Financial Crime World

Risk Assessment Crucial for Financial Institutions in Albania Amidst Economic Uncertainty

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The Bank of Albania has emphasized its commitment to identifying and mitigating systemic risks that could threaten the stability of the financial system and real economy. Systemic risk, which refers to the possibility of distress in the financial system, can manifest itself in both cyclical and structural dimensions.

Cyclical Dimension of Systemic Risk

The cyclical dimension of systemic risk is largely driven by the risk appetite of financial institutions during periods of economic growth, followed by excessive risk aversion during downturns. This volatility can lead to:

  • Unstable financial developments
  • Hasty asset sales
  • A sharp decline in asset prices
  • Weakening balance sheets and contracting credit

Structural Dimension of Systemic Risk

The structural dimension of systemic risk arises from the expansion of risk within the financial system itself. Large or interconnected financial institutions are particularly vulnerable to:

  • Local economic and financial shocks
  • Cross-border economic and financial shocks
  • Far-reaching consequences for the entire financial system

Mitigating Systemic Risks

To mitigate these risks, the Bank of Albania conducts regular analyses of indicators related to:

  • The real economy
  • Banking sector
  • Financial markets

The analysis helps identify and assess systemic risks, with the support of stress tests designed to gauge the ability of the banking sector to absorb losses resulting from adverse events in the real and financial sectors.

In addition, the central bank develops surveys with participants in the financial market to identify structural weaknesses that could lead to systemic instability. The results and estimates of these analyses are published in the Financial Stability Report, providing valuable insights into:

  • The state of the financial system
  • Potential risks on the horizon

Conclusion

By proactively identifying and addressing systemic risk, the Bank of Albania is working to maintain a stable financial system that supports economic growth and prosperity in Albania.