ISSN 2411-958X (Print) ISSN 2411-4138 (Online) European Journal of Interdisciplinary Studies September-December 2016 Volume 2, Issue 4 30 Understanding Implementation of Basel II and III in Albania: Obstacles and Solutions Sokol Ndoka PHD Cand. , European University of Tirana, Tirana, Albania Altin Zefi PHD. Cand. , European University of Tirana, Tirana, Albania Ermela Kripa Prof. Assoc. Dr , European University of Tirana, Tirana, Albania Abstract Banking Sector in Albania is suffering from high NPL levels, compared with historic levels of NPL in Albania, or with regional nations who have comparable economics. The 2008 crises in USA taught us the impact that the real economy can have from a crisis in Banking Sector. Thus the implementation of Basel III framework and its Capital Requirement ratios becomes crucially important for the stability of the Financial sector and stable growth of the economy. This paper firstly examines the state of Basel II implementation in Albania by the banking sector. The banking sector is primarily invested in government bonds and treasuries and lending to businesses and individuals but the high levels of NPL from both bankrupted businesses and individual poses a credit risks and wider market risks. Albanian Government has committed to speed up implementation of Basel II and Basel III on capital ratios. But questions remain: What’s the status of the implementation? Can the economy absorb the costs of implementing or not implementing Basel III? Secondly we research the additional costs associated with implementation of the banking sector. Because of the expansionary policy of the Bank of Albania the lending rates have fallen but not as fast as expected. Credit growth has been mostly stagnant posing a risk to the growth of the economy. For this study we use time series on Financial Institutions in Albania from the Bank of Albania on capital ratios as well as the policies and requirements set. We find that Basel II criteria have not been met and more can be done to prepare the implementation of Basel III. Keywords: Basel II, Basel III, Bank of Albania, Banking Sector, Implementation, Capital Requirements Introduction Financial sector is crucial to the development of the real economy, production and the transfer of the means of the production from the owner to entrepreneurs. But the financial sector also poses huge risks to the real economy. The 2008 sub-prime mortgage crises in the USA came to be known as the “Great Recession” a term reminiscent of the Great Depression of the 1930s. Albanian banking sector has been exposed to some of the same risks as its counterpart in the west. The NPL reached new levels risking to drag down the real economy. The causes of these NPL levels, which in September 2014 reached the level of 24,9%, are identified in the study of Meka. Lack of economic growth Declining remittances from emigrants Unpaid and deferred government obligations to businesses Loan making patterns applied by Albanian banks before and after the crises Chart 1: Source: International Monetary Fund, Global Financial Stability Report