Bosnia and Herzegovina: Financial Sector Assessment Program-Banking Sector Supervision Core Principles Implementation Update-Technical Note

EXECUTIVE SUMMARY1 A review of supervisory practices was conducted to assess progress towards implementation of the Basel Committee Core Principles for Effective Banking Supervision (BCP). A detailed BCP assessment was conducted in 2006 based on the 1999 version of the principles. A factual assessment of compliance was performed this time to measure progress towards BCP implementation since 2006. Each entity, Republika Srpska (RS) and Federation of Bosnia and Herzegovina (FBiH), completed a full self-assessment that was reviewed by the assessors and fully discussed during the mission. The self-assessments and discussions with management and staff of the Banking Agency of Republika Srpska (BARS) and the Banking Agency of Federation Bosnia and Herzegovina (FBA) provided a detailed view of actions undertaken to continue enhancing compliance with the BCPs. The results of the assessment are reported in a technical note with attachments providing detailed principle-by-principle summaries for each entity. However, compliance ratings were not assigned as the focus was on measuring progress. The attachments are formatted as the standard detailed assessment reports (DAR) but do not cover all essential criteria. Although all essential criteria were discussed, and compliance verified, the report was structured to highlight remaining areas in need of improvement and provide a summary of the current state of development. Although regulations2 in both entities are largely harmonized, as are supervisory practices, individual attachments were prepared to reflect the preference of the authorities and the preparation of individual self-assessments. The system of banking supervision oversight has significantly improved since the last review in 2006, but shortcomings remain. Both supervisory authorities have made progress in enhancing the regulatory framework and supervisory processes since the 2006 FSAP.3 The banking agencies are in the process of preparing a new Law on Banks that should address deficiencies in the supervisory powers, resolution tools, and consolidated supervision. These reforms will impact the respective laws on the Banking Agencies by adding supervisory powers. The regulatory framework has been broadened by the issuance of regulations on corporate governance, credit risk management and capital. Comprehensive regulations on risk management have been drafted that will address remaining deficiencies that are highlighted in this assessment. Harmonization in regulation between the entities has been largely achieved and joint planning continues for the implementation of additional regulations and operational improvements.