However the distinguishing feature of this recession is that it is centred on the banking system, which is at the heart of the allocation of resources through the economy and of the transmission mechanism for monetary policy. It is no surprise therefore that both in this country and elsewhere interest rates have been supplemented by measures that have directly focussed on banking and financial markets. Credit is a critical lubricant in a modern economy. It can bridge the gap between expenditure and income. It supports investment: allowing households and companies to bring forward the purchase of expensive assets, which would otherwise require an extended period of saving. And it allows spending to be smoothed in the face of unexpected shocks to income. As credit became more scarce, the economy was bound to slow, amplifying the slowdown in the real economy that was already in train. A feedback loop started to gather momentum. 4  BIS Review 5/2009  The more the banks reined in lending, the worse the economic outlook became, and the greater spectre of rising credit losses on the banks’ loan portfolios, encouraging further cuts in lending. Policymakers had to intervene to cut this feedback, to prevent funding markets for banks and industry from freezing up, and to ensure that the banks have the capital, the funds and the confidence to continue lending.
2/3  BIS central bankers' speeches  The second phase of this reform should aim at improving the education and know-how of the labour force, creating a legal, political, administrative and fiscal environment that attracts foreign developments and encourages domestic ones, and increasing the integration of Albania’s economy with the regional and European development infrastructure. Third, the opening of accession negotiations with the EU should be viewed as a primary instrument for the advancement of Albania’s development. The Bank of Albania judges that the fulfilment of the criteria for opening accession negotiations and the rigorous implementation of reforms that this process imposes should be the focus of the entire political spectrum in Albania. Thank you for your attention! 3/3  BIS central bankers' speeches