financial stability report - Banka Qendrore e Republikës së Kosovës

Number 3
Financial Stability Report
Kosovo's banking system continues to be characterized by a high degree of capitalization
and capital quality. Capital adequacy ratio (CAR) remains at 17.2 percent, significantly
exceeding the 12 percent minimum required by the CBK. Moreover, 60 percent of the total
capital consists of the share capital. The indicated high level of capitalization and capital
quality do point to the stability of Kosovo’s banking system and its satisfactory ability to
cover potential losses from external shocks. In addition, the satisfactory sustainable
position of the system is confirmed by stress-test analysis, the results of which show that
the banking system in Kosovo, in general, would be able to cope with “extreme” scenarios of
liquidity, credit, exchange rate, and interest rate risks. More specifically, the results
suggest that Kosovo's banking system would be able to withstand high degrees of
hypothetically instant deposit withdrawal rates, with the current level of liquidity.
Additionally, due to the high level of capitalization, Kosovo's banking system appeared able
to cope with the considerable potential increase in the level of non-performing loans, in
which case the need for recapitalization would arise to only a few individual banks. On the
other hand, the banking system's exposure to currency and interest rate risks continues to
be marginal, due to the low presence of flexible interest rate loans and deposits and low
level of foreign currency loans.
The infrastructure of the existing banks, albeit with a slower growth trend of branches and
sub-branches expansion, has continued its overall expansion - thus further increasing the
quality and volume of banking services accessed by citizens and businesses. Significant
contribution to the increased quantity and effectiveness of banking services has been made
by the continuous expansion of the ATM network and POS devices, which enable payment
processing at the points of sale. Although these services are growing at a fast pace, Kosovo
lags behind in the level of development and usage of electronic banking services compared
to the region. The development of the payment system has advanced in terms of both
increased security and sustainability, as well as increased efficiency. The number and value
of transactions processed through the Kosovo payment system has increased, along with
the increased payment security and sustainability supervisory measures. The issuance of
securities by the Government of the Republic of Kosovo, which commenced in January 2012
and for which the CBK acted as government’s fiscal agent, had a significant impact in
increasing the number of transactions processed through the payment system. It also
marked a significant increase in Kosovo’s financial sector stability and efficiency, thus
setting the grounds for country’s capital market development. The CBK is also in the final
stage of development of a more advanced payments’ system (RTGS system) which enables
real-time settlement of urgent and systemic payments between banks and local government
institutions, thereby reducing the potential risks from delays in settlements.
Other Financial Institutions, which in June 2012 accounted for 25.4 percent of total
financial sector assets, consist of pension funds, insurance companies, microfinance
institutions and financial auxiliaries. Kosovo’s pension system assets, most of which are
managed by the Kosovo Pension Savings Trust (KPST), marked an annual growth of 19.5
percent, amounting to 659.1 million euros. Most of these assets consist of investments in
overseas shares, the price of which increased over the observed period, and of investments
in overseas securities, which account for a significant share. In 2012, KPST invested 5
percent of its assets in the domestic market by placing deposits in commercial banks in
Kosovo, thus increasing the money supply in the market. The assets of insurance
companies also marked a significant increase of 16.3 percent, amounting to 120.2 million
euro in June 2012. Nevertheless, their profit halved, falling to 0.6 million compared with
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