The capitalization of the banking sector increased further during the past year. According to the Bank of Albania, the capital adequacy ratio at the end of 2024 reached 19.82%, from 19.42% at the end of 2023.

The capital adequacy indicator measures the value of the regulatory capital of the banking sector about the value of assets weighted with the relevant risk coefficients.

The value of the regulatory capital of the banking sector at the end of 2024 reached Lek 207.2 billion, an increase of 10.7% compared to the previous year.

The regulatory capital of the Albanian banking sector is largely first-level capital, which includes the highest quality capital instruments, mainly paid-in capital, share premium, reserves, and retained earnings. The factor with the main impact on the growth of the regulatory capital of the sector was the high financial result of 2024.

According to the BoA, for 2024 the net profit of the banking sector by local standards reached 37.4 billion lek, an increase of 15% compared to 2022.

On the other hand, the value of risk-weighted assets at the end of 2024 reached Lek 1045 billion, up 8.5% on an annual basis. The main group of risky assets on banks' balance sheets are loans to the private sector. The increase in risky assets over the past year is mainly due to the increase in lending to the economy.

The capital adequacy ratio of the banking sector in Albania is near historical highs. The increase in this indicator in recent years has been mainly due to the strong increase in minimum regulatory requirements by BoA.

The requirements for a higher capitalization of banks are in line with the measures taken by the counterpart supervisory institutions in Europe after the financial crisis and aim to increase the resistance of commercial banks against possible risks in the future.

The minimum required threshold is 12%, while for certain banks the demand has been even higher during the last decade. With the entry into force of the macro-prudential capital allowances, the required minimum levels of capitalization have increased even more.

By adding the conservative capital addition of 2.5%, the total capital adequacy ratio reaches 14.5%. While taking into account the countercyclical additions approved so far by the Bank of Albania, by the end of 2025 the minimum capital adequacy ratio for all banks will reach 15%.

Meanwhile, capitalization requirements are even higher for a special group of banks, classified as systemically important. National Commercial Bank BKT, Credins Bank, Raiffeisen Bank, and Bank OTP Albania have other additions to the capital adequacy ratio, in the amount of between 0.5% and 1.5%.

Also, systemically important banks and Intesa Sanpaolo Bank Albania, as of January 1, 2024, must meet the first required addition to the capital adequacy ratio related to the minimum requirement for regulatory capital instruments and eligible liabilities MREL.

Increasing capital requirements makes banks more secure against potential future losses. But, on the other hand, high and increasing levels of capital adequacy in principle affect the reduction of profitability and the increase of costs passed on to the public. Today, the banking sector has