At the risk of generalizing too much, I would say that CEE economies shared broadly the same development model and problems. We benefited from large capital inflows mainly in the form of FDI, remittances and cross-border loans. Western European banks penetrated our financial system, increasing financial intermediation and facilitating capital inflows. This  BIS Review 173/2010  1  process resulted in fast credit and economic growth based on a consumption lead model. While inflation has been generally under control financial imbalances and vulnerabilities were increasing, in the form of rapid growth in real estate prices and balance sheet exposures in liquidity and foreign currencies. Our economies were hit by the crisis since the first week of October 2008. The fear of contagion was enhanced further by a sharp decrease in the market value of the EU banking groups that operate in the region. It affected negatively the public trust in the system, resulting in widespread deposits withdrawals. Later, as the financial crisis progressed and transformed into a global economic recession, the effects extended to real economy and exchange rate depreciation. Most of the countries in the region faced a rapid liquidity shortage caused by the deposits run, lower remittances and FDI outflows. The balance sheets across the region suffered from both liquidity problems and exchange rate depreciation. This was negatively reflected in consumption and investment, which further deteriorated the financial stability outlook with the possibility of a balance sheet deflation and economic contraction mutually supporting each other in a vicious spiral.
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.