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					                                                   Supervision Annual Report        2011
e. on-Site SuperviSion

  1. on-Site eXAMinAtionS

on-site supervision is the main responsibility of portfolio Management office,
which is responsible for evaluating the risk profile of licensed institutions, in
co-operation with other risk-profiled sectors. the supervision of institutions
seeks to guarantee that they carry out their financial activity soundly and in
accordance	with	the	legal,	regulatory	and	supervisory	framework	requirements.	
the work is organized by combining the examination needs based on the
supervisory cycle set by the supervision operational policy and the importance
of concerns identified in individual banks with the efficient use of available
human resources.

  1.1 on-Site eXAMinAtion oF BAnKinG inStitutionS

the main purpose of on-site examinations carried out during 2011 was to
make a full assessment of banks’ risk profile. in addition, examinations were
initiated as a result of the emergence of specific phenomena in the licensed
institutions. During 2011, the Bank of Albania carried out 6 full-scope
examinations and 2 partial examinations of banking institutions.

Concerns related to adherence to regulations. the banking system has
generally operated in accordance with the legal, regulatory and supervisory
framework	 requirements.	 However,	 several	 weaknesses	 were	 identified	 in	
terms	of	credit	risk	management	practices,	exposure	to	large	risks,	liquidity	
risk, customer transparency, etc.

More specifically, several cases were identified in which the following
requirements	were	not	observed:

  •	   Regulation	 “On	 the	 Management	 of	 Risk	 Arising	 from	 Banks’	 Large	
       Exposures”.	An	excess	of	the	20%	maximum	allowed	exposure	of	the	
       regulatory capital to a beneficiary, in the form of exposure through
       lending or investment of funds in the form of deposits, was identified in
       on-site	examinations.	In	addition,	the	10%	threshold	of	the	regulatory	
       capital for persons related to the bank and the maximum amount of
       loans approved to these persons were not observed in a few cases.

Bank of Albania                                                                51
2011         Supervision Annual Report

                 on-site examinations also identified that, in a few cases, banks did not
                 respect the responsible authority for the approval of loans in favour of
                 persons related to the bank.

            •	   Regulation	 “On	 Credit	 Risk	 Management”.	 On-site	 examinations	
                 identified	 incorrect	 rating	 of	 loans	 and,	 consequently,	 insufficiency	
                 of	 loan	 loss	 provisions.	 Frequently,	 the	 level	 of	 additional	 loan	 loss	
                 provisions	required	during	the	examination	has	impacted	banks’	net	
                 profit	and	another	key	prudential	ratio,	the	capital	adequacy	ratio.	In	
                 addition to the level of loan loss provisions, banks were recommended
                 to take measures to improve lending policies and procedures,
                 strengthen the analytical capacities of the bank’s risk structure, and
                 improve the analysis of borrower’s financial position during the loan
                 approval process.

            •	   Regulation	“On	Capital	Adequacy	Ratio”.	The	identified	cases	related	
                 to the correct rating of asset items and their weighting in accordance
                 with the relevant risk category.

            •	   Regulation	“On	Basic	Management	Principles	of	Banks	and	Branches	
                 of Foreign Banks and Criteria for the Approval of their Administrators”.
                 the identified cases related to the necessary documentation submitted
                 to the Bank of Albania for the preliminary approval of administrators.

            •	   Regulation	 “On	 Liquidity	 Risk	 Management”.	 The	 identified	 cases	
                 related	to	the	observance	of	the	minimum	liquid	asset	ratio.	In	addition	
                 to the regulatory threshold, non-compliance was also identified in
                 banks’	internal	policies	and	procedures	for	liquidity	risk	management.	
                 In	accordance	with	the	Regulation	“On	Liquidity	Risk	Management”,	
                 banks	were	required	to	make	periodic	stress	test	analyses,	in	order	to	
                 identify	 and	 measure	 the	 bank’s	 exposure	 to	 liquidity	 risk	 in	 normal	
                 and extraordinary situations.

