Financial Crime World

Regulatory Framework on Banking Supervision in Bosnia and Herzegovina: A Comparison with the European Union

Introduction

Bosnia and Herzegovina (BIH) is committed to aligning its regulatory framework on banking supervision with that of the European Union (EU). This assessment provides a comprehensive comparison of BIH’s framework with the EU’s framework, focusing on key aspects such as own funds requirements, credit risk, and credit risk mitigation.

Section 2: Own Funds Requirements

BIH’s own funds requirements are significantly higher than those in the EU framework. The key differences are outlined below:

  • CET1 ratio: 6.75% (compared to EU’s CET1 ratio)
  • T1 ratio: 9% (compared to EU’s T1 ratio)
  • Total Capital ratio: 12% (compared to EU’s Total Capital ratio)

Core capital items in BIH are the same as those in CET1, as per the Capital Requirements Regulation (CRR), including:

  • Paid-in share capital
  • Excluding cumulative preferential shares
  • Reserves from profit
  • Profit of the bank

Eligibility criteria for capital instruments in BIH are identical to those prescribed in the CRR.

The trigger event for BIH is set at 7.687% or higher, indicating a more stringent approach than the EU framework.

Section 5: Credit Risk (Standardised Approach)

BIH’s framework for Standardised Approach to Credit Risk includes the same exposure classes as those in the CRR:

  • Residential properties secured by mortgages: Higher risk weights than CRR Art. 125 (50% vs. 35% in CRR)
  • Commercial real estate secured by mortgages: Higher risk weights than CRR Art. 126 (75% vs. 50% in CRR), but with a slightly higher Loan-to-Value ratio
  • Public Sector Entities: Defined similarly to the CRR, i.e., non-commercial administrative bodies responsible to central/regional/local governments, non-commercial legal entities owned by or set up by central/regional/local governments, with explicit unconditional guarantee for the obligations of that entity

Section 7: Credit Risk Mitigation

BIH’s approach to credit risk mitigation is equivalent to the EU framework. The rationale for equivalence includes:

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This assessment highlights key differences between BIH’s regulatory framework on banking supervision and the EU framework. By comparing these aspects, policymakers can identify areas for improvement and work towards aligning BIH’s framework with international standards.