Financial Stability Report No1 20 December 2010 - Banka Qendrore ...

Financial Stability ReportNumber 11. ForewordThe Central Bank of the Republic of Kosovo is pleased to present to the public the firstedition of the Financial Stability Report. This publication, which is enriched in its contentand improved in quality, is a continuity of the Financial Sector Bulletin that has beenpublished on yearly basis since 2005. The Financial Stability Report aims at informing thepublic, professionals, and decision-making authorities on the financial sector developments,with particular focus on the banking sector, by identifying fragilities and risks threateningthe stability of this sector. Based on the Law on the Central Bank of the Republic of Kosovo,the primary objective of this institution is to ensure financial sector stability. Sincefinancial crises have high economic and social costs, financial stability represents animportant objective for policy-makers. Consequently, the publication of Financial StabilityReport represents a continuity of engagements of the Central Bank contributing to thestability of this sector. By informing the public on the state of the financial sector, theCentral Bank aims at increasing the transparency and eliciting the professional debate onthe developments and challenges of the domestic financial sector.Considering the degree of integration of the global finances, this edition of FinancialStability Report initially concentrates on main international macroeconomic and financialsector developments, in order to identify potential external risks to the financial sector ofKosovo. Developments in the real, external and fiscal sectors are jointly determined withdevelopments in the financial sector and represent an important determinant of theperformance of this sector. Thus, the report continues with an analysis of macroeconomicdevelopments in the domestic economy. The report then presents an overview of the generalcharacteristics of Kosovo's financial sector. A special focus is given to the banking sector, soit continues with a more detailed analysis of the latest developments with regard to theactivity and the performance of this sector.In order to provide a clearer view of sustainability and potential risks facing the bankingsector, this report also addresses banking sector risks, including liquidity risk, credit riskand solvency risk. Also, the methodology and results of the stress–test for Kosovo’s bankingsector are presented, thus providing an assessment on the ability of Kosovo’s banking sectorto absorb potential shocks. Part of the report is dedicated to main developments in othersectors of Kosovo’s financial system and interrelation with the banking sector.Financial sector stability, apart from the ability to absorb shocks, also means an efficientfunctioning of markets, institutions and infrastructure supporting the financial system foran efficient allocation of resources. Therefore, this edition of the Financial Stability Reportalso presents four special topics that elaborate specific segments of the banking sector andinteractions with other factors in the economy. The first topic addresses issues related toeconomic growth and financial stability in SEE countries. Second analysis decomposes thecost of intermediation in Kosovo’s banking sector and compares it with several countries inthe region, thus providing a general idea on the factors that determine loan interest rates.The third topic addresses issues related to the enforcement of creditor rights in Kosovo andis based on the results obtained from a survey with commercial banks in Kosovo. The lastanalysis presented in this report deals with the issue of access to finance in Kosovo, basedon data from Business Environment and Enterprise Performance Survey (BEEPS).Gani GërguriActing Governor| 9