## _cr15216 — EXECUTIVE SUMMARY ## Source details **Canonical URL:** [_cr15216 — EXECUTIVE SUMMARY](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15216.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15216.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15216.pdf.json) --- ### INTRODUCTION - Key focus: frameworks for managing systemic liquidity and financial safety nets, including liquidity management at individual bank level and across the financial system, and the financial safety net arrangements for liquidity support, prompt corrective action, resolution strategies, and recovery and resolution powers. - Mission assessed: liquidity within the banking system, inter-bank market functioning, macroprudential risk frameworks, and financial safety net arrangements, with emphasis on obstacles to NPL resolution. - Technical Note (TN) coverage: findings and recommendations on systemic liquidity, the financial safety net (including recovery and resolution powers, prompt corrective action, resolution funding, and emergency liquidity arrangements), and macroprudential policy. ### SYSTEMIC LIQUIDITY MANAGEMENT — Key findings - No central bank liquidity window; secondary market for government securities is small and illiquid. - Money market and interbank markets are relatively small; foreign banks’ internal risk management reduces exposures vis-à-vis domestically-owned banks. - Currency board arrangement (CBA) imposes constraints requiring conservative liquidity management and buffers. - Banking system liquid assets: 24.7 percent of total assets and 43.6 percent of short term liabilities as of 1Q2014. - Banks had excess reserves over the ten-day average reserve requirement of about 150 percent (KM 2.0 billion), with significant dispersion across banks. - As of November 30th 2014, foreign exchange reserves of the CBBH (KM 7,7 bn) exceeded its monetary liabilities and liabilities to non-resident (KM 7,2 bn) by only 7 percent (or KM 0,5 bn). - Since February 2011: RR levels set at 10 percent for deposits and borrowed funds with contractual due date up to one year, and 7 percent for funds with due date longer than one year. - Banks hold a relatively high proportion of liquid assets relative to short-term financial liabilities—approximately 43 percent in aggregate as at June 2014. - Banks’ reserves at the CBBH are currently, in aggregate, more than double the minimum level required to be held at the CBBH. ### SYSTEMIC LIQUIDITY MANAGEMENT — Key recommendations - Revise reserve requirements (RR): - Increase flexibility of RR holdings in times of stress and introduce daily or period-minimum holding thresholds. - Combine increased flexibility with higher penalty rates and enhanced supervision prior to sanctions. - For the RR base, consider using residual maturities and set a minimum daily requirement. - Reconsider adequacy of existing RR levels, noting they were significantly lowered during the financial crises. - Streamline liquidity regulations and adopt the LCR: - For maturity calculations, account for early deposit withdrawal options. - Raise the minimum liquidity ratio above the RR to ensure it is binding. - Upon LCR adoption, exercise care in treating RRs as HQLA given uncertain availability. - Calibrate haircuts on public securities for LCR purposes owing to shallow markets. - Calibrate assumptions for deposits/borrowed funds run-off rates and treatment of liabilities maturing after 30 days with a prepayment clause. - Given high euroization, consider currency-specific LCRs. - Perform a quantitative impact study (QIS) using historical data with emphasis on stress situations. - Improve information exchange on systemic liquidity: - Collect daily data on deposits and interest rates (currently monthly averages), systemic concentration, and intra-month interbank transactions. - Banking agencies recently began collecting daily bank-by-bank deposit data to aid analysis of deposit behavior. ### MONEY, MARKETS, AND LEGAL CONSTRAINTS - Interbank market is small and fragmented; most interbank transactions conducted outside the stock exchange and the electronic platform launched by the CBBH in 2008. - REPO transactions have not taken off despite BLSE developing a standard REPO contract aligned with international standards. - Secondary market for public securities is underdeveloped and illiquid; banks generally hold securities until maturity even if classified as ‘securities for trading’. - Legal constraints: CBBH prohibited from intervening in the money market and from granting any credit (Article 37; Art. 67 point 1.a). Under the CBA, aggregate domestic liabilities must not exceed net foreign exchange reserves at the fixed exchange rate — limiting standing liquidity facilities or LOLR functions. ### RESERVE REMUNERATION AND SANCTIONS - Remuneration for reserves: - Required reserves: 70 percent of the weighted average of interest rates earned by the CBBH on deposits invested in one month, with a floor of zero. - Excess reserves: 90 percent of that weighted average (otherwise same principle). - Note: Since August 2014, there has been no remuneration because of negative interest rates for short term funds offered by the European Central Bank. - Penalties: - Penalty interest rate for RR noncompliance: 0.5 percent per day. - After the second consecutive 10-day period failing to meet RR, CBBH must cease processing withdrawal transactions for the bank (risking expulsion from the payment system). - Suggested reform: apply the withdrawal sanction only after more extended noncompliance and failure to meet at least a certain percentage of RR, paired with preventive liquidity supervision and higher interest penalties. ### FINANCIAL SAFETY NET — Key findings - Banking agencies have statutory authority to require corrective actions; guidance includes triggers based on breaches of capital, liquidity, and asset quality. - Enforcement limits: limited authority to impose financial penalties or permanently suspend board members and controlling owners except under provisional administration. - Corrective action framework components (required): early warning indicators, notification obligations, robust supervision, legal powers for corrective actions, penalties, policy framework with triggers, supportive organisational culture, and accountability including removal powers subject to due process. - Prompt corrective action: supervisory ratings range from 1 to 5; corrective actions typically apply to banks rated as 4 or below. - Deposit Insurance Agency (DIA): - Established in 2002; funded by annual levies and supported by a €50 million standby facility with the EBRD. - Deposit insurance level increased to KM50,000 per depositor per bank effective January 1, 2014. - DIA pay-out in Bobar Bank liquidation: liquidation on December 22, 2014; DIA started deposit pay-out on January 19, 2015. - Formal assessment indicates majority of IADI principles are compliant or largely compliant. - Crisis preparedness: contingency plans prepared in 2014 and a coordinated contingency plan by the SCFS exist but require revision to cover each crisis stage; no specific cross-border crisis resolution arrangements with foreign counterparts. ### FINANCIAL SAFETY NET — Key recommendations - Deposit Insurance (DIA) legal and operational reforms: - Establish capacity for prompt pay-outs to insured depositors; shorten DIA payout period substantially (current up to 90 days) to align with EU relevant directive. - Amend law to authorize use of DIA funds to facilitate purchase and assumption (P&A) under the least cost solution and to enable prompt pay-out and depositor transfer mechanisms. - Link DIA membership to issuance/withdrawal of bank operating licenses so all deposit-taking banks are DIA members. - Ensure DIA involvement early in problem bank resolution with supervisors and test depositor pay-out and P&A procedures regularly (walk-through testing). - Corrective action enforcement: - Strengthen powers to remove supervisory board and management beyond narrow preconditions; strengthen ability to apply financial sanctions and pursue criminal charges where appropriate. - Develop dashboards of early warning indicators, regular stress testing, and strengthen supervisory culture and accountability. - Resolution authority and powers: - Vest resolution powers in FBA and BARS for banks in respective jurisdictions, with governance and accountability arrangements to avoid conflicts of interest; consider DIA representation on the DIA management board if this route is taken. - Draft laws modeled on FSB Key Attributes and EU BRRD should clearly set objectives, triggers, powers (including bail-in, bridge bank, transfer of assets, temporary stay of early terminations), safeguards (no creditor worse off, ex post independent assessment), and cross-border cooperation powers. - Resolution funding: - Broaden DIF scope to allow participation in bank resolution subject to least-cost principle—up to amount that would have been expended for insured depositor reimbursement in liquidation, including P&A; DIF resources should not be used for open bank assistance. - Over time, establish a Financial Stability Fund (FSF) administered by DIA for open bank assistance and limited, temporary liquidity support in systemic crises under strict criteria to protect taxpayers and minimize moral hazard. - FSF financing: ex-ante levies on banks, capacity for ex-post levies, and possible IFI credit lines as supplements. ### CRISIS PREPAREDNESS FRAMEWORK — Key recommendations and timing - Enable prompt depositor pay-out (DIA). (Time: I) - Link DIA membership to bank licensing so all deposit-taking banks are DIA members. (Time: I) - Require all banks to have recovery plans and to regularly test them (BARS and FBA). (Time: NT) - Establish resolution plans for all systemically important banks, with pre-positioning for least-cost resolution. (Time: NT) - Strengthen, regularly review, and test bank contingency plans of SCFS members. (Time: I) - Strengthen cooperation between DIA and financial safety net players. (Time: I) - SCFS members to undertake regular crisis simulation exercises individually and in coordination. (Time: NT) - BARS, FBA and CBBH to develop cross-border bank crisis resolution coordination arrangements with counterparties for all systemically important banks, desirably on a multilateral basis. (Time: NT) - Hold a joint, cross-agency crisis exercise in 2015 and repeat using different scenarios at least every two years; after domestic exercises, seek cross-border crisis exercises with home jurisdiction counterparts at least every 3 years or so. ### DELINQUENCY MANAGEMENT AND NPL RESOLUTION — Key findings - NPLs continue to increase due to weak domestic demand and modest credit activity; high levels of NPLs are a key vulnerability. - Domestic banks: NPLs around 26 percent of total loans, mostly corporate loans. - Sectoral NPL concentrations: manufacturing, trade, construction, and real estate around 30 percent. - Legal impediments: Law on Obligations and Law on Protection of Consumers prevent banks from transferring non-cancelled NPLs to non-bank entities (impeding sales to AMCs or external debt buyers). - Absence of streamlined company-creditor restructuring process; companies often enter bankruptcy, lowering recoveries and increasing court backlogs. - Judicial weaknesses: lack of specialist commercial courts in some jurisdictions, inadequate court resourcing, and appeals practices