Abstract
One of the main problems in the Albanian financial market is the high rates of Non Profit Loans. As part of this problem, banks need to predict and calculate the level of reserve funds (provisions) to cover the possible losses from these loans. Currently these calculations are made based on the standard method which does not take in consideration many factors, including seasonality. The objective of this paper is to study if there is seasonality in the variance of NPL values for Albanian market. It is part of a study in relation to the possibility for the use of Value at Risk (VaR) models to predict future values of Non Profit Loans (NPL) in Albania. Using the official data from the Bank of Albania we first study the NPL time series by creating an initial predicting VaR model of future NPL values. Then the data are grouped under 3 months intervals and are studied to see if they have seasonality and if the existence of seasonality can improve the initial model. DOI: 10.5901/ajis.2016.v5n3s1p579
Highlights
As a result of the global financial crisis, the regulations of financial institutions were changed to improve and to avoid the repetition of scenarios where losses of financial institutions were paid by governments.One of the highlights of these regulations is the minimal level of capital a bank must hold to cover potential losses as a result of exposure to various types of risks
As the supervisor authority, define the models to be used by commercial banks for the calculation of the level of regulatory capital that these banks should have
Standard methods imposed by the central banks have a conservative tendency that requires from commercial banks to hold a significant amount of capital to cover potential losses from their financial activity
Summary
One of the highlights of these regulations is the minimal level of capital a bank must hold to cover potential losses as a result of exposure to various types of risks. The possibility to use personalized valuation methods, different from traditional methods, was introduced for the first time in the June 2004 as part of Basel II recommendations. These methods must be evaluated and approved in advance by the supervisor authority. These methods are introduced for more than a decade, in Albania the relevant legislation does not allow their use by commercial banks. At the moment the use of an internal model can be limited as complementary and not as a substitute of the traditional model
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