For the fourth consecutive year, Albanian banks are increasingly using government bonds and securities as collateral for loans. According to the Albanian Financial Supervisory Authority (AMF), the value of government debt securities used as collateral for bank loans reached 1.43 billion ALL in the first nine months of 2024, marking a 37% increase compared to the previous year.
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This trend is largely driven by individuals, who held a total of 1.25 billion ALL in debt securities as collateral—a remarkable 232% increase from the same period in 2023. Conversely, the use of bonds as collateral among businesses decreased, with only 181 million ALL placed as collateral, down by 73% from the previous year, Monitor reports.
In terms of transactions, the frequency of using government bonds as collateral rose sharply. In 2024, there were 363 transactions, representing a staggering 585% increase compared to 2023.
Three commercial banks in particular—Raiffeisen Bank Albania, Credins Bank, and OTP Bank Albania—have accepted government securities as collateral, reflecting a preference for this type of collateral due to its unique benefits.
Advantages of Government Bonds as Collateral
Government bonds offer several advantages for banks compared to other types of collateral, such as real estate. Government securities are more liquid and easier to assess in value, which enhances banks' ability to manage risks and costs. Additionally, execution procedures for government bonds in the event of default are generally quicker and more cost-effective, leading to lower interest rates for loans secured by treasury bonds and government securities.
Challenges with Bond-Backed Collateral
While bonds and securities provide low-risk, high-liquidity guarantees, there are some challenges in using this type of collateral. One of the primary issues is related to the market value of the collateral. If the market value of the bond decreases below the client’s debt at the time of execution, the bank may be left with an unpaid portion of the debt.
To mitigate this risk, banks maintain a higher coverage ratio than the loan value and conduct regular checks on the market values of these collateral securities. If the value of the collateral drops below the acceptable limit, the bank may require the client to increase the collateral amount.
Areas for Improvement
Banking experts highlight areas where improvements could streamline the collateral process. One such area is the ability to record a lien on securities in favor of the lending bank within the Bank of Albania’s securities register, which would help secure the collateral further. Additionally, enabling the transfer of ownership to the lending bank in cases where other banks act as custodians for the collateral securities could simplify the loan security process and offer greater protections for lending institutions.