that prolong cases. ### DELINQUENCY MANAGEMENT — Key recommendations - Amend Law on Obligations and Law on Consumer Protection to enable transfer of NPLs to non-bank entities, including private AMCs, with safeguards and supervision for AMCs within banking groups. - Establish a new law to enable court-approved company/creditor restructurings as an alternative to bankruptcy, with court enforcement where a majority of creditors agree and safeguard that no creditor is worse off than in bankruptcy. - Streamline execution procedures: allow final auction at no reserve price if previous rounds failed and specify realistic criteria for asset market values. (Responsible: RS/FBiH Ministry of Justice). (Time: I) - Consider tools and incentives to facilitate restructurings and adopt out-of-court restructuring guidelines. (Responsible: RS/FBiH/BiH MoF, FBA, BARS). (Time: I) - Revise insolvency framework: introduce incentives to initiate proceedings early and expand to cover businesses run by individuals. (Responsible: RS/FBiH MoJ). (Time: NT) - Institutional improvements: hire more commercial court judges and improve regulation of the insolvency profession. - Require all NPLs to be maintained on a credit register so banks and other credit providers can assess debtor risk. ### MACROPRUDENTIAL POLICY — Key findings - Macroprudential policies in BiH are in their infancy; no institution with an explicit macroprudential mandate. - Existing initiatives: RR adjustments, calculation/publication of Financial Soundness Indicators (FSI), CBBH top-down stress tests, regulation on foreign currency open position, joint DSIB methodology, capital regulations aligned with aspects of Basel III including a 2.5 percent conservation capital buffer. - Gaps: lack of clear governance, data gaps, delayed publication of Financial Stability Report (FSR), banking agencies’ reports lacking analytical risk evaluation, and DSIB methodology/DSIB list not made public. ### MACROPRUDENTIAL POLICY — Key recommendations and framework - Amend coordination MoU among CBBH, FBA and BARS to add macroprudential analysis and policy and publish it on respective websites. (Time: NT) - CBBH, FBA and BARS to define and collect additional information for assessment of vulnerabilities and design of macroprudential tools. (Time: I) - Define tools for identification of systemic risk, select and calibrate appropriate instruments, and implement by corresponding institution. (Time: NT) - Governance and process: - CBBH to handle technical work assessing systemic risks and vulnerabilities, based on inputs from FBA and BARS. - CBBH, BARS and/or FBA to propose macroprudential measures, discuss, calibrate and reach agreement. - CBBH Governor and FBA and BARS directors to discuss macroprudential issues at least quarterly. - SCFS to be regularly informed; CBBH FSR to include a section on macroprudential activities and policies. - Data priorities to collect examples: - Loan To Value (LTV) ratios, Debt to Income (DTI) ratios, indicators of indebtedness of households and corporates, currency mismatch in debtor balance sheets. - Disclosure: content of updated MoU to be disclosed on websites of CBBH, FBH and BARS. ### EMERGENCY LIQUIDITY ASSISTANCE, FSF, AND LOLR — Key findings and recommendations - Legal constraints: CBBH prevented by Articles 1(1) and 67(1)(a) from providing credit; Article 31(1) caps aggregate monetary liabilities to net foreign exchange reserves. Current free reserves are too low to provide meaningful LOLR support. - No government agency has statutory authority to provide liquidity assistance to a solvent bank; DIA can use funds only to pay protected depositors when a bank is closed and in liquidation. - Rationale: limited, temporary liquidity support may be needed to prevent otherwise solvent banks defaulting during acute liquidity stress; any LOLR must not undermine the CBA. - Proposed Financial Stability Fund (FSF) under DIA: - FSF to provide limited, temporary liquidity support to solvent systemic banks only after market/internal liquidity options exhausted and subject to strict conditions (capital compliance, sound management, sufficient collateral/guarantees). - FSF financing via ex-ante levies, capacity for ex-post levies, and potential IFI credit lines; FSF legally distinct from DIF. - Suggested preconditions for access include exhaustion of liquid assets, parent funding, asset sales, possible drawing down of reserves at CBBH below required level with approval, and supervisor affirmation of capital and management conditions. - LOLR fund sizing and reserve flexibility: - Target size of LOLR fund and credit line to supplement it to be determined by liquidity stress testing and analysis of plausible maximum lending for idiosyncratic bank distress scenarios. - Recommendation: allow temporary drawdown of reserves at the CBBH below minimum for short periods conditional on banking agency affirmation that the bank is not in breach of capital requirements or will be under resolution arrangements. - Mission has not undertaken calibration analysis at this stage. ### FSAP MAIN RECOMMENDATIONS — Selected items and timing - Systemic Liquidity Management: - Revise RR including residual (instead of contractual) terms for the base, a minimum daily requirement and reinstatement of the requirement to borrowed funds from non-resident. (Time: NT) - Revise rules for noncompliance with RR (limit transactions and interest charged), linking fines to magnitude and length of breach. (Art. 36 CBBH Law). (Time: MT) - Recalibrate liquidity regulation consistent with RR rules; standardize treatment of maturity mismatch and set criteria for time bucket allocation of deposits with early withdrawal clauses. (Time: NT) - Introduce the LCR, including criteria for treating RRs, haircuts on public securities, outflow assumptions, deposits with maturity above 30 days with early withdraw clauses, and rules for using this liquidity buffer by banks. (Time: MT) - Improve scope and exchange of information on key systemic liquidity variables (I). (Time: I) - Crisis Management Framework: - Provide resolution powers to FBA and BARS for banks in their jurisdictions in new banking laws, following FSB Key Attributes and EU BRRD. (Time: I) - Broaden scope to draw on DIF for funding bank resolution using least-cost solution. (Time: I) - Establish FSF under DIA for open bank resolution and limited temporary liquidity support in systemic crisis. (Time: MT) - Delinquency Management and NPLs: - Streamline collateral execution procedures, consider tools to facilitate restructurings, revise insolvency framework. (Times: I, NT) - Macroprudential Policy: - Amend coordination MoU, collect additional data, define and calibrate tools. (Times: NT, I, NT) *Source: BOSNIA AND HERZEGOVINA — INTERNATIONAL MONETARY FUND, EXECUTIVE SUMMARY (content unit _cr15216).* ### EXECUTIVE SUMMARY ___________________________________________________________________________ 3 ### _cr15216 - EXECUTIVE SUMMARY ___________________________________________________________________________ 3 ### INTRODUCTION - Key focus: frameworks for managing systemic liquidity and financial safety nets, including liquidity management at individual bank level and across the financial system, and the financial safety net arrangements for liquidity support, prompt corrective action, resolution strategies, and recovery and resolution powers. - The mission assessed liquidity within the banking system, inter-bank market functioning, macroprudential risk frameworks, and financial safety net arrangements, with emphasis on obstacles to NPL resolution. - The Technical Note (TN) sets out findings and recommendations on systemic liquidity, the financial safety net (including recovery and resolution powers, prompt corrective action, resolution funding, and emergency liquidity arrangements), and macroprudential policy. ### SYSTEMIC LIQUIDITY MANAGEMENT — Key findings and recommendations - Findings: - The system lacks a central bank liquidity window; the secondary market for government securities is small and illiquid. - Money market and interbank markets are relatively small, reflecting high levels of bank liquidity and foreign banks’ internal risk management practices that minimize exposures vis-à-vis domestically-owned banks. - Given the currency board arrangement (CBA), limitations call for conservative liquidity management and liquidity buffers for banks. - Banking system liquid assets: 24.7 percent of total assets and 43.6 percent of short term liabilities as of 1Q2014. - Banks had excess reserves over the ten-day average reserve requirement of about 150 percent (KM 2.0 billion), with significant dispersion across banks. - Recommendations: - Revise reserve requirements (RR) to support systemic liquidity management: - Increase flexibility of RR holdings in times of stress and introduce daily or period-minimum holding thresholds. - Combine increased flexibility with higher penalty rates and enhanced supervision prior to sanctions. - For the RR base, consider using residual maturities and set a minimum daily requirement. - Reconsider adequacy of existing RR levels, noting they were significantly lowered during the financial crises. - Streamline liquidity regulations and adopt the LCR to strengthen liquidity management: - For maturity calculations, account for early deposit withdrawal options. - Raise the minimum liquidity ratio above the RR to ensure it is binding. - Upon LCR adoption, exercise care in treating RRs as HQLA given uncertain availability. - Calibrate haircuts on public securities for LCR purposes owing to shallow markets. - Calibrate assumptions for deposits/borrowed funds run-off rates and treatment of liabilities maturing after 30 days with a prepayment clause. - Given high euroization, consider currency-specific LCRs. - Improve information exchange on systemic liquidity: systemic concentration, intra-month interbank transactions, daily data on deposits and interest rates. ### FINANCIAL SAFETY NET — Key findings and recommendations - Findings: - Banking agencies have statutory authority to require corrective actions, with guidance including triggers based on breaches of capital, liquidity, and asset quality requirements. - Enforcement powers are limited: limited authority to impose financial penalties for noncompliance, or to permanently suspend board members and controlling owners except under provisional administration. - Authority to replace or restrict powers of controlling owners outside provisional administration is limited. - Deposit Insurance (DIA): - DIA is a relatively well-developed paybox scheme with infrastructure for effective deposit insurance: MOUs for coordination, regular testing of depositor data, and pay-out procedures. - Formal assessment against IADI standards indicates majority of principles are compliant or largely compliant. - Recommended legal/amendment actions for DIA: - Establish capacity for making prompt pay-outs to insured depositors, in line with the EU relevant directive. - Amend legislation to establish means for prompt pay out and authorize use of DIA funds to facilitate purchase and assumption (P&A) under least cost solution. - Ensure DIA involvement at an early stage in problem bank resolution with supervisors. - Crisis preparedness and coordination: - Contingency plans prepared in 2014 and a coordinated contingency plan by the SCFS represent progress but require revision to cover each crisis stage: systemic