Although drafting recovery plans is the task of individual banks, the Bank of Albania, in its capacity as the Supervisory Authority, plays an essential role in assessing the quality and reliability of these plans. During 2018, banks have prepared recovery plans based on a new bylaw adopted by the Bank of Albania that sets out their detailed content. The opening panel of this Conference will present concretely our assessment of these plans. In brief, we may say that our challenges remain the same as those faced by other supervisory authorities, whether in European or regional countries. In sound financial situations, such recovery planning allows the Bank of Albania to deeply understand the structure and activity of the bank, thus supporting our supervisory process to identify areas for improvement, as well as bank’s self-diagnosis in these areas. In stressed financial situations, the recovery plan is the main document the bank has to correct its difficulties and, as such, it must be efficient, applicable and comprehensive. The second step of the new crisis management framework is related with the early intervention in the bank. This step is activated if, after the implementation of the recovery plans, the bank’s actions fail to improve the situation. The Bank of Albania, in the capacity of the Supervisory Authority, undertakes several concrete early intervention measures in the bank, before the bank shows signs of insolvency. Currently, we are in the process of drafting bylaws for the early intervention implementation in accordance with the new legal requirements.
In this context, the risk of disruption or a financial crisis matters because of the potential reduction of necessary financial services and economic activity in the future. As I discussed in a talk at this conference a few years ago, a short-term discussion of the balance between firm resilience and the provision of financial services may be reframed over a longer horizon as a dynamic trade-off between the provision of financial services today and in the future.5 This risk/return framework extends that perspective if one cares about the volatility of those financial services across different states of the world and over time. The idea of multiple objectives suggests a policy trade-off with an efficient frontier. In this framework, an efficient financial sector regime can only realize more intermediation if it accepts a higher risk of financial instability and less intermediation in the future. A second premise is that the official sector can impact outcomes relative to this frontier through a combination of rules, regulation, and supervisory policies. For example, a reduction in loan documentation requirements, risk management reviews and supervisory oversight might allow increased lending in the short-run, but potentially lowers loan quality and increases risk over time. A particular set and calibration of policies is efficient if the only way to increase financial intermediation is to accept higher risk of disruption or crisis. Equivalently, an efficient outcome is one where the only way to reduce risk is to accept less intermediation.