Banks' exposure to exchange rate risk remains low

2025-10-20 10:39:00, Ekonomi CNA

The direct risk to banks' balance sheets from exchange rate changes was at low levels. According to information from the Bank of Albania, in the middle of this year the indicator of the net open foreign exchange position of the banking sector, which is used to assess this risk, was "in buy" at the level of 5.6% of regulatory capital.

The level of this position was about 1 percentage point higher compared to six months and a year ago, however it remains significantly below the maximum regulatory limit. During the 6-month period of 2025, this position has not shown significant fluctuations, remaining close to the values ??of the last year.

The net open foreign exchange position for each foreign currency (or in gold) is calculated as the difference between assets and liabilities in foreign currency, including accrued interest, as well as transactions (spot or forward) that involve the purchase and sale of currencies that have been agreed upon but have not yet been recorded in the accounting books.

The bank's total net open foreign exchange position at the end of each business day should not exceed 30% of its regulatory capital. The bank's net open foreign exchange position in a particular foreign currency (or in gold) at the end of each business day should not exceed 20% of its regulatory capital.

The performance of the overall banking sector indicator is largely determined by the performance of the indicator for systemically important banks. For these banks, the net open foreign exchange position “on purchase” was as much as 9.1% of the value of their regulatory capital. This value was significantly higher than the levels of 5.6% and 6.4% recorded six months and a year ago.

While the net open foreign exchange position of non-systemic banks was "on sale" at the level of 0.4% of regulatory capital. Six months and a year ago, their position was "on purchase" and as much as 0.8% and 0.3% of the regulatory capital of these banks.

Despite the occasional change in the direction of the net open position, "buying" or "selling", the exposure of non-systemic banks does not exceed the level of 2% of their regulatory capital, and this level has remained stable over time.

Non-systemic banks generally present low and stable exposure to exchange rate fluctuations.

The exchange rate between the Euro and the Lek has experienced a significant decline in recent years. In the last five years, the depreciation of the Euro against the Lek is estimated at more than 22%. However, exchange rate fluctuations have not caused problems in the balance sheets of banks, also due to the low levels of direct exposure to this risk.

Meanwhile, the risk associated with the quality of unhedged foreign currency loans (when the borrower takes out loans in a currency other than the one in which he earns his income) is also decreasing. The non-performing loan ratio for this loan portfolio stood at 3.7% at the end of June 2025, down from 4.3% a year earlier./ Monitor