impact assessment, diagnostics, assessment and implementation of resolution options, cross-border coordination, and stakeholder communications. - Regular crisis simulation testing and capacity-building are required. - Cross-border cooperation: no specific crisis resolution arrangements with foreign counterparts; given systemic importance of several foreign banks, MoUs with home authorities are necessary to support whole-of-group resolution. - Resolution framework: - Need to establish a designated resolution authority. Currently FBA and BARS have some resolution powers but are not formally designated or equipped as resolution authorities. - Proposed approach: vest resolution powers in FBA and BARS for banks in their respective jurisdictions, with governance and accountability arrangements to avoid conflicts of interest; include DIA representation on DIA management board if this route is taken. - Resolution funding and Financial Stability Fund (FSF): - Broaden scope to allow existing Deposit Insurance Fund (DIF) to participate in bank resolution subject to least-cost principle—i.e., up to amount that would have been expended for insured depositor reimbursement in liquidation—including P&A transactions; DIF resources should not be used to provide open bank assistance. - Over time, establish a Financial Stability Fund (FSF) under the DIA for open bank assistance and limited, temporary liquidity support in systemic crises, subject to clearly defined criteria to protect taxpayers and minimize moral hazard. - FSF liquidity support: limited and temporary, triggered only after banks exhaust available liquidity options (interbank market, parent funding, reserve requirements), available only to systemic banks that comply with supervisory capital requirements, are under sound management, and provide sufficient collateral/guarantees; accompanied by enhanced monitoring and supervision. - FSF financing: ex-ante levies on banks and capacity for ex-post levies to cover costs and losses. ### CRISIS PREPAREDNESS FRAMEWORK — Key recommendations - Enable prompt depositor pay-out (DIA). (Time: I) - Link DIA membership to the issuance (and withdrawal) of bank operating licenses so all banks collecting deposits are DIA members. (Time: I) - Require all banks to have recovery plans and to regularly test them (BARS and FBA). (Time: NT) - Establish resolution plans for all systemically important banks, with pre-positioning for least-cost resolution. (Time: NT) - Strengthen, regularly review, and test bank contingency plans of SCFS members. (Time: I) - Strengthen cooperation between DIA and financial safety net players. (Time: I) - SCFS members to undertake regular crisis simulation exercises individually and in coordination. (Time: NT) - BARS, FBA and CBBH to develop cross-border bank crisis resolution coordination arrangements with counterparties for all systemically important banks, desirably on a multilateral basis. (Time: NT) ### DELINQUENCY MANAGEMENT AND NPL RESOLUTION — Key findings and recommendations - Legal framework for creditor/debtor relationships is comprehensive, but debt resolution and bankruptcy liquidation do not work effectively, impeding NPL resolution. - Recommended reforms: - Streamline execution procedures by allowing a final auction at no reserve price if previous rounds failed and specify realistic criteria for asset market values. (Responsible: RS/FBiH Ministry of Justice). (Time: I) - Consider tools and incentives to facilitate restructurings and debt resolution and adopt out-of-court restructuring guidelines. (Responsible: RS/FBiH/BiH MoF, FBA, BARS). (Time: I) - Revise insolvency framework by introducing incentives to initiate proceedings early and expand insolvency framework to cover businesses run by individuals. (Responsible: RS/FBiH MoJ). (Time: NT) - Institutional improvements: hire more commercial court judges with appropriate experience and improve regulation of the insolvency profession. ### MACROPRUDENTIAL POLICY — Key findings and recommendations - Macroprudential policies in Bosnia and Herzegovina (BiH) are in their infancy; there is no institution with an explicit macroprudential mandate. - Some isolated macroprudential initiatives have been taken, but further coordination is needed to improve systemic risk assessment and policy design/implementation. - Recommended actions: - Amend coordination MoU among CBBH, FBA and BARS to add macroprudential analysis and policy and publish it on respective websites. (Time: NT) - CBBH, FBA and BARS to define and collect additional information for assessment of vulnerabilities and design of macroprudential tools. (Time: I) - Define tools for identification of systemic risk, select and calibrate appropriate instruments, and implement by corresponding institution. (Time: NT) ### FSAP MAIN RECOMMENDATIONS — Selected items and timing - Systemic Liquidity Management: - Revise RR including residual (instead of contractual) terms for the base, a minimum daily requirement and reinstatement of the requirement to borrowed funds from non-resident. (Time: NT) - Revise rules for noncompliance with RR (limit transactions and interest charged), linking fines to magnitude and length of breach. (Art. 36 CBBH Law). (Time: MT) - Recalibrate liquidity regulation consistent with RR rules; standardize treatment of maturity mismatch and set criteria for time bucket allocation of deposits with early withdrawal clauses. (Time: NT) - Introduce the LCR, including criteria for treating RRs, haircuts on public securities, outflow assumptions, deposits with maturity above 30 days with early withdraw clauses, and rules for using this liquidity buffer by banks. (Time: MT) - Improve scope and exchange of information on key systemic liquidity variables (I). (Time: I) - Crisis Management Framework: - Provide resolution powers to FBA and BARS for banks in their jurisdictions in new banking laws, following FSB Key Attributes and EU BRRD. (Time: I) - Broaden scope to draw on DIF for funding bank resolution using least-cost solution. (Time: I) - Establish FSF under DIA for open bank resolution and limited temporary liquidity support in systemic crisis. (Time: MT) - Delinquency Management and NPLs: - Streamline collateral execution procedures, consider tools to facilitate restructurings, revise insolvency framework. (Times: I, NT) - Macroprudential Policy: - Amend coordination MoU, collect additional data, define and calibrate tools. (Times: NT, I, NT) *Source: BOSNIA AND HERZEGOVINA — INTERNATIONAL MONETARY FUND, EXECUTIVE SUMMARY.* ### 7. Both foreign and domestic banks in RS have lower liquidity compared to the banks in ### 7. Both foreign and domestic banks in RS have lower liquidity compared to the banks in ### Liquidity comparison between RS and FBiH - Both foreign and domestic banks in RS have lower liquidity compared to banks in FBiH. - This pattern has been observed over several years and is present in banks of the same group licensed in both entities. - Possible contributor: differences in criteria applied by maturity mismatch regulations between the two entities. ### Role of parent banks and funding trends - Foreign-owned banks rely on parent banks, especially during liquidity shortages and stress. - Parent banks’ funding has been decreasing in recent years due to deleveraging and weak credit demand, yet subsidiaries continue to rely on parent funding as a liquidity backstop. - Liquidity support arrangements vary: some formal contracts, others informal; reputational risk usually incentivizes parent support unless the parent is stressed or home supervisor restricts support. ### Interbank market, repo, and secondary market for public securities - Interbank market is small and fragmented; most interbank transactions conducted outside the stock exchange and the electronic platform launched by the CBBH in 2008. - Limited overnight interbank transactions occur intra-month and mainly among domestic banks; these are not captured in monthly supervisory reports. - According to parent bank policies, foreign banks do not have credit limits to provide interbank loans to domestic banks. - REPO transactions have not taken off despite BLSE developing a standard REPO contract aligned with international standards. No interbank lending has been structured as REPO. - Secondary market for public securities has been growing but remains underdeveloped and illiquid. Banks generally hold public securities until maturity, although classified as ‘securities for trading’. - A more developed secondary market would facilitate monetization of public securities and boost the REPO market by improving collateral trustworthiness. ### Legal constraints on CBBH and implications - The legal framework prohibits the CBBH from intervening in the money market and acting as a LOLR; CBBH cannot perform money market operations involving securities of any type (article 37) and Art. 67 point 1.a prohibits the CBBH, under any circumstances, from granting any credit. - Under the CBA, CBBH must ensure aggregate domestic liabilities do not exceed the equivalent of its net foreign exchange reserves at the fixed exchange rate. - As of November 30th 2014, foreign exchange reserves of the CBBH (KM 7,7 bn) exceeded its monetary liabilities and liabilities to non-resident (KM 7,2 bn) by only 7 percent (or KM 0,5 bn). - Given limited excess net foreign exchange reserves, the law sets clear limits on CBBH monetary operations and precludes establishing a standing liquidity facility or performing LOLR functions. ### Reserve requirement (RR) as CBBH’s liquidity tool - RR is the only tool available to CBBH to influence bank and systemic liquidity. Art. 36 of the CBBH Law establishes RR characteristics (same application for all banks; compliance based on an average of 10 days; consequences for noncompliance). - Since February 2011: RR levels set at 10 percent for deposits and borrowed funds with contractual due date up to one year, and 7 percent for funds with due date longer than one year. - RR calculation base includes deposits and borrowed funds (regardless of currency), excluding borrowed funds from nonresidents (from November 2008) and funds from entity government intended for development projects (from May 2009). - RR levels and calculation base have been modified before and after the global financial crisis, used as a countercyclical tool. ### Remuneration of required and excess reserves - CBBH remunerates banks’ central bank accounts for both required and excess reserves; accounts are denominated in KM. - Remuneration for balances up to the amount required to comply with RR: level equivalent to 70 percent of the weighted average of interest rates earned by the CBBH on deposits invested in one month, with a floor of zero. - Remuneration for balances that exceed the reserve requirement uses 90 percent instead of 70 percent (otherwise same principle) to incentivize banks to keep excess liquidity at CBBH rather than at correspondent banks abroad. - Note: Since August 2014, there has been no remuneration because of negative interest rates for short term funds offered by the European Central Bank. ### Penalties and payment system sanction for RR breach - Penalty interest rate for not complying with RR: 0.5 percent per day. - After the second consecutive 10-day period failing to meet RR, CBBH is obliged to cease processing withdrawal transactions for the bank, risking expulsion from the payment system. - Suggested reform: amend the law