Measurement of Credit Risk by Macroeconomic Factors: Albanian Case

Abstract

Stress testing is a macro–prudential analytical method of assessing the financial system’s resilience to adverse events. This thesis describes the methodology of the stress tests and illustrates one of the stress testing models (VARs) for measurement the credit risk by the macroeconomic factors. This approach is important because it gives a significance result about how independent variables affect in a crucial way dependent variables. A novity to this paper is the fact of building and linking together three main models of estimating the credit risk like Johansen test, Unit Root test and least but not last VAR. These three models give an insight about the significant role of credit risk in an economy, especially in developing countries like Albania. Credit risk is captured by the non-performing loans in Albania, evaluating this element as the main factor that has a significant impact on the financial stability of the economic environment of the country. The important part of the paper is to give a conclusion about how the macroeconomic impact or effect credit risk seeing the co-integration and the trending movements of the variables taken in study. This relationship is crucial because the economy always depends on the lending procedures of the banks. In developing countries, as others paper have related, macroeconomic factors impact credit risk or other risks as well in a notable way. What was really surprising about the thesis was that while using the VARs approach to see the critical dependence between variables, the conclusion was very clear: NPLs is affected mainly by the historical data of the default rate. So the trending changes of the NPL over years, has proven to have a decisive impact on non-performing loans. Other factors taken in consideration like GDP, inflation rate or interest rate didn’t affect much the non-performing loan rate.