            •	   Regulation	“On	the	Use	of	Information	Technology	and	Communication	
                 in institutions licensed by the Bank of Albania”. the identified cases
                 related to the improvement of the information technology and
                 communication risk assessment, including the classification of systems
                 and applications used and the identification of deficiencies and
                 possible threats, improvement of business continuity plans based on
                 the size and complexity of the institution, improvement of the archiving
                 procedure	of	the	back-up	copy	related	to	its	frequency	and	location,	
                 improvement of bank’s internal regulatory framework, etc.

            •	   Regulation	“On	the	Transparency	of	Banking	and	Financial	Products	
                 and Services” related to the reporting to the Bank of Albania and the
                 publication, in the bank’s premises, of the effective interest rate and
                 the accuracy of its calculation, as well as the change in the terms and
                 conditions of the contracts and/or provision of products and services.
            •	   Regulation	“On	Minimum	Standards	for	Operational	Risk	Management”	

       52                                                                       Bank of Albania
                                                    Supervision Annual Report        2011
       related to certain aspects of operational risk management, such as the
       identification, monitoring and reporting to the responsible structures,
       collection of data on operating losses and conduct of an annual self-
       assessment campaign.

  •	   Regulation	 “On	 Prevention	 of	 Money	 Laundering”	 related	 to	 the	
       classification of transactions by risk and application of due diligence.

  •	   Regulation	“On	Minimum	Requirements	for	Information	Disclosure	by	
       Banks and Branches of Foreign Banks”.

  •	   Regulation	 “On	 the	 Functioning	 of	 Credit	 Registry	 at	 the	 Bank	 of	
       Albania” related to the accurate entry of data by files.

  •	   Regulation	“On	Foreign	Exchange	Activity”	related	to	the	accompanying	
       documentation of transfers.

  1.2 on-Site eXAMinAtion oF non-BAnK inStitutionS

During 2011, the Bank of Albania examined 5 non-bank financial institutions,
of which 3 conduct financial leasing, 1 conducts lending activity and 1
provides payment and money transfer services.

the examined financial leasing institutions were selected based on banks’
examination	 plan,	 pursuant	 to	 the	 regulatory	 requirements	 of	 consolidated	
supervision. While the examination of the lending institution was based on the
level of risk and its organizational and decision-making developments.

Examinations	mainly	focused	on	the	assessment	of	quality	in	financial	leasing	
and credit risk management processes. particular focus was paid to the
adequacy	of	internal	structures	for	supporting	the	activity	and	the	assessment	
of institutions’ financial performance and stability. other important areas
included compliance with the regulatory framework related to the observance
of	 prudential	 requirements,	 public	 transparency,	 prevention	 of	 money	
laundering, information and communication technology and operational risk.

examinations identified the following main concerns:

  •	   Improvement	of	the	lending	process.	A	number	of	recommendations	
       were made to improve the analyses of borrowers’ solvency, the accurate
       rating of the loan portfolio and the establishment of provisioning in
       accordance with the regulation “on the Management of risk in the
       Activity of non-Bank Financial institutions”.

  •	   Improvement	 of	 the	 internal	 regulatory	 framework.	 A	 number	 of	
       recommendations were made to review and improve the internal
       regulatory framework in line with the internal structural developments
       of non-bank institutions and in accordance with all the effective

Bank of Albania                                                                 53
2011         Supervision Annual Report

                 regulatory	 requirements.	 Improvements	 were	 mainly	 required	 to	 be	
                 made in terms of establishing the criteria for the identification of
                 related parties and procedures for monitoring credit and improvement
                 of borrower’s financial statements. non-bank institutions were also
                 recommended to formulate procedures for public transparency related
                 to customer complaints.

            •	   Non-compliance	with	the	prudential	and	regulatory	standards	related	
                 to large exposures to non-resident investments and excesses of
                 exposure	to	credit	risk.	Non-bank	institutions	were	required	to	make	a	
                 plan to bring all the violated prudential standards back to within the
                 thresholds, in order to ensure a sound functioning of the activity.

