Bank of Albania targets high euroisation by increasing product costs
Bank of Albania seems determined to increase product costs in foreign currency in the banking system, with the aim to curb the rising trend of euroisation in the country, especially on the side of deposits.
In its financial stability statement, the Central Bank openly states that it is estimating the need for concrete actions that aim to keep a positive difference between interest rates in Albanian Lek and interest rates of major currencies, as well as to strengthen borrowers’ awareness of risks associated with unjustified borrowing in foreign currency.
The Central Bank is concerned about the increased weight of foreign currency obligations in the banking system, mainly due to growth of deposits in euro.
Because the risk of liquidity in euro is higher, the Bank of Albania announced that it will increase regulatory demand for liquidity, which will be expressed in a higher ratio between liquid assets and short-term liabilities in the European Union currency.
The growth of foreign currency deposits can revamp lending in foreign currency once again, after a gradual decline reported in recent years.
This would indirectly increase the risk of exchange rate, given that the majority of borrowers have their income in ALL.
This process can also turn into a vicious circle, through the process of money creation, where foreign currency loans would result in the expansion of foreign currency deposits.
In the case of such a scenario, the Bank of Albania expressed concern that the sensitivity of the banking sector and economic agents to exchange rate fluctuations would impair the ability of the central bank’s monetary policy to effectively use transmission channels.
This concern is the basis of the strategy to reduce euroisation, made official this week with the signing of a Memorandum of Understanding between the Bank of Albania, Ministry of Finance and the Financial Supervisory Authority.
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