Macroprudential Framework in Bosnia and Herzegovina September 22, 2017 Dejan Kovačević Central Bank of Bosnia and Herzegovina The views in this presentation are these of the author and do not necessarily represent the views of the Central Bank of Bosnia and Herzegovina.
Outline of the presentation: Stylized facts on Bosnia and Herzegovina s Economy Structure of the BH Macroprudential framework Standing Committee for Financial Stability (SCFS) Coordination of Banking Supervision Central Bank of Bosnia and Herzegovina (CBBH) Banking Agencies Deposit Insurance Agency (DIA) Macroprudential Tools Implemented International Coordination of Macroprudential Supervision
Stylized facts on Bosnia and Herzegovina s Economy Monetary Policy Strategy Currency Board - a rule based, nondiscretionary monetary policy: Basic principles set out in the Law on Central bank of Bosnia and Herzegovina (CBBH): Fixed exchange rate of the national currency, convertible mark, to euro (1 EUR = 1.95583 KM), Full convertibility of the local currency into the peg currency euro and vice versa (buying and selling of KM through foreign exchange window). Full coverage of CBBH s monetary liabilities with its foreign reserves. The Law sets clear limits to the CBBH for engaging in any kind of monetary operations an orthodox currency board (vs. quasicurrency board), Required Reserves the only instrument of monetary policy at operational disposal. The CBBH is prevented from providing credit (by Articles 1(1) and 67(1)(a) of the Law) thus, the CBBH cannot perform lender of last resort function. In the absence of official liquidity support arrangements, banks generally hold a much higher amount of reserves at the CBBH than the minimum requirement.
Stylized facts on Bosnia and Herzegovina s Economy Macroeconomic Indicators Deteriorated macroeconomic situation after the onset of the Global Financial Crisis: Slowdown in real economic growth and moderate recovery, Low inflation with prolonged periods of deflation, Lower and stagnating current account balance and FDI, Improving fiscal balance (Reform Agenda - fiscal restructuring and austerity policy to reduce public debt).
Stylized facts on Bosnia and Herzegovina s Economy Financial Sector Bank-oriented financial system Dominated by foreign banks Process of banking sector consolidation Capital and money markets underdeveloped Two stock exchanges: Banja Luka Stock Exchange (BLSE) Sarajevo Stock Exchange (SASE) Financial system structure Banking sector Increase in banking sector risks after the crisis Foreign banks deleveraging Slowdown in credit growth Increase in nonperforming loans 2014 2015 2016 Value Value Value Share, in % Share, in % Share, in % Financial intermediaries assets (KM million) (KM million) (KM million) Banks 22,766 87.4 23,737 87.5 25,014 87.8 Lising companies 514 1.97 475 1.75 423 1.48 Microcredit organisations 647 2.48 640 2.36 665 2.34 Investment funds 758 2.91 824 3.03 802 2.81 Insurance and reinsurance companies 1,355 5.20 1,465 5.40 1,582 5.56 Total 26,039 27,141 28,486 Financial market capitalisation Corporative bonds 6.2 0.1 9.7 0.1 7.5 0.1 Government bonds 1,133.6 9.0 1,220.5 9.0 1,567.1 9.0 Treasury bills 1) 78.6 0.8 86.4 0.8 87.9 0.8 Stocks 8,010.1 90.1 8,651.1 90.1 8,228.9 90.1 Total 9,228.5 9,967.7 9,891.4 T-Bills FBH are not included because they are not traded at the SASE.
Structure of the Bosnia and Herzegovina s Macroprudential Framework The macroprudential framework consists of analytical, operational and institutional aspects: The analytical aspect refers to the identification and monitoring of systemic risks, including the identification and collection of data and the process of it to assess the risk to the financial stability. The operational aspect has to contemplate the tools to contain risks and prevent them from becoming systemic, the rules governing the use of these instruments; and assessments of their effectiveness. Finally, the institutional aspect includes the mechanisms of governance, accountability, transparency and coordination of macroprudential policy with the objective to preserve the financial stability. Deposit Insurance Agency Banking Agencies: FBA BARS Standing Committee for Financial Stability Central Bank of Bosnia and Herzegovina Coordination of Banking Supervision
Standing Committee for Financial Stability (SCFS) Established in December 2009 through a Memorandum of Understanding (MoU) between the CBBH, the two banking agencies, the Deposit Insurance Agency and the Fiscal Council. Members: governor of the CBBH, ministers of finance of the state and entity governments, directors of banking agencies and director of Deposit Insurance Agency. Objectives and scope: the set up for cooperation of common assessments on threats to financial stability, the preparation of common solutions and actions for managing a crisis, exchange of information, coordination of public information, and establishing contingency plans, including stress testing exercises. The CBBH acts as a coordinator of the SCFS, while the Financial Stability Department of the CBBH is responsible for the compilation of data, information and analysis to be distributed to the SCFS members (including the one from the banking agencies). Activities of the SCFS: considers the results of the stress test of the financial system, being informed of the Financial Soundness Indicators (FSI) and Financial Stability Report (FSR), discusses specific situation of banks with problems, and has been in the process of collecting (from the banking agencies and CBBH) individual crisis management contingency plans, with the purpose to elaborating a master plan on crisis management.
