Banking & Finance in Bosnia & Herzegovina

I. LEGAL FRAMEWORK

1.1. Which main legislative and regulatory provisions govern the banking sector in your jurisdiction?

The governance structure of Bosnia and Herzegovina (BiH) comprises the institutions of the state of Bosnia and Herzegovina, the governments of the two territorial and administrative entities – the Federation of Bosnia and Herzegovina (FBiH) and the Republika Srpska (RS) – as well as Brcko District (BD). At the entity level, both the FBiH and the RS have significant constitutional autonomy and regulate independently the matters which the Constitution of Bosnia and Herzegovina has not assigned to the state government. The financial system of BIH is under the jurisdiction of the administrative entities and is governed by a number of legislative and regulatory provisions while monetary policy is governed at the state level.

Some of the main provisions that apply to banks and other financial institutions operating in BiH include:

• The Law on Central Bank in BiH (Official Gazette BIH no. 1/97, 29/02, 8/03, 13/03, 14/03 – corr., 9/05, 76/06 and 32/07);
• The Law on Banks in FBiH, RS and BD (Official Gazette FBiH, no. 27/17, Official Gazette RS, no. 04/17, 19/18, 54/19 and Official Gazette BD, no. 5/03, 19/07, 3/22);
• The Central Bank of Bosnia and Herzegovina Act (Official Gazette BiH, no. 1/97, 29/02, 8/03, 13/03, 14/03 – corr., 9/05, 76/06, 32/07);
• The Law on Banking Agency in FBIH and RS (Official Gazette FBiH, no 75/17, Official Gazette RS, no. 59/13, 04/17);
• The Law on National Payment Transactions in FBiH, RS and BD (Official Gazette FBiH no. 48/15, 79/15- corr., Official Gazette RS no. 52/12, 92/12, 58/19, 38/22, Official Gazette BD no. 5/01, 23/16);
• The Law on Anti Money Laundering and Terrorism Financing in BiH and BD (Official Gazette BiH no. 47/14, 46/16, Official Gazette BD, no. 14/03);
• The Law on Deposit Insurance in Banks of Bosnia and Herzegovina (Official Gazette BiH, no. 32/20);
• The Law on Foreign Exchange Operations in FBiH, RS, and BD (Official Gazette FBiH no. 47/10, Official Gazette RS no. 96/03, 123/06, 92/09, 20/14, 20/18, Official Gazette BD no. 23/16);

1.2. Which bodies are responsible for enforcing the applicable laws and regulations? What are their main competencies?

Bearing in mind the very complex structure of BiH as a country, this is also reflected in the banking system. Thus, BiH has responsible bodies both at the state level and entity levels.

At the state level, the central bank, known as the Central Bank of Bosnia and Herzegovina (CBBH) is responsible for monetary stability, issuing and controlling the monetary policy of BiH, supporting, and maintaining appropriate payment and settlement systems, and coordinating activities of the entity Banking Agencies, which are in charge of bank licensing and supervision. The CBBH can provide banking services for the benefit of foreign governments, foreign central banks, and monetary authorities, and for the benefit of international organizations in which it or Bosnia and Herzegovina participate but cannot give credit to the nay institution.

In particular, the banking regulatory and supervisory authority for the Federation of BiH is the Federal Banking Agency (FBA), while the responsible authority for Republika Srpska is the Banking Agency of Republika Srpska (BARS) (Banking Agency). The FBA and BARS are independent, autonomous, and non-profit institutions with competencies for prudential regulation, supervision (and resolution) of banks, microcredit organizations, leasing and factoring companies, and saving-credit organizations. The FBA and BARS work to ensure the stability and soundness of the banking sector in the BiH by enforcing compliance with banking laws and regulations, conducting on-site inspections of banks, and taking corrective actions when necessary to address any problems that are identified. They report to the Parliaments of the FBiH and the Republic of Srpska respectively, who supervise their operations.

The Banking Agency determines its basic tasks, and some of these tasks are: a) issuing licenses for the establishment and operation of banks, microcredit organizations, and leasing companies, b) issuing permits for changes in the organizational structure of banks, microcredit organizations, and leasing companies, c) issuing consent for the appointment of bank management, d)issuing licenses for internal payment transactions, e) initiation, management, and supervision of the procedure of temporary administration, liquidation and bankruptcy of banks, i.e. rehabilitation of banks, f) cancellation of banking licenses for banks, microcredit organizations and leasing companies, and other tasks.

In addition to their supervisory functions (licensing, supervising, and issuing corrective measures), FBA and BARS are also authorized to adopt prudential regulations, issued in the form of decisions, instructions, and rulebooks/guidelines. Banks must comply with all regulations issued by the FBA/BARS. Decisions and rulebooks are adopted by the respective Management Boards, while instructions and guidelines are adopted by the Director of the Agency and explain in more technical detail how to apply provisions of the law or decisions. The two agencies coordinate on any changes, in order to keep the regulatory frameworks aligned. With regard to primary legislation per se, laws are brought into effect via the Ministry for Finance, while the agencies can give comments and technical advice. The final approval is then for the Parliament.

The State Ministry of Finance, the different entities’ Ministries of Finance, and the Financial Directorate of BD do not have direct authority over banks operating in BiH. However, these institutions do play a role in shaping financial and fiscal policy at their levels, which can indirectly affect the operations of banks in BiH. In addition, the BIH Ministry of Finance is responsible for managing the national budget, managing public debt, and preparation of projects and arrangements that are implemented through domestic banks (revolving funds), cooperation with the Central Bank of Bosnia and Herzegovina, domestic banking and financial institutions, monitoring of regulations regulating the work of the Central Bank of Bosnia and Herzegovina, banking and foreign exchange system, insurance system, and capital markets, providing information and technical support to the Central Bank of BiH. As such, it plays a key role in the overall financial stability of the country, which can impact the operations of banks in BiH. 

