financial stability report - Banka Qendrore e Republikës së Kosovës

Financial Stability Report
Number 3
6.5. Stress-Test Analysis
In addition to the analysis of the the current state of the banking system’s exposure to
credit risk, liquidity risk and solvency risk, the stress-test analysis represents another tool
for assessing the resilience of the sector from potential shocks, both, in credit portfolio and
in liquid assets. The results elaborated below are bank-level data for the period as of June
2012. This analysis tests the stability of the banking system against credit risk, combined
with the interest rate risk and the exchange rate risk, as well as the ability of the banking
system to preserve the liquidity level under hypothetical assumptions in case of large
deposit withdrawals.
6.5.1 Credit Risk
Methodology
The analysis is based on the hypothetical scenario that the economic crisis in the European
Union will continue reflecting in the Kosovo’s economy through the decrease of remittances
and exports, thus discouraging the aggregate demand in the country. Consequently, it is
supposed that the economic growth will be adversely affected, the output gap will increase
and the quality of credit portfolio will deteriorate.This scenario assumes that the economic
growth rate in kosovo will be 4 percent, which represents the average growth rate of the
five previous years. Further, an economic decline of 2.0 percent for 2012 is also assumed,
which in effect, would raise the output gap for 6.0 percent. For the purpose of assessing the
impact of output gap in the quality of the loan portfolio, namely in non-performing loans
(NPL), we have used elasticity coefficients for several countries in Central and
Southeastern Europe, 13 which are taken from an unpublished IMF report Hence,
considering a coefficient of 0.8 for the elasticity of NPLs against the output gap, the share of
NPL to total banking system loans would increase by 4.8pp. The credit risk is combined
with the interest rate risk and the exchange rate risk, where taking into account the recent
developments in some of the eurozoen countries, a decrease of interest rates and
depreciation of the euro against other currencies is assumed. In addition to the increase of
the share of NPL to total loans, this scenario also assumes a depreciation of the euro
against the U.S. dollar by 20 percent 14 and a decline in the interest rates by 2.0 pp.
A presumed increase in the NPLs ratio, leads to an increase of provisions; the depreciation
of the euro affects the revaluation of the losses/profits from net open positions; and the
reduction of interest rates affects the losses/profits from net interest income, considering
the maturity mismatch between loans and deposits. Apart from the assumptions on the
above mentioned shocks the expected profits are also considered for absorbing potential
losses. In this context, it is assumed that revenues from “commissions and fees” and other
non-interest revenues in 2012 would be equivalent to 60 percent of the level realized in
2011 (because it is assumed that there will be no increase of loans), while other components
of the income statement are assumed to be similar to those in 2011.
The assumed increase of NPLs is expressed through the migration of loans from performing
categories (standard, watch, substandard) towards non-performing categories (doubtful and
loss). The NPL growth was proportionally distributed within the categories of doubtful and
loss loans, taking into account the initial distribution of NPL in these categories. NPL
13 IMF unpublished note “CESE Bank Loss Projection and Stress Testing Exercise”, July 2009.
14 Supozim i bazuar në të dhënat historike mbi luhatjen e kursit të këmbimit valutor euro/dollar amerikan.
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