Coordination of Banking Supervision Members: Governor of the CBBH, directors of the banking agencies Based on Memorandum of Understanding for the Coordination of Banking Supervision and Cooperation and Exchange of Information signed June 12, 2008, CBBH formally acts as a coordinator (Law on CBBH, Article 2,e) Regular (monthly) meetings Aim to recognize vulnerabilities in the banks, more efficiently identify potential risks and timely recognize crises situation, discuss about causes, take appropriate positions and propose the measures for solving such situations. Cooperation includes: Exchange of data and timely informing on important issues regarding operations of individual banks and stability of the banking system, Proposing measures (designing macroprudential tools) to improve the situation and strengthen financial stability, Conclusions reached will be considered by each institution for its implementation according to their responsibilities established in their respective legal framework, respecting the constitutional and regulatory framework, Publishing of data from own competencies, Building of the mutual trust, Cooperation in area of implementation of Main Basle Principles and Directives of the European Union for the efficient supervision, Work in common expert groups, Participation in common education, Cooperation with other supervisors.
Central Bank of Bosnia and Herzegovina (CBBH) Legislation: Law on CBBH Required Reserves (RR) policy The successive changes adopted by the CBBH of the RR ratios and on the calculation base were done with the purpose to mitigate the credit booming and credit crunch before and after the global financial crisis. Changes in the RR policy as of July 1, 2016. were conducted primarily for macroprudential reasons - increase in liquidity buffers of commercial banks, thus their ability to sustain liquidity shocks (RR rate of 10%, introduction of the overall base for calculation without any exclusions). Financial Stability Department Financial stability report Banking sector stress tests Financial soundness indicators Coordinating role in banking supervision: Memorandum on the Principles of Coordination of Banking Supervision and cooperation and exchange of data and information Signed 12 June, 2008. Registry of Transactions Accounts Central Credit Registry Basic assumptions regarding stress tests in % Basic Scenario Extreme scenario 2017 2018 2017 2018 Real GDP growth 3.0 3.5-4.0-1.5 Increase in assets value 5.5 6.0-3.5-3.2 Nominal credit growth 5.9 5.6-4.0-3.5 Increase in securities value 15.0 10.0-5.0 0.0 Inflation 1.4 1.7-1.1-0.8 Source: CBBH FSR 2017 Stress tests results Basic Scenario Extreme scenario 2017 2018 2017 2018 Capital adequacy ratio (in %) 16.0 16.5 14.9 14.3 No. of banks that need recapitalization 3 4 8 9 Source: CBBH FSR 2017
Banking Agencies (FBA and BARS) Two banking agencies at entity level: Federal Banking Agency (FBA), Banking Agency of Republic of Srpska (BARS). Legislation (reformed under the latest IMF EFF program): Laws on entity banking agencies, Entity banking laws, Laws aligned with EU Bank Recovery and Resolution Directive (EU BRRD) and Financial Stability Board Key Attributes for Effective Resolution Regimes for Financial Institutions and Basel requirements, Legislation reform aimed to strengthen supervisors corrective and enforcement powers, introduce consolidated supervision of banking groups, and establish a comprehensive bank resolution framework. Harmonization of regulation and coordination between banking agencies. Bank supervision authorities: on-site, off-site supervision of banks, Bank resolution authorities introduced with clear separation between their supervision and resolution functions. Require corrective actions from banks (according to triggers for corrective actions based on breaches of capital, liquidity and asset quality requirements), Actions based on early warning indicators and stress tests, Produce reports on the condition of the banking system (quarterly and annually), List of systematically important banks (according to the methodology adopted), Cross-border crisis resolution coordination for systemically important banks.