In regard to the resolution authority in BiH within the FBA and BARS, an independent organizational unit is established in which one or more ombudsmen for the banking system (Ombudsman) act to promote and protect the rights and interests of natural persons as users of financial services. The Ombudsman, as one of the bearers of the protection of users’ rights in the Federation and the Republic of Srpska, enables disagreements and disputes between entities of the banking system and users to be resolved fairly and quickly by independent parties with a minimum of formality through conciliation, mediation or in another peaceful way. The Ombudsman is independent in the performance of his tasks, he is responsible to the Management Board for their execution and enforcement and does not act as a representative of the agency. The settlement agreement that the participants in the peaceful resolution of the conflicting relationship reach with mediation by the Ombudsman has the force of an enforcement document.

1.3. What are the current priorities of regulators and how does the regulator engage with the banking sector?

For the FBA and BARS, one of the main priorities are to keep promoting transparency and fairness in the banking sector and to continue taking measures and activities to preserve and strengthen the stability of the banking sector and the protection of depositors, to improve the safety, quality, and legal operation of banks in FBiH. In 2023 the Banking Agency will continue to keep monitoring the risk profile and capital position of all banks, including the fulfilment of capital requirements as a result of the Supervisory Review and Evaluation Process assessment, control on the application of the decision on credit risk management and determination of expected credit losses, including the assessment of internal models for assessing credit risk parameters, monitor the implementation of strategies for dealing with non-performing exposures and annual operational plans for banks where the share of NPLs in total loans is greater than 5%, monitor interest rate growth and its impact on the banking sector, and undertaking activities to mitigate the effects and continuing continuous cooperation with the competent supervisory authorities for the supervision of banking groups from the EU and third countries whose members are based in FBiH, with the aim of more efficient supervision and improvement of supervisory practices, and cooperation and exchange of information with the ECB and the EBA on matters of supervision and banking regulations, as well as with international financial institutions.

To carry out their duties, the FBA and BARS have a number of tools and mechanisms at their disposal to engage with the banking sector in BiH. Some of the ways in which the Banking Agency engages with the banking sector include:

• On-site inspections: The Banking Agency conducts on-site inspections of banks to assess their compliance with laws and regulations and to identify any potential risks or vulnerabilities.
• Off-site surveillance: The Banking Agency monitors the financial health of banks through off-site surveillance, which involves collecting and analyzing financial data and other information about banks.
• Supervisory reports: The Banking Agency publishes supervisory reports on the banking sector in BiH, which provide information on the financial health of the sector and highlight any areas of concern.
• Meetings with bank management: The Banking Agency meets with the management of banks on a regular basis to discuss their operations and any issues or concerns that may arise.
• Issuing regulations, acts, and guidance: The Banking Agency has the authority to issue regulations, acts, and guidance to banks to ensure compliance with laws and regulations and to promote the stability of the banking sector.
• Sanctions and enforcement actions: If a bank is found to be in violation of laws or regulations, the Banking Agency has the authority to impose sanctions and take enforcement actions, such as issuing fines or revoking a bank’s license.

II. AUTHORIZATION

2.1. What licenses are required to provide banking services in your jurisdiction? What activities do they cover?

In BiH, the bank must obtain a license from the Banking Agency in order to provide banking services in the country and registration in the court register in order to acquire the status of a legal entity. In the District Brcko, the application for issuing a banking license shall be submitted by the choice of the founder to the FBA or the BARS.

Banking licenses are granted for an indefinite period and are not transferable to other persons. The banking license of each bank specifies the banking activities that such a bank shall be authorized to engage in. The banking license is a condition for registration at the Court Register of business entities.  The bank is obliged to fulfill all the conditions under which the license was issued during its operations. BARS and FBA have different criteria for banking license withdrawal, but all appear to be within the bounds of what is expected in the EU.

(1) The bank can perform the following operations:

a) receiving and depositing deposits or other funds with the obligation to return,

b) granting and taking credits and loans,

c) issuing guarantees and all forms of surety,

d) domestic and international payment transactions and transfers of money, in accordance with special regulations,

e) purchase and sale of foreign currency and precious metals,

f) issuance and management of means of payment (including payment cards, traveler’s, and bank checks),

g) financial leasing,

h) purchase, sale, and collection of receivables (factoring, forfeiting, and others),

i) participation, purchase, and sale of money market instruments for one’s own or someone else’s account,

j) purchase and sale of securities (broker and dealer operations),

k) management of a portfolio of securities and other values,

l) support operations securities market, agent jobs, and underwriting, in accordance with the regulations governing the securities market,

m) investment advisory jobs and custodial jobs,

n) financial management and consulting services,

o) data collection services, making analyses, and providing information on the creditworthiness of legal entities and natural persons independently performing registered business activities,

p) safe deposit box rental services,

r) mediation in insurance affairs, in accordance with regulations governing insurance brokerage,

s) other jobs that represent support for specific banking jobs.

The bank is obliged to conduct its operations in accordance with the law, the agency’s regulations, the conditions, and restrictions established by the banking license, and the corresponding business and accounting principles and standards.

