financial stability report - Banka Qendrore e Republikës së Kosovës

Financial Stability Report
Number 3
The stress-test analysis also tests the ability of each of the banks to cope with the failure of
the three largest borrowers. The assumption that the three largest borrowers would fail in
each of the banks reduces the CAR of some banks below 12 percent, whereas the total CAR
of the banking system will continue to remain above the required regulatory level. The CAR
of the three banks would decrease below 12 percent, and in order to bring back the level of
CAR of these three banks to the minimum required level of 12 percent, a capital injection
equivalent to 0.48 percent of GDP would be needed. Under the assumption of the failure of
the five largest borrowers of each bank, the value of the capital injection would be
equivalent to 0.7 percent of GDP.
In addition, the results suggest that banks seem to be able to cope with quite high levels of
NPLs without the need for recapitalization. The lowest level of the NPL ratio when one of
the banks would need additional capital (so that the CAR remains at 12 percent) is 8.1
percent, whereas in one of the banks, only after the NPL ratio reaches 33.1 percent,
additional capital would be needed. The whole banking system can withstand an NPL ratio
up to 21.1 percent without facing problems in maintaining the CAR at the regulatory
required level of 12 percent.
6.5.2 Liquidity risk
Methodology
The stress-test analysis on the liquidity risk is based on a scenario of a more significant
withdrawal of deposits from the banking system. The withdrawal of deposits over a period
of five consecutive days was considered, without taking into account the possibility of
banks’ access to external financing. Liquidity risk scenario is based on a very conservative
assumption: deposit withdrawal at a rate of 10 percent of total deposits over a five-day
period. The scenario is also built under the assumption that during this period, banks have
the ability to convert liquid assets into cash at a rate of 80 percent, whereas the possibility
of converting illiquid assets into cash would be just one percent of these funds within a day.
It is also assumed that the banks have full access to their reserves, while not considering
the possibility of bank financing through external funding sources. Besides the fixed rate of
10 per cent of deposit withdrawals on a daily basis, another scenario considers deposit
withdrawals with progressive rates, ranging from 5 percent to 10 percent over a period of 5
days. Along with the above mentioned scenario, an additional scenario within the liquidity
risk analysis also considers the withdrawal of the largest depositors in each bank, together
with the maximum level of deposit withdrawal that banks can withstand, without needing
additional liquid assets. The stability of the banking system in this analysis is tested in
terms of assessing the sufficiency of banks' liquid assets to meet such withdrawals of
deposits.
Results
In the previous sections of this publication, it is stated that Kosovo's banking system is
considered to be highly liquid, which is confirmed by the high level of liquidity indicators.
The ‘core’ liquid assets and ‘broad’ liquid assets constitute 22.6 percent and 28.9 percent of
total banking assets, respectively. Thus, even under the assumption that the above
scenarios are likely to emerge in practice, the banking system would prove to be resilient
against the liquidity risk. In general, based on the scenario of a consecutive five-day deposit
withdrawal, the stress-test results suggest that Kosovo’s banking system appears to have a
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