Bank of Albania Regulation 48/2013 on Capital Adequacy Ratio

REPUBLIC OF ALBANIA
BANK OF ALBANIA
SUPERVISORY COUNCIL
DECISION
No. 48, dated 31.07.2013
ON APPROVAL OF REGULATION
“ON CAPITAL ADEQUACY RATIO”
In accordance with Article 12, letter “a” and Article 43, letter “c” of the Law No. 8269, dated
23.12.1997 “On the Bank of Albania”, as amended; Article 58, letters “a”, “b”, “c” and “ç”,
Article 59, paragraphs 2 and 3 and Article 60, paragraph 2 of the Law No. 9662, dated
18.12.2006 “On banks in the Republic of Albania”, as amended, having regard to the
proposal form Supervision Department, the Bank of Albania’s Supervisory Council, DECIDED:

1. The approval of the Regulation “On capital adequacy ratio” and annexes as integral part
   of the regulation, as provided in the text attached to this decision.
2. The Bank of Albania's Supervision Department and Statistics Department are responsible
   for following the implementation of this decision.
3. Banks, until the entry into force of this decision, shall take the measures and establish the
   necessary conditions for the implementation of the regulation requirements, and shall report to the Bank of Albania on the progress of taking the measures and on capital requirements, at the request of the Supervision Department.
4. Upon the entry into force of this regulation, shall be repealed the regulation “On capital
   adequacy ratio”, approved by Supervisory Council’s decision No. 58, dated 05.05.1999, as amended.
5. Foreign Relations, European Integration and Communication Department is responsible
   for the publication of this regulation in Bank of Albania's Official Bulletin and in the Official Journal of the Republic of Albania. This decision shall enter into force on 31 December 2014. SECRETARY CHAIR Ylli Memisha Ardian Fullani

REGULATION
"ON CAPITAL ADEQUACY RATIO"
(Approved under decision No.48, dated 31.7.2013 and amended by decision No. 43, dated 30.7.2014, decision No. 70, dated 18.12.2014, decision No. 49, dated 1.7.2015, decision No.91, dated 2.12.2015, decision No.49, dated 30.3.2016, decision No. 5, dated 1.2.2017, decision No. 34, dated 2.5.2018, decision No. 7, dated 5.2.2020, circulating decision No. 22, dated 1.4.2020, circulating decision No. 54, dated 9.11.2021, decision No. 68, dated 22.12.2021, decision No. 44, dated 2.11.2022, decision No. 36, dated 2.8.2023, decision No. 15, dated 6.3.2024 and by decision No. 31, dated 2.7.2025 of the Supervisory Council of the Bank of Albania)
CHAPTER I
GENERAL PROVISIONS
Article 1
Scope

1. The purpose of this Regulation is to set out:
   a) the criteria and rules for the calculation of capital adequacy ratio; and b) the minimum of capital adequacy ratio
   Article 2
   Legal grounds
2. This Regulation is issued pursuant to and in implementation of:
   a) Article 12, “a”, Article 43, “c” and Chapter V of the Law No. 8269, dated 23/12/1997 “On the Bank of Albania”, as amended; b) Article 58, “a”, “b”, “c” and “ç”, Article 59, paragraphs (2) and (3), and Article 60, paragraph (2), of the Law No. 9662, dated 18/12/2006 “On Banks in the Republic of Albania”, as amended, which herein shall be referred to as the “Law on Banks”.
   Article 3
   Entities subject to this Regulation
   This Regulation shall apply to banks licensed to carry out the banking and financial activity in the Republic of Albania, in line with the licence granted by the Bank of Albania (for simplicity hereinafter referred as “banks”).

Article 4
Definitions

1. The terms used throughout in this Regulation shall have the same meanings with those
   set forth in the Law on Banks.
2. In addition to paragraph “1” of this article, for the purposes of implementing this
   Regulation, the following terms shall have these meanings and shall be used respectively:
   a) In Chapter III to calculate the attached definitions and integral part of capital requirement for credit risk according to the standard method:

1. “External Credit Assessment Institutions” (hereafter referred to as “ECAI” for
   simplicity in this Regulation) – means a legal person that conducts assessments and assign the credit quality to another institution/ entity;
2. “Eligible External Credit Assessment Institution” (hereafter in this Regulation
   referred to as “eligible ECAI” for simplicity) – means the External Credit Assessment Institution, recognized as such by the Bank of Albania. For the purposes of calculating the capital requirement, banks may use only the credit assessments of eligible ECAIs;
3. “Nominated ECAI” (hereafter in this regulation referred to as “nominated ECAI”
   for simplicity) - means the eligible ECAI, the credit assessments of which, bank has decided to use to assign risk weights;
4. “Export Credit Agency” (hereafter in this regulation referred to as “ECA” for
   simplicity) – means the agency that supports export activities of natural and legal persons, from the countries where ECA has its registered office. ECAs provide government – backed loans, guaranties and insurance covering both commercial and political risk of the borrowing country. Banks, in the calculation of capital requirements, may use credit assessments published by ECAs, if they meet the conditions laid down in this Regulation;
5. “Supervised Institutions” – means, banks, investment firms and financial
   institutions;
6. 1
   “Investment firms” (Brokerage firms) – means the companies as defined in Article 3, paragraph 47 of the law no. 62/2020 “On capital markets”;
7. “Financial institutions”2 – are financial intermediaries subject to supervisory
   requirements equivalent to supervisory requirements for banks. 3 In the case of institutions supervised by the Bank of Albania, shall be included non-bank financial institutions and savings & loans associations and their unions, while foreign exchange bureaus shall not be included;
8. “Competent Supervisory Authorities” – means national authorities, domestic or
   international, which are empowered by law or regulation to supervise banks and/or other financial institutions;

1 Amended by the Decision No. 36, dated 2.8.2023 of the Supervisory Council of the Bank of Albania. 2 Repealed the footnote by the Decision No. 7, dated 5.2.2020 of the Supervisory Council of the Bank of Albania. 3 Added by the Decision No. 7, dated 5.2.2020 of the Supervisory Council of the Bank of Albania.

9. “Collective Investments Undertakings” (hereafter in this regulation referred to as
   “CIUs” for simplicity) – means the undertakings as defined 4 in article 2, paragraph 73 of the Law No.56/2020, dated 30.04.2020 “On collective investment undertakings”;
10. “Local and regional government authorities” – means local and regional self￾government units, as set forth by the competent authorities of each country;
11. 5“Public sector entities” - are non-commercial administrative bodies, responsible to
    central governments, regional governments or local authorities, or to authorities that exercise the same responsibilities as regional governments and local authorities; or non-commercial undertaking/legal persons that are owned by or set up and sponsored by central government, regional governments or local authorities, and that have guarantee arrangements from them, which include self-administered bodies governed by a special law and that are under public supervision;
12. “Small and Medium Sized Enterprises” (hereafter in this regulation referred to as
    “SME” for simplicity) – means respectively the categories that meet the following levels of annual turnover:
    The category Annual turnover
    Micro-enterprises less than 10 million ALL
    Small enterprises 10-15 million ALL
    Medium enterprises less than 250 million ALL
13. “Non-performing (loans) exposures (past due items) – means the exposures
    (loans) which, according to the requirements laid down in the Regulation “On credit risk management”, are classified in one of the following categories: substandard, doubtful and loss loans; 14) 6“Speculative immovable property financing” - means loans granted by the bank for the purposes of the acquisition of or development or construction on land in relation to immovable property, or of and in relation to such property, with the intention of reselling for profit;
14. “Covered bonds”– means the bonds whose issuance is regulated by special a law of
    the country where the issuer has its registered office and is to supervision by a competent authority and that simultaneously meet the following criteria:
    i. the funds obtained from the sale of covered bonds must be invested in assets which
    provide sufficient coverage for obligations arising from collateralized bonds until their maturity; and
    ii. covered bonds in the event of bankruptcy of the issuer, allow preferential treatment
    to the holder of collateralized bonds giving him priority in terms of principal and interest payments;
15. “Cash items in the process of collection”– means funds that are in the course of
    being transmitted between banks. These items include funds at transfer accounts, cheques and other forms of payment that have been sent for collection7 ;

4 Amended by the Decision No.68, dated 22.12.2021 of the Supervisory Council of the Bank of Albania. 5 Amended by the Decision No. 7, dated 5.2.2020 of the Supervisory Council of the Bank of Albania. 6 Amended by the Decision No.68, dated 22.12.2021 of the Supervisory Council of the Bank of Albania. 7 For example, “pending accounts” as set out in the reporting methodology and financial report content.

17. “Minimum lease payments”– means the payments and any bargain option that the
    lessee is or can be required to make over the lease term (i.e. option, the exercise of which is reasonably certain);

18. “Solicited rating/ assessment– is an assessment by an eligible ECAI, on the request
    of a bank, upon the payment of a fee. The assessments produced in the absence of a request shall be considered as such, if the bank has previously received an assessment requested by the same ECAI.

19. “Unsolicited rating/assessment”– is an assessment produced without the request of
    the bank by an eligible ECAI and without the payment of a fee; b) In the Chapter IV for the credit risk mitigation techniques:

20. “Credit risk mitigation” – means the technique applied by a bank, to reduce the
    credit risk related to an exposure, or its exposures;

21. “Credit protection” – means any contractual method pursuant to which the
    protection seller provides and the protection buyer receives protection for the purpose of mitigating credit risk;

22. “Underlying asset” – means the asset, registered in the balance sheet of the buyer
    for which credit protection is acquired;

23. “Protection buyer”– means the entity which buys protection from credit risk, (i.e.
    sells credit risk);

24. “Protection provider”– means the entity which sells protection from credit risk,
    (i.e. buys credit risk);

25. “Funded credit protection”– means the technique of credit risk mitigation, which
    gives to protection buyer the right, in the event of the default of the borrower, to refund the value of credit given through the assets or monetary values previously defined;

26. “Unfunded credit protection ” – means the techniques of credit risk mitigation
    based on the commitment of a third party to pay to bank a specific amount in the event of the default of the borrower or on the occurrence of other specified credit events;

27. “Secured lending transaction”– means any transaction giving rise to an exposure
    secured by collateral which does not include a provision conferring upon the bank the right to receive margin frequently from the debtor, pledge or other collateral provider;

28. “Capital market-driven transaction”– means any transaction giving rise to an
    exposure secured by collateral which includes a provision conferring upon the bank the right to receive margin frequently from the debtor, pledge or other collateral provider;

29. “Credit event” – means the event agreed by the parties (provider and protection
    buyer), that triggers the protection provider to pay to the protection buyer out the amount specified in the contract;

30. “Master netting agreement” – means the agreements that allow the netting of
    exposures of the two involved parties, based on individual legal transactions. In case of termination of agreements, the master agreements provide the settlement of respective amounts related to all transactions. Master netting agreements lay down the terms and conditions of netting where the parties trade in different products regulated by individual agreements. In this context, a master netting agreement provides for the overall relationship of the parties in case of trading in different products by giving the non-defaulting party the right to terminate and close-out all transactions under the agreement upon the event of default on any of the transactions, even for a single transaction;

31. “Credit derivative” – means a contract where the protection provider undertakes to
    pay out to the protection buyer upon occurrence of a predetermined credit event. This obligation shall equal to one of the following:
    i. the decline in the value of the reference obligation with respect to the initial
    value (cash settlement variable),
    ii. the entire notional value of the reference obligation in exchange for physical
    delivery of the reference obligation or another equivalent financial instrument (deliverable obligation) specified in the contract, and
    iii. a specified fixed amount (binary payout);

32. “Reference obligation” – means the obligation used for the purposes of determining
    cash settlement value, or deliverable obligation in case of credit derivatives;

33. “Credit Default Swap” – means a type of credit derivative under which the credit
    protection buyer transfers the credit risk of the reference asset to the credit protection provider. The credit protection provider undertakes to compensate the credit protection buyer in the event of the occurrence of other specified credit events specified in the contract. For this service the protection buyer pays the protection seller a periodic premium.

34. “Total Return Swap” – means contracts under which the protection buyer agrees to
    transfer all the cash flows generated by the reference obligation to the protection provider. The protection provider, for his part, agrees to transfer the cash flows associated with changes in a reference rate to the protection buyer. On the payment dates (or the termination date of the contract), the protection buyer transfers to the provider the amount of the potential revaluation of reference obligation (i.e. a value equal to the positive difference between the market value and the initial value of the reference obligation). In the case of a decline in the value of the reference obligation, the protection provider transfers to the buyer the respective amount which compensate this decline;

35. “Credit Linked Notes” (for simplicity in this regulation referred to as “CLN”
    hereafter) – means a derivative financial instrument with an Embedded Credit Default Swap, which enables the credit protection buyer to transfer the risk associated with the asset on which the CLN is based. The credit protection provider receives from the buyer an increased regular coupon rate and regular value of the asset at maturity unless a credit event occurs prior to maturity of the asset on which the CLN is based;

36. “Basket mitigation techniques” – means the techniques based on basket credit
    derivatives where the protection buyer transfers to the provider the credit risk of more than one exposure (many exposures). The usual forms of basket credit derivatives are first-to-default and nth-to-default;

37. “First-to-default credit derivative” – means a contract relating to a certain number
    (basket) of exposures under the terms of which the first default among the exposures shall trigger payment by protection provider;

38. “Nth-to-default credit derivative” – means a contract relating to a certain number
    (basket) of exposures under the terms of which the nth default among the exposures shall trigger payment by the protection provider;

39. “Cash similar instrument” – means a certificate of deposit or other similar
    instrument issued by the bank which include the obligation to be refunded for the nominal value;

40. “Surrender value”– means the money paid by an insurance company to a
    policyholder who is cancelling an annuity or cash-value life insurance policy. (i.e. the cash value which is accumulated when premiums and interest on any previous cash value exceed the cost of insurance);

41. “Cross-Default” – means a clause in a credit agreement or instrument, which brings
    the announcement of the failure of the borrower, in case the latter default to make any required payment (otherwise known as cross-acceleration);

42. “Remargining” – means to place more cash or securities with the counterparty
    following a margin call. In cases the market value of the pledged collateral fall, the collateral holder requires to counterparty to restore the margin to comply with the determined requirements; c) 8 In the Chapter V for the calculation of risk capital requirements in the positions created in the process of securitisation:

43. “Securitisation” - means a transaction or scheme (financial operation), whereby the
    credit risk associated with an exposure or a pool of exposures is tranched, having all of the following characteristics:
    i. payments in the transaction or scheme are dependent upon the performance of the
    exposure or of the pool of exposures,
    ii. the subordination of tranches determines the distribution of losses during the
    ongoing life of the transaction or scheme;

44. “Traditional securitisation” - means a securitisation involving the transfer of the
    economic interest in the exposures being securitised through the transfer of ownership of those exposures from the originator to an SSPE, or through sub￾participation by an SSPE. The securities issued do not represent payment obligations of the originator;

45. “Synthetic securitisation” - means a securitisation where the transfer of credit risk
    in one or two tranches is achieved by the use of credit derivatives or guarantees, and the exposures or portfolio of exposures being securitised remain exposures of the originator (are not object of transfers); 45/1) “NPE securitisation” - means a securitisation backed by a pool of non-performing exposures as defined in the regulation “On credit risk management from banks and

8 Amended by the Decision No.44, dated 2.11.2022 of the Supervisory Council of the Bank of Albania.

branches of foreign banks”, the nominal value of which makes up not less than 90 % of the entire pool’s nominal value at the time of origination and at any later time where assets are added to or removed from the underlying pool, due to replenishment, restructuring or any other relevant reason; 45/2) “Qualifying traditional NPE securitisation” - means a traditional NPE securitisation where the non-refundable purchase price discount is at least 50 % of the outstanding amount of the underlying exposures at the time they were transferred to the SSPE; 45/3) “Revolving securitisation” - means a securitisation where the securitisation structure itself revolves by exposures being added to or removed from the pool of exposures, irrespective of whether the exposures revolve or not; 45/4) “Resecuritisation” - means securitisation where at least one of the underlying exposures is a securitisation position;
46) Repealed;
47) “Securitisation position”- means an exposure to a securitisation;
48) “Originator” - means an entity which:
i. itself or through related entities, directly or indirectly, was involved in the
original securitisation agreement which created the obligations or potential obligations of the debtor or potential debtor giving rise to the exposures being securitised; or
ii. securitises the assets purchased by a third party, for its own account and recorded
onto its balance sheet;
49) “Sponsor” - means a bank, whether located in or outside the country, or an
investment firm as defined in law No. 62/2020 “On capital markets”, other than an originator, that:
i. establishes and manages an asset-backed commercial paper programme (ABCP)
or other securitisation, that purchases exposures from third-party entities, or
ii. establishes an asset-backed commercial paper programme or other securitisation,
that purchases exposures from third-party entities and delegates the day-to-day active portfolio management involved in that securitisation to an entity authorised to perform such activity in accordance with the law 56/2020 “On collective investment undertakings” and with the law 62/2020 “On capital markets” or relevant legislation; 49/1) “Original lender” - means an entity which, itself or through related entities, directly or indirectly, concluded the original agreement which created the obligations or potential obligations of the debtor or potential debtor giving rise to the exposures being securitised;
50) “ABCP (asset-backed commercial paper) programme” - means a programme of
securitisations, the securities issued by which predominantly take the form of asset￾backed commercial paper9 with an original maturity of one year or less; 50/1) “Fully-supported ABCP programme” - means an ABCP programme that its sponsor directly and fully supports by providing to the SSPE(s) one or more liquidity facilities covering at least all of the following:
i. all liquidity and credit risks of the ABCP programme;

9 “Commercial paper” – in an unsecured, short-term debt instrument, issued by corporations, typically used to finance short￾term liabilities.

ii. any other ABCP transaction-level and ABCP programme-level costs if necessary
to guarantee to the investor the full payment of any amount under the ABCP; 50/2) “ABCP transaction” - means a securitisation within an ABCP programme; 50/3) “Fully supported ABCP transaction” - means an ABCP transaction supported by a liquidity facility, at transaction level or at ABCP programme level that covers at least all of the following:
i. all liquidity and credit risks of the ABCP transaction;
ii. any other ABCP transaction-level and ABCP programme-level costs if necessary
to guarantee to the investor the full payment of any amount under the ABCP; 51)“Securitisation special purpose entity (SSPE)” - means a corporation, trust or other entity, other than an originator or sponsor, that:
i. is established for the purpose of carrying out one or more securitisations,
ii. the activities of which are limited to those appropriate to accomplishing that
objective,
iii. the structure of which is intended to isolate the obligations of the SSPE from
those of the originator;
52) “Credit enhancement” - means a contractual arrangement whereby the credit
quality of a position in a securitisation is improved in relation to what it would have been if the enhancement had not been provided, including the enhancement provided by more junior tranches in the securitisation and other types of credit protection;
53) “Tranche” - means a contractually established segment of the credit risk associated
with an exposure or a pool of exposures, where a position in the segment entails a risk of credit loss greater than or less than a position of the same amount in another segment, without taking account of credit protection provided by third parties directly to the holders of positions in the segment or in other segments;
54) “Excess spread” – means the difference between income flows received in respect of
the securitised exposures (assets and off-balance sheet items) and expenses related to securitisation;
55) “Investor” - means a natural or legal person holding a securitisation position;
56) “Clean-up call option” - means a contractual option that entitles the originator to call
the securitisation positions before all of the securitised exposures have been repaid, either by repurchasing the underlying exposures remaining in the pool in the case of traditional securitisations or by terminating the credit protection in the case of synthetic securitisations, in both cases when the amount of outstanding underlying exposures falls to or below certain pre-specified level;
57) “Liquidity facility” - means the securitisation position arising from a contractual
agreement to provide funding to ensure timeliness of cash flows to investors;
58) “Unrated positions” – mean securitisation positions which do not have an eligible
credit assessment by an eligible ECAI accepted by the Bank of Albania, in accordance with Subchapter IV of Chapter V of this regulation;
59) “Rated positions” - mean securitisation positions which have an eligible credit
assessment by an eligible ECAI accepted by the Bank of Albania, in accordance with Subchapter IV of Chapter V of this regulation;
60) “First loss tranche” - means the most subordinated tranche in a securitisation that is
the first tranche to bear losses incurred on the securitised exposures and thereby provides protection to the second loss and, where relevant, higher ranking tranches;

61. “Pro-rata” – means the division of payments between the originating bank and
    investors of interest, principal, expenses, losses and recoveries (if applied), based on the relative share of the originating bank and the investor in the drawn balances of underlying exposures at the beginning of each month;
62. “Revolving exposure” - means an exposure whereby borrowers’ outstanding
    balances are permitted to fluctuate based on their decisions to borrow and repay, up to an agreed limit;
63. “Early amortisation provision” - means a contractual clause in a securitisation of
    revolving exposures or a revolving securitisation which requires, on the occurrence of defined events, investors’ securitisation positions to be redeemed before the originally stated maturity of those positions; 63/1) “Servicer” - means an entity that manages a pool of purchased receivables or the underlying credit exposures on a day-to-day basis; 63/2) “Senior securitisation position” - means a position backed or secured by a first claim on the whole of the underlying exposures, disregarding for these purposes amounts due under interest rate or currency derivative contracts, fees or other similar payments, and irrespective of any difference in maturity with one or more other senior tranches with which that position shares losses on a pro-rata basis; 63/3) “Mezzanine securitisation position” - means a position in the securitisation which is subordinated to the senior securitisation position and more senior than the first loss tranche, and which is subject to a risk weight lower than 1250% and higher than 25%, in accordance with articles 109-114 of this regulation; 63/4) “Overcollateralisation” - means any form of credit enhancement by virtue of which underlying exposures are posted in value which is higher than the value of the securitisation positions; d) In the Chapter VI for the calculation of capital requirements for counterparty credit risk:
64. “Counterparty Credit Risk” (in this Regulation referred to as “CCR” hereafter for
    simplicity) - means the risk that the counterparty to a transaction could default before the final settlement of the transaction's cash flows;
65. “Central counterparty” – means any entity that legally interposes itself between
    counterparties to contracts traded within one or more financial markets, becoming the buyer to every seller and the seller to every buyer;
66. “Long Settlement Transactions” – mean transactions where a counterparty
    undertakes to deliver a security, a commodity, or a foreign exchange amount against cash, other financial instruments, or commodity, or vice versa, at a settlement or delivery date that is contractually specified as more than the lower of the market standard for this particular transaction and five business days after the date on which the bank enters into the transaction;
67. “Margin Lending Transactions” – mean transactions in which a bank extends
    credit in connection with the purchase, sale, carrying or trading of securities. Margin lending transactions do not include other loans that happen to be secured by securities collateral;
68. “Repurchase agreement and reverse repurchase agreement” – mean any
    agreement which meets the following criteria:

i. under this agreement the bank or its counterparty transfers securities or
commodities or guaranteed rights relating to the title of those securities and commodities (where that guarantee is issued by a recognized exchange which holds the rights to the securities or commodities); and
ii. this agreement does not allow a bank to transfer or pledge (or exchange for
securities or commodities of the same description) a particular security or commodity
iii. to more than one counterparty at one time, subject to a commitment to repurchase
them, (or substituted securities or commodities of the same description) at a specified price on a future date specified, or to be specified, by the transferor. For the banks, a repurchase agreement represents an agreement which meets the criteria in question and under which the bank sells securities or commodities. For the bank a reverse repurchase agreement represents an agreement which meets the criteria in question and under which the bank purchases securities or commodities;
69) “Netting set” – means a group of transactions with a single counterparty that are
subject to bilateral netting and for which netting is recognised under the sub-charter II of Charter VI of this Regulation. Each transaction that is not subject to a legally enforceable bilateral netting arrangement under sub-charter II of Charter VI should be interpreted as its own netting set for the purpose of this Chapter;
70) “Securities and commodities lending agreement and securities or commodities
borrowing agreement” – mean any agreement under which a bank or its counterparty transfers securities or commodities against appropriate collateral, subject to a commitment that the borrower will return equivalent securities or commodities at some future date or when requested to do so by the transferor. Equivalent securities are considered those of the same issuer, with the same interest rate and maturity, those that are denominated in the same currency and have the same legal standing in the event of bankruptcy;
71) “Risk position” – means a number that is assigned to a transaction under the
Standardised Method set out in Chapter VI, following a predetermined algorithm
72) “Hedging Set” – means an agreement which aims the hedge of the groups of risk
positions from the transactions within a single netting set for which only their balance is relevant for determining the exposure value under the Standardised Method set out in Chapter 5;
73) “Current Market Value” (in this regulation referred to as “CMV” hereafter for
simplicity) - means the net market value of the portfolio of transactions within the netting set with the counterparty. Both positive and negative market values are used in computing CMV as defined in the standard method of counterparty risk.
74) “Perfectly matching contracts” – are forward foreign exchange contracts or similar
contracts in which a notional principal is equivalent to cash flows if the cash flows fall due on the same value date and fully or partly in the same currency;

e) In the Chapter VII for the calculation of capital requirements for market risk:
75) “Over-the-counter derivative instruments” (in this regulation referred to as
“OTC” hereafter for simplicity in this Regulation) - means financial instruments referred to Annex IV of this Regulation which are not traded through the mediation of the central counterparty;
76) “Convertible security” – means a security which, at the option of the holder, may
be exchanged for another security;
77) “Warrant” – means a security which gives the holder the right to purchase an
underlying asset at a stipulated price until or at the expiry date of the warrant and which may be settled by the delivery of the underlying asset itself10 or by cash settlement;
78) “Stock financing” – means positions created upon the forward sale of commodities
and the maintaining unchanged of the funding cost till the forward sale date;
79) “Recognised Stock Exchanges” – is the stock exchange which meets the following
criteria:
i. functions normally;
ii. there are rules approved by the competent authorities of the country, which
define its activity, the term to access the stock exchange and the conditions that contracts must fulfil, before traded in the stock exchange; iii.the stock exchange has a clearing mechanism, through which the listed contracts are subjects to a request for a daily margin, which according to the opinion of Bank of Albania provide the appropriate protection.
80) “Delta coefficient”– means the expected change in an option price caused by the
change in the price of the instrument underlying the option;
81) “Gamma coefficient”–means the relative change in the delta coefficient caused by a
small change in the price of the instrument underlying the option;
82) “Vega coefficient”– means the change in an option price caused by a small change
in the volatility of the instrument underlying the option; f) In the Chapter VIII for the calculation of capital requirements for operational risk:
83) “Operational risk”– means the risk of loss an entity undertakes as a result from
inadequate or failed internal processes and systems, human errors, or external events. The operational risk includes legal risk but excludes the reputation and strategic risk;
84) “Operational risk management system” – means a set of rules, processes,
procedures, structures and resources established by the bank to identify, monitor, control, prevent and mitigate exposures to operational risks. It also includes the operational risk measurement system;
85) “Operational risk measurement system”– means a set of rules, processes,
procedures and controls for collecting, treating, elaborating and safekeeping data on operational risks and for determining the capital requirement for operational risk.

“Underlying asset” – means a financial instrument (e.g. stocks, future contracts, commodities, currencies, indexes, etc) based on which derives a derivative price (“Derivative – means a financial instrument the price of which derives from a different asset).

CHAPTER II
CAPITAL ADEQUACY
Article 5
Capital adequacy ratio

1. Banks shall calculate the capital adequacy ratio between the amounts of regulatory
   capital to the amount of risk weighted exposures (assets), expressed in percentage, on individual and consolidated basis.
2. Banks shall ensure that the capital adequacy ratio, calculated according to paragraph 1
   of this article, shall not be less than 12%.
   Article 611
   Risk Weighted Exposures
3. Banks shall calculate risk-weighted exposures, as the sum of the following elements, after
   taking into account the provisions laid down in paragraph 2 of this article:
   a) the risk weighted exposure amounts for credit risk and counterparty credit risk, calculated in accordance with Chapter III and article 164 of this regulation, for all the business activities of the bank, excluding risk weighted exposures from the bank’s trading book; b) the capital requirements for the bank’s trading-book for the following:
   i. market risk as determined in accordance with Chapter VII of this regulation,
   ii. large exposures exceeding the limits specified in regulation “On the risk
   management from large exposures of banks”, to the extent that the bank is permitted to exceed those limits, as determined in accordance with articles 165 and 166 of this regulation; c) the capital requirements for market risk as determined in Chapter VII of this regulation, for all bank’s activities that are subject to foreign exchange risk, commodity risk or settlement risk (with the exception of article 164 of this regulation); d) the capital requirements for operational risk as determined in Chapter VIII of this regulation; e) the risk weighted exposure amounts determined in accordance with Chapter VI of this regulation, for counterparty credit risk arising from the trading book business of the bank for the following types of transactions and agreements:
   i. contracts listed in Annex 4 of this regulation and credit derivatives,
   ii. repurchase transactions, securities or commodities lending or borrowing
   transactions based on securities or commodities,
   iii. margin lending transactions based on securities or commodities,
   iv. long settlement transactions.

11 Amended the content of the article 6 by the Decision No.68, dated 22.12.2021 of the Supervisory Council of the Bank of Albania.

2. The following provisions shall apply in the calculation of the total exposure amount
   referred to in paragraph 1:
   a) the capital requirements referred to in letters “c” and “d” of paragraph 1 of this article shall include those arising from all the business activities of the bank; b) banks shall multiply the capital requirements set out in letters “b” to “d” of paragraph 1 of this article, by 12,5.
   Article 7
   Regulatory capital
3. Banks shall calculate the regulatory capital according to the guideline issued by the
   Bank of Albania “On bank’s regulatory capital”.
4. Banks shall ensure that the regulatory capital shall be at any moment more than the sum
   of the following a) capital requirement for credit risk and credit counterparty risk, calculated as the total of risk weighted exposures (assets items on and off balance sheet), multiplied by 12%; b) capital requirement for market risk, calculated according to provisions specified in
   Chapter VII of this Regulation, multiplied by 1.5;
   c) capital requirement for operational risk, calculated according to the simple index method as per the provisions determined in Chapter VIII of this Regulation, multiplied by 1.5.
   CHAPTER III
   CREDIT RISK
   SUBCHAPTER I
   STANDARDISED APPROACH
   Article 8
   General provisions
5. Banks shall apply the Standardised Approach to calculate the capital requirement for
   credit risk and counterparty credit risk.
6. The capital requirements for credit risk and capital requirements for counterparty credit
   risk in accordance with the Standardised Approach shall be equal to 12% of the total of the risk-weighted exposures and contingent exposures in accordance with the provisions of this Chapter of the Regulation.

Article 9
Determining the exposure value

1. 12The exposure value of an asset item shall be its accounting value, after reserves to cover
   losses, additional value adjustments in accordance with article 9 of regulation “On bank’s regulatory capital” and other regulatory capital’s reductions related to this asset item, have been applied. The exposure value of an off-balance sheet item listed in Annex II of this Regulation shall be the following percentage of its nominal value, after reduction of specific credit risk adjustments, according to the classification in the risk categories:
   a) 100% of its value if it is a high-risk item; b) 50% of its value if it is a medium-risk item; c) 20% of its value if it is a low-risk item; d) 0% of its value if it is a risk-free item;
2. 13Repealed.
3. When the exposure is subject to funded credit protection, banks shall calculate the
   exposure value considering the credit risk mitigation techniques in accordance with
   Chapter IV of this Regulation.
4. In the case of banks using the Financial Collateral Comprehensive Method for risk
   mitigation, where an exposure takes the form of securities or commodities sold, posted or lent under a repurchase transaction or under a securities or commodities lending or borrowing transaction, and margin lending transactions the exposure value shall be adjusted with the increasing volatility effect, as laid down in Chapter IV of this Regulation.
5. Banks shall calculate the exposure value of a derivative instrument listed in Annex 4 of
   this Regulation in accordance with Chapter VI.
6. Banks shall calculate the exposure value of repurchase transactions, securities or
   commodities lending or borrowing transactions, long settlement transactions and margin lending transactions either in accordance with Chapter VI or Chapter IV of this Regulation.
7. Banks shall calculate the exposure value of credit risk to a central counterparty in
   accordance with Chapter VI of this Regulation, provided that the central counterparty's credit risk exposure with all participants in its arrangements is fully collateralized on a daily basis.
   Article 10
   Exposure classes
8. Banks shall assign each exposure item, on- and off-balance sheet, to one of the
   following exposure classes:
   a) exposures or contingent exposures on central governments or central banks; b) exposures or contingent exposures on regional governments or local authorities;

12 Amended by the Decision No.68, dated 22.12.2021 of the Supervisory Council of the Bank of Albania. 13 Repealed by the Decision No. 68, date 22.12.2021 of Supervisory Council of the Bank of Albania.

c) 14exposures or contingent exposures to public sector entities; d) exposures or contingent exposures on multilateral development banks; e) exposures or contingent exposures on international organizations; f) exposures or contingent exposures on supervised institutions; g) exposures or contingent exposures on corporates; g/1) 15exposures to supervised institutions and corporates with a short-term credit assessment; g/2) 16equity exposures; h) exposures or contingent exposures on retail portfolios; i) exposures or contingent exposures secured on real estate; j) past due items; k) exposures on high-risk categories; l) exposures in the form of covered bonds; m) exposures on securitization positions; n) exposures in the form of collective investment undertakings (“CIUs”); and/or o) other items.
2. 17Repealed.
3. 18Repealed.
4. 19Repealed.
Article 11
General requirements for determining risk-weighted exposure amounts and determining risk weights according to exposure classes

1. For the purposes of calculating risk-weighted exposure amounts, banks shall apply risk
   weights to all exposures, unless deducted from own funds, in accordance with the provisions of this subchapter.
2. Banks shall apply the risk weights based on the exposure class, within which this
   exposure is rated and on the credit quality.
3. The credit quality may be determined referring to the credit assessments of the ECAIs
   or credit assessments of ECA in accordance with subchapter II of this Chapter.
4. For purposes of applying a risk weight, banks shall multiply the exposure value by the
   risk weight specified or determined in accordance with this subchapter.
5. Where an exposure is subject to credit protection, Banks may modify the risk weight
   applicable to that exposure using credit risk mitigation techniques, in accordance with
   Chapter IV of this regulation
6. Banks shall calculate the risk-weighted exposure amounts for securitised exposures in
   accordance with the requirements of Chapter V of this regulation.
7. For exposures which are not specified under this regulation, banks shall calculate risk￾weighted exposure amounts by assigning a risk-weight of 100%.

14 Amended by the Decision No. 7, dated 5.2.2020 of the Supervisory Council of the Bank of Albania. 15 Added by the Decision No. 68, date 22.12.2021 of Supervisory Council of the Bank of Albania. 16 Added by the Decision No. 68, date 22.12.2021 of Supervisory Council of the Bank of Albania. 17 Repealed by the Decision No. 68, date 22.12.2021 of Supervisory Council of the Bank of Albania. 18 Repealed by the Decision No. 68, date 22.12.2021 of Supervisory Council of the Bank of Albania. 19 Repealed by the Decision No. 68, date 22.12.2021 of Supervisory Council of the Bank of Albania.

Article 12
Exposures to central governments or central banks

1. Without prejudice to paragraphs 2 to 7 of this article, banks shall assign to the
   exposures to central governments and central banks a 100% risk weight.
2. Based on the assessment determined by an ECAI, banks shall assign to the exposures to
   central governments and central banks a risk weight in accordance with Table 1.
   Table 1
   Credit quality step 1 2 3 4 5 6
   Risk Weight 0% 20% 50% 100% 100% 150%
3. Banks shall assign a 0% risk weight to the exposures to the European Central Bank.
4. 20Banks shall assign a 0% risk weight to the exposures to the Albanian Government,
   issued and funded in the Albanian currency.
5. Banks shall assign a 0% risk weight to the exposures to the Bank of Albania, issued and
   financed in Albanian currency and in foreign currency.
6. Banks shall assign 0% risk weight to the exposures to EU Member States’ central
   governments and central banks denominated and funded in their domestic currency.
7. Banks, in cases the competent authorities of a third country (excluding EU Member
   States) apply supervisory and regulatory arrangements at least equivalent to those applied by Bank of Albania, shall assign a risk weight which is lower than those indicated in paragraphs 1 to 2 of this article to exposures to their central government and central bank denominated and funded in the domestic currency, only upon the prior approval of the Bank of Albania.
8. When banks do not use assessments of an ECAI, or when an authorized ECAI has not
   made an assessment, they shall assign to the exposures to the central governments and central banks the risk weights according to Table 2, in accordance with the assessment made by ECA, recognized by the Bank of Albania, and related to which the bank intend to use.
   Table 2
   Minimum Export Insurance
   Premium (MEIP) 0 1 2 3 4 5 6 7
   Risk Weight 0% 0% 20% 50% 100% 100% 100% 150%

20 Amended by the Decision No. 68, dated 22.12.2021 of the Supervisory Council of the Bank of Albania.

Article 13
Exposures to regional governments or local authorities

1. Without prejudice to paragraphs 2 to 5 of this article, banks shall apply to the exposures
   to regional governments or local authorities the same risk-weight as to the exposures to supervised institutions (the treatment for short-term exposures specified in this Subchapter shall not be applied).
2. Where there is no difference in risk between such exposures with those to central
   government because of the specific revenue-raising powers of the former, or the existence of specific institutional arrangements the effect of which is to reduce their risk of default up to the level of the risk of central government, Bank of Albania may allow banks to apply to exposures to regional governments and local authorities the same risk weight as to exposures to the central government in whose jurisdiction they are established.
3. The treatment laid down in paragraph 2 of this article shall be implemented only for
   exposures to regional government and local authorities in Albania and European Union member states, set forth in the list prepared and published for this purpose by the competent authorities of each country.
4. Exposures to religious communities constituted in the form of a legal person under the
   Law “On merchants and companies”, and whose income are subject to taxation according to the Albanian legislation on this institutions, shall be treated as exposures to regional governments and local authorities, except for paragraph 2 of this article which shall not apply in this case.
5. When competent authorities of a third country (excluding EU Member States) which
   apply supervisory and regulatory arrangements at least equivalent to those applied by the Bank of Albania, treat exposures to regional governments and local authorities as exposures to their central government, banks may apply these risk weights only on prior approval by Bank of Albania.
6. 21Exposures to regional governments or local authorities of the countries that are not
   referred to in paragraphs 2 to 5 of this article and are denominated and funded in the domestic currency of that regional government and local authority shall be assigned a risk weight of 20 %.
   Article 1422
   Exposures to public sector entities
7. The banks shall assign a risk weight to the exposures to public sector entities for which
   a credit assessment by a nominated ECAI is not available, based on the credit quality step assigned to exposures to the central government of the jurisdiction in which the public sector entity is established/operating, in accordance with Table 2.1:
   Table 2.1
   Credit quality step assigned to central government 1 2 3 4 5 6 Risk Weight 20% 50% 100% 100% 100% 150%

21 Added by the Decision No. 68, date 22.12.2021 of Supervisory Council of the Bank of Albania. 22 Amended by the Decision No. 7, dated 5.2.2020 of the Supervisory Council of the Bank of Albania.

2. For exposures to unrated public sector entities incorporated in countries where the
   central government is unrated, the banks shall apply a risk weight of 100%.
3. Banks, for exposures to public sector entities for which an assessment by an ECAI is
   available, shall assign a risk weight in accordance with the risk weights for exposures to supervised institutions, specified in article 17/1 of this regulation. The preferential treatment for short-term exposures provisioned in article 17, paragraph 2, and in article 17/1, paragraph 2, shall not be applied to public sector entities.
4. Notwithstanding the above paragraphs, banks shall assign a risk weight of 20% for
   exposures to public sector entities, with an original maturity of 3 (three) months or less than 3 (three) months.
5. Banks, with the prior approval of the Bank of Albania, may treat exposures to public
   sector entities as exposures to the central government, in whose jurisdiction they are established/operate, in the event there is no difference in the risk arising from such exposures, because of the existence of an appropriate guarantee by the central government.
6. Banks, where the competent authorities of a Member State of the European Union treat
   exposures to public sector entities, as exposures to institutions or as exposures to the central government, in whose jurisdiction they are established/operate, may assign a risk weight in the same manner to such public sector entities.
7. Where the competent authorities of a third country (excluding EU countries), which
   have regulatory and supervisory criteria, at least equivalent to those of the Bank of Albania, and treat exposures to public sector entities in accordance with paragraphs 1 to 3 of this article, the banks may apply these risk weights only with the prior approval of the Bank of Albania. Unless the conditions specified in this paragraph are met, banks shall apply a 100% risk weight.
   Article 15
   Exposures to multilateral development banks
8. 23Banks shall treat exposures to multilateral development banks that are not provisioned
   in paragraph 3 of this article, as exposures to supervised institutions. The preferential treatment for short-term exposures provisioned in article 17, paragraph 2, in article 17/1, paragraph 2 and in article 17/2, paragraph 3 of this regulation, shall not be applied to multilateral development banks.
9. 24For the purposes of this article, the Inter-American Investment Corporation, the Black
   Sea Trade and Development Bank and the Central American Bank for Economic Integration are considered to be multilateral development banks.
10. Banks shall assign a 0% risk weight to the exposures to the following multilateral
    development banks. a) the International Bank for Reconstruction and Development; b) International Finance Corporation; c) Inter-American Development Bank;

23 Amended by the Decision No. 68, date 22.12.2021 of Supervisory Council of the Bank of Albania. 24 Amended by the Decision No. 68, date 22.12.2021 of Supervisory Council of the Bank of Albania.

d) Asian Development Bank; e) African Development Bank; f) Council of Europe Development Bank; g) Nordic Investment Bank; h) Caribbean Development Bank; i) European Bank for Reconstruction and Development; j) European Investment Bank; k) European Investment Fund; l) Multilateral Investment Guarantee Agency; m) International Finance Facility for Immunisation; n) Islamic Development Bank; o) 25the International Development Association; p) 26the Asian Infrastructure Investment Bank.
4. Banks shall assign a risk weight of 20% to the part of the unpaid capital subscribed to
the European Investment Fund.
Article 16
Exposures to international organisations

1. Banks shall assign a 0% risk weight to the exposures to the following international
   organisations:
   a) European Union; b) International Monetary Fund; c) Bank for International Settlements; d) European Financial Stability Facility; e) Any international financial institutions, established by two or more EU member states, for the purposes to finance and provide financing to its members, which are exposed or might be exposed to severe financial situations.
   Article 1727
   Exposures to supervised institutions
2. Banks, for exposures to supervised institutions for which an ECAI assessment is
   available, shall assign a risk weight as specified in article 17/1 of this regulation. Banks, for exposures to supervised institutions for which an ECAI assessment is not available, shall assign a risk weight as specified in article 17/2 of this regulation.

25 Added by the Decision No. 68, dated 22.12.2021 of the Supervisory Council of the Bank of Albania. 26 Added by the Decision No. 68, dated 22.12.2021 of the Supervisory Council of the Bank of Albania. 27 Amended by the Decision No. 7, dated 5.2.2020 of the Supervisory Council of the Bank of Albania.

2. Banks, for exposures to supervised institutions with a residual maturity of 3 (three) or
   less than 3 (three) months, and which are denominated and funded in the national currency of the borrower, shall assign a risk weight that is one category less favourable than the preferential risk weight applied to the central government (as defined in paragraphs 4, 6 and 7 of article 12 of this regulation). In any case, this risk weight may not be less than 20%.

Article 17/128
Exposures to rated supervised institutions

1. Banks, for exposures to supervised institutions with a residual maturity of more than 3
   (three) months, for which a credit assessment by a nominated ECAI is available, shall assign a risk weight according to Table 4.
   Table 4
2. Banks, for exposures to supervised institutions with a residual maturity of up to 3 (three)
   months, for which a credit assessment by a nominated ECAI is available, shall assign a risk-weight according to Table 4.1.
   Table 4.1
3. 29Repealed.
4. The bank, for the selection between the treatment of short term credit assessment by an
   ECAI,
   30under article 19/1 of this regulation and the preferential treatment for short term exposures (with residual maturity up to 3 (three) months) set out in paragraph 2 of this
   article, shall act as follows:
   a) if there is no short-term exposure assessment, the general preferential treatment for short-term exposures (with residual maturity up to 3 (three) months) as specified in paragraph 2 of this article, shall be applied to all exposures to institutions with a residual maturity of up to three months;

28 Added by the Decision No. 7, dated 5.2.2020 of the Supervisory Council of the Bank of Albania. 29 Repealed by the Decision No. 68, dated 22.12.2021 of the Supervisory Council of the Bank of Albania. 30 Amended by the Decision No. 68, dated 22.12.2021 of the Supervisory Council of the Bank of Albania. Credit quality step 1 2 3 4 5 6 Risk weight 20% 50% 50% 100% 100% 150% Credit quality step 1 2 3 4 5 6 Risk weight 20% 20% 20% 50% 50% 150%

b) if there is a short-term assessment which determines a more favourable or identical risk weight than the general preferential treatment for short-term exposures (with residual maturity up to 3 (three) months), as specified in paragraph 2 of this article, then the short-term assessment shall be used for that specific exposure only. Other short-term exposures shall follow the general preferential treatment for short-term exposures (with residual maturity up to 3 (three) months), as specified in paragraph 2 of this article; c) if there is a short-term assessment which determines a less favourable risk weight than the use of the general preferential treatment for short-term exposures (with residual maturity up to 3 (three) months), as specified in paragraph 2 of this article, then the general preferential treatment for short-term exposures shall not be used and all unrated short-term claims shall be assigned the same risk weight as that defined by the specific short-term assessment.
Article 17/231
Exposures to unrated supervised institutions

1. Banks, for the exposures to supervised institutions for which a credit assessment by a
   nominated ECAI is not available, shall assign a risk weight based on the level of the credit quality step assigned to exposures to the central government of the jurisdiction in which the institutions are established/operating, in accordance with Table 4.3.
   Table 4.3
   Credit quality step assigned to central government 1 2 3 4 5 6 Risk weight of exposure 20% 50% 100% 100% 100% 150%
2. For exposures to unrated supervised institutions incorporated in countries where the
   central government is unrated, the banks shall apply a risk weight of 100%.
3. Banks shall assign a 20% risk weight to exposures to unrated supervised institutions,
   with an original effective maturity of three months or less. For the purposes of this paragraph, exposures with an original (contractual) maturity of three months or less than 3 months, which are expected to be roll over, do not qualify for this preferential treatment.
4. Banks shall assign a risk weight of 50 % for trade finance32 exposures to unrated
   supervised institutions, with a residual maturity of up to one year, which are self￾liquidating transactions related to the exchange of goods and services, and a risk weight of 20 % for trade finance exposures to unrated supervised institutions, with a residual maturity of 3 (three) months or less than 3 (three) months.

31 Added by the Decision No. 7, dated 5.2.2020 of the Supervisory Council of the Bank of Albania. 32 According to the definition of “trade finance”, provisioned in regulation no.27, dated 28.3.2019 “On liquidity coverage ratio”.

Article 1833
Equity exposures

1. For the purposes of this article, banks shall consider as equity exposures, the following
   exposures:
   a) non-debt exposures conveying a subordinated, residual claim on the assets or income of the issuer; b) debt exposures and other securities, partnerships, derivatives or other vehicles, the economic substance of which is similar to the exposures specified in letter “a” of this paragraph.
2. Banks shall assign a risk weight of 100% to equity exposures, unless they are deducted
   from the regulatory capital, assigned a risk weight of 250% in accordance with article 20, paragraph 4 of the regulation “On the bank’s regulatory capital”, assigned a risk weight of 1250 % in accordance with article 11, paragraph 1, letter “j”, subparagraph “i” of regulation “On the bank’s regulatory capital”, or treated as high risk items in accordance with article 25 of this regulation.
3. Investments in equity or regulatory capital instruments issued by supervised institutions
   shall be classified as equity claims, unless they are deducted from the regulatory capital or assigned a 250 % risk weight in accordance with article 20, paragraph 4 of the regulation “On the bank’s regulatory capital” or treated as high risk items in accordance with article 25 of this regulation.
   Article 19
   Exposure to corporates
4. Banks, based on the credit assessment by a nominated ECAI, shall assign to the exposures
   to corporates the risk weights according to Table 5.
   Table 5
   Credit quality 1 2 3 4 5 6
   Risk Weight 20% 50% 100% 100% 150% 150%
5. When the credit assessment by an ECAI is not used or is not available, banks shall assign
   a 100% risk weight to the exposures to the corporates. This risk weight shall not be lower (more favourable) than the risk weight assigned to exposures to the central government of the jurisdiction in which the company is established and operates.
6. 34Repealed.

33 Amended the title and the content of the article 18 by the Decision No. 68, dated 22.12.2021 of the Supervisory Council of the Bank of Albania. 34 Repealed by the Decision No. 68, dated 22.12.2021 of the Supervisory Council of the Bank of Albania.

Article 19/135
Exposures to supervised institutions and corporates with a short-term credit assessment

1. Based on short-term assessment/s of an ECAI, banks shall assign risk weights to the
   exposures to supervised institutions and to corporates, according to Table 6.
   Table 6
   Credit quality 1 2 3 4 5 6
   Risk Weight 20% 50% 100% 150% 150% 150%
   Article 19/236
   Exposure to corporates that finance projects in strategic transport infrastructures37
2. Banks shall separately identify from the class of exposures to corporates, the exposures
   to corporates that finance projects in strategic transport infrastructures, as provided in paragraph 2 of this article, which meet the following conditions:
   a) the exposure is to a corporate, to finance or operate projects in strategic transport infrastructures, related to projects in one of the areas provided for in paragraph 2 of this article; b) the financing has a maturity up to 10 years; c) the loan contract gives the bank a high level of control over the assets of the project and the income that it generates; d) the source of repayment of the loan (obligation) consists of at least two thirds of its amount, of incomes generated by the project being financed; e) the borrower can meet its financial obligations even under severely stressed conditions that are relevant for the risk of the project being financed; f) the final beneficiary of the project being financed is the Albanian Government.
3. For the purposes of this article, projects in strategic transport infrastructures shall be
   considered financing of projects in the form of construction of a new infrastructure or of an existing infrastructure, in the fields of road transport and port and airport infrastructure, according to legal and sub-legal provisions and where the corporate has a contract/agreement with the relevant state institution.
4. For the purposes of this article, banks shall assign a risk weight of 50% to exposures to
   corporates that finance projects in strategic transport infrastructures, only if the conditions provided for in paragraph 1 and 2 of this article are met.
5. The provisions of this article shall apply to all exposures to corporates financing projects
   in strategic transport infrastructures, which shall be created until 31 December 2026 and shall be applicable until the approved maturity of the financing, which in any case shall not exceed 10 years.

35 Added by the Decision No. 68, dated 22.12.2021 of the Supervisory Council of the Bank of Albania. 36 Added by the Decision No. 31, dated 2.7.2025 of the Supervisory Council of the Bank of Albania. 37 Note: According to point 2 of decision no. 31, dated 2.7.2025 of the Supervisory Council of the Bank of Albania, for all banks that will benefit from the provisions of article 19/2, it will be allowed the distribution of the retained earnings from previous periods, or of the profit realized in 2025 and 2026, up to the extent of 50%.

Article 2038
Retail portfolio exposures

1. Banks shall assign a 75% risk weight to retail portfolio exposures, if they meet all the
   following conditions:
   a) the exposure shall be either to an individual person or persons, or to small or medium-sized enterprises; b) the exposure takes one of the forms of credit and revolving credit lines (for example, credit cards, overdrafts, etc), consumer loans and personal financial leasing (for example credit instalments, credit and financial leasing for vehicles, education loans, etc), and credit lines and commitments for the small and medium-sized enterprises; c) the exposure shall be one of a significant number of exposures with similar characteristics such that the risks associated with such lending are substantially reduced; d) aggregate retail exposure to an individual or small and medium-sized enterprise and the related parties, which is calculated as the gross amount of all exposures (before the reduction of reserve funds for covering losses and the mitigation techniques of credit risk) and potential exposures (considering their value as stipulated in article 9 of this regulation), does not exceed the amount of ALL 50 million39 .
2. Banks shall not qualify/classify securities exposures in the retail exposure class.
3. Banks shall classify the present value of retail minimum lease payments for financial
   leasing arrangements40, in the retail exposure class.
4. Exposures due to loans granted by the bank to pensioners or employees with a
   permanent contract against the unconditional transfer of part of the borrower's pension or salary to that bank, shall be assigned a risk weight of 35%, provided that all the following conditions are met:
   a) in order to repay the loan, the borrower unconditionally authorises the pension fund or employer to make direct payments to the bank, by deducting the monthly payments on the loan from the borrower’s monthly pension or salary; b) the risks of death, inability to work, unemployment or reduction of the net monthly pension or salary of the borrower are properly covered through an insurance policy underwritten by the borrower to the benefit of the bank; c) the monthly payments to be made by the borrower on all loans that meet the conditions set out in letters “a” and “b”, in aggregate41 , do not exceed 20 % of the borrower’s net monthly pension or salary; d) the maximum original maturity of the loan is equal to or less than ten years.
   Article 20/142
   Adjustment of risk-weighted non-defaulted SME exposures

38 Amended the content of article 20 by the Decision No. 68, dated 22.12.2021 of the Supervisory Council of the Bank of Albania. 39 For the purposes of calculating the retail portfolio, banks shall exclude the exposures or potential exposures, secured by mortgages on residential real estate, which are weighted by 35%. 40 Outstanding balance. 41 In cases when more than one loan has been granted to the borrower. 42 Added by the Decision No. 68, dated 22.12.2021 of the Supervisory Council of the Bank of Albania.