Deposit Insurance Agency (DIA) Established in 2002 by the Law on Deposit Insurance Tasks: Deposit insurance Issuing and revoking of the certificates of membership, Paying out insured deposits (up to KM 50,000.00). Deposit insurance fund financed by annual levies on banks, supported by EUR 50 million standby facility with the EBRD, Developed infrastructure for an effective deposit insurance framework, including MoUs to support coordination with the FBA and BARS, Performed well in the cases of bankruptcy of two small banks (Bobar Banka, Bank of Srpska), all deposits paid to bank clients that fall under the category of insured deposits, Currently there is no framework in BH for providing liquidity assistance to a solvent bank that is in liquidity distress, Financial Stability Fund - means of providing liquidity assistance to an idiosyncratic bank liquidity stress situation where the financial system as a whole is relatively stable (under consideration).
Macroprudential Tools Implemented in Bosnia and Herzegovina CBBH and the banking agencies have been adopting some of the macroprudential measures to limit systemic risk and system-wide financial risk: Changes of the reserve requirement ratios and calculation base by the CBBH; Calculation and publication of Financial Soundness Indicator (FSI) by the CBBH, aligned with the international standards, with the data provided by the banking agencies; CBBH has been performing top-down stress test on the main financial risks of the financial system, whose aggregate results are published and the individual ones (for each bank) are referred to the respective banking agencies; Regulation (in both entities) on foreign currency open position; CBBH, together with the banking agencies, have developed and applied a methodology for the identification of Domestic Systemically Important Banks (DSIB); Banking agencies have recently approved regulations regarding the inclusion of a conservation capital buffers and a leverage ratio, as well as, the announcement of potential future countercyclical capital buffer and capital surcharge for systemic banks. Liquidity coverage ratios (LCR) requires banks to have a sufficient amount of high quality liquid assets (HQLA) to cover the net outflows within 30 days period under a stress situation, Net stable funding ratio (NSFR) requires banks to fund their activities with sufficiently stable sources of funding in order to mitigate the risk of future funding stress (the amount of available stable funding to relative to the amount of required stable funding, is 100%).
International Coordination of Macroprudential Supervision The role of international institutions IMF, World Bank, EU, etc. as generators of reforms, Memorandums of understanding (MoUs) of CBBH, FBA, BARS with neighboring countries supervisors, with the European Authorities, given the systemic importance of several foreign banks to BH financial system (exchange of information and coordination in relation to resolution with home supervisors), Vienna Initiative: Vienna Initiative I (January 2009) brought together all the key stakeholders in the EU-based cross-border bank groups that are active in emerging Europe (major international financial institutions as well as the most important European institutions, home and host country regulatory and fiscal authorities of large cross-border banks and the largest banking groups operating in emerging Europe) Objectives: Prevent a large-scale and uncoordinated withdrawal of cross-border bank groups from the region, which could have triggered systemic bank crises not only in individual countries but in the region as a whole, Ensure that parent bank groups maintain their exposures and recapitalise their subsidiaries in emerging Europe, Ensure that national support packages of cross-border bank groups benefited their subsidiaries in emerging Europe and thus avoided a home bias, Agree on, and implement, basic crisis management principles in the region. Vienna Initiative II (end 2011) to prevent credit crunch within the Eurozone and tackle rapid deleveraging in Emerging Europe. Objectives: Avoid disorderly deleveraging, Ensure that potential cross-border financial stability issues are resolved, Achieve policy actions, notably in the supervisory area, that are taken in the best joint interest of home and host countries. Implementation of the EU directives and Basel III provisions in domestic legislation pertaining to the macroprudential issues.
Literature: CBBH (2016), Annual Report for 2016 CBBH (2016), Financial Stability Report for 2016 CBBH (2016), Quarterly Bulletin 2016 Q4 IMF (2015), Financial Sector Assessment Program, IMF Country Report No. 15/213 IMF (2016), Request for Extended Arrangement under the Extended Fund Facility, IMF Country Report No. 16/291 Ho, C. (2002), A Survey of the Institutional and Operational Aspects of Modern-Day Currency Boards, BIS Working Paper, No. 110, World Bank Group (2017), Faster Growth, More Jobs, Western Balkans Regular Economic Report, No. 17, www.vienna-initiative.com