so this sanction applies only after more extended noncompliance and failure to meet at least a certain percentage of RR, paired with more preventive liquidity supervision and higher interest penalties. ### Liquidity regulations, monitoring, and suggested improvements - Current regulations include best practice guidelines, a minimum liquidity ratio, and maturity mismatch thresholds; banks must maintain a liquidity ratio consisting of an average of 10 days minimum liquidity in cash funds of short-term liabilities. - Liquidity ratio threshold (10 percent) is de facto not binding and would be breached only after banks are already below mandatory RR; there is also a daily minimum requirement of 5 percent. - Recommendation: revise the liquidity ratio so it functions as an early warning indicator (e.g., adjust definitions, introduce haircuts on public securities depending on liquidity). - Maturity mismatch regulations differ between BARS and FBiH in wording and implementation: BARS has allowed banks to reallocate sight deposits into time buckets later than 30 days (not explicit in regulation); FBiH amended regulation (May 2014) to allow a corrective factor moving up to 15 percent of retail sight deposits into later buckets if stability can be demonstrated—this may explain differing liquidity levels between RS and FBiH banks. ### Deposits with early withdrawal clauses and misclassification risks - Banks offer open-saving accounts and term deposits with medium-term contractual maturity (e.g., 2-3 years) that allow clients to withdraw early, sometimes with penalties (lower interest rates). Some large depositors (utilities, government agencies) often retain penalty-free early withdrawal. - Many banks classify these deposits by contractual terms without accounting for early withdrawal clauses, implicitly assuming no prepayments—this underestimates individual and systemic liquidity risk. - Supervisors (mainly FBA) have inspected deposit contracts and required banks to revise internal policies; some banks had to reallocate deposits into the correct time buckets corresponding to prepayment rights. - Proposed amendment: treat the maturity of these deposits as up to the moment of prepayment; an impact study is required. Banking agencies should collect and analyze residual maturity data and client withdrawal rights to assess effects before adjusting minimum maturity mismatch percentages. ### Information exchanges, supervisory monitoring, and data needs - BARS and FBA receive daily information on banks’ total liquid assets and compare with liquidity ratio minimums; monthly maturity mismatch and quarterly concentration data are also received. FBiH periodically analyzes systemic concentration but exercise does not cover both entities. CBBH monitors daily balances and RR compliance and tracks foreign currency sales to banks as a liquidity indicator. Banking agencies provide CBBH with quarterly maturity mismatch and liquidity concentration data. - Recommendation: strengthen scope, usage, and exchange of liquidity information. Banking agencies recently began collecting daily bank-by-bank deposit data; even if delayed, this aids analysis of deposit behavior (stability, seasonality) and enhances early-warning indicators. Daily deposit and interest-rate data (currently monthly averages) would improve systemic liquidity monitoring. ### Liquidity Coverage Ratio (LCR) design and calibration for BiH - LCR (Basel III) requires banks to hold HQLA to cover net outflows within 30 days under stress; calibration must be tailored to BiH’s financial system features. - Key calibration considerations: treatment of RR (whether all, part, or none of RR included in HQLA); haircuts on government securities due to illiquid secondary market; treatment of deposits with early withdrawal clauses (whether included within the 30-day run-off period); relevant run-off rates under stress. - Suggested approach: perform a quantitative impact study (QIS) using historical data with emphasis on stress situations; consider separate LCR per currency (domestic and foreign) due to high euroization; in medium term consider inclusion of NSFR regulation (in domestic and foreign currency). *Source: CBBH; FBA; and BARS.* ### 27. The banking agencies should contemplate the conditions where the liquidity buffer ### The banking agencies should contemplate the conditions where the liquidity buffer (LCR) might be used by the bank ### Liquidity Coverage Ratio (LCR) and other liquidity metrics - During periods of financial stress banks may use their stock of HQLA, falling below the minimum of 100 percent established for this ratio; this use should be admitted because alternative refusal to allow drawdown could produce undue negative effects on the bank. - Supervisors should assess each situation and adjust their response according to the specific circumstances. - While implementing the LCR, other liquidity indicators should be re-visited: - The analysis on the liquidity ratio and maturity mismatch thresholds should determine whether these regulations need adjustments to be consistent with the LCR or might be eliminated, since they may have been subsumed by the LCR. - The RR would still play an important role in managing systemic liquidity, as a safeguard for any potential weaknesses in the new liquidity prudential regulation framework; and as a potential countercyclical tool. - Basel guidance: “Local supervisors should discuss and agree with the relevant central bank the extent to which central bank reserves should count towards the stock of liquid assets, i.e., the extent to which reserves are able to be drawn down in times of stress.” ### Corrective Action Arrangements — findings and components - Prompt corrective action framework is essential to promote financial stability and minimize bank distress or failure. - Required components include: - a reliable system of early warning indicators of emerging bank stress; - obligations on banks to provide prompt notification of actual or incipient breaches of prudential requirements; - robust off-site and on-site supervision; - effective legal powers for requiring corrective actions; - penalties on banks and their directors and management for non-compliance; - a policy framework that sets triggers for corrective action and specifies the nature of required actions; - an organisational culture that supports prompt corrective action and discourages regulatory forbearance; - robust accountability arrangements, including the ability to remove relevant management and staff from the agency where they have failed to discharge their obligations satisfactorily (subject to appropriate due process). - FBA and BARS powers in place: - powers to issue warnings, require rehabilitation plans, issue directions, suspend supervisory board members and management in certain circumstances, appoint an adviser, appoint a provisional administrator, and impose fines for non-compliance. - guidance developed setting triggers for corrective actions based on breaches of capital, liquidity and asset quality requirements; corrective actions escalate as severity increases. - supervisory ratings range from 1 (a very sound bank) to 5 (a bank in serious distress); corrective actions typically apply to banks rated as 4 or below. ### Corrective Action — shortcomings and recommendations - Legal and policy elements largely satisfactory, but deficiencies exist: - powers to remove members of the supervisory board and management are constrained to a narrow set of preconditions that do not adequately support corrective action; - ability to apply financial sanctions or pursue criminal charges against directors and management needs strengthening. - Effectiveness of corrective action relies on: - well-developed early warning indicators, regular stress testing, comprehensive off-site monitoring and on-site examinations, and experienced supervisory staff with sufficient expertise and seniority; - an organisational culture and discipline that fosters vigilant monitoring and prompt reaction; regulatory forbearance should be avoided unless based on sound supervisor judgement with satisfactory remedial measures. - Suggested improvements: - strengthen culture, disciplines and accountability within FBA and BARS to ensure prompt corrective action and avoid unwarranted forbearance. - develop ‘dashboards’ of early warning indicators covering the range of risks and intra-group contagion for all banks. ### Deposit Insurance Fund — current status and issues - DIA established in 2002 at State level; administers paybox deposit insurance funded by annual levies on banks and supported by a €50 million standby facility with the EBRD. - Deposit insurance level progressively increased; most recent increase on January 1, 2014 to KM50,000 per depositor per bank. - Current funding sufficient to cover all insured deposits in the small domestically-owned banks. - Bobar Bank liquidation on December 22, 2014; DIA started deposit pay-out on January 19, 2015 — the first deposit pay-out of the DIA. - DIA has developed MOUs, regular testing of depositor data and pay-out procedures; formal assessment vs IADI standards suggests majority of principles are compliant or largely compliant. - Membership issue: one bank in BiH currently operating without being a member of DIA; membership rules should be changed so membership is linked to the licensing process. ### Deposit Insurance Fund — enhancements and legal changes needed - Payout timeliness: - Under existing law DIA has up to 90 days to make pay-outs (and longer in some situations); this needs to be substantially reduced to maintain depositor confidence. - Ultimately, payout period should be shortened to bring it in line with the EU relevant directive. - Legislation should be amended to establish means for prompt pay-out and to enable a P&A transaction under the least cost solution. - P&A and least-cost principle: - Law on Deposit Insurance should be amended to enable deposit accounts of a failed bank to be transferred to a recipient bank via a purchase and assumption transaction (P&A), subject to meeting the ‘least-cost’ principle. - Current law does not facilitate the application of deposit insurance funds for this purpose. - Implementation also requires development of procedures by FBA, BARS and DIA to facilitate a recipient bank assuming deposit liabilities so depositors can continue to operate existing accounts post-transfer. - DIA backup facilities: - DIA should assess availability of suitable back-up facilities given its potential expanded role and the fact that its existing back-up line expires at end-2017. ### Safeguards for use of DIA funds - Where DIA funds are applied for purposes other than deposit pay-out, safeguards should be codified in Law on Deposit Insurance and policy guidance: - The DIA is fully informed and involved in the resolution decision-making process. - The use of the DIA’s funds is transparent, documented and clearly specified. - In a non-liquidation scenario, resolution should result in a viable, solvent, and restructured bank that limits DIA exposure to further funding. - Contributions are restricted to the costs DIA would otherwise have incurred in a payout of insured depositors in liquidation, net of expected recoveries. - Contributions are not used for recapitalization unless shareholders’ interests are reduced to zero and uninsured, unsecured creditors are subject to pari passu losses in accordance with legal claim