1. The banks shall adjust the risk-weighted exposure amounts for non-defaulted exposures
   to an SME (RWEA), which are calculated in accordance with Chapter III of this regulation, in accordance with the following formula:
   where,
   RWEA* - is the risk-weighted exposure amount for non-defaulted exposures to an SME (RWEA), adjusted by an SME supporting factor; E - is the total amount owed to the bank, including any exposure in default, but excluding claims or contingent claims secured by residential property collateral, by the SME or the group of connected clients of the SME.
2. For the purposes of this article:
   a) the exposure to an SME shall be included either in the retail or in the corporates or secured by real estate property classes; b) an SME has the meaning as defined in article 4 of this regulation; c) banks shall take reasonable steps to correctly determine the value of “E” in the formula in paragraph 1 of this article and obtain the information required under letter “b” of this paragraph.
   Article 2143
   Exposures secured by mortgages on immovable property
3. An exposure or any part of an exposure fully secured by mortgage on immovable
   property shall be assigned a risk weight of 100 %, where the conditions set out in article 22 or 23 of this regulation are not met, except for any part of the exposure which is assigned to another exposure class.
4. The part of the exposure that exceeds the mortgage value of the immovable property
   shall be assigned the risk weight applicable to the unsecured exposures of the counterparty involved. The part of an exposure that is treated as fully secured by immovable property shall not be greater than the pledged amount of the market value.
   Article 22
   Exposures secured by mortgages on residential property
5. Banks shall assign a risk weight of 35% to the exposures or any part of an exposure
   fully secured by mortgages on residential property44 , within the territory of the Republic of Albania or European Union, which shall meet at the same time the following characteristics:

43 Amended the content of the article 21 by the Decision No. 68, dated 22.12.2021 of the Supervisory Council of the Bank of Albania. 44 Amended by the Decision No. 68, dated 22.12.2021 of the Supervisory Council of the Bank of Albania.

a) the subject of which is the purchasing/construction/reconstruction45 of a residential real estate (house, apartment); b) the borrower is the purchaser/owner46 of this residential real estate; c) they are secured by a mortgage on a residential real estate, which is on borrower's ownership and the latter uses it or has rented it; d) there are meet the requirements laid dawn in Annex 1 of this Regulation; e) the exposure value is less or equal to 75% of the residential real estate’s value; f) 47the value of the property shall not materially depend upon the credit quality of the borrower. Banks may exclude situations where purely macro-economic factors affect both the value of the property and the performance of the borrower from their determination of the materiality of such dependence; g) 48the risk of the borrower shall not materially depend upon the performance of the underlying property or project, but on the underlying capacity of the borrower to repay the debt from other sources, and as a consequence, the repayment of the facility shall not materially depend on any cash flow generated by the underlying property serving as collateral. For those other sources, banks shall determine maximum loan-to-income ratios as part of their lending policy and obtain suitable evidence of the relevant income when granting the loan.
2. Banks shall assign a risk weight of 35% to exposures to a tenant under a property
leasing transaction, concerning residential property under which the bank is the lessor and the tenant has an option to purchase, provided that the exposure of the bank is fully and completely secured by its ownership of the property.
3. 49The Bank of Albania, based on its assessment on the loss experience of exposures
secured by immovable property and forward-looking immovable property markets developments, may set higher risk weights applicable to those exposures or impose stricter criteria than those set out in paragraph 1 and 2 of this article, for the exposures secured by mortgages on residential property. Where the Bank of Albania sets higher risk weights or stricter criteria, banks shall have a transitional period to implement these new requirements.
Article 23
Exposures secured by mortgages on commercial real estate

1. Banks shall assign a risk weight of 50% to the exposures or any part of an exposure
   fully secured by mortgages on commercial property 50(such as: offices, malls or other commercial premises, for commercial functions or purposes, etc.) within the territory of the Republic of Albania.
2. Banks shall assign a risk weight of 50% to exposures to a tenant under a property
   leasing transaction, within the territory of the Republic of Albania, exposures under which the bank is the lessor and the tenant has an option to purchase, provided that the exposure of the bank is fully and completely secured by its ownership of the property.

45 Amended by the Decision No. 7, dated 5.2.2020 of the Supervisory Council of the Bank of Albania. 46 Amended by the Decision No. 7, dated 5.2.2020 of the Supervisory Council of the Bank of Albania. 47 Added by the Decision No. 68, dated 22.12.2021 of the Supervisory Council of the Bank of Albania. 48 Added by the Decision No. 68, dated 22.12.2021 of the Supervisory Council of the Bank of Albania. 49 Added by the Decision No. 68, dated 22.12.2021 of the Supervisory Council of the Bank of Albania. 50 Added by the Decision No. 7, dated 5.2.2020 of the Supervisory Council of the Bank of Albania.

3. For the implementation of paragraphs (1) and (2) of this Article, banks shall ensure that
   the following criteria have been met:
   a) the value of the property does not materially depend upon the borrower's financial performance ( 51the bank may exclude situations, where purely macro-economic factors affect both the value of the real estate and the performance of the borrower, from the determination of the materiality of such dependence); b) the risk of the borrower does not materially depend upon the performance of the underlying property or project, but rather on the underlying capacity of the borrower to repay the debt from other sources (thus the repayment of the facility does not materially depend on any cash flow generated by the underlying property serving as collateral); c) the minimum requirements set out in Annex 1 of this regulation are met; d) the exposure value does not exceed 50% of the market value of commercial real estate.
4. The portion which exceeds the limit set out in paragraph 3, letter “d” of this article,
   shall be assigned a 100% risk weight.
5. When an EU Member State weights the exposures by commercial property, as set out in
   the above paragraphs of this article, banks shall assign 50% risk weight to the exposures secured by commercial properties located in the territory of that country.
6. 52For the purposes of this article, land is not considered as a commercial real estate
   mortgage.
7. 53The Bank of Albania, based on its assessment on the loss experience of exposures
   secured by immovable property and forward-looking immovable property markets developments, may set higher risk weights applicable to those exposures or impose stricter criteria than those set out in paragraphs 1 to 6 of this article, for the exposure secured by mortgages on commercial real estate. Where the Bank of Albania sets higher risk weights or stricter criteria, banks shall have a transitional period to implement these new requirements.
   Article 24
   Past due items
8. Without prejudice to the provisions contained in paragraphs 2 to 4 of this article, banks
   shall assign a risk weight to the unsecured part of any exposure secured by a collateral or guarantee, as follows:
   a) 150% if the provision funds created to cover losses are less than 20% of the unsecured part of the gross exposure value, and; b) 100%, if the provision funds created to cover losses are no less than 20% of the unsecured part of the gross exposure value.

51 Amended by the Decision No. 7, dated 5.2.2020 of the Supervisory Council of the Bank of Albania. 52 Added by the Decision No. 7, dated 5.2.2020 of the Supervisory Council of the Bank of Albania. 53 Added by the Decision No. 68, dated 22.12.2021 of the Supervisory Council of the Bank of Albania.

2. For the purposes of defining the secured part of the past due items, eligible collateral
   and guarantees shall be those eligible for credit risk mitigation purposes.
3. After deducting the provisioning funds for covering the losses, banks shall assign a
   100% risk weight to the exposures secured by a residential real estate as collateral, which are rated as past due items. 54If the provision funds created for these exposures are at least equal to 20% of the exposure value, to the residual part after deducting the provision funds shall be assigned a risk weight of with 50%.
4. After deducting the provisioning funds for covering the losses, banks shall assign a
   100% risk weight to the exposures secured with commercial real estate as collateral, which are rated as past due items.
   Article 25
   Exposures to high-risk categories
5. 55Banks shall assign a 150% risk weight to the exposures belonging to high-risk
   categories.
6. Banks shall assign a 50% higher risk weight56 to the loan amount, denominated or
   indexed in foreign currency, for the borrower, who meet simultaneously the conditions laid down in article 4, paragraph 2, letter “c” of the regulation “On credit risk management”.
7. 57For the purposes of this article, banks shall treat any of the following exposures as
   exposures belonging to high-risk categories:
   a) investments in venture capital firms, except where those investments are treated in accordance with article 28 of this regulation; b) investments in private equity, except where those investments are treated in accordance with article 28 of this regulation; c) speculative immovable property financing, as defined in article 4 of this regulation; d) the value of the loan granted outside of the territory where the bank operates, through its subsidiaries, branches or agencies, 58except from the value of the loan granted in the Republic of Kosovo; e) the value of immovable and movable properties against credit settlements; and f) other exposures, which are considered by Bank of Albania to belong to high-risk categories.
8. 59When assessing whether an exposure other than exposures referred to in the paragraph
   3 of this article, is associated with particularly high risks, banks shall take into account the following risk characteristics:
   a) there is a high risk of loss as a result of a default of the obligor;

54 Repealed by the Decision No. 7, dated 5.2.2020 of the Supervisory Council of the Bank of Albania. The repeal enters into force on 1 September 2020. 55 Amended by the Decision No. 68, dated 22.12.2021 of the Supervisory Council of the Bank of Albania. 56 The footnote is repealed by the Decision No. 7, dated 5.2.2020 of the Supervisory Council of the Bank of Albania. 57 Added by the Decision No. 68, dated 22.12.2021 of the Supervisory Council of the Bank of Albania. 58 Added by the Decision No. 15, dated 6.3.2024 of the Supervisory Council of the Bank of Albania. 59 Added by the Decision No. 68, dated 22.12.2021 of the Supervisory Council of the Bank of Albania.

b) it is impossible to assess adequately whether the exposure falls under letter “a” of this paragraph.
5. 60Banks, for the purpose of paragraph 3, letter “a” of this article, include in investments
in venture capital firms, at a minimum, any investment that meets both of the following conditions:
a) the investment is either of the following types of investment:
i. non-debt exposures, not listed on an exchange, conveying a subordinated, residual
claim on the assets or income of an enterprise not listed on an exchange,
ii. debt exposures and other securities, partnerships, derivatives or other vehicles, the
economic substance of which is similar to the exposures specified in subparagraph “i” and not listed on an exchange; b) the investment is held with the objective of providing funding to newly established enterprises, including to the development of a new product and related research for the enterprise in order to bring this product to the market, to the build-up of the production capacity of the enterprise or to the expansion of the business of the enterprise.
6. 61Banks, for the purpose of paragraph 3, letter “b” of this article, include in investments
in private equity, at a minimum, any investment that meets both of the following conditions:
a) the investment is either of the following types of investment:
i. all non-debt exposures not listed on an exchange conveying a subordinated,
residual claim on the assets or income of an enterprise,
ii. debt exposures and other securities, partnerships, derivatives or other vehicles, the
economic substance of which is similar to the exposures specified in subparagraph “i” and not listed on an exchange; b) the investment is held with the intention of generating a profit through a leveraged buyout, an initial public offering, sale of the equity stake by other means or any transaction with a similar economic substance. Any investments in which the bank has the intention to develop a strategic business relationship with the enterprise it has invested in, should not be considered as private equity for the purposes of this paragraph. However, such investments may constitute high risk exposures as provisioned in paragraphs 7 to 9 of this article.
7. 62Banks, in order to identify high risk exposures that are not included in paragraph 3 of
this article, consider all exposure classes, where they pay special attention to exposures to corporates, equity exposures and other exposures referred to in letters “g”, “g/2” and “o” of article 10 of this regulation.

60 Added by the Decision No. 68, dated 22.12.2021 of the Supervisory Council of the Bank of Albania. 61 Added by the Decision No. 68, dated 22.12.2021 of the Supervisory Council of the Bank of Albania. 62 Added by the Decision No. 68, dated 22.12.2021 of the Supervisory Council of the Bank of Albania.

8. 63Banks, from the exposures referred to in paragraph 7 of this article, should consider as
   items associated with high risk at least, those exposures that exhibit levels and ranges of risk drivers that are not common to other obligors or transactions of the same exposure class, where are included all of the following exposures:
   a) any financing of speculative investments in both financial and non-financial assets other than immovable property, in which the obligor has the intention to resell the assets for profit, including the financing of speculative investments in mobile property, agricultural products or intangible assets (such as licenses or patents), where both of the following conditions are met:
   i. there is a particularly high risk of loss in cases of the default of the obligor, in
   particular in the case of insufficient market liquidity or high price volatility for the financed object that has not yet been sufficiently mitigated by contractual arrangements, including irrevocable pre-sale contracts,
   ii. there are insufficient other incomes and assets of the obligor available for
   mitigating the loss risk for the bank, in particular in cases where the loss risk is high in relation to the financial resources of the obligor; b) any exposure for which an issue-specific external credit assessment is not available, to an entity created specifically to finance or operate physical assets other than immovable property, or is an economically comparable exposure, with contractual arrangements that give the lender a substantial degree of control over the assets and the income that they generate and for which the primary source of repayment of the obligation is the income generated by the assets being financed, in which any of the following conditions is met:
   i. the bank has identified in its analysis a high risk of loss resulting from any of the
   following:
    significant deficiencies in the financial strength of the corresponding special purpose vehicle (SPV),  significant uncertainty related to the political and legal environment of the location of the project, if relevant,  transaction or asset characteristics,  diminished strength of the sponsor or developer,
   ii. the bank has identified a high risk of loss for an exposure related to project
   finance in the form of a single project in its pre-operational phase, when it does not yet have a positive cash flow that is sufficient to cover any remaining contractual obligations and declining long-term debt, and where its cash flows serve both as guarantee/security and as source of repayment, that the bank considers to be of no high quality, as it renders it unable to fulfil its financial commitments in a timely manner.
9. 64Banks consider all equity exposures to a given issuer, as items associated with high
   risk where one or all of the following conditions is met:
   a) the risk weight for any debt exposure of the bank to the same issuer is 150%; b) any debt of such an issuer would receive a 150% risk weight, if these debt obligations were exposures of the bank due to either of the following reasons:

63 Added by the Decision No. 68, dated 22.12.2021 of the Supervisory Council of the Bank of Albania. 64 Added by the Decision No. 68, dated 22.12.2021 of the Supervisory Council of the Bank of Albania.

i. the associated credit assessment of an external credit assessment institution
(ECAI) nominated by the bank for the debt obligation, corresponds to a 150% risk weight,
ii. the issuer is non-performing.
10. 65Where the banks identify any types of exposures carrying a particularly high risk of
loss in accordance with the conditions set out in paragraph 4 of this article, other than those identified in accordance with paragraphs 8 or 9 of this article, they should notify the Bank of Albania, together with a brief description of the main characteristics of these exposures.
Article 26
Exposures in the form of covered bonds

1. Covered bonds, in accordance with the stipulation in Article 4 of this Regulation, 66in
   order to be treated with preferential risk weights in accordance with paragraphs 3 and 4 of this Article, shall meet the conditions provided for in paragraph 5 of this Article and shall be collateralised by any of the following eligible assets:
   a) exposures to or guaranteed by central governments, central banks, public sector entities67, regional governments and local authorities in the European Union; b) exposures to or guaranteed by:
   i. non-EU central governments, non-EU central banks, multilateral development
   banks, international organisations that qualify for the credit quality step 1 as laid down in this Chapter; and
   ii. non-EU public sector entities68, non-EU regional governments and local
   authorities that are risk weighted as exposures to institutions or central governments and central banks according to paragraphs 1 and 2 of Article 13 and 69paragraphs 1, 2, 3 and 5 of Article 14 respectively and that qualify for the credit quality step 1 as set out in this Chapter; and
   iii. and exposures in the sense of this item shall qualify as a minimum for the credit
   quality step 2 as set out in this Chapter, provided that they do not exceed 20% of the nominal amount of outstanding covered bonds of issuing institutions; c) exposures to institutions that qualify for the credit quality step 1 as set out in this
   Chapter. The total exposure of this kind shall not exceed 15% of the nominal
   amount of outstanding covered bonds of the issuing bank. Exposures caused by transmission and management of payments of the obligors of, or liquidation proceeds in respect of, loans secured by real estate to the holders of covered bonds shall not be comprised by the 15% limit. Exposures to institutions in the EU with a maturity not exceeding 100 days shall not be comprised by the step 1 requirement but those institutions shall as a minimum be qualified for credit quality step 2.

65 Added by the Decision No. 68, dated 22.12.2021 of the Supervisory Council of the Bank of Albania. 66 Added by the Decision No. 7, dated 5.2.2020 of the Supervisory Council of the Bank of Albania. 67 Amended by the Decision No. 7, dated 5.2.2020 of the Supervisory Council of the Bank of Albania. 68 Amended by the Decision No. 7, dated 5.2.2020 of the Supervisory Council of the Bank of Albania. 69 Amended by the Decision No. 7, dated 5.2.2020 of the Supervisory Council of the Bank of Albania.

d) loans secured by residential real estate up to the lesser of the principal amount of the liens (combined with any prior mortgage) and 80% of the market value of the pledged properties or by senior70 units issued by securitisation entities governed by the Albanian laws or laws of a EU Member State securitising residential real estate exposures provided that at least 90 %71 of the assets underlying such units (securitisation) are secured by residential mortgages, combined with any prior liens, up to the lesser of the principal amounts due under the units, the principal amounts of the liens, and 80 % of the value of the pledged properties; e) loans secured by commercial real estate up to the lesser of the principal amount of the liens that are combined with any prior liens and 60 % of the value of the pledged properties or by senior units issued by securitisation entities governed by the Albanian laws or laws of a Member State, securitising commercial real estate exposures, provided that at least 90 % of the underlying assets are composed of commercial mortgages that are combined with any prior liens up to the lesser of the principal amounts due under the units, the principal amounts of the liens, and 60 % of the value of the pledged properties, while the units qualify for the credit quality step 1 as set out in this Chapter and that such units do not exceed 20 % of the nominal amount of the outstanding issue. Bank of Albania may recognise loans secured by commercial real estate as eligible where the loan value exceeds 60 % of the property value up to a maximum level of 70 % if the value of the total assets pledged as collateral for the covered bonds exceed the nominal amount outstanding on the covered bond by at least 10 %, and the bondholders’ claim meets the legal certainty requirements set out in Chapter IV of this Regulation. The bondholders’ claim shall take priority over all other claims on the collateral. Exposures caused by transmission and management of payments of the obligors of, or liquidation proceeds in respect of, loans secured by pledged properties of the senior units or debt securities shall not be comprised in calculating the 90 % limit; or f) for the purpose of the implementation of this paragraph, the term “collateralised”72 includes situations where the assets as described in 73letters “a” to “e” of this paragraph, are exclusively dedicated in law with the purposes the protection of the bond-holders against losses.
2. Banks shall, for real estate collateralising covered bonds, meet the minimum
requirements set out in 74Annex 1 of this Regulation.
3. 75Banks, for covered bonds, for which a credit assessment by a nominated ECAI is not
available, shall assign a risk weight on the basis of the credit risk weight assigned to senior unsecured exposures to the issuer, according to Table 7:

70 Senior priority securities shall qualify for the step 1 of credit quality as set out in this Chapter, and shall not exceed 20% of the nominal (residual) issue value. 71 Exposures caused by transmission and management of obligors’ payments, or liquidation proceeds in respect of, loans secured by real estate to the holders of covered bonds shall not be comprised in calculating the 90% limit. 72 Amended by the Decision No. 7, dated 5.2.2020 of the Supervisory Council of the Bank of Albania. 73 Amended by the Decision No. 7, dated 5.2.2020 of the Supervisory Council of the Bank of Albania. 74 Amended by the Decision No. 7, dated 5.2.2020 of the Supervisory Council of the Bank of Albania. 75 Amended by the Decision No. 7, dated 5.2.2020 of the Supervisory Council of the Bank of Albania.

a) if the exposure to the issuing bank is assigned a risk weight of 20 %, the covered bond exposure shall be assigned a risk weight of 10 %; b) if the exposure to the issuing bank is assigned a risk weight of 50 %, the covered bond exposure shall be assigned a risk weight of 20 %; c) if the exposure to the issuing bank is assigned a risk weight of 100 %, the covered bond exposure shall be assigned a risk weight of 50 %; and d) if the exposures to the issuing bank is assigned a risk weight of 150 %, the covered bond exposure shall be assigned a risk weight of 100 %.
Table 7
Weights for senior unsecured exposures to the issuing bank 20% 50% 100% 150% Weights for the covered bond exposure 10% 20% 50% 100%
4. 76Banks, for covered bonds for which a credit assessment by a nominated ECAI is
available, shall assign a risk weight according to Table 7.1.
Table 7.1
Credit quality step 1 2 3 4 5 6
Risk weight 10% 20% 20% 50% 50% 100%
5. 77Banks treat with preferential risk weights, according to paragraphs 3 and 4 of this article,
the exposures in the form of covered bonds, which fulfil the following conditions:
a) the investing bank receives at least the following information on the investment portfolio:
i) the value of the cover pool and outstanding covered bonds; ii) the geographical distribution and type of assets that collateralize the covered bonds, loan size, interest rate and foreign currency risk; iii) the maturity structure of covered bonds and assets that collateralize these covered bonds; and iv) the percentage of loans more than 90 days past due; b) the issuer makes the information referred to in letter “a” of this paragraph, available to the investing bank, at least semi-annually.
Article 27
Exposures to securitisation positions
Banks shall determine the risk-weighted exposure amounts for securitisation positions in accordance with the provisions set out in Chapter V of this Regulation.

76 Added by the Decision No. 7, dated 5.2.2020 of the Supervisory Council of the Bank of Albania. 77 Added by the Decision No. 7, dated 5.2.2020 of the Supervisory Council of the Bank of Albania.

Article 2878
Capital requirements for exposures in the form of units or shares in CIUs

1. Banks shall calculate the risk-weighted exposure amount for their exposures in the form
   of units or shares in CIUs by multiplying the risk-weighted exposure amount of the CIU’s exposures, calculated in accordance with the approaches referred to in paragraph 2 of this
   article, with the percentage of units or shares held by the banks.
2. Where the conditions set out in paragraphs 4-7 of this article are met, banks may apply
   the look-through approach in accordance with paragraph 1 of article 28/1 or the mandate￾based approach in accordance with paragraphs 2-4 of article 28/1 of this regulation. Banks that do not apply the look-through approach or the mandate-based approach shall apply the fall-back approach, by assigning a risk weight of 1250 % to their exposures in the form of units or shares in a CIU.
3. Banks may calculate the risk-weighted exposure amount for their exposures in the form
   of units or shares in a CIU, by using a combination of the approaches referred to in paragraph 2 of this article, provided that the conditions for using those approaches are met.
4. Banks may determine the risk-weighted exposure amount of a CIU’s exposures, in
   accordance with the approaches set out in article 28/1 of this regulation, where all the following conditions are met:
   a) the CIU is one of the following:
   i. a collective investment undertaking for public offer or an undertaking for
   collective investment in transferable securities (UCITS), governed by Law 56/2020 “On collective investment undertakings” or by relevant legislation,
   ii. an alternative investment fund (AIF), as treated under Law 56/2020 “On
   collective investment undertakings” or in relevant legislation; b) the CIU’s prospectus or equivalent document includes the following:
   i. the categories of assets in which the CIU is authorised to invest,
   ii. where investment limits apply, the relative limits and the methodologies to
   calculate them; c) reporting by the CIU or the CIU management company to the bank complies with the following requirements:
   i. the exposures of the CIU are reported at least as frequently as those of the bank,
   ii. the granularity of the financial information is sufficient to allow the bank to
   calculate the CIU’s risk-weighted exposure amount, in accordance with the approach chosen by the bank,
   iii. where the bank applies the look-through approach, information about the
   underlying exposures is verified by an independent third party.

78 Amended the title and the content of the article 28 by the Decision No. 68, dated 22.12.2021 of the Supervisory Council of the Bank of Albania.

5. By way of derogation from subparagraph “i” of letter “c” of paragraph 4 of this article,
   where the bank determines the risk-weighted exposure amount of a CIU’s exposures in accordance with the mandate-based approach, the reporting by the CIU or the CIU management company to the bank may be limited to the investment mandate of the CIU and any changes thereof and may be done only when the bank incurs the exposure to the CIU for the first time and when there is a change in the investment mandate of the CIU.
6. Banks that do not have adequate data or information to calculate the risk-weighted
   exposure amount of a CIU’s exposures in accordance with the approaches set out in
   article 28/1 of this regulation, may rely on the calculations of a third party, provided that
   all the following conditions are met:
   a) the third party is one of the following:
   i. the depository institution or the depository financial institution of the CIU,
   provided that the CIU exclusively invests in securities and deposits all securities at that depository institution or depository financial institution,
   ii. for CIUs not covered by subparagraph “i” of this letter, the CIU management
   company, provided that the company meets the condition set out in letter “a” of paragraph 4 of this article; b) the third party carries out the calculation in accordance with the approaches set out in
   article 28/1 of this regulation, paragraphs 1, 2, 3 or 4, as applicable; and
   c) an external auditor has confirmed the correctness of the third party's calculation.
7. Banks that rely on third-party calculations shall multiply the risk-weighted exposure
   amount of a CIU’s exposures resulting from those calculations by a factor of 1,2.
8. By way of derogation from paragraph 7 of this article, where the bank has unrestricted
   access to the detailed calculations carried out by the third party, the factor of 1,2 shall not apply. The bank shall provide those calculations to the Bank of Albania, upon request.
9. Where the bank applies the approaches referred to in article 28/1 of this regulation for the
   purpose of calculating the risk-weighted exposure amount of a CIU’s exposures (“level 1 CIU”), and any of the underlying exposures of the level 1 CIU is an exposure in the form of units or shares in another CIU (“level 2 CIU”), the risk-weighted exposure amount of the level 2 CIU’s exposures may be calculated by using any of the three approaches described in paragraph 2 of this article. The bank may use the look-through approach to calculate the risk-weighted exposure amounts of CIUs’ exposures in level 3 and any subsequent level, only where it used that approach for the calculation in the preceding level. In any other scenario it shall use the fall-back approach.
10. The risk-weighted exposure amount of a CIU’s exposures calculated in accordance with
    the look-through approach and the mandate-based approach set out in article 28/1 of this regulation, shall be capped at the risk-weighted amount of that CIU’s exposures calculated in accordance with the fall-back approach.
11. By way of derogation from paragraph 1 of this article, banks that apply the look-through
    approach in accordance with article 28/1, paragraph 1 of this regulation, may calculate the risk-weighted exposure amount for their exposures in the form of units or shares in a CIU by multiplying the exposure values of those exposures, calculated in accordance with article 9 of this regulation, with the risk weight (RWi * ) calculated in accordance with the formula set out in article 28/3 of this regulation, provided that the following conditions are met:

a) the banks measure the value of their holdings of units or shares in a CIU at historical cost but measure the value of the underlying assets of the CIU at fair value if they apply the look-through approach; b) a change in the market value of the units or shares for which banks measure the value at historical cost changes neither the amount of regulatory capital of the banks nor the exposure value associated with those holdings.
Article 28/179
Approaches for calculating risk-weighted exposure amounts of CIUs

1. Where the conditions set out in paragraphs 4-7 of article 28 of this regulation are met,
   banks that have sufficient information about the individual underlying exposures of a CIU shall look through to those exposures to calculate the risk-weighted exposure amount of the CIU, risk weighting all underlying exposures of the CIU as if they were directly held by the banks.
2. Where the conditions set out in paragraphs 4-7 of article 28 of this regulation are met,
   banks that do not have sufficient information about the individual underlying exposures of a CIU to use the look-through approach may calculate the risk-weighted exposure amount of those exposures in accordance with the limits set in the CIU’s mandate and law 56/2020 “On collective investment undertakings”.
3. Banks shall carry out the calculations referred to in paragraph 2 of this article, under the
   assumption that the CIU first incurs exposures to the maximum extent allowed under its mandate or law 56/2020 “On collective investment undertakings”, in the exposures attracting the highest own funds requirement and then continues incurring exposures in descending order until the maximum total exposure limit is reached, and that the CIU applies leverage to the maximum extent allowed under its mandate or law 56/2020 “On collective investment undertakings”, where applicable.
4. Banks shall carry out the calculations referred to in paragraph 2 of this article, in
   accordance with the methods set out in this chapter, in chapter V, and in chapter VI of this regulation.
   Article 28/280
   Exclusions from the approaches for calculating risk-weighted exposure amounts of CIUs
5. Banks may exclude from the calculations referred to in article 28 of this regulation,
   Common Equity Tier 1, Additional Tier 1, Tier 2 instruments and eligible liabilities instruments held by a CIU, which banks shall deduct in accordance with article 11, paragraph 1 and articles 25 and 33 of regulation on regulatory capital respectively.
   Article 28/381

79 Added by the Decision No. 68, dated 22.12.2021 of the Supervisory Council of the Bank of Albania. 80 Added by the Decision No. 68, dated 22.12.2021 of the Supervisory Council of the Bank of Albania. 81 Added by the Decision No. 68, dated 22.12.2021 of the Supervisory Council of the Bank of Albania.

Treatment of off-balance-sheet exposures to CIUs

1. Banks shall calculate the risk-weighted exposure amount for their off-balance-sheet
   items with the potential to be converted into exposures in the form of units or shares in a CIU, by multiplying the exposure values of those exposures calculated in accordance with article 9 of this regulation, with the following risk weight:
   a) for all exposures for which banks use one of the approaches set out in article 28/1 of this regulation:
   where:
   RWi

• = the risk weight;
  i = the index denoting the CIU:
  RWAEi = the amount calculated in accordance with Article 28/1 for a CIUi; Ei
• = the exposure value of the exposures of CIUi;
  Ai = the accounting value of assets of CIUi; and EQi = the accounting value of the equity of CIUi. b) for all other exposures, RWi
• =1 250 %.

2. Banks shall calculate the exposure value of a minimum value commitment that meets the
   conditions set out in paragraph 3 of this article, as the discounted present value of the guaranteed amount using a default risk-free discount factor. Banks may reduce the exposure value of the minimum value commitment by any losses recognised with respect to the minimum value commitment under the applicable accounting standard. Banks shall calculate the risk-weighted exposure amount for off-balance sheet exposures arising from minimum value commitments that meet all the conditions set out in paragraph 3 of this article, by multiplying the exposure value of those exposures by a conversion factor of 20 % and the risk weight derived under article 28 of this regulation.
3. Banks shall determine the risk-weighted exposure amount for off-balance sheet
   exposures arising from minimum value commitments in accordance with paragraph 2 of this article, where all the following conditions are met:
   a) the off-balance sheet exposure of the bank is a minimum value commitment for an investment into units or shares of one or more CIUs under which the bank is only obliged to pay out under the minimum value commitment where the market value of the underlying exposures of the CIU or CIUs is below a predetermined threshold at one or more points in time, as specified in the contract; b) the CIU is any of the following:
   i. a collective investment undertaking for public offer or an undertaking for
   collective investment in transferable securities (UCITS), as defined in Law 56/2020 “On collective investment undertakings”, or in relevant legislation, or

ii. an alternative investment fund (AIF), as defined in Law 56/2020 “On
collective investment undertakings” or relevant legislation, which solely invests in transferable securities or in other liquid financial assets referred to in Law 56/2020 “On collective investment undertakings”, where the mandate of the AIF does not allow a leverage higher than that allowed under that Law; c) the current market value of the underlying exposures of the CIU underlying the minimum value commitment without considering the effect of the off-balance sheet minimum value commitments, covers or exceeds the present value of the threshold specified in the minimum value commitment; d) when the excess of the market value of the underlying exposures of the CIU or CIUs over the present value of the minimum value commitment declines, the bank, or another entity subject to the consolidated supervision of the Bank of Albania, can influence the composition of the underlying exposures of the CIU or CIUs or limit the potential for a further reduction of the excess in other ways; e) the ultimate direct or indirect beneficiary of the minimum value commitment is typically a retail client, as defined in Law 62/2020 “On capital markets”.
Article 29
Other exposures

1. Banks shall assign a 100 % risk weight to the following assets:
   a) fixed tangible assets; b) prepayments and accrued income for which it is unable to determine the counterparty; c) 82 repealed; d) 83 repealed.
2. Banks shall assign a 20 % risk weight to cash items in the process of collection.
3. Banks shall assign 0 % risk weight to cash in hand and equivalent cash assets.
4. Banks shall assign 0 % risk weight to gold bullion and silver held in own vaults or on
   an allocated basis to the extent backed by gold or silver liabilities.
5. In the case of repurchase agreements and outright forward purchases, the risk weight
   shall be that assigned to the assets in question and not to risk weight that accompanies the counterparty.
6. Where a bank provides 84credit protection for a number of exposures (exposure basket)
   under terms that the nth default among the exposures shall trigger payment and that this credit event shall terminate the contract, 85the risk weights of the exposures included in the basket will be aggregated, excluding n-1 exposures, up to a maximum of 1250 % and multiplied by the nominal amount of the protection provided by the credit derivative to obtain the risk weighted asset amount. The n-1 exposures to be excluded from the aggregation shall be determined on the basis that they shall include those exposures each of which produces a lower risk-weighted exposure amount than the risk￾weighted exposure amount of any of the exposures included in the aggregation.

82 Repealed by the Decision No. 68, dated 22.12.2021 of the Supervisory Council of the Bank of Albania. 83 Repealed by the Decision No. 68, dated 22.12.2021 of the Supervisory Council of the Bank of Albania. 84 Amended by the Decision No. 44, date 2.11.2022 of the Supervisory Council of the Bank of Albania. 85 Amended by the Decision No. 44, date 2.11.2022 of the Supervisory Council of the Bank of Albania.

7. The exposure value for leases shall be the discounted minimum lease payments.
   Minimum lease payments are the payments over the lease term that the lessee is or can be required to make and any bargain option (i.e. option the exercise of which is reasonably certain). Any guaranteed residual value fulfilling the set of conditions in Subchapter III of Chapter IV regarding the eligibility of protection providers (articles 82, 83) as well as the minimum requirements for recognising other types of guarantees provided in the same Chapter (article 77) shall also be included the minimum lease payments: These exposures shall be assigned in the relevant exposure class in accordance with article 10 of the regulation. When the exposure is a residual value of leased properties, the risk weighted exposure amounts shall be calculated according to the following formula:
   1/t * 100% * exposure value where: t is the maximum, 1 the number of years of the lease contract term, rounded to a whole number.
8. Bank of Albania may allow a risk weight of 10 % for exposures to institutions that are
   specialised in the inter-bank and public-debt markets in their home countries and subject to close supervision by the competent authorities where those asset items are fully and completely secured, upon the prior approval of the competent authorities of the home countries, for items assigned a 0 % or a 20 % risk weight and recognised by the latter as constituting adequate collateral. SUBCHAPTER II RECOGNITION OF ECAIS AND MAPPING OF THEIR CREDIT ASSESSMENTS
   Article 30
   Recognition of external credit rating
9. Banks shall use the external credit assessment of ECAIs to determine the risk weight of
   one or several exposures, only if the ECAI which provides it has been recognised as eligible for these purposes by the Bank of Albania.
10. The Bank of Albania shall recognise an ECAI as eligible for the purposes of meeting
    the requirements of this Regulation only if convinced its assessment methodology complies with the requirements of objectivity, independence, ongoing review, and that the resulting credit assessments meet the requirements of credibility and transparency, and the technical criteria set out in Article 31 of this Subchapter.
11. If an ECAI has been recognised as eligible by the competent authorities of a Member
    State of EU, the Bank of Albania may recognise that ECAI as eligible without carrying out their own evaluation process.
12. Bank of Albania shall make publicly available an explanation of the recognition
    process, and a list of eligible ECAIs.

Article 31
Technical criteria for recognition of ECAIs

1. To be recognised by Bank of Albania, ECAI shall meet the following criteria:
   a) Objectivity: The methodology employed by an ECAI for assigning credit assessments shall be rigorous, systematic, continuous, and subject to validation based on historical experience. To prove compliance with this requirement, Bank of Albania shall require the ECAI to meet the following conditions:
   i) the methodology used should take into consideration the factors which differentiate the specific features of different positions assessed according to this methodology (the recognition process does not aim at verifying the accuracy of the methodology, but the latter should be backed by statistical evidence of its usage in the past); ii) the explanatory ability of the methodology should be based upon available data on the default ratios, recorded for individual rating grades and ratings migration, amongst different rating grades; iii) the methodology should be applied consistently to all exposure of a given class and should make the appropriate differentiations between exposures of different classes; iv) the methodology should be validated within the ECAI based on historical experience; and v) the methodology should be adjusted based on the systematic mistakes coming up during the back-testing. b) Independence The methodology shall be free from external political influences or constraints, and from conflicts of interests and economic pressures that may influence the credit assessment. To prove compliance with this requirement, Bank of Albania shall require the ECAI to meet the following conditions:
   i. necessary measures have been taken to ensure the independence from ownership,
   and to prevent external political or economic influences or constraints that may jeopardize the objectivity of the credit assessment;
   ii. the organisation structure ensures, from an operational, human resources, and
   possibly legal perspective, the separation of the credit assessment activity from other activities, such as consulting and marketing, which can influence the objectivity of the assessment;
   iii. internal rules have been approved to prevent conflicts of interests related to
   persons involved in the ratings making;
   iv. the assessment activity is profitable and the ECAI has adequate available
   financial resources;
   v. the fee structure charged to assessed subjects and the compensation of persons
   responsible for the ratings making, is not affected by the rating results and vice versa;
   vi. necessary measures have been taken to ensure the independence in the ratings
   from major customers that generate main part of income (more than 5% ;

vii. there is adequate staffing and proper level of expertise and professional
experience in credit assessment ratings (for e.g. at least one of the persons involved in a rating decision shall have at least three years of experience). The staff members’ number should be adequate for the business volume, taking into consideration also the necessary on-going contacts with the assessed subjects, where this is part of the methodology that has been used.
viii. internal government rules are clearly formalised;
ix. appropriate disclosure of any conflict of interest;
x. there exist an internal audit function (or other similar functions) independent
from the persons involved in the ratings, and charged with the verification of the effective implementation of the independence criteria. c) On-going review. ECAI's credit assessments are subject to on-going review and shall be responsive to changes in the financial conditions. To prove compliance with this requirement, Bank of Albania shall require the ECAI to meet the following conditions:
i. the ECAI has in place procedures to monitor every change in the assessed
economical units that my trigger important assessment changes, and if necessary, to immediately change the assessment/assessments;
ii. the ECAI has in place an established back-testing procedure;
iii. the credit assessments shall be reviewed at least annually.
d) market credibility. ECAI’s individual credit assessments are recognised in the market as credible and reliable by the users of such credit assessments. Bank of Albania shall assess the credibility criteria based on factors such as:
i. market share of the ECAI;
ii. revenues generated by the ECAI, and more in general financial resources of the
ECAI;
iii. whether there is any pricing on the basis of the rating; and
iv. at least two banks use the ECAI's individual credit assessment for bond issuing
and/or assessing credit risks. e) Transparency of methodologies and assessments. Bank of Albania in the ECAIs recognition process shall require that:
i. the ECAI discloses the principles of the methodology and the assessment and
every change in the methodology, so as they are understandable for the users of the credit assessment;
ii. the individual credit assessments are accessible at equivalent terms and to all
banks having a legitimate interest in these individual credit assessments; and
iii. in particular, the individual credit assessments are accessible to the non-domestic
banks on equivalent terms as to domestic banks having a legitimate interest in these credit assessments.
Article 32
Documentation requirement related to the recognition of ECAIs

Bank of Albania, upon submission by an ECAI of an application for recognition, shall recognize the ECAI based on the compliance with the criteria prescribed in article 31.

1. The ECAI shall prepare an application for recognition in cooperation with the banks
   having an interest in its recognition. The application for recognition shall be accompanied by the documentation which shall evidence compliance with the criteria prescribed in article 31 of this subchapter.

2. In exclusion from what is determined in paragraph 3 of article 30, an ECAI recognized
   by the competent authority of an EU Member State, shall enclose with the application the documentation which shall evidence that it has been recognized by that competent authority, and the documentation laid down in Annex 6 (General information and mapping of credit long and short term assessment).

3. When deciding on the application, the Bank of Albania may request additional
   documentation that it deems necessary.
   Article 33
   Mapping of external credit assessments (rating)

4. Bank of Albania, taking into account the technical criteria set out in this subchapter on
   the recognition of ECAIs, shall determine the mapping process with which are to be associated the credit quality steps set out in subchapter I of this Chapter and the relevant credit assessments of an eligible ECAI. Those mappings shall be objective and consistent.

5. When the competent authority of a Member State of EU have made a determination
   under paragraph 1 of this article, the Bank of Albania may recognise that determination without carrying out its own process of determining the association between the credit quality and respective credit assessments.

6. Bank of Albania shall establish the mapping between credit assessments of an ECAI
   and the credit risk steps, considering the following factors:
   a) quantitative factors, such as the long-term default rate related to all assets with the save credit risk assessment. For recently established ECAIs and those that have compiled only a short record of default data, Bank of Albania shall require an assessment of the long-term default rates associated with all items assigned with the same credit assessment; b) qualitative factors such as the categories of pool of issuers assessed by the ECAI, the, range of credit assessments that the ECAI assigns, each credit assessment meaning and the ECAI's definition of default.

7. Bank of Albania shall compare default rates for each credit risk assessment carried out
   by an ECAI with a benchmark built on the basis of the experience with default rates by other ECAIs, for a category of issuers that present an equivalent level of credit risk.

8. When the Bank of Albania believes that the default rates for the credit assessment by a
   particular ECAI are materially and systematically higher than the benchmark, it shall assign a higher (less favourable) credit quality step to the ECAI credit assessment.

9. When the Bank of Albania has raised the risk weight in relation to the credit risk
   assessment of a particular ECAI, and the ECAI demonstrates that the default rates experienced for its credit assessment are no longer materially higher than the benchmark, Bank of Albania may and adopt a decision to restore the original credit quality step in the credit quality assessment scale to the ECAI credit assessment. SUBCHAPTER III USE OF ECAI CREDIT ASSESSMENTS FOR THE CALCULATION OF A RISK WEIGHTS
   Article 34
   Use of external credit ratings

10. The use of ECAI credit assessments for the calculation of a risk-weighted exposure
    amounts shall be consistent and in accordance with the provisions of this Chapter. Credit assessments shall not be used selectively.

11. Banks shall use only solicited rating. Unsolicited rating shall be used only for exposures
    or potential exposures to central governments or central banks.
    Article 35
    Use of credit assessments of an ECA

12. Bank of Albania shall recognise the assessments of an Export Credit Agency (ECA) if
    at least one of the following conditions is met:
    a) the ECA uses one of the risk score forms recognised by all ECAs participating in the OECD “Arrangement on Guidelines for Officially Supported Export Credits”; or b) the ECA publishes its credit assessments, and the credit assessment is associated with one of the eight minimum export insurance premiums (MEIP) according to the methodology established by the OECD and signed by the ECA.

13. 86The official list of ECAs is published and updated by the OECD at the link:
    http://www.oecd.org/trade/topics/export-credits/documents/links-of-official-export￾credit-agencies.pdf .
    Article 36

86 Added by the Decision No. 7, dated 5.2.2020 of the Supervisory Council of the Bank of Albania.

General requirements for the use of assessments

1. Banks may nominate one or more eligible ECAIs and/or ECAs, recognised by the Bank
   of Albania, whose credit assessments shall be used for the determination of risk weights for exposures or contingent exposures.
2. For the purposes of paragraph 1 of this article, the use of ECAs’ credit assessments
   shall be permitted only for exposures to central governments and central banks.
3. A bank which decides to use the credit assessments produced by an eligible ECAI
   and/or ECA for a certain class of assets must use those credit assessments consistently for all exposures belonging to that class.
4. A bank that decides to use credit assessments produced by a nominated ECAI and/or
   ECA, shall use them in a continuous and consistent way over time.
5. The bank may only use credit assessments by eligible ECAIs and/or ECAs that take into
   account all amounts both in principal and in interest.
6. If only one credit assessment is available from a nominated ECAI for a rated item, the
   bank shall use that credit assessment to determine the risk weight for that item.
7. If two credit assessments are available from an ECAI on a rated item and the two
   correspond to different risk weights, the bank shall use the higher (less favourable) risk weight for that item.
8. If more than two credit assessments are available from ECAIs for a rated item, the bank
   shall consider the two assessments generating the two lowest risk weights. If the two lowest risk weights are different, the bank shall use the higher risk weight, and if the two lowest risk weights are equal, the bank shall use that risk weight.
   Article 37
   Requirements for the use credit assessment for both the issuer and issue
9. Where a credit assessment is available for a specific issuing program or facility to
   which the item constituting the exposure belongs, the bank shall use this credit assessment to determine the risk weight to be assigned to that item.
10. Where no directly applicable credit assessment exists for a certain item, but a credit
    assessment exists for a specific issuing program or facility to which the item constituting the exposure does not belong or a general credit assessment exists for the issuer, the bank shall use that credit assessment if it produces:
    a) a higher risk weight; or b) a lower risk weight, but the exposure in question ranks at least at pari passu:
    i) to the specific issuing program or facility; or ii) to the senior unsecured exposures of that issuer.
11. Where the criteria set out in paragraph 2 of this article are not met, the bank shall use a
    risk weight applied to unrated exposures for all other exposures on that issuer (obligor) for which there is no directly applicable rating.
12. The bank cannot use credit assessment/s for issuers within a group as credit assessment
    of another issuer within the same group.

Article 38
Requirements for the use of long-term and short-term credit assessments

1. Banks shall use short-term credit assessments only for short-term on- and off-balance
   sheet items constituting exposures to 87supervised institutions and corporates.
2. Any short-term credit assessment shall only apply to the item the short-term credit
   assessment refers to, and it shall not be used to derive risk weights for any other item, except for the following cases:
   a) if a short-term rated facility is assigned a 150% risk weight, the bank shall assign a 150% risk weight to all unrated unsecured exposures on that obligor whether short￾term or long-term; b) if a short-term rated facility is assigned a 50% risk-weight, the bank shall assign a risk weight not lower than 100 % to all unrated short-term exposures.
   Article 39
   Requirements for the use of the assessments for domestic and foreign currency items
3. A credit assessment that refers to an item denominated in the obligor’s domestic
   currency cannot be used to derive a risk weight for another exposure on that same obligor that is denominated in a foreign currency.
4. By way of derogation from paragraph 1 of this article, when an exposure arises through
   a credit institution's participation in a loan that has been extended by a multilateral development bank whose preferred creditor status is recognised in the market, Bank of Albania may allow banks to use for risk weighting purposes the credit assessment on the obligor's domestic currency item.
   CHAPTER IV
   CREDIT RISK MITIGATION TECHNIQUES
   SUBCHAPTER I
   GENERAL PROVISIONS
   Article 40
   General principles on the credit risk mitigation techniques
5. Banks shall use credit protection techniques that together with the actions and steps
   taken and procedures and policies implemented by them shall result in credit protection arrangements which are legally effective and enforceable in all relevant jurisdictions.

87 Added by the Decision No. 7, dated 5.2.2020 of the Supervisory Council of the Bank of Albania.

2. Banks shall take all appropriate steps to ensure the effectiveness of the credit protection
   arrangement and to address related risks.
   Article 41
   Method of applying credit risk mitigation techniques

3. Banks shall modify the calculation of risk weighted exposures amounts by applying the
   eligible forms of credit protection, only if all the requirements set out in this Chapter have been met.

4. The risk-weighted exposure amounts for credit risk modified by using credit risk
   mitigation techniques may not exceed the risk-weighted exposure amount of the exposure that would be calculated for the same exposure in the absence of credit risk mitigation.

5. Where credit protection has already been taken into account in the calculation of risk￾weighted exposure amounts for credit risk under the Standardised Approach set out in
   Chapter III of this Regulation, banks shall not use again this technique to modify risk￾weighted exposure amounts for credit risk in accordance with this Chapter.
   Article 42
   Application of credit risk mitigation techniques in case of different types of credit protection

6. For credit risk mitigation purposes, Banks may use more than one type of credit
   protection to cover a single exposure.

7. In the case referred to in paragraph 1 of this article, to calculate risk-weighted exposure
   amounts for credit risk, Banks shall divide the exposure into parts each covered by one type of credit protection and shall calculate the risk-weighted exposure amount for each portion separately as set out in this Chapter.
   Article 43
   Types of credit protection

8. For credit risk mitigation purposes, Banks shall use the following types of credit
   protection:
   a) funded credit protection specified in Subchapter 2 of this Chapter; b) unfunded credit protection specified in Subchapter 3 of this Chapter.
   Article 44
   Maturity mismatch between the underlying exposure and credit protection

9. For the purposes of calculating risk-weighted exposure amounts for credit risk, banks
   shall take account of maturity mismatches which occurs when the residual maturity of the credit protection is less than that of the protected exposure.

10. Banks may not use the credit protection in cases when the residual maturity (of the
    credit protection) is less than 3 (three) months and the exposures’ residual maturity is larger than the residual maturity of the protection.

11. Banks may not use the credit protection in cases when its original maturity is less than
    one year, and the residual maturity of the credit is larger than the original maturity of the protection.

12. By way of derogation from paragraph 1 of this article, when banks use the Financial
    Collateral Simple Method to calculate risk-weighted exposure amounts specified in Articles 53 to 57, funded credit protection shall not be recognised as eligible if there is a maturity mismatch between the funded credit protection and the protected exposure.

13. Subject to a maximum of 5 years, the effective maturity of the underlying exposure
    shall be the longest possible remaining time before the obligor is scheduled to fulfil its obligations. The maturity of the credit protection shall be the time to the earliest date at which the protection may terminate or be terminated.

14. Where there is an option to terminate the protection which is at the discretion of the
    protection seller, banks shall consider as the maturity of the protection to be the time to the earliest date at which that option (of termination) may be exercised. While, where there is an option to terminate the protection which is at the discretion of the protection buyer and the terms of the arrangement at origination of the protection contain a positive incentive for the bank to call the transaction before contractual maturity, the maturity of the protection shall be taken to be the time to the earliest date at which that option may be exercised.

15. Where banks use as a mitigation technique a credit derivative that is permitted to
    terminate prior to expiration of any grace period, when this expiration qualifies as a condition for the default of the underlying obligation due to the failure to pay, the maturity of the protection shall be reduced by the amount of the grace period.

16. In the case of unfunded credit protection, when credit protection provided by a single
    protection provider has differing maturities, banks shall apply a similar approach to that described in paragraph 2 of article 42.
    Article 45
    Requirements for internal processes and systems for managing risks associated with the implementation of credit risk mitigation techniques

17. Banks shall have in place and implement appropriate internal bylaws which shall
    prescribe credit risk mitigation techniques together with the procedures and actions taken to provide the credit protection.

18. Notwithstanding the presence of credit risk mitigation taken into account for the
    purposes of calculating risk-weighted exposure amounts and as relevant expected loss amounts, banks shall continue to undertake full credit risk assessment of the underlying exposure. In the case of repurchase and reverse repurchase transactions and/or securities or commodities lending or borrowing transactions the underlying exposure shall, be deemed to be the net amount of the exposure. SUBCHAPTER II

FUNDED CREDIT PROTECTION
Article 46
General principles on the recognition of the funded credit protection

1. Banks shall recognise as eligible funded credit protection only the assets that meet the
   criteria/conditions set out in this Subchapter.

2. In the case of funded credit protection, banks shall ensure that the assets relied upon
   shall be sufficiently liquid and their value over time sufficiently stable to provide appropriate certainty as to the credit protection achieved having regard to the approach used to calculate risk-weighted exposure amounts and to the degree of recognition allowed.

3. In the case of funded credit protection, banks shall ensure by a contract, the right to
   liquidate or retain, in a timely manner, the assets from which the protection derives in the event of the default, insolvency or bankruptcy of the obligor, or other credit event set out in the contract and, where applicable, of the custodian holding the collateral.

4. Banks shall ensure that the degree of correlation between the value of the assets relied
   upon for protection and the credit quality of the obligor shall not be undue (e.g. where the bank uses for protection stocks of a company operating in the same market segment with the obligor, thus whose performance is affected by the same specific factors that affect the performance of the obligor, than this protection shall not be considered eligible, due to the strong correlation between the protection value and obligor’s credit quality).
   Article 47
   Types of funded credit protection

5. Banks, for purposes of credit risk mitigation, shall use the following forms of funded
   credit protection:
   a) financial collateral; b) on-balance sheet netting; c) master netting agreement; d) other funded credit protection:
   i. deposits with third party institution;
   ii. life insurance policies; and
   iii. instruments repurchased on request.

6. For purposes of calculating the effects of credit risk mitigation, banks shall consider as
   financial collateral according paragraph 1, letter “a” of this article, cash, securities or commodities purchased, posted or borrowed under a repurchase transaction, reverse repurchase transaction or under a securities or commodities lending or borrowing transactions.
   Article 48
   Eligibility of financial collateral

7. Where the credit risk mitigation technique used relies on the funded credit protection,
   the bank shall determine the eligibility of the financial collateral depending upon the method used by it: the Financial Collateral Simple Method, or the Financial Collateral Comprehensive Method.

8. In addition to the requirements set out in paragraph 1 of this article, in relation to
   repurchase transactions, reverse repurchase transactions and securities or commodities lending or borrowing transactions, banks shall consider in the process of the eligibility of the credit risk mitigation technique whether the transaction is booked in the non￾trading book or the trading book.
   Article 49
   Eligibility of financial collateral under all approaches

9. Banks shall recognise the following instruments as eligible financial collateral under all
   approaches for the recognition of credit risk mitigation:
   a) cash on deposits or certificate of deposits or similar instruments, held at the lending bank; b) debt securities issued by central governments or central banks, which according to the provisions for the risk weighting of exposures to central banks and central governments set forth in Chapter III, have an external credit risk assessment that associate with credit quality step 4 or above; c) debt securities issued by institutions, which according to the provisions for the risk weighting of exposures to institutions in Chapter III, have an external credit risk assessment that corresponds with credit quality step 3 or above; d) debt securities issued by other entities, which according to the provisions for the risk weighting of exposures to companies in Chapter III, have an external credit risk assessment that corresponds with credit quality step 3 or above; e) debt securities with a short-term credit risk assessment, which according to the provisions for the risk weighting of short term exposures in Chapter III, have an external credit risk assessment that corresponds with credit quality step 3 or above; f) equities or convertible bonds that are included in a main index;88 g) gold; h) 89securitisation positions that are not resecuritisation positions and which are subject to a 100 % risk weight or lower in accordance with article 113 and article 114 of this regulation.

10. In cases where a debt security listed in paragraph 1, letters “b” to “e” of this article, has
    two credit assessments by eligible ECAIs, banks shall apply the less favourable assessment. In cases when a debt security has more than two credit assessments by eligible ECAIs, banks shall apply the two most favourable assessments; and if the two most favourable assessments are different, banks shall apply the less favourable of the two.

11. For the purposes of letter “b” of paragraph 1 of this article, “debt securities issued by
    central governments or central banks” shall include:

88 Amended by the Decision No. 44, dated 2.11.2022 of the Supervisory Council of the Bank of Albania. 89 Added by the Decision No. 44, dated 2.11.2022 of the Supervisory Council of the Bank of Albania.

a) debt securities issued by regional governments or local authorities, exposures to which are treated as exposures to the central government in whose jurisdiction they are established in accordance with Chapter III of this regulation as exposures to the central government in whose jurisdiction they are established; b) debt securities issued by 90public sector entities which are treated as exposures to central governments in accordance with article 14; c) debt securities issued by multilateral development banks to which a 0 % risk weight is assigned under Chapter III of this regulation; and d) debt securities issued by international organisations which are assigned a 0 % risk weight under Chapter III of this regulation.
4. For the purposes of item paragraph 1, letter “c” of this article, “debt securities
issued by institutions” shall include:
a) debt securities issued by regional governments or local authorities other than the exposures to which are treated as exposures to the central government in whose jurisdiction they are established under Chapter III; b) debt securities issued by 91public sector entities, exposures to which are treated as exposures to institutions under Chapter III; and c) debt securities issued by multilateral development banks other than those to which a 0 % risk weight is assigned under Chapter III.
5. Debt securities issued by institutions which securities do not have an external credit
assessment may be recognised as eligible financial collateral if they fulfil the following criteria:
a) they are listed on a recognised exchange; b) they qualify as senior debt; c) all other issues by the issuing institution of the same seniority, which under the rules for the risk weighting of exposures to institutions or short-term exposures under Chapter III of this regulation have an external credit risk assessment which is associated with credit quality step 3 or above; d) the lending bank has no information to suggest that the issue would justify a credit assessment below that indicated in letter “c”; and e) the bank can demonstrate to the Bank of Albania that the market liquidity of the instrument is sufficient for these purposes.
6. Banks shall recognise as eligible financial collateral, the units in collective investment
undertakings (CIUs), if the following conditions are satisfied:
a) they have a daily public price quote; and b) the collective investment undertaking is limited to investing in instruments that are eligible for recognition under this article.
7. If the collective investment undertaking is not limited to investing in instruments that
are eligible for recognition under this article, banks may recognise CIU units with the value of the eligible assets as collateral under the assumption that the CIU has invested to the maximum extent allowed under its mandate in non-eligible assets as credit risk mitigation technique.

