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

Number 1Financial Stability ReportThe structure of investments in securities is primarily focused on three main categories,consisting of investments in government bonds, financial corporations’ bonds and nonfinancialcorporations’ bonds. Figure 31 shows that there was a large shift frominvestments in financial corporations’ bonds to government bonds from the third quarter of2009. While in June 2009, 98.1 percent of commercial banks' investments in securitiesconsisted of financial corporations’ bonds, in June 2010, 81.5 percent of securities consistedof government bonds. The share of financial corporations’ bonds to total bank investmentsin securities, in June 2010, was only 18.2 percent. Meanwhile, banks' investments in nonfinancialcorporations’ bonds represent only 0.3 percent of total investments in securities.The shift of investments from financial corporations’ to government bonds might beattributed to the increase of premiums in the bonds of some foreign governments in therecent period.Maturity mismatch between assets and liabilities represents another important aspect ofliquidity risk. A more pronouncedmaturity mismatch is noticed in thematurity bucket of ‘more than 1Figure 32. Liquidity Gap, difference between totalassets and liabilities based on maturityyear’, where the assets of thismaturity considerably exceed theliabilities (Figure 32). The maturity40,00030,00020,000mismatch between assets and10,0000liabilities mostly reflects the1-7 days 8 - 30 days 31 - 90 days 91 - 180 181 - 365 More than 1-10,000days days yeardifferences between the maturity of -20,000loans and deposits, given that theyconstitute the majority of assets and-30,000-40,000liabilities, respectively. In June-50,0002010, 53 percent of loans hadmaturity of ‘more than 1 year’, whileJune 2009 June 201098.4 percent of deposits had Source: CBK (2010)maturity of ‘less than 1 year’.Banking sector activity should be focused more on attracting liabilities with longermaturity, which will narrow the liquidity gap, and hence decrease the liquidity risk.Furthermore, the increase of funds with longer maturity ensures a more sustainablegrowth of long-term lending.Credit riskDespite the better performance of the economy in the first half of 2010, Kosovo’s bankingsector continued to apply more stringent lending criteria. This reflects the conservativeapproach applied by banks in managing their credit risk as a consequence of the globalcrisis. Despite the positive economic growth rate that was registered in Kosovo in 2009, andprojections for even higher growth in 2010, the effects of global crisis were present also inthe economy of Kosovo, causing a slower growth rate. This may have had an impact on thedebt servicing capacity of the borrowers, resulting in a deterioration of the quality of loanportfolio at the banking sector.The structure of loans based on quality classification changed marginally, with a slightshift from the category of standard loans (which represent loans without problems) towards42 |