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

Number 1Financial Stability ReportThis approach generalizes the intermediation costs related to overall banking operations.For example, interest received when relating to total assets does not make the distinctionbetween assets invested in low-risk low-return investments such as placements in banksabroad, government bonds and, on the other hand, assets invested in high-risk high-returnloans in the domestic market. However, the approximation is not unrealistic providedsimilarities in the ratio of loans to domestic economy to total assets for countries in theregion ranging from 58.48% in Kosovo to 66.24% average for the countries in the regionincluded in this analysis (see Table 2). Also provisions relate to total banking operationsand not explicitly to banks’ lending activity in the domestic market. Considering this, thenext section aims at decomposing the intermediation costs related to lending to domesticeconomy for the banking sector of Kosovo and other countries in the region.9.3. Decomposing intermediation spreadThe decomposition of the ex post intermediation costs is made into the funding, operational,risk and regulatory costs. This approach uses balance sheet and income statementinformation and under the set of assumptions approximates the intermediation cost relatedto domestic economy only. The analysis follows the basic accounting identityII NII IE C Pv Tax Pwhere interest income (II) plus noninterest income (NII) equals interest expenses (IE),operating costs (C), provisions for loan losses (Pv), taxes paid (Tax) and profit (P). However,this framework does not take into account behavioral effects of macroeconomic factors,institutional factors nor the bank and market-specific factors such as economies of scale,market power, etc., which may be reflected in the cost/revenue components.Regarding the institutional failures which to a great extent contribute to the credit risk,based on a survey with banks in Kosovo, a study on the enforcement of creditor rights hasbeen conducted recently, where Kosovo appears to compare well with other countries in theregion and wider. Similar results are presented also by the World Bank’s Doing Business(2011), where Kosovo compares well with other countries with regard to the days needed forthe enforcement of a contract and with regard to the protection of creditor rights by law.Nevertheless, the survey results suggest that institutional inefficiency still represents anobstacle, causing delays in the execution of collateral, which may increase banking sectorexpenditures and credit risk, which are then reflected in the lending rate. As a matter ofthe macroeconomic factors, due to the use of euro, Kosovo is characterized with stableinflationary environment although external imbalances, low economic activity and highunemployment rate may increase the general risk perception.9.3.1 Ex-post lending rateCosts that incur to borrowers are the interest rate they pay for the loans they get, plus feesand commissions. For example, ex ante interest rate does not reflect those loans that do not78 |