Tackling high euroization: BoA measures will increase costs for transactions in euro currency

The Bank of Albania approved last week the first measures within the platform aimed at lowering the euroization of the Albanian financial system.

The first direct measure was the increase of the required reserve in foreign currency and its decrease in Albanian Lek.

The mandatory reserve is the percentage of deposits that each bank has to keep unused in an account at the central bank.

Of the 10% that is currently, for euro deposits this threshold will increase to 12.5%.

Holding higher deposits will bring more costs to banks, also considering the negative interest rates that apply to the mandatory reserve in euros.

Currently, this rate is -0.4%. This means that banks have to pay 0.4% interest per annum for mandatory reserve funds.

This will increase costs for banks from euro deposits, making them, theoretically less interested, to increase deposits in the European currency.

Specifically, by the end of 2017, banks had about 3.7 billion euros in deposits.

Of these, approximately EUR 370 million has to be deposited into the mandatory reserve.

By regulation, the amount of blocked deposits increases to over EUR 460 million, for which an annual interest rate of 0.4% will be paid.

In parallel, the required reserve will decrease for the lek, to 7.5% of total deposits.

This means that banks will require less mandatory funds in lek to make them more interested in raising deposits in the national currency.

To say the truth, interest rates on euro deposits now are at very low levels, but, however, such a move could make banks lower them further, perhaps even refuse to accept demand deposits or current accounts in euros.

Another move would be to increase the margins for lending in euro, in order to compensate for additional costs from the Bank of Albania measures.

Even this move is in line with the target of the Central Bank, which is trying to curb euroization in the balance sheets of banks, both from the assets side and from that of liabilities.

On the other hand, the reduction of the mandatory ALL reserve in theory will have the opposite effect: banks may be encouraged to lower intermediation margins in the national currency, either by increasing deposit interest rates or by lowering loan interest rates.

SCAN

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