2.2. What is the procedure for obtaining a banking license? How long does this typically take?

In BiH, the procedure for obtaining a banking license is outlined in the Law on Banks and implementing by-laws, which are the primary legal framework for the regulation and supervision of the banking sector in the country. According to the Law on Banks, the bank represents a commercial company and is established in the form of a joint stock company. Any individual or legal entity that wishes to establish a bank in BiH must have a founding act or contract and a statute approved by the Banking agency and must submit an application for a banking license to the Banking agency. The application must be accompanied by a range of documents and information, including:

• Transparent ownership: Banks must be owned by individuals or entities that meet certain requirements. These requirements are intended to ensure that the owners of banks have the financial resources necessary to operate a bank effectively.
• Capital requirements: Banks must meet minimum capital requirements in order to be eligible for a license. These requirements are intended to ensure that banks have sufficient financial resources to meet their obligations and operate in a safe and sound manner. The minimum amount of paid-in founding capital of the bank and the amount of capital that the bank must maintain as a minimum cannot be below BAM 15 million (approximately EUR 7,5 million) (Minimum basic capital). The bank’s shares must be paid in full in cash before the bank’s registration, as well as during each subsequent increase in the total value of the shares. Things and rights can be entered as well, but the capital in money cannot be lower than BAM 15 million.
• Management: Banks must have a management team that meets certain qualifications. These qualifications are intended to ensure that the management team has the knowledge and experience necessary to operate a bank effectively.
• Eligibility of significant shareholders: a significant shareholder in a bank is an individual or legal entity that holds, directly or indirectly, 20% or more of the total voting rights at the bank’s general assembly or exercises a significant influence on the management of business policy of the bank. To be eligible as a significant holder in a bank in BiH, an individual or legal entity must be a trustworthy person and possess sufficient financial capacity considering the proposed size of the bank and the type of its activities, which the Banking Agency values in each specific case.
• Business plan: Banks must submit a business plan to the CBBH outlining their proposed operations and demonstrating that they meet the requirements for obtaining a license.
• Other requirements: Banks must also meet other requirements set by the Law on banks such as having an appropriate management structure in accordance with the planned size of the bank, an appropriate risk management system to which the bank could be exposed in its operations with an appropriate system of internal controls that includes clear administrative and accounting procedures and appropriate internal and external audit systems and appropriate salary policy, which should reflect and promote adequate and efficient risk management;

A banking license is issued after payment of capital and fulfillment of other conditions and includes the appointment of the bank management. Such a license cannot be transferred to another person and is always valid for an indefinite period of time.

The Banking Agency has to render a decision on the application not later than 60 days after receiving the duly completed application. In any case, the Banking Agency decides on issuing or refusing to issue a banking license within 12 months from the date of receipt of the application. An application for bank registration in the Court register shall be submitted within 30 days starting from the date when the Banking Agency issued a banking license. The bank acquires the capacity of a legal entity as of the moment being entered into the Court Register. A bank that has received a license to operate from the Banking Agency is obliged to become a member bank of the Deposit Insurance Agency of Bosnia and Herzegovina.

2.3. Can a foreign bank operate in your jurisdiction on the basis of its domestic license?

If a foreign bank decides to operate in BiH it must incorporate a locally registered legal entity and obtain a domestic banking license, provided that it meets the requirements set out in the Law on Banks as any other bank operating in the country and obtain the necessary additional approvals: the opinion/consent of the competent institution of the founder’s country of origin regarding capital investment in a bank that will operate on the territory of Bosnia and Herzegovina and the regulatory body of the country of origin, which performs control or supervision on a consolidated basis of that founder.

The foreign bank may also, with the approval of the Banking Agency, open a representative office, as an organizational part through which they present themselves, collect and provide information about the bank’s operations. The representative office does not have the status of a legal entity and may not perform banking operations.

Bearing in mind that BiH is not a member of EU passporting as a free movement of financial products and services by banks that are authorized in any EU or EEA state is not possible.

2.4. What are the restrictions on ownership, including foreign ownership of banks?

In BiH, all rules regarding restrictions of ownership apply to both domestic and foreign investors and are designed to ensure the stability and soundness of the banking sector in Bosnia and Herzegovina and to protect the interests of depositors and other stakeholders.

In BiH, there are several restrictions on the ownership of banks, including foreign ownership. According to the Law on Banks, no person or legal entity may own more than 10% of the voting shares in a bank unless they have received prior approval from the Banking Agency. A person or legal entity, which has a qualified holding in the bank must obtain the prior approval of the Banking Agency for any further indirect or direct acquisition of bank shares on the basis of which he acquires equal to or more than 20%, 30%, or 50% participation in the capital or voting rights in the bank.

If a bank has a qualified share in another legal entity, that legal entity cannot acquire a qualified share in that bank and vice versa.

The bank may not acquire its own shares without the prior consent of the Banking Agency. The acquisition of the bank’s own shares is carried out from funds derived from the bank’s profits. The bank is obliged to dispose of the acquired own shares within one year from the date of their acquisition. If the bank does not dispose of the acquired own shares within one year from the date of acquisition of its own shares, it is obliged to withdraw and cancel these shares at the expense of its shareholders’ capital.

2.5. What are the requirements for a proposed acquisition and acquirer of a qualified holding in a bank? Would the same requirements apply in the case of an increase of a qualifying holding?

In BiH, there are specific requirements that must be met by a proposed acquirer of a qualified holding in a bank. Qualifying holding is defined as when a person or a legal entity (alone or through related parties) has at least 10% of capital ownership or share in the voting rights of an institution or the ability to influence the management.