90 Amended by the Decision No. 7, dated 5.2.2020 of the Supervisory Council of the Bank of Albania. 91 Amended by the Decision No. 7, dated 5.2.2020 of the Supervisory Council of the Bank of Albania.

8. In cases where non-eligible assets can have a negative value due to liabilities or
   contingent liabilities resulting from ownership, banks shall calculate the total value of the non-eligible assets and shall reduce the value of the eligible assets by that of the non-eligible assets in case the latter is negative in total.
9. The use or potential use by a collective investment undertaking of derivative
   instruments to hedge permitted investments shall not prevent units in that undertaking from being eligible for credit risk mitigation.
   Article 50
   Other eligible instruments as collateral under the Financial Collateral Comprehensive Method
10. In addition to the financial collateral set out in article 49, where banks use the Financial
    Collateral Comprehensive Method under this subchapter, the following financial items may be recognised as eligible financial collateral:
    a) equities or convertible bonds not included in a main index but traded on a recognised exchange; and b) units in collective investment undertakings if the following conditions are met:
    i. they have a daily public price quote; and
    ii. the collective investment undertaking is limited to investing in instruments that
    are eligible for recognition under paragraphs 1 to 5 of article 49 and the items mentioned in letter “a” of this paragraph.
    iii. The requirements set out in paragraphs 7 and 8 of article 49 are met.
    The use (or potential use) by a collective investment undertaking of derivative instruments to hedge permitted investments shall not prevent units in that undertaking from being eligible for credit risk mitigation.
11. For the purposes of calculating the capital requirement for counterparty risk in relation
    to repurchase transactions, reverse repurchase transactions and securities or commodities lending or borrowing transactions booked in the trading book, banks may recognise as eligible collateral all financial instruments and commodities that are eligible to be included in the trading book.
12. For exposures due to OTC derivative instruments booked in the trading book, banks
    may recognise as eligible collateral the commodities that are eligible to be included in the trading book.
    Article 51
    Minimum requirements for the recognition of financial collateral under all approaches and methods
13. Banks shall recognize financial collateral and gold as eligible elements for the credit
    risk mitigation under both methods, only if the following conditions shall be met:

a) there exists a low correlation, thus the credit quality of the obligor and the value of the financial collateral must not have a material positive correlation (i.e. securities issued by the obligor, or any related group entity, are not eligible credit risk mitigation). Exceptionally, obligor's own issues of covered bonds falling within the terms of paragraph 1 of article 26 may be recognized as eligible when they are posted as collateral for repurchase transactions, reverse repurchase transactions and securities or commodities lending or borrowing transactions provided that there are met the requirements set out in letter “a” of this article (article 51); b) banks shall fulfil any contractual and statutory requirements in respect of, and take all steps necessary to ensure, the enforceability of the collateral arrangements under the law applicable to their interest in the collateral. Banks shall conduct sufficient legal review confirming the enforceability of the collateral arrangements in all relevant jurisdictions and shall reconsider such reviews as necessary to ensure continuing enforceability of these contracts; c) banks shall meet the following operational requirements:
i. they draft and approve the appropriate procedures for the documenting of
collateral arrangements with the purpose the timely liquidation of collateral;
ii. they implement clear procedures and processes to control risks arising from the
use of financial collateral – including risks of failed or reduced credit protection, valuation risks, risks associated with the termination of the credit protection, concentration risk arising from the use of financial collateral and the interaction with the bank's overall risk profile;
iii. they draft and approve policies and have in place documented practices
concerning the types and amounts of the financial collateral accepted as a mitigation technique;
iv. they calculate the market value of the financial collateral, and revalue it
accordingly, with a minimum frequency of once every six months and whenever the bank has reason to believe that there has occurred a significant decrease in its market value;
v. where the collateral is held by a third party, banks must take reasonable steps to
ensure that the third party segregates the financial collateral from its own assets.
Article 52
Financial Collateral - Calculation of the fully adjusted exposure value

1. For the purposes of calculating the effects of financial collateral, Banks may use one of
   the following methods:
   a) the Financial Collateral Simple Method; or b) the Financial Collateral Comprehensive Method.
2. For the purposes of calculating the effects of credit risk mitigation, a bank may not
   simultaneously use both the Financial Collateral Simple Method and the Financial Collateral Comprehensive Method.
   Article 53

Financial Collateral Simple Method – Collateral Valuation Under this method, the financial collateral that is recognised as a mitigation technique is assigned a value equal to its market value as determined in accordance with article 51, paragraph 1, letter “c”.
Article 54
Financial Collateral Simple Method - Calculating risk-weighted exposure amounts for credit risk

1. The bank shall proportionally assign to those portions of claims collateralized by the
   market value of the recognized collateral, the risk weight that would be assigned under
   Chapter III of this regulation if the lender had a direct exposure to the collateral
   instrument.
2. For this purpose, banks shall consider the exposure value of an off-balance sheet item
   listed in Annex 2, 100% of its value, rather than its exposure value set out in Annex 2 (classification of off-balance sheet items).
3. The bank shall assign a minimum of 20% risk weight to the collateralized portion,
   except as specified in articles 55, 56, 57. The remainder of the exposure shall receive the risk weight that would be assigned to an unsecured exposure under Chapter III of the Regulation.
   Article 55
   Financial Collateral Simple Method - Repurchase transactions and securities lending or borrowing transactions A risk weight of 0% shall be assigned to the collateralised portion of the exposure arising from transactions which fulfil the criteria enumerated in article 66. If the counterparty to the transaction is not an important participant in the market, banks shall assign to the exposure a risk weight of 10%.
   Article 56
   Financial Collateral Simple Method - OTC derivative transactions subject to daily accounting under the mark-to-market method
4. Banks shall assign a risk weight of 0%, to the extent of the collateralisation, to the
   exposure values determined under Chapter VI of this regulation for the derivative instruments listed in Annex 4 and subject to daily marking-to-market, collateralised by cash or cash assimilated instruments where there is no currency mismatch.
5. Banks shall assign a risk weight of 10%, to the extent of the collateralisation to the
   exposure values for debt securities issued by central governments or central banks, which under Chapter III of this regulation have been assigned a 0 % risk weight.
6. For the purposes of paragraph 2 of this article debt securities issued by central
   governments or central banks, shall include:

a) debt securities issued by regional governments or local authorities, exposures to which, according to Chapter III of this regulation are treated as exposures to the central government, in whose jurisdiction they have been established; b) debt securities issued by multilateral development banks to which a 0% risk weight is assigned under Chapter III of this regulation; and c) debt securities issued by international organisations to which a 0% risk weight is assigned according to Chapter III of this regulation.
Article 57
Financial Collateral Simple Method – Other transactions

1. Banks shall assign a 0% risk weight to collaterals in cases where the exposure and the
   collateral are denominated in the same currency, and the collateral is in the form of:
   a) cash on deposits or certificates of deposits or similar instruments with them, or b) debt securities issued by central governments or central banks eligible for a 0% risk weight under Chapter III of this regulation, and its market value has been discounted by 20%. For the purposes of paragraph “debt securities issued by central governments or central banks” shall include those indicated under paragraph 3 of
   article 56.
   Article 58
   Financial Collateral Comprehensive Method – Valuation of financial collateral

2. In valuing financial collateral for the purposes of the Financial Collateral
   Comprehensive Method, banks shall apply volatility adjustments to the market value of financial collateral, as set out in articles 60-66 below.

3. Banks, in compliance with the requirements of treating mismatches between currencies
   in the case of OTC derivatives transactions, as set out in paragraph 3 of this article, where financial collateral is denominated in a currency that differs from the currency in which the underlying exposure is denominated, in addition to the volatility adjustment appropriate to the financial collateral shall apply an adjustment reflecting currency volatility as set out in articles 60-66 below.

4. In the case of OTC derivatives transactions covered by netting agreements recognised
   by the Bank of Albania under Chapter VI, banks shall apply a volatility adjustment reflecting currency volatility when there is a mismatch between the collateral currency and the settlement currency.

5. Even in the case where multiple currencies are involved in the transactions covered by
   the netting agreement, banks shall apply only a single volatility adjustment (to the currencies basket, not to each individual currency).
   Article 59
   Financial Collateral Comprehensive Method – Calculation of adjusted values

6. Banks shall calculate the volatility-adjusted value of the collateral as follows in the case
   of all transactions except those transactions subject to recognised master netting agreements to which the provisions set out in articles 74 - 76 are applied. CVA = C x (1-HC-HFX) where:
   CVA - is the volatility-adjusted value of the collateral; C – is the value of the collateral before applying volatility-adjustment; HC - is the volatility-adjustment for the collateral, calculated according to Articles 60 to 65; HFX - is the volatility-adjustment for the currencies mismatch, calculated according to articles 60 to 65.

7. Banks shall calculate the volatility-adjusted value of the exposure with the following
   formula:
   EVA = E x (1 + HE), and, in the case of OTC derivative transactions, EVA = E. where:
   EVA - is the volatility-adjusted value of the exposure; E -is the exposure value determined under Chapter III of the regulation, if the exposure were not collateralised. For this purpose, the exposure value of off-balance sheet exposures listed in article 2 of the regulation shall be 100% of their value; HE - is the volatility adjustment appropriate to the exposure (E), as calculated under the provisions of articles 60 to 65.

8. Banks shall reflect the maturity of the credit protection and the exposure’s maturity in
   the adjusted value of collateral (thus shall reflect the mismatches of exposure’s and collateral maturities), as set out in the formula below:
   CVAM = CVA x (t-t*) / (T-t*) where:
   CVAM - is the CVA adjusted for the mismatch of maturities to be included in the formula for the calculation of the fully adjusted value of the exposure (E*); CVA - is the lesser between the volatility-adjusted value of the collateral as specified in this
   article and the exposure amount;
   t is the lesser between the number of residual years till the maturity date of the credit protection calculated according to article 44, paragraphs 5 to 7 and T value; T is the lesser between the number of residual years till the maturity date of the exposure calculated according to article 44, paragraphs 5 to 7 and 5 years; and t* is equal to 0.25

9. Banks shall calculate the fully adjusted value of the exposure, taking into account both
   volatility and the risk mitigating effects of collateral, as determined in the following formula:
   E* = max {0, [EVA - CVAM]} where:

E*- is the fully adjusted value of the exposure, taking into account both volatility and the risk mitigating effects of collateral; EVA - is the volatility-adjusted value of the exposure; CVAM - is CVA further adjusted for any maturity mismatch in accordance with the provisions of paragraph 3 of this article.
Article 60
Financial Collateral Comprehensive Method - Calculation of volatility adjustments

1. Banks shall calculate volatility adjustments according to one of the following methods:
   a) the Supervisory Volatility Adjustments Approach; and b) the Own Estimates of Volatility Adjustments Approach (the “Own Estimates” Approach)
2. Banks shall not obtain apply the “Own Estimates” Approach without the prior approval
   by the Bank of Albania.
3. Banks, upon the prior approval granted by the Bank of Albania on the use of “Own
   Estimates” Approach, shall use this approach for the full range of instrument types.
4. By way of derogation from paragraph 3 of this article, banks may use the Supervisory
   Volatility Adjustments Approach for immaterial portfolios.
5. Where the collateral consists of a number of recognised items, banks shall apply the
   volatility adjustment as set out in the following formula:
   H = ∑iiHi where:
   i - is the proportion of an item to the collateral as a whole and; Hi - is the volatility adjustment applicable to that item.
   Article 61
   Financial Collateral Comprehensive Method – Supervisory volatility adjustments Banks shall apply the volatility adjustments under the Supervisory volatility adjustments approach (provide daily revaluation is carried out) as set out in the following Tables (9-12).
   Table 9 Volatility adjustments for debt securities listed in Article 49, paragraph (1), letters
   "b", "c" and “d”
   Credit quality step with which the credit assessment of the debt security is associated Residual Maturity Volatility adjustments for debt securities issued by entities described in Article 49, paragraph (1) “b” Volatility adjustments for debt securities issued by entities described in
   Article 49, paragraph (1), “c” and “d”
   20-day liquidation period (%)
   10-day liquidation period (%)
   5-day liquidation period (%)
   20-day liquidation period (%)
   10-day liquidation period (%)
   5-day liquidation period (%)

1 ≤ 1 year 0.707 0.5 0.354 1.414 1 0.707

1 ≤ 5 years
2.828 2 1.414 5.657 4 2.828
5 years 5.657 4 2.828 11.314 8 5.657
2-3 ≤ 1 year 1.414 1 0.707 2.828 2 1.414
1 ≤ 5 years
4.243 3 2.121 8.485 6 4.243
5 years 8.485 6 4.243 16.971 12 8.485
4 ≤ 1 year 21.213 15 10.607 N/A
1 ≤ 5 years
21.213 15 10.607 N/A
5 years 21.213 15 10.607 N/A
Table 10 Volatility adjustments for debt securities listed in Article 49, paragraph (1), letters
"b", "c" and "d", with short-term credit assessments Credit quality step with which the credit assessment of the short-term debt security is associated Volatility adjustments for debt securities issued by entities described in Article 49, paragraph (1), “b”, with short-term credit quality assessment Volatility adjustments for debt securities issued by entities described in Article 49, paragraph (1), “c” and “d”, with short-term credit quality assessment 20-day liquidation period (%) 10-day liquidation period (%) 5-day liquidation period (%) 20-day liquidation period (%) 10-day liquidation period (%) 5-day liquidation period (%) 1 0.707 0.5 0.354 1.414 1 0.0707 2-3 1.414 1 0.707 2.828 2 1.414
Table 11 Volatility adjustments for other collateral or exposure types

Other collateral type s
Other collateral types 20-day liquidation period (%) 10-day liquidation period (%) 5-day liquidation period (%) Main index equities, main index convertible bonds 21.213 15 10.607 Other equities or convertible bonds listed on a recognised exchange 35.355 25 17.678 Cash deposits or other similar instruments 0 Gold 21.213 15 10.607
Table 12 Volatility adjustment for currency mismatch
Volatility adjustment for currency mismatch
20-day liquidation period (%) 10-day liquidation period (%) 5-day liquidation period (%)
11.314 8 5.657

1. For the purposes of applying credit risk mitigation techniques, the liquidation period
   shall be as follows:
   a) 20 business days for secured lending transactions; b) 5 business days for repurchase transactions (except in so far as such transactions involve the transfer of commodities or guaranteed rights relating to title to commodities); c) 5 business days for securities lending or borrowing transactions; and; d) 10 business days for other capital market-driven transactions.

2. In tables 9 to 12 and paragraphs 4 to 6 of this article the credit quality step with which a
   credit assessment of the debt security is associated is the credit quality step determined in Chapter III of the regulation. For purposes of this paragraph, when debt securities mentioned above have more than one credit assessment, banks shall apply a credit assessment consistent with article 49, paragraph 2.

3. For securities that do not meet the requirements for applying credit risk mitigation
   techniques and for commodities lent or sold under repurchase transactions, or securities or commodities lending or borrowing transactions, banks shall calculate the volatility adjustment same as for non-main index equities listed on a recognised exchange.

4. For units in collective investment undertakings that are recognised as eligible for
   purposes of mitigation techniques, banks shall calculate the volatility adjustment as the weighted average volatility adjustment that would apply to the assets in which the CIU has invested, having regard to the liquidation period of the transaction as specified in paragraph 2 of this article. If the assets in which the CIU has invested are not known to the bank, the volatility adjustment is the highest volatility adjustment that would apply to any of the assets in which the CIU has the right to invest.

5. For unrated debt securities issued by institutions and satisfying the eligibility criteria set
   out in article 49, paragraph 5, banks shall calculate the volatility adjustments same as for securities issued by institutions or corporates with an external credit assessment, associated with credit quality steps 2 or 3.
   Article 62
   Own estimates approach for the volatility adjustments

6. Bank of Albania shall permit banks complying with the requirements set out in articles
   63 and 64 to use their own volatility estimates for calculating the volatility adjustments to be applied to collateral and exposures.

7. When debt securities have a credit assessment by an eligible ECAI equivalent to
   investment grade or better (at least BBB- or credit quality step 3), banks may calculate a volatility estimate for each category of securities.

8. In determining relevant categories referred to in paragraph 2 of this article, banks shall
   take into account the type of issuer of the security, the assessment of securities by an eligible ECAI, their residual maturity, and their modified duration.

9. Volatility estimates must be representative of the securities included in each of the
   categories indicated in paragraph 3 of this article.

10. For debt securities having a credit assessment by an eligible ECAI equivalent to below
    investment grade (BB+ or credit quality step 4 at most), and for other eligible collateral, banks shall calculate the volatility adjustments for each individual item.

11. Banks using the Own Estimates Approach shall estimate volatility of the collateral or
    foreign exchange mismatch without taking into account any correlations between the unsecured exposure, collateral and/or exchange rates.

12. Banks using the Own Estimates Approach for the calculation of the capital requirement
    for counterparty risk shall calculate the volatility adjustments for each individual item with regard to the financial instruments and commodities referred to in article 50, paragraph 2.
    Article 63
    Quantitative criteria - Own estimates approach for volatility adjustments

13. In calculating the volatility adjustments according to the Own Estimates Approach,
    Banks shall use a 99% one-tailed confidence interval.

14. Banks shall use the liquidation periods as stipulated in paragraph 2 of article 61.

15. Banks may use volatility adjustment numbers calculated according to shorter or longer
    relevant liquidation periods (TM), scaled up or down to the liquidation period (TN) set out in article 61 for the type of transaction in question.

16. To adjust the relevant liquidation period (TM) to the liquidation period (TN), banks
    shall use the following formula:

HM=HN√TM√TN where:
HM - is the volatility adjustment under the relevant liquidation period TM; HN -is the volatility adjustment based on the liquidation period TN; TM - is the relevant liquidation period; TN - is the liquidation period referred to in Article 61.
5. Banks shall take into account the low liquidity level (illiquidity) of lower-quality assets
and appropriately adjust the liquidation period.
6. Banks shall identify where historical data may understate potential volatility, and deal
with such cases by means of a stress scenario.
7. The historical observation period for calculating volatility adjustments shall be a
minimum length of one year.
8. Banks that use a weighting scheme or other methods for the historical observation
period, shall assure that the effective observation period shall be at least one year.
9. Bank of Albania may also require a bank to calculate its volatility adjustments using a
shorter observation period if this is justified by a significant upsurge in prices or price volatility.
10. Banks shall update their data sets at least once every three months and shall also
reassess them whenever market prices are subject to material changes (implying that the volatility adjustments shall be computed at least every three months).
Article 64
Qualitative criteria - Own estimates approach for volatility adjustments

1. The volatility estimates shall be used in the day-to-day risk management process of the
   bank including in relation to its internal exposure limits.
2. If the liquidation period used by the bank is longer than that set out in article 61 for the
   type of transaction in question, the bank shall scale up the volatility adjustments in accordance with the formula set out in article 63, paragraph 4.
3. Banks shall establish and implement procedures for monitoring and ensuring
   compliance with the internal bylaws and controls for the operation of their systems for the estimation of volatility adjustments and for the integration of such estimations into their the risk management process.
4. Banks during their internal auditing processes shall carry out, at least once a year,
   independent reviews of the system for the estimation of volatility adjustments.
5. In the reviews referred to in paragraph 4 of this article, banks shall specifically
   consider:
   a) the integration of estimated volatility adjustments into daily risk management; b) validation of any significant change in the process for the estimation of volatility adjustments; c) the verification of the consistency, timeliness and reliability of data sources used to run the system for the estimation of volatility adjustments, including the independence of such data sources; and d) the accuracy and appropriateness of the volatility assumptions.

Article 65
Scaling up of volatility adjustments

1. Banks shall apply the supervisory volatility adjustments set out in article 61 where there
   is a daily revaluation of the exposure and the recognised collateral. Where banks use their own estimates of the volatility adjustments, these must be calculated in the first instance on the basis of daily revaluation.
2. Where the frequency of revaluation is less than daily, Banks shall apply larger volatility
   adjustments, which are calculated by scaling up the daily revaluation volatility adjustments, using the following formula:
   where:
   H - is the volatility adjustment to be applied; HM - is the volatility adjustment where there is daily revaluation; NR - is the actual number of business days between revaluations; TM - is the relevant liquidation period for the type of transaction in question.
   Article 66
   Conditions for applying a 0% volatility adjustment
3. In relation to repurchase transactions, and securities or commodities lending or
   borrowing transactions, where also the conditions set out in letters “a” to “h” of this paragraph are met, banks may apply a 0% volatility adjustment:
   a) both the exposure and the collateral are cash or debt securities issued by central governments or central banks as specified in article 49, paragraph 1, letter “b” and eligible for a 0% risk weight under Chapter III of the Regulation; b) both the exposure and the collateral are denominated in the same currency; c) the maturity of the transaction is no more than one day or both the exposure and the collateral are subject to daily marking-to-market or daily remargining; d) the time between the last marking-to-market, before a failure to remargin by the counterparty and the liquidation of the collateral shall be no more than four business days; e) the transaction is settled across a settlement system proven/tested for that type of transaction; f) the documentation covering the agreement is standard market documentation for repurchase transactions, reverse repurchase transactions or securities or commodities lending or borrowing transactions in the securities or commodities concerned; g) the transaction is governed by documentation specifying that if the counterparty fails to satisfy an obligation to deliver cash or securities or to deliver margin or otherwise defaults, then the transaction is immediately terminable, and h) the counterparty is considered a “core market participant”.   M R M M T N T H H  1 

Core market participants shall include the following entities:
i. entities mentioned in article 49, paragraph 1, letter “b”, exposures to which in
accordance with Chapter II of the regulation, are assigned a 0% risk weight;
ii. supervised institutions
iii. other financial companies (including insurance companies), exposures to which are
assigned a 20% risk weight under Chapter III of the regulation
iv. adjusted and licensed collective investment undertakings that are subject to capital
or financial leverage requirements;
v. adjusted pension funds; and
vi. recognised clearing houses.
2. Where a competent authority of an EU Member State allow the treatment in accordance
with paragraph 1 of this article on the repurchase transactions, or securities or commodities lending or borrowing transactions for securities issued by its government, Bank of Albania may permit the banks to apply the same approach to the same transactions.
Article 67
Calculating risk-weighted exposure amounts

1. Banks shall consider as the exposure value for the purposes of calculating risk-weighted
   exposure amounts under Chapter III of the regulation, the E* indicator as calculated under article 59.
2. In the case of off-balance sheet items listed in article 2 of this regulation, banks shall
   consider E* as the value at which shall be applied the percentages indicated in article 9 and the risk weights indicated in Chapter III of the regulation, to arrive at the exposure value.
   Article 68
   On-balance sheet netting – Eligibility
3. Banks shall use/recognize as a mitigation technique the netting of reciprocal claims
   between the bank and its counterparty.
4. By way of derogation from article 72, banks shall use/recognize on-balance sheet
   netting only for reciprocal cash balances between the bank and its counterparty. Banks shall qualify as reciprocal cash balances only loans and deposits of the bank for the modification of risk weighted exposure values, in the case of on-balance sheet netting agreement.
   Article 69
   On-balance sheet netting – Minimal requirements
5. Banks shall recognize as an eligible credit risk mitigation technique the on-balance
   sheet netting agreement (except from the master netting agreement covering the repurchase transactions, or securities or commodities lending or borrowing transactions and/or other capital market transactions) only if the following conditions shall be satisfied:

a) they must be legally effective and enforceable in all relevant jurisdictions, including the event of the insolvency, winding-up or bankruptcy of a counterparty; b) banks shall be able to determine at any time those assets and liabilities that are subject to the on-balance sheet netting agreement; c) banks shall monitor and control the relevant risk related to the termination of the credit protection; and d) banks shall monitor and control relevant exposures on a net basis.
Article 7092
On-balance sheet netting

1. Loans to and deposits with the lending bank, subject to on-balance sheet netting shall be
   treated by that bank as cash collateral for the purpose of calculating the effect of funded credit protection for those loans and deposits of the lending bank subject to on-balance sheet netting which are denominated in the same currency.
   Article 7193
   On-balance sheet netting - Calculating risk-weighted exposure amounts Repealed.
   Article 72
   Master netting agreements covering repurchase transactions, and/or securities or commodities lending or borrowing transactions and/or capital market-driven transactions - Eligibility
2. For credit risk mitigation purposes, banks may use master netting agreements covering
   repurchase transactions, and/or securities or commodities lending or borrowing transactions and/or other capital market-driven transactions, only if they apply the Financial Collateral Comprehensive Method.
3. Banks shall recognise the effects of master netting agreements covering repurchase
   transactions, and/or securities or commodities lending or borrowing transactions, and/or other capital market-driven transactions, only if the collateral taken and securities or commodities borrowed within such agreements comply with the requirements set out in articles 49 and 50.
4. The requirements stipulated in paragraph 2 of this article shall not oppose the banks’
   obligation to implement the requirements laid down in Chapter IV.
   Article 73
   Master netting agreements – Minimum requirements

92 Amended the title and the content of the article 70 by the Decision No. 68, dated 22.12.2021 of the Supervisory Council of the Bank of Albania. 93 Repealed by the Decision No. 68, dated 22.12.2021 of the Supervisory Council of the Bank of Albania.

1. Banks may recognize94 as eligible credit risk mitigation techniques the master netting
   agreements covering repurchase transactions, securities or commodities lending or borrowing transactions and/or other capital market-driven transactions, 95after notifying the Bank of Albania and only if the following criteria are met:
   a) they must be legally effective and enforceable in all relevant jurisdictions, including the event of the insolvency, winding-up or bankruptcy of a counterparty; b) give the non-defaulting (solvent) party the right to terminate and close-out in a timely manner all transactions under the agreement upon the event of default, including in the event of the insolvency, winding-up or bankruptcy of the counterparty; and; c) provide for the netting of gains and losses on transactions closed out under a master agreement so that a single net amount is owed by one party to the other; and d) in addition to the requirements set out in letters “a” to “c” of this article, must fulfil also the minimum requirements for the recognition of financial collateral according to Financial Collateral Comprehensive Method set out in article 49.
2. Master netting agreements covering repurchase transactions, and/or securities or
   commodities lending or borrowing transactions and/or capital market-driven transactions which provide for the netting of non-trading and trading book positions may be recognised for the purpose of calculating the capital requirement for counterparty risk if the netted transactions meet the following requirements:
   a) all transactions are subject to daily marking-to-market method; b) all instruments borrowed, purchased or received under the transactions covered by the master netting agreement are recognised as eligible financial collateral under the provisions of this Chapter, without applying the provisions of article 50, paragraphs 2 and 3, and article 62, paragraph 7.
   Article 74
   Master netting agreements - Supervisory volatility adjustments / Own estimates volatility adjustments
3. In calculating the “fully adjusted exposure value” (E*) for the exposures subject to an
   eligible master netting agreement covering repurchase transactions and/or securities or commodities lending or borrowing transactions and/or other capital market-driven transactions, Banks shall apply the volatility adjustments either using the Supervisory Volatility Adjustments Approach or the Own Estimates Volatility Adjustments Approach, as set out in articles 61 to 66.
4. Banks that use the Own Estimates Volatility Adjustments Approach shall apply the
   same conditions and requirements as those applied under the Financial Collateral Comprehensive Method.
   Article 75
   Master netting agreements - Calculation of the fully-adjusted exposure value

94 Amended by the Decision No. 68, dated 22.12.2021 of the Supervisory Council of the Bank of Albania. 95 Added by the Decision No. 68, dated 22.12.2021 of the Supervisory Council of the Bank of Albania.

1. Banks shall calculate the net position in each type of security or commodity by
   subtracting from the total value of the securities or commodities of that type lent, sold or provided under the master netting agreement, the total value of securities or commodities of that type borrowed, purchased or received under the agreement.
2. For the purposes of paragraph 1 of this Article, “type of security” means securities
   which are issued by the same entity, have the same issue date, the same maturity and are subject to the same terms and conditions and to the same liquidation periods as indicated in Articles 61 to 66.
3. Banks shall calculate the net position in each currency, other than the settlement
   currency of the master netting agreement, by subtracting from the total value of securities denominated in that currency lent, sold or provided under the master netting agreement added to the amount of cash in that currency lent or transferred under the agreement, the total value of securities denominated in that currency borrowed, purchased or received under the agreement added to the amount of cash in that currency borrowed or received under the agreement.
4. Banks shall apply the volatility adjustment appropriate to a given type of security or
   cash position to the absolute value of the positive or negative net position in the securities of that type.
5. Banks shall apply the foreign exchange risk (fx) volatility adjustment to the net positive
   or negative position in each currency other than the settlement currency of the master netting agreement.
6. Banks shall calculate the fully-adjusted exposure value (E*) according to the following
   formula:
   E* = max {0, [(∑(E) - ∑(C)) + ∑(|net position in each type of security | x Hsec) + (∑|Efx| x Hfx)]} where:
   E* - is the fully adjusted exposure value;
   E - is the exposure value for each separate exposure under the agreement that would apply in the absence of the credit protection; C - is the value of the securities or commodities borrowed, purchased or received or the cash borrowed or received in respect of each such exposure; ∑(E) - is the sum of all Es under the agreement; ∑(E) - is the sum of all Cs under the agreement; Hsec - is the volatility adjustment appropriate to a particular type of security; Efx -is the net position (positive or negative) in a given currency other than the settlement currency of the agreement as calculated under paragraph (3) of this Article; Hfx - is the foreign exchange volatility adjustment.
   Article 76
   Master netting agreements – Calculation of risk weighted exposures amounts Banks shall consider as of risk weighted exposures amounts to counterparties arising from the transactions subject to master netting agreements, the fully adjusted exposure value (E*) calculated according to article 75.

Article 77
Other funded credit protection – Eligibility

1. Banks shall recognise as eligible credit risk mitigation collateral the cash on deposit/s or
   deposits certificate or cash similar instruments held by a third party institution in a non￾custodial arrangement and pledged to the lending credit institution.
2. Banks shall recognise as eligible credit risk mitigation collateral the life insurance
   policies pledged to banks.
3. Banks shall recognise as eligible credit risk mitigation collateral the instruments issued
   by other/third party institutions, which will be repurchased by that institution on request.
   Article 78
   Other funded credit protection – Minimum requirements
4. Banks shall recognise as eligible credit risk mitigation collateral (according to the
   provisions in article 77, paragraph 1, the cash on deposit/s or deposits certificate or cash similar instruments held by another / third party institution, only if the following conditions are met:
   a) the borrower's right/claim against the other institution/third party is openly pledged or transferred to the lending bank and such pledge or transfer is legally effective and enforceable in all relevant jurisdictions; b) the other institution/ third party is notified of the pledge or the transfer; c) as a result of the notification, the other / third party institution is able to make payments solely to the lending bank or to other parties with the lending bank’s consent; and d) the pledge or transfer is unconditional and irrevocable.
5. Banks shall recognise as eligible credit risk mitigation collateral the life insurance
   policies pledged to them (the lending banks) only if the following conditions are met:
   a) the life insurance policy is pledged or transferred to the lending bank; b) the company providing the life insurance is notified of the pledge or transfer and as a result may not pay amounts payable under the contract without the consent of the lending bank; c) the lending bank has the right to cancel the policy and receive the surrender value in the event of the borrower's default ; d) the lending bank is informed of any non-payments under the insurance policy by the insurance policy-holder; e) the credit protection is provided for the maturity of the loan. Where this is not possible because the insurance relationship ends before the loan relationship expires, the bank must ensure that the amount deriving from the insurance contract serves the bank as security until the end of the duration of the credit agreement. f) the pledge or transfer is legally effective and enforceable in all jurisdictions which are relevant at the time of the conclusion of the credit agreement;

g) the surrender value is declared by the company providing the life insurance and is non-reducible; h) the surrender value is to be paid in a timely manner upon request; i) the surrender value cannot be requested without the consent of the bank; and; j) the company providing the life insurance is subject to the Law No. 9267, dated
29.07.2004 “On the activity of insurance, reinsurance and intermediation in
insurance and reinsurance”, as amended, or is subject to supervision by a competent authority of a third country which applies regulatory and supervisory standards at least equivalent to those applied in Albania.
3. Banks, for purposes of credit risk mitigation, shall use instruments repurchased on
demand, only if the following conditions are met a) the issuing institution has an ECAI credit assessment which has been determined by Bank of Albania to be associated with credit quality step 1, under the requirements for the risk weighting of exposures to institutions under Chapter III of the regulation; b) the issuing institution should demonstrate that the instruments are sufficiently liquid.
Article 79
Calculating risk-weighted exposure amounts - Cash on deposits or deposits certificate or cash similar instruments held by another / third party institution Banks shall treat as a guarantee by another /third party institution the cases of credit protection falling within the terms set out in Chapter III (Unfunded Credit Protection).
Article 80
Calculating risk-weighted exposure amounts - Life insurance policies pledged to the lending bank

1. Banks shall assign risk weights as set out in paragraph 2 of this article, to the exposure
   value collateralised by the current surrender value of life insurance policies pledged to the lending bank, if the conditions set out in article 78, paragraph 2 are met.

2. For the purposes of paragraph 1 of this article, banks, on the basis of the risk weights
   assigned to a senior unsecured exposure to the company providing the life insurance, shall assign the following risk weights:
   a) a risk weight of 20%, where the senior unsecured exposure to the company providing the life insurance is assigned a risk weight of 20%; b) a risk weight of 35%, where the senior unsecured exposure to the company providing the life insurance is assigned a risk weight of 50%; c) a risk weight of 70%, where the senior unsecured exposure to the company providing the life insurance is assigned a risk weight of 100%; d) a risk weight of 150%, where the senior unsecured exposure to the company providing the life insurance is assigned a risk weight of 150%.

3. For the purposes of paragraph 2 of this article, where there is any currency mismatch
   between the exposure and the recognised credit protection, banks shall reduce the current surrender value as specified in article 91.
   Article 81
   Calculating risk-weighted exposure amounts - Instruments repurchased on demand

4. Banks shall treat as a guarantee by the issuing institutions, under the provisions set out
   in subchapter III (Unfunded Credit Protection), the eligible instruments falling under the conditions set out in article 78, paragraph 3.

5. Banks shall determine the value of the recognised credit protection as follows:
   a) where the instrument will be repurchased at its nominal value, the value of the protection shall be equivalent to that amount (nominal value; b) where the instrument will be repurchased at market price, the value of the protection shall be the value of the instrument valued in the same way as the debt securities specified in article 49, paragraph 5. SUBCHAPTER III UNFUNDED CREDIT PROTECTION
   Article 82
   General provisions

6. Banks shall recognise as eligible unfunded credit protection only the protection
   providers and types of protection agreements set out in this subchapter.

7. In the case of unfunded credit protection, for the credit protection provider to be eligible
   for recognition, Banks shall ensure that the protection provider is sufficiently reliable, and the protection agreement legally effective and enforceable in the relevant jurisdictions, to provide appropriate certainty as to the credit protection.

8. Banks shall use the following forms as unfunded credit protection:
   a) guarantees; b) counter-guarantees or other legal arrangements having the same legal effects as counter-guarantees (hereinafter: counter-guarantees), and; c) credit derivatives.
   Article 83
   Eligibility of protection providers under all approaches

9. Banks shall recognise the following entities as eligible providers of unfunded credit
   protection:
   a) central governments and central banks; b) regional governments or local authorities; c) multilateral development banks;

d) international organisations exposures to which are assigned a 0% risk weight as laid down in Chapter III of this regulation; e) public sector entities, exposures / claims on which are treated by the Bank of Albania as exposures / claims on institutions or central governments under Chapter III of this regulation; f) supervised institutions; and g) other corporate entities, including parent, subsidiary and affiliate entities of the bank, which under the provisions in Chapter III of the regulation on the risk weighting of exposures to corporates, have a credit assessment by an eligible ECAI which is associated with credit quality step 2 or above.
2. By way of derogation from paragraph 1 of this article, Bank of Albania may also
recognise as eligible providers of unfunded credit protection, other financial institutions licensed and supervised by the competent authorities responsible for the licensing and supervision of banks and subject to prudential requirements equivalent to those applied to banks and investment firms.
Article 84
Eligibility of credit derivatives

1. For purposes of credit risk mitigation, banks shall recognise the following types of
   credit derivatives and instruments that may be composed of such credit derivatives or that are economically effectively similar to:
   a) credit default swaps (CDS); b) total return swaps (TRS); and c) credit linked notes (CLN) to the extent of their cash funding.
2. Where Banks buy credit protection through a TRS and record the net payments received
   on the swaps net income, but do not record offsetting deterioration in the value of the asset that is protected (either through reductions in fair value or by an addition to reserves), the credit protection shall not be recognised as eligible.
   Article 85
   Internal hedges
3. When banks conduct an internal hedge using a credit derivative (i.e. hedges the credit
   risk of an exposure in the non-trading book with a credit derivative booked in the trading book) in order for the protection to be recognised as eligible for the purposes of this Chapter, the credit risk transferred to the trading book shall be transferred out to a third party or parties.
4. With reference to paragraph 1 of this article, subject to the compliance of such transfer
   with the requirements for the recognition of credit risk mitigation set out in this
   Chapter, banks shall apply the rules for the calculation of risk weighted exposure
   amounts that are applied for the unfunded credit protection.

Article 86
Minimum requirements common to guarantees and credit derivatives

1. Banks shall recognise as credit risk mitigation techniques, a guarantee or credit
   derivative only if the following conditions shall be met:
   a) the credit protection shall be direct; b) the extent of the credit protection shall be clearly defined and non-controvertible; c) the credit protection contract shall not contain any clause, the fulfilment of which is outside the direct control of the lender, that:
   i. would allow the protection provider to unilaterally cancel the protection;
   ii. would increase the effective cost of protection as a result of deteriorating credit
   quality of the protected exposure;
   iii. could prevent the protection provider from being obliged to pay out in a timely
   manner in the event that the original obligor fails to make any payments due;
   iv. could allow the maturity of the credit protection to be reduced by the protection
   provider; d) the contract must be legally effective and enforceable in all jurisdictions which are relevant at the time of its signature.
2. Banks shall develop systems to manage potential concentration of risk arising from the
   bank's use of guarantees and credit derivatives, as credit risk mitigation techniques.
3. Banks shall ensure that their strategies in respect of the use of credit derivatives and
   guarantees are effectively related or interact with the management of their overall risk profile.
   Article 87
   Minimum requirements for central governments and central banks other public sector counter-guarantees
4. Where an exposure is protected by a guarantee which is counter-guaranteed by a central
   government or central bank, a regional government or local authority, 96a public sector entity, exposures to which are treated as claims on the central government in whose jurisdiction they are established under a multi-lateral development bank or an international organisation, to which a 0 % risk weight is assigned under Chapter III of this regulation, or a public sector entity, 97exposures to which, pursuant to article 14, paragraphs 1, 2 and 3 of the regulation, are weighted on the basis of the credit quality assigned to exposures to central government or treated as exposures to supervised institutions; banks shall treat the exposure as protected by a guarantee provided by the entity in question, provided the following conditions are met:
   a) the counter-guarantee covers all credit risk elements of the exposure;

96 Amended by the Decision No. 7, dated 5.2.2020 of the Supervisory Council of the Bank of Albania. 97 Amended by the Decision No. 7, dated 5.2.2020 of the Supervisory Council of the Bank of Albania.

b) both the original guarantee and the counter-guarantee meet the requirements for guarantees set out in articles 86 and 88, with exception from the paragraph 1, letter “a” in article 86 (i.e. the counter-guarantee need not be direct); and c) the cover is robust and that nothing in the historical evidence suggests that the coverage of the counter-guarantee is at least equivalent to that of a direct guarantee by the entity in question.
2. Banks shall apply the treatment set out in paragraph 1 of this article also to an exposure
which is not counter-guaranteed by an entity listed in paragraph 1, if that exposure's counter-guarantee is in turn directly guaranteed by one of the 98entities listed in paragraph 1 of this article and the conditions listed in that paragraph are satisfied.
Article 88
Additional requirements for guarantees

1. In addition to the requirements set out in article 86, banks shall recognise guarantees as
   eligible credit risk mitigation techniques, only if the following conditions shall be met:
   a) on the qualifying default of and/or non-payment by the counterparty, the lending bank shall have the right to pursue, in a timely manner, the guarantor for any money amount due under the claim in respect of which the protection is provided (payment by the guarantor shall not be subject to the lending bank first having to pursue the obligor); b) in the case of unfunded credit protection covering residential mortgage loans, the requirements in article 86, paragraph 1, letter “c”, sub-paragraph “iii”, and letter “a” of paragraph 1 of this article, have to be satisfied within 24 months (i.e. on the qualifying default of and/or non-payment by the counterparty, the lending bank shall have the right to execute the collateral and, in case the execution fails, it shall trigger payment under the guarantee and pursue the guarantor for any monies due under the claim within 24 months); c) the guarantee shall explicitly document obligation assumed by the guarantor; and d) the guarantee shall cover all types of payments the obligor is expected to make in respect of the claim. Where certain types of payment are excluded from the guarantee, the recognised value of the guarantee shall be adjusted to reflect the limited coverage.
2. In the case of guarantees provided in the context of mutual guarantee schemes
   recognised for these purposes by the Bank of Albania or provided by or counter￾guaranteed by entities referred to in 99paragraph 1 of article 87, Bank of Albania shall consider the requirements in paragraph 1 of this article (article 88), letters “a” and “b” to be satisfied, where either of the following conditions are met:

98 Amended by the Decision No. 7, dated 5.2.2020 of the Supervisory Council of the Bank of Albania. 99 Amended by the Decision No. 7, dated 5.2.2020 of the Supervisory Council of the Bank of Albania.

a) the lending bank, proportional to the coverage of the guarantee, has the right to obtain in a timely manner a provisional payment by the guarantor calculated to represent a robust estimate of the amount of the economic loss, including losses resulting from the non-payment of interest and other types of payment which the borrower is obliged to make. b) the lending bank can demonstrate that the loss-protecting effects of the guarantee, including losses resulting from the non-payment of interest and other types of payments which the borrower is obliged to make, justify such treatment.
Article 89
Other requirements for credit derivatives

1. Banks shall recognise credit derivatives as credit risk mitigation techniques only if, in
   addition to the requirements set out in article 86, the following conditions shall be met:
   a) the credit events specified under the credit derivative shall at a minimum include:
   i. the failure to pay the amounts due under the terms of the underlying obligation
   that are in effect at the time of such failure (with a grace period that is closely in line with or shorter than the grace period in the underlying obligation);
   ii. the bankruptcy, insolvency or inability of the obligor to pay its debts, or its
   failure or admission in writing of its inability generally to pay its debts as they become due, and analogous events; and
   iii. the restructuring of the underlying obligation involving forgiveness or
   postponement of principal, interest or fees that results in a credit loss event (i.e. establishing reserve funds to cover for losses, etc.). b) where the credit events specified under the credit derivatives in letter “a” of paragraph 1 of this article, do not include restructuring of the underlying obligation as described in subparagraph “iii”, the credit protection may be recognised subject to a reduction in the recognised value as specified in paragraph 3 of article 90. c) in the case of credit derivatives allowing for cash settlement, banks shall have in place a careful process in order to estimate loss reliably, and to clearly specify the period for obtaining post-credit-event valuations of the underlying obligation. d) if the protection purchaser's right and ability to transfer the underlying obligation to the protection provider is required for settlement, the terms of the underlying obligation shall provide that any required consent to such transfer may not be unreasonably withheld; and; e) the identity of the parties responsible for determining whether a credit event has occurred shall be clearly defined. This determination (whether a credit event has occurred) shall not be the sole responsibility of the protection provider. The protection buyer shall have the right/ability to inform the protection provider of the occurrence of a credit event.

2. A mismatch between the underlying asset and the reference obligation under the credit
   derivative (i.e. the obligation used for the purposes of determining cash settlement value or the deliverable obligation) or between the underlying asset and the obligation used for purposes of determining whether a credit event has occurred is permissible only if the following conditions are met:
   a) the reference obligation or the obligation used for purposes of determining whether a credit event has occurred, as the case may be, ranks pari passu with or is junior to the underlying obligation; and b) the underlying asset and the reference obligation or the obligation used for purposes of determining whether a credit event has occurred, as the case may be, share the same obligor (i.e., the same legal entity) and there are in place legally enforceable cross-default or cross-acceleration clauses.
   Article 90
   Valuation of unfunded credit protection

3. Banks shall determine the value of unfunded credit protection (G) as the amount that
   the protection provider has undertaken to pay in the event of the default or non-payment of the borrower or on the occurrence of other credit events specified in the contract.

4. Banks shall treat credit linked notes issued by them and received subsequently as credit
   protection, as cash collateral and their valuation and calculation of their effects shall be carried out pursuant to the provisions of article 52.

5. Where the credit events specified under the credit derivative do not include the
   restructuring of the underlying asset involving forgiveness or postponement of principal, interest or fees that results in a credit loss event (i.e. value adjustment, establishment of reserve funds to cover losses from credit risk, or other similar debit to the profit and loss account), banks shall adjust the credit derivatives amounts as follows:
   a) if the amount that the protection provider has undertaken to pay is not higher than the exposure value, the value of the credit protection (G) shall be reduced by 40%; or b) if the amount that the protection provider has undertaken to pay is higher than the exposure value, the value of the credit protection (G) shall be no higher than 60% of the exposure value.
   Article 91
   Currency mismatch

6. Where unfunded credit protection is denominated in a currency different from that in
   which the exposure is denominated (there exist a currency mismatch), banks shall reduce the credit protection value, applying a volatility adjustment HFX, as determined in the following formula:
   G* =G x (1-HFX) where:

G is the nominal amount of the credit protection; G* is G adjusted for any foreign exchange risk; and HFX - is the volatility adjustment for any currency mismatch between the credit protection and the underlying asset. Where there is no currency mismatch, G* = G.
2. Banks shall calculate the volatility adjustments for any currency mismatch based on the
Supervisory Volatility Adjustments Approach or the Own Estimates Approach as set out in articles 60 to 66.
Article 92
Maturity mismatch

1. Banks shall reflect the maturity of the credit protection and the maturity of the exposure
   in the adjusted value of the credit protection as specified in the following formula:
   GA = G* x (t-t*) / (T-t*) where:
   G* - is the amount of the protection adjusted for any currency mismatch; GA - is G* adjusted for any maturity mismatch; t is the lowest between the number of years remaining to the maturity date of the credit protection calculated in accordance with article 44, paragraphs 5 to 7, and the value of T; T is the lowest between the number of years remaining to the maturity date of the exposure calculated in accordance with article 44, paragraphs 5 to 7, and 5 years; and t* is equal to 0.25; GA- is then taken as the value of the protection for the purposes of articles 94 and 95.
   Article 93
   Calculating risk-weighted exposure amounts -
   Partial protection (tranching)
2. Where Banks transfer a part of the risk of an exposure in one or more tranches, they
   shall apply the provisions of Chapter V.
3. Materiality thresholds on payments below which no payment shall be made in the event
   of loss are considered to be equivalent to retained first loss positions and to give rise to a tranched transfer of risk.
   Article 94
   Calculating risk-weighted exposure amounts - Full protection
4. For the purposes of implementing article 11, banks shall consider g the risk weight to be
   assigned to an exposure, the exposure value (E) of which is fully protected by unfunded protection (GA), where:

E - is the exposure value according to article 9 (for this purpose, the exposure value of an off-balance sheet item listed in Annex 2, shall be 100% of its value instead of the exposure value determined in paragraph (1) of article 9); g - is the risk weight of exposures to the protection provider as specified under
Chapter III of the Regulation; and
GA -is the value of G* as calculated under article 91, further adjusted for any maturity mismatch as laid down in article 92.
Article 95
Calculating risk-weighted exposure amounts -
Partial protection (equal seniority)

1. Where the protected amount is less than the exposure value and the protected and
   unprotected parts are of equal seniority, i.e. the bank and the protection provider share losses on a pro-rata basis, banks may apply a proportional regulatory capital relief.
2. For the purposes of implementing article 11, banks shall calculate the risk-weighted
   exposure amounts in accordance with the following formula (E-GA) x r + GA x g where:
   E - is the exposure value according to article 9 (for this purpose, the exposure value of an off-balance sheet item listed in Annex 2, shall be 100% of its value instead of the exposure value determined in paragraph 1 of article 9); GA - is the value of G* as calculated under article 9 further adjusted for any maturity mismatch as laid down in article 92. r - is the risk weight of exposures to the obligor as specified under the provisions of Chapter III of the regulation; and g - is the risk weight of exposures to the protection provider as specified under Chapter III of the regulation.
   Article 96
   Calculating risk-weighted exposure amounts – Guarantees of central governments or central banks For the purposes of the calculations referred to in articles 94 and 95, for exposures or parts of exposures guaranteed by the central government or central bank, where the guarantee is denominated in the domestic currency of the borrower and the exposure is funded in that currency, banks shall consider g=0%.
   Article 97
   First-to-default credit derivatives

Where banks obtain credit protection for a number of exposures under terms that the first default among the exposures shall trigger payment and that this credit event shall terminate the contract, they may modify the calculation of the risk-weighted exposure amount, which would, in the absence of the credit protection, according to Chapter III of the regulation, produce the lowest risk-weighted exposure amount under the provisions of this Chapter, only if the exposure value is less than or equal to the value of the credit protection.
Article 98
Nth-to-default credit derivatives
Where the nth default among the exposures triggers payment under the credit protection, banks shall recognise the protection for the calculation of risk-weighted exposure amounts only if protection has also been obtained for defaults 1 to n-1 or when n-1 defaults have already occurred. In such cases, the methodology shall follow that set out in article 97 for first-to-default derivatives appropriately modified for nth-to-default credit derivatives.

CHAPTER V100
SECURISATION
SUBCHAPTER I
MINIMUM REQUIREMENTS FOR RECOGNITION OF SIGNIFICANT RISK TRANSFER FOR CREDIT RISK
Article 99
Traditional securitisation

1. The originator bank of a traditional securitisation may exclude underlying exposures
   from its calculation of risk-weighted exposure amounts, if either of the following conditions is fulfilled:
   a) significant credit risk associated with the underlying exposures has been transferred to third parties; b) the originator bank applies a 1250% risk weight to all securitisation positions it holds in the securitisation or deducts these securitisation positions from Common Equity Tier 1 items in accordance with letter “j” of paragraph 1 of article 11 of regulation “On bank’s regulatory capital”.
2. Significant credit risk shall be considered as transferred in either of the following cases:
   a) the risk-weighted exposure amounts of the mezzanine securitisation positions held by the originator bank in the securitisation do not exceed 50% of the risk-weighted exposure amounts of all mezzanine securitisation positions existing in this securitisation; b) the originator bank does not hold more than 20% of the exposure value of the first loss tranche in the securitisation, provided that both of the following conditions are met:
   i. the originator bank can demonstrate that the exposure value of the first loss
   tranche exceeds a reasoned estimate of the expected loss on the underlying exposures by a substantial margin,
   ii. there are no mezzanine securitisation positions.
   Where the possible reduction in risk-weighted exposure amounts, which the originator bank would achieve by the securitisation under letters “a” or “b”, is not justified by a commensurate transfer of credit risk to third parties, Bank of Albania may decide on a case-by-case basis that significant credit risk shall not be considered as transferred to third parties.
3. By way of derogation from paragraph 2 of this article, Bank of Albania may allow the
   originator bank to recognise significant credit risk transfer in relation to a securitisation, where the originator bank demonstrates in each case that the reduction in capital requirements which the originator achieves by the securitisation, is justified by a

100 Amended the content of Chapter V (article 99-125/2) by the Decision No. 44, dated 2.11.2022 of the Supervisory Council of the Bank of Albania.

commensurate transfer of credit risk to third parties. Permission may only be granted where the originator bank meets both of the following conditions:
a) the originator bank has adequate internal risk management policies and methodologies to assess the transfer of credit risk; b) the originator bank has also recognised the transfer of credit risk to third parties in each case, for the purposes of the bank’s internal risk management and its internal capital allocation.
4. In addition to the requirements set out in paragraphs 1, 2 and 3 of this article, for the
recognition of a significant credit risk transfer, all of the following conditions shall be met:
a) the transaction documentation reflects the economic substance of the securitisation; b) the securitisation positions do not constitute payment obligations of the originator bank; c) the underlying exposures are placed beyond the reach of the originator bank and its creditors in a manner that meets the requirements set out in this paragraph. The title to the underlying exposures shall be acquired by the SSPE by means of a true sale or assignment or transfer with the same legal effect in a manner that is enforceable against the seller or any other third party. The transfer of the title to the SSPE shall not be subject to severe clawback provisions in the event of the seller’s insolvency; d) the originator bank does not retain control over the underlying exposures. The originator bank shall be considered that retains control over the underlying exposures where the originator bank has the right to repurchase from the transferee the previously transferred exposures in order to realise their benefits or if it is otherwise required to re-assume transferred risk. The originator bank’s retention of servicing rights or obligations in respect of the underlying exposures shall not of itself constitute control of the exposures; e) the securitisation documentation does not contain terms or conditions that:
i. require the originator bank to alter the underlying exposures to improve the
average quality of the pool in the securitisation, or
ii. increase the yield payable to holders of positions or otherwise enhance the
positions in the securitisation in response to a deterioration in the credit quality of the underlying exposures; f) where applicable, the transaction documentation makes it clear that the originator or the sponsor may only purchase or repurchase securitisation positions or repurchase, restructure or substitute the underlying exposures beyond their contractual obligations where such arrangements are executed in accordance with prevailing market conditions and the parties to them act in their own interest as free and independent parties (arm’s length); g) where there is a clean-up call option, that option shall meet all of the following conditions:
i. it can be exercised at the discretion of the originator bank,
ii. it may only be exercised when 10% or less of the original value of the
underlying exposures remains unamortised,
iii. it is not structured to avoid allocating losses to credit enhancement positions
or other positions held by investors in the securitisation and is not otherwise structured to provide credit enhancement; h) the originator bank has received an opinion from a qualified legal counsel confirming that the securitisation complies with the conditions set out in letter “c” of this paragraph.

