ALBANIA Assistance to the Bank of Albania on selected Corporate Governance Issues Technical Assistance Project of Reference BACKGROUND Since the global financial crisis, it has become clear that weaknesses in corporate governance, including inadequate board oversight over risk management and internal control functions, have contributed to excessive and imprudent risk-taking in the banking sector, which has led in turn to systemic problems. This is particularly critical for Albania, as the Albanian financial system is currently centred on banks and the equity market is remarkably underdeveloped. At the end of 2013, the ratio of financial system assets to GDP reached 99.1%, with the banking sector owning 91.4% of financial system assets (90.6% of GDP), while stock market capitalization is the lowest in South East Europe (SEE). Although the global financial crisis did not affect the Albanian economy as strongly as its SEE neighbours, there are a number of weaknesses in the way banks are regulated, managed and supervised. An analysis undertaken by the EBRD in 2011 on corporate governance of the banking framework in Albania highlighted a number of shortcomings, highlighting especially the unclear role of independent directors, lack of objectivity with potential for conflicts of interests at the board, unclear roles of board committees, uncertain internal audit practices and limited non-financial disclosure. Following the EBRD review, the legal framework was revised and several recommendations were implemented, especially through Regulation no. 63 dated 14 November 2012 Core “On Management Principles of Banks and Branches of Foreign Banks and Criteria on the Approval of their Administrators”. However, some issues remain to be addressed, especially in the area of board composition and functioning, internal control and disclosure. On 27 June 2014, Albania received the Candidate” status and the country is “EU approximating its legislation with the Acquis. In this context, the Bank of Albania is very interested in calibrating the banking framework and supervisory practices with those of the EU. The EU has recently introduced a new legal framework to ensure that credit institutions and banking supervisors strengthen their supervision on a number of issues, including the suitability of board members, practices and the soundness of the internal control framework of credit institutions and disclosure. In particular, Directive 2013/36/EU and Regulation No 575/2013 (so-called CRD IV package) transpose the new global standards on bank capital (the so-called Basel III Agreement) into EU law. The CRD IV also contains new corporate
ALBANIA Assistance to the Bank of Albania on selected Corporate Governance Issues Technical Assistance Project of Reference BACKGROUND Since the global financial crisis, it has become clear that weaknesses in corporate governance, including inadequate board oversight over risk management and internal control functions, have contributed to excessive and imprudent risk-taking in the banking sector, which has led in turn to systemic problems. This is particularly critical for Albania, as the Albanian financial system is currently centred on banks and the equity market is remarkably underdeveloped. At the end of 2013, the ratio of financial system assets to GDP reached 99.1%, with the banking sector owning 91.4% of financial system assets (90.6% of GDP), while stock market capitalization is the lowest in South East Europe (SEE). Although the global financial crisis did not affect the Albanian economy as strongly as its SEE neighbours, there are a number of weaknesses in the way banks are regulated, managed and supervised. An analysis undertaken by the EBRD in 2011 on corporate governance of the banking framework in Albania highlighted a number of shortcomings, highlighting especially the unclear role of independent directors, lack of objectivity with potential for conflicts of interests at the board, unclear roles of board committees, uncertain internal audit practices and limited non-financial disclosure. Following the EBRD review, the legal framework was revised and several recommendations were implemented, especially through Regulation no. 63 dated 14 November 2012 “On Core Management Principles of Banks and Branches of Foreign Banks and Criteria on the Approval of their Administrators”. However, some issues remain to be addressed, especially in the area of board composition and functioning, internal control and disclosure. On 27 June 2014, Albania received the “EU Candidate” status and the country is approximating its legislation with the Acquis. In this context, the Bank of Albania is very interested in calibrating the banking framework and supervisory practices with those of the EU. The EU has recently introduced a new legal framework to ensure that credit institutions and banking supervisors strengthen their supervision on a number of issues, including the suitability of board members, practices and the soundness of the internal control framework of credit institutions and disclosure. In particular, Directive 2013/36/EU and Regulation No 575/2013 (so-called CRD IV package) transpose the new global standards on bank capital (the so-called Basel III Agreement) into EU law. The CRD IV also contains new corporate
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