an edge to business competitiveness. Electronic banking services are very important tools that can enhance customer experience. Time becomes more valuable in today’s society, saving client’s time by eliminating the need to visit one of the bank’s branches providing at the same time 24/7 access to their accounts and funds. Tirana Bank is committed to support and improve its electronic banking services and will continue to invest in providing new services and products to its valued customers. Banking services are provided with a single goal, to always support customers, adding value to their time and supporting them in their everyday life and especially while they are conducting their business.

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FINANCIAL AUDITORIUM

SECURITIZATION - A REVOLUTIONARY VEHICLE FOR MANAGING AND TRANSFERRING RISK

Securitization can be used by a financial institution to manage a variety of risks, like: interest rate risks, prepayment risk, credit risk and liquidity risk. Also, securitization could be seen as a strategic weapon for market penetration and diversification.

B

anking used to be a simple business. A bank borrowed money and loaned to others at a spread over cost. The borrowing and lending activities were reflected on the bank’s balance sheet. But now banks are as likely to do this business “off-balance sheet” as “on.” When a bank sells a loan commitment, for instance, it needs to provide funding only if the customer exercises the commitment.

If a “takedown” occurs, the loan appears on the balance sheet.

But the banks can avoid funding, even at this stage, by selling the loan to another bank (a loan sale) or by securitizing it. Securitization involves combining the loan with others of similar characteristics, creating credit-enhanced claims against the cash flow of this portfolio, and then selling these claims to investors.

The practice of loan sales by bank is quite old; it predates 1880. Securitization, by contrast, is more recent,

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dating back to 1970 when the Government National Mortgage Association developed the passed-through, a mortgage backed security. Banks are relative newcomers to the market.

Although in 1977 Bank of America issued the first private –sector passthrough, which was backed by mortgages, the securitizing of various types of bank loans did not begin until 1985.

Securitization can be used by a financial institution to manage a variety of risks, like: interest rate risks, prepayment risk, credit risk and liquidity risk. Also, securitization could be seen as a strategic weapon for market penetration and diversification.

Different Types of Securitization Contracts Loan-backed securities are calloateralized by residental, multifamily, and commercial mortgage loans, aouto-

mobile loans, credit card receviables, computer and truck leases, loans for mobile homes, and various finance receivables. There are three basic types of asset-backed securities, each of which evolves from the secondary mortgage market.

1. Pass – Throughs The fist type of loan- backed security is a pass-through, which represents direct ownership in a portfolio of mortgage loans that share similar maturity, interest rate, and quality characteristics. The portfolio is placed in a grantor trust and certificates of ownership are sold directly to investors; each certificate represents a claim against the entire loan portfolio. The loan originator (say a bank or a thrift) services the portfolio and collects interest and principal on the loans, although sometimes origination and servicing are provided by different institutions.

Borrowers

Principal Interest on Loans

Grantor Trust Originator/ Servicer

Principal and Interest Minus Servicing Fee

Insurance Fee Paid to Credit Enhancer

The servicer deducts a fee from the collected proceeds and passes the difference along to the investors; hence the name “pass-through”. Ownership of the loans (mortgages) resets with the certificate holders. Thus, pass-throughs do not appear on the originator’s balance sheet. There are two structures used with passthrughs; static pool and dynamic pool. Each is disscused below.

2. Asset-Backed Bonds The second type of ABS is asset-backet bonds (ABB). Like the static passthrough, the ABB is collateralized by a portfolio of loans.

The main difference is that in the case of ABB , the originator sells the assets to a wholly owned subsidiary created for the sole purpose of sevuritizing the assets. Consequently, the assets remain on the originator’s (consolidated) balance sheet. That is, instead of selling the assets to a trust that subsequently sells claims against the assets to incestitors, the subsidiary itself issues claims (general obligaton notes) to investors.

These claims are secured solely by the assets of the subsidiary and any credit enhancement obtained for the

Collection Account

Principal and Interest

Investors who hold Certicicates

Payments to Make up Shortfalls Created by Delinquencies and Defaults Credit Enhancer

purpose. Figure 9.3 depicts the cashflow structure of an ABB. As the figure indicates, the fincance company, which is a wholly-owned subsidiary of the originator, issues certificates/ notes to investors, usually through an investment bank that underwrites the issue. The revenues collected by the finance company from principal and interest payments are transferred to a trustee. These revenues are added to cash contributions made by a credit enhancer and then disbursements are made to investors by a trustee.

3. Pay-Throughs The third type of ABS is pay-through bond. This security combines features of the pass-through and the ABB. Its similarity to the ABB is that the paythrough appears on the originator’s balance sheet as debt. Its similarity to the pass-through is that the cash flows from the pool of assets used as collateral are dedicated to servicing the bonds.

4. Securitization Inniovation New types of securitization contracts continue to proliferate for three main reasons. First, lower interest rates have made the prepayment options

in mortgages more valuable to investors, who have become more sophisticated in dealing with prepayment risk. Thus, new securities that facilitate the management of prepayment risk have been created.

Second, investors who are relatively uninformed about the probability distributions of future payoffs on various securities will find themselves at a disadvantage in dealing with investors who are better informed. The uninformed will therefore demand relatively informationinsensitive securities by partitioning the cash flows of a composite, information-sensitive security in such a way that the senior most security is a nearly riskless bond that would appeal to uninformed investors.

Third, inovations is securitization and cash flow stripping have also facilitated the creation of the securities that appeal to informed investors.

A given security with some private information content can always be stripped into two securities, one of which is more information sensitive (has a greater private-information content) than the original security. prepared by AAB staff

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