Article 100
Synthetic securitisation

1. The originator bank of a synthetic securitisation may calculate risk-weighted exposure
   amounts, with respect to the underlying exposures, in accordance with articles 106 and 107 of this regulation, where either of the following conditions is met:
   a) significant credit risk has been transferred to third parties either through funded or unfunded credit protection; b) the originator bank applies a 1250% risk weight to all securitisation positions that it retains in the securitisation or deducts these securitisation positions from Common Equity Tier 1 items, in accordance with letter “j” of paragraph 1 of article 11 of regulation “On bank’s regulatory capital”.
2. Significant credit risk shall be considered as transferred in either of the following cases:
   a) the risk-weighted exposure amounts of the mezzanine securitisation positions held by the originator bank in the securitisation, do not exceed 50% of the risk-weighted exposure amounts of all mezzanine securitisation positions existing in this securitisation; b) the originator bank does not hold more than 20% of the exposure value of the first loss tranche in the securitisation, provided that both of the following conditions are met:
   i. the originator bank can demonstrate that the exposure value of the first loss
   tranche exceeds a reasoned estimate of the expected loss on the underlying exposures by a substantial margin,
   ii. there are no mezzanine securitisation positions.
   Where the possible reduction in risk-weighted exposure amounts, which the originator bank would achieve by the securitisation, is not justified by a commensurate transfer of credit risk to third parties, Bank of Albania may decide on a case-by-case basis that significant credit risk shall not be considered as transferred to third parties.
3. By way of derogation from paragraph 2 of this article, Bank of Albania may allow the
   originator bank to recognise significant credit risk transfer in relation to a securitisation, where the originator bank demonstrates in each case that the reduction in capital requirements which the originator achieves by the securitisation, is justified by a commensurate transfer of credit risk to third parties. Permission may only be granted where the originator bank meets both of the following conditions:
   a) the originator bank has adequate internal risk-management policies and methodologies to assess the transfer of risk; b) the originator bank has also recognised the transfer of credit risk to third parties in each case for the purposes of the bank’s internal risk management and its internal capital allocation.
4. In addition to the requirements set out in paragraphs 1, 2 and 3 of this article, for the
   recognition of a significant credit risk transfer, all of the following conditions shall be met:
   a) the transaction documentation reflects the economic substance of the securitisation; b) the credit protection by virtue of which credit risk is transferred complies with article 104 of this regulation; c) the securitisation documentation does not contain terms or conditions that:

i. impose significant materiality thresholds below which credit protection is
deemed not to be triggered if a credit event occurs,
ii. allow for the termination of the protection due to deterioration of the credit
quality of the underlying exposures,
iii. require the originator bank to alter the composition of the underlying
exposures to improve the average quality of the pool in a securitisation, or
iv. increase the bank’s cost of credit protection or the yield payable to holders of
positions in the securitisation in response to a deterioration in the credit quality of the underlying pool; d) the credit protection is enforceable in all relevant jurisdictions; e) where applicable, the transaction documentation makes it clear that the originator bank or the sponsor may only purchase or repurchase securitisation positions or repurchase, restructure or substitute the underlying exposures beyond their contractual obligations, where such arrangements are executed in accordance with prevailing market conditions and the parties to them act in their own interest as free and independent parties (arm’s length); f) where there is a clean-up call option, that option meets all the following conditions:
i. it may be exercised at the discretion of the originator bank,
ii. it may only be exercised when 10% or less of the original value of the
underlying exposures remains unamortised,
iii. it is not structured to avoid allocating losses to credit enhancement positions or
other positions held by investors in the securitisation and is not otherwise structured to provide credit enhancement; g) the originator bank has received an opinion from a qualified legal counsel confirming that the securitisation complies with the conditions set out in letter “d” of this paragraph.
Article 101
Operational requirements for early amortisation provisions Where the securitisation includes revolving exposures and early amortisation provisions or similar provisions, significant credit risk shall only be considered transferred by the originator bank where the requirements laid down in articles 99 and 100 of this regulation are met and the early amortisation provision, once triggered, does not:
a) subordinate the originator bank’s senior or pari passu claim on the underlying exposures to the other investors’ claims; b) subordinate further the originator bank’s claim on the underlying exposures relative to other parties’ claims; or c) otherwise increase the originator bank’s exposure to losses associated with the underlying revolving exposures.

SUBCHAPTER II
CALCULATION OF RISK - WEIGHTED EXPOSURE AMOUNTS
Article 102
Calculation of risk-weighted exposure amounts

1. Where an originator bank has transferred significant credit risk associated with the
   underlying exposures of the securitisation in accordance with subchapter I of this
   Chapter, that bank may:
   a) in the case of a traditional securitisation, exclude the underlying exposures from its calculation of risk-weighted exposure amounts; b) in the case of a synthetic securitisation, calculate risk-weighted exposure amounts, with respect to the underlying exposures in accordance with articles 106 and 107 of this regulation.
2. Where the originator bank has decided to apply paragraph 1 of this article, it shall
   calculate the risk-weighted exposure amounts as set out in this Chapter for the positions that it may hold in the securitisation. Where the originator bank has not transferred significant credit risk or has decided not to apply paragraph 1, it shall not be required to calculate risk-weighted exposure amounts for any position it may have in the securitisation but shall continue including the underlying exposures in its calculation of risk-weighted exposure amounts, as if they had not been securitised.
3. Where there is an exposure to positions in different tranches in a securitisation, banks
   shall consider the exposure to each tranche, as a separate securitisation position. The providers of credit protection to securitisation positions shall be considered as holding positions in the securitisation. Securitisation positions shall include exposures to a securitisation arising from interest rate or currency derivative contracts that the bank has entered into with the transaction.
4. Banks, unless a securitisation position is deducted from Common Equity Tier 1 items
   pursuant to letter “j” of paragraph 1 of article 11 of regulation “On bank’s regulatory capital”, shall include the risk-weighted exposure amount in the bank’s total risk￾weighted exposure amounts for the purposes of article 6 of this regulation.
5. The risk-weighted exposure amount of a securitisation position shall be calculated by
   multiplying the exposure value of the position, calculated as set out in article 103 of this regulation, by the relevant total risk weight.
6. The total risk weight shall be determined as the sum of the risk weight set out in this
   Chapter and any additional risk weight in accordance with article 119 of this regulation.
   Article 103
   Exposure value
7. Banks calculate the exposure value of a securitisation position as follows:
   a) the exposure value of an on-balance sheet securitisation position shall be its accounting value remaining after any relevant credit risk adjustments on the

securitisation position have been applied, in accordance with article 9 of this regulation; b) the exposure value of an off-balance sheet securitisation position shall be its nominal value less any relevant specific credit risk adjustments on the securitisation position in accordance with article 9 of this regulation, multiplied by the relevant conversion factor (percentage) as set out in this letter. The conversion factor shall be 100%, except in the case of cash advance facilities. To determine the exposure value of the undrawn portion of the cash advance facilities, a conversion factor of 0% may be applied to the nominal amount of a liquidity facility that is unconditionally cancellable, provided that repayment of drawn amounts from the facility are senior to any other claims on the cash flows arising from the underlying exposures and the bank demonstrates to the satisfaction of the Bank of Albania that it is applying an appropriately conservative method for measuring the amount of the undrawn portion; c) the exposure value for the counterparty credit risk of a securitisation position that results from a derivative instrument listed in Annex 4 of this regulation, shall be determined in accordance with Chapter VI of this regulation; d) an originator bank may deduct from the exposure value of a securitisation position which is assigned 1250 % risk weight in accordance with articles 113 and 114 of this
chapter, or deducted from Common Equity Tier 1, in accordance with letter “j” of
paragraph 1 of article 11 of regulation “On bank’s regulatory capital”, the amount of the credit risk adjustments on the underlying exposures in accordance with article 9 of this regulation, and any non-refundable purchase price discounts connected with such underlying exposures to the extent that such discounts have caused the reduction of regulatory capital.
2. Where a bank has two or more overlapping positions in a securitisation, it shall include
only one of the positions in its calculation of risk-weighted exposure amounts. Where the positions partially overlap, the bank may split the position into two parts and recognise the overlap in relation to one part only in accordance with the first subparagraph. Alternatively, the bank may treat the positions as if they were fully overlapping by expanding for capital calculation purposes the position that produces the higher risk-weighted exposure amounts. The bank may also recognise an overlap between the specific risk capital requirements for positions in the trading book and the capital requirements for securitisation positions in the non-trading book, provided that the bank is able to calculate and compare the capital requirements for the relevant positions. For the purposes of this paragraph, two positions shall be deemed to be overlapping, where they are mutually offsetting in such a manner that the bank is able to preclude the losses arising from one position by performing the obligations required under the other position.
3. Where letter “d” of article 125 of this regulation applies to positions in an ABCP, the
bank may use the risk weight assigned to a liquidity facility in order to calculate the risk￾weighted exposure amount for the ABCP, provided that the liquidity facility covers 100% of the ABCP issued by the ABCP programme and the liquidity facility ranks pari passu with the ABCP in a manner that they form an overlapping position. The bank shall notify

the Bank of Albania where it has applied the provisions laid down in this paragraph. For the purposes of determining the 100 % coverage set out in this paragraph, the bank may take into account other liquidity facilities in the ABCP programme, provided that they form an overlapping position with the ABCP.
Article 104
Recognition of credit risk mitigation for securitisation positions

1. A bank may recognise funded or unfunded credit protection with respect to a securitisation
   position where the requirements for credit risk mitigation laid down in this Chapter and in
   Chapter IV of this regulation, are met.
2. Eligible funded credit protection shall be limited to financial collateral which is eligible
   for the calculation of risk-weighted exposure amounts under Chapter III, as laid down under Chapter IV of this regulation. Recognition of credit risk mitigation shall be subject to compliance with the relevant requirements as laid down under Chapter IV of this regulation.
3. Eligible unfunded credit protection and unfunded credit protection providers shall be
   limited to those which are eligible in accordance with Chapter IV of this regulation. Recognition of credit risk mitigation shall be subject to compliance with the relevant requirements as laid down under Chapter IV of this regulation.
4. By way of derogation from paragraph 2, the eligible providers of unfunded credit
   protection listed in letter “g” of paragraph 1 of article 83 of this regulation, shall have been assigned a credit assessment by a recognised ECAI which is credit quality step 2 or above at the time the credit protection was first recognised and credit quality step 3 or above thereafter. The requirement set out in this paragraph shall not apply to qualifying central counterparties.
5. By way of derogation from paragraph 2 of this article, SSPEs shall be eligible protection
   providers where all of the following conditions are met:
   a) the SSPE owns assets that qualify as eligible financial collateral in accordance with
   Chapter IV of this regulation;
   b) the assets referred to in letter “a” of this paragraph, are not subject to claims or contingent claims ranking ahead or pari passu with the claim or contingent claim of the bank receiving unfunded credit protection; and c) all the requirements for the recognition of financial collateral set out in Chapter IV of this regulation are met.
6. For the purposes of paragraph 5 of this article, the amount of the protection adjusted for
   any currency and maturity mismatches in accordance with Chapter IV of this regulation shall be limited to the volatility adjusted market value of those assets. The risk weight of exposures to the protection provider shall be determined as the weighted-average risk weights that would apply to those assets as financial collateral under the Standardised Approach.
7. Where a securitisation position benefits from full credit protection or a partial credit
   protection on a pro-rata basis, the following requirements shall apply:
   a) the bank providing credit protection shall calculate risk-weighted exposure amounts for the portion of the securitisation position benefiting from credit protection, in accordance with articles 113 and 114 of this regulation, as if it held that portion of the position directly;

b) the bank buying credit protection shall calculate risk-weighted exposure amounts in accordance with Chapter IV of this, for the protected portion.
8. In all cases not covered by paragraph 7 of this article, the following requirements shall
apply:
a) the bank providing credit protection shall treat the portion of the position benefiting from credit protection as a securitisation position and shall calculate risk-weighted exposure amounts as if it held that position directly, in accordance with articles 113 and 114 of this regulation, subject to paragraphs 9, 10 and 11 of this article; b) the bank buying credit protection shall calculate risk-weighted exposure amounts for the protected portion of the position referred to in letter “a” of this paragraph, in accordance with Chapter IV of this regulation. The bank shall treat the portion of the securitisation position not benefiting from credit protection as a separate securitisation position and shall calculate risk-weighted exposure amounts in accordance with articles 113 and 114 of this Chapter, subject to paragraphs 9, 10 and 11 of this article.
9. Banks using the Standardised Approach (SEC-SA) under article 113 of this regulation
shall determine the attachment point (A) and detachment point (D) separately for each of the positions derived in accordance with paragraph 7 of this article, as if these had been issued as separate securitisation positions at the time of origination of the transaction. The value of KSA shall be calculated taking into account the original pool of exposures underlying the securitisation.
10. Banks using the External Ratings Based Approach (SEC-ERBA) under article 114 of this
regulation for the original securitisation positions, shall calculate risk-weighted exposure amounts for the positions derived in accordance with paragraph 8 of this article as follows:
a) where the derived position has the higher seniority, it shall be assigned the risk weight of the original securitisation position; b) where the derived position has the lower seniority, it may be assigned an inferred rating in accordance with article 114, paragraph 7 of this regulation. In that case, tranche’s thickness value (T) shall only be computed on the basis of the derived position. Where a rating may not be inferred, the bank shall apply the higher of the risk weight resulting from either:
i. applying the SEC-SA in accordance with paragraph 9 of this article and article
113 of this regulation; or
ii. the risk weight of the original securitisation position under the SEC-ERBA.
11. The derived position with the lower seniority shall be treated as a non-senior
securitisation position, even if the original securitisation position prior to protection qualifies as senior.
Article 105
Implicit support in a securitization transaction

1. A sponsor or an originator which in respect of a securitisation has made use of article
   102, paragraphs 1 and 2 of this regulation, in the calculation of risk-weighted exposure amounts or has sold instruments from its trading book to the effect that it is no longer required to hold own funds for the risks of those instruments shall not provide support, directly or indirectly, to the securitisation beyond its contractual obligations with a view to reducing potential or actual losses to investors.

2. A transaction shall not be considered as support for the purposes of paragraph 1 of this
   article, where the transaction has been duly taken into account in the assessment of
   significant credit risk transfer and both parties have executed the transaction acting in their own interest as free and independent parties (arm’s length). For this purpose, the bank shall undertake a full credit review of the transaction and, at a minimum, take into account all of the following items:
   a) the repurchase price; b) the bank’s capital and liquidity position before and after repurchase; c) the performance of the underlying exposures; d) the performance of the securitisation positions; e) the impact of support on the losses expected to be incurred by the originator relative to investors.

3. The originator and the sponsor shall notify the Bank of Albania of any transaction entered
   into in relation to the securitisation in accordance with paragraph 2 of this article.

4. If an originator or a sponsor fails to comply with paragraph 1 of this article in respect of a
   securitisation, it shall include all of the underlying exposures of that securitisation in its calculation of risk-weighted exposure amounts as if they had not been securitised and disclose:
   a) that it has provided support to the securitisation in breach of paragraph 1 of this
   article; and
   b) the impact of the support provided in terms of capital requirements.
   Article 106
   Originator banks’ calculation of risk-weighted exposure amounts of exposures in a synthetic securitization

5. For the purpose of calculating risk-weighted exposure amounts for the underlying
   exposures, the originator bank of a synthetic securitisation shall use the calculation methodologies set out in this subchapter where applicable, instead of those set out in
   Chapter III of this regulation.

6. The requirements set out in paragraph 1 of this article shall apply to the entire pool of
   exposures backing the securitisation. Subject to article 107 of this regulation, the originator bank shall calculate risk-weighted exposure amounts with respect to all tranches in the securitisation in accordance with this subchapter, including the positions in relation to which the bank is able to recognise credit risk mitigation in accordance with article 104 of this regulation. The risk weight to be applied to positions which benefit from credit risk mitigation may be adopted in accordance with Chapter IV of this regulation.
   Article 107
   Treatment of maturity mismatches in synthetic securitisations Banks, for the purposes of calculating risk-weighted exposure amounts in accordance with article 106 of this regulation, shall calculate any maturity mismatch between the credit protection by which the transfer of risk is achieved and the underlying exposures as follows:

a) the maturity of the underlying exposures shall be taken to be the longest maturity of any of those exposures, subject to a maximum of 5 years. The maturity of the credit protection shall be determined in accordance with Chapter IV of this regulation; b) the originator bank shall ignore any maturity mismatch in calculating risk-weighted exposure amounts for securitisation positions subject to a risk weight of 1250% in accordance with this subchapter. For all other positions, the maturity mismatch treatment set out in Chapter IV of this regulation, shall be applied in accordance with the following formula:
RW* = RWSP ˑ [(t - t
*
) / (T - t
*
)] + RWAss ˑ [(T - t) / (T - t
*
)] where:
RW* = risk-weighted exposure amounts for the purposes of letter “a” of paragraph 1 of article 6 of this regulation; RWAss = risk-weighted exposure amounts for the underlying exposures as if they had not been securitised, calculated on a pro-rata basis; RWSP = risk-weighted exposure amounts calculated under article 106 of this regulation, as if there was no maturity mismatch; T = maturity of the underlying exposures, expressed in years; t = maturity of credit protection, expressed in years; t

• = 0,25.
  Article 108
  Reduction in risk-weighted exposure amounts

1. banks, for securitisations position which are assigned a 1250 % risk weight, may deduct
   the exposure value of such positions from Common Equity Tier 1 capital, in accordance with letter “j” of paragraph 1 of article 11 of regulation “On bank’s regulatory capital”, as an alternative to including the positions in their calculation of risk-weighted exposure amounts. For that purpose, the calculation of the exposure value may reflect eligible funded credit protection in accordance with article 104 of this regulation.
2. Where a bank makes use of the alternative set out in paragraph 1 of this article, it may
   subtract the amount deducted in accordance with letter “j” of paragraph 1 of article 11 of regulation “On bank’s regulatory capital”, from the amount specified in article 116 of this regulation as maximum capital requirement that would be calculated in respect of the underlying exposures as if they had not been securitised.
   Article 109
   Hirearchy of methods of calculation
3. Banks shall use one of the following methods to calculate risk-weighted exposure
   amounts:
   a) standardized approach (SEC-SA), as defined in article 113 of this regulation;

a) where the SEC-SA may not be used, the bank shall use the SEC-ERBA in accordance with article 114 of this regulation, for rated positions or positions in respect of which an inferred rating may be used.
2. For rated positions or positions in respect of which an inferred rating may be used, a bank
shall use the SEC-ERBA instead of the SEC-SA, in each of the following cases:
a) where the application of the SEC-SA would result in a risk weight higher than 25% or the application of the SEC-ERBA would result in a risk weight higher than 75%; b) for securitisation transactions backed by pools of auto loans, auto leases and equipment leases.
3. In cases not covered by paragraph 2 of this article, and by way of derogation from letter
“a” of paragraph 1 of this article, the bank may decide to apply the SEC-ERBA instead of the SEC-SA to all of its rated securitisation positions or positions in respect of which an inferred rating may be used. The bank shall notify Bank of Albania of any subsequent decision to further change the approach applied to all of its rated securitisation positions, within 30 days following that decision. In the absence of any objection by the Bank of Albania within 30 days following the notification, the decision notified by the bank shall take effect from 1 January of the following year and shall be valid until a subsequently notified decision comes into effect. A bank shall not use different approaches in the course of the same year.
4. By way of derogation from paragraph 1 of this article, Bank of Albania may prohibit
banks, on a case by case basis, from applying the SEC-SA when the risk-weighted exposure amount resulting from the application of the SEC-SA is not commensurate to the risks posed to the bank or to financial stability, including but not limited to the credit risk embedded in the exposures underlying the securitisation. Particular regard shall be had to securitisations with highly complex and risky features.
5. For a position in a re-securitisation, banks shall apply the SEC-SA in accordance with
article 113 of this regulation, with the modifications set out in article 118 of this
regulation.
6. In all other cases, a risk weight of 1250% shall be assigned to securitisation positions.
Article 110
Determination of KSA

1. Where a bank applies the SEC-SA in accordance with article 113 of this regulation, it
   shall calculate KSA by multiplying by 8%, the risk-weighted exposure amounts that would be calculated under Chapter III of this regulation, in respect of the underlying exposures, as if they had not been securitised, divided by the value of the underlying exposures. KSA shall be expressed in decimal form, between 0 and 1. For the purposes of this paragraph, banks shall calculate the exposure value of the underlying prior to applying reserves to cover losses, additional value adjustments in accordance with article 9 of regulation “On bank’s regulatory capital” and other own funds reductions.
2. For the purposes of paragraph 1 of this article, where a securitisation structure involves
   the use of an SSPE, all the SSPE’s exposures related to the securitisation shall be treated as underlying exposures. Without prejudice to the preceding, the bank may exclude the SSPE’s exposures from the pool of underlying exposures for KSA calculation purposes, if

the risk from the SSPE’s exposures is immaterial or if it does not affect the bank’s securitisation position.
Article 111
Determination of attachment point (A) and detachment point (D)

1. For the purposes of articles 113 and 114 of this regulation, banks shall set the attachment
   point (A) at the threshold at which losses within the pool of underlying exposures would start to be allocated to the relevant securitisation positions. The attachment point (A) shall be expressed as a decimal value between 0 and 1 and shall be equal to the greater of 0 and the ratio of the outstanding balance of the pool of underlying exposures in the securitisation minus the outstanding balance of all tranches that rank senior or pari passu to the tranche containing the relevant securitisation position including the exposure itself, to the outstanding balance of all the underlying exposures in the securitisation.
2. For the purposes of articles 113 and 114 of this regulation, banks shall set the detachment
   point (D) at the threshold at which losses within the pool of underlying exposures would result in a complete loss of principal for the tranche containing the relevant securitisation position. The detachment point (D) shall be expressed as a decimal value between 0 and 1 and shall be equal to the greater of 0 and the ratio of the outstanding balance of the pool of underlying exposures in the securitisation minus the outstanding balance of all tranches that rank senior to the tranche containing the relevant securitisation position, to the outstanding balance of all the underlying exposures in the securitisation.
3. For the purposes of paragraphs 1 and 2 of this article, banks shall treat
   overcollateralisation and funded reserve accounts as tranches and the assets comprising such reserve accounts as underlying exposures.
4. For the purposes of paragraphs 1 and 2 of this article, banks shall disregard unfunded
   reserve accounts and assets that do not provide credit enhancement, such as those that only provide liquidity support, currency or interest rate swaps and cash collateral accounts related to those positions in the securitisation. For funded reserve accounts and assets providing credit enhancement, the bank shall only treat as securitisation positions the parts of those accounts or assets that are loss-absorbing.
5. Where two or more positions of the same transaction have different maturities but share
   pro rata loss allocation, the calculation of the attachment points (A) and the detachment points (D) shall be based on the aggregated outstanding balance of those positions, and the resulting attachment points (A) and detachment points (D) shall be the same.
   Article 112
   Determination of tranche maturity (MT)
6. For the purposes of articles 113 and 114 of this regulation and subject to paragraph 2 of
   this article, banks may measure the maturity of a tranche (MT ) as either:
   a) the weighted average maturity of the contractual payments due under the tranche, in accordance with the following formula:

where CFt denotes all contractual payments (principal, interest and fees) payable by the borrower during period t; or b) the final legal maturity of the tranche in accordance with the following formula:
MT = 1 + (ML – 1) * 80%, where ML is the final legal maturity of the tranche.
2. For the purposes of paragraph 1 of this article, the determination of a tranche maturity
(MT) shall be subject in all cases to a floor of 1 year and a cap of 5 years.
3. Where a bank may become exposed to potential losses from the underlying exposures by
virtue of contract, the bank shall determine the maturity of the securitisation position by taking into account the maturity of the contract plus the longest maturity of such underlying exposures. For revolving exposures, the longest contractually possible remaining maturity of the exposure that might be added during the revolving period shall apply.
Article 113
Calculation of risk-weighted exposure amounts under the Standardised Approach (SEC-SA)

1. Under the SEC-SA, the risk-weighted exposure amount for a position in a securitisation
   shall be calculated by multiplying the exposure value of the position as calculated in accordance with article 103 of this regulation, by the applicable risk weight determined as follows, in all cases subject to a floor of 15%:
   RW = 1250 % when D ≤ KA
   RW = 12.5 * KSSFA(KA) when A ≥ KA
   When A ˂ KA < D where:
   D is the detachment point as determined in accordance with article 111 of this regulation; A is the attachment point as determined in accordance with article 111 of this regulation; KA is a parameter calculated in accordance with paragraph 2 of this article; where:

a = – (1/(p · KA)) u = D – KA l = max (A – KA; 0) p = 1 for a securitisation exposure that is not a re-securitisation exposure.
2. For the purposes of paragraph 1 of this article, KA shall be calculated as follows:
KA = (1-W) * KSA + W * 0.5 where:
KSA is the capital charge of the underlying pool as defined in article 110 of this regulation; W is the ratio of:
a) the sum of the nominal amount of underlying exposures in default, to b) the sum of the nominal amount of all underlying exposures. For the purposes of this Chapter, an exposure in default shall mean an underlying exposure which is either:
i. 90 days or more past due;
ii. subject to bankruptcy or insolvency proceedings;
iii. subject to foreclosure or similar proceeding; or
iv. in default in accordance with the securitisation documentation.
Where a bank does not know the delinquency status for 5 % or less of underlying exposures in the pool, the bank may use the SEC-SA subject to the following adjustment in the calculation of KA:
Where the bank does not know the delinquency status for more than 5% of underlying exposures in the pool, the position in the securitisation must be risk-weighted at 1250%.
3. Where a bank has a securitisation position in the form of a derivative to hedge market
risks, including interest rate or currency risks, the bank may attribute to that derivative an inferred risk weight, equivalent to the risk weight of the reference position calculated in accordance with this article. For the purposes of this paragraph, the reference position shall be the position that is pari passu in all respects to the derivative or, in the absence of such pari passu position, the position that is immediately subordinate to the derivative.
Article 114
Calculation of risk-weighted exposure amounts under the External Ratings Based Approach (SEC-ERBA)

1. Under the SEC-ERBA, the risk-weighted exposure amount for a securitisation position
   shall be calculated by multiplying the exposure value of the position as calculated in accordance with article 103 of this regulation, by the applicable risk weight in accordance with this article.

2. For exposures with short-term credit assessments or when a rating based on a short-term
   credit assessment may be inferred in accordance with paragraph 7 of this article, the following risk weights shall apply:
   Table 13
   Credit Quality Step 1 2 3 All other ratings
   Risk Weight 15% 50% 100% 1250%

3. For exposures with long-term credit assessments or when a rating based on a long-term
   credit assessment may be inferred in accordance with paragraph 7 of this article, the risk weights set out in Table 14 shall apply, adjusted as applicable for tranche maturity (MT) in accordance with article 112 of this reulation and paragraph 4 of this article and for tranche thickness for non-senior tranches, in accordance with paragraph 5 of this article.
   Table 14
   Credit quality step
   Senior Tranche Non-senior (thin) tranche
   Tranche Maturity (MT) Tranche Maturity (MT)
   1 year 5 years 1 year 5 years
   1 15% 20% 15% 70%
   2 15% 30% 15% 90%
   3 25% 40% 30% 120%
   4 30% 45% 40% 140%
   5 40% 50% 60% 160%
   6 50% 65% 80% 180%
   7 60% 70% 120% 210%
   8 75% 90% 170% 260%
   9 90% 105% 220% 310%
   10 120% 140% 330% 420%
   11 140% 160% 470% 580%
   12 160% 180% 620% 760%
   13 200% 225% 750% 860%
   14 250% 280% 900% 950%
   15 310% 340% 1050% 1050%
   16 380% 420% 1130% 1130%
   17 460% 505% 1250% 1250%
   All other 1250% 1250% 1250% 1250%

4. In order to determine the risk weight for tranches with a maturity between 1 and 5 years,
   the bank shall use linear interpolation between the risk weights applicable for 1 and 5 years maturity respectively, in accordance with Table 14.

5. In order to account for tranche thickness, banks shall calculate the risk weight for non￾senior tranches as follows:
   RW = [RW after adjusting for maturity according to paragraph 4] · [1 – min (T; 50%)] where T = tranche thickness measured as D – A where

D is the detachment point as determined in accordance with article 111 of this regulation; A is the attachment point as determined in accordance with article 111 of this regulation.
6. The risk weights for non-senior tranches resulting from paragraphs 3, 4 and 5 of this
article shall be subject to a floor of 15 %. In addition, the resulting risk weights shall be
no lower than the risk weight corresponding to a hypothetical senior tranche of the same securitisation with the same credit assessment and maturity.
7. For the purposes of using inferred ratings, banks shall attribute to an unrated position an
inferred rating, equivalent to the credit assessment of a rated reference position which meets all of the following conditions:
a) the reference position ranks pari passu in all respects to the unrated securitisation position or, in the absence of a pari passu ranking position, the reference position is immediately subordinate to the unrated position; b) the reference position does not benefit from any third-party guarantees or other credit enhancements that are not available to the unrated position; c) the maturity of the reference position shall be equal to or longer than that of the unrated position in question; d) on an ongoing basis, any inferred rating shall be updated to reflect any changes in the credit assessment of the reference position.
8. Where the bank has a securitisation position in the form of a derivative to hedge market
risks, including interest rate or foreign exchange risks, the bank may attribute to that derivative an inferred risk weight equivalent to the risk weight of the reference position, calculated in accordance with this article. For the purposes of this paragraph, the reference position shall be the position that is pari passu in all respects to the derivative or, in the absence of such pari passu position, the position that is immediately subordinate to the derivative.
Article 115
Maximum risk weight for senior securitisation positions: look-through approach

1. A bank which has knowledge at all times of the composition of the underlying exposures,
   may assign the senior securitisation position a maximum risk weight equal to the exposure-weighted-average risk weight that would be applicable to the underlying exposures as if the underlying exposures had not been securitised.
2. In the case of pools of underlying exposures where the bank uses exclusively the
   Standardised Approach (SEC-SA), the maximum risk weight of the senior securitisation position shall be equal to the exposure-weighted-average risk weight that would apply to the underlying exposures under Chapter III of this regulation, respectively, as if they had not been securitised. Where the bank applies the SEC-SA or the SEC-ERBA, the maximum risk weight for senior securitisation positions shall be equal to the Standardised Approach weighted￾average risk weight of the underlying exposures.
3. Where the maximum risk weight calculated in accordance with paragraph 1 of this article,
   results in a lower risk weight than the risk-weight floors set out in articles 113-114 of this regulation, as applicable, the former shall be used instead.

Article 116
Maximum capital requirements

1. An originator bank or a sponsor using the SEC-SA or the SEC-ERBA may apply a
   maximum capital requirement for the securitisation position it holds equal to the capital requirements that would be calculated under Chapter III of this regulation, in respect of the underlying exposures had they not been securitised.

2. The maximum capital requirement shall be the result of multiplying the amount
   calculated in accordance with paragraph 1 of this article, by the largest proportion of interest that the bank holds in the relevant tranches (V), expressed as a percentage and calculated as follows:
   a) for a bank that has one or more securitisation positions in a single tranche, V shall be equal to the ratio of the nominal amount of the securitisation positions that the bank holds in that given tranche to the nominal amount of the tranche; b) for a bank that has securitisation positions in different tranches, V shall be equal to the maximum proportion of interest across tranches. For these purposes, the proportion of interest for each of the different tranches shall be calculated as set out in letter “a” of this paragraph.

3. When calculating the maximum capital requirement for a securitisation position in
   accordance with this article, the entire amount of any gain on sale shall be deducted from Common Equity Tier 1 items in accordance with letter “j” of paragraph 1 of article 11 of regulation “On bank’s regulatory capital”.
   Article 117
   Treatment of non-performing exposures (NPE) securitisations

4. Banks shall calculate the risk weight for a position in an NPE securitisation, in
   accordance with article 109 or article 115 of this regulation. The risk weight shall be subject to a floor of 100%, except when article 114 of this regulation is applied.

5. By way of derogation from paragraph 1 of this article, banks shall assign a risk weight of
   100% to the senior securitisation position in a qualifying traditional NPE securitisation, except when article 114 of this regulation is applied.

6. By way of derogation from paragraph 2 of this article, where the exposure-weighted￾average risk weight calculated in accordance with the look-through approach set out in
   article 115 of this regulation is lower than 100%, the bank may apply the lower risk
   weight, subject to a 50 % risk-weight floor.
   Article 118
   Re-securitisations

7. For a position in a re-securitisation, banks shall apply the SEC-SA in accordance with
   article 113 of this regulation, with the following changes:
   a) W = 0 for any exposure to a securitisation tranche within the pool of underlying exposures; b) p = 1,5; c) the resulting risk weight shall be subject to a risk-weight floor of 100%.

8. The banks calculate KSA for the underlying securitisation exposures, in accordance with
   articles 109-112 of this regulation.

9. The maximum capital requirements set out in articles 115-116 of this regulation shall not
   be applied to re-securitisation positions.

10. Where the pool of underlying exposures consists of a mix of securitisation tranches and
    other types of assets, the KA parameter shall be determined as the nominal exposure weighted-average of the KA calculated individually for each subset of exposures.
    Article 119
    Additional risk weight

11. Where a bank does not meet the requirements of subchapter III of this Chapter in any
    material respect by reason of negligence or omission by the bank, the Bank of Albania shall impose a proportionate additional risk weight of no less than 250% of the risk weight, capped at 1250%, which shall apply to the relevant securitisation position in the manner specified in article 102, paragraph 6 or in article 153/1, paragraph 2 of this regulation, respectively. The additional risk weight shall progressively increase with each subsequent infringement of the due diligence and risk management provisions.

12. The Bank of Albania shall take into account the exemptions for certain securitisations
    provided for in article 121, paragraph 4 of this regulation by reducing the risk weight it would otherwise impose under this article in respect of a securitisation, to which article 121, paragraph 4 of this regulation applies. SUBCHAPTER III GENERAL REQUIREMENTS FOR ALL SECURITISATIONS
    Article 120
    Due-diligence requirements for institutional investors

13. Prior to holding a securitisation position, a bank other than the originator, the sponsor or
    the original lender, shall verify the respect – by the originator, sponsor, original lender, where relevant – of the provisions set out in articles 121-123 of this regulation.

14. Prior to holding a securitisation position, a bank, other than the originator, sponsor or
    original lender, shall carry out a due-diligence assessment which enables it to assess the risks involved. That assessment shall consider at least all of the following:
    a) the risk characteristics of the individual securitisation positions and of the underlying exposures; b) all the structural features of the securitisation that can materially impact the performance of the securitisation positions, including the contractual priorities of payment and priority of payment-related triggers, credit enhancements, liquidity enhancements, other triggers affecting the securitization, and transaction-specific definitions of default;

15. Notwithstanding letters “a” and “b” of paragraph 2 of this article, in the case of a fully
    supported ABCP programme, banks investing in the commercial paper issued by that ABCP programme shall consider the features of the ABCP programme and the full liquidity support.
    Article 121
    Risk retention

16. The originator, sponsor or original lender of a securitisation shall retain on an ongoing
    basis a material net economic interest in the securitisation of not less than 5%. That interest shall be measured at the origination and shall be determined by the notional value for off-balance-sheet items. Where the originator, sponsor or original lender have not agreed between them who will retain the material net economic interest, the originator shall retain the material net economic interest. There shall be no multiple applications of the retention requirements for any given securitisation. The material net economic interest shall not be split amongst different types of retainers and not be subject to any credit-risk mitigation or hedging.

17. Originators shall not select assets to be transferred to the SSPE with the aim of rendering
    losses on the assets transferred to the SSPE, measured over the life of the transaction, or over a maximum of 4 years where the life of the transaction is longer than four years, higher than the losses over the same period on comparable assets held on the balance sheet of the originator.

18. Only the following shall qualify as a retention of a material net economic interest of not
    less than 5% within the meaning of paragraph 1 of this article:
    a) the retention of not less than 5% of the nominal value of each of the tranches sold or transferred to investors; b) in the case of revolving securitisations or securitisations of revolving exposures, the retention of the originator’s interest of not less than 5% of the nominal value of each of the securitised exposures; c) the retention of randomly selected exposures, equivalent to not less than 5% of the nominal value of the securitised exposures, where such non-securitised exposures would otherwise have been securitised in the securitisation, provided that the number of potentially securitised exposures is not less than 100 at origination; d) the retention of the first loss tranche and, where such retention does not amount to 5% of the nominal value of the securitised exposures, if necessary, other tranches having the same or a more severe risk profile than those transferred or sold to investors and not maturing any earlier than those transferred or sold to investors, so that the retention equals in total not less than 5% of the nominal value of the securitised exposures; or e) the retention of a first loss exposure of not less than 5% of every securitised exposure in the securitisation.

19. Paragraph 1 of this article shall not apply where the securitised exposures are exposures
    on or exposures fully, unconditionally and irrevocably guaranteed by:
    a) central governments or central banks; b) regional governments, local authorities and public sector entities;

c) supervised institutions to which a 50% risk weight or less is assigned under Chapter III of this regulation; or d) the multilateral development banks listed in article 15 of this regulation.
5. Paragraph 1 of this regulation shall not apply to transactions based on a clear, transparent
and accessible index, where the underlying reference entities are identical to those that make up an index of entities that is widely traded, or are other tradable securities other than securitisation positions.
Article 122
Ban on resecuritisation

1. The underlying exposures used in a securitisation shall not include securitisation
   positions.
2. By way of derogation from paragraph 1 of this article, Bank of Albania may grant
   permission to an entity under its supervision to include securitisation positions as underlying exposures in a securitisation where Bank of Albania deems the use of a resecuritisation to be for legitimate purposes as set out in paragraph 3 of this article.
3. For the purposes of this article, the following shall be deemed to be legitimate purposes:
   a) the facilitation of the winding-up of a bank; b) ensuring the viability as a going concern of a bank, in order to avoid its winding-up; or c) where the underlying exposures are non-performing, the preservation of the interests of investors.
4. A fully supported ABCP programme shall not be considered to be a resecuritisation for
   the purposes of this Article, provided that none of the ABCP transactions within that programme is a resecuritisation and that the credit enhancement does not establish a second layer of tranching at the programme level.
   Article 123
   Criteria for credit-granting
5. Originators, sponsors and original lenders shall apply to exposures to be securitised the
   same sound and well-defined criteria for credit-granting which they apply to non￾securitised exposures. To that end, the same clearly established processes for approving and, where relevant, amending, renewing and refinancing credits shall be applied. Originators, sponsors and original lenders shall have effective systems in place to apply those criteria and processes in order to ensure that credit-granting is based on a thorough assessment of the obligor’s creditworthiness, taking appropriate account of factors relevant to verifying the prospect of the obligor meeting his obligations under the credit agreement.
6. Where an originator purchases a third party’s exposures for its own account and then
   securitises them, that originator shall verify that the entity which was, directly or indirectly, involved in the original agreement, which created the obligations or potential

obligations to be securitised, fulfils the requirements referred to in paragraph 1 of this
article.
SUBCHAPTER IV
EXTERNAL CREDIT ASSESSMENTS
Article 124
Use of credit assessments by ECAIs
Bank to determine the risk weight of a securitisation position in accordance with this Chapter, shall use the credit assessment issued or endorsed by an eligible ECAI.
Article 125
Requirements for credit assessments of ECAIs
For the purposes of calculating risk-weighted exposure amounts in accordance with subchapter II of this Chapter, banks shall use a credit assessment by an eligible ECAI, only where all of the following conditions are met:
a) there is no mismatch between the types of payments reflected in the credit assessment and the types of payments to which the bank is entitled under the contract giving rise to the securitisation position in question; b) the ECAI publishes the credit assessments and information on loss and cash-flow analysis, sensitivity of ratings to changes in the underlying ratings assumptions, including the performance of underlying exposures, and information on the procedures, methodologies, assumptions, and key elements underpinning the credit assessments. For the purposes of this letter, information shall be considered as publicly available where it is published in an accessible public format. Information that is made available only to a limited number of entities shall not be considered as publicly available; c) the credit assessments are included in the ECAI’s transition matrix; d) the credit assessments are not based or partly based on unfunded support provided by the bank itself. Where a position is based or partly based on unfunded support, the bank shall consider that position as if it were unrated for the purposes of calculating risk-weighted exposure amounts, in accordance with subchapter II of this chapter; e) the ECAI has committed to publishing explanations on how the performance of underlying exposures affects the credit assessment.
Article 125/1
Use of credit assessments

1. The bank may decide to nominate one or more ECAIs (“nominated ECAI”) the credit
   assessments of which shall be used in the calculation of its risk-weighted exposure amounts under this Chapter.

2. The bank shall use the credit assessments of its securitisation positions in a consistent and
   non-selective manner and, for these purposes, shall comply with the following requirements:
   a) a bank shall not use an ECAI’s credit assessments for its positions in some tranches and another ECAI’s credit assessments for its positions in other tranches within the same securitisation, that may or may not be rated by the first ECAI; b) where a position has two credit assessments by different nominated ECAIs, the bank shall use the less favourable credit assessment; c) where a position has three or more credit assessments by different nominated ECAIs, the two most favourable credit assessments shall be used. Where the two most favourable assessments are different, the less favourable of the two shall be used; d) the bank shall not actively solicit the withdrawal of less favourable ratings.

3. Where the exposures underlying a securitisation benefit from full or partial eligible credit
   protection, in accordance with Chapter IV of this regulation, and the effect of such protection has been reflected in the credit assessment of a securitisation position by a nominated ECAI, the bank shall use the risk weight associated with that credit assessment. Where the credit protection referred to in this paragraph is not eligible under
   Chapter IV of this regulation, the credit assessment shall not be recognised and the
   securitisation position shall be treated as unrated.

4. Where a securitisation position benefits from eligible credit protection in accordance with
   Chapter IV of this regulation and the effect of such protection has been reflected in its
   credit assessment by a nominated ECAI, the bank shall treat the securitisation position as if it were unrated and calculate the risk-weighted exposure amounts in accordance with
   Chapter IV of this regulation.
   Article 125/2
   Securitisation mapping

5. The Bank of Albania shall determine in an objective and consistent manner, the mapping
   of the credit quality steps set out in this Chapter with the relevant credit assessments of all eligible ECAIs.

6. Bank of Albania, in determining the mapping as specified in paragraph 1 of this article,
   shall differentiate between the relative degrees of risk expressed by each assessment.

7. Bank of Albania shall consider in this process quantitative factors, such as default
   or loss rates, and the historical performance of credit assessments of each ECAI across different asset classes.

8. Bank of Albania shall consider in this process, qualitative factors such as the range of
   transactions assessed by the ECAI, its methodology and the meaning of the credit assessment.

9. The securitisation positions to which the same risk weight is applied on the basis of the
   credit assessments of eligible ECAIs, are subject to equivalent degrees of credit risk.

CHAPTER VI
COUNTERPARTY CREDIT RISK
SUBCHAPTER I
CALCULATION METHODS OF THE EXPOSURES AMOUNT
Article 126
General requirements for the choice of the method

1. Banks shall calculate the capital requirement for the counterparty credit risk for all of
   their exposures, in the non-trading and trading books.
2. The capital requirement for counterparty credit risk shall be 12% of the total risk￾weighted exposure amounts, calculated according to paragraph 7 of article 127.
3. For the purposes of calculating the capital requirement for counterparty credit risk,
   banks shall calculate exposures due to the following trading and non-trading book items:
   a) OTC derivative instruments set out in Annex 4 of this regulation; b) credit derivatives (included only in the trading book; c) repurchase agreements, reverse repurchase agreements, securities or, commodities, lending or borrowing transactions(commodities); d) securities margin lending transactions; e) long settlement transactions.
4. Banks shall use one of the following methods to calculate the exposure value for the
   derivative instruments listed in Annex 4 of this regulation:
   a) the Original Exposure Method; b) the Mark-to-Market Method; c) the Standardised Method.
5. Banks that do not meet the criteria specified in paragraph 1 of article 144 of this
   regulation, cannot use the original exposure method for the calculation of the exposure amount of derivative instruments.
6. Banks cannot use the original exposure method to determine the exposure value for the
   contracts listed in paragraph 3 of Annex 4 of this regulation.
7. The combined use of the methods set out in paragraph 4 of this article for the
   calculation of the exposure value of the derivative contracts shall be permitted on a permanent basis only within a banking group, but not within a single bank. The combined use of these methods is only permitted within one bank only in the cases set out in paragraph 2 of article 133 of this Chapter.
8. Banks shall calculate exposures due to the items referred to in “b” of paragraph 3 of this
   Article using the Mark-to-Market Method, or the Standardised Method.
9. Banks shall calculate exposures due to the items referred to in “c” and “d” of paragraph
   3 of this article, using one of the methods specified in Chapter IV of this regulation:
   a) the Standardised Method; b) the comprehensive method with volatility adjustments set out by the Bank of Albania;

c) the comprehensive method with internal volatility adjustment.
10. Banks shall calculate exposures due to long settlement transactions using one of the
methods set out in paragraph 4 of this article, independently of the method chosen to treat OTC derivatives, repurchase agreements, reverse repurchase agreements, securities or commodities lending or borrowing transactions; or securities margin lending transactions.
11. Banks which shall calculate exposures using the Mark-to-Market Method and
Standardised Method are not allowed to use the original exposure method in the following reporting period.
12. Notwithstanding the method chosen, banks shall calculate the exposure to a given
counterparty, as the sum of all the exposure values, calculated for every netting set with that counterparty.
13. Repurchase and Reverse Repurchase agreements with the Bank of Albania shall not be
subject of the provisions of this Chapter.
Article 127
Special requirements for determining the exposure value

1. When banks purchase credit derivative instruments for protection on a non-trading book
   exposure, or for an exposure to a counterparty credit risk, they may compute the capital requirement for the hedged asset in accordance with Chapter IV of this regulation, articles 90, 93, 94, 95 and 96. In these cases, the exposure value for the counterparty’s credit risk for the credit derivatives is set equal to zero.

2. The exposure value to a counterparty risk from short credit default swap, that are
   included in the banking book, is zero, in cases these contracts are treated as hedge to credit, supplied by the bank and are subject of the capital requirement for credit risk, for issued guaranties.

3. Banks shall not calculate exposure value for the credit risk of a central counterparty,
   due to the derivative instruments, repurchase agreements, reverse repurchase agreements, securities or commodities, lending or borrowing transactions, long settlement transactions, or securities margin lending transactions, if they have been accepted by the central counterparty.

4. Banks shall not calculate exposure value for the credit risk of a central counterparty,
   arising from the financial instruments given as collateral to a central counterparty, for the transactions set out in paragraph 3.

5. For the purposes of applying the exemptions set out in paragraphs 3 and 4 of this
   Article, banks shall ensure that the exposures to the central counterparty, including all
   participants in their agreements, must be fully collateralised on a daily basis.

6. For the Mark-to-Market Method and original exposure, the Bank of Albania shall
   ensure that the nominal amount to be taken into account is an appropriate benchmark for the risk inherent in the contract. Where, the contract provides for a multiplication of cash flows, the nominal amount must be adjusted in order to take into account the effects of the multiplication on the risk structure of that contract.

7. For the purposes of calculating risk weighted exposures, banks shall treat exposures
   calculated in accordance with the original exposure method, Mark-to-Market Method and Standardised Method, in accordance with the risk weights set out in Chapter III of this regulation.
   Article 128
   Original Exposure method

8. Banks shall calculate the exposure value of an individual contract according to this
   method, multiplying the nominal value of the contract by the percentages set out in
   Table 16:
   Table 16
   Original maturity Interest-rate contracts
   Contracts concerning foreign exchange rates and gold One year or less (≤ 1 year) 0.5% 2% Over one year, not exceeding two years 1% 5% Additional allowance for each additional year 1% 3%

9. In the case of contract concerning interest rates, banks may use the residual or the
   original maturity, only upon the prior approval by the Bank of Albania.
   Article 129
   Mark-to-Market Method

10. In accordance with the Mark-to-Market Method, banks shall calculate the exposure of
    an individual contract as the sum of:
    a) the current replacement cost of the contract, which represents its positive current market value; and b) the potential future credit exposure (except in the case of single currency floating/floating interest rate swaps, for which only the current replacement cost shall be calculated), which is calculated as the notional amount of an individual contract multiplied by the appropriate percentage, as provided in the following
    table:

Table 17
Residual maturity
Interest-rate contracts
Contracts concerning foreign exchange rates and gold Contracts concerning equities Contracts concerning precious metals except gold Contracts concerning commodities, other than precious metals ≤ 1 year 0% 1% 6% 7% 10% 1 year < Residual maturity ≤ 5 years
1.5 % 5% 8% 7% 12 %

5 years
1.5 %
7.5 % 10% 8 % 15 %

2. For contracts which do not fall within one of the five categories indicated in Table 17,
   banks shall use percentages from the category of contracts concerning commodities, other than precious metals in accordance with their residual maturity.
3. For contracts with multiple exchanges of principal, banks shall multiply the percentages
   set out in Table 17 above by the number of remaining payments still to be made according to the contract.
4. For contracts that are structured to settle outstanding exposure following specified
   payment dates and where the terms are reset such that the market value of the contract is zero on these specified dates, banks shall calculate the residual maturity equal to the time until the next reset date. In the case of interest-rate contracts that meet these criteria and have a residual maturity longer than one year, the percentage shall be no lower than 0,5 per cent.
5. For collateralized OTC derivatives contracts, for the recognition of the collateral as per
   the Mark-to-Market Method, Banks shall use the “Comprehensive Method of Financial Collateral” according to Chapter IV of this regulation, taking into consideration the netting agreement when necessary.
   Article 130
   Standardised Method
6. Banks shall use the Standardised Method (SM) only to calculate the exposure value for
   OTC derivatives and long settlement transactions.
7. Banks shall calculate the exposure value for the instruments and transactions
   determined in paragraph 1 of this Article, separately for each netting set, and on net basis taking into consideration the deduction of collateral as set out in the following formula:
   exposure value =ß*max(CMV-CMC; ∑j
   |∑iRPTij-∑lRPClj|*CCRMj
   ) where:

CMV = the current market value of the portfolio of transactions within the netting set with a counterparty, that is, where CMV= ∑iCMVi CMVi = the current market value of transaction i; CMC = the current market value of the collateral assigned to the netting set; that is, where CMC= ∑lCMCl CMCl =the current market value of collateral l; i = index designating transaction; l = index designating collateral; j= index designating hedging set category. These hedging sets correspond to risk factors for which risk positions of opposite sign can be offset to yield a net risk position on which the exposure measure is then based; RPTij = risk position from transaction i with respect to hedging set j; RPClj = risk position from collateral with respect to hedging set j; CCRMj = Multiplier of counterparty’s credit risk set out in Table 19 with respect to hedging set j; ß= 1.4
3. For purposes of calculating the exposure value, banks shall assign to the collateral
received from counterparty a positive sign, whereas collateral posted to counterparty a negative sign to.
4. For purposes of recognizing the collateral according to this method, banks shall ensure
that the collateral shall meet at least the criteria for recognition of collateral according to article 50 in Chapter IV of this regulation and according to paragraphs 5 to 8 of
article 137 of this Chapter.
Article 131
Treatment of the financial instruments in accordance with the Standardised Method

1. When an OTC derivative transaction with a linear risk profile stipulates the exchange of
   a financial instrument for a payment, banks shall consider the payment part as the payment leg.

2. Transactions that stipulate the exchange of payment against payment consist of two
   payment legs. Payment legs consist in gross payments agreed on agreements, including the notional value of the transaction.

3. Banks may disregard the interest rate risk from payment legs payment legs with a
   remaining maturity of less than one year for the purposes of applying the Standardised Method.

4. Banks may treat transactions that consist of two payment legs that are denominated in
   the same currency, such as interest rate swaps, as a single aggregate transaction. The treatment for the payment leg applies to the aggregate transaction.

5. Banks shall assign to transactions with a linear risk profile with equities (including
   equity indices), gold, other precious metals or other commodity as the underlying financial instruments, a risk position in the respective equity (or equity index) or commodity (including gold and other precious metals) and an interest rate position for the payment leg. If the payment leg is denominated in foreign currency, it is additionally mapped to a risk position in the receptive currency.

6. Transactions of OTC derivatives with a linear risk profile with a debt instrument as the
   underlying instrument are mapped to an interest rate risk position for the debt instrument and another interest rate risk position for the payment leg.

7. Transactions of OTC derivatives with a linear risk profile that stipulate the exchange of
   payment against payment, including foreign exchange forwards, are mapped to an interest rate risk position for each of the payment legs. If the underlying debt instrument is denominated in a foreign currency, the debt instrument is mapped to a risk position in this currency. If the payment leg is denominated in foreign currency, the payment leg is again mapped to a risk position in this currency. The exposure value assigned to a foreign exchange basis swap transaction is zero.

8. Banks shall determine the size of a risk position from a transaction of OTC derivatives
   with linear risk profile as the effective nominal value (market price multiplied by quantity) of the underlying financial instruments, (including commodities), converted to the bank's domestic currency, except for debt instruments.

9. For debt instruments and for payment legs, banks shall determine the size of the risk
   position as the effective notional value of the outstanding gross payments (including the notional value) converted to Albanian lek, multiplied by the modified duration of the debt instrument, or payment leg, respectively.

10. Banks shall determine the size of a risk position from a credit default swap (CDS), as
    the nominal value of the reference debt instrument, multiplied by the remaining maturity of the credit default swap.

11. Banks shall determine the size of a risk position from an OTC derivative with a non￾linear risk profile, swap (and options), is equal to the delta equivalent effective notional
    value of the financial instrument that underlies the transaction, except in the case of an underlying debt instrument.

12. Banks shall determine the size of a risk position from an OTC derivative with a non￾linear risk profile, including swaps (and options), of which the underlying is a debt
    instrument or a payment leg), is equal to the delta, equivalent effective notional value of the financial instrument or payment leg), multiplied by the modified duration of the debt instrument, or payment leg, respectively.

13. For the determination of risk positions, banks shall consider the collateral received from
    counterparty as a claim on the counterparty under a derivative contract (long position) that is due today, while collateral posted is to be treated like an obligation to the counterparty (short position) that is due today.
    Article 132
    Determining risk positions according to the standardised method

14. Banks shall group risk positions into appropriate hedging sets categories and calculate
    the net risk positions for each hedging set. The net risk position represents the absolute value amount of the individual risk positions (arising from the transactions) and collateral in a netting set (compensation) included within it.

