ALBANIA
Assistance to the Bank of Albania on selected Corporate Governance Issues
Technical Assistance Project
Terms of Reference
1.
BACKGROUND
Since the global financial crisis, it has become clear that weaknesses in corporate governance,
including inadequate board oversight over risk management and internal control functions,
have contributed to excessive and imprudent risk-taking in the banking sector, which has led
in turn to systemic problems. This is particularly critical for Albania, as the Albanian
financial system is currently centred on banks and the equity market is remarkably
underdeveloped. At the end of 2013, the ratio of financial system assets to GDP reached
99.1%, with the banking sector owning 91.4% of financial system assets (90.6% of GDP),1
while stock market capitalization is the lowest in South East Europe (SEE).
Although the global financial crisis did not affect the Albanian economy as strongly as its
SEE neighbours, there are a number of weaknesses in the way banks are regulated, managed
and supervised.
An analysis undertaken by the EBRD in 2011 on corporate governance of the banking
framework in Albania highlighted a number of shortcomings, highlighting especially the
unclear role of independent directors, lack of board objectivity with potential for conflicts of
interests at the board, unclear roles of board committees, uncertain internal audit practices
and limited non-financial disclosure.
Following the EBRD review, the legal framework was revised and several recommendations
were implemented, especially through Regulation no. 63 dated 14 November 2012 “On Core
Management Principles of Banks and Branches of Foreign Banks and Criteria on the
Approval of their Administrators”.
However, some issues remain to be addressed, especially in the area of board composition
and functioning, internal control and disclosure.
On 27 June 2014, Albania received the “EU Candidate” status and the country is
approximating its legislation with the Acquis. In this context, the Bank of Albania is very
interested in calibrating the banking framework and supervisory practices with those of the
EU.
The EU has recently introduced a new legal framework to ensure that credit institutions and
banking supervisors strengthen their supervision on a number of issues, including the
suitability of board members, practices and the soundness of the internal control framework
of credit institutions and disclosure. In particular, Directive 2013/36/EU and Regulation No
1
BSCEE Review 2013 http://www.bscee.org/bins/BSCEE_Review_13_tcm23-39008.pdf
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575/2013 (so-called CRD IV package)2 transpose the new global standards on bank capital
(the so-called Basel III Agreement) into EU law. The CRD IV also contains new corporate
governance rules, address company reporting, board composition, risk management,
responsibilities of the board and control of executive remuneration.
In addition, in November 2014, the Single Supervisory Mechanism (SSM) entered into force
in Europe. The SSM is a new system of banking supervision. It comprises the European
Central Bank (ECB) and the national supervisory authorities of the participating countries. As
an independent EU institution, the ECB oversees banking supervision from a European
perspective by establishing a common approach to day-to-day supervision; taking harmonised
supervisory actions and corrective measures; and ensuring the consistent application of
regulations and supervisory policies. In October 2015, the ECB published its “Guide to
Banking Supervision”, referring to the ECB SSM Supervisory Manual.
The SSM Supervisory Manual is an internal rulebook for staff involved in the SSM. The
Manual takes as its basis the proven methods and processes which have been developed from
the experiences of the euro-area supervisory authorities and aim to ensure a stable and
functioning banking system. The Manual also addresses the on-site inspection methods, the
SSM risk assessment system and the supervisory review and evaluation process. These
approaches are described in detail, while the annex to the Manual provides supplementary
information, particularly about on-site inspections. Since these are core supervisory
processes, the aim is to achieve the greatest possible degree of harmonisation in the
procedures and to establish a clear framework for subsequent supervisory measures taking
into account the principle of proportionality. The supervisory review and evaluation process
plays a key role in achieving efficient and consistent supervisory outcomes.
In 2016, the Bank of Albania will be subject to an EC assessment in the framework of the EU
Capital Requirements Regulation (CRR - EU Regulation 575/2013), which foresees that