According to the Law on Banks, a person or legal entity that wishes to acquire a qualified holding in a bank must first submit a request to the Banking agency for the issuance of prior approval. The Banking Agency will then review the proposed acquisition to determine whether it especially assesses the applicant’s eligibility and financial condition, his management skills, and influence on the bank based on the following criteria: business reputation and reputation that are valued in relation to his financial and business activities, criminal records, assessment of the management abilities, the applicant’s financial condition and its impact on the bank’s operations, indicators that may be important for evaluating the impact of the applicant on risk management in the bank, the existence of reasonable grounds for suspicion of money laundering and the financing of terrorist activities, and the ability of the bank to meet the requirements established by this law and by-laws.

If the Banking Agency determines that the proposed acquisition meets the necessary requirements, they will issue approval for the acquisition to proceed within 60 days from the date of receipt of the request with complete documentation. If the Banking Agency does not reject the proposed acquisition in writing within the period referred to in the previous sentence, the acquisition is considered to have been approved. If the acquisition is not approved, the acquirer will not be permitted to acquire the qualified holding in the bank.

A person who has qualified participation in the bank must obtain the prior approval of the Banking Agency in the same manner for any further indirect or direct acquisition of bank shares on the basis of which he acquires equal to or more than 20%, 30%, or 50% participation in the capital or voting rights in the bank.

III. REGULATORY CAPITAL AND LIQUIDITY

3.1. How are banks typically funded in your jurisdiction?

Banks in Bosnia and Herzegovina are typically funded through a combination of sources, including deposits from customers, borrowing from other financial institutions, and the formation of their own capital.

Deposits from customers are a common source of funding for banks and may include savings deposits, checking accounts, and other types of accounts that allow customers to deposit money with the bank. Deposits holders can be 1. the population (individuals, households) – the basic sector that holds deposits with banks, 2. non-profit institutions (citizens’ associations, religious associations, sports clubs), 3. state and public enterprises (ministries, local administration bodies, and self-government), 4. trading companies, i.e., domestic business enterprises, 5. financial institutions (domestic and international), and 6. non-residents. Due to the majority of foreign ownership, the banks in BiH are able to maintain the necessary level of liquidity without difficulty with the support of foreign banks that represent bank groups and whose banks from BiH are members. The most common form of support in maintaining the necessary liquidity is represented by subordinated loans or long-term deposits from the bank or through bank recapitalization.

Non-deposit sources of funds are supplementary resources of banks, necessary for filling the financial potential. The share of non-deposit sources of funds compared to deposit sources is constantly increasing. Borrowing on the money market can be arranged within minutes and the funds are immediately transferred to the bank that needs them. Also, most non-deposit funds do not require keeping reserves, which reduces the costs of this type of financing. Non-deposit sources are formed from credit sources, securities, and capital. Credit sources consist of loans between commercial banks and loans from other financial organizations. Funds collected by issuing different types of securities can be short-term (treasury bills, certificates of deposit) or long-term (shares or bonds, long-term certificates of deposit). Capital represents permanently invested funds in the bank account.

Banks may also raise capital by issuing new ordinary shares, which can be purchased by investors, funds generated by the issue of preferred shares, surplus, retained earnings, and capital reserves.

The specific mix of funding sources used by a particular bank will depend on a variety of factors, including the bank’s business model, its risk appetite, and the availability of funding sources.

3.2. What capital and own funds requirements apply to banks in your jurisdiction?

In BiH, banks are subject to capital and own funds requirements that are designed to ensure the stability and soundness of the banking sector. Capital and own funds refer to the financial resources that a bank has available to absorb losses and meet its financial obligations. The minimum requirements regarding the amount of share capital, regulatory capital, and capital rates of the Bank are defined by the Law on Banks, the Decision on the calculation of bank capital of the Banking Agency of the Federation of Bosnia and Herzegovina, and other legal regulations that regulate this area.

Some of the key capital and own funds requirements that apply to banks in BiH include:

• Tier 1 capital is a sum of the Common Equity Tier 1 after regulatory adjustment and the Additional Tier 1 after regulatory adjustment.
• Common Equity Tier 1 – CET 1 - The bank’s Common Equity Tier 1 – CET 1 consists of items that are available to cover the risk or loss of the bank during its regular operations, in case of bankruptcy or liquidation. Common Equity Tier 1 is the highest quality layer of capital and consists of share capital, share premium account related to Common Equity Tier 1 instruments, retained earnings, accumulated other comprehensive income, other reserves, and reserves for general banking risks, after deductions for regulatory adjustments.
• Additional Tier 1 – AT 1 - Additional Tier 1 consists of issued capital instruments after deduction for regulatory adjustments, which do not belong to Common Equity Tier 1. This capital consists of capital instruments issued and paid in and the purchase of which was not directly or indirectly financed by the bank and the share premium account relating to the Additional Tier 1 instruments.
• Tier 2 Capital – T2 - The bank’s Tier 2 capital (T2) consists of the bank’s Tier 2 items after deduction for regulatory adjustments. The bank’s Tier 2 items consist of capital instruments and subordinated loans that do not meet the requirements for items of Common Equity Tier 1 and Additional Tier 1, share premium accounts related to Tier 2 instruments, and general value adjustments for credit losses of up to 1.25% of the risk-weighted exposures. Tier 2 capital may not exceed one-third of the Tier 1 capital.
• The bank’s regulatory capital - is the amount of funding sources the bank is obliged to maintain for the purpose of safe and stable operations, i.e., fulfillment of obligations to creditors. Regulatory capital is the sum of Common Equity Tier 1 and Tier 2 capital, after regulatory adjustments.

Therefore, in line with the Decisions on the capital calculation the bank must at all times meet the following capital requirements: :

a) CET 1 ratio 6.75%;

b) T1 ratio 9%;

c) regulatory capital rate of 12%.