The net risk position, in the formulas presented in paragraph 2, article 130, shall be calculated as follows:
2. To calculate the net risk position, banks shall refer to the following categories of
hedging sets:
a) risk positions sensitive to “interest rate” risk factor: qualified issuer “qualified issuer” shall be every issuer for which a capital requirement is applied, for the specific risk of the tradable portfolio, equal or lower than 1.6%, as set out in Table 21, Chapter VII of this regulation.
i. banks shall include the risk positions of qualified issuers related to money deposits
received from the counterparty as collateral, from payment legs and from underlying debt instruments, in one of the six hedging sets for each currency as shown in Table
18. Hedging sets are defined by a combination of the criteria “maturity” and
“referenced interest rate”.
ii. for interest rate risk positions from underlying debt instruments or payment legs, for
which the interest rate is linked to a reference interest rate that represents a general market interest level (e.g. Libor, Euribor, etc.), banks shall consider remaining maturity as the length of the time interval up to the next readjustment of the interest rate. In all other cases, remaining maturity shall be the remaining life of the underlying debt instrument or in the case of a payment leg, the remaining life of the transaction.
Table 18
Interest rate remaining maturity / time interval up to the next readjustment Government referenced interest rates Non – government referenced interest rates Maturity Up to 1 year 1 year to 5 years Over 5 years Up to 5 years 1 year to 5 years Over 5 years b) Risk positions sensitive to “interest rate” risk factor: qualified issuer credit default swap, qualified issuer. Banks shall establish separate hedging sets for each qualified issuer of a reference debt instrument that underlies a credit default swap. “Nth to default” basket of a credit default swap shall be treated as follows:

i. banks shall determine the size of a risk position in a reference debt instrument in a
basket underlying a nth-to-default” credit default swap, which is equal to the effective notional value of the reference debt instrument, multiplied by the modified duration of the nth-to-default, with respect to a change in the credit spread of the reference debt instrument;
ii. banks shall lay down a hedging set for each reference nth-to-default credit default
swap. Risk positions from different nth-to-default credit default swaps shall not be included in the same hedging set. c) Banks shall consider as unqualified issuers any issuer to which is assigned a capital requirement for the specific risk of the tradable portfolio of more than 1.6% according to
Table 21 of Chapter VII of this regulation.
i. For interest rate risk position related to debt instruments referred to unqualified
issuers, for payment legs related to such issuers as well as for risk positions from money deposits that are placed as collateral with the counterparty, banks shall set out a separate hedging set for each issuer.
ii. Banks can include in the same hedging set risk positions that arise from debt
instruments of an unqualified, payment legs related to these issuers, or from reference debt instruments of the same issuer that underlie credit default swap. d) Risk positions sensitive to other risk factors Banks shall assign the same hedging set financial instruments, other than debt instruments, only if they are identical or similar instruments. In all other cases they shall be assigned to separate hedging sets. The similarity of instruments is established as follows:
i. for equities, similar instruments are those of the same issuer. An equity index is
considered to be issued by a separate issuer;
ii. for precious metals, similar instruments are those of the same metal. A precious
metal index is treated as a separate precious metal;
iii. for electric power, similar instruments are those delivery rights and obligations,
that refer to the same peak or off-peak load time interval within any 24-hour interval; and
iv. for commodities, similar instruments are those of the same commodity. A
commodity index is treated as a separate commodity.
Article 133
Counterparty credit risk multipliers according to the standardized approach

1. Banks shall apply the counterparty credit risk multipliers (CCRM) for the different risk
   positions referred to each hedging set category as set out in Table 19.

Table 19
Hedging set categories CCRM
1 Interest rates, for risk positions related to debt instruments of qualified issuers 0.2% 2 Interest rates, for risk positions related to a reference debt instrument that underlies credit default swap 0.3% Interest rates, for risk positions related to debt instrument, or reference debt instrument of unqualified issuers. 0.6% 4 Exchange rate 2.5 % 5 Electricity 4 % 6 Gold 5 % 7 Equity 7 % 8 Precious metals (except gold) 8.5% 9 Other commodities (except precious metals and electricity) 10% Basic instrument of OTC derivative financial instruments, which are not included in any of the above categories 10%
2. For transactions with a non-linear risk profile or for payment legs and transactions with
debt instruments as underlying for which the bank cannot determine the delta or the modified duration, banks shall use the Mark-to-Market method, set out in article 129 of this Chapter.
3. Banks shall not recognise the transaction netting set out in paragraph 2 of this article,
which means that the exposure value should be determined on the assumption that netting set comprises just the individual transaction (thus each transaction shall be considered as a separate netting set).
4. Banks shall draft and approve internal procedures to verify that, prior to including a
transaction in a hedging set; the transaction is covered by a legally enforceable netting contract that meets the requirements set out in Subchapter II of this Chapter. SUBCHAPTER II CONTRACTUAL NETTING
Article 134
Netting types recognised by the Bank of Albania

1. For purposes of this Subchapter, by “counterparty” banks shall understand every natural
   and legal person that has the power to conclude a contractual netting agreement, which shall mean a written bilateral agreement that creates a single legal obligation covering all bilateral agreements.

2. For purposes of the mitigation / reducing of the counterparty credit risk, banks can use
   as mitigation technique the following netting types:
   a) bilateral contracts for novation between a bank and its counterparty under which mutual claims and obligations are automatically amalgamated in such a way that this novation fixes one single net amount each time novation applies and thus creates a legally binding, single new contract extinguishing former contracts; b) other bilateral agreements between a bank and its counterparty.
   Article 135
   Requirements for recognition of contractual netting as a counterparty credit risk reducing

3. Bank of Albania shall recognise contractual netting as a counterparty credit risk
   reducing technique only under the following conditions:
   a) banks shall have a contractual netting agreement with their counterparty, which incorporates the close-out, where respective legal obligations shall be assessed by Mark-to-Market value of the included individual transactions; b) banks must make available to the Bank of Albania written and reasoned legal opinions to the effect that, in the event of a legal challenge, the relevant courts and administrative authorities would, in the cases described under letter “a” of this paragraph, find that the bank's claims and obligations would be limited to the net sum, as described in this paragraph, under:
   i. the law of the jurisdiction in which the counterparty is incorporated and, if a
   foreign branch of an undertaking is involved, also under the law of the jurisdiction in which the branch is located;
   ii. the law that governs the individual transactions included; and
   iii. the law that governs any contract or agreement necessary to effect the
   contractual netting; c) Banks must have procedures in place to ensure that the legal validity of its contractual netting is kept under review in the light of possible changes in the relevant laws; d) Banks maintains all required documentation in their files; e) Banks shall factorise the effects of netting into the measurement of each counterparty’s aggregate credit risk exposure and manage their counterparty credit risk on such a basis, and f) Banks shall aggregate credit risk to each counterparty to arrive at a single legal exposure across transactions. This aggregation shall be factored into credit limit purposes and internal capital purposes.

4. Bank of Albania shall provide, if necessary after consulting the other competent
   authorities concerned, that the contractual netting is legally valid under the law of each of the relevant jurisdictions. If Bank of Albania is not satisfied in that respect, the contractual netting agreement will not be recognized as risk-reducing for either of the counterparties.

Article 136
Effects of recognition of contractual netting

1. For purposes of applying the Standardized Method, banks shall recognise the
   contractual netting as set out in articles 130 – 132 of this regulation.
2. For purposes of applying the Mark-to-Market method and the original exposure method
   banks, shall recognise the contractual netting as set below:
   a) for replacement contract
   i. Mark-to-Market Method: Banks shall calculate the current replacement cost, and
   the notional value taking account of the net value of the contracts for replacement;
   ii. original exposure method: Banks shall calculate the notional value taking into
   consideration the net value of the contract for replacement and applying the percentages of Table 16 of this Chapter. b) for the other netting agreements:
   i. Mark-to-Market Method: Banks shall calculate the current replacement cost for the
   contracts included in a netting agreement by taking account of the actual hypothetical net replacement cost which results from the agreement (in the case where netting leads to a net obligation for the bank calculating the net replacement cost, the current replacement cost is calculated as ‘zero’), and shall reduce the
   figure for potential future credit exposure for all contracts included in a netting
   agreement may be reduced according to the following formula:
   PCEred = 0,4 * PCEgross + 0,6 * NGR * PCEgross where:
   PCEred = the reduced figure for potential future credit exposure for all contracts with a given counterparty included in a legally valid bilateral netting agreement; PCEgross = the sum of the figures for potential future credit exposure for all contracts with a given counterparty, which are included in a legally valid bilateral netting agreement, and are calculated by multiplying their notional principal amounts by the percentages set out in
   Table 17 of this Chapter.
   NGR = “net-to-gross ratio”: the quotient of the net replacement cost for all contracts included in a legally valid bilateral netting agreement with a given counterparty (numerator), and the gross replacement cost for all contracts included in a legally valid bilateral netting agreement with that counterparty (denominator). For the calculation of the potential future credit exposure according to the above formula, the perfectly matching contracts included in the netting agreement, may be taken into account as a single contract with a notional principal equivalent to the net receipt.

ii. Original exposure method: For purposes of applying this method, Banks shall take into
account perfectly matching contracts involved in the netting agreement as a single contract with notional value equal to net receipt, where the notional values are applied by the percentages given in Table 17, and shall apply for all other contracts included in a netting contract, the percentages set out in Table 20.
Table 20
Original maturity* Interest-rate contracts Exchange-rate contracts Less than one year 0.35 % 1.50% More than a year but not more than two years 0.75 % 3.75 % Additional Payment for each additional year 0.75 % 2.25 % *In the case of the interest rates contracts, Banks, upon the prior approval of the Bank of Albania, may choose between the original maturity and the residual maturity. SUBCHAPTER III SPECIAL TREATMENTS OF THE COUNTERPARTY'S RISK
Article 137
Special rules for trading book exposures

1. For purposes of applying the Mark-to-Market, banks shall calculate the potential future
   credit exposure of total return swaps and credit default swaps, in the trading book by multiplying the nominal amount of the instrument by the following percentages:
   a) 5%, if the reference claim is such that it would be considered the position of a qualified issuer according to article 132 of this regulation, if it constituted a direct exposure; b) 10%, if the reference claim is such that it would not be considered the position of a qualified issuer according to article 132, if it constituted a direct exposure.
2. For credit default swaps that give rise to a long position in the underlying, (protection
   provider), to calculate potential future exposure of credit (for the purpose of mark-to￾market method), banks shall use a figure of 0% for the potential future credit exposure, unless the credit derivative contract contains a clause providing for close out in the event of the insolvency of the entity, the exposure of which arising from the swap represents a short position in the underlying, even though the underlying has not default.
3. Banks shall determine the percentage for the calculation of the potential future exposure
   for the credit derivative “nth to default”, as below:

a) ranking the underlying obligations, on a descending scale of the credit quality, starting from those not qualified according to the specific position risk as per
Chapter VII of this regulation;
b) taking into consideration the underlying obligation on the n-position and the weighting factor related to it (e.g. in the case of a first-to-default contract, the weighting factor is determined by referring to the obligation with the lower quality in the basket).
4. In calculating risk-weighted exposure amounts, for trading book exposures, banks
cannot use the Simple Method, set out in articles 52 to 58 of Chapter IV of this regulation, for the recognition of the effects of financial collateral.
5. In the case of repurchase transactions and securities or commodities lending or
borrowing transactions, booked in the trading book, banks may recognise as eligible collateral all financial instruments and commodities that are eligible to be included in the trading book.
6. For exposures due to OTC derivative instruments booked in the trading book, banks
may recognise as eligible collateral also the commodities that are eligible to be included in the trading book.
7. For the purposes of calculating volatility adjustments where such financial instruments
or commodities which are not eligible under Chapter IV are lent, sold or provided, or borrowed, purchased or received by way of collateral or otherwise under such a transaction, and banks are using the supervisory volatility adjustments approach under
Chapter IV, banks shall treat such instruments and commodities in the same way as
non-main index equities listed on a recognised exchange.
8. Where banks are using their own estimates of volatility adjustments approach under
Chapter IV of this regulation, in respect of financial instruments or commodities which
are not eligible under the requirements of this Chapter (Chapter IV), volatility adjustments must be calculated for each individual item.
9. For the calculation of the exposures, in relation to the recognition of master netting
agreements covering repurchase transactions and/or securities or commodities lending or borrowing transactions and/or other capital market-driven transactions, banks shall recognise netting across positions in the trading book and the non-trading book only when the netted transactions fulfil the following conditions:
a) all transactions are assessed daily upon Marked-to-Market; and; b) any instrument or commodity borrowed, purchased or received under the transactions may be recognised as eligible financial collateral.
10. Where a credit derivative included in the trading book forms part of an internal hedge
and the credit protection is recognised under Chapter IV of this regulation, banks shall deem that no counterparty risk arises from the position in the credit derivative.
11. Alternatively, banks may consistently include for the purposes of calculating capital
requirements for counterparty credit risk all credit derivatives included in the trading book forming part of internal hedges or purchased as protection against a counterparty credit risk exposure where the credit protection is recognised under the requirements of
Chapter IV.

CHAPTER VII
MARKET RISK
SUBCHAPTER I
TRADING BOOK
Article 138
General characteristics of trading book

1. For purposes of calculating capital requirement for market risk, banks shall include in
   “the trading book” all positions in financial instruments and commodities, held with trading intent or in order to hedge other elements of the trading book. These instruments must be free of any restrictive clauses on their tradability or able to be hedged completely.

2. Banks shall consider “Positions held with trading intent”, those held intentionally for
   short-term resale and/or positions with the intention of benefiting from actual or expected short-term price differences between buying and selling prices, or from other price or interest rate variations. The term “positions” shall mean proprietary positions and positions arising from client servicing and market maker.

3. Banks shall consider as “Positions held in order to hedge other elements in the trading
   book”, those positions that have been taken in order to offset, in whole or in part, the risk factors associated with those elements.
   Article 139
   Policies and internal procedures for the management of the trading positions and trading book

4. Banks shall draft and approve policies and procedures to manage their positions or
   trading portfolios, which determine the intent to trade, and include at least:
   a) a clearly documented trading policy approved by the Steering Council of the bank for the position, instrument or portfolios, which shall include the expected holding horizon; b) clearly defined policies and procedures for the active management of the position, taken on a trading desk, which shall include the following:
   i. the setting and monitoring of position limits’ appropriateness;
   ii. dealers’ autonomy to enter into and manage the position within agreed limits and in
   accordance with to the approved strategy;
   iii. the system of reporting to senior management as an integral part of the institution's
   risk management process;
   iv. actively monitor positions with reference to market information sources;
   v. assessment of the marketability or hedge-ability of the position or its component
   risks, including the assessment of the quality and availability of market inputs to the valuation process, level of market turnover, sizes of positions traded in the market.

5. Banks, in compliance with their trading policy, shall draft clearly defined internal
   policy and procedures to monitor the turn over and static positions in the trading book.

6. Banks shall have in place clear procedures for determining positions to be included in
   the trading book for purposes of calculating the capital requirement. These procedures shall be part of the risk management systems of the banks. Compliance with these procedures shall be subject of monitoring of the internal auditor.

7. Banks shall draft and approve clear procedures for the overall management of the
   trading book, which shall determine at least:
   a) activities that the bank shall consider as trading and which are included in the trading book for purposes of calculating the capital requirement; b) the level at which a position may be revaluated on a daily basis, referring to an active and liquid market as in purchasing and selling; and c) for the exposures assessed through specific methods (mark-to-model), the extent to which the bank is able to:
   i. identify all material exposure risks;
   ii. hedge all material exposure risks with instruments, for which there exist an
   active and liquid market, both for selling and buying;
   iii. provide reliable assessments on the main assumptions and parameters used in the
   model; d) The extent to which the bank can provide positive estimations that 101can be externally validated on on-going basis; e) The extent to which, legal or other operational requirements hinder the ability of the bank to liquidate or hedge a position in the short term; f) The extent to which the banks can actively manage the position risk in the framework of its trading activity; g) The extent to which the bank may transfer the risk or the position between the tradable and non-tradable book and the criteria for such transfers.
   Article 140
   Specific requirements of the Bank of Albania

8. The Bank of Albania may request the exclusion from the trading book of those items,
   whose tradability, currently or for a long time, is not evident (e.g. lack of liquidity and tradability), especially if the holding period of such instruments is longer than that qualifying for the short term trade purpose.

9. The Bank of Albania may suspend the inclusion in the trading book of those items on
   which banks do not have the necessary resources and experience to actively manage them, and where appropriate control if systems are missing.

101 Amended by the Decision No. 44, dated 2.11.2022 of the Supervisory Council of the Bank of Albania.

Article 141
Internal hedging

1. Banks shall define “internal hedging” as the position that completely or at major part,
   offsets the risk of a position or set of positions in the banking books.
2. Banks shall include in the positions arising from internal hedges the eligible for trading
   book capital treatment, provided that they are held with trading intent and that they meet the general criteria in accordance with paragraph 1 and 2 of article 139, and the prudent valuation specified in article 142. Banks, in particular:
   a) ensure that hedges shall not be primarily intended to avoid or reduce capital requirements and these hedges shall be properly documented and subject to particular internal approval and audit procedures; b) treat the internal transactions according to the market conditions and dynamically manage, within the authorized limits for market risk, arising from the internal hedging in the trading portfolio; c) monitor internal transactions by carefully using the adequate procedures.
3. The treatment referred to in paragraph 2 of this article applies without prejudice to the
   capital requirements applicable to the banking book leg of the internal hedge.
4. When banks use a credit derivative booked in the trading book to hedge a banking book
   exposure, which is created through internal hedging, the banking book exposure may be deemed to be hedged for the purposes of calculating the capital requirements provided that the bank purchases from third-party a credit derivative meeting the requirements laid down in Chapter IV of this regulation, to hedge the banking book exposure.
5. In the cases set out in paragraph 4 of this article, for purposes of calculating the capital
   requirement, banks shall not include in the trading book the internal or the external derivative.
   Article 142
   Requirements for the evaluation of trading book items
6. Banks shall ensure that the value applied to each of its trading book positions correctly
   reflects its market value. This valuation shall appropriately reflect the dynamic nature of the trading book positions and the demands of prudential soundness inherent in the trading book.
7. Banks shall re-value the trading book positions daily. When a market price is not
   available, or when for certain convertible products, the market price does not reflect the intrinsic value of the position, banks shall use an alternative method of valuation,, Mark-to-Model, after having informed in advance the Bank of Albania, provided that the method is sufficiently prudent.
8. Banks shall book the positions from the trading date of the transactions.
9. Banks shall establish systems and implement sufficient control to provide prudent and
   reliable estimates of the risk in the trading book, which should include at least the following elements:
   a) documented procedures for the process of valuation. This shall clearly define:
   i. responsibilities of different organisational units involved in the valuation
   process;

ii. the sources of market information and review of their appropriateness;
iii. the frequency of independent valuation;
iv. the timing of closing prices
v. the procedures for adjusting valuations, the month-end and ad-hoc verification
procedures; b) reporting lines for the unit in charge of the valuation process that are clear and independent of operating unit (front-office). The reporting lines shall ultimately be to the Steering Council of the bank.
5. Banks shall use Mark-to-Market valuation of positions in the trading book, which
means at least daily valuation of the positions on close out prices that are sourced independently. (Examples include exchange prices, screen prices, or quotes from several independent reputable broker).
6. When Mark-to-Market, banks use the more prudent side of bid/ask unless the cases
when banks is a significant market maker in the particular type of financial instrument or commodity in question and it can close out at mid-market. 102Where banks make use of this derogation, they shall every six months inform Bank of Albania of the positions concerned and submit evidence that they can close out at mid-market price.
7. Where Mark-to-Model is not possible, banks must 103conservatively mark to model their
positions/portfolios before applying trading book capital treatment. Marking to model is defined as any valuation which has to be benchmark, extrapolated or otherwise calculated from a market input.
8. When marking to model, banks must comply with the following requirements:
a) senior management shall be aware of the elements of the trading book which are subject to mark to model and shall understand the materiality of the uncertainty this creates in the reporting of the risk/performance of the bank; b) market input shall be, where possible, in line with market prices; c) the appropriateness of the market inputs of the particular position and the parameters of the model shall be assessed on a frequent basis; d) where available, for particular financial instruments or commodities, shall be used valuation methodologies which are accepted in the market practice; e) where the model is developed by the bank itself, it shall be based on appropriate assumptions, which have been assessed and challenged by suitably qualified parties independent of the development process; the model shall be developed or approved independently of the front-office; f) models shall be independently tested, including validation of the mathematics, assumptions and software implementation; g) there shall be formal change control procedures in place and a secure copy of the model shall be held and periodically used to check valuations; h) risk management structures shall be aware of the weaknesses of the models used and reflect those in the valuation output; and i) the model shall be subject to periodic review to determine the accuracy of its performance (e.g. assessing the continued appropriateness of assumptions, analysis of profit and loss versus risk factors, comparison of actual close out values to model outputs).

102 Added by the Decision No. 44, dated 2.11.2022 of the Supervisory Council of the Bank of Albania. 103 Amended by the Decision No. 44, dated 2.11.2022 of the Supervisory Council of the Bank of Albania.

9. In addition to daily marking to market or marking to model, banks shall perform
   independent price verification through which to regularly verify market prices or model inputs.

10. Banks shall ensure that the verification of market prices and model inputs shall be
    performed by a unit independent of the dealing room, at least monthly, or, depending on the nature of the market/trading activity, more frequently.

11. Where independent pricing sources and market sources are not available, banks shall
    consider the valuation adjustments or creating valuation reserves.
    Article 143
    Valuation adjustments of positions in the trading book

12. Banks shall draft and approve internal procedures related to the valuation adjustments
    or the creation of valuation reserves.

13. Banks assess the possibility of carrying out valuation adjustment or creation of reserves
    as a result of the following factors:
    a) unearned credit spreads; b) position close-out costs; c) operational risks; d) position early termination; e) investing and funding costs; f) future administrative costs; and g) model risk (where relevant).

14. Banks shall establish valuation reserves for less liquid positions, which could arise from
    both market events and institution related situations (e.g. concentrated positions and/or static positions.

15. Banks shall decide on establishing reserves, as set out in paragraph 3 of this Article,
    based on the following factors:
    a) the amount of time it would take to hedge out the position or risks within the position; b) the volatility and average of bid/offer spreads; c) the availability of market quotes (number and identity of market maker; d) the volatility and average of trading volumes; e) market concentrations; f) the ageing of position; g) the extent to which valuations rely on marking to model; h) the impact of other model risks.

16. When using third party valuations or marking to model, banks shall consider whether to
    apply a valuation adjustment or to establish reserves for less liquid positions and on an ongoing basis review their continued suitability.

17. Banks shall deduct the valuation reserves from the regulatory capital as set out in the
    regulation “On the regulatory capital”.

18. 104With regard to complex products, including securitisation exposures and n-th-to￾default credit derivatives, banks shall explicitly assess the need for valuation
    adjustments, to reflect the model risk associated with using a possibly incorrect valuation methodology and the model risk associated with using unobservable (and possibly incorrect) calibration parameters in the valuation model. SUBCHAPTER II CAPITAL REQUIREMENT FOR MARKET RISK
    Article 144
    Calculating the capital requirement for market risk

19. Banks shall calculate the capital requirement for market risk as set out in Chapter III of
    this regulation, if the following conditions are met:
    a) during the last two six-months periods, the ratio of the average book value of the trading portfolio to the total assets and off balance assets, is not higher than 5%. This ratio should not exceed 6% at any time. b) During the last two six-months periods the average book value of the trading portfolio is not higher than Euro 15 million. This value should not exceed Euro 20 million at any time.

20. Banks, with the purpose the calculation of the activity at the trading book, shall evaluate
    the debt securities at their market value or nominal value, capital equities at their market value and derivatives, accordingly to nominal or market value of their basic instruments. Short positions shall be added to long positions, notwithstanding their sign.

21. Banks shall be subject of the requirements of this Chapter if any of the limits set out in
    paragraph 1 of this article has been exceeded.

22. Banks shall calculate the capital requirement for market risks as the sum of:
    a) capital requirements for trading book positions, which include:
    i. capital requirement for position risks;
    ii. capital requirement for concentration risk.
    b) capital requirements for all of credit institution's positions (non-trading book positions and trading book positions), which include:
    i. capital requirement for foreign exchange risk;
    ii. capital requirement for commodities position risk;
    iii. capital requirement for settlement risk.

23. The regulatory treatment of options is set out in articles 175-181 of this Subchapter.

104 Added by the Decision No. 44, dated 2.11.2022 of the Supervisory Council of the Bank of Albania.

Article 145
Position risk

1. Position risk describes the risk in respect of fluctuations in the prices of securities
   owing to factors related to market developments and the situation of the individual issuer.
2. Position risk, calculated for the bank’s trading book, consists of two separate
   components:
   a) a general risk, which refers to the risk of losses caused by adverse movements in the prices of financial instruments in general (for example, for debt securities this risk is associated with an adverse change in the level of interest rates; for equity securities it is associated with an adverse general movement in the market); and b) a specific risk, which refers to the risk of losses caused by adverse movements in the price of financial instruments due to factors related to the individual issuer’s situation.
3. The position risk and the related capital requirements shall be calculated separately for:
   a) debt securities and other financial instruments whose values depend on interest rates and issuer’s creditworthiness, including credit derivatives; b) equity securities and other financial instruments whose values depend on the developments in the equity market; c) units / quotas in collective investment undertakings and other financial instruments whose values depend on the value of the collective investment undertakings (CIUs).
   Article 146
   Netting
4. The absolute value of the difference105 of long positions over short positions in the same
   equity, debt and convertible issues and identical financial futures, options, warrants and covered warrants shall be its net position in each of those financial instruments.
5. For the purposes of calculating the capital requirement for specific risk, banks are
   allowed the netting between debt instrument positions arising from derivative instruments against the offsetting position in these debt instruments. 2/1. 106No netting shall be allowed between a convertible and an offsetting position in the instrument underlying it, unless the Bank of Albania introduces an approach under which the likelihood of a particular convertible security being converted is taken into account or require a capital requirement to cover any loss which conversion might entail.
6. Banks shall convert on a daily basis all the net positions, irrespective of their signs, into
   the bank's reporting currency at the prevailing spot exchange rate before their aggregation.

105 Amended by the Decision No. 44, dated 2.11.2022 of the Supervisory Council of the Bank of Albania. 106 Added by the Decision No. 44, dated 2.11.2022 of the Supervisory Council of the Bank of Albania.

Article 147
Treatment of derivative and other instruments for the calculation of position risk

1. When calculating the capital requirement for position risks, banks shall treat derivative
   financial instruments (excluding options) as combinations of hypothetical positions as follows:
   a) long interest-rate futures shall be treated as a combination of a short position in a risk-free debt security without a coupon and maturity date equal to that of the futures contract and a long hypothetical position in a risk-free debt instrument without a coupon with a maturity date equal to that of the interest rate futures contract plus the contract period. Short interest rate futures will be treated the same way, but by exchanging long and short positions. (For the purpose of calculating specific risk both positions will be assigned in the first row of the Table 21); b) forward-rate agreements (FRAs) in selling shall be treated as a combination of a long position in a risk-free debt security without a coupon with a maturity date equal to that of the forward rate agreement plus the contract period, and a short position in a risk-free debt instrument without a coupon with a maturity date equal to that of the forward-rate agreement. Long forward-rate agreements will be treated the same way but with exchanging long and short positions. (For the purpose of calculating specific risk both positions with be assigned in the first row of the Table 21.) c) forward contracts to buy a debt instruments shall be treated as a combination of a short position in a risk-free debt instrument without a coupon, with a maturity date equal to that of a forward contract and a long position in a debt security in question. Forward contracts to sell a debt instrument will be treated the same way, but with exchanging long and short positions. (For the purpose of calculating specific risk the position in risk free debt instrument will be assigned in the first row of Table 21 while the debt security in the column that corresponds to its features. d) currency forward and future contracts shall be treated as hypothetical long/short positions in risk-free debt security without a coupon in purchased/sold currency with maturity equal to that of the contract. e) interest-rate and currency swaps shall be treated as two hypothetical positions in risk-free debt securities with equivalent maturities.
   i. interest-rate and currency swaps shall be treated as a combination of a long and a
   short hypothetical position in risk-free debt instruments with fixed-rate or floating-rate interest and equivalent maturities;
   ii. currency interest rate swaps shall be treated as a combination of a long and a
   short hypothetical positions in risk-free debt security in a particular currency with fixed-rate or floating-rate interest (depending which relates to that currency) and equivalent maturities.

2. Banks shall treat options in accordance with articles 175 – 181.

3. Banks shall treat equity derivatives in accordance with article 160.

4. Banks shall treat warrants related to debt instruments and equities, in the same manner
   as the instruments set out in paragraph 3 of this article.

5. For purposes of calculating the capital requirement for market risk, banks may include
   in the trading book the positions arising from repurchase agreements, reverse repurchase agreements, and securities and commodities lending or borrowing transactions, provided that these transactions meet the criteria to be included in the trading book, and their inclusion shall be done on consistent basis. Notwithstanding where these transactions are booked, they are subject to the capital requirements for the counterparty credit risk. Banks shall treat:
   a) repurchase agreements and lending agreements as a combination of a long position in the underlying security with the equivalent maturity and a short position in a risk-free debt instrument with a maturity date and interest rate equal to the repurchase rate; b) repurchase agreements and lending agreements as a combination of a short position in the underlying security with the equivalent maturity and an assumed long position in a risk-free debt instrument with a maturity date and interest rate equal to the repurchase rate.

6. For the treatment of convertible bonds, banks may choose between 2 different
   methodologies, respectively:
   a) first, banks shall include convertible bonds in debt securities; and b) second, banks shall include such bonds in debt securities or equity, based upon the probability of conversion through delta equivalent value. If they choose to use the second methodology, banks shall apply it to the entire convertible bonds portfolio.

7. Banks may not make netting between the convertible security and the opposite sign
   position on its underlying instrument.

8. Banks, that do not use sensibility models,
   107in accordance with article 150, may treat as fully offsetting any positions in interest-rate derivatives (forward rate agreements, interest-rate swaps, swap options) that meet at least the following conditions:
   a) the positions are offset up to the same notional amount and are denominated in the same currency and relate to the same underlying instrument; b) the reference rates for floating rate positions are identical and the differential between coupons for fixed-rate positions not more than 20 basis points; c) the next interest-rate fixing date or, in the case of fixed-coupon positions, the residual maturity meets the following conditions:
   i. less than one month: same day
   ii. between one month and one year: within 30 days

107 Amended by the Decision No. 44, dated 2.11.2022 of the Supervisory Council of the Bank of Albania.

Article 148
The treatment of the protection seller

1. Banks, when calculating the capital requirement for market risks, unless otherwise
   provided for in this Subchapter, in the case of the protection seller, shall treat the positions arising from credit derivatives as debt instruments in their notional amount. 108Notwithstanding the first sentence, the bank may elect to replace the notional value by the notional value plus the net market value change of the credit derivative since trade inception (a net downward change from the protection seller's perspective carrying a negative sign). For the purposes of calculating capital requirements for specific risk, other than for total return swaps, banks shall determine the maturity of positions pursuant to the maturity of the credit derivative contract, instead of the maturity of the reference obligation. Accordingly:
   a) a total return swap shall be treated:
   i. for the general risk, as a combination of a long position in the reference
   obligation with a maturity equivalent to that of the total return swap and a short position in a risk-free debt instrument with maturity equivalent to the period until the next interest rate fixing;
   ii. for the specific risk, as a long position in the reference obligation.
   b) a credit default swap shall be treated:
   i. for the general risk, no position is created;
   ii. for the specific risk, as a combination of a long synthetic position in the
   reference obligation.
   Exceptionally, where a credit default swap has been rated externally and meets the conditions for a qualifying debt item set out in paragraph 7 of article 153, it shall be treated as a long position in the given derivative instrument. If premium or interest payments are due under the credit derivative contract, for the purposes of calculating capital requirement, banks shall treat these cash flows as positions in a risk-free debt instruments, with interest rate and a maturity date equal to that of the contract. c) a single name credit linked note shall be treated:
   i. for the general risk, as a long position in the underlying debt instrument (note),
   treated as an interest rate product;
   ii. for the specific risk, as a synthetic long position in the reference obligation and
   as a long position against the issuer of the note.

108 Added by the Decision No. 44, dated 2.11.2022 of the Supervisory Council of the Bank of Albania.

For the purposes of calculating capital requirement for position risk, in cases when a single name credit linked note has an external rating and meets the conditions for a qualifying debt item referred to paragraph 7 of article 153, banks shall treat them as a single long position in the debt instrument (note). d) multiple name credit linked note shall be treated:
i. for general risk, as a long position in the underlying debt instrument (note);
ii. for specific risk, this instrument, providing proportional hedging, creates several
long positions in each reference obligation in the amount equivalent to the proportion of the individual reference obligation in the total notional amount of the multiple name credit linked note. For the purposes of calculating capital requirement for specific risk, where more than one reference obligation exist, banks shall treat the relevant risk weighting equal to the highest risk weighting assigned to the obligations in question. For the purposes of calculating capital requirement for specific risk, in cases when a single name credit linked note has an external rating and meets the conditions for a qualifying debt item referred to paragraph 7 of article 153, banks shall treat them as a single long position in the debt instrument (note). e) first-asset-to-default derivative shall be treated:
i. for the specific risk, as a long position in each reference obligation of the credit
derivative contract.
If the size of the maximum payment in a credit event is lower than the capital requirement for the exposures created as above, the maximum payment amount may be taken as the capital requirement for the specific risk.
ii. for the general risk, if according to the contract of the given instrument a
premium and interests are due, these cash flows shall be treated as notional position in a risk-free debt instrument with interest rate and maturity equal to that of the contract. For the purposes of calculating capital requirement for specific risk, where a first-asset-to-default derivative contract has an external rating and meets the conditions for a qualifying debt item referred to paragraph 7 of article 153, banks shall treat them as a single long position in the debt instrument (note); f) n-th asset-to-default derivative shall be treated:
i. for the specific position risk, a long position in each reference obligation of the
credit derivative contract minus nth- 1 positions (the lowest initial capital requirement for specific position risk). If the size of the maximum payment in a credit event is lower than the capital requirement for the exposures created as above, the maximum payment amount may be taken as the capital requirement for the specific risk;

ii. for general risk, if according to the contract of the given instrument a premium
and interests are due, the cash flows shall be treated as free risk debt instrument position, with interest rate and maturity equal to those in the contract. For purposes of calculating capital requirement for specific risk, where nth-asset￾to-default derivative contract has an external rating and meets the conditions for a qualifying debt item referred to paragraph 7 of article 153, banks shall treat them as a position in the debt instrument that reflect derivative rating.
Article 149
Treatment of the protection buyer

1. For the purposes of calculating capital requirements for position risks, in the case of the
   protection buyer, banks shall treat positions arising from the credit derivative contract the same way as the protection seller, but with the opposite sign, with the exception of credit linked notes, which entail no short position in the debt instrument itself.
2. If at a given moment there is a call option in combination with a step-up, banks shall
   consider such moment as the maturity of the protection.
3. first-to-default and nth-to-default derivative, banks shall make the following treatments:
   a) first-to-default credit derivatives: when a bank obtains credit protection for a number of exposures under terms that the first default among the exposures shall trigger payment and that this credit event shall terminate the contract, it may offset the specific risk for the reference unit, to which is applied the lowest capital requirement amongst the other reference units, according to Table 21 of this
   Chapter;
   b) nth-to-default credit derivatives: where the nth default among the exposures triggers payment, the credit protection buyer may offset the specific risk, if protection has also been obtained for defaults 1 to n-1 or when n-1 defaults have already occurred. In such cases, the methodology set out for first to default credit derivative shall be applied also to n-th to default products.
   Article 150
   Sensitivity models
4. Banks, which evaluate and manage interest rate risk arising from derivative financial
   instruments on a discounted-cash-flow basis, may use Sensitivity Models to calculate positions in those instruments.
5. Banks may use such models also for the calculation of positions in bonds but only for
   those bonds which generate cash flows over their residual life. Positions calculated in this manner shall be included in the calculation of capital requirements for general interest rate risk in accordance with articles 155 and 156.
6. Banks may use Sensitivity Models, referred to above, subject to the prior permission of
   the Bank of Albania, provided that the following conditions are met:
   a) positions obtained under the model shall have the same sensitivity to interest-rate changes as the underlying instruments; and

b) the sensitivity of positions to interest-rate changes shall be assessed with reference to independent movements in sample rates across the yield curve, with at least one sensitivity point in each of the maturity bands set out in the maturity based approach (Table 22).
4. The bank shall comply with the conditions referred to in paragraph 3 of this article on
an ongoing basis, starting from the day it obtained the permission from the Bank of Albania.
5. Banks shall apply for permission to use the sensitivity model and submit the following
documentation:
a) types of financial instruments to which the sensitivity model is to be applied; b) basic assumptions of the Sensitivity Model; c) compliance with the conditions set out in paragraph 3 of this article.
6. If the bank ceases to comply with the conditions based on which the Bank of Albania
has provided its approval, it shall either present a plan for a timely return to compliance or demonstrate that the effect of non-compliance is immaterial to the use of the model
7. Bank of Albania may revoke the permission approved to use Sensitivity Model, in cases
when:
a) the bank fails to comply with the supervisory measures of the Bank of Albania aiming to eliminate irregularities, and b) the non-compliance of the bank with the conditions referred to in this Chapter is important to the use of the model.
Article 151
Specific risk of trading book positions hedged by credit derivatives

1. Banks may mitigate specific risk of trading book positions hedged by credit derivatives,
   in accordance with the requirements of this article.
   1/1. 109Banks shall treat the position in the credit derivative as one “leg” and the hedged position that has the same nominal, or, where applicable, notional amount, as the other “leg”.
2. Where the value of a long/short trading book position and a short/long position arising
   from a credit derivative always move in the opposite direction and broadly to the same extent, banks shall exclude both positions from the calculation of the initial capital requirement for specific risk.
3. Banks shall apply such exclusion (as set out in paragraph 2 of this article) in the
   following situations:
   a) the positions refer to completely identical instruments; or

109 Added by the Decision No. 44, dated 2.11.2022 of the Supervisory Council of the Bank of Albania.

b) a long cash position is hedged by a total rate of return swap and there is an exact match between the reference obligation and the exposure arising from the trading book (cash position). The exact match shall not refer to the maturity of the total return swap itself which may be different from that of the exposure arising from the trading book position.
4. Where the value of a long/short trading book position and a short/long position arising
from a credit derivative always move in the opposite direction, but not to the same extent, banks shall reduce the initial capital requirement for specific risk, if the following conditions are met:
a) there is an exact match in terms of the reference obligation, the maturity of both the reference obligation and the credit derivative and the currency of the exposure in the trading book; and b) the key features of the credit derivative contract (definition of a credit event, the settlement system) do not cause the market value of derivatives to materially deviate from the market value of the trading book position.
5. Where a transaction that meets the conditions set out in paragraph 4 of this article
transfers risk, banks shall offset by 80% the capital requirement for specific risk, to the leg of the transaction with the higher risk weighting (for the specific risk), while the capital requirement for specific risk of the other leg shall be zero.
6. Where the values of long/short trading book positions and short/long positions arising
from a credit derivative usually move in the opposite direction, banks may apply partial reductions of the initial capital requirement for specific risk, in the cases when:
a) positions arising from the credit protection meet the conditions referred to in letter “b” of paragraph 4 of this article, but there is a mismatch between the reference obligation and the exposure arising from the trading book position. However, the positions must meet the following requirements:
i. the reference obligation ranks pari passu with or is junior to the exposure arising
from the trading book (the hedged exposure/obligation); and
ii. the reference obligation and the exposure arising from the trading book position
share the same reference (obligor) entity and have cross-default and cross￾acceleration default clauses; b) positions arising meet the conditions referred in paragraph 3, letter “a” or paragraph 4 of this article, but there is a currency or maturity mismatch between the credit protection and the trading book position; c) positions arising meet the conditions referred to paragraph 4 of this article, but there is a mismatch in the type of instrument between the trading book position (cash position) and the credit derivative (the exposure in the credit derivative documentation shall be defined as one of the possible deliverable obligations).
7. Banks, in the situations falling under paragraph 6 of this article, shall calculate the
capital requirement for specific risk only for the side of the transaction (credit derivative or hedged position) to which the higher capital requirement for specific risk applies.

8. In all situations not falling under the above paragraphs of this article, banks shall
   calculate the capital requirement for specific risk for the credit derivative and the hedged position.
   Article 152
   Position risk of debt securities
9. Banks shall classify the net positions in debt instruments according to the currency of
   denomination.
10. Banks shall calculate the capital requirement for the specific and general risk, for each
    currency separately.
    110Article 152/1
    Cap on the capital requirement for a net position The bank may cap the capital requirement for specific risk of a net position in a debt instrument, at the maximum possible default-risk related loss. For a short position, that limit may be calculated as a change in value due to the instrument or, where relevant, the underlying names immediately becoming default risk-free.
    Article 153
    Specific risk for non-securitisation debt securities111
11. Banks shall include net positions in debt instruments 112that are not securitisation,
    calculated as provided in article 146, to the appropriate categories in Table 21, on the basis of their issuer, external or internal credit assessment and residual maturity, and then multiply them by the prescribed weightings in the same table.
12. For the purposes of calculating the initial capital requirement for specific risk, banks
    shall sum up the absolute amounts of the weighted positions, as shown in paragraph 1 of this article, 113regardless of whether they are long or short position.
    Table 21
    Categories Capital requirement a)
    Debt securities issued or guaranteed by central governments, issued by central banks, international organisations, multilateral development banks or Member States' local or regional government units which would qualify for credit quality step 1 or which would receive a 0% risk weight under Chapter III of this regulation. 0%

110 Added by the Decision No. 44, dated 2.11.2022 of the Supervisory Council of the Bank of Albania. 111 Amended the title of the article 153 by the Decision No. 44, dated 2.11.2022 of the Supervisory Council of the Bank of Albania. 112 Added by the Decision No. 44, dated 2.11.2022 of the Supervisory Council of the Bank of Albania. 113 Added by the Decision No. 44, dated 2.11.2022 of the Supervisory Council of the Bank of Albania.

b)
Debt securities issued or guaranteed by central governments, issued by central banks, international organisations, multilateral development banks or Member States' regional government or local authorities, which would qualify for credit quality step 2 or 3 under
Chapter III of this regulation.

• Debt securities issued or guaranteed by the bank which would qualify for credit quality
  step 1 or 2 under Chapter III of this regulation.
• Debt securities issued or guaranteed by corporate which would qualify for credit quality
  step 1, 2 or 3 under Chapter III of this regulation.
• other qualifying items pursuant to paragraph 7 of this article.
  0.25% (residual term to final maturity 6 months or less) 1.00% (residual term to final maturity greater than 6 and up to and including 24 months) 1.60% (residual term to final maturity exceeding 24 months) c)
• Debt securities issued or guaranteed by central governments, issued by central banks,
  international organisations, multilateral development banks or Member States' regional government or local authorities which would qualify for credit quality step 4 or 5 under
  Chapter III of this regulation.
• Debt securities issued or guaranteed by corporate which would qualify for credit quality
  step 3 under Chapter III of this regulation.
• Debt securities issued or guaranteed by corporate which would qualify for credit quality
  step 4 under Chapter III of this regulation.
• exposures for which credit assessment by a nominated ECAI is not available.
  8% d)
• Debt securities issued or guaranteed by central governments, issued by central banks,
  international organisations, multilateral development banks or Member States' regional government or local authorities which would qualify for credit quality step 6 under
  Chapter III of this regulation.
• Debt securities issued or guaranteed by corporate which would qualify for credit quality
  step 5 or 6 under Chapter III of this regulation.
  12%

3. Banks shall not calculate specific risk for own debt instruments, included in the trading
   book.

4. Banks shall assign the maximum charge as per Table 21 (12%) to debt instruments on
   which the risk is growing as a result of the inability of the issuer to pay, or the falling liquidity of the instrument.

5. Banks shall assign 8% or 12% risk weight to the debt instruments issued by a non￾qualifying issuer according to Table 21. Bank of Albania may require banks to apply a
   higher specific risk charge to such instruments for the purposes of calculating capital requirement for specific risk to such instruments, and/or to disallow the offsetting possibility, for the purposes of defining the extent of general market risk between such instruments and any other debt instruments, for the purposes of calculating capital requirement for general risk.

6. For securitisation exposures that would be subject to deducting elements in the
   calculating the regulatory capital, or risk-weighted at 1,250 % as set out in Chapter V of this regulation, shall be subject to a capital charge that is no less than that set out under those treatments. For liquidity facilities that are not subject to rating, banks shall assign a capital charge that is not less than that set out in subchapter IV of Chapter III of this regulation.

7. For the purposes of using Table 21, banks shall include in qualifying items the
   following positions:
   a) long and short positions in debt instruments qualifying for a credit quality step corresponding at least to investment grade as per the standardised method of credit risk; b) long and short positions in debt instruments for which a credit assessment by a nominated ECAI is not available and which meet the following conditions:
   i. they are considered by the bank to be sufficiently liquid;
   ii. according to the bank’s own discretion their investment quality is at least
   equivalent to that of the position referred to under letter “a” of this paragraph; and
   iii. they are listed on at least one regulated market in a Member State, in the
   Republic of Albania or on a stock exchange in a third country provided that the exchange is recognised by the competent authorities of the relevant Member State and of the Republic of Albania. c) long and short positions in debt instruments issued by other banks (institutions), which on bank’s own discretion are considered to be sufficiently liquid and their credit quality is at least equivalent to that of the debt securities under letter “a” of this paragraph; d) positions in securities issued by other banks (institutions) that are deemed to have an equivalent, or higher, credit quality than those associated with credit quality step 2 under Chapter III of this regulation, for exposures to institutions, and that are subject to supervisory and regulatory regime comparable to the regime that applies to banks.

8. 114Banks may calculate the specific risk requirements for any bonds that qualify for a
   10% risk weight, in accordance with the treatment set out in article 26, paragraphs 3 and 4 of this regulation, as half of the applicable specific risk capital requirement for the second category in table 21.
   Article 153/1115
   Own funds requirement for securitisation instruments

9. For instruments in the trading book that are securitisation positions, the bank shall
   weight its net positions as calculated in accordance with article 146, paragraph 1 of this regulation, with 8% of risk weight that the bank will apply to non-trading book positions as set out in subchapter II of Chapter V of this regulation.

114 Added by the Decision No. 44, dated 2.11.2022 of the Supervisory Council of the Bank of Albania. 115 Added by the Decision No. 44, dated 2.11.2022 of the Supervisory Council of the Bank of Albania.

2. For securitisation positions that are subject to an additional risk weight in accordance
   with article 102, paragraph 6 of this regulation, 8% of the total risk weight shall be applied.
3. Except for securitisation positions treated in accordance with article 153/2, paragraph 4 of
   this regulation, the bank shall sum its risk weighted positions resulting from the application of paragraph 1 and 2 of this article, regardless of whether they are long or short, in order to calculate its capital requirement for specific risk.
4. Where an originator bank of a traditional securitisation does not meet the conditions for
   significant risk transfer, as set out in article 99 of this regulation, it shall include in the calculation of the capital requirement, the securitised exposures from this securitisation, as if these exposures have not been securitised.
5. Where an originator bank of a synthetic securitisation does not meet the conditions for
   significant risk transfer, as specified in article 100 of this regulation, it shall include in the calculation of the capital requirement the securitised exposures from this securitisation, as if these exposures have not been securitised, but not any credit protection obtained for the securitised portfolio.
   Article 153/2116
   Capital requirement for the correlation trading portfolio
6. The correlation trading portfolio shall consist of securitisation positions and n-th-to￾default credit derivatives that meet all of the following criteria:
   a) the positions are neither re-securitisation positions, nor options on a securitisation tranche, nor any other derivatives of securitisation exposures that do not provide a pro-rata share in the proceeds of a securitisation tranche; b) all reference instruments are either of the following:
   i. single-name instruments, including single-name credit derivatives, for which a
   liquid two-way market exists;
   ii. commonly-traded indices based on those reference entities.
   A two-way market is deemed to exist where there are independent bona fide offers to buy and sell so that a price reasonably related to the last sales price or current bona fide competitive bid and offer quotations can be determined within one day and settled at such price within a relatively short time conforming to trade custom.
7. Positions related to any of the following instruments or claims shall not be part of the
   correlation trading portfolio:
   a) an underlying instrument that is capable of being assigned to the exposure class “retail exposures” or to the exposure class “exposures secured by mortgages on immovable property” under the Standardised Approach for credit risk in a bank's non-trading book; b) a claim on a special purpose entity, collateralised, directly or indirectly, by a position that would itself not be eligible for inclusion in the correlation trading portfolio in accordance with paragraph 1 of this article and this paragraph.

116 Added by the Decision No. 44, dated 2.11.2022 of the Supervisory Council of the Bank of Albania.

3. Banks may include in the correlation trading portfolio positions which are neither
   securitisation positions nor nth-to-default credit derivatives, but which hedge other positions of that portfolio, provided that a liquid two-way market as described in paragraph 1 of this article, exists for the instrument or its underlyings.
4. Banks shall determine the specific risk capital requirement for the correlation trading
   portfolio, as the larger of the following amounts:
   a) the total specific risk capital requirement that would apply just to the net long positions of the correlation trading portfolio; b) the total specific risk capital requirement that would apply just to the net short positions of the correlation trading portfolio.
   Article 154
   Methods for the calculation of general risk of debt instrument
5. For the purposes of calculating the general risk of debt instruments, banks may use two
   alternative methods:
   a) securities Maturity-based approach; b) financial Duration-based approach.
6. Banks, which for the purposes of calculating the general risk, use the Duration-based
   approach, may not discontinue its use, except for special cases.
   Article 155
   Maturity based approach
7. Banks that use the Maturity-based Approach shall follow three steps laid down in letters
   “a”, “b”, and “c” below:
   a) they shall weight the previously determined net positions (instrument by instrument and by residual maturity):
   i. assign the net positions to the appropriate maturity bands in Table 22, on the
   basis of the residual maturity in the case of fixed-rate securities and of the period remaining until the next interest rate fixing in the case of other instruments, making a distinction between securities with a coupon of less than 3% and those with a coupon of more than 3%;
   ii. multiply each net position by the risk weight shown in column 4 of Table 22 (the
   weighting is designed to reflect their sensitivity to general interest-rate movements);
   iii. calculate the sum of all weighted long and short positions, by setting out the
   weighted short and long position for each maturity band;

Table 22
Zone
Maturity band
Weighting
Assumed change in interest rates (%). Coupon of 3% or more Coupon of less than 3% Zone 1 0 ≤ 1 month

1 ≤ 3 months
3 ≤ 6 months
6 ≤ 12 months
0 ≤ 1 month
1 ≤ 3 months
3 ≤ 6 months
6 ≤ 12 months
0%
0.2%
0.4%
0.7%

1%
1%
1%
Zone 2

1 ≤ 2 years
2 ≤ 3 years
3 ≤ 4 years
1.0 ≤ 1.9 years
1.9 ≤ 2.8 years
2.8 ≤ 3.6 years
1.25%
1.75%
2.25%
0.9%
0.8%
0.75%
Zone 3
4 ≤ 5 years
5 ≤ 7 years
7 ≤ 10 years
10 ≤ 15 years
15 ≤ 20 years
20 years
3.6 ≤ 4.3 years
4.3 ≤ 5.7 years
5.7 ≤ 7.3 years
7.3 ≤ 9.3 years
9.3 ≤ 10.6 years
10.6 ≤ 12.0 years
12.0 ≤ 20.0 years
20 years
2.75%
3.25%
3.75%
4.5%
5.25%
6%
8%
12.5%
0.75%
0.7%
0.65%
0.6%
0.6%
0.6%
0.6%
0.6% b) offsetting the net weighted positions as follows:
i. referring to each maturity band concerned: match the long weighted position with
the short weighted position for each maturity band (the weighted long or short position with the smaller value shall be the matched weighted position in that maturity band, while the difference between the long and short positions shall be the unmatched weighted long/short position for the same band);
ii. referring to each zone: compute the unmatched weighted long and short positions
for each zone, as the sum of all unmatched weighted short and long positions for all the maturity bands within each zone, and match the weighted long positions by the weighted short positions for each zone (the position with the smaller value shall be the matched weighted position in that zone, while the difference between two positions shall be the unmatched weighted position for that zone);
iii. between zones: compute the amount of the unmatched weighted long (short)
position in zone one which is matched by the unmatched weighted short (long) position in zone two, that shall be referred as the matched weighted position between zones 1 and 2 (the unmatched weighted position in zone two which is left over, matched by the unmatched weighted position in zone three, shall be the matched weighted position between zones 1 and 3).

Banks may reverse the order of the above calculations. Thus, they may start calculating the matched weighted position between zones two and three and then that position between zones one and two. The remainder of the unmatched weighted position in zone one shall then be matched with what remains of that for zone three after the latter's matching with zone two in order to derive the matched weighted position between zones one and three. The sum of all the unmatched weighted positions shall be the total weighted unmatched position; c) calculate the capital requirement for the general risk of debt securities as the sum of the following items:
i. 10% of the matched weighted positions in all maturity bands;
ii. 40% of the matched weighted position in zone one;
iii.30% of the matched weighted position in zone two;
iv. 30% of the matched weighted position in zone three;
v. 40% of the matched weighted position between zones one and two and between
zones two and three;
vi. 150% of the matched weighted position between zones one and three;
vii.100% of the total unmatched weighted position.
Article 156
Duration-based Approach

1. Banks that use the Duration-based Approach shall follow the steps set out in letters “a”,
   “b”, “c” and “d” as follows:
   a) Calculate the modified duration of each debt security.
   Banks shall calculate first for the fixed-rate debt instruments, their yield to maturity (the discount rate for that instrument) based on their market value, and for floating-rate instruments, their yield (on the assumption that the principal is due when the interest rate can next be changed) based on their market value. The methods of calculating yield to maturity shall apply on a consistent basis to all trading book positions for which it calculates general risk for debt securities. The modified duration of each debt instrument shall be calculated on the basis of the following formula:
   Dmod= D/1+r
   Where:
   Dmod = modified duration;
   D = duration:

r = yield to maturity;
Ct = cash payment in time t; m = maturity; t = time; b) Allocate positions to the duration zones. Banks shall allocate each debt instrument to the appropriate zone specified in Table 23, on the basis of the modified duration of each instrument. Banks shall calculate the duration￾weighted position for each instrument by multiplying its market price by its modified duration and by the assumed interest-rate change
Table 23
Zone Modified duration Assumed change in interest rates (in %) 1 > 0.0 ≤ 1.0 1.00 2 > 1.0 ≤ 3.6 0.85 3 > 3.6 0.70 c) Match positions within and between zones. With the purpose to calculate matched positions, Banks shall apply the procedures laid down for matched and unmatched weighted positions described in maturity method; d) Calculate the capital requirement for general risk as the sum of:
i. 2 % of the matched duration-weighted position for each zone;
ii. 40 % of the matched duration-weighted positions between zones one and two;
iii. 40 % of the matched duration-weighted positions between zones two and three;
iv. 150 % of the matched duration-weighted position between zones one and three;
and
v. 100 % of the residual unmatched duration-weighted positions.
Article 156/1117
Correction to the modified duration to reflect prepayment risk

1. Banks, for debt instruments which are subject to prepayment risk shall calculate the
   corrected modified duration, applying one of the following formulas:
   a) the formula set out in paragraph 2 of this article; b) the formula set out in paragraph 3 of this article.

