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Albania’s Financial Institutions Under Scrutiny: Bank of Albania Assesses Systemic Risk

In an effort to mitigate potential financial catastrophes, the Bank of Albania has been diligently monitoring and assessing systemic risk within the country’s financial institutions. Systemic risk refers to the likelihood of widespread distress in the financial system that could have devastating consequences for both the economy and real estate.

Understanding Systemic Risk

Experts identify two distinct dimensions of systemic risk: cyclical and structural.

Cyclical Risks

• Arise from fluctuations in economic growth periods, where financial institutions become over-optimistic during expansion phases, only to become overly cautious during downturns.
• This seesaw effect can lead to:
  • Asset sales
  • Balance sheet weakening
  • Funding stress
  • Credit contraction

Structural Risks

• Stem from the exponential growth of risk within the financial system itself.
• Large and interconnected financial institutions are particularly vulnerable to local or cross-border economic shocks that could imperil the entire financial system.

Assessing Systemic Risk

The Bank of Albania regularly analyzes a range of indicators, including:

• Real economy performance
• Banking sector health
• Financial market trends

Additionally, the central bank conducts stress tests to assess the resilience of the banking sector in the face of potential adverse events. The bank also surveys key players in the financial market to identify structural weaknesses that could lead to systemic instability.

Financial Stability Report

The findings from these assessments are published in the Financial Stability Report, which serves as a vital tool for policymakers and stakeholders alike. By keeping a watchful eye on systemic risk, the Bank of Albania is well-positioned to prevent potential financial calamities and ensure the stability of Albania’s financial system.