            •	   Non-compliance	 with	 the	 requirements	 of	 the	 Regulation	 “On	 the	
                 Management of risk in the Activity of non-Bank Financial institutions”
                 related to the violation of the limit of open foreign currency position.
                 For	the	evidenced	cases,	measures	were	required	in	order	to	bring	the	
                 exposure back to the limit.

            •	   Non-reporting	to	the	Bank	of	Albania	in	accordance	with	the	Law	“On	
                 Accounting and Financial Statements” and international accounting

            •	   Incomplete	public	transparency	related	to	the	completion	of	contracts	
                 with the nei (nominal effective interest rate), inclusion of the credit
                 settlement plan as part of the leasing/credit contract, incomplete
                 information related to the risk of borrowing in foreign currency, the
                 methodology of interest rate calculation and announcement for their
                 change, publication of interest rates on loans and commissions on
                 products and services being offered.

            •	   Incomplete	compliance	with	the	regulatory	requirements	for	the	prevention	
                 of money laundering. non-bank institutions need to create the customers’
                 economic profile and categorize them by risk. they also need to improve
                 their policies further pursuant to the instruction “Knowing the client”,
                 and their practical implementation; designate a person responsible for
                 the prevention of money laundering on an administrators’ level, and
                 formulate annual training plans and enhance their efficiency.

            •	   Information	 and	 communication	 technology	 and	 operational	 risk.	
                 examinations identified concerns related to the auditing of non-bank
                 institutions’ iCt from structures independent from those involved in
                 the operational processes, the need to review the users’ profiles and
                 divide the duties according to the processes, and develop a strategy
                 about the support that the information technology will provide in the
                 future. Concerning operational risk, necessary structures need to be
                 created to manage this type of risk and relevant procedures on how to
                 address this risk need to be developed.

       54                                                                 Bank of Albania
                                                     Supervision Annual Report        2011
 1.3 on-Site eXAMinAtion oF tHe AlBAniAn SAvinGS AnD CreDit

there are two unions of Savings and Credit Associations operating in
Albania: the Albanian Savings and Credit union (ASCu) and Jehona union.
During 2011, the Bank of Albania examined the ASCu, which has the
largest	share	in	the	activity	of	savings	and	loan	associations	(about	98%	of	
total assets).

the examination identified some concerns mainly related to the development
stage of these institutions, the philosophy of their development and operation
(principles of volunteer ownership and management, principles of mutual
assistance rather than a desire to maximise profits etc.). Based on these
concerns, the Bank of Albania identified the needs for legal and regulatory
changes in order to ensure a more consolidated supervision of these entities
(comparable to that of banks, whose activity is very much similar). the Bank
of Albania has begun to work on formulating the relevant drafts.

  2. prevention oF MoneY lAunDerinG AnD

  2.1 eXAMinAtionS DurinG 2011

in addition to off-site surveillance, the Supervision Department has also carried
out on-site examinations on banks and non-bank financial institutions. During
2011, the Supervision Department examined 7 banks, 5 non-bank financial
institutions and 11 foreign exchange bureaus for the compliance with the
legal and regulatory framework, and transparency and prevention of money
laundering and financing of terrorism.

in addition, in order to verify the operational conditions of institutions applying
to carry out their activity in new premises or applying to be licensed by the
Bank of Albania pursuant to the provisions of Article 14, paragraph 7 of the
regulation “on licensing and Conduct of Activity of Banks and Branches of
Foreign Banks in the republic of Albania”, and Article 18, paragraph 1 of
the regulation “on Minimum technical and Security Conditions of premises
in which Banking and Financial Activity is Conducted”, the Bank of Albania
examined 30 foreign exchange bureaus during 2010.

