Albanian Banking System: Risk Behavior, Bank Capital and their Mutual Relationship with Cost Efficiency

Abstract

Albanian financial systems is dominated and identified by banks because its assets account for more than 95 percent of it. At the same time, it has to be mentioned that its role is very important to the stability and soundness economic system. This is the reason that has brought Albanian banking system in the focus of different researches relied on theoretical and empirical literature. Among others they aim to explain the relationship between risk and capital and also the dynamic of bank efficiency of the Albanian banking system. The topic of bank efficiency has been studied either for the whole banking system or for individual banks that are part of it. The relation between risk and capital is found to be positive and simultaneous, while researches on the analyses of cost efficiency show the presence of inefficient banks in Albania but the relationship between ROA or size of the bank with the cost efficiency is not clear. While analyzing the relationship between capital and risk it is very important to take in consideration bank efficiency. The level of bank efficiency is very important to and determines both capital and risk. On the other side, the capital regulation and risk-taking behavior influenced by it has its impact on efficiency. Their impact might give upward or downward movement on efficiency. Relied on theoretical and empirical literature of the interrelationship between risk-taking, capital and efficiency, this paper states hypothesis and introduces a model to test them in case of Albanian banking system.

DOI: 10.5901/ajis.2015.v4n3p45