Largest banks this year will face a further increase in capital requirements, as by the end of 2023, they must meet an additional 1.5% in the overall capital adequacy ratio. 

Currently, this obligation has entered into force for four banks of systemic importance, "Banka Kombëtare Tregtare", "Credins Bank", "Raiffeisen Albania Bank", "OTP Albania Bank", as well as for "Intesa Sanpaolo Albania Bank". 

They are subject to meeting the minimum requirement for regulatory capital instruments and accepted liabilities (MREL), according to the regulation approved by the Bank of Albania in December 2020. 

This regulation is related to the new framework brought by the law "On extraordinary recovery and intervention in banks". 

In recent years, the minimum regulatory capital requirements for banks have increased significantly. In addition to the basic requirement of 12%, provided for in the "Capital adequacy" regulation, since 2019 macroprudential capital allowances have also started to be applied. 

The capital conservation allowance for all banks in the sector for 2022 was 1.5%, while by the end of 2023 the increased level of 2% must be met. Meanwhile, for the four systemically important banks, a special surcharge is also applied, in the values of 0.5%, 1% and 1.5%, depending on the grade of systemic importance of the bank. 

Taking into consideration the above additions, as well as the specific addition that some banks in the sector have, the limit of the required capital adequacy ratio varies between 16% and 19% for systemically important banks, and 14% and 17% for banks of others. 

Banks have the obligation to meet, in order, the minimum requirements for regulatory capital, the minimum requirement for MREL and finally macroprudential capital additions. 

According to the Bank of Albania, the sufficiency rates for systemically important banks and other banks are above the above regulatory levels. 

In average terms, the capital adequacy ratio for the banking sector at the end of 2022 reached 18.13%, increasing by 0.13 percentage points compared to the end of 2021. 

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

From the calculation of all capital requirements according to the data reported for the end of 2022, the banking sector results with capital surplus, i.e. with higher capital than capital requirements. The capital surplus until the end of the period reached ALL 36 billion. 

However, the significant increase in capital requirements in recent years may make it challenging for individual banks to fully meet regulatory requirements. To meet these requirements, banks are increasingly using the instrument of subordinated debt, mainly through the issuance of bonds with a private offer. 

These instruments aim to meet part of the additional capital needs without requiring the injection of new capital from shareholders or without completely blocking the possibility to distribute dividends from the profits of the activity. 

Five of the commercial banks have issued these instruments at least once, while it is expected that a sixth bank will also issue such an issue within 2023, an issue mainly related to the requirements for additional capital provided by the MREL regulation. 

By 2027, the required capital adequacy ratio for the largest banks could reach up to 27%, up from 12% that was the minimum requirement until 2019. 

These requirements aim to make the banking sector more secure in the face of possible future shocks. But, on the other hand, such a large increase in capital requirements significantly increases costs and makes the banking sector less attractive to new investors. 

(Source: Monitor)