Euro "dominates" Albanian banks - De-euroization package, little effect on boosting the local currency
Banks continue to have a large presence of foreign currencies, mainly euros, in their loans and deposits. According to the latest report of the Bank of Albania on the progress of the de-euroization process indicators, the sector has seen a very slight improvement in terms of reducing the use of foreign currency in the financial system during the second half of last year.
In terms of borrowing, the share of foreign currency loans in relation to total loans has continued to shrink, while foreign currency loans not hedged by the exchange rate have also declined. Foreign currency loans account for 44.2% of total loans in the banking sector, about 1.1 percentage points less than a year ago. Foreign currency loans themselves have continued to grow, but this change in the ratio has come as a result of the faster growth of loans in lek.
Unhedged loans, i.e. those where the borrower's income is in a currency other than the currency of the loan, have the highest risk profile. At the end of the year, these loans accounted for 20.72% of foreign currency loans, down 9.1%.
On the other hand, the increase in deposits in lek has also given a "green light" towards reducing euroization, but the current level of foreign currency deposits to total deposits remains far from the targeted threshold of 30%.
Since 2018, the Bank of Albania has been implementing a package of measures to promote the local currency. This package initially includes raising borrowers' awareness of exchange rate risk. For example, in cases where a client applies for a loan in a currency other than the currency in which he has his income, banks must propose to him an alternative loan in the same currency as his income, as well as provide him with a concrete example of how the loan installment changes.
Second, the Bank of Albania has increased the minimum regulatory requirement for liquid foreign currency assets. This means that the Bank of Albania requires banks to hold more cash or highly secure foreign currency assets, so that they are always able to meet customer withdrawal requests.
A third measure is the differentiation of the reserve requirement rate for foreign currency liabilities and those with a maturity in Lek, which means that the Bank of Albania sets a higher reserve rate for foreign currency deposits than for Lek deposits, i.e. the percentage of deposits that banks must keep blocked at the Bank of Albania.
Despite these measures, the level of euroization in the financial system remains high, especially in the structure of deposits and lending.
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