Banks "fill" crisis reserve. Reaches BoA's 20.2% target. How affordable is the cost of meeting MREL?
Five out of 11 banks in our country have met the Bank of Albania's 20.2% target for holding a certain amount of capital and financial instruments, such as bonds, an amount that is used as a reserve to compensate for banks' losses, in case the latter face financial crises or risk bankruptcy.
The report on the progress of the minimum requirement for regulatory capital instruments and liabilities, MREL, highlights that banks have exceeded this target in the first half of the year, reaching an average of 22.6% in reserves. This means that they have set aside enough cash and financial instruments to withstand potential crises.
In Albania, 5 banks are considered critical to financial stability, as they control around 75% of total banking assets. As a result, only these banks are required to meet this target, as a financial problem in them could cause the collapse of the entire system.
In 2027, banks are expected to have a buffer equal to 24.9% of their risk-weighted exposures, which refer to the riskiness of a bank's activities. The higher the risk, the more buffers a bank must hold. This is the ultimate target that banks must achieve to meet the MREL requirement by 2027, ensuring that they have sufficient financial buffers to manage crises effectively.
Has the increase in interest rates affected the cost of financing this reserve by banks?
According to an analysis by the Bank of Albania, the cost of meeting the MREL appears affordable for banks, reaching 5.1% of net interest income in 2027. For all banks, it is estimated that the cost of financing existing liabilities accepted can be fully absorbed in the banks' net financial result, without significantly affecting their profitability.
Overall, it is estimated that the cost of debt service for MREL purposes will continue to increase for all banks, but remains limited in relative terms of profitability indicators. Developments in the banking sector during the period, in particular the continued strengthening of the capital position through the profit that banks have made during the previous year, reduce the additional need for MREL financing and constitute the main mitigating factor of the financing cost. In any case, the banking sector continues to report satisfactory values of net interest income and profitability indicators, even in the most severe scenarios, the Bank of Albania states in its analysis.
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