IBNA Analysis/ Shadow banking in Albania

IBNA Analysis/ Shadow banking in Albania

The Past, the Present and the Future!

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

By Prof. Asoc. Dr. Elvin Meka*

Shadow banking has been one of the most quoted phrase within global financial system, among financial market practitioners and academia, especially after the outbreak of the last financial crisis of 2007-2008, given the particular role, the “shadow banking” system played in originating such crisis.

The term “shadow banking”, as iconized by Mr Paul McCulley, an US economist and former managing director of PIMCO, the well-known global investment management firm, includes financial services and credit to clients, be they businesses or individuals, by way of nontraditional and nonbank distribution channels, which are provided by entities which are not subject to regulatory oversight, as well as the financial activity of regulated intermediaries, which is not subject to oversight.

However, its definition is not exhaustive, as according to Global Finance: “Financial Stability Board (FSB) has a very wide definition of shadow banking, including all nonbank financial intermediation in aggregate”, and it “defines it as the Monitoring Universe of Non-Bank Financial Intermediation (MUNFI)”.

When it comes to Albania, shadow banking is not a new phenomenon, although the Albanian “shadow banking”, used to be quite rudimentary and had almost nothing to be compared with the standard definition of it.

Nevertheless, we know quite well the repercussions and effects of such activity, during the last decade of the last century. Now it belongs to the past and fortunately it had no interconnectedness with the formal commercial banking system.

As for the present, the situation is far more different and positive, in every aspect of discussion, be it regulatory, operational, the public and institutional approach towards risk and its respective management, etc.

On the other hand, what we can see being developed now is a rise of the informal lending and borrowing and a quiet substitution of bank deposits with other alternatives, coming from collective investments schemes, which seems to be a pragmatic choice for individuals, who are naturally looking for higher yields, in an environment with continuously low and ultra low interest rates.

What is country-specific for Albania is that the modern and standard shadow banking is being developed in total absence of any organized form of the securities market, which would enable regulators to collect more information about it, let alone the fact of enabling them to monitor, supervise, regulate and enforce it, thus mitigating and containing the systemic nature of risks, triggered and produced by such activity.

So, the future could bring numerous challenges, not only for regulators of the Albanian financial system, but also for commercial banks, given the challenging nature and the steady growth of shadow banking, in a time when commercial banks will be much less interested in long-term loans for regulatory reasons, the EU integration process for Albania, and the digital revolution and new technologies, especially big data and business intelligence, which are reshaping totally the financial landscape, globally.

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

That’s why the Albanian regulators of financial system and markets, must consider the famous quote of Desiderius Erasmus, the well-known Dutch humanist, that:

“Prevention is better than cure!!!”

* Editor–in-Chief “The Banker”