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

Number 1Financial Stability ReportThe improvements in the real sector of the economy were also reflected in the performanceof the global financial system. During 2010, most of financial markets (stock markets,money markets) recorded animprovement in the performance.This resulted in the return ofinvestors’ confidence and decline inthe volatility of financial markets,which was quite evident in theFigure 1. EURIBOR and LIBOR interest rates6.00%5.00%4.00%3.00%2.00%previous periods. The actions taken1.00%to support the liquidity position of0.00%the financial system and creditgrowth as had a positive influenceEURIBOR 1 mujorEURIBOR 3 mujoron the increase of activity in moneyLIBOR 1 mujorLIBOR 3 mujorand equity markets. Thesedevelopments contributed to the Source: Datastreamslowdown and alleviation of theimpact of the crisis.Nevertheless, risks remain present; therefore, it is needed a continuous awarenes bygovernments and central banks to prevent the decline of economic activity and the return ofuncertainty in financial markets. Given the high level of public debt in many developedcountries, especially in the eurozone, the scope for potential actions is very limited. Theincrease of public debt led to a deterioration of sovereign ratings for countries facing fiscaldifficulties, which was reflected in higher premiums for government bonds. However fiscaldifficulties can have spill over effectFigure 2. Annual change of indices of the threeon the banking system. First,considering that commercial banksinvest considerable funds ingovernment bonds, the default of agovernment to service its liabilitieswould cause considerable losses forbanks. Second, the country ratinghas a substantial impact also forthe cost of financing for the privatesector. The deterioration of countryrating increases the cost of externalfinancing for commercial banks andmay have negative implications forlargest stock markets60.0%40.0%20.0%0.0%-20.0%-40.0%-60.0%Jan 2006Mar 2006May 2006Jul 2006Sep 2006Nov 2006Jan 2007Mar 2007May 2007Jul 2007Sept 2007Nov 2007Jan 2008Mar 2008May 2008Jul 2008Sept 2008Nov 2008Jan 2009Mar 2009May 2009Jul 2009Sept 2009Nov2009Jan 2010Mar 2010May 2010Source: DatastreamNikkei 225 Stock Average IndexDow Jones Euro Stoxx 50 Price IndexStandard & Poors 500 Composite Indexthe stability of the entire banking sector. One of the countries that are experiencing such ascenario is Greece, where the weak fiscal position contributed to the downgrading ofsovereign rating which in turn will increase the cost of financing for public and privatesector. While economic activity is increasing, lending is lower than in the pre-crisis perioddeteriorated in many developed countries. Asean economies are an exception, wherelending has increased continuously. In some countries, such as China, the regulatoryauthorities have taken measures to slowdown the credit growth in order to avoid potentialasset bubble.16 |