Capital Requirements and Credit Risk Assessment in Bosnia and Herzegovina

Introduction

Bosnia and Herzegovina has adopted capital requirements similar to those of the European Union’s Capital Requirements Regulation (CRR) for banks. This article summarizes the key points related to capital requirements, deductions from Common Equity Tier 1 (CET1), credit risk assessment, and credit risk mitigation techniques in Bosnia and Herzegovina.

Capital Requirements

Minimum CET1 Capital Requirements

Banks operating in Bosnia and Herzegovina must hold a minimum of 10% CET1 capital against their total risk exposure. Some deductions are allowed from this requirement.

Deductions from CET1

The following deductions apply to banks in Bosnia and Herzegovina:

• Significant Investments: Gross positions of entire amounts invested can be deducted, but significant investments in CET1 instruments themselves are not permitted.
• Minority Interests: Minority interests do not have a material effect on Bosnian banks and are therefore not specifically provided for.

Credit Risk

Bosnia and Herzegovina adopts the Standardised Approach to Credit Risk, which is equivalent to the CRR framework. Key aspects of credit risk assessment in Bosnia and Herzegovina include:

Exposure Classes

• Residential Properties Secured by Mortgages: Higher risk weights than those specified in the CRR.
• Commercial Real Estate Secured by Mortgages: Higher risk weights and a required Loan-to-Value (LTV) ratio of 60%, compared to 50% in the EU framework.

Public Sector Entities

Public sector entities are defined similarly to the CRR, with non-commercial administrative bodies responsible to central/regional/local governments qualifying as such entities.

Credit Risk Mitigation Techniques

Unfortunately, credit risk mitigation techniques are not explicitly mentioned in the provided text.