Advertisement

Stress-Testing at the Bank of Albania: Methodology of Approaches and the Quality of Forecasting

  • Ela GolemiEmail author
  • Vasilika Kota
Conference paper
Part of the Lecture Notes in Networks and Systems book series (LNNS, volume 91)

Abstract

The paper aims to present for the first time the methodology for building the stress-testing at the Bank of Albania, as well as to evaluate the quality of its forecasts. Through the forward- looking stress-testing analysis the financial system stability and capital adequacy in the banking sector are estimated for a period of up to two years. Regardless of the purpose of stress-testing to assess whether in the event of large losses the banking sector has the ability to absorb them and not to accurately predict the indicators of the banking sector, it is still important to assess whether the attitude toward risk is sufficiently conservative.

The results suggest that the forecast of the capital adequacy ratio is quite close to its actual values. However, disintegrating these developments by the contribution that comes from the underestimation of the regulatory capital, in order to preserve the conservative trend of the exercise, has eased the underestimation of the risk-weighted assets, mainly reflecting the changes in the regulatory framework of the Bank of Albania.

Following the results of the analysis, the paper proposes several ways to further improve the quality of forecasting. They relate mainly to the transition towards a dynamic stress test forecasting, the consolidation of the conservative trend for the forecasting of the regulatory capital and a preliminary assessment of the regulatory changes and their inclusion in the stress test.

Keywords

Stress-testing Capital adequacy Quality of forecasting 

References

  1. Blaschke, W., Jones, M., Majnoni, G., Martines Peria, S.: Stress testing of financial systems: an overview of issues, methodologies and FSAP experiences. IMF Working Paper (2001)Google Scholar
  2. Geršl, A., Seidler, J.: Conservative stress testing: the role of regular verification. Working Paper, Czech National Bank (2010)Google Scholar
  3. Haldane, A.G.: Why Banks Failed the Stress Test, Speech given at the Marcus Evans Conference on Stress-Testing, 9–10 February 2009Google Scholar
  4. Jorion, Ph.: Risk management lessons from the credit crisis. In: European Financial Management (2009)Google Scholar
  5. Zoltan, M.J., Kota, V., Dushku, E.: Macro econometric model of Albania: a follow up. In: 7th Conference of the Bank of Albania, Monetary Policy Strategies for Small Economies (2007)Google Scholar

Copyright information

© Springer Nature Switzerland AG 2020

Authors and Affiliations

  1. 1.University “Aleksandë Moisiu”DurrësAlbania
  2. 2.Bank of AlbaniaTiranaAlbania

Personalised recommendations