Stress Testing of Credit Risk: Case Based on Loan Portfolio, Capital Adequacy and Non-Performing Loans in Kosovo

Nowadays the financial stability of the banking sector is a very controversial topic especially the assessment of the right quantity of capital that banks must set aside to be protect against various types of risks with which has to do the banking sector, it presents a big challenge. One of techniques that help to bring answer on the question whether a special bank or banking sector has a sufficient capital in case of crisis is a stress testing. So the stress testing analysis represents an important tool of sustainable assessment of the banking sector towards possible shocks on credit portfolio and on liquidity position, which can resulting from unfavorable economic development and changes on market conditions. Stress testing’s of the sensitivity of financial institutions towards macroeconomic shocks are a valuable assistance in the assessment of the economic stability. They allow a predictive analysis and an uniform approach for the identification of potential risks of the banking system in general.
The results of the analysis for stress testing that are made for the banking sector in Kosovo suggest satisfied abilities of this sector to meet unexpected situations of exposure toward possible risks. Although banks are facing with many risks, the credit risk which will be treated in this study aloud a great weigh. This study has intent to determine macroeconomic factors that have impact in quality of loan portfolios. Through the study we would present an analysis of financial situation in connection with the impending level of nonperforming loans, proceedings that are taken to reduce or to keep at sustainable level, also will be evaluated .The vulnerability of the banking sector toward sector risk as much as we have information on the macroeconomic level and to determine the indicators that warning the early
worsening in the quality of loan portfolio. Also through stress scenarios we could understand what will happen in different situations with nonperforming loans.

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