In principle, the three-pillar structure of the New Accord provides more precise directions to regulators to strengthen bank supervision and incentives to banks to become more sophisticated in risk management. Implementation of Basel II eliminates “one size fits all” methodology to assess risks and offers instead a wide range of methods to evaluate risks based more on failure likelihood. But the supervisory authorities in several emerging markets and many developing economies are concerned that Basel II puts a challenge they cannot meet. Probably our greatest concern relates to the need of the standardized approach to rely on external rating agencies for calculating minimum capital requirements. Currently domestic rating agencies are totally absent in Albania and not well developed as in many other non-OECD countries. On the other hand, in most of our economies many small enterprises cannot afford to be clients of international rating agencies. Since borrowers unrated from rating agencies will be assigned a 100% risk according to Basel II, initially most domestic credits may end up under this 100% category. This could reduce risk sensitivity of the new system brining it close or similar to that of Basel I. On the other hand, Albanian banks hold a significant share of government treasury bills and notes. Actually, under Basel I to this exposure of the banking system denominated in local currency is assigned 0% risk independently whether credit risk of the sovereign debt is rated or not.
On the other hand, its implementation may be a bit too ambitious and a difficult task for our countries. Therefore it is in our interest to find ways to make it more suitable to our needs by following a gradual approach rather than jeopardising its success through an uninformed adoption. 1  According to Basel II, the assessment of the borrower’s credit risk will depend on the performance of the economy, whether it is in a upward or downward trend. In the worst case, when the economy will be wholly swept in recession, banks will have automatically either to increase the level of capital, or shift towards less risky assets, that most intuitively calls for a slow down to provide loans thus engendering credit crunch and further recession.