certain categories of exposure by EU banks to entities located in third countries - including
central governments - can benefit from a more favourable treatment in terms of capital
requirements. This preferential treatment is only available if the EC Commission determines
that the third country’s prudential supervisory and regulatory requirements are at least
equivalent to those applied in the EU. In the absence of such EC Commission decision,
exposures by EU banks to public sector entities (including central and local governments) are
assigned a high risk weight.
Most prospective EU member countries in the Western Balkans are assigned a low credit
quality step of 4 or lower, implying that government securities and central bank bills receive
a 100% risk weight for the purposes of consolidated reports on risk-weighted asset by parent
banking groups.
2
Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity
of credit institutions and the prudential supervision of credit institutions and investment firms, amending
Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC (available at http://eurlex.europa.eu/legal-content/EN/ALL/?uri=CELEX:32013L0036) and Regulation (EU) No 575/2013 of the
European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and
investment firms and amending Regulation (EU) No 648/2012 (available at http://eur-lex.europa.eu/legalcontent/EN/ALL/?uri=CELEX:32013R0575).
2
The equivalence of supervisory regimes in place in Albania will be assessed by the EC in
2016.
Under this framework, the Bank of Albania, has requested the EBRD to provide technical
assistance in order to strengthen its supervisory procedure on selected internal governance
and risk management issues and align them to those of the EU, taking into account the recent
international and European developments, in particular the new ECB SSM Supervisory
Manual.
2.
OBJECTIVE
The main objective of this Project is to assist the Bank of Albania in strengthening its
regulatory framework and supervisory functions and align them with the legislation and
practices in place in the EU.
In order to achieve the objective of the Project, the EBRD intends to retain a firm or
association of firms with strong proven detailed knowledge of the EU framework regulating
corporate governance of banks, EU supervisory practices and ideally the ECB SSM
Supervisory Manual and with local legal expertise, with strong proven knowledge of the
Albanian banking framework and supervisory practices (the “Consultant”).
3.
SCOPE OF WORK
The Consultant shall undertake the following activities:
3.1. work with the EBRD and the Bank of Albania in order to:
a.
Review the Albanian legislation on corporate governance of banks and provide
comments and recommendations to the Bank of Albania, in the context of the
review of the supervisory practices, with the goal of aligning it with the Acquis.
b.
Review the Bank of Albania’s supervisory framework, methodology and on-site
and off-site supervisory practices inspection objectives, expected controls and
inspection techniques on:
Credit Risk and Counterparty Risk: organisational framework, policies
and procedures (governance, policies and procedures, remuneration,
resources, outsourcing and compliance); credit risk profile and strategies
(risk profile and strategies and new products); credit risk management
(granting process and monitoring process; specific requirements for credit
risk models; risk classification process; collateral management process;
other credit risk mitigation techniques; recovery process; provisioning
process; credit administration process; information technology systems;
reporting and disclosure requirements); credit quality review (data
validation; review of the portfolio risk quality; review of collateral; review
of repossessed assets; collective provision analysis; review of country risk
and the risk of equity in the banking book); internal audit.
Internal Governance and Risk Management: composition and
governance of the management body; roles and responsibilities of the
management body; committees of the management body in its supervisory
function; corporate structure and organisation; governance processes;
internal governance transparency and disclosure;
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c.
d.
e.
f.
Internal Governance and Remuneration: remuneration policy;
governance (management body, remuneration committee, control
functions); variable elements of remuneration; specific requirements
(measurement and performance process, award process, pay-out process);
[if applicable] institutions that benefit from government intervention (to
obtain assurance that institutions receiving public aid have set up a
remuneration policy in line with the priority of building up capital base for