117 Added by the Decision No. 44, dated 2.11.2022 of the Supervisory Council of the Bank of Albania.

2. For the purposes of letter “a” of paragraph 1 of this article, banks shall apply the
   following formula to correct the Modified Duration and compute a Corrected Modified Duration (CMD):
   CMD = MD X Φ X Ω where:
   MD = modified duration, in accordance with article 156 of this regulation Φ = Ω = 1 + Δ + ΓdB + Ψ P = price of the bond with the embedded optionality B = theoretical price of the vanilla bond Δ = delta of the embedded option Γ = gama of the embedded option Ψ = additional factor (which is not considered in the calculation of Δ and Γ, and is material), for transaction costs and behavioural variables consistent with an Internal Rate of Return (IRR) shift of 100 basis points (b.p.)
3. For the purposes of letter “b” of paragraph 1 of this article, banks should apply the
   following formula to re-compute directly the CMD by repricing the instrument after a shift of 100 b.p. in the IRR:
   where:
   P0 = the current market price of the product;
   P Δr = theoretical price of the product after a negative and a positive IRR shock equal to Δr; Δr = hypothetical IRR change of 50 b.p. Ψ = additional factor (which is not considered in the calculation of P Δr, and is material), for transaction costs and behaviorual variabils consistent with a IRR shift of 100 b.p.
4. The computation of the additional factor Ψ need only to be considered if the factor is
   material and should never lead to a shorter CMD than if it had not been considered in the calculation.
5. For the purposes of assessing the additional factor Ψ in accordance with paragraph 3 of
   this article, banks should take into account all of the following:
   a) that transaction costs reduce the value of the option, making the option unlikely to be executed below the threshold established by the transaction costs;

b) that there are behavioural factors suggesting that some clients, in particular retail clients, may not always exercise an option, despite it being in the money, due to some known circumstances including the following:
i. where the remaining principal is close to the initial amount lent, leading some
“aggressive” borrowers to leave or refinance at an early stage;
ii. in the case of borrowers with the largest loan size who have the largest gain
from prepayment as the cost attached to prepayment is a fixed amount.
6. The assessment of the additional factor Ψ should be based on historical data, obtained
from the banks’ own experience or from external sources. Data on the behavioural factors referred to in paragraph 5, letter “b” of this article, may be obtained from the assessment of other balance sheet elements subject to prepayment risk, such as those observed for retail clients in the non-trading book.
7. Banks should calibrate the additional factor Ψ by assessing significant divergences
between the real behaviour historically observed for a type of client and the theoretical behaviour that would have been envisaged for counterparties acting in a purely rational way.
8. The calibration of the additional factor Ψ, due to behavioural factors referred to in
paragraph 7 of this article, should be made where a relevant amount of these instruments with prepayment risk are held in the trading book and especially where the counterparties are retail clients. Additional factors should not be considered for the embedded options where the bank has the right to call for an early termination of the instrument.
Article 157
General provisions for positions in equity securities

1. The bank shall calculate its net long or short position in each equity in accordance with
   Article 146.
2. The sum of the two 118absolute figures, as per the paragraph 1 of this article, shall be the
   bank’s overall gross position.
3. 119The bank shall calculate, separately for each market, the difference between the two
   figures, as per the paragraph 1 of this article, which shall be the bank’s overall net position. For the purpose of calculating the overall net position in equity securities, according to this article, the term “market” shall mean:
   a) for the European Union area, all equities listed in stock markets located in jurisdictions that have adopted the euro as their currency; b) for the rest of the world, all equities listed in stock markets located in the same national jurisdiction.

118 Added by the Decision No. 44, dated 2.11.2022 of the Supervisory Council of the Bank of Albania. 119 Amended by the Decision No. 44, dated 2.11.2022 of the Supervisory Council of the Bank of Albania.

Article 158
Specific risk of equity securities

1. 120The bank shall multiply its overall gross position by 8% in order to calculate its
   capital requirement for specific risk.
2. 121Repealed.
   Article 159
   General risk of equity securities
   Banks shall calculate the capital requirement for general risk by multiplying the overall net position, as defined in paragraph 3 of article 157, by 8 %.
   Article 160
   Treatment of equity derivative instruments
3. Banks shall treat equity futures and forward relating to individual equity instruments,
   equity portfolios or stock indices, as a combination of a long or a short position in the underlying equity instrument and a short or a long position in the risk-free debt security without a coupon and maturity date equal to that of the contract.
4. Banks shall treat equity swaps as a combination of a long position in an equity
   instrument or in an equity or a stock index portfolio under which banks receive an amount based on the change in price of that equity instrument or an equity or a stock index portfolio and a short position in an equity instrument or a stock index portfolio, under which banks pay an amount based on the change in value of that equity instrument or an equity or stock index portfolio.
5. Banks shall treat stock-index futures, the delta-weighted of options in share indices and
   share index, collectively referred to hereafter as stock-index futures, as a combination of a short/long position on each underlying stock and a long/short position in a risk-free debt instrument, without a coupon, and maturity date equal to that of the contract. Subject to the approval of the Bank of Albania, banks may net off positions in constituent equity instruments of the given stock index against positions in the same equity instruments.
6. Where banks netted off their positions in equity instruments arising from equity
   derivatives according to paragraph 3 of this article, against positions in the same equity instruments, they shall ensure to have adequate capital to cover the risk of loss caused by the mismatch in the movement of market values of equity derivatives and market values of equities. If banks hold opposite positions in stock-index derivative instruments, they shall ensure additional capital to cover the risk of loss caused by the mismatch in the maturity and/or composition of the respective stock indices, or both factors simultaneously.
7. Banks shall treat stock-index futures which are exchange traded and represent broadly
   diversified indices, with a capital requirement against general risk of 8 %, but no capital requirement against specific risk.

120 Amended by the Decision No. 44, dated 2.11.2022 of the Supervisory Council of the Bank of Albania. 121 Repealed by the Decision No. 44, dated 2.11.2022 of the Supervisory Council of the Bank of Albania.

Such stock-index futures shall be included in the calculation of the overall net position in according to paragraph 3 of article 157, but shall be disregarded in the calculation of the overall gross position according to paragraph 2 of article 157.
6. In the case a stock-index future contract is not broken down into its underlying
positions, banks shall treat it as if it were an individual equity. The specific risk on this individual equity can be ignored if the stock-index future in question is exchange traded and represents a broadly diversified index.
Article 161
Position risk for investment units in collective investment undertakings (CIU)

1. For investment units in the collective investment undertakings (CIUs) qualified to be
   included in the trading book, banks shall calculate the capital requirement for the general and specific position risk of 32% (Residual Method).
2. For the investment units in the collective investment undertakings (CIUs), banks shall
   calculate capital requirement for position risk (specific and general) and foreign￾exchange risk of no higher than 40%.
3. Unless otherwise noted in this regulation, banks are not permitted to netting between
   the underlying investments of a collective investment undertakings (CIUs) where they hold units, and other similar positions held by the bank.
4. Without prejudice to the above, banks may use the methods set out in paragraph 6 of
   this article for the calculation of the capital requirement for the positions in collective investment undertakings (CIU) supervised or incorporated in EU Member State or in the Republic of Albania, if they meet the following criteria:
   a) the prospectus or equivalent document of the collective investment undertakings122 shall determine:
   i. the categories of assets in which the collective investment undertakings123 are
   authorised to invest;
   ii. if investment limits apply, the relative limits and the methodologies to calculate
   them;
   iii. if leverage is allowed, the maximum level of leverage;
   iv. if investment in OTC financial derivatives or repo-style transactions are allowed,
   a policy to limit counterparty risk arising from these transactions; b) the performance of the collective investment undertakings124 shall be reported in half-yearly and annual reports to enable an assessment to be made of the assets and liabilities, income and operations over the reporting period; c) the units/shares of the collective investment undertakings125 are redeemable in cash, on a daily basis at the request of the unit holder;

122 Amended by the Decision No. 44, dated 2.11.2022 of the Supervisory Council of the Bank of Albania. 123 Amended by the Decision No. 44, dated 2.11.2022 of the Supervisory Council of the Bank of Albania. 124 Amended by the Decision No. 44, dated 2.11.2022 of the Supervisory Council of the Bank of Albania. 125 Amended by the Decision No. 44, dated 2.11.2022 of the Supervisory Council of the Bank of Albania.

d) investments of the collective investment undertakings126 shall be segregated from the assets of the relevant CIU’s manager; and e) the investing banks shall undertake adequate risk assessment of the collective investment undertakings; f) 127CIUs shall be managed by persons supervised in accordance with law no. 56/2020 “On collective investment undertakings” or equivalent legislation.
5. Upon the approval by the Bank of Albania, banks may recognise as eligible for the
specific treatment set out in paragraph 6 of this Article, the units in collective investment undertakings (CIUs) in third countries, if the conditions set in letters “a” to “e” of paragraph 4 of this article are met.
6. Banks may choose between 3 specific methods, based on the nature of tradable units in
collective investment undertakings (CIU) and the available information, regarding the investments done by the collective investment undertakings (CIUs) in accordance with its mandate, as laid down below. a) Method 1. Banks which are aware of the underlying investment structure of the collective investment undertaking on a daily basis, may, for the purposes of calculating the initial capital requirement for position risks (specific and general), shall treat units in collective investment undertakings as positions in underlying investments of the collective investment undertaking and include them in the calculation of the capital requirement for position risks (specific and general), according to the type of instrument (debt or equity securities). For the purposes of calculating the capital requirement for position risk (specific and general), netting is permitted between positions in the underlying investments of the collective investment undertaking and the same trading book positions held by the bank, as long as the bank holds a sufficient quantity of units to allow for redemption/creation in exchange for the underlying investments. b) Method 2. For the purposes of calculating the initial capital requirement for position risk (specific and general), banks may treat units in collective investment undertakings (CIUs) as positions in a particular stock index or basket of equities or debt securities and include them in the calculation of the capital requirement for position risks (specific and general) according to the type of instrument (debt or equity securities), only if the following conditions are met:
i. the purpose of the collective investment undertaking's mandate is to replicate the
composition and performance of a particular stock index or fixed basket of equities or debt securities;
ii. the correlation between the daily price movements of the units in collective
investment undertakings and the stock index or fixed basket of equities or debt securities shall be at least 0.9 over a minimum period of six months (for the purposes of this item, “correlation” means the correlation coefficient between daily returns on the unit in the collective investment undertaking and the stock index or fixed basket of equities or debt securities it tracks).

126 Amended by the Decision No. 44, dated 2.11.2022 of the Supervisory Council of the Bank of Albania. 127 Added by the Decision No. 44, dated 2.11.2022 of the Supervisory Council of the Bank of Albania.

c) Method 3. Where banks are not aware of the above underlying investments on a daily basis, they may calculate the capital requirement for position risk (general and specific) according to the type of instrument (debt or equity securities), subject to the following conditions:
i. it will be assumed that the collective investment undertakings (CIU) first invests
to the maximum extent allowed under its mandate in the asset classes attracting the highest capital requirement for position risk (general and specific), and then continues making investments in descending order until the maximum total investment limit is reached. The position in the units of the collective investment undertakings (CIUs) will be treated as a direct holding in the assumed position;
ii. Banks shall take account of the maximum indirect exposure that they could
achieve by taking leveraged positions in the collective investment undertakings (CIUs) when calculating their capital requirement for position risk, by proportionally increasing the position in the collective investment undertakings (CIUs) up to the maximum exposure to the underlying investment items resulting from its mandate; and Should the capital requirement for position risk (general and specific) exceed the limit laid down paragraph 1 and/or 2 of this article, banks shall limit/reduce the capital requirement to that level.
7. 128Banks may rely on the following third parties to calculate and report capital
requirements for position risk (general and specific), for positions in collective investment undertakings (CIUs) in accordance with the methods set out in paragraph 6 of this article:
a) the depository of the CIU, provided that the CIU exclusively invests in securities and deposits all securities at this depository; and b) for other CIUs, the CIU management company, provided that the CIU management company meets the criteria set out in paragraph 4, letter “a” of article 28 of this regulation. The correctness of the calculation shall be confirmed by an external auditor.
Article 162
Settlement risk

1. Banks which perform transactions in debt securities, equity securities, derivatives,
   currencies and commodities, may expose to the risk of a loss arising from failure to settle at maturity date.
2. Banks shall classify the losses from failure of settlement as losses related to
   respectively a) in case of transactions settled on a delivery vs. payment, the loss is the difference between the agreed settlement price and the fair value of the financial instruments, the currencies or commodities to be received (delivered);

128 Amended by the Decision No. 44, dated 2.11.2022 of the Supervisory Council of the Bank of Albania.

b) in case of transactions not settled on a DVP basis, where cash is paid before the underlying is delivered, or the underlying is delivered before cash is paid (“non￾DVP” or “free delivery” transactions), the loss is the fair value of the financial instruments, currencies or commodities transferred to the counterparty for which payment is not received, or the cash paid without delivery of the underlying.
3. Banks shall calculate capital requirements as set out in articles 163 and 164, for risks in
relation to all unsettled transactions in financial instruments (including derivatives), currencies and commodities.
4. Banks shall not calculate capital requirements for repurchase and reverse-repurchase
agreements, and securities or commodities, lending or borrowing transactions, and derivative contracts not involving the exchange of capital.
5. In the event of system-wide failure of a settlement or clearing system, the Bank of
Albania may temporarily wave, in part or in full, the application of capital requirements to unsettled transactions until the situation is rectified. In such circumstances, the failure of counterparty to settle a trade shall not be deemed a default, for the purposes of credit risk.
Article 163
Settlement risk for DVP transactions
Banks shall calculate capital requirement by applying weighting factors, in different time bands, as set out in the Table on difference, where it is positive (entails a loss for the bank), between the agreed settlement price and the fair value of the financial instruments, currencies or commodities to be received or delivered.
Table 24
Number of working days after settlement date Weighting factors From day 5 - 15 8 From day 16 - 30 50 From day 31 - 45 75 From day 46 on 100
Article 164
Settlement risk for non DVP transactions

1. Banks that have paid cash for or deliver financial instruments, currencies or
   commodities and have not receive the corresponding deliverable or payment due in the course of the same day or, for cross-border transactions, by the next working day, shall recognize the transferred asset as a receivable from the counterparty and apply the same calculation method for the capital requirement used for exposures not included in the trading portfolio.

2. Regardless of the methodology used, where the exposure amounts in respect of
   unsettled DVP transactions are not material, banks may apply a 100% risk weight.

3. Banks that have made payment or delivery and have not received the deliverable or
   payment from the counterparty by the fourth business day after the agreed delivery date129 must deduct from the regulatory capital the larger between the amount transferred and the fair value of the underlying receivable instrument, or between the cash receivable and the fair value of the transferred deliverable, as set out in the regulation on regulatory capital.
   Article 165
   Concentration risk in trading portfolio

4. Banks that, as a result of the risk positions in their trading books, have exceeded the
   maximum allowed limit, set out in the article 64, paragraph 1 of the Law on banks, are obliged to comply with a specific capital requirement.

5. Banks may exceed the individual exposure limit provided that they meet the following
   conditions:
   i. exposures in the banking book to borrowers or groups of connected borrowers do
   not exceed the limits laid down in the Law on banks, and that the amount in excess of the limit originates entirely in the trading book;
   ii. banks comply with a further capital requirement for exceeding the limits on large
   exposures;
   iii. where no more than 10 days have passed since the limit was exceeded, the
   exposure to the borrowers or groups of connected borrowers in the trading book is not more than five times the regulatory capital of the bank;
   iv. where more than 10 days have passed since the limit was exceeded, the total excess
   exposure is no more than six times the regulatory capital of the bank.

6. With respect to the trading book, banks shall calculate the exposure to an individual
   borrower or group of connected borrowers as the sum of the net long position calculated for each financial instrument issued by the borrower or group of connected borrowers and the exposure to settlement risk and counterparty risk in respect of the same borrower as determined in this Chapter. The risk positions in respect of the trading book shall be measured by weighting the exposure in compliance with the regulation on the management of large exposure of banks.
   Article 166
   Capital requirement for concentration risk

7. Banks shall calculate the capital requirement for concentration risk as follows:
   a) calculate the total risk position as the sum of the risk position for each borrower, in respect of the trading book and all other risk positions b) calculate the excess over the individual exposure limit for each borrower as the difference between the total risk position in respect of a borrower and the individual exposure limit;

129 The "second date" in a non-DVP transactions.

c) classify the risk positions in the trading book for borrowers for which an excess to the maximal allowed limit is found as per letter “b” of this paragraph, in order to identify the riskiest, to which the excess exposure shall be attributed; Banks shall order the positions in the trading book starting with those subject to capital requirements for specific risk and subsequently including those subject to capital requirements for settlement and counterparty risk. In each risk profile, banks shall allocate the capital requirements for the excess/es beginning with the component with the largest capital requirement; d) sum the positions thus ordered until they reach the value of the amount in excess as determined under letter “b” of this paragraph; e) where no more than 10 days have passed since the limit was exceeded, the additional capital requirement shall be equal to twice that required for specific risk, settlement risk and counterparty risk for the positions identified as in “d” of this paragraph; f) where more than 10 days have passed since the limit was exceeded, the additional capital requirement shall be calculated by:
i. summing the positions identified as in letter “d” of this paragraph in the intervals
given in Table 25, column 2, beginning with the position with the smallest capital requirement, until the upper limit of each interval is reached;
ii. multiplying the capital requirements for the positions thus classified by the
corresponding percentages given in Table 25, column 3;
iii. summing the result of the product of capital requirements and the related
percentages.
Table 25
Risk Position (in % to the regulatory capital) Amount in excess to the maximal allowed limit (in % to the regulatory capital) Weighting Column 1 Column 2 Column 3 From 20% - 40% From 40%-60% From 60%-80% From 80% to 100% From 110% to 250% More than 250% From 0% to 20% From 20% to 40% From 40% to 60% From 60% to 80% From 80% to 230% More than 230% 200% 300% 400% 500% 600% 900%
Article 167
Treatment of position from securities underwriting

1. Banks shall include positions arising from underwriting of debt and equity securities in
   the calculation of capital requirements for position risks as set out in this article.

2. Banks shall calculate the net position by deducting the amount of securities it became
   unconditionally committed to accept at an agreed price, by positions which are underwritten by third parties, on the basis of formal agreements.

3. Banks shall reduce the obtained net position as set out in paragraph 2 of this Article, by
   the reduction factors in Table below:
   Table 26
   Working day Reduction factor (%)
   Working day 0*: 100
   Working day 1: 90
   Working day 2 to 3 75
   Working day 4: 50
   Working day 5: 25
   After working day 5 0%
   *Working day zero, shall be the working day on which the bank becomes unconditionally committed to accepting a known quantity of securities at an agreed price. 3/1. 130The bank shall notify to the Bank of Albania on the use of the factors provisioned in paragraph 3 of this article.

4. Banks shall include the reduced net positions in the calculation of capital requirements
   in accordance with requirements set in the position risk for debt instruments and position risk for equities.

5. Banks shall ensure sufficient capital against the risk of loss which exists between the
   time of the initial commitment and “working day 1”.
   Article 168
   Positions in commodities

6. Banks shall calculate capital requirements against risk of potential losses in
   commodities positions.

7. Banks for the purposes of calculating capital requirement for commodities positions,
   shall include all assets and liabilities in and off balance sheets in commodities, held for stock financing.

8. Banks shall state in terms of standard unit of measurement, every position in
   commodity, or derivatives on commodities. These positions shall be converted in reporting currency, using the spot price for every commodity.

9. If banks have a short position in a commodity which falls due before the long position
   in the same commodity, they shall take into account the risk of a shortage of liquidity which may exist in some markets.

10. For the simple methods, as set out in article 171, banks shall consider as “net position in
    each commodity”, the excess of their long (short) positions over its short (long) positions in the same commodity and identical commodity future in commodities, in options and commodities and warrants(commodities).

130 Added by the Decision No. 44, dated 2.11.2022 of the Supervisory Council of the Bank of Albania.

6. Banks shall consider as “positions in the same commodity” the following positions:
   a) positions in different sub-categories of commodities in cases where the sub￾categories are deliverable against each other; and b) positions in similar commodities if they are close substitutes and if a minimum correlation of 0,9 between price movements can be clearly established over a minimum period of one year.
   Article 169
   Treatment of commodity derivatives and other instruments
7. Banks shall treat futures and forwards in commodities as a combination of a long/short
   position in the underlying commodity and a short/long position in a government bond without a coupon and shall be reported as notional amounts in terms of the standard unit of measurement and maturity equal to that of the contract.
8. Banks shall treat commodity swaps, as a combination of long positions in the
   commodity, on the basis of which the banks pay a fixed price and receive/benefit a floating price and short positions in the commodity, on the basis of which they receive a fixed price and pay a floating price. If banks use the Maturity Ladder Approach as set out in article 172, they shall treat commodity swap as a series of positions equal to the notional amount of the contract, with each position corresponding with one payment on the swaps and slotted into the maturity ladder in Table 27. In cases of commodity swaps where the sides of the transaction are in different commodities, banks shall include them in the relevant maturity band pursuant to the underlying commodity in accordance with Table 27.
9. Banks shall treat positions arising from repurchase agreements, reverse repurchase
   agreements on commodities, and commodities lending or borrowing agreements as:
   a) for repurchase agreements and commodity lending agreements, as a long position in the underlying commodity with the equivalent maturity and a short position in a risk-free debt instrument with a maturity date and interest rate equal to the repurchase rate; b) for reverse repurchase agreements and securities borrowing agreements, as a long position in risk-free debt security with a maturity date and interest rate equal to the repurchase rate.
   Article 170
   Methods of calculating capital requirement for commodities risk Banks may calculate the capital requirement respectively according to:
   a) the Simplified Approach; b) the Maturity Ladder-based Approach.

Article 171
Simplified Approach

1. For the purposes of calculating the initial capital requirement for commodities risk
   under this approach, banks shall calculate for each commodity the sum of the following elements:
   a) 15% of the net position, long or short, multiplied by the spot price for the commodity); and b) 3 % of the gross position, long plus short, multiplied by the spot price for the commodity (sum of the absolute values).
2. Banks shall calculate the overall capital requirement for commodities risk as the sum of
   the capital requirement calculated for each commodity.
   Article 172
   The Maturity Ladder-based Approach
3. Banks that opt to use the Maturity Ladder-based Approach shall notify the Bank of
   Albania and in all cases, banks shall apply the method selected on an ongoing basis.
4. Banks shall use a separate maturity ladder for each commodity in accordance with
   Table 27 as follows:
   Table 27
   Maturity band Spread rate (in %)
   ≤ 1 month 1.5 %

1 ≤ 3 months 1.5 %
3 ≤ 6 months 1.5 %
6 ≤ 12 months 1.5 %
1 ≤ 2 years 1.5 %
2 ≤ 3 years 1.5 %
3 years 1.5 %

3. Banks may offset between them the positions in the same commodity or those
   considered as such according to paragraph 6 of article 168, and assign them to the appropriate maturity bands on a net basis, if one of the following conditions is met:
   a) contracts positions mature on the same date; b) contracts positions mature within 10 days of each other if the contracts from which they arise are traded on markets which have daily delivery dates.

4. Physical stocks shall be assigned to the first maturity band.

5. Banks shall calculate the sum of the long positions and the sum of the short positions in
   each maturity band. The sum of the long/short positions which are matched by the sum of short/long positions in a given maturity band shall be the matched positions in that band, while the residual long or short position shall be the unmatched position for the same band.

6. The amount of the unmatched long /short position for a given maturity band that is
   matched by the unmatched short /long position for a maturity band further out shall be the matched position between two maturity bands. The residual amount shall be the (long or short) unmatched between the two maturity bands.

7. Banks shall calculate the capital requirement for each commodity as the sum of the
   following:
   a) the sum of absolute amounts of the matched (long or short) positions within a maturity band multiplied by the spread rate specified in Table 27 and by the spot price for that commodity; b) the absolute amount of the unmatched position in one maturity band or between two maturity bands which is carried forward in the following maturity band, multiplied by 0.6 % carry rate, and the spot price for the commodity; c) the residual unmatched position, multiplied by 15% (outright rate) and by the spot price for that commodity.

8. Banks shall calculate the initial capital requirement for the commodity risk, as the sum
   of the capital requirement for each commodity, calculated as set out in paragraph 7 of this article.
   Article 173
   Capital requirement for foreign exchange risk
   If the total net open position of the bank 131and the net open position of gold, defined according to regulation “On the management of open foreign exchange position” is higher than 2 % of the regulatory capital, the bank shall multiply by 8% the value of this position to calculate capital requirement for the foreign exchange risk.
   Article 174
   Positions in foreign currencies in collective investment undertakings, as part in the calculation of the bank's net overall foreign currency position

9. To calculate the net open foreign currency position according to regulation “On the
   management of open foreign exchange position”, banks shall take into account the current foreign currency positions in collective investment undertakings (CIUs) making a distinction between:
   a) positions in CIUs whose current underlying positions in foreign currencies are known to the bank;

131 Added by the Decision No. 44, dated 2.11.2022 of the Supervisory Council of the Bank of Albania.

b) other CIUs positions.
2. For CIUs positions referred to in paragraph 1 “a” of this article, banks shall consider the
book value of the foreign-currency assets that make up the CIU, in proportion to the relative weight of each asset in the total investments of the CIU. The resulting foreign currency positions shall be included in the calculation of the net foreign currency position for each currency.
3. For the positions referred to in paragraph 1 “b” of this article, (banks are not aware of
the CIUs foreign currency positions), banks shall assume that it is invested up to the maximum extent allowed under the CIUs mandate in foreign exchange.

4. For CIUs positions allocated to the trading book and whose rules allow borrowing,
   Banks shall take account of the maximum indirect exposure that the CIU could achieve by taking leveraged positions. For this purpose, the book value of the CIU shall be proportionally increased up to the maximum exposure to the underlying investment items resulting from the investment mandate.
5. Where aware of the direction (sign) of the investment of the foreign currency positions,
   created as set out in paragraph 3, banks shall treat the positions as other CIU positions – not separate currencies, 132according to the treatment of investments in gold, subject to the addition of the total long position to the total long open foreign exchange position and the total short position to the total short open foreign exchange position, where the direction of the CIU’s investment is available. In all other cases, banks shall treat the above mentioned positions as positions in separate currencies.
6. No netting between long and short positions in the same CIU or different CIUs shall be
   allowed.
7. As per the above, banks shall calculate the net open foreign currency position as the
   sum of:
   a) the greater of: i) the sum of net long positions plus positions in “other CIU positions – non-separate currencies” (if they are long positions); b) the sum of net short positions plus short positions in “other CIU positions – non-separate currencies” (if they are short positions); b) positions in “other CIU positions - separate currencies”.
   Article 175
   Capital requirement for options
8. Banks may use one of the following approaches to calculate the initial capital
   requirement for option portfolio:
   a) the Simplified Approach; b) the Delta Plus Approach.

132 Added by the Decision No. 44, dated 2.11.2022 of the Supervisory Council of the Bank of Albania.

Article 176
Simplified Approach

1. Banks that use a limited range of purchased options may adopt the Simplified Approach
   elaborated below, for special combinations.
2. For purchased call options or put options, banks shall calculate the capital requirement
   as the lesser of:
   a) the market value of the underlying instrument multiplied by the sum of the specific and general risk weights; and b) the market value of the option (the book value for options on which no market value is available).
3. For long positions in the underlying instrument cash or forward associated with
   purchased put options, or short positions in the underlying instrument (cash or forward), associated with a purchased call option, banks shall calculate the capital requirement equal to the market value of the underlying instrument multiplied by the sum of the specific and general risk, less any positive internal value of the option at a minimum 0.
4. Banks shall calculate the internal value of an option, respectively:
   a) for call option, as the difference between the market value of the underlying instrument and the strike price; and b) for put option, as the difference between strike price and the value of the underlying instrument.
5. In the cases set out in paragraph 4 of this article for options positions, and where
   relevant, banks shall not consider the associated positions in the underlying instrument from the capital requirement calculated for position risk, for foreign exchange risk and commodity risk.
6. The capital requirement for options calculated using this method shall be added to the
   capital requirement calculated for position risk, exchange rate risk and commodity risk.
   Article 177
   General provisions for the Delta Plus Approach
7. The Delta Plus Approach uses the sensitivity parameters associated with options.
8. Banks that use the Delta Plus Approach shall recognise options as positions equal to
   market value of the underlying instrument multiplied by the delta parameter (equivalent), to evaluate the position risk in the trading book, the foreign exchange risk and the commodities risk.
9. Banks, with the purpose to calculate total capital requirement, shall calculate the capital
   requirement for Gamma parameter (the rate of change of delta) and for vega coefficient (the sensitivity of the value of an option to a change in price volatility), since delta equivalent does not sufficiently cover the risks associated with options positions.
10. For exchange-traded options, banks shall use the sensitivity coefficients, delta, gamma
    and vega, calculated by that exchange, while for over-the-counter options, banks shall calculate these coefficients by using the standard market models or their own internal model previously notifying the Bank of Albania.

Article 178
Specific risk by the Delta Plus Approach
Banks shall calculate the capital requirement for specific risk separately for each option by multiplying the delta equivalent value of each option by the risk weights for specific risk, set out in article 153 for debt instrument, article 158 for equity instruments and article 161 for investment in CIU.
Article 179
General risk by the Delta Plus Approach

1. Banks shall incorporate the delta weighted position for each option with debt securities
   as the underlying, for the purposes of calculating the capital requirement in accordance with one of the procedures set out in article 155 or 156.
2. Banks shall calculate the capital requirement for options on CIUs with respect to the
   equivalent delta value, in accordance with the calculation method applied on the basis of the provisions of article 161.
3. Banks shall calculate the capital requirement for options with equities as the underlying
   on the basis of the delta-weighted positions in accordance with article 159.
4. Banks shall incorporate the delta -weighted positions in respect to options on currencies
   in the calculation of the net open foreign currency position, and assign it capital requirement according to article 173.
5. Banks shall calculate the capital requirement for options of commodities, on the basis of
   equivalent delta positions, in compliance with one of the methods set out in articles 171 or 172.
6. For options in instruments not included above, banks shall adopt a two-legged
   approach, with one entry at the time the underlying contract takes effect and another at the time the underlying contract matures.
7. For the purposes of calculating capital requirement for the position risk and
   commodities, banks shall offset delta equivalents against positions in identical underlying instruments or derivative financial instruments, whereby purchased call/written put options shall be treated as long positions, and written call/purchased put options as short positions.
   Article 180
   Gamma and vega risk
8. Banks shall calculate gamma and vega risk for each individual option and aggregated
   by the underlying instrument.
9. Banks shall consider the following as a single underlying instrument:
   o for equities and stock indices, each national market; o for interest-rate instruments, each maturity band as defined in Table 22; o for currencies and gold, each pair of currencies and gold; o for commodities, positions in a single product.
10. Banks shall calculate gamma risk as follows for each option:

Gamma risk= 1/2 gamma * N * (variation of underlying instrument)2 , where N is the number of the underlying instruments of the option.
4. Banks shall determine the variation of the underlying instrument in the same way as for
calculating the general risk, as laid down following:
a) for options on equities and stock indices, it shall be equal to 8% of the market value of the underlying instrument; b) for options on interest rates, if the underlying instrument is a debt security the market value of the underlying instrument shall be multiplied by the weighting factor specified in Table 21 or by the interest-rate change as defined in Table 22 (depending on the chosen method). In case the underlying instrument is the interest rate, the variation of the underlying instrument shall be the variation of interest rates as per Table 21; c) for foreign exchange options, it shall be equal to 8% of the exchange rate for the currency pair concerned; d) for commodities it shall be equal to 15% of the market value of the concerned commodity; e) for options on CIU positions, the market value of the underlying instrument shall be multiplied by 32%, where the residual method is used to calculate the capital requirement for position risk in CIUs.
5. Banks shall calculate the vega risk for each individual option as:
Vega risk = Vega * N * volatility of underlying instrument/4, where is the number of the underlying instruments.
6. Each option of the same underlying instrument may have a negative or positive effect
on the gamma factor. Banks shall sum up these individual effects, which have a positive or negative net effect on the gamma of each underlying instrument. For the purposes of calculating the capital requirement, only the negative impact on gamma shall be taken into account.
Article 181
Capital requirement as per the Delta Plus Approach

1. Banks shall calculate the capital requirement for option risks as the sum of:
   a) capital requirement for specific risk (article 178); b) capital requirement for general risk for delta risk (article 179) adding up the sum of the absolute value of the vega risks and the sum of net negative gamma risks.
2. Banks that choose this method for the calculation of the capital requirement for options
   risk, shall add to the capital requirement for market risk calculated according to paragraph 3 of article 144, the capital requirement calculated in accordance with paragraph 1 of this article.

CHAPTER VIII
OPERATIONAL RISK
SUBCHAPTER I
BASIC INDICATOR APPROACH
Article 182
Capital requirement
Banks shall calculate the capital requirement for operational risk under the Basic Indicator Approach, which takes into account the net income from banking activities for the last three years of the bank’s activity, and an α coefficient equal to 15%.
Article 183
The indicator of net income from banking activities

1. The indicator of net income from banking activities is the sum of net interest income
   and net non-interest income for the given fiscal year.
2. The indicator of net income from banking activities for each year is calculated based on
   the data for the 12 months of the fiscal year, and when audited figures are not available, bank’s estimates may be used.
3. If for any given observation, the indicator of net income from banking activities is
   negative or equal to zero, this figure shall not be taken into account in the calculation of the three-year average.
4. Average net income indicator from, banking activity shall be calculated as the sum of
   positive values of net income indices from the banking activity, subdivided by the number of years, for which the indicator is positive.
   Article 184
   Qualifications
5. The indicator of net income from banking activities for each of the three years shall be
   calculated as the sum of net interest income and net non-interest income, reflecting the following items on the calculation:
   a) Net interest income; b) Net income from leasing operations and factoring; c) Net commission income; d) Net income from operations with securities and other financial operations; e) Net profit on foreign exchange operations; f) Other income.
6. The indicator of net income shall be calculated before the deduction of any provisions
   and operating expenses (including commission/expenses carried out for services from third parties), and excluding in any case the following:

a) Extraordinary income; b) Income from insurance; c) Income from participating interests in subsidiaries or other related parties; d) profits/losses from the sale of non-trading book items.
3. In case when full data are not available for the three years (in cases of banks with not
more than one year of activity) banks shall use the data estimated in their business plans.
4. Banks shall use the following formula to calculate capital requirements for operational
risk:
Capital requirement for operational risk = {(Net Income indicator of T-1) * (15%) + (Net Income indicator of T-2) * (15%) + (Net Income indicator of T-3) * (15%)} / 3 With the condition that:

• The Net Income indicator of year T -1 > 0; and
• The Net Income indicator of year T -2 > 0; and
• The Net Income indicator of year T -3 > 0; and
  T is considered the reporting year.
  SUBCHAPTER II
  STANDARDISED APPROACH
  Article 185
  Capital requirement

1. Banks shall calculate the capital requirement for operational risk under the Standardised
   Approach, which takes into account the indicator of the net income from banking activity for the last three years according to business lines and the respective coefficient β, specified in Table 30. In each given year, a negative capital requirement in one business line, resulting from a negative relevant indicator may be imputed to the whole. However, where the aggregate capital charge across all business lines within a given year is negative, then the input to the average for that year shall be zero.
2. The indicator of net income from banking activity for each year is calculated on the
   basis of the data at the end of the fiscal year, and when audited figures are not available, bank’s estimates may be used.

Table 30 Business Lines, Activities and respective coefficient ß
No. Business lines Business list Coefficient ß

1. Corporate finance

• Underwriting of financial instruments and / or placing of financial
  instruments on an irrevocable commitment basis;
• Services related to underwriting;
• Advisory services in the field of investment;
• Services for the assessment of trade associations;
• Services for securitization operations for the third parties;
• Advisory services on capital structure business strategy and related aspects,
  such as consulting services and services related to merger and acquisition of companies (enterprises);
• Research and financial analyses and other general advisory forms, related
  to transactions with financial instruments.
  18%

Treasury operations

• Dealing on own account;
• Mediation in interbanking markets;
• Securitization on own account;
• Receiving and transmission of orders in relation to one or more financial
  instruments;
• Execution of orders on behalf of clients;
• Placing of financial instruments without an irrevocable commitment basis;
• Management of a (Multilateral Trading Facilities).
  18%

3. Retail brokerage

• Receiving and transmission of orders in relation to one or more financial
  instruments;
• Execution of orders on behalf of clients;
• Placing of financial instruments without a firm commitment basis.
  12%

Banking and financial activity

• Acceptance of deposits and other repayable funds;
• lending;
• Financial leasing and factoring;
• Exports and trade funding.
• offering guarantees and receiving commitments;
• operations with foreign currencies.
  15%

5. Retail banking

• Acceptance of deposits and other repayable funds;
• Lending;
• Financial leasing and factoring;
• Offering guarantees and receiving commitments.
• Operations with foreign currencies.
  12%

Payments and settlements

• Services and the payment, transfer and clearing systems (SWIFT, AECH,
  MasterCard, Visa, Amex, e-banking, etc);
• Issuing and administering means of payment.
  18%

7. Agency services

• Safekeeping and administration of financial instruments for the account of
  clients, including custodianship and related services such as cash/collateral management. 15%

8. Asset management

• Portfolio management;
• Managing of undertakings for collective investment in transferable
  securities (Managing of UCITS);
• Other forms of asset management.
  12%

3. Upon the authorisation granted by the Bank of Albania, a bank may calculate its capital
   requirement for operational risk using an alternative standardised approach, as set out in subchapter III of this Chapter.
   Article 186
   Principles for Business Line Mapping
   Banks must develop specific policies and criteria for mapping the relevant indicator for current business lines and activities into the standardised framework. The criteria must be reviewed and adjusted as appropriate for new or changing activities and risks undertaken by the bank133 . SUBCHAPTER III ALTERNATIVE INDICATORS FOR CERTAIN BUSINESS LINES
   Article 187
   Modalities
4. Bank of Albania may grant the prior approval to a bank, if it will require using an
   alternative indicator different from that of the net income from the banking activity, for the following business lines:
   a) retail banking activity; and b) banking and financing activity.
5. For these business lines, the bank may use the indicator of the three-year average of the
   total nominal amount of loans granted to customers, multiplied by a coefficient 0,035.
6. For the retail and/or banking and financing activities business lines, the loans granted to
   be used for the indicator shall consist of the total drawn amounts in the corresponding credit portfolios. For the banking and financing business line, securities held in the bank’s book shall also be included.
7. Banks shall use the alternative indicators if they have concentrated their activities in
   retail and/or commercial banking activities, which shall account for at least 90 % of its income.
8. Banks shall use the standardised method at variable indicators to calculate the total
   capital requirement, equal to standardised method.
9. Bank of Albania shall grant its authorisation for the use of alternative indicators only if
   the bank proves that a significant proportion of its retail and/or commercial banking activities comprise loans associated with a high Probability of Default, and that the alternative standardised approach provides an improved basis for assessing the operational risk.

133 The principles for categorizing business lines are determined in Annex 5 of the Regulation No. 3 dated 19.01.2011 “On the Management of Operational Risk”.

Article 188
Qualifying criteria

1. Banks shall meet the qualifying criteria listed in paragraph 2 of this article, in addition
   to the general risk management standards set out in Annex 3 of this regulation on the technical criteria concerning the organization and treatment of risks, and in the Regulation “On the management of operational risk”.
2. According to their nature, size, and complexity and profile of their activity, banks shall
   ensure:
   a) a well-documented assessment and management system/s for operational risk with clear responsibilities assigned. This system/s shall identify bank’s exposures to operational risk and track relevant operational risk data, including material loss data. This system/s shall be subject to regular and independent review by the bank. b) operational risk assessment system/s closely integrated into the risk management processes of the bank. The results provided by this system or these systems, shall be integral part of the monitoring and controlling process of the bank’s operational risk profile; c) Banks shall draft and approve procedures for taking appropriate action according to the information within the management reports. Banks shall draft and approve procedures to undertake the needed actions, based on the information provided in the directory's reports.
3. Banks, which use the standardised method should receive the prior approval by the
   Bank of Albania, with the purpose to shift to the simplified indicator method, and only if:
   a) the bank provides that the use of simplified indicator method does not aim the reduction of the requirement for capital for the operational risk, but is necessary given the nature and complexity of its activity; and b) this change shall not have a considerable negative effect, on the capital adequacy ratio or its capability to effectively manage the operational risk.
4. Banks using standardised method shall submit at the Bank of Albania the following
   documents:
   a) structure that determines the duties and responsibilities assigned to the function for the management and control of the operational risk at the bank; b) decisions of the Steering Council on the use of the standardised method; c) a document that describe the assessment process of operational risk and the assessment conclusions; d) a special report of the bank's internal audit; and e) a report, on a yearly basis, by the management structures of the bank on the implementation of the regulatory requirements for the use of standardised method and a report by the internal audit on the quality of the management system for the operational risk at the bank.

CHAPTER IX
BANKS' ASSESSMENT PROCESS
Article 189
General requirements

1. Banks shall draft and approve sound, effective and complete strategies and processes to
   assess and maintain on an ongoing basis the amounts, types and distribution of internal capital that they consider adequate to cover the nature and level of the risks to which they are or might be exposed.
2. The strategies and processes defined in paragraph 1 of this article shall be subject to
   regular internal review by the bank to ensure that they remain comprehensive and proportionate to the nature, scale and complexity of the activities of the bank. SUBCHAPTER I INTERNAL CAPITAL ADEQUACY ASSESSMENT PROCESS (ICAAP)134
   Article 190
   General provisions
3. The bank shall establish an appropriate internal assessment process on capital adequacy,
   based on the strategies for risks management.
4. The internal assessment process on capital adequacy shall be considered appropriate for
   the bank if:
   a) it is based on the identification, measurement and assessment of the risks, in the overall risk assessment and the monitoring of main risks, to which the bank is exposed during its activity; b) ensures the necessary capital for covering the bank’s risk profile; and c) this process is properly integrated in the management systems.
5. The bank, through a full internal assessment process on capital adequacy, shall ensure
   that the level of risk, to which the bank is exposed, is within its risk capacity.
6. The bank shall establish an internal assessment process on capital adequacy, as set out
   in paragraph 1 of this article, proportionally with the nature, size and complexity of its activity.
   Article 191
   Identification, measurement and assessment of the risks, and the drafting of an overall risk assessment and their monitoring
7. Based on its risk profile, the bank shall determine the main risk categories to be
   considered in the internal assessment process on capital adequacy.

134 Internal Capital Adequacy Assessment Process.

2. The banks shall argument and document its decisions related to whether it shall take
   into consideration the specific risks and assumptions used in the internal assessment process on capital adequacy.

3. The banks shall draft and implement appropriate methodologies for risk measurement
   or assessment, aiming at the designing of specific measures or risk assessments.

4. Methodologies for risk measurement or assessment shall be appropriate if they include:
   a) the using of methods for calculating capital requirements in accordance with the requirements of this regulation; b) internal documented methodologies of the bank; and/or c) other methodologies, suitable for the risk measurement or assessment.

5. If the bank realizes that the measure or assessment of a specific risk mentioned in the
   paragraph 1 of this article does not reflect the actual exposure of the bank to that risk, it may adjust the assessment with an upward or downward assessment.

6. The bank shall argument and document the use of individual methods used for the risk
   measurement or assessment, the unquantifiable risk assessments, and the adjustments to the risk assessments mentioned in paragraph 5 of this article.

7. The bank shall determine the overall risk position, based on the measurement or
   assessment of individual risks.

8. The bank shall determine the appropriate internal methodology for determining the
   overall risk position/profile.

9. The internal methodology for determining the overall risk position/profile shall be
   considered appropriate if it may enable a set of comparable risk measures or assessments, and where possible, an adjustment of the overall risk profile.
   Article 192
   Ensuring adequate capital coverage of the risk profile

10. The bank shall determine the appropriate internal objectives to ensure adequate own
    funds.

11. Internal objectives shall be considered appropriate if they shall ensure the capital
    coverage of risk/s, at least:
    a) during the normal activity of the bank; and b) in extraordinary circumstances.

12. When setting the internal objectives, the bank, to ensure adequate capital coverage of
    risk, shall take into consideration its resources related to its capacity to provide/own capital.
    Article 193
    Types of internal capital

13. The bank shall determine the type of capital, with which it ensures adequate cover for
    the risk.

14. The bank shall ensure that the total capital to cover risk is in compliance with its
    capacity to undertake risks at any time. The total capital for risk coverage may differ from the total amount of capital determined in article 7 of this regulation.

15. In case when the total capital for risk coverage is lower than the total amount of capital
    determined in article 7 of this regulation, the bank shall inject capital (or submit to the Bank of Albania a capital raising plan), up to the amount calculating as per the requirements of this regulation.

16. The bank ensures an internal assessment of the capital adequacy and its distribution at
    least once a year, and every important change of the exposure towards risks.
    Article 194
    Integration of the internal assessment process on capital adequacy in the risk/s management systems The bank shall ensure the integration of the internal assessment process on capital adequacy in the risk/s management systems, based on the usage of the results of this process in the monitoring of the decisions on its activity, of the decisions related to risk/s management, and of the decisions related to the internal distribution of the internal capital, assessed as adequate to cover risk/s.
    CHAPTER X
    SUPERVISION AND DISCLOSURE BY BANKS
    Article 195
    Supervision

17. Bank of Albania, taking into account the technical criteria set out in Annex 3, shall
    review the strategies, processes and mechanisms implemented by banks to comply with the requirements of this regulation and evaluate the risks to which the banks are or might be exposed.

18. On the basis of the review and evaluation referred to in paragraph 1 of this article, the
    Bank of Albania shall determine whether the strategies, processes and mechanisms implemented by the banks and the own funds held by them, ensure a sound management and monitoring of their risks.

19. Bank of Albania, having regard to the nature, size, systemic importance and complexity
    of the activities of the banks, shall establish the frequency and intensity of the review and evaluation referred to in paragraph 1.

Article 196
Disclosure by banks
Banks, for the purposes of meeting the requirements of this regulation, shall publicly disclose the information laid down in the regulation “On minimum requirements of disclosing information by banks and foreign bank branches”.
CHAPTER XI
FINAL PROVISIONS
Article 197
Reporting requirements
Banks shall report the data on Capital Adequacy Ratio to the Bank of Albania in accordance with the Unified Reporting System.
Article 198
Supervisory and corrective measures
The Bank of Albania, in case of non-compliance with the obligations laid down in this regulation, shall implement the supervisory and/or penalising measures stipulated in the Law on Banks.
Article 198/1135
Temporary provision

1. 136 Exceptionally from the definition of article 12, paragraph 4 of this regulation, banks
   shall weight by 0% the Albanian Government’s debt securities in foreign currency that will be issued during 2020. This provision shall apply until the maturity of these securities.
2. 137 Exceptionally from the definition of article 12, paragraph 2 of this regulation, banks
   shall weight by 0% the Albanian Government’s debt securities in foreign currency issued during 2021.

135 Added by the Circulating Decision No. 22, dated 1.4.2020 of the Supervisory Council of the Bank of Albania. 136 Added by the Circulating Decision No. 22, dated 1.4.2020 of the Supervisory Council of the Bank of Albania and numbered by the Circulating Decision No. 54, dated 9.11.2021 of the Supervisory Council of the Bank of Albania. 137 Added by the Circulating Decision No. 54, dated 9.11.2021 of the Supervisory Council of the Bank of Albania.

3. 138 Exceptionally from the definition of article 14, paragraph 1 of this regulation, banks
   shall weight by 0% the exposures in the form of loans in foreign currency, granted during 2021 to “Operatori i Shpërndarjes së Energjisë Elektrike Sh.A.”, fully guaranteed by the Albanian Government.
4. 139 The provisions provided in paragraphs 2 and 3 of this article shall apply until the
   maturity of these exposures.
   Article 199
   Final provision
   The attached annexes are an integral part of this regulation.
   CHAIRMAN OF THE SUPERVISORY COUNCIL
   ARDIAN FULLANI

138 Added by the Circulating Decision No. 54, dated 9.11.2021 of the Supervisory Council of the Bank of Albania. 139 Added by the Circulating Decision No. 54, dated 9.11.2021 of the Supervisory Council of the Bank of Albania.

ANNEX 1
MINIMUM REQUIREMENTS FOR THE RECOGNITION AND VALUATION OF THE IMMOVABLE PROPERTY COLLATERAL
Part 1
Minimum requirements for the recognition of the immovable property collateral

1. Banks, for the recognition of real estate collateral, for the purposes of Chapter III of this
   regulation, shall meet the following conditions. a) Legal certainty:
   i. The mortgage or charge shall be enforceable in all jurisdictions which are
   relevant at the time of the conclusion of its credit agreement, and the mortgage or charge shall be properly filed (registered on the Office for the Registration of Real Estate) and on a timely basis.
   ii. The collateral agreement shall reflect a mortgage/safe pledge (i.e. all legal
   requirements for establishing the pledge shall been fulfilled).
   iii. The collateral agreement and the legal process underpinning it shall enable
   banks to profit the value of the protection within a reasonable timeframe. b) Monitoring of immovable property values:
   i. Banks shall monitor the value of the immovable commercial properties on a
   frequent basis and at a minimum once every year and once every three years for residential immovable properties;
   ii. Banks, in cases where the market is subject to significant changes in conditions,
   shall perform/carry out the more frequent monitoring defined in point i) of this point;.
   iii. Banks may use the statistical methods in order to monitor the value of the
   immovable property and for its identification in those cases where (the immovable property) it needs a revaluation.
   iv. Banks shall evaluate the immovable property by an independent appraiser in
   those cases when the information on the immovable property value indicates that its value has sensitively declined in comparison to general market prices;
   v. For loans exceeding EUR 3 million or 5 % of the bank regulatory capital, banks
   shall evaluate the relevant loan by an independent appraiser, at least every three years. "Independent appraiser" shall mean a person who possesses the necessary qualifications, ability, experience and the licence to carry out the professions and who is independent from the credit decision process. c) Documentation:
   i. Banks shall document clearly the types of residential and commercial
   immovable properties accepted/acknowledged by them as well as their lending policies related to them.

d) Insurance:
i. Banks shall draft and approve procedures to properly monitor the insurance
from damages of the immovable property taken as protection for the loan.
Part 2
Minimum requirements for the valuation of immovable properties

1. The property shall be valued by an independent appraiser at a value not higher than the
   market value. The latter shall be documented in a transparent and clear manner.
2. "Market value" means the estimated amount for which the property should exchange on
   the date of valuation between a willing buyer and a willing seller in an arm's-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion
3. The value of the collateral shall be the market value or mortgage lending value reduced
   as appropriate to reflect the results of the monitoring required under Part 1, of this
   annex and to take account any prior right on it (the immovable property).

140ANNEX 2
CLASSIFICATION OF OFF-BALANCE SHEET ITEMS
Off -balance sheet items are classified as:
High risk items, which comprise:
a) Guarantees having the character of credit substitutes (with bank’s funds), where are included letter of credit, approved guarantee with a credit line, etc.; b) Credit derivatives (Forwards or Options); c) Acceptances, which are elements of guarantee form, where the bank does not release funds, but guarantee a future payment or financing as defined in the respective agreement; d) Cheques, endorsements on bills not bearing the name of another bank; e) Transactions with recourse, which predict the right to ask the obligation repayment, including factoring, invoice discount facilities, etc.; f) Irrevocable standby letters of credit having the character of credit substitutes; g) Assets purchased under outright Forward purchase agreements; h) Forward deposits, which represent the physical deposit of predicted funds on a define date in the future according to the respective contract/s; i) The unpaid portion of partly-paid shares and securities; j) Asset sale and repurchase agreements as referred to in the law/regulation on REPO; k) Other high risk items, as classified by the bank itself and evaluated by the Bank of Albania. Medium risk items, which comprise:
a) Trade finance off-balance sheet items, namely documentary credits issued and confirmed; b) Other off-balance sheet items:
i. shipping guarantees, customs and tax bonds (guarantees), where the guarantee
serves to ensure payment of customs and tax liabilities;
ii. undrawn credit facilities, which represent agreements to lend, to purchase securities,
to provide guarantees or acceptance facilities with an original maturity of more than one year;
iii. note issuance facilities (NIFs) which represent agreements between several banks to
buy any short or long-term note issuance that the borrower is not able to sell in the Eurozone market, as well as the revolving underwriting facilities (RUFs), which represent a form of the revolving credit, where a group of banks agree to grant credit in cases where a borrower is unable to sell in the Eurozone market;
iv. other medium risk items, classified by the bank and assessed by the Bank of
Albania.

140 Amended by the Decision No. 7, dated 5.2.2020 of the Supervisory Council of the Bank of Albania.

Low risk items, which comprise:
a) trade finance off-balance sheet items:
i. documentary credits in which underlying shipment or the commodity acts as
collateral and other self-liquidating transactions;
ii. warranties including mainly tender and performance bonds (guarantees) and
associated advance payment and retention guarantees and guarantees not having the character of credit substitutes;
iii. irrevocable standby letters of credit not having the character of credit substitutes;
b) other off-balance sheet items:
i) undrawn credit facilities which represent loan agreements, purchase securities, provide guarantees or acceptance facilities with an original maturity of up to and including one year, which may not be cancelled unconditionally at any time without notice, or that do not effectively provide for automatic cancellation due to deterioration in a borrower's creditworthiness; ii) other low risk items, as classified by the bank itself and evaluated by Bank of Albania. Risk-free items, which comprise:
a) undrawn credit facilities which represent loan agreements, purchase securities, provide guarantees or acceptance facilities which may be cancelled unconditionally at any time without notice, or that do effectively provide for automatic cancellation due to deterioration in a borrower's creditworthiness. Retail credit lines may be considered as unconditionally cancellable, if the terms and conditions permit the bank to cancel them to the full extent allowable under consumer protection legislation and sublegal acts related to it; b) undrawn credit facilities for tenders and performance guarantees, which may be cancelled unconditionally at any time without notice, or that do effectively provide for automatic cancellation due to deterioration in a borrower's creditworthiness; c) other risk-free items classified by the bank itself and evaluated by Bank of Albania.

ANNEX 3
TECHNICAL CRITERIA CONCERNING THE ORGANISATION AND TREATMENT OF RISKS RESPONSIBLE AND EFFECTIVE GOVERNANCE/MANAGEMENT OF THE BANK

1. The Steering Council of the bank in compliance with the applicable legal 141 and
   regulatory142 framework on the effective and responsible internal governance, taking into account the size and complexity of the bank’s activity, shall ensure the presence of internal control systems and especially the segregation of duties in preventing and monitoring conflicts of interest. TREATMENT OF RISKS
2. The Steering Council of the bank shall approve and periodically review the strategies
   and policies for taking up, managing, monitoring and mitigating the risks the bank is or might be exposed to, including those posed by the macroeconomic environment in which it operates. CREDIT AND COUNTERPARTY RISK
3. The banks shall base the credit-granting on sound and well-defined criteria, and shall
   clearly establish the process for approving, amending, renewing, and re-financing credits.
4. The bank shall ensure effective systems for the ongoing administration and monitoring
   of their various credit risk bearing portfolios and exposures, including for identifying and managing problem credits and for making adequate value adjustments and provisions.
5. The bank shall ensure the diversification of credit portfolios considering its long term
   crediting objectives as in its overall credit strategy and credit target markets. RESIDUAL RISK
6. The banks shall draft and approve policies and procedures for the management and
   control of the residual risk that arises when the credit risk mitigation techniques used by the bank prove to be less effective than expected.

