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Bosnia and Herzegovina: Financial System Stability Assessment-Press Release; Staff Report; and Statement by the Executive Director for Bosnia and Herzegovina
Summary:EXECUTIVE SUMMARY
Economic and financial activity in Bosnia and Herzegovina (BiH) remains stuck in a low gear
since the global financial crisis, reflecting weak external demand, tighter funding conditions,
and deep seated structural issues. A high system-wide NPL ratio—14 percent at end-2014, about
two thirds of which are provisioned—reflects the impact of the crisis, low growth since then, and a
history of lax lending policies. Bank governance problems, related-party loans and inadequate
corporate resolution and insolvency frameworks are obstacles to addressing asset quality problems
and re-establishing bank profitability. Institutional fragmentation is delaying much-needed financial
sector reforms.
Aggregate solvency and liquidity indicators appear broadly sound, but significant pockets of
vulnerability exist. The banking system is more than 80 percent foreign-owned banks. The average
regulatory capital adequacy ratio exceeded 16 percent as of end 2014. However, the dispersion
among banks is wide, ranging from about 7 percent to 48 percent. Vulnerabilities are concentrated
within domestically-owned banks, some of which are struggling to meet capital requirements, while
some others are relying on public support. Stress tests indicate that these banks have large
concentration risks and low liquidity ratios. While the insurance sector is small, a number of
companies have thin solvency margins. FSAP team access to supervisory data—at the individual
bank level, aggregated along group of banks, and system wide level—was exceptionally good.
Decisive and timely actions to deal with weak banks are critical for preserving financial
stability. A comprehensive strategy—backed by a credible diagnostic assessment—is needed soon
to either facilitate the recovery of these banks (if practicable) or to resolve them in a cost-effective
manner that is also consistent with maintaining the stability of the financial system and protecting
insured depositors. The timetable for these steps should be spelled out clearly and effectively
communicated, and consideration should also be given to a credible and transparent public
backstop to deal with potentially systemic cases.
Banking and insurance oversight improved since the 2006 FSAP, but a number of important
shortcomings remain that have contributed to the vulnerabilities of the financial sector.
Cooperation among the various oversight institutions is complex, having potential repercussions in
times of stress. Lack of adequate governance and risk management has contributed to the current
number of problem banks. The administrative powers of the agencies to sanction and fine
supervisory board members and significant owners are inadequate. Moreover, the identification of
ultimate beneficial owners of banks is problematic and related-party lending and group exposures
are obscure. There is a need to further strengthen the supervisory board selection process and
internal audit functions of state banks. The prudential framework for the insurance sector should be
updated to improve its risk sensitivity. Consumer protection and financial literacy in the insurance
industry are weak and should be improved.
The legal framework governing creditor/debtor relationships is comprehensive; however,
neither debt resolution nor bankruptcy liquidation work effectively, impeding NPL resolution.
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