financial stability report - Banka Qendrore e Republikës së Kosovës

Number 3
Financial Stability Report
9. Identifying Systemically Important Banks in Kosovo
Albulenë Kastrati* 19
Abstract
This article elaborates the concept of the systemic risk in the financial sector, giving
emphasis on a relatively new concept in the finance literature, that of systemically
important financial institutions (SIFIs). The importance of the debate on SIFIs lies in the
fact that these institutions are essential for the smooth functioning of the financial sector,
but also their breakdown or bankruptcy poses serious threat to the financial and
macroeconomic stability. In order to provide a more comprehensive overview, this article
includes a model for identifying systemically important banks (SIB) in the financial sector
of Kosovo, which bases on the three criteria, namely, size, substitutability and
interconnectedness. The main findings of this analysis are that the three largest banks in
Kosovo clearly have systemic importance in all of the considered criteria; three biggest
banks, two other smaller banks are also considered as systemically important in the
substitutability criterion; whereas, besides having a negligible level of inter-bank
correlations, three largest banks in Kosovo results as systemically important.
9.1. Introduction
During the financial crises, financial institutions are more fragile to shocks and crises
(Bernanke and Gertler, 1989) and may easily cause severe implications in the whole
economy. The financial crisis that commenced in 2007/2008 serves as an example where the
failure of the individual institutions helped spreading the shocks across the financial
system and proclaimed the crisis into the real sector. Therefore, a key policy lesson from the
recent financial crisis has been the need to put a greater emphasis on securing financial
market stability, by paying special attention to the systemic risk (Tarashev et al., 2010). In
effect, the global financial crisis induced a large amount of the rethinking of the previous
financial regulatory frameworks (such as Basel II) and motivated reforms in regulating
financial institutions, particularly the large and interconnected institutions. This is
because, these particular financial institutions are significantly important for the wellfunctioning
of the financial sector as well as other sectors in the economy, and likewise may
pose serious consequences for the system and the economy. An emerging literature names
these institutions as systemically important financial institutions (SIFIs).
The original idea on the systemic risk is relatively old in the literature, dating back more
than twenty years ago. However, in terms of policymaking, the concept of SIFIs is relatively
new, and to the best of our knowledge, it emerged no earlier than in 2009.
The purpose of this paper is to analyse the systemic importance in the banking system of
Kosovo and to draw attention on the financial and economic costs inferred if the wellfunctioning
of these institutions is disturbed. We will also present an analytical framework
and the criteria used as instruments to identify SIFIs in the banking system of Kosovo. The
*Albulenë Kastrati is Economist at the Financial Stability and Economic Analysis Department in the CBK. Views expressed in this article are the Authors’ and
do not necessarily express the official views of the Central Bank of the Republic of Kosovo.
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