141 Law No. 9662, dated 18.12.2006 “On Banks in the Republic of Albania”; 142 Regulation No. 24, dated 26.03.2008 “On the internal control systems of banks and branches of foreign banks” and Regulation No. 63, dated 14. 11. 2012 “On basic management principles of banks and branches of foreign banks and criteria for the approval of their administrators”.

CONCENTRATION RISK

1. The bank shall draft and approve policies and procedures for the management of the
   concentration risk arising from exposures to counterparties, groups of connected counterparties, and counterparties in the same economic sector, geographic region or from the same activity or commodity, the application of credit risk mitigation techniques, and including in particular risks associated with large indirect credit exposures, for example, to a single collateral issuer. SECURITISATION RISK
2. The bank shall ensure the evaluating and addressing, through appropriate policies and
   procedures, of the risks arising from securitisation transactions in relation to which the banks are investor, originator or sponsor, including reputational risks (such as arise in relation to complex structures or products), to ensure in particular that the economic substance of the transaction is fully reflected in the risk assessment and Steering Board's decisions.
3. Banks, which are originators of revolving securitisation transactions involving early
   amortisation provisions, shall have liquidity plans to address the implications of both scheduled and early (unscheduled) amortization. MARKET RISK
4. Banks shall draft and approve appropriate policies and processes for the measurement
   and management of all material sources and effects of market risks.
   INTEREST RATE RISK IN THE BANKING BOOKS
5. The bank shall provide systems to assess and manage the risk arising from potential
   changes in interest rates as they affect the banking books.
   OPERATIONAL RISK
6. The bank shall draft and implement policies and processes for measuring and managing
   operational risk exposure, including serious events, and even those with low frequency.
7. The bank, as defined in the regulatory framework of the Bank of Albania for the
   management of operational risk143, for the internal purposes of operational risk management, may specify more detailed definitions of this risk, provided that they contain a minimum elements defined in this Regulation.
8. The bank shall provide the emergency and business continuity plans so that the bank be
   able to continue operations and to limit losses in case of serious situations (disorders) related to its business. LIQUIDITY RISK
9. The bank shall draft and implement sound strategies, policies, processes and systems
   for identifying, managing and monitoring liquidity risk, which include at least the elements specified in the regulatory framework of the Bank of Albania on the liquidity risk management144 .

143 Regulation No. 3 dated 19.01.2011” On the Operational Risk Management” and its annexes. 144 Regulation No. 71, dated 14.10.2009” On the Operational Risk Management” and its annexes.

2. The bank shall ensure that the system of liquidity risk management, quantitatively and
   qualitatively, is consistent with the bank's size, typology and level of exposure to liquidity risk.
3. The bank shall develop methodologies for identifying, measuring, managing and
   monitoring of funding positions. These methodologies should include actual data and the expected cash flows arising from assets, liabilities, off-balance items (commitments), including available emergency funds (potential) and the possible impact of reputational risk.
4. The bank shall distinguish between pledged assets (to be invested / allocated / etc.) and
   to which there is no legation, which are available at any time, especially during emergency situations. The bank shall also consider the person to whom such assets belong, the country in which the asset is legally registered - in a register or account, whether they are acceptable or not as liquid assets and monitor them (the assets) in order to be able to mobilize them at any time.
5. The bank shall consider the legal and regulatory restrictions in force and real
   opportunities to transfer liquidity and assets to which there is no contention between the banks / parties.
6. The bank shall provide various techniques to mitigate liquidity risk, including a system
   of limits and liquidity needs coverage so that it (the bank) is able to withstand stress situations and an efficient and diversified funding structure in order to have access to funding sources, which are reviewed on a regular periodic basis.
7. The bank shall manage liquidity not only in normal terms /circumstances, but prepare
   for its administration also in emergency circumstances. In the latter function, the bank shall perform periodically stress tests, to identify and measure its exposure to liquidity risk, as in normal conditions / situations of daily activity, or in unusual situations.
8. The bank develops a contingency plan for liquidity risk management in extraordinary
   conditions, which is part of the risk management system and contains at least the elements defined in the regulatory framework of the Bank of Albania for liquidity risk management145 .

145 Regulation No.71, dated 14.10.2009 “On liquidity risk management” and its annexes.

ANNEX 4
TYPES OF DERIVATIVES

1. Interest-rate contracts:
   a) single-currency interest rates swaps; b) basic swaps; c) forward rates agreements; d) interest-rate futures; e) interest-rate purchased options; and f) other contracts of similar nature.
2. Foreign-exchange contracts and contracts concerning gold:
   a) cross-currency interest-rate swaps; b) forward foreign-exchange contracts; c) currency futures; d) currency purchased options; e) other contracts of similar nature. f) contracts concerning gold of a nature similar to (a) to (e).
3. Contracts of a nature similar to those in paragraph 1, from (a) to (e) and paragraph 2,
   from (a) to (d), concerning other reference items or indices.
   This includes as a minimum all instruments specified below:
   a) options, futures, swaps, forward interest rate agreements, and any other derivative contracts relating to securities, interest rates or yields, or other derivative instruments, financial indices or financial measures which may be settled physically or in cash; b) options, futures, swaps, forward rate agreements and any other derivative contracts relating to commodities, that must be settled in cash, or may be settled in cash at the option of one party of the parties (otherwise than by reason of default or other termination event); c) options, futures, Swaps, and any other derivative contracts relating to commodities that may physically settled provided that they are traded on a regulated market and/or multilateral trading facility;

d) options, futures, Swaps, forwards and any other derivative contracts relating to commodities that can physically settled not otherwise mentioned in letter c of this paragraph, and not being for commercial purposes, which have the characteristics of other derivative financial instruments, having regard to whether they are cleared and settled through recognised clearing houses or are subjects to regular margin calls (carried out by brokers/dealers when the accounts fall below the limit of the marginal requirements); e) financial contracts for differences; f) options, futures, swaps, forwards and any other derivative contracts relating to climatic variables, interest rates for the transport of commodities, emission allowances, inflation rates or other economic statistics that must be settled in cash, or may be settled in cash at the option of one of the parties (otherwise than by reason of a default or other termination event), as well as any other derivative contracts relating to assets, rights, obligations, indices and measures not otherwise mentioned in this Article, which have the characteristics of other derivative financial instruments, having regard to whether they are traded on a regulated market or a multilateral trading facility, are cleared and settled through recognized clearing houses or are subject to regular margin calls.

ANNEX 5
TECHNICAL CRITERIA ON REVIEW AND EVALUATION BY THE BANK OF ALBANIA

1. Bank of Albania, in its supervisory process, in addition to credit, market and operational
   risks, shall review and evaluate:
   a) the results of stress-tests carried out by the credit institutions applying an internal evaluation model; b) the exposure to and management of concentration risk by the banks, including their compliance with the requirements laid down in Regulation no. 31, dated 30.04.2008 “On risk arising from large exposures of banks” as amended; c) the robustness, suitability and manner of application of the policies and procedures implemented by banks for the management of the residual risk associated with the use of recognized credit risk mitigation techniques; d) the extent to which the own funds (regulatory capital) held by banks in respect of assets which it has securitised are adequate having regard to the economic substance of the transaction, including the degree of achieved risk transfer; e) the exposure to and management of liquidity risk by the bank f) the impact of diversification effects and how such effects are factored into the risk measurement system; g) the results of stress-tests carried out by banks, which use internal models to calculate market risk capital requirements.
2. Bank of Albania shall monitor whether a bank has provided implicit support to a
   securitisation. If a bank is found to have provided implicit support on more than one occasion, Bank of Albania shall take appropriate measures (for e.g. reviewing of the regulatory framework, supervisory methodology, etc.) reflective of the increased expectation that it will provide future support to its securitisation, thus failing to achieve a significant transfer of risk.
3. Bank of Albania shall consider whether the values adjustments and provisions taken for
   positions/portfolios in the trading book, enable the bank to sell or hedge out its positions within a short period without incurring material losses under normal market conditions

ANNEX 6
CRITERIA AND DOCUMNETATION FOR THE RECOGNITION OF ECAIs A. General Information

1. Type of loan assessment: solicited and/or unsolicited, providing a short explanation on
   the implemented logic for the assessment policy;
2. Places where the ECAI carries out the activity;
3. A review of ECAI legal structure and the group to whom it belongs: ownership, main
   branches (subsidiaries), facilities or other supplied, etc. The information on ownership shall incorporate a list of shareholders that own more than for example 10% of ECAI's capital;
4. General number of employees;
5. General number and the percentage of income from main customers and/or consumers
   that share 5% or more of the total income;
6. Financial information that shows the financial soundness of ECAI; ECAI financial
   statements for the last three years and the forecasts for the three next years if available, or a supporting document submitted by the parent entity;
7. Information on the code of conduct, if this code is compliant with the accepted
   standards of the market or the international principles.
   B. Information that evidences that there are met the recognition criteria as acceptable of ECAIs. Objectivity of the methodology
8. A detailed description of the methodology and processes of credit assessment and how
   this methodology is determined, implemented and amended. This description should incorporate a description of on-site processes, to provide the implementation on ongoing basis of assessment methodologies, for all the assessments of credit, in particular the role of assessing commissions and the guidelines they observe, the level of data included by the assessing entities, access to confidential information, etc.;
9. A detailed description of quantitative data; key variables, data sources, the used
   quantitative assumptions and techniques, extension of data by the assessed entities, for every tranche within which it is applied, in particular, a genuine methodology (for example for the structured finances tranche, public finances or trading entities);
10. A detailed description of qualitative data: in particular the subject of qualitative
    judgement, as for example relating to the strategy, business plan of the classified entities, etc., for every tranche within which it is applied, in particular, a genuine methodology (for example for the structured finances tranche, public finances or trading entities);
11. A summary, by geographical zones, on the considerable changes in the used basic
    methodologies;
12. A description on the used methodology to verify the correctness, sustainability and the
    distinctive power of classifying systems, with details on the results and conclusions attained from such an analysis.

Independence of the methodology

1. A description of the procedures that aim to provide correct and objective assessments of
   credit: mechanisms to identify, prevent, manage and eliminate the current or potential conflicts of interest;
2. A description of the protective applicable measures in the event the shareholders or
   other parties in the group of related parties are rated;
3. Declaration on the existence of an internal control function and/or that there exist
   means to ensure that the internal procedure to draft, review and draw rating of credit are implemented effectively;
4. Declaration on the right and needed professional capabilities for the members of
   assessment groups and committees, including the expertise and experience for the rating of credit, and their improvement through the sufficient training programs;
5. A description of the main characteristics of the internal code of conduct of ECAI;
6. Declaration on the policy for staff remuneration included in the rating of credit, which
   shall not affect the conduction of independent and objective credit ratings (for example, attestation that the remuneration of analysts is not related to the decisions on credit rating, payments by assessed entities or incomes from customers or consumers);
7. Detailed information on ECAI’s commissions policy;
8. Declaration that the personnel involved in the rating process of credit is not engaged
   into business relationships with the assessed entities, which may hamper the issue of independent and highly qualitative assessments of credit. On-going review of the methodology
9. General information on the review of credit assessment (for example on the spot
   process, main features, field of action, frequency and the teams/groups of the involved staff, the used means, treatment, the main stages of monitoring process, refresh of data, the information from the considered assessed entities, automatic systems, mechanisms that allow systematic errors, which are reflected on various potential changes in the assessment method, etc.);
10. A summary of the conducted reviews;
11. Information on the presence of a “back-testing” system installed on site and that
    functions at least from one year;
12. List of contacts with the executive management, of the assessed entities.
    Transparency of the methodology
13. Attestation that are published the methodology principles used by ECAI with the
    purpose to formulate its credit ratings;
14. Description of the ways used to make public the methodologies and terms of receiving
    the credit ratings by all possible users;
15. A description of policies transparency, relating to the type of credit assessments:
    unsolicited and solicited.
    Confidentiality
16. Every evidence that certifies/demonstrates that the market is based on credit
    assessments, such are: market part; number of assessed entities; how long ECAI has been active in the market; income received from the activity of ratings.

Transparency of credit assessments

1. A detailed description of the applicable procedures for the disclosures.
   C. The needed information for mapping of credit rating.
   The needed information for mapping of long -term credit rating.
2. Definition of default;
3. Cumulative Default Rate -CDR of more than three years for each category (to be
   offered every year, if ECAI will be known) and at least the two latest CDRs;
4. 10-year average of 3-year CDR and of that one is not available, an indicator of ECAI
   expectation relating to the 10-year average of 3-year CDR;
5. An information on the estimated failure probability for each category of credit
   assessment, if an estimated failure probability is used;
6. Description of methodology for the calculation of CDR: selection of the pool (static
   versus adjusted dynamic, definition of failure, aggregation of failures (weighting mechanism);
7. Statistical importance of failure rates;
8. Dynamic characteristics of assessment method;
9. Meaning of credit assessment categories;
10. Gamma of credit assessment that ECAI determines;
11. Term of credit assessment;
12. Transitional matrix;
13. Geographical covering.
    The needed information for mapping of short-term credit rating.
14. Relation between crucial short-term credit assessments with crucial long-term credit
    ratings;
15. Relation between credit short-term assessments of structured finances and credit long￾term ratings of structured finances.

ANNEX 7146
REPORTING TEMPLATES ON CAPITAL ADEQUACY (COREP) AND METHODOLOGY GUIDELINES

146 Added by the Decision No. 43, dated 30.07.2014 and amended by the Decision No. 36, dated 2.8.2023 of the Supervisory Council of the Bank of Albania.

Form CAR: Capital Adequacy Ratio
010 REGULATORY CAPITAL
020 CAR (%)
030 TOTAL RISK-WEIGHTED EXPOSURES
I CREDIT RISK
040 1. Risk weighted exposures for credit, counterparty, and non￾DVP settlement risk - Standardized Approach (SA) 050 1.1 Exposure classes under SA excluding securitisation positions 060 1.1.1 Exposures or contingent exposures to central governments or central banks 070 1.1.2 Exposures or contingent exposures to regional governments or local authorities 080 1.1.3 Exposures or contingent exposures to public sector entities 090 1.1.4 Exposures or contingent exposures to multilateral development banks 100 1.1.5 Exposures or contingent exposures to international organizations 110 1.1.6 Exposures or contingent exposures to supervised institutions 120 1.1.7 Exposures or contingent exposures to corporates 130 1.1.8 Exposures or contingent exposures to retail portfolios 140 1.1.9 Exposures or contingent exposures secured by realestate property 150 1.1.10 Past due items 160 1.1.11 Exposures to high-risk categories 170 1.1.12 Exposures in the form of covered bonds 180 1.1.13 Exposures in the form of collective investment undertakings "CIU" 190 1.1.14 Other items 191 1.1.15 Exposures to supervised institutions and corporates with a short-term credit assessment 192 1.1.16 Equity exposures 200 1.2 SA securitisation positions 200* 1.2* of which: re-securitisation 205 4 ERBA securitisation positions 205* 4* of which: re-securitisation II MARKET RISK 210 2. Risk weighted exposure for market risk 220 2.1 Risk weighted exposure for settlement risk 230 2.1.1 Settlement risk in the banking book 240 2.1.2 Settlement risk in the trading book 250 2.2 Risk weighted exposure for position, foreign exchange and commodity risk (SA) 260 2.2.1 Position risk of debt securities 270 2.2.2 Position risk of equities 280 2.2.3 Foreign exchange risk 290 2.2.4 Commodity investment risk 300 2.3 Risk weighted exposure for concentration risk in the trading book III OPERATIONAL RISK 310 3. Risk weighted exposure for operational risk 320 3.1 Basic Indicator Approach (BIA) 330 3.2 Standardised Approach / Alternative Standardised Approach

Form CR SA Credit, counterparty, and non-DVP transaction settlement risk Exposure class ________________ Nominated ECAI ________________ 010 020 030 040 050 060 070 080 090 100 110=040-090+100 120 130 140 150 = 110 + 120 - 130 160 170 180 190 200=150-160- 0,8170-0,5180 210 220 230 240 250 260 010 Total exposures 011 Of which: SME exposures 012 Of which: SME exposures treated with supporting factors 020 Balance sheet items subject to credit risk 030 Off-balance sheet items subject to credit risk Exposures/transactions subject to counterparty risk 040 Securities funding transactions 060 Derivatives and long settlement transactions 090 0% 100 10% 110 20% 120 35% 130 50% 140 75% 150 85% 160 100% 170 125% 180 150% 190 200% 195 250% 200 1250% 210 Other risk weights 220 Look-through approach 230 Mandate-based approach 240 "Fall-back" approach Breakdown by type of exposure (-) the adjusted amount of risk￾weighted exposures resulting from the SME supporting factor Of which: with a credit assessment by a nominated ECAI Of which: with a credit assessment derived from central government (-) Guarantees (-) Credit derivatives (-) Financial collateral:
Simple Method
(-) Other funded credit protection
(-) Total outflows Total inflows (+) of which: (-) Volatility and maturity adjustments (-) Financial Collateral:
adjusted value
(Cvam)
0%
Of which: related to counterparty credit risk
Fully adjusted exposure value (E*)
Breakdown of the fully adjusted exposure value of off-balance sheet items by conversion factors Original exposure pre conversion factors 50% Exposure net of value adjustments and provisions Risk weighted exposure amount, pre SME supporting factor Risk weighted exposure amount, after SME supporting factor Breakdown of total exposures according to the CIU method Breakdown of total exposures by weighting (-) Value adjustme nts and provision s associate d with the original exposure 20% Credit risk mitigation techniques with substitution effects on the exposure Unfunded Credit Protection:
Adjusted Value (Ga) Funded credit protection Substitution of the exposure due to CRM Volatility adjustment to the exposure Net exposure after CRM substitution effects pre conversion factors 100% Credit risk mitigation techniques affecting the amount of the exposure: Funded credit protection. Financial Collateral Comprehensive Method Exposure value

Form CR SEC SA Securitization
Type of securitization: ________________
Nominated ECAI: ________________
Securitisation positions
(-) Total outflows
Adjusted value of unfunded credit protection (G*) (-) Total outflows Total inflows Risk weight =< 20% Risk weight >20% - 50% Risk weight

50% - 100%
Risk weight
100% -
1250%
Risk weight
1250% (W unknown)
Risk weight
1250% (Other)
010 020 030 040 050 060 070=050-060 080 090 100 110 120 130 140 150 160 170 180 190 200=180-190 210 220 230 240 250 260 270 280 290 300 310 320 330 340 350 360 010 Total exposures 020 Securitization positions 030 Re-securitization positions 040 Originator: Total exposures Securitization positions: Balance sheet items Securitization positions: Off-balance sheet items and derivatives 070 Re-securitization positions 080 Investor: Total exposures Securitization positions: Balance sheet items Securitization positions: Off-balance sheet items and derivatives 0110 Re-securitization positions 0120 Sponsor: Total exposures Securitization positions: Balance sheet items Securitization positions: Off-balance sheet items and derivatives 0150 Re-securitization positions The notional amount retained or repurchased of the credit protection Original exposure pre conversion factors (-) Unfunded Credit Protection:
Adjusted Value
(Ga)
(-) Funded credit protection
Memorandum items:
total risk-weighted exposure amount corresponding to outflows from securitizations to other exposure classes (-) Exposure value that is deducted from the regulatory capital SEC-SA Approach Of which:
synthetic securitization
Exposure value
Breakdown of exposures subject to risk weights, by risk weights Risk-weighted exposure amount for other cases (risk weight 1250%) Risk-weighted exposure amount SEC￾SA method Total risk￾weighted exposure amount Risk-weighted exposure amount before applying the risk weight cap (-) Reductions due to risk weight cap (-) Reductions due to capital requirement cap Total amount of securitized exposures originated Synthetic Securitization: Credit protection to the securitized exposures (-) Value adjustments and provisions Net value of exposures (after value adjustments and provisions) Adjustments of the exposure amount when the bank does not meet the requirements provided for in sub-chapter III of
chapter V of the
regulation
(-)Specific credit risk adjustments on underlying exposures Credit risk mitigation techniques (CRM) with substitution effect on the exposure Substitution of exposures due to CRM Exposure value subject to risk weights (-) Non￾refundable purchase price discount Net exposure after substitution effect as a result of CRM, pre conversion factors (-) Credit risk mitigation techniques affecting exposure value: funded credit protection, under the financial collateral Fully adjusted exposure value (E*) of which:
subject to a conversion factor of 0%
Adjustments to the risk￾weighted exposure amount due to maturity mismatches (-) Funded credit protection (Cva)

Form CR SEC ERBA Securitization
Type of securitization: ________________
Nominated ECAI: ________________
Securitisation positions
Adjusted value of unfunded credit protection (G*) (-) Total outflows Total inflows 010 020 030 040 050 060 070=050-060 080 090 100 110 120 130 140 150 160 170 180 190 200=180- 190 210 220 230 240 250 260 270 280 290 300 310 320 330 340 350 360 370 380 390 400 410 420 430 440 450 460 470 480 490 500 510 520 530 540 550 560 010 Total exposures 020 Securitization positions 030 Re-securitization positions 040 Originator: Total exposures Securitization positions: Balance sheet items Securitization positions: Off-balance sheet items and derivatives 070 Re-securitization positions 080 Investor: Total exposures Securitization positions: Balance sheet items Securitization positions: Off-balance sheet items and derivatives 0110 Re-securitization positions 0120 Sponsor: Total exposures Securitization positions: Balance sheet items Securitization positions: Off-balance sheet items and derivatives 0150 Re-securitization positions 0170 CQS 1 0180 CQS 2 0190 CQS 3 0200 All other CQS and unrated 0220 CQS 1 0230 CQS 2 0240 CQS 3 0250 CQS 4 0260 CQS 5 0270 CQS 6 0280 CQS 7 0290 CQS 8 0300 CQS 9 0310 CQS 10 0320 CQS 11 0330 CQS 12 0340 CQS 13 0350 CQS 14 0360 CQS 15 0370 CQS 16 0380 CQS 17 0390 All other CQS and unrated Breakdown of exposures subject to risk weights by risk classes: short-term Breakdown of exposures subject to risk weights by risk classes: long-term CQS 13 CQS 14 CQS 15 CQS 16 CQS 17 All other CQS CQS 7 CQS 8 CQS 9 CQS 10 CQS 11 CQS 12 (-) Exposure value that is deducted from the regulatory capital Exposure value subject to risk weights Risk- weighted exposure amount Breakdown by the reason for applying the SEC-ERBA method CQS 1 CQS 2 CQS 3 All other CQS CQS 6 Positions according to article 109, paragraph 4 of the regulation Use of hierarchy of methods Short-term credit quality steps (CQS) Long-term credit quality steps (CQS) CQS 1 CQS 2 CQS 3 CQS 4 CQS 5 Total risk-weighted exposure amount Memorandum items:
total risk-weighted exposure amount corresponding to outflows from securitizations to other exposure classes (-) Funded credit protection (Cva) (-) Total outflows The notional amount retained or repurchased of the credit protection Original exposure pre conversion factors (-) Unfunded Credit Protection: Adjusted Value (Ga) (-) Funded credit protection Substitution of exposures due to CRM of which:
subject to a conversion factor of 0%
Risk-weighted exposure amount
Adjustments to the risk-weighted exposure amount due to maturity mismatches Adjustments of the exposure amount when the bank does not meet the requirements provided for in sub￾chapter III of
chapter V of the
regulation
Risk- weighted exposure amount before applying the risk weight cap (-) Reductions due to risk weight cap (-) Reductions due to capital requirement cap Total amount of securitized exposures originated Synthetic Securitization: Credit protection to the securitized exposures (-) Value adjustments and provisions Net value of exposures (after value adjustments and provisions) Of which:
synthetic securitizati on
Auto loans, auto leasing and equipment leasing The option of applying the SEC- ERBA method Positions according to article 109, paragraph 2, letter "a" of the regulation Credit risk mitigation techniques (CRM) with substitution effect on the exposure Net exposure after substitution effect as a result of CRM, pre conversion factors (-) Credit risk mitigation techniques affecting exposure value: funded credit protection, under the financial collateral comprehensive method adjusted value Fully adjusted exposure value (E*) (-) Non￾refundable purchase price discount (-) Specific credit risk adjustments on underlying exposures Breakdown of exposures subject to risk weights, by risk weights Exposure value

Form MKR SA TDI Position risk of debt securities Currency: ________________ Long Short Long Short 010 020 030 040 050 060 070 010 Traded debt instruments in trading book 011 General risk 012 Derivatives 013 Other assets and liabilities 020 Maturity based approach 030 Zone 1 040 0 ≤ 1 month 050 > 1 ≤ 3 months 060 > 3 ≤ 6 months 070 > 6 ≤ 12 months 080 Zone 2 090 > 1 ≤ 2 (1,9 for cupon of less than 3%) years 100 > 2 ≤ 3 (> 1,9 ≤ 2,8 for cupon of less than 3%) years 110 > 3 ≤ 4 (> 2,8 ≤ 3,6 for cupon of less than 3%) years 120 Zone 3 130 > 4 ≤ 5 (> 3,6 ≤ 4,3 for cupon of less than 3%) years 140 > 5 ≤ 7 (> 4,3 ≤ 5,7 for cupon of less than 3%) years 150 > 7 ≤ 10 (> 5,7 ≤ 7,3 for cupon of less than 3%) years 160 > 10 ≤ 15 (> 7,3 ≤ 9,3 for cupon of less than 3%) years 170 > 15 ≤ 20 (> 9,3 ≤ 10,6 for cupon of less than 3%) years 180 > 20 (> 10,6 ≤ 12,0 for cupon of less than 3%) years 190 (> 12,0 ≤ 20,0 for cupon of less than 3%) years 200 (> 20 for cupon of less than 3%) years 210 Duration-based approach 220 Zone 1 230 Zone 2 240 Zone 3 250 Specific risk 251 Capital requirement for unsecuritised debt instruments 260 Debt securities under the first category in Table 22, of the CAR Regulation 0.00 270 Debt securities under the second category in Table 22, of the CAR Regulation 280 With a residual maturity ≤ 6 months 0.25 290 With a residual maturity > 6 months and ≤ 24 months 1.00 300 With a residual maturity > 24 months 1.60 310 Debt securities under the third category in Table 22, of the CAR Regulation 8.00 320 Debt securities under the fourth category in Table 22, of the CAR Regulation 12.00 321 Rated n-th to default credit derivatives 325 Capital requirement for securitisation positions 326 Capital requirement for the correlation trading portfolio 340 Particular approach for position risk in CIU-s 350 Additional charge for options (non-delta risks) 360 Simple approach 370 Delta plus approach - additional charge for gamma risk 380 Delta plus approach - additional charge for vega risk Positions All positions Net positions Capital requirement (in %) Capital requirements Risk weighted exposure Net positions subject to capital charge

Form MKR SA EQU Position risk of equities
Net positions subject to capital charge
Long Short Long Short
010 020 030 040 050 060 070
010 Equities in trading book
020 General risk 8.00
Derivatives
Other assets and liabilities
Exchange traded stock index futures broadly diversified, subject to particular approach 040 Other equities than those defined in line 030 Specific risk 4.00 080 Particular approach for positions in CIU-s 090 Additional charge for options (non delta risks) 100 Simplified method 110 Delta plus approach - gamma risk 120 Delta plus approach - vega risk Positions Capital requirement (in %) Capital requirements Total risk weighted exposures All positions Net positions

Form CR TB SETT Settlement risk
Unsettled transactions at settlement price
Price difference exposure due to unsettled transactions Capital requirements Total risk weighted exposure 010 020 030 040 010 Total unsettled transactions in the banking book 020 Transactions unsettled up to 4 days (0 %) 030 Transactions unsettled between 5 and 15 days (8%) 040 Transactions unsettled between 16 and 30 days (50%) 050 Transactions unsettled between 31 and 45 days (75%) 060 Transactions unsettled over 46 days and more (100%) 070 Total unsettled transactions in the trading book 080 Transactions unsettled up to 4 days (0 %) 090 Transactions unsettled between 5 and 15 days (8%) 100 Transactions unsettled between 16 and 30 days (50%) 110 Transactions unsettled between 31 and 45 days (75%) 120 Transactions unsettled over 46 days and more (100%)

Form MKR SA COM Commodity investment risk
Long Short
010 020 030 040 050 060 070
010 Total positions in commodities
020 Precious metals (except gold)
030 Base metals (zinc, copper, etc.)
040 Agricultural products (softs)
050 Other
060 Out of which: energy products (oil, gasoline) 070 Maturity ladder approach Extended maturity ladder approach 090 Simplified approach: All positions Additional charge for options (non-delta risks) 110 Simplified Method Delta plus approach - additional charge for gamma risk 130 Delta plus approach - additional charge for vega risk Scenario matrix approach Capital requirements Risk weighted exposure Long Short All positions Net positions Positions subject to capital charge Capital requirement (%)

Form MKR SA FX Foreign exchange risk
Long Short Long Short Long Short Long Short
010 020 030 040 050 060 070 080 090 100
010 Total positions in foreign currencies
020 Currencies closely correlated
030 All other currencies (including CIUs treated as different currencies) 8.00 8.00 040 Gold 8.00 8.00 050 Additional charge for options (non-delta risks) 060 Simplified method 070 Delta plus approach - additional charge for gamma risks 080 Delta plus approach - additional charge for vega risks 090 Scenario matrix approach Breakdown of positions according to instrument type 100 Financial instruments 110 Off-balance sheet items 120 Derivatives Positions in different currencies 130 Euro EUR 140 Albanian Lek ALL 150 Argentinian Peso ARS 160 Australian Dollar AUD 170 Brasilian Real BRL 180 Bulgarian Lev BGN 190 Canadian Dollar CAD 200 Czech Koruna CZK 210 Danish Krona DKK 220 Egyptian Pound EGP 230 British Pound GBP 240 Hungarian Forint HUF 250 Japanese Yen JPY 260 Letonese Lata LVL 270 Lithuanian Lita LTL 280 Macedonian Denar MKD 290 Mexican Peso MXN 300 Polish Zloty PLN 310 Romanian Leu RON 320 Russian Rouble RUB 330 Serbian Denar RSD 340 Swedish Krona SEK 350 Swiss Francs CHF 360 Turkish Lira TRY 370 Ukrainian Hryvnia UAH 380 American Dollar USD 390 Icelandic Krona ISK 400 Norvegian Krona NOK 410 Other Risk weighted exposures Preferential treatment positions Currency code All positions Net positions Risk capital charge (%) Capital requirement

Form MKR SA SEC Standardised approach for specific risk in securitisations Long Short (-) Long (-) Short Long Short [0 - 10%[ [10 - 12%[ [12 - 20%[ [20 - 40%[ [40 - 100%[ [100 - 150%[ [150 - 200%[ [200 - 225%[ [225 - 250%[ [250 - 300%[ [300 - 350%[ [350 - 425%[ [425 - 500%[ [500 - 650%[ [650 - 750%[ [750 - 850%[ [850 - 1250%[ 1250% [0 - 10%[ [10 - 12%[ [12 - 20%[ [20 - 40%[ [40 - 100%[ [100 - 150%[ [150 - 200%[ [200 - 225%[ [225 - 250%[ [250 - 300%[ [300 - 350%[ [350 - 425%[ [425 - 500%[ [500 - 650%[ [650 - 750%[ [750 - 850%[ [850 - 1250%[ 1250% SEC-SA SEC-ERBA OTHER (Risk Weight=12 50%) WEIGHTED NET LONG POSITIONS WEIGHTED NET SHORT POSITIONS 0010 0020 0030 0040 0050 0060 0061 0062 0063 0064 0065 0066 0071 0072 0073 0074 0075 0076 0077 0078 0079 0081 0082 0083 0085 0086 0087 0088 0089 0091 0092 0093 0094 0095 0096 0097 0098 0099 0101 0102 0103 0104 0403 0404 0406 0530 0540 0570 0601 0010 Total exposures 0020 Of which: Re-securitization 0030 Originator: Total exposures 0040 Securitization positions Re-securitization positions 0060 Investor: Total exposures 0070 Securitization positions Re-securitization positions 0090 Sponsor: Total exposures 0100 Securitization positions Re-securitization positions BEFORE THE CAP AFTER THE CAP / TOTAL CAPITAL REQUIREM ENT ALL POSITIONS (-) POSITIONS DEDUCTED FROM CAPITAL NET POSITIONS BREAKDOWN OF NET POSITIONS (LONG) ACCORDING TO RISK WEIGHTS BREAKDOWN OF NET POSITIONS (SHORT) ACCORDING TO RISK WEIGHTS BREAKDOWN OF NET POSITIONS ACCORDING TO APPROACHES GENERAL EFFECT (ADJUSTMENT) WHEN THE BANK DOES NOT MEET THE

Form MKR SA CTP Standardised approach for specific risk in the correlation trading portfolio LONG SHORT (-) LONG (-) SHORT LONG SHORT [0 - 10%[ [10 - 12%[ [12 - 20%[ [20 - 40%[ [40 - 100%[ [100 - 250%[ [250 - 350%[ [350 - 425%[ [425 - 650%[ [650 - 1250%[ 1250% [0 - 10%[ [10 - 12%[ [12 - 20%[ [20 - 40%[ [40 - 100%[ [100 - 250%[ [250 - 350%[ [350 - 425%[ [425 - 650%[ [650 - 1250%[ 1250% SEC-SA SEC-ERBA Other (Risk Weight=1 250%) WEIGHTED NET LONG POSITIONS WEIGHTED NET SHORT POSITIONS WEIGHTED NET LONG POSITIONS WEIGHTED NET SHORT POSITIONS 0010 0020 0030 0040 0050 0060 0071 0072 0073 0074 0075 0076 0077 0078 0079 0081 0082 0086 0087 0088 0089 0091 0092 0093 0094 0095 0096 0097 0403 0404 0406 0410 0420 0430 0440 0450 0010 Total exposures Securitization positions:
0020 Originator: Total exposures
0030 Securitization positions
0040 Other CTP positions
0050 Investor: Total exposures
0060 Securitization positions
0070 Other CTP positions
0080 Sponsor: Total Exposures
0090 Securitization positions
0100 Other CTP positions
0110 Nth-to-default credit derivatives
0120 Other CTP positions
BREAKDOWN OF NET POSITIONS
ACCORDING TO APPROACHES BEFORE THE CAP AFTER THE CAP TOTAL CAPITAL REQUIREME NT NTH-TO-DEFAULT CREDIT DERIVATIVES:
ALL POSITIONS
(-) POSITIONS
DEDUCTED FROM
CAPITAL
NET POSITIONS BREAKDOWN OF NET POSITIONS (LONG) ACCORDING TO RISK WEIGHTS BREAKDOWN OF NET POSITIONS (SHORT) ACCORDING TO RISK WEIGHTS

Form OPR Operational Risk
Gross Income Loans and advances (in case of ASA application) 010 020 030 040 050 060 070 071

1. TOTAL BANKING ACTIVITIES SUBJECT TO BASIC
   INDICATOR APPROACH (BIA)
2. TOTAL BANKING ACTIVITIES SUBJECT TO
   STANDARDISED (STA) / ALTERNATIVE STANDARDISED
   (ASA) APPROACHES
   Subject to the Standardised approach:
   030 CORPORATE FINANCE (CF)
   040 TRADING AND SALES (TS)
   050 RETAIL BROKERAGE (RBr)
   060 COMMERCIAL BANKING (CB)
   070 RETAIL BANKING (RB)
   080 PAYMENT AND SETTLEMENT (PS)
   090 AGENCY SERVICES (AS)
   100 ASSET MANAGEMENT (AM)
   Subject to the Advanced Standardised Approach:
   110 COMMERCIAL BANKING (CB)
   120 RETAIL BANKING (RB)
   130 AMA
   Banking activities
   Capital requirements Risk weighted exposure
   Year-3 Year-2 Last year Year-3 Year-2 Last year

147Methodology guidelines for reporting templates on capital adequacy ‘COREP’

147 Added by the Decision No. 43, dated 30.07.2014 and amended by the Decision No. 36, dated 2.8.2023 of the Supervisory Council of the Bank of Albania.

1 Contents
2 CAPITAL REQUIREMENTS FOR CREDIT RISK ......................... 191
2.1 Form CR SA – Credit risk, counterparty credit risk, and non-DVP
transactions settlement risk …………………………………………………………….. 191
2.1.1 General provisions.................................................................................................................... 191
2.1.2 Content of the columns............................................................................................................. 191
2.1.3 Content of the rows................................................................................................................... 196
2.2 Form CR SEC SA – Securitisation ………………………………………………. 197
2.2.1 General provisions.................................................................................................................... 197
2.2.2 Content of the columns............................................................................................................. 197
2.2.3 Content of the Rows ................................................................................................................. 203
2.3 Form CR SEC ERBA-Securitisation …………………………………………….. 205
2.3.1 General provisions.................................................................................................................... 205
2.3.2 Content of the columns............................................................................................................. 205
2.3.3 Content of the rows................................................................................................................... 211
3 CAPITAL REQUIREMENTS FOR MARKET RISK........................ 212
3.1 Form MKR SA TDI – Position risks in traded debt instruments ……... 212
3.1.1 General provisions.................................................................................................................... 212
3.1.2 Content of the columns............................................................................................................. 212
3.1.3 Content of the rows................................................................................................................... 213
3.2 Form MKR SA EQU – Position risk in equities ……………………………… 215
3.2.1 General provisions.................................................................................................................... 215
3.2.2 Content of columns................................................................................................................... 215
3.2.3 Content of rows......................................................................................................................... 216
3.3 Form CR TB SETT – Settlement risk …………………………………………… 217
3.3.1 General provisions.................................................................................................................... 217
3.3.2 Content of the columns............................................................................................................. 217
3.3.3 Content of the Rows ................................................................................................................. 218
3.4 Form MKR SA COM - Commodity investment risk ………………………… 218
3.4.1 General provisions.................................................................................................................... 218
3.4.2 Content of the columns............................................................................................................. 219
3.4.3 Content of rows......................................................................................................................... 219
3.5 Form MKR SA FX - Foreign exchange risk ………………………………….. 220
3.5.1 General provisions.................................................................................................................... 220
3.5.2 Reporting the net foreign currency position.............................................................................. 220
3.5.3 Reporting capital requirement for open foreign currency net position ..................................... 221
3.5.4 Other risks................................................................................................................................. 221
3.5.5 Capital requirement................................................................................................................... 222
3.6 Form MKR SA SEC- Standardised approach for specific risk in
securitisations …………………………………………………………………………………… 222
3.6.1 General provisions.................................................................................................................... 222
3.6.2 Content of the columns............................................................................................................. 223
3.6.3 Content of the rows................................................................................................................... 224

3.7 Form MKR SA CTP - Standardised approach for specific risk in the
correlation trading portfolio …………………………………..…………………………….. 224
3.7.1 General provisions.................................................................................................................... 224
3.7.2 Content of the columns............................................................................................................. 225
3.7.3 Content of the rows................................................................................................................... 226
4 CAPITAL REQUIREMENT FOR OPERATIONAL RISK.............. 227
4.1 Form OPR - Operational risk ……………………………………………………… 227
4.1.1 General provisions.................................................................................................................... 227
4.1.2 Basic Approach......................................................................................................................... 228
4.1.3 Standardized Approach............................................................................................................. 228
4.1.4 Advanced Standardized Approach............................................................................................ 228
5 FORM CAR - CAPITAL ADEQUACY RATIO................................. 228

2 Capital requirements for credit risk
2.1 Form CR SA – Credit risk, counterparty credit risk, and non-DVP
transactions settlement risk
2.1.1 General provisions
This form covers the following capital requirements:
 Credit risk in the banking book, which includes the counterparty risk in the banking book;  Counterparty risk in the trading book;  Non-DPV transactions settlement risk (article 164), both in the banking and in the trading book. Banks shall fill in this form for each exposure class, as defined in article 10 of the regulation, and for the total exposure classes, excluding securitised exposures, which would be presented in separate forms (CR SEC SA and CR SEC ERBA). Exposures, which according to the regulatory framework in force, are considered as unhedged against the exchange rate, shall be reflected in the exposure class wherein they would be classified if they did not have this feature, although in the regulation such exposures are classified in the high-risk exposure class. Banks shall not fill in the fields in red. In the field of nominated ECAI and/or ECA, banks shall report the names of all nominated ECAI-s by the bank and/or ECA-s to be used for rating exposures included in each of exposure classes. When filling this table in, banks shall take into consideration all the exposures that have not been deducted from the regulatory capital, and those that are not subject to banks' capital requirements for market risk. This form shall be reported quarterly.
2.1.2 Content of the columns
The form contains 26 columns, as follows:
Columns 010-030: These columns are highlighted in red and shall not be filled by the banks. Column 040 - Exposure net of value adjustments and provisions In Column 040, in row “Total exposures”, banks shall present the total value of net exposure, corresponding to the category specified in the field “Exposure class”, in accordance with the following rules:

 The value of an individual exposure, included in the banks' balance sheet, is equal to the net value of the relevant exposure in the balance sheet (after deducting provisions).  The value of an individual exposure, included in the banks' off-balance sheet items, is equal to the value of the relevant exposure in the off-balance sheet items (after deducting provisions).  The value of individual exposures, deriving from repurchase agreements for securities or commodities, securities or commodities lending or borrowing agreements, which are not subject to the master netting agreements and margin lending transactions, is equal to the value of the relevant transaction.  In the case of master netting agreements covering repurchase agreements for securities or commodities, securities or commodities lending or borrowing agreements, the value of exposure deriving from these netting agreements equals the fully-adjusted exposure value (E*), calculated in accordance with
article 75, paragraph 6 of the regulation.
 The value of an individual exposure deriving from long settlement agreements is calculated according to the methods stipulated in chapter IV of the regulation.  The value of exposure, arising from derivatives specified in annex IV of the regulation shall be calculated in accordance with stipulations set out in chapter IV of the regulation. Banks shall detail the amount reported in the first column, under row “Total exposure” in individual rows:
 Distinguishing exposures to SME-s from which exposures to SME-s treated with supporting factors are separated;  By type of exposure (on-balance sheet items, off-balance sheet items, securities financing transactions148 and derivatives and long settlement transactions);  By risk weights (0%, 10%, 20%, 35%, 50%, 75%, 85%, 100%, 125%, 150%, 200%, 250%, 1250% and other weights). Columns 050-100: Credit risk mitigation techniques with substitution effects on the exposure Columns from 050 to 100 refer to funded and unfunded credit protection that mitigates credit risk for one or more exposures through the substitution effect, in accordance with articles 53-57 (Funded credit protection – Financial Collateral Simple Method) and articles 94-96 (Unfunded credit protection), substituting the risk weight for the covered
part of the exposure with the weight of the collateral risk or collateral pledger.
Columns 050-060 - Unfunded credit protection: Adjusted value (GA) Banks in these columns present the value of unfunded credit protection, adjusted for maturity and currency mismatch, calculated according to articles 90-92 of the regulation.

148 Securities financing transactions include repurchase agreements for securities or commodities, securities or commodities lending or borrowing agreements and margin lending transactions.

The adjusted value of guarantees and credit derivatives is given separately, in columns 050 and 060. Columns 070-080 - Funded credit protection Columns 070 and 080 refer to the funded credit protection (not taking into master netting agreements, which are taken into consideration with the original exposure value, in column 010). Credit linked notes and balance sheet netting are treated as collateral in the form of cash deposit (article 90, paragraph 2). Banks, which use the financial collateral simple method specified in articles 53-57 of the regulation, shall report in column 070 the financial collateral values; banks that use the financial collateral comprehensive method shall not fill in this column. The value of other funded credit protection, specified in articles 77-78 of the regulation shall be filled in column 080. Columns 090 and 100 - Substitution of the exposure due to Credit Risk Mitigation Column 090 - Total outflows In this column, the banks shall present the amount of outflows that means the mount of those parts of exposures included in column 040, which are guaranteed by funded and unfunded credit protection, in accordance with columns from 050 to 080. If the issuer of the funded credit protection or the provider of unfunded credit protection is classified in the same class as the debtor, the individual outflow for this exposure shall be presented as inflow in column 100 of the same form, taking into account the type of exposure and credit risk weight for the funded or unfunded protection, in accordance with articles 54, 94 and 95 of the regulation. If the issuer of the funded credit protection or the provider of unfunded credit protection is not classified in the same class of exposure as the debtor, individual inflows shall be presented as inflows in the respective column of the form, presenting the class of exposures including the exposure of the issuer of the funded credit protection or the provider of the unfunded credit protection. Column 100 - Inflows In column 100, row “Total exposures” shall be presented the amount of total outflows of column 090 of the same exposure class and outflows of forms of other exposure classes, as a result of taking into consideration the funded and unfunded credit protection (in accordance with articles 54, 94 and 95 of the regulation) whose issuer and provider are classified in the exposure class corresponding to the form that is filled in. The amount presented in column 100 in the total row, shall be divided according to individual rows, taking into account:
 the type of exposure guaranteed by funded or unfunded protection, whose issuer or provider are classified in the exposure class corresponding to the form that is filled in.  the weight determined for the funded and unfunded credit protection.

Column 110 - Net exposure after credit risk mitigation substitution effects, pre conversion factors In this column, the bank shall report the amount of exposures after the amount of outflows and inflows has been taken into consideration, from the application of credit protection substitution effects on exposures, calculated by deducting from net exposure in column 040, the outflows in column 090 and by adding the inflows in column 100. Columns 120 to 140 - Credit risk mitigation techniques affecting the exposure amount:
Funded credit protection, financial collateral comprehensive method. Articles 59-67 of the regulation, including credit linked notes. Columns from 120 to 140 refer to the calculation of the adjusted value of exposure and funded credit protection. Column 120 - Volatility adjustment to the exposure The bank shall report the volatility adjustment to the exposure, calculated according to the formula (EVA – E) = E × HE Column 130 - Financial collateral: Adjusted value (CVAM) The bank shall report the value of financial collateral as calculated according to article 59, paragraph 3 according to the formula: CVAM = C × (1-HC-HFX)×(t-t*)/(T-t*). Column 140 – of which: Volatility and maturity adjustment The bank shall present volatility and maturity mismatch adjustments as calculated according to the formula (CVAM – C) = C × [(1-HC-HFX)×(t-t*)/(T-t*) - 1], whereby the effect of volatility adjustment is calculated according to the formula (CVA – C) = C × [(1- HC-HFX – 1], and the effect of maturity mismatch adjustment is calculated according to the formula (CVAM – CVA) = C × (1-HC-HFX)× [(t-t*)/(T-t*) - 1]. Column 150 - Fully adjusted exposure value (E*) The bank shall report the fully-adjusted exposure value, which takes into consideration the exposure volatility and financial collateral effects, in accordance with article 74 and 59, paragraph 1. This value shall be calculated by adding to the amount in column 110, the amount in column 120, and deducting from it the amount in column 130. Columns 160-190 - Breakdown of the fully adjusted exposure value of off-balance sheet items by conversion factors  In column 0% shall be presented the part of the amount from column 150 that represents off-balance sheet exposures, which are classified as no risk items, according to annex 2 “Classification of off-balance sheet items” of the regulation.  In column 20% shall be presented the part of the amount from column 150 that represents off-balance sheet exposures, which are classified as low risk items, according to annex 2 “Classification of off-balance sheet items” of the regulation.  In column 50% shall be presented the part of the amount from column 150 that represents off-balance sheet exposures, which are classified as medium risk items, according to annex 2 “Classification of off-balance sheet items” of the regulation.

 In column 100% shall be presented the part of the amount from column 150 that represents off-balance sheet exposures, which are classified as high risk items, according to annex 2 “Classification of off-balance sheet items” of the regulation. The amounts reported in columns 160-190, in the row “Total exposures” shall be equal to the amounts included in the intersection of row 030 “Off-balance sheet items”, with these columns. Column 200 - Exposure value In this column, banks shall report the net exposure value, after taking into consideration the credit protection effects and conversion factors for off-balance sheet items. To calculate the exposure value for off-balance sheet items, from column 150 shall be deducted the total of column 160, 80% of the amount in column 170, 50% of the amount of column 180. For other types of exposure, the amount in column 200 equals the amount in column 150. The amount reported in this column, in the intersection with total exposures row, equals the sum of rows 020, 030, 040, 060, of the same column. Column 210 - Of which: related to counterparty credit risk In this column, banks shall report the part of the amount reflected in column 200, which is related to exposures arising from derivatives, repo transactions with securities or commodities, securities or commodities lending or borrowing agreements, margin lending transactions and long settlement agreements. Column 220 – Risk weighted exposure amount, pre SME supporting factor Banks, assign a risk weight for exposure values from column 200, based on the credit quality. Column 230: The adjusted amount of risk-weighted exposures resulting from of the SME supporting factor In this column, the difference of the amount of risk-weighted exposures for non￾defaulted exposures to SMEs (RWEA) calculated in accordance with the requirements of
chapter III of the regulation, with RWEA* as provided for in article 20/1, paragraph 1 of
the regulation, is deducted.
This column will be completed only for the classes “Exposures or contingent exposures to corporates”, “Exposures or contingent exposures to retail portfolios”, or “Exposures or contingent exposures secured by real estate property”, as well as in the summary form of all classes of exposures. Column 240: Risk weighted exposure amount, after SME supporting factor The value in this column will be the difference of the values of columns 220 and 230. This column will be completed only for the classes “Exposures or contingent exposures to corporates”, “Exposures or contingent exposures to retail portfolios”, or “Exposures or contingent exposures secured by real estate property”, as well as in the summary form of all classes of exposures.

Column 250: Of which: with a credit assessment by a nominated ECAI This column shall present that part of the exposures classified by risk classes, for whose calculation banks have used risk weights based on the credit quality assessments of the counterparty issued by a nominated ECAI, provided respectively in the letters: “a” to “d”, “f”, “g”, “g/1”, “l”, “n” and “o”. Column 260: Of which: with a credit assessment derived from central government This column shall present that part of the exposures classified by risk classes, for whose calculation banks have used risk weights based on the credit quality assessments of the central government, provided respectively in the letters: “b” to “d”, “f”, “g”, “l” and “n”.
2.1.3 Content of the rows
Row 010 - Total exposures
In “Total exposures” row, banks shall report the total amount by individual columns, which presents the sum of individual columns against exposure type or risk weight. Row 011 - Of which: SME exposures This row shall be filled in for the classes of “Exposure or contingent exposures to corporates”, “Exposures or contingent exposures to retail portfolios”, “Exposures or contingent exposures secured by real estate property”, “Non-performing exposures (loans)”, as well as in the summary form of all exposure classes. Row 012 – Of which: SME exposures treated with supporting factors This row is completed for the classes “Exposures or contingent exposures to corporates”, “Exposures or contingent exposures to retail portfolios”, “Exposures or contingent exposures secured by real estate property”, as and in the summary form of all classes of exposures. Rows 020 - 060 - Breakdown by type of exposure The amount of exposure presented in column 040 in row “Total exposures” is broken down by type of exposure as follows:
 On balance sheet items: these items are not listed under any of the other types of exposure. Exposures arising from non-DVP settlement, although they are not on-balance sheet items, they are presented in this row. Exposures that are on-balance sheet items and treated as securities financing transactions and as derivatives or long settlement transactions are not included in this row, but in rows 040 and 060, respectively.  Off-balance sheet items: items set out in annex 2 of the regulation. Exposures that are off-balance sheet items and treated as securities financing transactions and as derivatives or long settlement transactions are not included in this row, but in rows 040 and 060, respectively.  Securities financing transactions (including repurchase transactions, securities and commodities lending and borrowing transactions, margin lending

transactions and E* value of master netting agreement related to such transactions).  Derivatives and long settlement transactions: Derivatives, as specified in
annex IV of the regulation and long settlement transactions, as provided for in
article 4, letter “d”, point 66.
Rows 090 - 210 – Breakdown of total exposures by risk weight The sum of exposures amount presented in the cell, which is formed by the intersection between column 040 and row “Total exposures”, is broken down by specified risk weights at: 0%, 10%, 20%, 35%, 50%, 75%, 85%, 100%, 125%, 150%, 200%, 250%, 1,250%, other risk weights). Rows 220-240 - Breakdown of total exposures according to the CIU approach These rows shall be completed only for the class of exposures to Collective Investment Undertakings (CIU), as provided for in articles 28, 28/1, 28/2 and 28/3 of the regulation.
2.2 Form CR SEC SA - Securitisation
2.2.1 General provisions
When the bank is the originator of the securitization, it fills in the relevant information in the CR SEC SA form for the exposures related to the securitization transactions, for all securitizations for which the transfer of a significant part of the credit risk is recognized. When the bank is in the role of investor, all exposures must be reported. This form is filled out especially for the exposures related to traditional and synthetic securitizations that are kept in the banking book, which is defined in the field “Type of securitization”. Reporting will depend on the role that banks assume in the securitisation process. Therefore, the reporting of items will vary depending on the fact whether the bank is the originator, investor or sponsor. In the field “Nominated ECAI”, banks shall write the name of all nominated ECAI-s for rating such exposures. Banks shall not fill in the fields in red. This form shall be reported quarterly.
2.2.2 Content of the columns
The CR SEC SA form contains 36 columns as follows:
Column 010 - Total amount of securitized exposures originated This column shall be reported only by banks that are originators in a securitisation. In this column, banks shall fill in the outstanding amount at the reporting date, of all

securitised positions originated during securitisation transaction, regardless of who holds the positions. Thus, both securitised exposures in the balance sheet (bonds, subordinated bonds) and off-balance sheet exposures (subordinated credit lines, liquidity facilities and financial derivatives) originated during the securitisation process shall be reported. In the case of a traditional securitization where the originator does not hold any position, the originator will not consider this securitization for reporting purposes. For this purpose, the securitization position held by the originator shall include early amortization provisions, as defined in article 4, letter “c”, point 63, in the securitization of revolving exposures. Columns 020-040: Synthetic securitizations: Credit protection to the securitised exposures Columns 020 - 040 refer to credit protection of a synthetic securitisation, through which securitised exposures are segmented (tranching). Only originator banks in a synthetic securitisation shall fill in these columns. Credit protection shall not include adjustments for maturity mismatch, according to the requirements of articles 106 and 107 of the regulation. Columns 020 and 030 refer to funded and unfunded credit protection. Column 020 - Funded credit protection (CVA) Banks shall fill in the amount of funded credit protection according to article 59 of the regulation. For the financial collateral, banks may use only the financial collateral comprehensive method. For this reason, the collateral value in this column shall be presented as adjusted for volatility and maturity mismatch as set out in article 59. Credit linked notes shall be treated as funded credit protection according to article 90, paragraph 2. Column 030 - Adjusted value of unfunded credit protection (G*) Following the general rule for “inflows” and “outflows”, the amounts reported under this column shall appear as “inflows” in the corresponding credit risk form (CR SA) and in exposure class to which the reporting bank allocates the protection provider (i.e. the third party to which the tranche is transferred by means of unfunded credit protection). The bank shall report the value of unfunded credit protection, adjusted for currency mismatch (G*), according to article 91, paragraph 1. Column 040 - Notional amount retained or repurchased of the credit protection Banks shall report in this column the notional amounts of credit protection that the originator as the collateral purchaser, retains or repurchases from collateral providers. The effects of volatility adjustments, as set out in articles 58 and 59 of the regulation, shall not be taken into account when calculating the retained or repurchased value of the credit protection.

