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The capitalization of the banking sector near the highest historical level*

The capital adequacy ratio of the banking sector increased significantly in the second quarter of the year.

According to the Bank of Albania, this ratio increased to 19%, from 17.9% in the first quarter and the ninth period of the previous year. The capitalization of banks is very close to the highest historical level, which was recorded at the end of the first quarter of 2020. The capital adequacy ratio measures the value of the banking sector’s regulatory capital in relation to the value of assets weighted with the relevant risk coefficients. The value of the regulatory capital of the system increased further and reached about ALL 181.6 billion, with an annual increase of 14.6%. Meanwhile, the value of assets weighted by risk coefficients reached the value of ALL 956 billion, with an annual increase of 8.2%.

The regulatory capital of the Albanian banking sector is mostly Tier 1 capital, which includes the highest quality capital instruments, mainly paid-in shareholder capital, share premiums, reserves, and retained earnings. The growth of the capital of the sector is again supported by the expansion of profits, although in the first half of this year they suffered a decrease compared to the same period last year, at least according to the reporting standards of the Bank of Albania (which are also the basis for the calculation of regulatory indicators). The data of the Bank of Albania show that the net profit of the banking sector decreased to the value of ALL 6.5 billion, with a decrease of 38% compared to the same period a year ago.

In addition to the positive financial results, some banks are also using subordinated debt instruments (corporate bonds) to increase their regulatory capital. The banking sector in Albania has historically had high levels of capitalization, due to the conservative regulatory line, followed by the Bank of Albania. The minimum required threshold is 12%, while for certain banks the demand has been even higher during the last decade. With the entry into force of the macroprudential capital allowances, the required minimum levels of capitalization have increased even more.

From the beginning of this year, the banks have also met the conservative addition of 1.5% in the capital adequacy ratio. This has brought the minimum capitalization at the system level to 13.5%. For the five largest banks, which are classified as systemically important banks, this ratio should be even higher, from 0.5% to 1.5%. The additional demands are being reflected in increasingly higher levels of sector capitalization in average values. However, bankers feel that such high levels of capital adequacy ratio are excessive and constitute a significant cost to banks, costs that must ultimately be paid by the public in the price of banking products and services.

Source: Bank of Albania

* Taken from ‘Revista Monitor’ https://www.monitor.al/kapitalizimi-i-sektorit-bankar-prane-nivelit-me-te-larte-historik/?utm_content=buffer7ac3c

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The article can be republished by other media only by citing “Revista Monitor” accompanied by the link to the original article.