PROGRAM INFORMATION DOCUMENT (PID)

CONCEPT STAGE

February 14, 2012

Report No.: AB6973

(The report # is automatically generated by IDU and should not be changed)

Operation Name / Financial Sector Modernization Loan
Region / EUROPE AND CENTRAL ASIA
Country / Albania
Sector / Banking (100%)
Operation ID / P130092
Lending Instrument / Development Policy Lending
Borrower(s) / Republic of Albania
Implementing Agency / Bank of Albania
Date PID Prepared / February 14, 2012
Estimated Date of Appraisal / March 12, 2012
Estimated Date of Board Approval / April 12, 2012

I.  Key development issues and rationale for Bank involvement

European financial markets have remained under considerable stress in recent months. Albania’s banking system, owned predominantly by Austrian, Greek and Italian parent banks, operates under increasing pressures from within. Overall, banks’ earnings have substantially declined as new loan loss provisions were required in response to a sharp escalation of non-performing loans (NPLs) now over 18 percent. Moreover, additional loans now rated ‘watch’ (or Category II) may become delinquent in 2012. Albania’s proximity to Greece has placed the country at the frontline of difficulties emanating from Greece. The prospects of one or more foreign owned banks to substantially alter its business model in the region and/or the country are significant.

The Albanian authorities have already taken a number of key steps to safeguard financial stability and improve their capacity to resolve a failing bank if necessary. The authorities recognize the need to further strengthen their crisis preparedness framework to enable them to move quickly in the event any spillover from the Eurozone occurs in Albania. The proposed two tranche Financial Sector Modernization Loan (FSML) is designed to quickly strengthen the resiliency of the banking sector so as to better equip the authorities with the means to tackle potential financial sector related disturbances should they arise.

The proposed DPL supports a comprehensive program of measures to strengthen the banking sector, mitigate key vulnerabilities and increase the resilience of the sector against possible future shocks. The proposed specific reforms to strengthen the banking sector are in the following areas: (i) enhancing the financial capacity of the Albanian Deposit Insurance Agency (ADIA); (ii) strengthening the institutional framework for the Financial Stability Committee (FSC) to monitor and act in a coordinated manner on emerging risks; (iii) developing a comprehensive plan to reduce non-performing loans (NPLs) in the banking system; (iv) strengthening the capabilities and tools of the central bank to deal with distressed banks in a rapid and cost effective manner; (v); expanding the central bank liquidity support mechanism to provide increased flexibility, and (vi) strengthening the banking sector through converting Greek-owned bank branches into subsidiaries.

II.  Proposed Objective(s)

The objective of the operation is to strengthen the resiliency of the banking sector and improve the authorities’ capacity to respond in the event of a banking crisis.

III.  Preliminary Description

This operation is expected to: (i) improve the capacity of the deposit insurer to promptly meet depositors’ needs in the event of a significant (or multiple) bank resolution(s); (ii) enhance macro-prudential oversight and systemic risk assessment capacity of the FSC; (iii) improve the quality of banks’ loan portfolios through lowering NPLs; (iv) strengthen the operational capacity of the central bank and the BoA to intervene and/or resolve a problem bank; (v) expand the ability of the central bank to provide emergency liquidity assistance, and (vi) increase the capitalization and change the legal status of Greek-owned bank branches to subsidiaries.

IV.  Poverty and Social Impacts and Environment Aspects

The measures in this DPL, while contributing to strengthen the financial sector are not expected to have adverse distributional effects. Poor people in general are less likely to have either deposits or loans from banks and are likely to be largely unaffected by the envisaged FSML reforms.

Specific actions under the proposed DPL are not expected to have any negative effect on the environment. The specific country policies supported by the DPL are not likely to cause effects on the country’s environment and natural resources. The legal and regulatory changes implemented in the context of the DPL expand deposit insurance coverage to micro-finance institutions, strengthen financial stability and otherwise do not allow the banking sector to circumvent environmental regulations governing investments, nor modify the existing environmental regulatory framework in any way.

V.  Tentative financing

Source: / ($m.)
Borrower / 0
International Bank for Reconstruction and Development / 100
Borrower/Recipient
Total / 100

VI.  Contact point

World Bank

Contact: Michael Edwards

Title: Lead Financial Sector Specialist

Tel: (202) 473-5370

Fax:

Email:

Borrower

Contact: Mr. Nezir Haldeda

Title: Deputy Minister of Finance

Tel: +355.4.222.8373

Email:

VII.  For more information contact:

The InfoShop

The World Bank

1818 H Street, NW

Washington, D.C. 20433

Telephone: (202) 458-4500

Fax: (202) 522-1500

Web: http://www.worldbank.org/infoshop