  2.2 BAnKS AnD non-BAnK FinAnCiAl inStitutionS’ CoMpliAnCe
WitH tHe reGulAtorY FrAMeWorK For tHe prevention oF MoneY
lAunDerinG (pMl), trAnSpArenCY AnD SuperviSorY StAnDArDS

the banking system generally complied with the Bank of Albania’s regulatory
framework for the prevention of money laundering, transparency and
compliance with the supervisory standards. More specifically:

Bank of Albania                                                                  55
2011         Supervision Annual Report

            2.2.1 prevention of Money laundering

        With regard to the prevention of money laundering and fight against terrorism
        financing, the Bank of Albania’s examinations found that the institutions have
        taken preventive measures in view of:

            •	   Creating	adequate	structures	and	formulating	internal	policies	and	a	
                 complete regulatory framework, reflecting the law amendments and
                 the	Guideline	requirements;

            •	   Improving	banks’	electronic	systems	in	order	to	establish	a	functional	
                 system for due diligence in relation to high-risk clients;

            •	   Organizing	 and	 participating	 in	 different	 trainings	 and	 seminars,	 in	
                 order to introduce the bank employees to the risks facing this sector
                 in the area of money laundering and financing of terrorism and make
                 them aware of;

            •	   Significantly	 increasing	 the	 reporting	 of	 doubtful	 transactions,	 in	
                 terms	 of	 number	 and	 quality,	 hence	 reflecting	 higher	 accountability	
                 and improved disclosure, particularly from banks, in the fight against
                 financial crime;

            •	   Increasing	 the	 number	 of	 different	 typologies	 of	 reported	 cases,	
                 reflecting a deeper analysis, related to the identification of doubtful
                 cases	 and,	 consequently,	 higher	 accountability	 in	 the	 fight	 against	
                 financial crime.

       Despite the measures taken by the examined institutions, the Bank of
       Albania’s examinations identified some concerns which generally consisted
       in the insufficiency of the effective risk management systems, particularly
       for	 the	 categories	 of	 customers	 and	 transactions	 requiring	 due	 diligence;	
       concrete implementation of approved policies related to determining doubtful
       elements	and	admitting	customers;	frequency	and	focus	of	internal	controls	
       on the prevention of money laundering and financing of terrorism in relation
       to due diligence; customer identification through identification documents
       for amounts of no less than All 200.000 (for foreign exchange bureaus);
       indicators of abnormality, etc.

       In	 view	 of	 increasing	 the	 number	 and	 enhancing	 the	 quality	 of	 reporting	
       of doubtful activities, during 2011, the Bank of Albania engaged in close
       cooperation with the General Directorate for the prevention of Money
       laundering. this cooperation consisted in the conduct of joint examinations,
       which focused on the categorization, identification of doubtful transactions
       and	activities,	and	more	frequent	trainings	of	these	entities,	in	order	to	raise	the	
       staff’s awareness and professionalism and further improve the identification of
       doubtful activities.

       56                                                                    Bank of Albania
                                                             Supervision Annual Report           2011
     2.2.2 public transparency

transparency and information disclosure were one of the areas under reform
in	2011,	both	in	terms	of	the	regulatory	framework	and	the	steps	required	to	
comply	with	the	new	requirements	arising	from	these	regulatory	amendments.	
the amendments to the Bank of Albania’s regulations on transparency,
approved in March 201115, were indispensable. they sought to create a more
adequate	business	climate	for	banks	and	higher	public	protection.	

However, while certain areas like deposits and accounts, disclosure and
customer complaints are generally considered to be less problematic, loan
contracts need further improvement. Although the contents of a loan contract
are	 generally	 in	 accordance	 with	 the	 regulatory	 requirements	 in	 relation	 to	
the included elements, the paragraph providing for the loan interest rate
remains problematic. A number of related complaints by bank customers
were submitted to the Bank of Albania in 2011. this concern has also been
the focus of the central bank’s examination of transparency and has pushed
the Bank of Albania to take measures in 2011, including in particular the
above-mentioned regulatory amendments.

in the meantime, banks were committed to complying with the new regulatory
requirements	in	the	area	of	transparency	and	adopted	their	internal	regulatory	
framework in line with these amendments.

in the framework of the measures taken by the Bank of Albania, all banks
operating in the republic of Albania have their official website that provides
information to the public.

in view of enhancing public transparency, in August 2011, the Bank of
Albania initiated the project for the standardization of banks’ reporting of
interest rates on loans and deposits, and commissions on banking products
and services. the testing process of reporting through the approved standard
forms of commissions and interest rates on loans and deposits began in the
third	 quarter	 of	 2011.	 This	 process	 precedes	 the	 final	 publication	 of	 this	
information on the Bank of Albania’s official website. the impact of this
project is expected to help and orient the consumers towards a better choice
that suits their financial conditions.