their own recovery and repaying the taxpayer assistance and in line with the
national provisions in this regard); disclosure; internal audit review;
Risk Control Function: organisational framework status of the function
and resources (governance, resources, outsourcing, remuneration); scope of
activity; the risk management process (identification, assessment and
measurement, monitoring, stress testing and reporting); internal audit.
Compliance Function: organisational framework, status of the function
and resources (governance, resources, outsourcing, remuneration); scope of
activity; internal audit.
Internal Audit Function: governance; status and organisation of the
internal audit function (professional competence, internal audit charter,
management of the internal audit department, reporting lines of the internal
audit function, relationship between internal audit, compliance and risk
management, internal audit in a group context, remuneration, outsourcing,
periodical activity report); scope of activity; internal audit life cycle;
and provide recommendations in order to align them with those in force in the EU
and in particular with the procedures detailed in the ECB SSM Supervisory
Manual.
Illustrate and advise the Bank of Albania on the practices in place by selected EU
banking supervisors on the issues above and recommend practices appropriate for
the Bank of Albania considering – among others - the expertise and resources
(both human and financial) needed at the Bank of Albania for effectively
implementing the proposed practices against the resources currently available;
and the structure and challenges posed by the Albanian banking system;
Assist the Bank of Albania in developing and in drafting a new supervisory
methodology (the “Methodology”) on the issues mentioned above. For the
avoidance of doubt, the drafting of the Methodology will be done by the
Consultant (the drafting will be in English and the final version will also be
translated in Albanian). The Methodology shall also include all necessary
guidelines, templates and procedures for the implementation of the Methodology.
Design and provide training to the Bank of Albania to illustrate and to effectively
implement the Methodology and to commercial banks on how they should
provide internal assurance on the issues detailed above.
In addition to the above, the Consultant shall also remain available to provide
assistance and ad-hoc advice to the Bank of Albania for the adoption and
implementation of the Methodology up to a maximum of 2 man/days during the
first 6 months of the implementation of the Methodology.
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4.
IMPLEMENTATION AND DELIVERABLES
4.1. Implementation
a.
The Bank of Albania shall evaluate the recommendations presented by the
Consultant, and decide on the solution to be adopted. Upon agreement with the
Bank of Albania, the OL shall instruct the Consultant to develop and present to
the Bank of Albania the Methodology - in line with the EU supervisory
practices and legislation and in particular with the ECB SSM Supervisory
Manual.
b.
The Bank of Albania shall commit to providing all necessary equipment
(including translation and interpretation), its experts and any necessary
documents, data and information necessary for the implementation of the
Project.
c.
The Project shall be managed by the Operation Leader of the EBRD in
consultation with the Bank of Albania. The Consultant shall report to the EBRD
Operation Leader and work in close cooperation and under the guidance of the
Bank of Albania and.
d.
The methodology shall be prepared in Albanian and English. The training shall
be delivered in English with interpretation in Albanian. Two separate trainings
sessions will be organised: one to staff of the Bank of Albania and one to
commercial banks.
e.
The Consultant shall supply all necessary computer hardware and software
required to deliver the services, together with the necessary office equipment.
f.
The Consultant will be responsible for arranging their own transport,
accommodation, communications, materials, printing and report preparation etc.
(the Consultant will be responsible for the cost of connection time for
calls/faxes/internet).
g.
The Bank of Albania will provide serviced and furnished office accommodation
for the, plus suitable office space for Consultant meetings, together with access
to all relevant information, reports, maps, studies, legal documents etc., at no
cost to the Consultant. All available project information, reports and documents
will be made available to the Consultant by the Bank of Albania.
4.2. Deliverables and Reporting
The Consultant shall deliver the activities described in Section 3 above and produce the
following deliverables:

Draft a Report on the Albanian legislation on corporate governance of banks,
following the review detailed in section 3.1.a above. The Report shall include
comments and recommendations, on how to align the legislative framework to the
Acquis.

Draft a Report on the Bank of Albania’s Supervisory Framework, Methodology
and Practices, legislation on corporate governance of banks, following the review
detailed in section 3.1.b above. The Report shall include comments and
recommendations, specifically on the issues detailed in section 3.1.b above.

Advice to the Bank of Albania on the practices in place by other EU banking
supervisors, pursuant to section 3.1.c above.

Assistance to the Bank of Albania in developing and then draft the Methodology,
pursuant to section 3.1.d above.
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
The Consultant will develop, organise and implement a Training Program, pursuant
to sections 3.1.e and 4.1.d above.
Remain available to provide ad hoc advice, pursuant to section 3.1.f above.

The Consultant shall deliver to the EBRD quarterly reports on the progress of the Project,
highlighting the major obstacles faced and results achieved.
At the end of the Project, the Consultant shall deliver to the EBRD a final report, covering all
issues listed in Section 3 above and highlighting the major obstacles faced and the results
achieved.
All deliverables will be produced in English and Albanian, and submitted in hard copies and
electronic format. The exact timeframe for submission of all deliverables will be agreed with
EBRD in advance.
4.3. Donor Visibility
It is expected that the Assignment will be funded by the Government of Luxembourg through
the Luxembourg - ODA Technical Co-operation Fund. The Consultant will be required to
ensure visibility of these resources. Support on these visibility aspects can be obtained from
the Bank’s Communications Department. Measures could include but not be limited to:

All documents produced in relation to the project and exchanged between the
consultant and the client should mention donor support and include the use of
donor/s’ logo, when appropriate

This project can be used for a case study/article to be published on the EBRD web
site, Blueprint, the Donor Update and other external and internal publications.
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ANNEX 1 – TEAM INPUTS
Experts
Name and nationality
Position
Total
Expert days of input
Home
Field
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ANNEX 2 – FINANCIAL PROPOSAL
2.A Financial Submission Form
[Location, Date]
To:
European Bank for Reconstruction & Development
One Exchange Square
London EC2A 2JN
United Kingdom
Subject: [project_name]
Dear Sirs:
Herewith is our Financial Proposal in the sum of [amount in words and figures].
This amount is (exclusive of VAT),
A. (We determined that the services are exempted from indirect taxes/VAT. The basis of exemption is
set out in …(provide evidence)….as attached, OR
B.
(We determined that the services are subject to indirect taxes/VAT. The basis of the determination
for indirect taxes/VAT being chargeable on the services is set out in …(provide evidence)…as
attached;
Indirect taxes/VAT have been estimated at [amount in words and figures]. If this determination is
verified by the Bank, it is intended that the Bank is responsible for paying and recovering the indirect
taxes/VAT associated with the services.
which we have estimated at [amount in words and figures]
___________________________________________________
[authorised signature(s)]
Name and Title of Signatory
Name of Firm
Address
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Final
2.B Breakdown of Costs (exclusive of VAT)
DIRECT EXPENSES
1. Fees (Remuneration):
Name of Experts
Job Titles
Working
Period
In the
Field
In Home
Office
Total
Period
Expert
Rate
Total
Total Fees
2. Per Diem Allowance:
Place
Number
Rate Period
Per Diem
Total
Total Per Diem
REIMBURSABLE EXPENSES*
3. Air Travel: (Full Economy Class or Equivalent)
Routing
Air Fare
No. of
Flights
Total
No. of Journeys
Total
Total Air Travel
4. Local Travel: (Travel from home to departure airport and
return, and reasonable local travel when abroad)
Journey
Cost
Total Local Travel
5. Miscellaneous
Item
Visas
Interpretation and Translation
Reports
Communications
Equipment Purchase
Accommodation (not listed in Per Diem) for long term experts
Other Miscellaneous Expenses (to be specified)
Miscellaneous Total
Description, number etc
6. Contingencies: (utilisation only after prior approval in
writing by the Bank)
Total Amount of Financial Proposal
Total
[contingency]
* May include indirect taxes, such as VAT which are not otherwise recoverable by the Consultant.
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