The Bank of Albania is reviewing its decisions on risk management for the banking sector, aiming to align them with new standards and with the practices followed by European supervisory institutions.

The changes will also take place within the framework of adjustments to financial reporting for supervisory purposes, in accordance with the International Financial Reporting Standards (IFRS).

The most significant change will relate to the method of calculating reserve funds for loan losses. Currently, under the regulatory framework applied by the Bank of Albania, the classification of non-performing loans is primarily based on the time delays in their repayment.

According to the IFRS, however, the classification of loans is based on the analysis of the borrower’s financial condition and expected repayment capacity.

Furthermore, the IFRS allows the deduction of collateral value from the expected loss, generally leading to lower provisioning expenses. According to information from the Bank of Albania, the draft of the new regulation is expected to be finalized within this year.

The use of a dual financial reporting standard has been a long-standing concern for the banking sector in Albania.