„Position of Monetary Institution in the 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 institution in providing stability 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 2

Banking 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There were no bank failures during crisis Even though the citizens’ anxiety was felt during the crisis (EUR 400 million withdrawn), timely reaction of the CBBH and commercial banks has preserved confidence in the system, witnessed by the savings increase Established and strengthened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” 33

What are the main risks for the banking 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 44

Banking 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) 55

The 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 Value, KM million Share, % Value, KM million Share, % Value, KM million Share, % Value, KM million Share, % Banks Investment funds Leasing companies Insurance and re-insurance companies Microcredit organizations Total

Banking 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” 77

What are the main risks for the banking 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 88

Future 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. 99

10 Thank you for your attention 10