In addition to the regulatory minimum adequacy rates, the Bank is also obliged to provide a protective layer for the preservation of capital, which must be maintained in the form of regular core capital in the amount of 2.5%.

In any event, the bank’s regulatory capital must not fall below the amount of the founding capital of BAM 15 million that, in accordance with the provisions of the law, is required when issuing a banking license.

3.3. Has your jurisdiction implemented the Basel III framework? Are there any major deviations?

In order to comply with the EU regulations, the process of reforms to improve the regulatory framework in BIH has already started. New regulations cover a period of over ten years since they have been in effect in the EU. In April 2017, a new Law on Banks was announced in the FBH, and at the end of 2017, decisions and instructions of the FBH Banking Agency in the risk management area were announced. During 2018, the reform process was continued in BiH, so supplements were made to the existing regulatory requirements related to internal assessments of the banks’ liquidity adequacy. The transition process is extremely demanding, both for commercial banks and regulators. To adequately respond to all regulatory requirements, the banks will need to invest significantly in the development of new tools, processes, and specialist training for employees.

In line with European Banking Authority Report from 2019 the good profitability and efficient management of NPLs, as well as the high capital requirements imposed by FBA and BARS (CET1 at 6.75%, Total Capital at 12%, i.e., 50% higher than required under Basel III and the CRR), the BiH banking system is adequately capitalized, showing a CET1 ratio of 16.2% in RS and of 16.5% in FBiH. The high level of capital adequacy is also confirmed by the leverage ratio, at 10.4% in RS and 10.7% in FBiH.

IV. REPORTING, ORGANISATIONAL REQUIREMENTS, INTERNAL GOVERNANCE, AND RISK MANAGEMENT

4.1. What key reporting and disclosure requirements apply to banks in your jurisdiction?

In Bosnia and Herzegovina, banks are subject to various reporting and disclosure requirements designed to ensure transparency and promote the stability and soundness of the banking sector. These requirements are set forth in the Law on Banks, Decisions on the publication of Data and Information of the Bank (Official Gazette FBiH, no. 39/21, Official Gazette RS, no. 89/17), the Decision on the form and content of reports submitted by banks to the Banking Agency (Official Gazette RS, no. 120/21, 74/22) and the Decision on reports submitted by banks to the Banking Agency for supervisory and statistical purposes (Official Gazette RS, no. 86/20), and other regulations that apply to the banking industry in Bosnia and Herzegovina. Some of the key reporting and disclosure requirements that apply to banks in Bosnia and Herzegovina include:

• Preparation of financial statements: Banks are required to prepare financial statements on a regular basis, in accordance with international financial reporting standards (IFRS) or other recognized accounting standards. These financial statements must be audited by an independent auditor and must be made available to the public.
• Submission of reports to the regulatory authorities: The bank is obliged to prepare and deliver to the Banking Agency reports and data on its financial condition and operations, including risk exposure, large exposures, asset quality, reserves for credit losses, business with persons in a special relationship with the bank, liquidity, solvency, and profitability, as well as on planned business activities of the bank and its subsidiaries in accordance with this law and the regulations of the Banking Agency. In addition, the bank is obliged to submit, at the request of the agency: a) data on the financial situation, operations, and exposure to risk on a consolidated basis and b) data for the member of the banking group that is necessary for the assessment of the situation and risks of the bank or banking group. At the request of the Banking Agency, the bank is obliged to submit a report and information on all matters important for the implementation of supervision or supervision or for the execution of other tasks within the competence of the agency.
• The bank is obliged to submit to the Banking Agency, along with the annual financial report, the annual report on the implementation of control functions, which was adopted by the bank’s supervisory board.

In regard to the disclosure, the bank is obliged to disclose the following information at least once a year on its official website, in a way that is easily visible to users, that is, to interested participants in the financial market. The bank is obliged to publish the name, headquarters, and organizational parts of the bank, as well as quantitative and qualitative data on the bank’s operations and organizational structure, the bank’s risk profile, and other information that is not considered protected or confidential in accordance with the regulations, and which is of importance to inform the public about its financial condition and operations, such as:

a) ownership structure and members of the bank’s supervisory board and management;

b) remuneration policy;

c) scope of application of regulatory requirements, on an individual or consolidated basis;

d) the bank’s strategy, objectives, and risk management policies;

e) regulatory capital, protective layers of capital, capital requirements, and adequacy of regulatory capital;

f) financial leverage rate;

g) liquidity requirements;

h) exposure based on the bank’s equity investments;

i) interest rate risk in the banking book;

j) internal capital adequacy assessment process (CAAP) and internal liquidity adequacy assessment process (ILAAP);

k) unencumbered (unpledged) and encumbered (pledged) assets of the bank;

l) low-quality and restructured exposures and collateral acquired by taking over and implementing enforcement proceedings.

Also, it is important to mention that the bank in BiH is obliged to inform the Baking Agency without delay about the following:

a) the general meeting held and all decisions made at that general meeting,

b) any planned change in the bank’s capital of 10% or more,

c) the cessation of certain operations within the scope of the bank’s activities,

d) upon learning that a natural or legal person has acquired a qualified participation or that the holder of a qualified participation has sold or otherwise alienated his shares so that, as a result, his participation has increased above or decreased below the amount by which has received prior consent,

e) shareholders of the bank and persons related to them who have 5% or more of shares with the right to vote at the bank’s assembly,

f) persons related to the bank and

g) composition of groups of related parties to which the bank is exposed.

A bank whose shares are listed for trading on a regulated market is obliged to inform the Banking Agency about the shareholders who are holders of qualified shares and about the size of those shares.