Concerning complaints, during 2011, the Supervision Department at the Bank
of Albania handled a number of complaints (about 30) about institutions
licensed and supervised by the Bank of Albania. in most cases, their solution
goes beyond the competences of the Bank of Albania as the bank-customer
relationship is regulated by written contracts and disputes arising from the
non-observance of their conditions are handled by the competent authority,
the Court. However, the raised concerns regarding institutions and customers
were handled duly.
     The latest amendments to the Bank of Albania Regulations No. 5 of 11.02.2009 “On consumer
     and mortgage lending to households” and No. 59 of 29.08.2008 “On the transparency for
     banking and financial products and services”.

Bank of Albania                                                                             57
2011         Supervision Annual Report

        non-bank financial institutions have made satisfactory efforts to comply with
        the	 Bank	 of	 Albania’s	 relevant	 regulatory	 requirements.	 However,	 on-site	
        examinations have identified concerns mainly related to the contents of loan
        contracts;	 customer	 complaints’	 management	 function	 and	 equipment	 of	
        customers with receipts (in the case of foreign exchange bureaus). the Bank
        of Albania has, thereupon, made the relevant recommendations.

            3. CooperAtion WitH otHer AutHoritieS

            3.1 CooperAtion WitH ForeiGn AutHoritieS

       Cooperation with foreign authorities continued during 2011. Based on
       cooperation agreements with several foreign supervisory authorities,
       information on certain foreign banks operating in Albania has been prepared.
       in addition, as a follow-up to the european Central Bank’s initiative for
       the establishment of colleges of supervisors for all major european cross-
       border financial institutions in the eu, the Bank of Albania participated in the
       colleges of supervisors hosted by the Bank of Greece during 2011. the Bank
       of Albania has also held meetings with the embassy of the united States of
       America and has participated in training activities organized by the Spanish
       Financial intelligence unit, General Directorate for the prevention of Money
       laundering (GDpMl) and Albanian General prosecutor’s office.

            3.2 CooperAtion WitH otHer loCAl AutHoritieS

       the Bank of Albania cooperated closely with the GDpMl during 2011.
       This	 cooperation	 did	 not	 only	 limit	 to	 the	 quarterly	 periodic	 reporting	
       to the GDpMl on the implementation of the strategic document for the
       investigation	of	financial	crime,	but	it	has	also	included	a	frequent	exchange	
       of correspondence throughout the year between the Bank of Albania and the
       GDpMl. Worth noting here is the increase and efficiency of:

            •	   Joint	examinations	and	activities	in	view	of	enhancing	the	supervisory	
                 professional capacities and exchange of experience;

            •	   Trainings	of	entities	in	view	of	improving	the	operation	of	their	relevant	
                 activities	and	their	compliance	with	the	legal	requirements;

            •	   Implementation	of	documents	related	to	the	strategy	of	fight	against	
                 organized crime, trafficking, terrorism etc.

       During 2011, the Bank of Albania and the GDpMl conducted 10 joint examinations
       and 3 rounds of joint trainings in tirana, vlora, Shkodra, Durrës, etc.

       on the other hand, there was an efficient cooperation with different institutions
       monitoring specific activities of the financial market. the Bank of Albania

       58                                                                  Bank of Albania
                                                Supervision Annual Report        2011
has exchanged information and has carried out joint examinations with the
Albanian Financial Supervision Authority in insurance companies, in two
banks and one non-bank institution. the Bank of Albania has also cooperated
with the Albanian Competition Authority, mostly related to discussions and
exchange of correspondence on proposals and studies about the cost of
products and services provided by banks, which are addressed in the reports
of the Competition Authority.

Bank of Albania                                                             59

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