Understanding Implementation of Basel II and III in Albania: Obstacles and Solutions

Abstract

Banking Sector in Albania is suffering from high NPL levels, compared with historic levels of NPL in Albania, or with regional nations who have comparable economics. The 2008 crises in USA taught us the impact that the real economy can have from a crisis in Banking Sector. Thus the implementation of Basel III framework and its Capital Requirement ratios becomes crucially important for the stability of the Financial sector and stable growth of the economy. This paper firstly examines the state of Basel II implementation in Albania by the banking sector. The banking sector is primarily invested in government bonds and treasuries and lending to businesses and individuals but the high levels of NPL from both bankrupted businesses and individual poses a credit risks and wider market risks. Albanian Government has committed to speed up implementation of Basel II and Basel III on capital ratios. But questions remain: What’s the status of the implementation? Can the economy absorb the costs of implementing or not implementing Basel III? Secondly we research the additional costs associated with implementation of the banking sector. Because of the expansionary policy of the Bank of Albania the lending rates have fallen but not as fast as expected. Credit growth has been mostly stagnant posing a risk to the growth of the economy. For this study we use time series on Financial Institutions in Albania from the Bank of Albania on capital ratios as well as the policies and requirements set. We find that Basel II criteria have not been met and more can be done to prepare the implementation of Basel III.