The Interdependence of Financial Risk and Operational Risk in Banking Institutions and Non-Bank Financial Institutions within Albanian Environment. [A Contribution of Draft Framework]

Doc. Msc. Ilir Hoti, Dr. Vera Ivanaj, Prof. As. Dr. Palok Kolnikaj



The continuum Risk Management is essential for long-term sustainable performance of Banking Institutions and Non Bank Institutions. This paper presents a comprehensive framework from a new viewpoint of risk identification, measurement and control in financial transactions and the operational risk involvement per each transaction. The impact of risk assets to the capital adequacy and other forms of the capital (economic capital and regulatory capital) propenses toward a Risk Management and Control Manual with an advanced framework for early warning systems.
In managerial terms, either the financial or the operational risk are finite products. The Bank of Albania has recently approved a regulation for operational risk management [adopted in March 2011], but it misses a sound policy and methodical structure. On the other hand there is a time gap that does not afford a consequent continuity of the Regulations. This is because the regulations are approved by time lag difference of 3-4 years. Meanwhile from 1991-2011 there were no operational risk regulations.
Jeopardizing such a vacuum requires to review the goal of any business by getting rid from the previous and propensing to a new one. So far we support the idea that the main aim of any business is not just ‘the profit maximization’ or ‘the maximization of shareholders wealth’ but profit maximization and/or the maximization of shareholders wealth with minimum cost of risk‘. The paper redefines the concept and practice of risk minimizing by segregating it from the concept and practice of minimizing the cost of risk. This is a new way of financial thinking quite concurrent with challenges of crisis and financial volatilities.
The proposed approach for Risk Control offers several components convergent with applications of Basel III doctrine. This work highlights many new insights on the selection and weighting indicators of capital adequacy, capital structure levels, the establishment of Early Warning systems, and other complementary components.


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