The management of the bank is obliged to inform the Banking Agency without delay about the following:

a) if the liquidity or solvency of the bank is threatened, and

b) if there are circumstances for the termination of the validity of the banking license, the reasons for the cancellation of the banking license, or the reasons for the cancellation of the authorization to perform the approved activities.

4.2. What are the organizational requirements for banks, including with respect to corporate governance? Please briefly describe the requirements and the procedure of assessment of the suitability of the members of the management body and key function holders.

The specific corporate governance requirements that apply to banks in Bosnia and Herzegovina are set forth in the Law on Banks. Some of the key organizational requirements for banks in Bosnia and Herzegovina with respect to corporate governance include:

• The Assembly: The bank’s assembly consists of the bank’s shareholders. The right to vote at the Assembly belongs to the shareholder who was registered in the registry 30 days before the Assembly. Shareholders exercise the right to vote directly or through a proxy. As a rule, the Assembly is held at least once a year, at the location of the bank’s headquarters. The Supervisory Board convenes the Assembly.
• The bank assembly is responsible for adopting and amending the statute, the bank’s business strategy, plan, and programs, forming the capital of the bank through the issue of shares or increase of ordinary/priority shares, capital increase/decrease, adoption of the annual report on the bank’s operations, distribution of profits and payment of dividends, status changes, as well as the individual selection and dismissal of the supervisory board. The assembly also has the power to appoint and remove external auditors, and to make decisions on major transactions and other important matters.
• Management Board: Banks must have a board of directors, which is responsible for the execution of the decisions of the assembly and the supervisory board of the bank, overseeing the management of the bank and implementation of strategic decisions on behalf of the bank and informing the supervisory board and the Banking Agency regarding the financial status of the bank. The board of directors must be composed of at least three members, and one of them is the President of the Board. Only a person who has received prior approval from the Banking Agency can be appointed as the President and a member of the Management Board. In order to be able to perform tasks within the competence of the administration, they must be employed in the bank, full-time.
• Members of the Management Board can be persons who: have a good reputation, higher education, the required level of education, are not in a conflict of interest in relation to the bank, non-shareholders and members of the Supervisory Board, and others. A member of the Management Board cannot be a person who: is a member of the Supervisory Board of another bank in BiH, if the possibility of exercising that function is excluded by another law, and others. It is considered that a person who does not have a good reputation, who has been legally convicted, and a person against whom proceedings are being conducted for criminal offenses in the field of finance, capital market, money laundering, and financing of terrorist activities, or who has been issued a security measure prohibiting the performance of banking or other financial activities or the performance functions of the board member.
• Members of the bank’s management are jointly and severally liable to the bank for damage that occurs as a result of actions, omissions, and failure to fulfill their duties unless they prove that they acted with the care of a good and conscientious businessman in fulfilling their duties of managing the bank.
• The Supervisory Board: is an independent body responsible for the supervision of the bank’s activities. It consists of at least five members, who are elected and dismissed by the Assembly. There can be more than five members, provided that it must always be an odd number. It must have at least two independent members. These are persons who do not have direct/indirect qualified participation in the ownership of the bank, nor are they members of the banking group to which the bank belongs, etc. A member of the Supervisory Board can only be a person who has received prior approval from the Banking Agency to perform the function of a member of the Supervisory Board.
• The main tasks include ensuring that the bank complies with laws and regulations, convenes Assembly sessions and determines the proposed agenda, determines the proposal of business, plan, policy, and strategy, adopts the general terms and conditions of the bank’s operations and other general acts of the bank, appoints and dismisses the bank’s management and supervises its work, appoints and dismisses secretary of the bank, audit committee, the remuneration committee, the risk committee, the appointment committee, the voting committee, and other specialized committees, monitoring the financial health and takes appropriate actions when it detects any signs of financial distress, conducting regular audits, providing oversight of the management of the bank, participating in the resolution of failed banks and cooperation with other supervisory authorities. In addition, the Supervisory Board of the bank informs the Banking Agency about the date and place of the Assembly meeting so that the representative of the Banking Agency can attend.

The new Laws on Banks additionally define the position, rights, and responsibilities of risk management, internal controls, auditing, the Secretary, the Procurator, and bank associations.

4.3. What are the local rules for loans to the management body and their related parties?

In Bosnia and Herzegovina, there are specific rules that apply to loans made by banks to the management body and related parties of the bank. The rules for loans to the management body and related parties of a bank in Bosnia and Herzegovina are set forth in the Law on Banks and Decision on Bank Operations with Persons in a Special Relationship with the Bank (Official Gazette FBiH no. 81/17, Official Gazette RS no. 15/18, 99/20). Some of the key rules that apply to these loans include:

• Disclosure: Banks must disclose any loans to the management body and related parties in their quarterly reports to the Banking agency 30 days after the end of the reporting quarter and based on the final data. This helps to ensure transparency and allows depositors and other stakeholders to see how the bank is using its funds.
• Approval: The bank can perform legal transactions with persons in a special relationship with the bank only in accordance with the legislation and the bank’s policies which, at the proposal of the bank’s management, the supervisory board of the bank is obliged to adopt and monitor their application. The supervisory board of the bank is responsible for the bank’s actions related to the management loans. This helps to ensure that these loans are made in the best interests of the bank and are not used to benefit a small group of individuals at the expense of the bank’s other stakeholders.
• Risk assessment: Banks must conduct a risk assessment of loans to the management body and related parties based on all relevant information, details, and terms of transactions to ensure that these loans are viable and do not pose an undue risk to the bank. This may include reviewing the creditworthiness of the borrower and the terms and conditions of the loan.
• Limits: There may be limits on the amount that a bank can lend to the management body and related parties. The bank may perform business transactions if the bank’s exposure to that natural person reaches or exceeds EUR 50,000 EUR (EUR 25.000 in RS) only with prior approval of the Supervisory board, that a person, a member of a management board, is not participating in the approval of any legal transaction between him and the bank and that bank may grant transactions to natural persons, members of the management board, up to 1% of the amount of the recognized capital of the bank.

