„„Position of Monetary Institution in Position of Monetary Institution in the Regional Cooperationthe Regional Cooperation““

Kemal Kozarić, Ph.D.Governor of the Central Bank of Bosnia and Herzegovina

Workshop“The Impact of Euro Crisis and Investment Opportunities in Bosnia and Herzegovina”

Session 2 “Regional Cooperation Between Monetary Authorities”

May 11, 2012, St Antony’s College, University of Oxford

Role of monetary institutionRole of monetary institution in providing in providing stabilitystability

The role of the CBBH is limited, but effective: Currency Board constraints – monetary policy tools limited – only RR,

no role of lender of last resort Preserved monetary and financial stability

There are other ways to get things done Coordinating role in banking supervision Establishing of Standing Committee for Financial Stability Signed MoU on data exchange with monetary supervisory authorities Excellent regional Central Banks’ cooperation

Initiatives such as “Vienna Initiative” very important for providing continuous commitment of parent banks to the lending and exposure, as well as for maintenance of the adequate capital ratio

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Banking sector in BH during the crisisBanking sector in BH during the crisis

During the crisis in 2009 and 2010, the CBBH changed its investment policy by moving its foreign reserves (EUR 3.3 billion) to EMU Central Banks

There were no bank failures during crisis Even though the citizens’ anxiety was felt during the

crisis (EUR 400 million withdrawn), timely reaction of the CBBH and commercial banks has preserved confidence in the system, witnessed by the savings increase

Established and strengthened deposit insurance scheme Signed “Vienna Initiative 1”

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What are the main risks for the banking What are the main risks for the banking sector in BH (and region)?sector in BH (and region)?

After the fall of the savings level during the crisis, regaining of confidence and increase in households savings (14% in 2010, 10% in 2011)

A slight increase in lending activity (close to 3% in 2010, close to 4% in 2011)

The results of stress tests (for the time being the banking system is well capitalized and resistant to shocks)

Financial and banking sector has shown remarkable level of resilience to the financial crisis so far

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Banking sector in BHBanking sector in BH

“Bank-centric” financial sector: 84% of the total assets of the financial sector (end 2010). The dominance of foreign banking groups 95% of total assets and 82% of equity is concentrated in

banks with majority foreign ownership The significance of "Vienna Initiative" (external debt of the

banking sector - 29,5% of total commitments)

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The structure of the financial sector in BHThe structure of the financial sector in BH A large percentage of foreign ownership is a potential risk

because strategic decisions are made outside the reach of the monetary authorities of Bosnia and Herzegovina.

Relatively small share of other financial intermediaries.

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2008 2009 2010 2011

Value, KM million

Share, %Value,

KM millionShare, %

Value, KM million

Share, %Value,

KM millionShare, %

Banks 19.570 79.8 20.815 80.8 20.604 82.7 20.416 84.3

Investment funds 1.762 7.2 1.225 4.8 871 3.5 888 3.7

Leasing companies 1.378 5.6 1.607 6.2 1.416 5.7 1.108 4.6

Insurance and re-insurance companies 853 3.5 890 3.5 940 3.8 941 3.9

Microcredit organizations 946 3.9 1.213 4.7 1.087 4.4 856 3.5

Total 24.510   25.749   24.919   24.210  

Banking sector in BHBanking sector in BH 29 commercial banks operating in the country

5 of those banks have 70% of all market share

High liquidity Good capital adequacy, approximate 16% Profitability endangered

Loss in 2010, but return to profit in 2011 with cca EUR 70 million profit

NPL increase – 11,8% at the end of 2011 In order to monitor the soundness of the banking sector,

the CBBH carries out the periodical stress tests – one with so-called “base scenario” and the other with “extreme scenario”

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What are the main risks for the banking What are the main risks for the banking sector in BH (and region)?sector in BH (and region)?

The possibility of the crisis spill-over from home country of foreign banking groups and the EU zone

Pro-cyclicality of the financial crisis to other segments of the financial sector - micro-credit organizations, leasing companies, capital market and insurance companies

The efficiency of supervision (cross-border cooperation) Corporate governance in banks (respect and protection

of local interests) Exposure in the region – importance of home-host

supervision framework

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Future challenges for the banking sectorFuture challenges for the banking sector

There is certainly a difficult period ahead of us, but we should try to: achieve adequate liquidity; avoid systemic risk at any cost; achieve adequate capitalization; achieve an adequate amount of cash in the vaults; achieve adequate credit activity; avoid any form of unfair competition achieve adequate communication with internal and external

public.

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Thank you for your attentionThank you for your attentionhttp://www.cbbh.bahttp://www.cbbh.ba

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