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Banking Sector of Bosnia and Herzegovina

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Economic Costs of Banking Crises

The economic costs of a banking crisis are far-reaching and include:

• Direct costs:
  • Consequences of deposit outflows and bank failures
• Indirect costs:
  • Losses for companies and citizens due to bankruptcy, loss of economic growth, and increased real interest rates

Bank Failure and Deposit Insurance

In the event of a bank failure, depositors may face significant losses if no deposit insurance system is in place. Even with deposit insurance, there are concerns about moral hazard and the potential for banks to take on excessive risk.

Regulatory Framework

The goal of regulatory institutions is to protect various groups, including founders, shareholders, creditors, and clients. Recent experiences have led economists to recommend that states not subsidize problem banks, as this can lead to a burden on taxpayers.

Key Principles

• Protecting depositors and maintaining financial stability
• Encouraging sound banking practices and market discipline
• Minimizing the risk of bank failures and their consequences

Supervisory Institutions and Market Discipline

Supervisors should focus on improving private monitoring of banks, such as requiring them to publicly publish audit reports. This approach has advantages over direct regulation, as it promotes market discipline and leads to independence for supervisors.

Benefits of Private Monitoring

• Encourages transparency and accountability among banks
• Reduces the risk of moral hazard and excessive risk-taking
• Promotes competition and efficiency in the banking sector

Banking Sector in Bosnia and Herzegovina

The banking sector in Bosnia and Herzegovina is subject to a regulatory framework that includes a law on deposit insurance and harmonized legislative frameworks at the entity level.

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