Column 050 - Securitisation positions: Original exposure pre conversion factors Banks shall report the book value of securitised individual positions, calculated in accordance with article 103, paragraphs 1 and 2, without applying any value adjustments or provisions and conversion factors, and without applying any non￾refundable purchase price discounts of securitized exposures, as defined in article 103, paragraph 1, letter “d” and without applying value adjustments or provisions for securitization positions. The originator that uses the synthetic securitisation in the form of balance sheet items and/or “investor’s interest”, shall calculate the position according to columns 010-020-030+040. Thus, the exposure value shall be filled in after taking into consideration inflows and outflows as a result of credit protection used for segmenting (trancheing). Netting shall only be relevant with respect to multiple derivative contracts provided to the same SSPE. Column 060 - Value adjustments and provisions The amount of value adjustments and provisions for on-balance sheet and off-balance sheet items is completed only for securitization positions, in accordance with article 103. Value adjustment for securitized exposures shall not be considered. Column 070 - Net value of exposures (after value adjustments and provisions) This column shall include the exposure values of securitisation positions calculated in accordance with article 103, paragraphs 1 and 2, net of value adjustments and provisions, without applying conversion factors and gross of any non-refundable purchase price discounts on the securitised exposures as referred to in article 103, and net of value adjustments and provisions on the securitisation position. Exposures’ net value is calculated as the difference between columns 050 and 060, without applying conversion factors. Columns 080 - 110 - Credit risk mitigation techniques with substitution effects on the exposure Banks will report in columns 080-110 information on credit risk mitigation techniques that mitigate credit risk, as a result of substitution effect on exposure, with the risk weight for the protected part being substituted with the risk weight of the collateral (which means collateral provider). Collateral that has an effect on the exposure value (e.g. if used for credit risk mitigation techniques with substitution effects on the exposure) shall be capped at the exposure value. Column 080 - Unfunded credit protection: adjusted value (Ga) Banks shall report the value of unfunded credit protection, adjusted for maturity mismatch and currency, in accordance with articles 90 to 92 of the regulation. Column 090 - Funded credit protection Funded credit protection, as defined in article 4, letter “b”, point 25 and as referred to in
article 104, paragraph 2 and as regulated in articles 49, 68 and 77. For the financial
collateral, this column shall be reported only by banks that use the financial collateral simple method, in accordance with articles 53-56 of the regulation.

Credit linked notes and on-balance sheet netting agreements shall be treated as cash collateral, as referred to in articles 90, paragraph 2 and article 70 of the regulation. Column 100 - Total outflows Articles 54 and 95 of the regulation. The collateralized amount is filled in for each of the roles that a bank has in the securitization (originator, investor, etc.). Outflows shall correspond to the covered portion of the column “Net value of exposures (after value adjustments and provisions)” that is deducted from the obligor/borrower's exposure class (and where relevant, the risk weight or credit quality step of the obligor) and subsequently assigned to the protection provider's exposure class (and where relevant, risk weight or credit quality step of the obligor). The same amount will be filled in as inflows for the same role (originator, investor and sponsor) into the protection provider's exposure class (and where relevant, the risk weight or credit quality step of the obligor). Column 110 - Total inflows Securitisation positions which are debt securities and are used as eligible financial collateral in accordance with article 49, paragraph 1 of the regulation and where the financial collateral simple method is used, shall be reported as inflows in this column. Column 120 - Net exposure after substitution effects as a result of credit risk mitigation, pre conversion factors This column shall include the exposures assigned in the corresponding risk weight and exposure class, after taking into account inflows and outflows, as a result of credit risk mitigation techniques with exposure’s substitution effect, which is calculated by deducting the total amount in column 100 from column 070 and adding the amount from column 110 (070-100+110). Column 130 - Credit risk mitigation techniques affecting exposure value: funded credit protection, under the financial collateral comprehensive method adjusted value Articles 58-67 of the regulation. The reported values should also include credit linked notes. Column 140 - Fully adjusted exposure value (E*): calculated as (120 – 130) In this column should be reported the exposure value of securitisation positions, calculated in accordance with article 103, but without applying the conversion factors laid down in letter “b” of paragraph 1 of article 103. Column 150 - Of which: subject to a conversion factor of 0%
Article 103, paragraph 1, letter “b”.
For reporting purposes, fully adjusted exposure values (E*) shall be reported for the 0% conversion factor.

Columns 160 - Non-refundable purchase price discount In accordance with article 103, paragraph 1, letter “d” of the regulation, an originator bank may deduct from the exposure value of a securitisation position which is assigned a 1250 % risk weight, any non-refundable purchase price discounts connected with such underlying exposures, to the extent that such discounts have caused the reduction of regulatory capital. Columns 170 - Specific credit risk adjustments on underlying exposures In accordance with article 103, paragraph 1, letter “d” of the regulation, an originator bank may deduct from the exposure value of a securitisation position, which is assigned a 1250 % risk weight or is deducted from common equity tier 1, the amount of the specific credit risk adjustments on the underlying exposures as determined in accordance with article 9 of the regulation. Columns 180 - Exposure value In this column shall be reported the exposure value, calculated in accordance with article 103. Column 190 - Exposure value that is deducted from the regulatory capital In accordance with article 99, paragraph 1, letter “b”, article 100, paragraph 1, letter “b” and article 108, paragraph 1 of the regulation, shall be reported the value of the securitized positions, which have been assigned a risk weight of 1250%, which the bank does not include in the amount of risk-weighted exposures, but deducts from the regulatory capital, according to the regulation “On the bank's regulatory capital”. Column 200 - Exposure value subject to risk weights Banks fill in this column the exposure value calculated as the difference between columns 180 and 190. Column 210 – 260 - Breakdown of exposures subject to risk weights, by risk weights Exposures are divided according to risk classes. For the risk weight of 1250% (W unknown), article 113, paragraph 2 of the regulation provides that securitization positions shall be weighted by 1250% when the bank does not recognize delays for 5% or less of the underlying exposures in the underlying exposures pool. Column 270: Risk-weighted exposure value for other cases (risk weight 1250%) In this column, the risk-weighted exposure value is filled in, in cases where none of the methods (SEC-SA or SEC-ERBA) is applied and the securitization positions are assigned a risk weight of 1250%, in accordance with the provisions in article 109, paragraph 6 of the regulation.

Column 280: Risk-weighted exposure amount SEC-SA method In this column should be reported the total risk-weighted amount, calculated in accordance with subchapter II of chapter V of the regulation, as the sum of the products of the individual exposures from columns 210-260 and the corresponding risk weights, before maturity mismatches or prudential adjustments, and excluding any risk-weighted exposures corresponding to redistributed exposures through outflows in other forms. Column 290 – Of which: Synthetic securitization For synthetic securitizations with maturity mismatches, the amount to be reported in this column does not consider maturity mismatches. Column 300 - Adjustments to the risk-weighted exposure amount due to maturity mismatches Maturity mismatches for synthetic securitizations RW*-RWSP, between the credit protection through which the risk transfer is achieved and the securitized exposures, are calculated in accordance with article 107 of the regulation. Risk-weighted exposure value adjustments for maturity mismatches are included in this column, except where segments (tranches) are subject to a risk weight of 1250%, where the amount to be reported is 0. The RWSP amount includes not only the amount of risk-weighted exposures reported under column 280, but also includes the amounts of risk-weighted exposures corresponding to exposures distributed through outflows in other forms. Column 310 - Adjustments of the exposure amount when the bank does not meet the requirements provided for in subchapter III of chapter V of the regulation In accordance with article 119 of the regulation, when the bank does not meet the requirements provided for in subchapter III of chapter V of the regulation, the Bank of Albania may proportionally set an additional risk weight of not less than 250% of the risk weight, but not higher than 1250%, which would be applied to the corresponding securitization position, in the manner defined in chapter V of the regulation. Column 320 - Risk-weighted exposure amount before applying the risk weight cap The total amount of risk-weighted exposures for securitized positions, calculated in accordance with subchapter II of chapter V of the regulation, before the application of the restrictions specified in article 115 and 116. Column 330 – Reductions due to risk weight cap In accordance with article 115 of the regulation, a bank which has knowledge at all times of the composition of the underlying exposures, shall assign to the senior securitization positions, a maximum risk weight equal to the weighted average risk weight of the exposures that would be applicable to the underlying exposures as if these underlying exposures had not been securitized. Column 340 – Reductions due to capital requirement cap Pursuant to article 116 of the regulation, an originating bank or a sponsor using the standardized approach (SEC-SA) or the external ratings based approach (SEC-ERBA) may apply a maximum capital requirement for the
securitization position, equal to the

capital requirement that would be calculated in accordance with chapter III of the regulation, in relation to the underlying exposures, if these underlying exposures were not securitized. Column 350 – Total risk-weighted exposure amount This column reports the total amount of risk-weighted exposure, calculated in accordance with the requirements of subchapter II of chapter V of the regulation, considering the total risk weight defined in article 102, paragraph 6. Column 350 is calculated by subtracting from column 320, columns 330 and 340 (320- 330-340). Column 360 - Memorandum items: total risk-weighted exposure amount corresponding to outflows from securitizations to other exposure classes This column reports the amount of risk-weighted exposures derived from exposures redistributed to the credit mitigation provider, that are reported in the relevant form and that are considered in the computation of the risk weight cap for securitisation positions. Banks shall report securitisation exposures by column and analyse the fields covered by such activity in rows according to the assumed role in the securitisation.
2.2.3 Content of the Rows
The CR SEC SA form contains 15 rows, which are divided into three main groups that collect data on exposures originated/sponsored/held or purchased by originators, investors and sponsors. For each of them, the information will be divided into balance sheet items, off-balance sheet items, and derivatives, as well as whether it is a re￾securitization. Row 010 – Total exposure The value in row 10 should be equal to the sum of the bank's total exposures in securitizations and re-securitizations. This row summarizes all the information reported by originators, sponsors and investors in the following rows. Row 020 – Securitization positions This row reports the total amount of securitization positions as defined in article 4, letter “c”, point 47, which have not been re-securitised as defined in article 4, letter “c”, point 45/4. Row 030, 070, 0110, 0150 – Re-securitization positions In these rows, the total amount of the positions in re-securitization is reported. Row 040 – Originator: Total exposure This row summarizes information on securitized exposures for balance sheet items as well as off-balance sheet exposures and derivatives, together with re-securitization

positions for which the bank is in the role of the originator, as defined in article 4, letter “c”, point 48 of the regulation. Rows 050, 090, 0130 – Securitization positions: Balance sheet items In accordance with article 103, paragraph 1, letter “a” of the regulation, the exposure value of a securitization position recorded in the balance sheet, will be its accounting value after deducting the reserves for covering losses for the securitization position, in accordance with article 9 of the regulation. Rows 060, 0100, 0140 – Securitization positions: Off-balance sheet items These rows summarize information on off-balance sheet securitization positions and securitization positions derived from a derivative instrument, subject to a conversion factor under the securitization regulatory framework. The exposure value of an off￾balance sheet securitization position is its nominal value after deducting the relevant specific loss reserves for the securitization position, multiplied by a 100% conversion factor, unless otherwise specified. Off-balance sheet securitization positions derived from a derivative instrument listed in
Annex 4 of the regulation shall be determined in accordance with Chapter VI of the
regulation. The exposure value for the counterparty credit risk of a derivative instrument listed in Annex 4 shall be determined in accordance with chapter VI of the regulation. For liquidity facilities, credit commitments and cash advances, the bank must report the undrawn amount. For interest rate and exchange rate swaps, the exposure value calculated according to
article 103, paragraph 1, shall be reported.
Row 080 – Investor: Total exposure
This row summarizes information on securitized exposures for balance sheet items as well as off-balance sheet exposures and derivatives, together with re-securitization positions for which the bank is in the role of investor, as defined in article 4, letter “c”, point 55 of the regulation. Row 0120 – Sponsor: Total exposure This row summarizes information on securitized exposures for balance sheet items as well as off-balance sheet exposures and derivatives, together with re-securitization positions for which the bank is in the role of sponsor, as defined in article 4, letter “c”, point 49 of the regulation. If the sponsor also securitizes its own assets, it must complete the rows where it is reported the exposure in the role of originator with information on its own securitized assets. Banks, which have investments in securitisations, in this form shall fill out only the cells colored in yellow.

2.3 Form CR SEC ERBA-Securitisation
2.3.1 General provisions
When the bank is the originator of the securitization, it fills in the relevant information in the CR SEC ERBA form for the exposures related to the securitization transactions, for all securitizations for which the transfer of a significant part of the credit risk is recognized. When the bank is in the role of investor, all exposures must be reported. This form is filled out especially for the exposures related to traditional and synthetic securitizations that are kept in the banking book, which is defined in the field “Type of securitization”. Reporting will depend on the role that banks assume in the securitisation process. Therefore, the reporting of items will vary depending on the fact whether the bank is the originator, investor or sponsor. In the field “nominated ECAI”, banks shall write the name of all nominated ECAI-s for rating such exposures. Banks shall not fill in the fields in red. This form shall be reported quarterly.
2.3.2 Content of the columns
The CR SEC ERBA form has 56 columns as follows:
Column 010 - Total amount of securitized exposures originated This column shall be reported only by banks that are originators in a securitisation. In this column, banks shall fill in the outstanding amount at the reporting date, of all securitised positions originated during securitisation transaction, regardless of who holds the positions. Thus, both securitised exposures in the balance sheet (bonds, subordinated bonds) and off-balance sheet exposures (subordinated credit lines, liquidity facilities and financial derivatives) originated during the securitisation process shall be reported. In the case of a traditional securitization where the originator does not hold any position, the originator will not consider this securitization for reporting purposes. For this purpose, the securitization position held by the originator shall include early amortization provisions, as defined in article 4, letter “c”, point 63, in the securitization of revolving exposures. Columns 020-040: Synthetic securitizations: Credit protection to the securitised exposures Columns 020 - 040 refer to credit protection of a synthetic securitisation, through which securitised exposures are segmented (tranching). Only originator banks in a synthetic securitisation shall fill in these columns. Credit protection shall not include adjustments

for maturity mismatch (according to the requirements of articles 106 and 107 of the regulation). Columns 020 and 030 refer to funded and unfunded credit protection. Column 020 - Funded credit protection (CVA) Banks shall fill in the amount of funded credit protection according to article 59 of the regulation. For the financial collateral, banks may use only the financial collateral comprehensive method. For this reason, the collateral value in this column shall be presented as adjusted for volatility and maturity mismatch as set out in article 59 of the regulation. Credit linked notes shall be treated as funded credit protection according to
article 90, paragraph 2.
Column 030 - Unfunded credit protection: Adjusted values (G*) Following the general rule for “inflows” and “outflows”, the amounts reported under this column shall appear as “inflows” in the corresponding credit risk form (CR SA) and in exposure class to which the reporting bank allocates the protection provider (i.e. the third party to which the tranche is transferred by means of unfunded credit protection). The bank shall report the value of unfunded credit protection, adjusted for currency mismatch (G*), according to article 91, paragraph 1 of the regulation. Column 040 - Notional amount retained or repurchased of credit protection Banks shall report in this column the notional amounts of credit protection that the originator as the collateral purchaser, retains or repurchases from collateral providers. The effects of volatility adjustments, as set out in articles 58 and 59 of the regulation, shall not be taken into account when calculating the retained or repurchased value of the credit protection. Column 050- Securitisation positions: Original exposure pre conversion factors Banks shall report the book value of securitised individual positions, calculated in accordance with article 103, paragraphs 1 and 2, without applying any value adjustments or provisions and conversion factors, and without applying any non￾refundable purchase price discounts of securitized exposures, as defined in article 103, paragraph 1, letter “d” and without applying value adjustments or provisions for securitization positions. The originator that uses the synthetic securitisation in the form of balance sheet items and/or “investor’s interest”, shall calculate the position according to columns 010-020-030+040. Thus the exposure value shall be filled in after taking into consideration inflows and outflows as a result of credit protection used for segmenting (trancheing). Netting shall only be relevant with respect to multiple derivative contracts provided to the same SSPE. Column 060 - Value adjustments and provisions The amount of value adjustments and provisions for on-balance sheet and off-balance sheet items is completed only for securitization positions, in accordance with article 103 of the regulation. Value adjustment for securitized exposures shall not be considered.

Column 070 - Net value of exposures (after value adjustments and provisions) This column shall include the exposure values of securitisation positions calculated in accordance with article 103, paragraphs 1 and 2, net of value adjustments and provisions, without applying conversion factors and gross of any non-refundable purchase price discounts on the securitised exposures as referred to in article 103, and net of value adjustments and provisions on the securitisation position. Exposures’ net value is calculated as the difference between columns 050 and 060, without applying conversion factors. Columns 080 – 110 - Credit risk mitigation techniques with substitution effects on the exposure Banks will report in columns 080-110 information on credit risk mitigation techniques that mitigate credit risk, as a result of substitution effect on exposure, with the risk weight for the protected part being substituted with the risk weight of the collateral (which means collateral provider). Collateral that has an effect on the exposure value (e.g. if used for credit risk mitigation techniques with substitution effects on the exposure) shall be capped at the exposure value. Column 080 - Unfunded credit protection: adjusted values (Ga) Banks shall report the value of unfunded credit protection, adjusted for maturity mismatch and currency, in accordance with articles 90 to 92 of the regulation. Column 090 - Funded credit protection Funded credit protection, as defined in article 4, letter “b”, point 25 of the regulation and as referred to in article 104, paragraph 2 and as regulated in articles 49, 68 and 77 of the regulation. For the financial collateral, this column shall be reported only by banks that use the financial collateral simple method, in accordance with articles 53-56 of the regulation. Credit linked notes and on-balance sheet netting agreements as referred to in article 90, paragraph 2 and article 70 of the regulation shall be treated as cash collateral. Column 100 - Total outflows Articles 54 and 95 of the regulation. The collateralized amount is filled for each of the roles that a bank has in the securitization (originator, investor, etc.). Outflows shall correspond to the covered portion of the column “Net value of exposures (after value adjustments and provisions)” that is deducted from the obligor/borrower’s exposure class (and where relevant, the risk weight or credit quality step of the obligor) and subsequently assigned to the protection provider’s exposure class (and where relevant, risk weight or credit quality step of the obligor). The same amount will be filled in as an inflows for the same role (originator, investor and sponsor) into the protection provider's exposure class (and where relevant, the risk weight or credit quality step of the obligor).

Column 110 - Total inflows
Securitisation positions which are debt securities and are used as eligible financial collateral in accordance with article 49, paragraph 1 of the regulation and where the financial collateral simple method is used, shall be reported as inflows in this column. Column 120 - Net exposure after substitution effects as a result of credit risk mitigation, pre conversion factors This column shall include the exposures assigned in the corresponding exposure class and risk weight, after taking into account inflows and outflows, as a result of credit risk mitigation techniques with exposure’s substitution effect, which is calculated by deducting the total amount in column 100 from column 070 and adding the amount from column 110 (070-100+110). Column 130 - Credit risk mitigation techniques affecting exposure value: funded credit protection, under the financial collateral comprehensive method adjusted value Articles 58-67 of the regulation. The reported values should also include credit linked notes. Column 140 - Fully adjusted exposure value (E*): calculated as (120 – 130) In this column should be reported the exposure value of securitisation positions, calculated in accordance with article 103, but without applying the conversion factors laid down in letter “b” of paragraph 1 of article 103. Column 150 - Of which: subject to a conversion factor of 0%
Article 103, paragraph 1, letter “b”.
For reporting purposes, fully adjusted exposure values (E*) shall be reported for the 0% conversion factor. Columns 160 - Non-refundable purchase price discount In accordance with article 103, paragraph 1, letter “d” of the regulation, an originator bank may deduct from the exposure value of a securitisation position which is assigned a 1250 % risk weight, any non-refundable purchase price discounts connected with such underlying exposures, to the extent that such discounts have caused the reduction of regulatory capital. Columns 170 - Specific credit risk adjustments on underlying exposures In accordance with article 103, paragraph 1, letter “d” of the regulation, an originator bank may deduct from the exposure value of a securitisation position, which is assigned a 1250 % risk weight or is deducted from common equity tier 1, the amount of the specific credit risk adjustments on the underlying exposures as determined in accordance with article 9 of the regulation.

Columns 180 - Exposure value
In this column shall be reported the exposure value, calculated in accordance with article 103 of the regulation. Column 190 - Exposure value that is deducted from the regulatory capital In accordance with article 99, paragraph 1, letter “b”, article 100, paragraph 1, letter “b” and article 108, paragraph 1 of the regulation, shall be reported the value of the securitized positions, which have been assigned a risk weight of 1250%, which the bank does not include in the amount of risk-weighted exposures, but deducts from the regulatory capital, according to the regulation “On the bank's regulatory capital”. Column 200 - Exposure value subject to risk weights Banks fill in this column the exposure value, calculated as the difference between columns 180 and 190. Columns 210 – 420 - Breakdown of exposures subject to risk weighting according to risk weights The reporting is based on the provisions of article 114 of the regulation. For the securitization positions for which a derived assessment can be used, as provided in article 109, paragraph 2 of the regulation, the external ratings based approach (SEC￾ERBA) is used and they are reported as rated positions. Exposures subject to risk weighting will be divided into credit quality steps, according to short-term credit assessment and long-term credit assessment, according to the provisions in table 13 and 14 of article 114 of the regulation. Column 430 – Risk-weighted exposure value In this column is filled in, the total risk-weighted amount, calculated in accordance with subchapter II of chapter V of the regulation, as the sum of the products of the individual exposures from columns 210-420 and the corresponding risk weights, before maturity mismatches or prudential adjustments, and excluding any risk-weighted exposures corresponding to redistributed exposures through outflows in other forms. Columns 440 – 480 – Risk-weighted exposure amount: Breakdown by the reason for applying the SEC-ERBA method For each securitization position, the bank must consider one of the options set out in columns 440-480. Column 440 - Auto loans, auto leasing and equipment leasing The reporting will be based on the requirements of article 109, paragraph 2, letter “b” of the regulation. All auto loans, auto leasing and equipment leasing must be reported in this column, even if they qualify in the provisions of article 109, paragraph 2, letter “a” of the regulation.

Column 450 – The option of applying the SEC-ERBA method The reporting is based on the requirements of article 109, paragraph 3 of the regulation. Column 460 - Positions according to article 109, paragraph 2, letter "a" of the regulation The reporting is based on the requirements of article 109, paragraph 2, letter “a” of the regulation. Column 470 - Positions according to article 109, paragraph 4 of the regulation In this column, securitization positions are reported, in cases where the Bank of Albania may not allow the bank to apply the standardized method (SEC-SA), according to article 109, paragraph 4 of the regulation. Column 480 - Use of hierarchy of methods Securitization positions where the application of the SEC-ERBA method is based on following the hierarchy of methods, according to the provisions of article 109, paragraph 1 of the regulation. Column 490 - Of which: Synthetic securitization For synthetic securitizations with maturity mismatches, the amount to be reported in this column does not consider maturity mismatches. Column 500 - Adjustments to the risk-weighted exposure amount due to maturity mismatches Maturity mismatches for synthetic securitizations RW*-RWSP, between the credit protection through which the risk transfer is achieved and the securitized exposures, are calculated in accordance with article 107 of the regulation. Risk-weighted exposure value adjustments for maturity mismatches are included in this column, except where segments (tranches) are subject to a risk weight of 1250%, where the amount to be reported is 0. The RWSP amount includes not only the amount of risk-weighted exposures reported under column 430, but also includes the amounts of risk-weighted exposures corresponding to exposures distributed through outflows in other forms. Column 510 - Adjustments of the exposure amount when the bank does not meet the requirements provided for in sub-chapter III of chapter V of the regulation In accordance with article 119 of the regulation, when the bank does not meet the requirements provided for in subchapter III of chapter V of the regulation, the Bank of Albania may proportionally set an additional risk weight of not less than 250% of the risk weight, but not higher than 1250%, which will be applied to the corresponding securitization position, in the manner defined in chapter V of the regulation. Column 520 - Risk-weighted exposure amount before applying the risk weight cap The total amount of risk-weighted exposures for securitized positions, calculated in accordance with subchapter II of chapter V of the regulation, before the application of the restrictions specified in article 115 and 116 of the regulation.

Column 530 – Reductions due to risk weight cap In accordance with article 115 of the regulation, a bank which has knowledge at all times of the composition of the underlying exposures, shall assign to the senior securitization positions, a maximum risk weight equal to the weighted average risk weight of the exposures that would be applied to the underlying exposures, as if these underlying exposures had not been securitized. Column 540 – Reductions due to capital requirement cap In accordance with article 116 of the regulation, an originating bank or a sponsor using the standardized approach (SEC-SA) or the external ratings based approach (SEC-ERBA) may apply a maximum capital requirement for the securitization position, equal to the capital requirement that would be calculated in accordance with chapter III of the regulation, in relation to the underlying exposures, if these underlying exposures were not securitized. Column 550 – Total risk-weighted exposure amount This column reports the total amount of risk-weighted exposure, calculated in accordance with the requirements of subchapter II of chapter V of the regulation, considering the total risk weight defined in article 102, paragraph 6 of the regulation. Column 550 is calculated by subtracting from column 520, columns 530 and 540 (520- 530-540). Column 560 - Memorandum item: total risk-weighted exposure amount corresponding to outflows from securitization to other exposure classes This column reports the amount of risk-weighted exposures derived from exposures redistributed to the credit mitigation provider, that are reported in the relevant form and that are considered in the calculation of risk weight cap for the securitization positions. Banks shall report securitization exposures by column and analyse the fields covered by such activity in rows according to the assumed role in the securitisation.
2.3.3 Content of the rows
The CR SEC ERBA form contains 39 rows. The first 15 rows (010-0150) are divided into three main groups, which collect data on exposures originated/sponsored/held or purchased by originators, investors and sponsors. For each of them, the information will be divided into balance sheet items, off-balance sheet items and derivatives, as well as if the exposure is a re-securitization. Rows 010-0150 Rows 010-0150 of the CR SEC ERBA form shall be completed in the same manner as explained in section 2.2.3 “Content of the rows” of these instructions, for the manner of filling in the corresponding rows of the CR SEC SA Form.

Rows 0160 – 0390 - Breakdown of exposures subject to risk weights by risk classes These rows summarize information on the current positions (outstanding positions) on the reporting date, for which a credit risk assessment has been assigned according to the credit quality steps, provided for in Tables 13 and 14 of article 114 of the regulation, on the date of origination. These rows will be filled in for columns 180-480. Banks, which have investments in securitization, in this form will fill only the cells coloured in yellow. 3 Capital requirements for market risk
3.1 Form MKR SA TDI – Position risks in traded debt instruments
3.1.1 General provisions
Form MKR SA TDI contains information on the position and capital requirements for position risk (general and specific) for debt securities held in the trading book, as part of capital requirements for market risk. Banks shall fill this form out separately for the major currencies (ALL, EUR, USD), for all the other currencies (excl. major ones) in which they have positions in these instruments in the trading book and in total (for both major and other currencies). Banks shall write the currency symbol in the field “Currency”. The rows of the table consider the following approaches implemented for calculating the capital requirement.  General risk: maturity-based approach  General risk: duration-based approach  Specific risk  Specific risk for positions in CIU  Non-delta (gamma and vega) risks related to options Banks shall not fill out the fields in red. This form shall be reported semi-annually.
3.1.2 Content of the columns
This form has 9 columns, as follows:

Columns 010 and 020 - All positions (long and short) In columns 010 and 020, banks shall fill in gross positions, without taking into consideration netting agreements and positions derived from the underwriting of debt securities, from third parties in accordance with article 167 of the regulation. Columns 030 and 040 - Net positions (long and short) Column 030 (net long position) and column 040 (net short position) refer to the net position (long or short), in accordance with article 146 of the regulation. Banks shall calculate the net position as the difference between the long/short position and short/long ones in financial instruments of the same type. Banks shall report the value of the net position, i.e. the offsetting position for each maturity band. Column 050 - Net positions subject to capital charge This column refers to weighted positions, subject to capital charge, calculated under the approaches reflected in the rows of this form. For the maturity-based approach, these positions are reflected in article 155, letter “c”, whereas for the duration-based approach they are reflected in article 156, letter “d” of the regulation. Column 060 - Capital requirements Banks shall calculate the capital requirement for each of the approaches reflected under the rows of this form as well as the total capital requirement. The total capital requirement, which is reflected in row 010 “Traded debt instruments in trading book”, is the sum of the capital requirement for the general risk (reflected in row 020 of the same column in case the bank uses the maturity based approach or in row 210, in case the bank uses the duration-based approach) and of the capital requirement for the specific risk (reflected in row 250, where the value in this row is the sum of rows 251, 325 and 326), as well as adding the amounts reported in rows 340 and 350.
3.1.3 Content of the rows
In the rows of this form, the banks shall report positions in debt securities and respective capital requirements based on the category of risk, maturity and approach used. Rows 012-013 These rows shall be filled out for only the first two columns of the form and shall contain information on the initial gross positions from derivatives on interest rates and debt securities (in accordance with article 147 of the regulation) and other assets and liabilities, whose value depends on the dynamics of the interest rate. Rows 020 - 200 - General risk: Maturity based approach In these rows, the banks shall report the positions in debt securities in accordance with
article 155, paragraph 1, letter “a” of the regulation. Thus, banks assign net positions to
each of the appropriate maturity bands (see table 22 of the regulation), based on the residual maturity for fixed-rate debt securities and the residual period until next interest rate fixing, for variable-rate debt securities, hence distinguishing between coupons of 3% and higher than 3%.

Rows 210 - 240 - General risk: Duration-based approach In these rows, the banks shall report positions in debt securities in accordance with
article 156, paragraph 1, letter “a” and “b” of the regulation, based on the duration of
each instrument.
Row 250 - Specific risk
In this row, in column 060, banks shall report the capital requirement for specific risk (see explanation for column 060). In this row, from column 010 to column 040, banks shall report positions in debt securities subject to capital requirement for specific risk, as the sum of rows 260-321. Row 251 - Capital requirement for unsecuritised debt instruments In this row, banks shall report the capital requirement for specific risk on debt securities, as an aggregate of capital requirements for four categories of debt securities, set out in rows 260 - 320, and rated nth to default credit derivatives, set out in row 321. In calculating capital requirement, bank shall also consider the reductions in capital resulting from hedging of positions with credit derivatives, in accordance with article 151 of the regulation. Row 325 - Capital requirement for securitisation positions This row refers to article 153, paragraph 6 of the regulation. In this row, banks shall report securitised exposures in columns 010-040, and the capital requirement in column 060. Row 341 - Particular approach for position risk in CIUs This row refers to the position risk for investments in CIUs, calculated in accordance with
article 161 of the regulation. In this row, banks shall register positions in CIU by
individual columns 010-040 and the capital requirement for column 060. The capital requirement for positions in CIU is calculated as 32% of the net position in CIU investments. If a bank calculates the capital requirement for the foreign exchange risk in CIU investments, the capital requirement will be the lowest between the 32% of the net position and the difference between the 40% of the net position and the capital requirement for the exchange rate risk calculated for these positions. Rows 350-380 - Additional charge for options, non-delta risks Row 350 - Additional charge for options (non-delta risks) represents the amount of the capital requirement reflected in the following rows, 360-380. Row 360 – “Simple approach” represents the capital requirement calculated for those positions in debt securities options, specified in article 176 of the regulation. Row 370 – “Delta plus approach - additional charge for gamma risk” represents the capital requirement for gamma risk of the debt securities option, calculated in accordance with article 180, paragraph 3 of the regulation.

Row 380 – “Delta plus approach - additional charge for vega risk” represents the capital requirement for vega risk of the debt securities options, calculated in accordance with
article 180, paragraph 5 of the regulation.
Banks shall calculate risk-weighted exposures by multiplying the total capital requirement with 12.5 and the result is reflected in column 070, row 010.
3.2 Form MKR SA EQU – Position risk in equities
3.2.1 General provisions
This form shall report information on the position risk and capital requirement for position risk (general and specific) related to equity securities held in the trading book, as part of the capital requirement for the market risk. Banks shall not fill in the fields in red. This form shall be reported semi-annually.
3.2.2 Content of columns
This form has 7 columns, as follows:
Columns 010 and 020 - Individual positions (long and short) In columns 100 and 200, banks shall fill in the gross positions, not taking into consideration netting agreements and the positions derived from the underwriting of financial instruments. Columns 030 and 040 - Net positions (long and short) The net position is the difference between the long/short positions and short/long ones in financial instruments of the same type. Banks shall report the value of the net position, i.e. the offset position for each maturity band. When filling out these columns, banks shall take into consideration the provisions of article 167, setting out the reduction factors - where applicable. Column 050 - Net positions subject to capital charge This column refers to the net positions subject to capital charge, calculated under the approaches reflected in rows 010-120 of this form. The total net position shall be calculated as the sum of positions from rows 010-120 of this form in the row “Equities in trading book”. Capital charge in % This column reports the weights with which net positions subject to capital charge are multiplied, to calculate the respective capital requirement.

Column 060 - Capital requirements
Column 060 reports the capital requirement calculated as the multiplication of weights in column “capital requirement (in %)” and net positions subject to capital charges from column 050. The total capital requirement is the sum of capital requirements for rows 1- 6 of this form and reflected in row “Equities in trading book”.
3.2.3 Content of rows
This form contains rows as follows:
Row 020 - General risk
The row “General risk” contains positions in equity securities, calculated in accordance with articles 159 and 160 of the regulation. In the individual rows 021 and 022, banks shall report positions pointed in columns 010-070. In row 020, they shall report the respective sums of rows 021 and 022. Row 030 - Exchange traded stock index futures broadly diversified, subject to particular approach Banks shall report in row 030 positions in equity securities and stock index futures, traded in recognised stock exchanges, and representing broadly diversified stock indices, subject to a particular approach, calculated in accordance with article 160 of the regulation. Row 040 - Other equities than those specified in row 030 Banks shall fill in row 040 with positions in equities other than exchange traded stock￾index futures, traded in recognised stock exchanges, and representing broadly diversified stock indices, calculated in accordance with article 159 of the regulation. Row 050 - Specific risk Row “Specific risk” shows positions in equity securities subject to specific risk calculations, in accordance with articles 158 and 160 of the regulation. Row 080 - Particular approach for position risk in CIUs This row refers to the position risk of investments in CIUs, in accordance with article 161 of the regulation. In this row, banks shall register positions in CIUs by individual columns 010-040 and the capital requirement in column 060. Capital requirement for positions in CIUs is calculated as 32% of the net position in CIU investments. If a bank calculates the capital requirement for the exchange rate risk in CIU investments, the capital requirement will be the lowest between the 32% of the net position and the difference between the 40% of the net position and the capital requirement for the exchange rate risk calculated for these positions. Rows 090-120 - Additional charge for options, non-delta risks Row 090 - Additional charge for options (non-delta risks) represents the amount of the capital requirement reflected in the following rows, 100-120.

Row 100 – “Simplified method” represents the capital requirement calculated for those positions in debt securities options specified in article 176 of the regulation. Row 110 – “Delta plus approach - additional charge for gamma risk” represents the capital requirement for gamma risk of the debt securities options, calculated in accordance with article 180, paragraph 3 of the regulation. Row 120 – “Delta plus approach - additional charge for vega risk” represents the capital requirement for vega risk of the debt securities options, calculated in accordance with
article 180, paragraph 5 of the regulation.
Banks shall calculate risk-weighted exposures for this risk by multiplying the total capital requirement with 12.5 and the result is reflected in column 070, row 010.
3.3 Form CR TB SETT – Settlement risk
3.3.1 General provisions
Form CR TB SETT contains information on transactions in the banking and trading book, which are still unsettled even after the settlement (value date) and on the capital requirement for the settlement risk in accordance with article 163 of the regulation. Banks shall report in this form, information on the settlement risk related to debt securities, equity securities, currency and commodities in the trading book and in the banking book. In the case of unsettled transactions after the settlement date (value date), banks shall calculate the difference at price, to which they are exposed. This is the difference between the agreed settlement price for the instrument and its actual price, when this difference results in loss for the bank. Banks shall multiply this difference with the respective factor in accordance with table 24 of the regulation. For transactions unsettled up to four days, the weighting factor shall be 0%.
3.3.2 Content of the columns
This form contains the following columns:
Column 010 - Unsettled transactions at settlement price In this column should be reported all DVP transactions at their settlement price, which result as unsettled after the value date, irrespective of whether they result in loss or profit after the settlement date. Column 020 - Price difference exposure due to unsettled transactions According to article 163 of the regulation, banks shall report in this column the difference between the agreed settlement price for the instrument and its actual price, when the difference results in a loss for the bank. Banks, therefore, shall report in this column only transactions resulting in loss after the settlement date (value date).

Column 030 - Capital requirements
In this column, banks shall report the capital requirement for the settlement risk for DVP transactions, in accordance with article 163 of the regulation. Column 040 - Risk weighted exposures Banks calculate risk-weighted exposures for this risk, by multiplying the total capital requirement with 12.5 and the result is reflected in column 040, row 010.
3.3.3 Content of the Rows
This table contains the following rows:
Row 010 - Total unsettled transactions in the banking book Banks shall report in row 010, the aggregated information in relation to the settlement risk for transactions in the banking book. Banks shall report in cell 010/010 (row/column) the amount of unsettled transactions after the settlement date (value date) at the settlement price. Banks shall report in cell 010/020 (row/column) the amount of price difference, due to unsettled transactions resulting in loss. Banks shall report in cell 010/030 the aggregate capital requirement for transactions in the banking book. Rows 020 - 060 - Unsettled transactions In these rows, banks shall report transactions in the banking book subject to the settlement risk in accordance with the categories established in table 24 of the regulation. For transactions unsettled up to four days, the weighting factor shall be 0%. In the next rows, banks shall report the same information as in rows 010-060, but related to transactions in the trading book.
3.4 Form MKR SA COM - Commodity investment risk
3.4.1 General provisions
Form MKR SA COM contains information on positions in commodities and the corresponding capital requirement for these positions, as part of the capital requirement for the market risk. Banks shall not fill in the fields in red. This form shall be reported semi-annually.

3.4.2 Content of the columns
The template contains the following columns:
Columns 010-020 - All positions - long and short Banks shall fill out gross long/short positions considering positions in the same commodity, in accordance with article 168, point 2 and 6 of the regulation. Columns 030-040 - Net positions Banks shall fill out the net position, in accordance with article 168, point 5. Column 050 - Positions subject to capital charge Banks shall fill out positions subject to capital charge in accordance with the methodology set out in article 168 of the regulation. Column 060 - Capital requirements Banks shall report capital requirements for commodity risk, in accordance with article 168 of the regulation. Column 070 - Risk weighted exposure Banks calculate risk-weighted exposures for this risk by multiplying the total capital requirement with 12.5 and the result is reflected in column 070, row 010.
3.4.3 Content of rows
The template has rows, as follows:
Row 010 - Total positions in commodities
Banks shall fill in positions in commodities and the corresponding capital requirement. Rows 020-060 - Positions by commodity classes For reporting purposes, banks shall group the commodities in the following four classes:
 Precious metals (except gold)
 Base metals (zinc, copper, etc.)
 Agricultural products (softs)
 Other
Row 070 - Maturity ladder approach
Banks shall fill in positions in commodities, subject to the maturity ladder approach, in accordance with article 172 of the regulation.

Row 090 - Simplified approach: All positions
Banks shall fill in positions in commodities, subject to the maturity ladder approach, in accordance with article 171 of the regulation. Rows 100-130 - Additional charge for options, non-delta risks Row 100 - Additional charge for options (non-delta risks) represents the amount of the capital requirement reflected in the following rows, 110-130. Row 110 – “Simplified method” represents the capital requirement calculated for those positions in commodities options specified in article 176 of the regulation. Row 120 – “Delta plus approach - additional charge for gamma risk” represents the capital requirement for gamma risk of commodities options, calculated in accordance with article 180, paragraph 3 of the regulation. Row 130 – “Delta plus approach - additional charge for vega risk” represents the capital requirement for vega risk of commodities options, calculated in accordance with article 180, paragraph 5 of the regulation.
3.5 Form MKR SA FX - Foreign exchange risk
3.5.1 General provisions
The calculation of the capital requirement for the foreign exchange risk refers to provisions in the regulation “On the open foreign exchange positions risk management” and articles 173 and 174 of the regulation, as part of the capital requirement for market risk. Banks shall not fill in the fields in red. This table shall be reported semi-annually.
3.5.2 Reporting the net foreign currency position
This table has 13 columns (010-100), of which three are not open for entering data (060-090). Banks shall first fill in columns 020 and 030, for rows 130 – “Euro” to row 410 – “other currencies”. Positions that banks shall fill out in these cells are related to the ALL equivalent of positions reported in form 32 of the URS, except for Gold positions. Banks shall fill out the long and short positions (columns 020 and 030 of the form) for rows from 130 - EUR to 400 - Norwegian Corona, based on form 32 of the URS as follows:

 Long positions for each currency = sum of the spot position (long) + forward position (long) + long options position.  Short positions for each currency = sum of the spot position (short) + forward position (short) + short options position. In cells 020/410 (column/row) and 030/410 (column/row), banks shall report positions deriving from investments in CIUs, which shall be treated as separate currencies, in accordance with article 174. The sum of rows 130-410 in column 020, which represents long positions, shall be filled out in cell 020/030 (column/row) - All other currencies (including CIUs positions in separate currencies). The sum of rows 130-140 in column 030, which represents short positions, shall be filled out in cell 030/030 (row/column) - All other currencies (including CIUs positions in separate currencies). Banks shall fill out cell 020/040 (column/row) long and short positions and in cell 030/040 referring to the value reported in form 32 of the URS. Banks shall fill out the net position for each currency (columns 040 and 050), for rows 130-140 as a difference between the long and short position for each currency. The difference refers to column 10 of form 32 of the URS. The total sum of net long positions for rows 130-410 shall be filled out in cell 040/030 (column/row) - All other currencies (including CIUs positions in separate currencies). The total sum of net short positions for rows 130-410 shall be filled out in cell 050/030 (column/row) - All other currencies (including CIUs positions in separate currencies). Banks shall fill out in row 040, columns 040 and 050, the net positions (long and short) in Gold.
3.5.3 Reporting capital requirement for open foreign currency net position
Banks shall calculate the net long foreign exchange position of the bank in all currencies as a sum of rows 030 and 040 in column 040. Banks shall calculate the net short foreign exchange position of the bank in all currencies as a sum of rows 030 and 040 in column 050. The highest value between the positions, as described above, constitutes the bank's net foreign exchange position. When the net foreign exchange position value is higher than 2%, the banks shall calculate the capital requirement by weighting this position by 8%. The capital requirement shall be filled out in column 090, in rows 030 and 040.
3.5.4 Other risks
In the calculation of total capital requirement for the foreign exchange risk, banks shall include also the capital requirement for non-delta risks related to foreign exchange options in the trading book.

This requirement shall be reported in rows 050-080 of the form, by column 090. Row 050 - Additional charge for options (non-delta risks) represents the amount of the capital requirement reflected in the following rows, 060-080. Row 060 – “Simplified method” represents the capital requirement calculated for those positions in foreign exchange options specified in article 176 of the regulation. Row 070 – “Delta plus approach - additional charge for gamma risk” represents the capital requirement for gamma risk of foreign exchange options, calculated in accordance with article 180, paragraph 3 of the regulation. Row 080 – “Delta plus approach - additional charge for vega risk” represents the capital requirement for vega risk of foreign exchange options, calculated in accordance with
article 180, paragraph 5 of the regulation.
3.5.5 Capital requirement
Banks shall calculate the total capital requirement for the foreign exchange risk in column 090, row 010 as the sum of capital requirements for foreign exchange positions (row 030 + row 040) and the capital requirement for non-delta risk options (row 050). Banks shall calculate risk-weighted exposures for this risk by multiplying the total capital requirement with 12.5 and the result is reflected in column 100, row 010.
3.6 Form MKR SA SEC- Standardised approach for specific risk in
securitisations
3.6.1 General provisions
This form presents information on the positions (all/net and long/short) and on the corresponding capital requirements, for the specific risk element in securitizations/re￾securitizations, which are held in the trading book (which are not eligible for the trading correlated portfolio), according to the standardized method. This form presents the capital requirement only for the specific risk of securitization positions, in accordance with article 152/1 of this regulation, related to article 153/1. In cases where the securitization positions of the trading book are hedged by credit derivatives, articles 149 and 151 of this regulation apply. The capital requirement for the general risk of these positions is reported on the MKR SA TDI form. Positions which are weighted with a risk weight of 1250% may, as an alternative, be deducted from Common Equity Tier 1 Capital (see point “b” of article 99/1, point “b” of
article 100/1 and article 108 of regulation). In these cases, the above positions are
reported in row “1.1.1.13” of Annex 1 of regulation “On the bank’s regulatory capital”.

3.6.2 Content of the columns
This form contains 49 columns, with the following content:
Columns 0010 - 0020 - All positions (long and short) These positions are reflected in article 138 and article 142, paragraph 1 of the regulation, together with article 153/1 of the regulation (securitization positions). Columns 0030 – 0040 – Positions deducted from capital (long and short) According to article 99, paragraph 1, letter “b”; article 100, paragraph 1, letter “b” and
article 108 of the regulation.
Columns 0050 – 0060 – Net positions (long and short) According to articles 146, 147 and 152 of the regulation. Columns 0061 – 0104 – Breakdown of net positions according to risk weights According to articles 114 (Tables 13 and 14) and 109 of the regulation. The division is carried out separately for long and short positions. Columns 0403 – 0406 – Breakdown of net positions according to approaches According to article 109 of the regulation. Column 0403 – SEC - SA According to article 113 of the regulation. Column 0404 – SEC - ERBA According to article 114 of the regulation. Column 0406 – Other (Risk weight = 1250%) According to article 109, paragraph 6 of the regulation. Columns 0530 - 0540 - General effect (adjustment) when the bank does not meet the requirements provided for in chapter V/subchapter III of the regulation According to article 119 of the regulation. Column 0570 – Before the cap According to article 153/1 of the regulation, without considering the possibility of choice presented by article 152/1 of the regulation, which allows the bank to set a cap on the capital requirement for the specific risk of a net position in a debt instrument, considering the largest possible loss associated with the default risk.

Column 0601 – After the cap / total capital requirements According to article 153/1 of the regulation, taking into consideration the possibility of choice presented by article 152/1 of the regulation.
3.6.3 Content of the rows
This form contains 11 rows with the following content:
Row 0010 – Total exposures
This row contains the total amount of outstanding securitizations and re-securitizations (held in the trading book), which are reported by the bank that has the role(s) of originator, investor or sponsor. Rows 0040, 0070 and 0100 – Securitization positions According to article 4, letter “c”, point 47 of the regulation. Rows 0020, 0050, 0080 and 0110 – Re-securitization positions According to article 4, letter “c”, point 45/4 of the regulation. Rows 0030 – 0050 – Originator According to article 4, letter “c”, point 48 of the regulation. Rows 0060 – 0080 - Investor According to article 4, letter “c”, point 55 of the regulation. The bank that holds a securitization position in a securitization transaction for which it is neither the originator nor the sponsor, nor the original lender. Rows 0090 – 0110 – Sponsor According to article 4, letter “c”, point 49 of the regulation. A sponsor that also securitizes its own assets will complete the originator rows with information about its own securitized assets.
3.7 Form MKR SA CTP - Standardised approach for specific risk in the
correlation trading portfolio
3.7.1 General provisions
This form presents information on the positions of the correlation trading portfolio (CTP) (which includes securitization positions, nth-to-default credit derivatives and other CTP positions, included in accordance with article 153/2, paragraph 3 of the regulation) and that meet capital requirements under the standardized approach.

The MKR SA CTP form presents capital requirements only for specific risk positions that are assigned to CTP, in accordance with article 152/1 of the regulation, together with paragraphs 2 and 3 of article 153/2 of the regulation. In case the CTP positions of the trading book are hedged by credit derivatives, articles 97, 98 and 151 of the regulation shall apply. There is only one form for all CTP positions of the trading book, regardless of the method banks use to determine the risk weight for each of the positions, in accordance with Chapter V of the regulation. The capital requirements for the general risk of these positions are reported on the form MKR SA TDI – Debt Securities Position Risk. This form separates securitization positions, nth-to-default credit derivatives and other CTP positions. Securitization positions are always reported on rows 0030, 0060 or 0090 (depending on the bank’s role in the securitization). Nth-to-default credit derivatives are always reported in row 0110. “Other CTP positions” are positions that are neither securitization positions nor nth-to-default credit derivatives (see article 153/2, paragraph 3 of the regulation), but are explicitly “linked” to one of these two positions (due to the hedging intent). Positions weighted with a risk weight of 1250% may alternatively be deducted from Common Equity Tier 1 Capital (CET1) (see article 99, paragraph 1, letter “b”; article 100, paragraph 1, letter “b” and article 108 of the regulation). In this case, these positions are reported in row “1.1.1.13” of Annex 1 of regulation “On the regulatory capital of the bank”.
3.7.2 Content of the columns
This form contains 36 columns with the following content:
Columns 0010 - 0020 - All positions (long and short) According to article 138 and article 142, paragraph 1 of the regulation, together with paragraphs 2 and 3 of article 153/2 of the regulation (positions assigned to the correlation trading portfolio). Columns 0030 – 0040 - Positions deducted from capital (long and short) According to article 108 of the regulation. Columns 0050 – 0060 - Net positions (long and short) According to articles 146, 147 and 152 of the regulation. Columns 0071 – 0097 - Breakdown of net positions according to risk weights According to articles 114 (Tables 13 and 14) and 108 of the regulation. Columns 0403 – 0406 – Breakdown of net positions according to approaches According to article 109 of the regulation. Column 0403 – SEC - SA According to article 113 of the regulation.

Column 0404 – SEC - ERBA
According to article 114 of the regulation.
Column 0406 – Other (Risk weight = 1250%)
According to article 109, paragraph 6 of the regulation.
Columns 0410 - 0420 – Before the cap – Weighted net long/short positions According to article 153/2 of the regulation, without taking into consideration the possibility of the choice presented by article 152/1 of the regulation. Columns 0430 - 0440 – After the cap – Weighted net long/short positions According to article 153/2 of the regulation, taking into consideration the possibility of the choice presented by article 152/1 of the regulation. Column 0450 – Total capital requirement The capital requirement is defined as the greater value between: (i) the specific risk weight that would apply only to the net long positions (column 0430) and (ii) the specific risk weight that would apply only to the net short positions (column 0440).
3.7.3 Content of the rows
This form contains 12 rows with the following content:
Row 0010 – Total exposure
This row contains the total amount of outstanding positions (held in the correlation trading portfolio), which shall be reported by the bank that has the role of originator, investor or sponsor. Rows 0020 – 0040 - Originator According to article 4, letter “c”, point 48 of the regulation. Rows 0050 – 0070 - Investor According to article 4, letter “c”, point 55 of the regulation. The bank that holds a securitization position in a securitization transaction for which it is neither the originator nor the sponsor, nor the original lender. Rows 0080 – 0100 – Sponsor According to article 4, letter “c”, point 49 of the regulation. A sponsor that also securitizes its own assets will complete the originator rows with information about its own securitized assets.

Rows 0030, 0060 and 0090 – Securitization positions The correlation trading portfolio includes securitizations, nth-to-default credit derivatives and possibly other hedging positions, which fulfill the criteria defined in paragraphs 2 and 3 of article 153/2 of the regulation. Derivatives of securitization exposures, which provide a pro-rata share, as well as positions hedging CTP positions, are included in the row “Other CTP positions”. Row 0110 – Nth–to-default credit derivatives Nth-to-default credit derivatives, which are protected by nth-to-default credit derivatives, in accordance with article 149, paragraph 3 of the regulation, are both reported in this row. The originator, investor and sponsor of the positions are not eligible for nth–to-default credit derivatives. As a result, the breakdown to which securitization positions are subject cannot be provided for nth-to-default credit derivatives. Rows 0040, 0070, 0100 and 0120 – Other CTP positions This row includes the following positions:

• Derivatives of securitization exposures, which provide a pro-rata share, as well
  as positions hedging CTP positions;
• CTP positions hedged by credit derivatives, in accordance with article 151 of the
  regulation;
• Other positions, which fulfill the requirements of paragraph 3 of article 153/2 of
  the regulation.
  4 Capital requirement for operational risk
  4.1 Form OPR - Operational risk
  4.1.1 General provisions
  This form is used to report on the capital requirements for operational risk under the Basic Indicator Approach, the Standardised Approach, and the Advanced Standardised Approach. Banks shall report only that part of the form that refers to calculations for the selected approach to calculate the capital requirement. Banks shall not fill in the fields in red. This form shall be reported at the end of every year.

4.1.2 Basic Approach
To report the capital requirement according to this approach, banks shall report in columns 010-030 the net income from banking activity for the last three years calculated in accordance with article 184, paragraph 1, 2 and 3. (Years: T-3, T-2, T-1, where T is the actual reporting year). Banks shall report the capital requirement in cell 070/010 (column/row), calculated in accordance with article 184, paragraph 4. Banks calculate risk-weighted exposures for this risk by multiplying the total capital requirement with 12.5 and the result is reflected in cell 071/010.
4.1.3 Standardized Approach
To report the capital requirement according to the standardized approach, banks shall fill in rows 030-100, in columns 010-030, the net income from banking activity for the last three years in accordance with article 185 (table 30) of the regulation. Banks shall report the capital requirement in cell 070/020, calculated in accordance with
article 185, paragraph 1.
4.1.4 Advanced Standardized Approach
Rows 110 and 120, in columns 040-060 are related to specific reporting requirements according to the advanced standardized approach. In these rows, banks shall report the alternative indicator for both business rows, Commercial Banking and Retail Banking, in accordance with article 185, paragraphs 2 and 3. Banks shall report the capital requirement in accordance with this approach in cell 070/020. 5 Form CAR - Capital Adequacy Ratio This form is used to reflect the calculation of the capital adequacy ratio by banks. The form shall be reported quarterly.

ANNEX 8

149 Repealed by the Decision No. 34, dated 2.5.2018 of the Supervisory Council of the Bank of Albania.