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Subordinated debt of the banking sector reaches its highest historical value

2026-02-16 22:57:26, Ekonomi CNA

The banking sector's subordinated debt increased again last year and reached its highest historical value.

Bank of Albania data show that at the end of 2025, subordinated debt was worth approximately 29.7 billion lek, an increase of 29.7% compared to the previous year.

The strong growth of subordinated debt on banks' balance sheets in recent years is mainly linked to the higher capital requirements applied by the Bank of Albania. In particular, macroprudential capital add-ons, but also partly those related to the minimum requirements for regulatory capital instruments and eligible liabilities (MREL), have pushed banks to increasingly use subordinated debt instruments to partially meet the required capital add-ons.

According to the regulation "On Capital Adequacy", banks' subordinated debt instruments are recognized as Tier 2 regulatory capital, which can cover up to one third of the required regulatory capital.

According to Bank of Albania statistics, at the end of last year, subordinated debt accounted for about 12.8% of the banking system's regulatory capital, up from the 11% it held at the end of 2024. For the most part, the banking sector's capital consists of tier 1 instruments, such as paid-in capital, reserves, retained earnings or share premium.

Subordinated debt ranks last in the order of repayment of an entity's liabilities in the event of bankruptcy. For this reason, it is classified as a higher-risk instrument compared to a company's other liabilities.

Subordinated debt, convertible into bank equity, can be financed through loan agreements or through the issuance of debt securities, which are offered for purchase to individuals or entities selected by the issuer itself. In recent years, Albanian commercial banks have increasingly used privately placed bonds as a subordinated debt security instrument. This use has increased especially after 2019, when the application of macroprudential capital additions began.

The use of subordinated debt is a mechanism that creates space for the distribution of dividends to shareholders, precisely because part of the regulatory capital requirement is covered through this instrument.

So far, seven of the commercial banks in the country have carried out at least one private bond issue, specifically National Commercial Bank, Credins Bank, OTP Albania, ABI Bank, Tirana Bank, Union Bank and Fibank.

The capital adequacy ratio of the banking sector increased again during 2025 and reached its highest historical level. According to statistics from the Bank of Albania, at the end of December this indicator increased to 20.36%, from 19.82% a year earlier./Monitor.al