priority. - Use of DIA funds is subject to an independent audit and results reported back to DIA. - All resolution actions and decisions using DIA funds are subject to independent ex post review. ### Testing, contingency planning and communications - DIA, in close liaison with FBA and BARS, must undertake testing of procedures for bank closure and pay-out (and deposit account transfer via P&A). - Although DIA regularly tests depositor data, there has been no program of regular ‘walk-through’ testing covering all elements required to facilitate prompt pay-out; this should be a major priority. - Inter-agency contingency plans should include guidance on actions required by all SCFS members if a bank is closed and depositors are paid out, including public communications to minimize contagion risk. - An effective communications program should be prepared ex ante as part of crisis preparedness to mitigate adverse public confidence and financial stability effects. ### Contingency Planning and Coordinating Arrangements — findings and recommendations - Progress made on contingency plans, but further refinement needed: - More specificity required on responsibilities of each agency in implementing different resolution forms (closing a bank and making pay-outs; closing and transferring insured deposits; recapitalizing a systemically important bank; establishing a bridge bank and transferring systemic business). - Plans need more detail on resolution options, criteria for selection, and procedures for implementation. - For systemically important banks, plans should include guidance on recapitalization via external capital, bail-in of shareholders and creditors, and transfer of systemic functions and performing loans to a bridge bank or existing acquirer. - For non-systemic banks, plans should include guidance on closing and paying out insured depositors or transferring viable business to another bank. - Guidance should include implementation details for each resolution option: policies, procedures, systemic impact assessment, financial institution diagnostics, assessment of resolution options, determination and implementation of appropriate resolution, cross-border coordination and communications. - Cross-border crisis planning: - Draft plans lack details of how cross-border resolution would be implemented; further detail needed given systemic importance of foreign banks in BiH. - Banking agencies should develop crisis resolution plans for foreign banks with systemically significant operations in BiH, including SPE and MPE recapitalization implementations. - Master plan and coordination: - A draft cross-agency ‘master plan’ has been developed; more specificity needed regarding preconditions for different resolution options, criteria for option selection and required procedures, especially for systemically important banks. - Master plan should include guidance on purchase and assumption, bail-in, bridge bank and asset liquidation units. ### Cross-border cooperation and crisis simulation exercises - Cross-border cooperation gaps: - No specific crisis resolution related arrangements in place with foreign counterparts for banking agencies, CBBH, DIA and other relevant authorities. - Recommendation: - Establish MOUs between banking agencies, CBBH and DIA with respective foreign counterparts, bilaterally or multilaterally, to document cooperation and coordination processes with home supervisors or resolution authorities of banks of systemic importance in BiH. - Engage foreign counterparts to develop resolvability assessments, recovery plans and resolution plans on a whole-of-group basis for all foreign banks of systemic importance in BiH, including SPE and MPE recapitalization options. - Crisis simulation exercises: - None of the SCFS agencies has held a crisis simulation exercise to test plans and build capacity; this should be a high priority for FBA, BARS and DIA. - Recommendation timeline: - Hold a joint, cross-agency crisis exercise in 2015 and repeat using different scenarios at least every two years. - After domestic exercises and incorporation of lessons learned, seek cross-border crisis exercises with home jurisdiction counterparts at least every 3 years or so. *Source: IMF staff report excerpt on banking agency liquidity, corrective action, deposit insurance, contingency planning, and cross-border resolution arrangements.* ### 49. Other capacity-building initiatives should also be undertaken by the SCFS agencies, ### _cr15216 - 49. Other capacity-building initiatives should also be undertaken by the SCFS agencies, ### Capacity-building and training - Recommend regular senior management workshops of resolution strategies, including discussing and documenting responses to “what if” scenarios of plausible crisis situations. - Workshop frequency example: every one or two years. - Purpose of workshops: - Build and maintain senior management understanding of key elements of resolution. - Provide a forum for senior management teams in SCFS member agencies to interact and promote cohesive, coordinated crisis resolution. - Recommend development of a program of staff training on bank crisis resolution for staff below senior management. - Hold staff training on a cross-agency basis to promote cross-agency understanding of key resolution issues. ### Recovery and resolution planning (priority actions) - Recovery planning: - Require all banks (large and small) to develop comprehensive recovery plans and regularly test their plans. - Include recovery plan requirements in regular supervision of all banks. - Recovery plans should be more comprehensive for larger banks. - For foreign-owned banks, recovery plans should be developed in coordination with parent banks and incorporate parent-led recovery actions supporting operations in BiH. - Resolution planning for systemically important banks: - Undertake resolvability assessments of all systemically important banks to establish resolution plans that preserve continuity of systemically important business and functionality. - Keep resolution plans under regular review to ensure they remain up-to-date. - For foreign-owned banks, develop resolvability assessments and resolution plans in close consultation with respective parent resolution authorities. ### Assessment of crisis management framework (findings) - Overall finding: Significant deficiencies in the bank resolution framework, despite progress; much further progress required on: - New resolution powers. - Recovery and resolution planning. - Coordinated crisis resolution plans by the authorities. - Crisis management capacity building. - Main resolution-related laws listed (entity-level and state-level applicability): - The Law on Banking Agency of the Republika Srpska; - The Law on Banking Agency of the Federation of Bosnia and Herzegovina; - The Banking Law of the Republika Srpska; - The Banking Law (applicable in the Federation of Bosnia and Herzegovina); - The Law on Deposit Insurance in banks of Bosnia and Herzegovina. - Identified legal weaknesses: - Banking laws do not provide adequate early intervention powers for FBA and BARS. - Agencies lack sufficient powers to replace a bank’s supervisory board and management and to require pre-positioning for resolution via resolution plans. - Provisional administration provisions insufficient for business transfer, transfer of NPLs for liquidation/recapitalization without shareholder consent. - No powers to establish a bridge bank or to enforce a bail-in of shareholders and creditors. - Laws lack clear statutory purposes, principles governing exercise of resolution powers, and preconditions for exercising powers. ### Draft laws and alignment with international standards (recommendations) - Authorities have drafted new laws modeled on FSB Key Attributes and EU BRRD that, if enacted, would: - Allow banking agencies as resolution authorities to directly assume control of a bank in distress. - Permit removal and replacement of supervisory board members. - Force recapitalization without shareholder consent. - Apply bail-in of shareholders and creditors. - Transfer business to another bank or bridge bank. - Transfer impaired assets to a company established by the resolution authority. - Include resolution objectives, principles, and triggers for exercise of resolution powers. - Suggested further review before parliamentary introduction to ensure alignment with Key Attributes and EU BRRD and mutual consistency between FBiH and RS drafts. - Specific matters the draft laws should address (modeled substantially on EU BRRD): - Clearly set out objectives of resolution and principles for use of resolution powers. - Empower the resolution authority to require banks to prepare, review, amend, test, and subject recovery plans to external independent review. - Empower the resolution authority to obtain information for resolvability assessments. - Empower the resolution authority to require banks to develop, review, amend, test, and subject resolution plans to external independent review. - Specify triggers/grounds for use of each resolution power to minimize judicial challenges. - Unambiguously empower the resolution authority to remove and replace supervisory board and management of the bank and entities in the consolidated group. - Empower the resolution authority to take control of a bank and subsidiaries for resolution when triggers met. - Ensure the resolution authority can give binding directions to a provisional administrator and remove/replace the provisional administrator without discontinuing administration. - Ensure recapitalization (including cancellation of existing shares and issuance of new shares and other qualifying capital instruments) can be implemented without shareholder consent. - Ensure comprehensive powers to transfer business (assets, liabilities, systems, data and staff) to another entity (including bridge bank) and apply to subsidiaries in the supervised banking group. - Ensure bail-in of shareholders and creditors (other than insured depositors and secured creditors) can be implemented to absorb all estimated losses and, if appropriate, fund recapitalization or capitalization of a bridge bank. - Empower the resolution agency to establish a bridge bank and an asset liquidation company. - Ensure resolution powers can be exercised without risking triggering events of default or suspension of obligations to the bank by counterparties. - Ensure continuity of essential services and functions. - Subject all resolution powers to an ex post independent assessment so that no shareholder or creditor is left worse off than in a conventional bankruptcy, with compensation where resolution did leave them worse off. - Temporarily stay exercise of early termination rights. - Impose a moratorium with suspension of payments to unsecured creditors and customers and stay on creditor actions to attach assets or collect money, while protecting enforcement of eligible netting and collateral agreements. - Make provision for resolution funding (see later in the Technical Note). ### Coordination, cross-border cooperation, and supervisory colleges - Resolution laws should facilitate coordination between agencies, conferring explicit powers to share information and cooperate with domestic agencies (SCFS member agencies), the DIA, and foreign agencies (foreign supervisors, resolution authorities, central banks, finance ministries). - Draft laws should empower resolution agencies to: - Establish (as