4.4. What are the main legal provisions governing risk management in the banking sector in your jurisdiction?

In Bosnia and Herzegovina, the main legal provisions governing risk management in the banking sector are set forth in the Law on Banks and other regulations that apply to the banking industry in Bosnia and Herzegovina. Some of the key legal provisions that relate to risk management in the banking sector in Bosnia and Herzegovina include:

• Responsibility for risk management: The supervisory board is responsible for the establishment of an efficient management system in the bank and for the supervision of that system and is obliged to ensure that the bank’s management identifies the risks to which the bank is exposed, as well as controls these risks in accordance with approved policies and procedures. The board of directors of a bank is responsible for the implementation of the adopted strategies, policies, rules, and procedures in the daily operations of the bank. Additionally, the bank is obliged to define the authorizations and responsibilities clearly and precisely in risk management for all organizational levels, all levels of work processes, and decision-making in the bank. During the establishment and application of the risk management system, the bank is obliged to ensure that the assumption of risk is functionally separated from the tasks of identification, measurement, monitoring, and control of risk, and in this sense, depending on the size and complexity of the business, the bank has to define organizational parts in its organizational structure, that is, employees who will be directly responsible for risk management at the operational level.
• Risk assessment: Banks are required to conduct a risk assessment of their operations and to identify the risks that they are exposed to. The risk assessment should include a review of the bank’s business model, its products and services, its risk appetite, and the risks associated with its operations. The bank is obliged to provide an independent assessment of the functioning of the risk management system through internal and external audits.
• Risk management policies and procedures: the Banks are required to establish processes and procedures in risk management according to the defined strategy, policies, and procedures, which include identification and assessment of significant risks, risk measurement, measures to limit and mitigate risks, monitoring, analysis, and control of risks, as well as appropriate lines for continuous reporting to the supervisory board and management. Also, to efficiently, reliably, and timely report on risks, with adequate IT support that ensures comprehensive, timely, and reliable collection and processing of data necessary for measuring, monitoring, and reporting on the bank’s exposure to risks according to regulatory requirements and for the bank’s internal needs in the risk management system. These policies and procedures should be reviewed and updated regularly.
• Risk management systems and controls: Banks are required to have systems and controls in place to manage the risks that they are exposed to. These systems and controls should be designed to identify and assess risks, as well as to mitigate and manage those risks. Therefore, the bank must conduct stress tests – tests of the bank’s sensitivity to risks (individual and integral), using several scenarios, that is, assumptions about changes in external and internal factors that can have a significant impact on risks in the bank’s operations. The systems and controls should be reviewed and updated regularly.

The risk management system in the bank must be established in such a way as to include all the risks that the bank considers significant and to which it is exposed or could be exposed in its operations, and it should define them in its strategy, policies, and procedures for risk management, and as a minimum the following risks: a) credit risk; b) liquidity risk; c) market risks (position risk, currency risk, commodity risk, and other market risks); d) operational risk; e) interest rate risk in the banking book; f) country risk; g) compliance risk; h) concentration risk; i) settlement risk; j) strategic risk; k) reputational risk; l) other risks.

4.5. What are the legal requirements applicable to banks in combating money laundering and terrorist financing area?

In Bosnia and Herzegovina, banks are subject to legal requirements designed to combat money laundering and terrorist financing. These activities pose a serious threat to the stability and integrity of the financial system and are therefore heavily regulated in Bosnia and Herzegovina.

The legal requirements applicable to banks in combating money laundering and terrorist financing in Bosnia and Herzegovina are set forth in the Law on Prevention of Money Laundering and Financing of Terrorism and other regulations that apply to the banking industry in Bosnia and Herzegovina. Some of the key legal requirements that apply to banks in this area include:

• Customer due diligence: Banks are required to conduct customer due diligence when opening new accounts or engaging in certain types of transactions. This includes verifying the identity of their customers and obtaining information about the purpose and intended nature of the account or transaction. Banks must also be alert to suspicious activity and report any suspicious transactions to the regulatory authorities.
• Recordkeeping: Banks are required to maintain records of their transactions and customer information for a certain period of time. This includes keeping records of account opening documents, transaction records, and other relevant information. These records must be made available to the regulatory authorities upon request.
• Internal controls: Banks must have internal controls in place to prevent and detect money laundering and terrorist financing. These controls should be designed to identify and assess risks, as well as to mitigate and manage those risks. The internal controls should be reviewed and updated regularly.
• Training: Banks must ensure that their employees receive training on money laundering and terrorist financing, including an authorized person for the prevention of money laundering, and how to identify and report suspicious activity.
• Reporting: With the aim of providing information to the Financial Intelligence Department of the BiH State Agency for Security and Investigations (FOO), and for the performance of other duties in accordance with the provisions of this Law on Prevention of Money Laundering and Financing of Terrorism, the bank appoints an authorized person and one or more deputies about which he informs FOO within seven days from the date of appointment. An authorized person ensures correct and timely reporting to FOO. The bank is obliged to submit to the FOO the data on a) any attempted or completed suspicious transaction, b) suspicious assets independently from the transaction, c) about any suspicious client or person, d) a cash transaction whose value is or exceeds the sum of BAM 30,000, and e) related cash transactions whose total value amounts to or exceeds the sum of BAM 30,000.

