Systemic risk assessment

Systemic risk is the possibility of distress in the financial system that may lead to serious adverse consequences for the functioning of the financial system and the real economy. Systemic risk may appear in the cyclical and structural dimensions.

1. The cyclical dimension of the systemic risk stems from the risk appetite of the financial institutions in economic growth periods, and too much risk aversion in economic downturn periods. All these are accompanied by unstable financial developments during the expansion phase of the economic cycle which, afterwards, during its downturn, may lead to hasty asset sales and a sharp decline of their price, weakening of balance sheets, stress of the funding situation and contraction of credit.
2. The structural dimension of systemic risk stems from the expansion of risk within the financial system. It occurs when financial institutions are so large or are so interconnected that when they are affected by an unfavourable local or cross-border economic or financial development , the consequence may jeopardise the stability of the entire financial system.

For the systemic risk assessment, the Bank of Albania analyses regularly the indicators of the real economy, the banking sector and the financial indicators. The analysis helps to identify and assess systemic risks, with the support of the stress test. These tests aim to prove the ability of the banking sector to cope with losses resulting from the materialization of adverse, but possible, events in the real and financial sector. Also, the Bank of Albania develops surveys with the participants of the financial market, which help identify the weaknesses in the structure and functioning of the financial system, which may lead to systemic instability. The results and estimates of the above analysis are also published in the Financial Stability Report.