home supervisor) or participate in (as host supervisor) bank-specific supervisory colleges for banking groups with material cross-border operations. - Share information bilaterally and through colleges of supervisors. - Develop, in liaison with parent supervisory and resolution authorities, a framework for cross-border crisis cooperation and coordination. ### Legal capacities and safeguards - Resolution authority legal capacities: - Apply one or a combination of resolution powers simultaneously or sequentially. - Apply different resolution measures to different parts of the firm’s business. - Wind down operations not critical to the financial system or economy. - Safeguards to include in resolution laws: - Respect hierarchy of claims while allowing flexibility to depart from pari passu treatment to contain systemic impact or maximize value for creditors. - “No creditor worse off” principle: creditors compensated where they receive less than in a liquidation. - Statutory immunity for directors and officers acting in compliance with resolution authority decisions, except for bad faith actions or failures. - Limit judicial action so it does not constrain implementation or reverse measures taken in good faith; adjudication should provide redress by awarding compensation instead. - Powers over local branches of foreign banks: - Enable resolution authority to support foreign home authority resolutions if consistent with domestic resolution objectives (maintenance of financial stability and protection of depositors). - Enable BiH resolution authority to act where home jurisdiction is not taking action or acts inappropriately (including assume control of branch, transfer business to another bank or bridge bank, initiate winding up of branch). ### Implementation timing and government support powers - Urgency: New resolution powers should be implemented as a matter of high priority. - Encouragement to have the laws enacted in 2015. - Strengthening government legal powers for financial assistance in resolution: - Entity laws should enable prompt provision, without recourse to parliament for appropriation, of guarantees, indemnities or funding to facilitate resolution, subject to statutory and procedural protections. - Protections include well-defined statutory purposes, preconditions for triggering support (with discretion to provide support resting with Minister of Finance or relevant ministers), powers to attach conditions, enforcement powers, and exit powers. - Consideration should follow FSB Key Attributes and international practice, including within the EU. ### Resolution authority design and governance - Need to establish a resolution authority: - FBA and BARS currently have some resolution powers but are not formally designated or equipped as resolution authorities. - Proposed approach: vest resolution powers in FBA and BARS and designate them as resolution authorities for their jurisdictions, enabling synergies between supervision (early intervention) and resolution execution. - This requires governance and accountability arrangements to avoid conflicts of interest; recommend DIA management board include representatives of the two banking agencies if this route is taken. - Governance and accountability recommendations: - Require resolution functions to be administered in a division of FBA and BARS separate from supervision but closely integrated. - Require a senior management position with dedicated responsibility for resolution matters reporting directly to the executive board. - Require policies, internal controls, and staff with necessary experience and expertise to perform resolution functions and manage conflicts of interest. - Transparency: - FBA and BARS should be required to include in published annual reports a summary of actions taken to prepare for and undertake resolution, by reference to objectives and principles set out in laws. - Authorities encouraged to develop detailed bank intervention and resolution manuals to provide ex ante structure. - Capacity building: - Recruit and train staff to ensure knowledge and skills for exercising resolution powers. - Develop contingency plans, processes and procedures to guide resolution options, following previous IMF Technical Assistance. - Conduct regular crisis resolution testing. ### Resolution funding (findings and recommendations) - Deposit Insurance Fund (DIF): - Current scope: DIF can only pay out insured deposits. - Recommendation: Broaden scope to allow DIF to participate in bank resolution subject to least cost solution—i.e., up to the amount that would have been expended for insured depositor reimbursement in a liquidation—including P&A transactions. - Restriction: DIF resources should not be used to provide open bank assistance. - Financial Stability Fund (FSF) under DIA (longer-term option): - Establish FSF for open bank assistance in systemic crises only if necessary to preserve financial stability and where there is no new capital forthcoming from private creditors. - FSF backstop option should be subject to clearly defined criteria to protect the taxpayer. - Loss absorption: All losses in failed banks should be absorbed up-front by existing shareholders and by other creditors according to the hierarchy of claims in liquidation and subject to financial stability considerations. - Use conditions: FSF to be used under strict conditions minimizing moral hazard and allowing for ex-post recovery from the banking industry. *Source: _cr15216 - 49.* ### 70. Resolution funding should only be provided in well-defined circumstances. These ### _cr15216 - 70. Resolution funding should only be provided in well-defined circumstances. These ### Preconditions for providing resolution funding - Resolution funding should only be provided in well-defined circumstances. These preconditions would generally be where: - the resolution authority (in this case the FBA and BARS), in conjunction with the other relevant agencies (in this case the other members of the SCFS) have determined that the bank in question is systemically important in the prevailing circumstances and that some form of open resolution is required to minimize adverse impacts on the financial system, economy, depositors and confidence; - existing shareholders of the distressed bank have absorbed losses to the full extent of the shareholders’ funds and any callable unpaid capital; - other capital instrument holders have been bailed in if any losses remain; - subordinated and, if necessary, senior unsecured creditors have been bailed in to absorb losses to the extent that losses remain after all capital holders have fully absorbed losses (on the basis that bail-in should occur in a manner consistent with the ranking of claims in a winding up); and - the resolution authority is satisfied that the resolution cannot be implemented without funding from outside the distressed bank or an acquiring bank. ### Purposes of resolution funding (modelled on EU BRRD) - Suggested main purposes for which resolution funding could be applied include: - to guarantee the assets or the liabilities of the institution under resolution, its subsidiaries, a bridge institution or an asset management vehicle; - to make loans to the institution under resolution, its subsidiaries, a bridge institution or an asset management vehicle; - to purchase assets of the institution under resolution; - to make contributions to a bridge institution and an asset management vehicle; - to pay compensation to shareholders or creditors in accordance with the principle of no party being left worse off than in a liquidation under conventional insolvency law; - to make a contribution to the institution under resolution in lieu of the write down or conversion of liabilities of certain creditors, when the bail-in tool is applied and the resolution authority decides to exclude certain creditors from the scope of bail-in; - to lend to other financing arrangements on a voluntary basis; and - to take any combination of the actions referred to above. - Resolution funding should not generally be used to finance the recapitalization of a bank or capitalization of a bridge bank. Recapitalization or capitalization is expected to be sourced from shareholders and possibly the bail-in of creditors, on the basis that no party is left worse off than had the bank been liquidated under conventional bankruptcy law or from an external new shareholder. Under the EU BRRD, resolution funding can be applied for recapitalization only to the extent that the resolution authority excludes some liabilities from bail-in. ### Proposed Fund for Systemic Failures (FSF): funding mechanisms and target sizing - Recommendation: the proposed FSF, administered by the DIA, become the source of resolution funding over the medium term. - Proposed funding mechanisms: - Annual levies on all banks, based on an appropriate denominator, such as total deposits or total non-capital funding. Levies would be calibrated to build the fund to a target level and to cover administration and standby facility fees. The levy could be uniform (per KM of relevant liability) or risk-based. Higher fees could apply for banks considered systemically important. - A funding line with a suitable party, such as an IFI, to supplement accumulated funds. - A capacity to impose an ex post levy on banks to recover losses or repay amounts drawn under the funding line and not covered by recoveries from the bank in resolution. Ex post levies could be uniform or risk-based and could be weighted by systemic importance. - Target size calibration: - The target size of the fund will be assessed using stress testing and estimates of plausible funding needs for resolution of systemically important banks. - Calibration should assume that all or most of the maximum estimated losses in the bank in distress will be absorbed by shareholders, other capital instrument holders and creditors through a bail-in arrangement. ### Administration, governance and institutional roles - The DIA is recommended as the appropriate entity to administer the FSF, given existing infrastructure; DIA would need increased staffing to handle broadened responsibilities. - The FSF would be legally distinct from the deposit insurance fund (DIF); deposit insurance funds would be available for open resolution only under limited circumstances (essentially where funds are used solely for protection of depositors and where the least-cost principle is met). For systemically important bank resolution, the resolution fund would be the main source. - The statute establishing the FSF should set out the preconditions for drawdowns; respective banking agencies would be responsible for testing that preconditions are met, complementing their supervisory and resolution roles. - Determination of when the FSF could be used for resolution purposes should be joint responsibility of the member agencies of the DIA board. The relevant banking agency would specify terms and conditions for use of resolution funds and monitor compliance and enforcement. ### Limited and temporary Emergency Liquidity Assistance (ELLA) in the context of a Currency Board Arrangement (CBA) - Current legal and institutional constraints: - CBBH is prevented by Articles 1(1) and 67(1)(a) of the Law on CBBH from providing credit; it has no statutory powers to act as LOLR to a bank. - Article 31(1) of the Law on CBBH caps aggregate monetary liabilities to the equivalent of net foreign exchange