4.6. Are there any legal provisions regulating banking secrecy in your jurisdiction?

The main legal provisions regulating banking secrecy in Bosnia and Herzegovina are set forth in the Law on Banks and other regulations that apply to the banking industry in Bosnia and Herzegovina.

Under these legal provisions, banks in BiH are required to maintain the confidentiality of the financial affairs of their customers and are prohibited from disclosing this information to third parties without the customer’s consent. This means that banks are not allowed to share information about their customers’ accounts, transactions, or other financial affairs with anyone outside of the bank unless they have been specifically authorized to do so by the customer. There are a few exceptions to this rule, however, including situations where the disclosure of customer information is required by law or is necessary to protect the interests of the bank or its customers.

The legal provisions regulating banking secrecy in BiH are designed to protect the privacy of bank customers and to ensure the stability and soundness of the banking sector. They help to ensure that customers can trust that their financial affairs will be kept confidential by their bank and that their bank will not disclose sensitive information about their finances to others without their consent.

V. TRENDS

5.1. What are the main trends in the banking sector in your jurisdiction?

The figures from banking reports show that the banking system in BiH is liquid, well-capitalized, profitable, and operating in a moderately dynamic economic environment. However, the economy of Bosnia and Herzegovina is largely aligned with the economic cycle in Europe and many companies are also major exporters. Preliminary forecasts highlight the risks of slow economic growth in the leading economies and markets to which BIH is tied. Under the assumption that inflationary pressures are temporary, and even triggered only by temporary factors or shocks in the energy market, it is certain that in the medium term, there will be moderate corrections of reference interest rates.

The risks of maintaining inflation and possible changes in the level of interest rates already in 2023 cannot be ruled out. When and if they happen, changes in the level of interest rates will be transmitted to the BIH market, but at a slower pace, due to already mentioned good indicators and the state of liquidity of the BiH banking system. Banks managed to compensate for decreased interest by increasing the share of non-interest income based on the delivery of other fee-based traditional services and other optimization (mainly on the side of costs). However, banks announce their continuation of active adjustment and support to the economy.

Regarding the NPLs there has been a steady decrease in the share of non-performing loans as a result of the active approach to recovery and measures aligned with EU best practices, however, there is a need for constant review of the market.

Political conditions and EU enlargement may have additional significant effects on economic growth, stability, and demographic conditions bearing in mind the latest assigned EU candidate status to BiH.

5.2. What are the biggest challenges in the banking sector at the moment?

The key challenge is to maintain the dynamics of compliance and application of regulatory requirements, in accordance with the dynamics established in the EU. Key activities include very intensive coordination with institutions within BiH. The Banking Agencies are strengthening the guidelines for corporate governance in banks and monitoring its application, setting clearer principles regarding third-party risks and externalization, and implementing a new framework for liquidity management and financial reporting.

BIH needs to solve the issue of harmonizing key laws at the BiH level with relevant requirements and guidelines from the EU. Any delay in harmonizing the framework for preventing money laundering and financing of terrorist activities at the BiH level is not acceptable and exposes BiH to significant risks.

Activities will be focused on the continuation of optimization in the areas of supervision with the emphasized need for the continuation of digitization of processes. Application of best practices and standards in the areas of regulation and supervision remains the main task in 2023.

5.3. What’s new in fintech?

Fintech in BiH still lags behind the traditional way of doing business, however, has made significant progress in the BiH banking system in recent years. Many banks in the country have started to adopt digital technologies to improve the efficiency and accessibility of their services. This has included the implementation of online banking, mobile banking, and digital payment systems. Additionally, several fintech companies have emerged in BiH to provide financial services such as digital lending and crowdfunding. The use of fintech has increased financial inclusion in BiH, particularly for individuals and small businesses that have limited access to traditional banking services. However, there is a need for more regulation and support for fintech companies in order to enable them to continue to grow and improve the financial sector in the country. In BiH, there is still no specific law that would cover all the models that Fin-Tech companies deal with, and this is exactly what prevents these companies from expanding their business.

Generally, the cryptocurrency in BiH is not yet regulated, and the problem is also a matter of jurisdiction, given that monetary transactions and payment transactions are at the entity level, while the Central Bank of BiH and its currency are at the state level. Due to the lack of regulation, cryptocurrency trading takes place in a market that is beyond the reach of tax authorities, because the laws on value-added tax, income, and profit do not regulate this area. The biggest problem for all those involved in trading or mining cryptocurrencies was that they could not realize their earnings in Bosnia and Herzegovina. With the opening of the Balkan Crypto exchange, that problem has also been solved. Also, in the last three months, thanks to a couple of applications in the BiH market, it is possible to pay the bill in several places in BiH using a QR code with cryptocurrencies and to buy cryptocurrencies at the first ATM bitcoin in Sarajevo

However, in Republika Srpska, cryptocurrency trading recently has been regulated by amending the Law on the Securities Market of the Republic of Srbska by the end on 2022. Legal entity which is not registered with the Commission in accordance with the Law cannot provide services related to virtual currencies. A service provider with virtual currencies must be registered with the Securities Commission of the RS, which establishes and maintains records. The Rulebook on the record of service providers related to virtual currencies entered into force by the end of the January 2023. Therefore, persons (legal and natural) operating with virtual currencies were obliged, no later than January 31, 2023 to notify the Commission together with a description of the internal control measures that are established in order to fulfill the obligations established in the regulations on the prevention of money laundering and submit a request for entry in the records with the prescribed attachments.