Bosnia and Herzegovina’s Banking Sector Exposed to Vulnerabilities

A Delicate Financial Landscape

Bosnia and Herzegovina’s banking sector is still recovering from the effects of the global financial crisis. While system-wide solvency and liquidity indicators appear sound, a closer examination reveals significant pockets of vulnerability among domestically-owned banks.

Key Issues in the Banking Sector

• Asset Quality: Many locally-based institutions are struggling with asset quality issues.
• Profitability: Locally-based banks face profitability challenges.
• Lack of Transparency: Financial reporting framework has only recently improved, but more work is needed to ensure consistency between entities.

Regulatory Framework and Oversight

Despite improvements in banking and insurance oversight since the 2006 financial sector assessment program (FSAP), several major shortcomings remain. Authorities must take decisive action to address these weaknesses to prevent further destabilization of the financial system.

Regulatory Challenges

• Inefficient Processes: The process for resolving debts, reorganizing businesses, and liquidating bankruptcies is plagued by inefficiencies.
• Governance Issues: Concerns have been raised about the governance processes of state-owned banks, particularly regarding the selection process for supervisory boards and internal audit functions.

State-Owned Banks: A Cause for Concern

The Development Bank of the Federation of Bosnia and Herzegovina operates under only partial supervision by the Banking Agency of the Federation of Bosnia and Herzegovina (FBA), while the Republika Srpska government’s support for the financial sector lacks a clear strategy or exit plan.

Risk Factors

• Lack of Clear Strategy: The Republika Srpska government’s support for the financial sector lacks a clear strategy or exit plan.
• Insufficient Supervision: The Development Bank operates under only partial supervision by the Banking Agency of the Federation of Bosnia and Herzegovina (FBA).

Conclusion

Experts warn that failure to address these vulnerabilities could have far-reaching consequences for the country’s financial stability, making it essential for authorities to take immediate action to strengthen the banking sector.