reserves; CBBH could only lend to banks to the extent of surplus foreign exchange reserves. Current level of free reserves is too low to provide meaningful LOLR support. - No other government agencies have statutory authority to provide liquidity assistance to a solvent bank; the DIA can only use funds to pay protected depositors when a bank is closed and in liquidation. - Ministries of finance lack readily available funding, infrastructure and expertise to act as LOLR and would create moral hazard and bail-out expectations. - Current liquidity profile and private sector buffers: - Banks’ reserves at the CBBH are currently, in aggregate, more than double the minimum level required to be held at the CBBH. - Banks hold a relatively high proportion of liquid assets relative to short-term financial liabilities—approximately 43 percent in aggregate as at June 2014. - Parent banks may provide liquidity support to subsidiaries, except where parents are themselves in stress. ### Rationale for limited LOLR arrangements and scope - Liquidity support may be necessary to prevent otherwise solvent and adequately capitalized banks from defaulting during acute liquidity stress, including: - when a parent bank is in distress and cannot support a subsidiary; - when failure(s) create bank runs or wholesale deposit withdrawals; or - when a severe economic shock triggers large withdrawals. - Liquidity support may also be required as part of a resolution (e.g., during bail-in, external support, or bridge bank operations) to retain depositors and markets until stabilization. - A LOLR facility should not undermine the CBA; it would not by itself resolve a system-wide crisis given resource constraints under a CBA. At most it addresses idiosyncratic liquidity stresses while the system as a whole remains relatively stable. - Principles for LOLR design: - complement and not undermine the CBA; - respect responsibilities and statutory independence of CBBH, BARS, FBA and DIA; avoid duplication of functions; - avoid creating a new agency where possible; and - keep legislative amendments to a minimum. ### FSF as a limited liquidity backstop; safeguards and monitoring - The FSF could be designed to provide very limited, temporary liquidity support to solvent banks in acute stress, triggered only after all market-based and internal liquidity options are exhausted (including interbank market, parent bank funding if available, and reserve requirements). - Such support should be available only to systemic banks that comply with supervisory capital requirements, are under sound management, and have sufficient collateral or guarantees to cover credit risks (support provided on a repo basis where possible). - Emergency liquidity support should be accompanied by enhanced monitoring and supervision to minimize moral hazard; compliance with terms would be monitored by the applicable banking agency, and breaches could trigger resolution powers. - FSF financing options reiterated: ex-ante levies, ex-post levies, possible IFI financing, and potential partial switching of potential RR increases into the FSF. The FSF would be administered by the DIA and separated from the DIF, with safeguards including objectives, permitted purposes, preconditions for invocation and governance arrangements. ### Suggested preconditions for access to LOLR - Preconditions to be specified in statute or protocol might include: - The bank has exhausted all existing sources of liquidity, including: - having drawn down all available liquid assets, including surplus reserves at the CBBH; - exhausted the ability to obtain liquidity from shareholders; - exhausted the ability to obtain liquidity by selling securities or other assets (such as packaged portfolios of high quality loans) to other banks in BiH, either via sale and repurchase agreements or straight sale agreements; - drawn down reserves at the CBBH below the required level, subject to a floor, with approval from the CBBH; - the relevant authorities (BARS and FBA) are satisfied and have affirmed in writing to the FSF that the bank: - has capital that meets the minimum requirements specified by the prudential supervisor; or - will be restored to capital compliance as part of a resolution by provision of capital support from shareholders, bail-in or some other source, and that this will be achieved simultaneously or within a very short period (e.g., 24 hours) of LOLR being provided; - is being soundly managed to the satisfaction of BARS or FBA (or will very shortly be as part of any resolution actions being taken); and - either has sufficient collateral (preferably high quality bonds and portfolios of high quality loans, although various types of collateral may be accepted in stress) such that LOLR liquidity is provided on a repo basis, or collateral/guarantee is provided by a financially robust third party to the LOLR agency (e.g., a parent bank or a resolution fund). *IMF staff analysis excerpt from the Bosnia and Herzegovina assessment (content unit _cr15216).* ### 96. The target size of a LOLR fund and size of a credit line to supplement the fund would ### _cr15216 - 96. The target size of a LOLR fund and size of a credit line to supplement the fund would ### Liquidity backstop: LOLR fund sizing and reserve flexibility - Target size of a LOLR fund and the size of a credit line to supplement the fund should be determined by: - liquidity stress testing; and - analysis of the plausible maximum extent of lending required to meet a range of liquidity shocks for small, medium and large banks in the context of idiosyncratic bank distress scenarios. - Mission has not undertaken calibration analysis at this stage, pending consideration of the conceptual framework. - Recommendation: In addition to establishing a LOLR facility via the FSF, CBBH should establish greater flexibility in reserve requirements as an additional liquidity cushion. - Modify CBBH reserve requirements to allow banks to draw down their reserves at the CBBH below the minimum requirement for short periods, conditional on: - CBBH receiving an affirmation from the relevant banking agency that the bank is not in breach of its capital requirements and is otherwise prudentially sound, or will be under resolution arrangements in place. - Expected effect: assist banks in periods of liquidity stress and lessen probability of LOLR facility usage. *BOSNIA AND HERZEGOVINA — INTERNATIONAL MONETARY FUND* ### Addressing the NPL overhang — key findings - NPLs continue to increase due to weak domestic demand and modest credit activity; high levels of NPLs are a key vulnerability. - Domestic banks: NPLs around 26 percent of total loans, mostly corporate loans. - Foreign banks: NPLs have remained relatively stable. - Sectoral NPL concentrations: - Manufacturing, trade, construction, and real estate: NPL levels of around 30 percent. - Household NPLs: remained remarkably steady despite high unemployment and stagnant wages. - High share of special mention loans that could become NPLs indicates further systemic risk. ### Legal, judicial, and structural impediments to NPL resolution - Legal impediment: Law on Obligations and Law on Protection of Consumers prevent banks from transferring non-cancelled NPLs to entities other than banks, impeding sale of NPLs to AMCs or external debt buyers. - Work-arounds exist but are limited: - Example: one bank achieved a ‘synthetic’ loan transfer by terminating loans under contractual rights and transferring receivables and recovery rights; not widely used due to challenges and likely loss of value. - Absence of an alternative to bankruptcy: - No streamlined process exists for company-creditor negotiated restructurings to facilitate least-cost solutions to loan impairment. - Result: more companies enter bankruptcy, lower recoveries, loss of economic activity and jobs, and large court backlogs. - Imperative: create a new law to enable court-supervised company/creditor restructurings. - Judicial framework weaknesses: - Lack of specialist commercial court (noting a footnote that such courts already exist in RS15). - Inadequate court resourcing and lack of experienced judges for complex corporate cases. - Appeals court tendencies to refer decisions back to primary court prolong cases and contribute to backlog. ### Importance and systemic implications - High NPL levels: - Signal weak underwriting practices. - Impair banks’ capital positions. - Weaken profitability, cash-flow, and liquidity. - Divert management attention from productive activities. - Reducing NPLs and enabling cost-effective management of NPLs are critical to financial stability. ### Recommended initiatives to address NPLs - Assess adequacy of banks’ credit risk management policies and practices, including: - risk appetite, lending policies and procedures, stress testing frameworks, and governance arrangements. - Amend relevant laws (Law on Obligations and Law on Consumer Protection) to enable banks to transfer NPLs to non-bank entities, including private AMCs, with safeguards: - banking agencies must have powers to supervise private AMCs where part of banking groups (consistent with consolidated banking supervision practice); - require all NPLs to be maintained on a credit register so banks and other credit providers can assess debtor risk. - Resolution powers should allow transfer of NPLs to an SPV established to liquidate remaining assets of a bank under resolution (as proposed in draft banking laws). - Establish a new law to enable court-approved company and creditor restructurings as an alternative to bankruptcy, with court enforcement on all creditors where a majority agree, subject to safeguard that no creditor is worse off than in bankruptcy. - Establish a specialist commercial court in FBiH entities, with adequate resourcing and experienced judges, to help clear backlogs and improve resolution of corporate NPL cases. *BOSNIA AND HERZEGOVINA — INTERNATIONAL MONETARY FUND* ### Macroprudential policy — Best practices (summary) - Purpose: use prudential tools to limit systemic and system-wide financial risk by: - limiting buildup of financial imbalances; - constructing defenses to contain consequences of downswings; - identifying and addressing common exposures, concentrations, linkages, and interdependencies that cause contagion and spillovers. - Definitions: - systemic risk: risk of disruptions to financial services caused by impairment of all or parts of the financial system, with serious negative real-economy consequences; - system-wide financial risk: risk arising from all kinds of financial institutions, instruments, markets and infrastructure. - Macroprudential policies address: - Time dimension (procyclicality — excessive risk-taking in upswing); - Cross-sectional dimension (distribution of risk across the system at a point in time). - Framework components: - Analytical: identification and monitoring of systemic risks, data collection and assessment processes. - Operational: tools to contain risks, rules governing instrument use, and assessments of effectiveness. - Institutional: governance, accountability, transparency, and coordination of macroprudential policy to preserve financial stability. - Institutional requirements: clear mandates, control over macroprudential instruments commensurate with mandates (e.g., countercyclical capital buffers, capital surcharge to systemic banks), operational independence, accountability, transparency and communication of decisions. *BOSNIA