We addressed the first issue through increasing information sharing and facilitating the dialogue between the monetary policy and the financial stability and supervision of the Bank. Normally, the foresight of monetary policy is from the trough to the pick of the business cycle because it is mandated with smoothing the fluctuation in economy or prices. However, the duration of financial gaps and excesses might be very different and usually much longer. Therefore monetary policy by design has the potential to forget about financial stability; therefore we were potentially missing important information regarding the effects that decision making on monetary policy could have on the sustainability of agent’s budgets. That is why I believe was important to have guardians of financial stability in the monetary policy decision making process. With this reasoning we have brought the director of supervision and the director of financial stability in the monetary policy advisory committee. In this respect our monetary policy did not focus only in the discussion of macro effects but also in the discussion of the micro effects of decision making. This resulted in policy coordination within the central bank. I believe that this is the first line of defense that we had in our philosophy. This helped us to strike the correct balance between all policies. The second issue was addressed through tightening macro-prudential regulations and policies and strengthening the on-site supervision of banks.
At the same time, more than 70 percent of total credit was in foreign currency with EURO making the biggest share of the outstanding stock. The tune of that period was the same in the entire region. The overall impression that the financial innovations had reduced the risk and the abundant global liquidity created a very optimistic picture. Despite some truth in this, the pace at which financial intermediation grew annually was frenetically high. In particular there were two main aspects of financial intermediation that were particularly troubling in my opinion. First, economic agents created financial excesses using mostly the financial system. While meeting their needs, the financial system aligns and matches agents’ positions according to length of maturity and liquidity. This holds true under the assumption that all claims and obligation will be fulfilled in timely manner in the same order. Otherwise if they violate this assumption and end up overlapping each other than financial system might become unstable. Our concern was that too many gaps were opening to fast and the Albanian economy seemed to experience some sort of what latter came to be named as risk-taking channel. Second, there appeared to be a general mispricing of risks from the banking sector. High concentration in particular sectors or clients indicated undue risk analysis or risk management from banks, while lending to  2  BIS Review 173/2010  un-hedged borrowers in a flexible exchange rate regime seemed to be a potential moral hazard issue.