Impact on financial stability  Like other central banks, the Bank of Algeria faced the need to strengthen the surveillance of systemic risk, particularly in relation to the volatility of hydrocarbon prices in international markets and the interconnectedness of financial institutions within the banking sector. To address these concerns, banking legislation, as amended in 2010, has extended the central bank’s mandate to include the objective of financial stability. With this amendment, the financial stability mandate becomes of equal importance to the price stability mandate. In practice, it is worth noting that the contribution of monetary policy to monetary and financial stability in Algeria is crucial in view of the dominance of the banking sector in the financial system and its potentially important role in the development of financial intermediation. This contribution is of particular importance in the context of persistent excess liquidity in the money market since 2002. To strengthen the operational framework of financial stability, and following the introduction, in 2010, of new accounting rules of international standard, risk assessment rules with regard to new financial products and the introduction, in 2011, of new regulations regarding liquidity risk identification, measurement, management and control, the Council of Money and Credit (the monetary authority) promulgated in 2014 a new prudential framework to ensure conformity of the prudential rules to the new Basle norms and standards.
Within this new regulatory framework, the minimum tier one capital adequacy ratio is set at 9.5 percent, exceeding the minimum ratio recommended by the Basle Committee, and the adequacy ratio, based on regulatory equity, is set at 12 percent. An assessment of financial soundness indicators at end 2015 shows that the Algerian banking sector soundness is relatively well preserved despite the boom phase of the credit cycle in the context of the ongoing external shock. Capital adequacy ratios remained comfortable in 2015, standing at 14.5 percent in relation to tier one capital and 17 percent in relation to regulatory equity. The quality of banks’ capital, essentially comprising tier one capital, and the substantial increase in the required minimum  2  BIS central bankers’ speeches  capital for banks and financial institutions, implemented in December 2009, significantly contributed to maintaining financial soundness indicators at a comfortable level. By end 2015, the banking system remained well capitalised and profitable. Return on equity and on assets strengthened to 24.6 percent and 2.2 percent respectively, in a situation of still comfortable liquidity. However, the acuity of the impact of the external shock in terms of banking liquidity contraction, following its relative stability in 2014, is such that some banks no longer met the requirements in terms of short term liquidity ratio in 2015.