AND HERZEGOVINA — INTERNATIONAL MONETARY FUND* ### Macroprudential policy — The case of Bosnia and Herzegovina - Institutional landscape: - No single institution or committee has responsibility for financial stability design and implementation of macroprudential tools. - Supervisory responsibility for banks in each jurisdiction lies with respective banking agencies in accordance with constitutional and legal framework.17 - CBBH’s main objective: maintain stability of domestic currency per the CBA; tasks include promoting payment system and coordinating banking agencies (including information exchange). - SCFS (established December 2009 via MoU among CBBH, two banking agencies, Deposit Insurance Agency, and Fiscal Council): - Objectives: cooperation on common assessments of threats to financial stability, preparation of common solutions and crisis management actions, information exchange, coordination of public information, and consistency plans including stress testing. - CBBH coordinates SCFS; CBBH’s Financial Stability Unit (FSU) compiles data, information and analysis for SCFS members. - SCFS activities: considered stress test results, was informed of Financial Soundness Indicators (FSI) and Financial Stability Report (FSR), discussed specific problematic banks, and collected individual crisis management contingency plans to elaborate a master crisis management plan. - Existing macroprudential-like initiatives (isolated and need institutional development): - CBBH changes to reserve requirement (RR) ratios and calculation base. - Calculation and publication of FSI by CBBH using banking agencies’ data. - CBBH top-down stress tests on main financial risks; aggregate results published, individual bank results referred to respective banking agencies. - Regulation on foreign currency open position (by both entities). - Joint development and application of methodology for identifying Domestic Systemically Important Banks (DSIB). - Banking agencies approved regulations on conservation capital buffers and a leverage ratio, and announced potential future countercyclical capital buffer and capital surcharge for systemic banks. - Reserve requirement (RR) policy as primary macroprudential tool applied: - Since end of 2004, CBBH increased RR rate in successive steps from 5.0 percent to 18.0 percent during fast credit growth and capital inflow. - October 2008: CBBH began cutting RR rates and differentiated between deposits and borrowed funds with original contractual maturity: - up to one year: currently at a rate of 10 percent; - more than one year: currently at a rate of 7 percent. - Funds borrowed from non-residents with written agreement and government funds for development projects were excluded from calculation base since November 2008 and May 2009 respectively. - Financial Stability Report (FSR): - Annual FSR is comprehensive but published late (e.g., 2013 version published in September 2014). - Delays attributed to data collection and slow printing procurement; FSU working to shorten process. - Posting the report on CBBH website before printing could reduce lag by two months and, if paired with a dissemination strategy, reinforce communication. - Banking agencies’ reports: - BARS and FBA publish quarterly and annual reports that are mainly descriptive and numeric, lacking analysis and risk evaluation. - Many banks reportedly unaware of the CBBH FSR. - DSIB methodology: - Based on BCBS document and adapted to BiH characteristics and data availability. - Joint CBBH and banking agencies work produced a Memorandum describing variables for size, interconnectedness, substitutability and complexity, and assigned weights. - Thresholds for DSIB list were set by CBBH and distributed to the two banking agencies; neither the methodology nor the DSIB list was made public. - Mid-2014 capital regulation developments: - Both banking agencies approved new capital regulations aligned with aspects of Basel III, including potential future countercyclical capital buffer. - New regulation includes a 2.5 percent of RWA as a conservation capital buffer above core capital and total capital. - If a bank has Core Capital and Total Capital below 8.5 and 14.5 percent, respectively, it is not allowed to pay dividends, with limited impact only in some banks. - Regulations include timetable for increasing minimum participation of core capital in total capital and a minimum non-risk-weighted leverage ratio of 6 percent. - Announcement that a countercyclical capital buffer and a systemic risk buffer may be prescribed in the future, requiring significant analytical effort and data collection. - Design recommendation: - Macroprudential framework should rely on existing cooperation among CBBH, FBA and BARS. - Joint projects (stress tests, DSIB methodology) show benefits of collaborative development and calibration of tools and indicators, including microprudential regulations with macroprudential impact. - Framework for joint work: 2008 MoU for “Coordination of Banking Supervision and Cooperation and Exchange of Information.” *BOSNIA AND HERZEGOVINA — INTERNATIONAL MONETARY FUND* ### 119. The proposal of a macroprudential framework should be aligned as much as possible ### 119. The proposal of a macroprudential framework should be aligned as much as possible ### Alignment with international standards and institutional constraints - The framework proposed builds on the MoU on Coordination already in force and should be aligned as much as possible to international standards, contemplating the legal framework and constrains in BiH. - The MoU could be amended to include: - Assessment of systemic risks and vulnerabilities; - Selection and calibration of macroprudential tools to address financial stability (the tools should also cover microprudential regulation for macroprudential purpose); - Defining the timing (i.e., activation and deactivation) of macroprudential tools. ### Governance, coordination, and accountability - CBBH Governor and FBA and BARS directors will discuss macroprudential issues at least quarterly. - Conclusions reached will be considered by each institution for implementation according to their responsibilities established in their respective legal framework, respecting the constitutional and regulatory framework. - SCFS will be regularly informed by the CBBH, FBA and BARS on: - activities performed; - conclusions achieved; - regulations implemented with macroprudential impact; - systemic risks and vulnerabilities that could be better addressed via fiscal policies. - Accountability measures: - Publication in the FSR of the activities done by the CBBH, FBA and BARS. - CBBH Financial Stability Report will include a section describing activities, conclusions achieved and macroprudential policies implemented in the reference period. - The content of the new (updated) MoU will be disclosed on the corresponding web site of each of the three institutions. ### Data needs and information sharing - Priority: definition and collection of additional information for assessment of vulnerabilities and design of macroprudential tools. - Recommended data to collect (examples): - Loan To Value (LTV) ratios applied by banks; - Debt to Income (DTI) ratios applied by banks; - indicators of level of indebtedness of household and corporates; - currency mismatch in debtor’s balance sheets (for those who have loans in foreign currency or indexed to a foreign currency). - Data sources and responsibilities: - Some information could be collected by the banking agencies requiring it to the banks; - Other information could be obtained by the CBBH itself (e.g., credit registries) or other sources. - Action: make a diagnosis of the data gap and start filling it. ### Identification, selection, and calibration of macroprudential tools - CBBH, FBA and BARS should exchange views and reach conclusions on: - tools to be used for identification of systemic risk; - best instruments to address identified risks. - Roles: - CBBH: best placed to handle technical work to assess systemic risks and vulnerabilities, based on inputs from FBA and BARS. - FBA and BARS: provide experience from contact with banks and supervision to complement system-wide overview from CBBH. - Process: - CBBH, BARS and/or FBA would propose macroprudential measures; - These will be discussed among representatives of the three institutions; - Further calibration and timing will be carried out until a proposal among CBBH, BARS and FBA representatives is agreed. - Calibration specifics: - Calculate thresholds and consequences of breaching them (example: having a LTV above certain level could trigger a higher RWA). - Define activation and deactivation timing for each macroprudential tool or microprudential tool with macroprudential impact. ### Implementation responsibilities and fiscal interaction - Final implementation rests with the corresponding institution according to the legal framework: - Changes to reserve requirements: implemented by the CBBH. - Prudential regulations: implemented by each banking agency. - Risks better tackled with fiscal policies: any of CBBH, FBA or BARS should raise the issue in the next SCFS meeting. ### Appendix I. Macroprudential Framework — summary proposal A. Framework - Macroprudential policies should be underpinned by broader cooperation between CBBH, FBA and BARS. - The MoU on “Coordination of Banking Supervision and Cooperation and Exchange of Information” would provide a useful platform for discussing and adopting macroprudential policy measures. - The MoU (Art. 7) contemplates cooperation in respect of financial stability: “Cooperation in respect of financial stability shall include an exchange of data relevant to financial stability analysis and participation in discussions in that respect and proposing measures to improve the situation and strengthen financial stability.” - Suggested MoU amendments to add: - Assessment of Systemic Risks and Vulnerabilities; - Selection and calibration of macroprudential tools to address financial stability (including microprudential regulation for macroprudential purpose); - Defining the timing (activation and deactivation) of macroprudential tools. B. Setting and Process - Characteristics of the macroprudential analysis and policy process: - With tools to monitor system-wide risks, the CBBH would be best placed to handle technical work to assess systemic risks and vulnerabilities, based on inputs from FBA and BARS. - Subsequently, the CBBH, BARS and/or FBA would propose macroprudential measures to be discussed by the three institutions, with further calibration and timing until agreement. - CBBH Governor and FBA and BARS Directors will discuss macroprudential issues at least quarterly; conclusions will be considered by each institution for implementation according to legal responsibilities. - SCFS will be regularly informed about coordinated macroprudential work, conclusions reached, and systemic risks and vulnerabilities that could be better addressed via fiscal policies. - The CBBH Financial Stability Report will include a section—endorsed by CBBH, FBA and BARS—on relevant conclusions and macroprudential policies implemented in the reference period. C. Disclosure - The content of the new (updated) MoU will be disclosed on the web site of each institution (CBBH, FBH and BARS). *Source: IMF staff proposal as presented in the cited chapter of the PDF.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15216.pdf_