Credit risk measurement of the Albanian banking system- Applicability of Z-index

 MSc. Artiola Agalliu (PhD cand.)1, Prof. Asoc. Dr. Orfea Dhuci2

 

Abstract
Albanian banking system owns the majority of the share within the country financial system, in numbers about 93.6% of the financial sector total assets at the end of 2012, or about 87.9% of the country’s GDP. The high weight and its undispensable role in the Albanian economy developments justify the high public attention toward its trend, especially for the financial conditions of the system.
The risks to which the banking system is exposed and the exposure itself are crucial indicators of the risk inherited from the system. Among others, the main risks of the banking system are credit risk, market risk (mainly foreign exchange risk and interest rate risk), liquidity risk and operational risk. Credit risk is the most important one since the loan portfolio owns the highest share in the total assets of the banking system and counterparty risk is also another important element of credit risk.
The main aim of this article is the credit risk measurement of the Albanian banking system. As such, the Z index has been used for this purpose, as well as probability of insolvency has been derived from it as a very good proxy of the level of credit risk in banks. Such indexes have been calculated using the 5-years moving average values while the historical trend is of crucial importance since it refers the credit risk level and trend of the system.

Keywords: credit risk, Z-index, probability of insolvency, credit risk measurement, Albanian banking system.
JEL: G21, D81, G29

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