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

Financial Stability ReportNumber 1pay interest, have fallen in arrears, etc. To deal with this issue the ratio between theinterest income from loans derived from monthly income statements (flow data) and grossloans derived from monthly balance sheet (stock data) is calculated and the monthly flowdata are annualized and the ratio averaged over one year (to smooth the effect of theproblem when relating flow and stock data). In addition, banks in Kosovo charge 1-2% feeon each disbursed loan (processing/disbursement fee). To capture this and other possiblefees e.g., penalty for late loan re-payment, the ratio between the income from fees andcommissions (flow variable) and gross loans (stock variable) is calculated. To separate theincome from fees and commissions related to lending activity in the domestic economy only,the fee and commission item is multiplied with factor A. A represents for each period theshare of lending to domestic economy in the total balance sheet. It is assumed that thebanking sector activity devoted only to lending to domestic economy is captured by thisfactor. 149.3.2 Ex-post cost decompositionThe cost structure of banking sector is decomposed by calculating four components: fundingcosts, operational costs, risk costs and regulatory costs. Deposits represent the mostimportant source of finance for the banking sector lending activity. Funding costs or the‘actual’ deposit rate is derived by calculating the ratio of interest expenditures on depositsand other borrowings to total outstanding debt to clients (D). Again, the former being a flowvariable and the latter a stock variable, monthly flow data are annualized and the ratioaveraged over one year.Operational costs such as personnel costs, occupancy costs and other non interest costs maybe shifted to customers through higher interest rates. These costs are attributable to entirebanking activities. For the period 2004-2009 the largest proportion of operational costsconsisted of personnel costs (40 percent) and occupancy costs (40 percent). To separate theoperational costs related to lending to domestic economy only, we multiply the costs withfactor A. Relating this to gross loans (L) may give the operational costs devoted to lendingto domestic economy. This percentage is additional contributing factor to theintermediation costs related to lending activity of commercial banks.Provisions represent the risk that bankers perceive or assess in their portfolio and areadditional wedge to the intermediation costs. The risk costs is derived from the balancesheet data by dividing provisions for loan losses with gross loans to domestic economy on amonthly basis for each year in the period 2004-2009. In addition, based on actual dataaround 95% of provisioning is attached to loans to domestic economy.The regulatory costs cover taxation and mandatory reserves required by the central bank.Basically the same calculation logic is used for taxation, by relating provisioning for taxes(multiplied with factor A) with gross loans. Taxation and reserve requirement costs areexpected to be less important. After the ‘actual’ lending rate and all the cost componentsare calculated, the difference between the two reflects the residual (ε). This is composed ofother banking operations income and errors that result from assumptions made andcombining the flow data from income statement and stock data from balance sheet.The basic accounting identity is transformed in this form:14 Another possible assumption for factor A may be interest income from loans to total income. However, the results do not change significantly.| 79