What are the basic risks to the financial stability of the state

The concept of financial stability became relevant at the beginning of the liberalization of international capital flows in the early '80s of the last century. Along with positive effects on the development of the global economy, due to a significant increase in the volume of international financial transactions and the increasing complexity of financial instruments, liberalization simultaneously contributed to the frequent occurrence of financial crises. This development of events in international financial markets and the global economy resulted in the need for systematic monitoring of financial stability, reports the Bosnian news agency Patria.

Systematic monitoring of financial stability, in most countries, is carried out within central banks. Following the example of positive international practices, but also due to the fact that financial stability is a necessary prerequisite for maintaining monetary stability, which is under the jurisdiction of the CBBiH, at the beginning of 2007, within the CBBiH, a separate organizational unit was established whose main task is to monitor the stability of the BiH financial system. Financial stability means a state in which the financial system can absorb shocks without significant disruptions in its current and future functioning, and whose functioning has no negative effects on the economy, and the function of monitoring financial stability implies timely identification of vulnerabilities in the country's financial system. 

Based on various analyses carried out by the CBBiH Financial Stability Department, an assessment of the health of the financial system is made and the main risks to financial stability are identified. With the aim of informing and communicating with the wider public about identified risks to financial stability, the CBBiH prepares and publishes the Financial Stability Report. In addition to the publication in written form, which is available to a narrower circle of domestic and international financial institutions with which the CBBiH cooperates, this publication is also available to the wider public in electronic form on the website cbbh.ba.

The Financial Stability Report is an annual publication and represents an assessment of the stability and resilience of the financial system to shocks from the macroeconomic environment as well as the financial system itself. By publishing the Financial Stability Report, the CBBiH contributes to preserving financial stability in BiH by improving understanding and encouraging dialogue on risks for financial intermediaries, pointing out to financial institutions the possible impact of their individual actions on the entire financial system, and creating consensus on financial stability and improving financial infrastructure. 

Since 2007, when it was first published, the Report has evolved in terms of comprehensiveness, approach to analyses, and communication of findings with the wider public. Over time, the sectoral approach to analysis was abandoned in favor of a risk-focused analysis, and efforts were made towards a simpler and more publicly acceptable way of communicating findings, following current trends in the international environment. It should be noted that the Report is conceived exclusively on systemic risks, since the supervision of the operations of individual intermediaries in the financial sector, in accordance with the applicable regulations in BiH, is the task of the competent supervisors.

The Report identifies the most important risks to the stability of the financial system arising from the international and domestic macroeconomic environment, and analyzes the effects of their spillover to the household, legal entity, and financial intermediary sectors. The focus of the Report is the assessment of the effects of risks on the stability of the banking sector, given the dominant share of this sector in the BiH financial sector. Also, the Report covers another extremely important aspect for preserving the stability of the financial system, namely financial infrastructure. Therefore, an overview of the development of financial infrastructure, i.e., payment systems, as well as an overview of basic trends regarding various types of interbank transactions, represents a regular part of the Report. As the regulatory framework for the operations of financial intermediaries significantly affects developments in the financial sector, the Report also monitors all relevant changes to the regulatory framework for the operations of financial intermediaries, including regulations in preparation. Within the Report, there are regularly separate thematic units presented in the form of text boxes that deal in more detail with specific topics of importance for financial stability.

Basic risks to financial stability

In 2014, the financial system demonstrated resilience to current risks from the domestic and international environment. The most significant risk in the country was identified as weak domestic demand, which affects the financial sector through weak credit demand, primarily in the legal entity sector, and especially in those activities oriented towards domestic markets. Due to weak economic activity in previous years, the trend of growth in non-performing loans, as one of the main risks to the stability of the banking sector, continued in 2014. Another significant risk to the stability of the banking sector, identified in previous periods, is the deleveraging process of BiH banks in foreign ownership. In conditions of weak credit activity, the reduction of foreign sources of financing did not lead to an increase in systemic risk in the banking sector in 2014, since in the same period an increase in domestic deposits was recorded, which adequately substituted foreign sources of financing. Given that the maturity structure of domestic deposits is still not adequate for long-term financing, and that capital markets are not significantly developed, BiH, as a small and open economy, will continue to depend significantly on sources of financing from abroad. Therefore, the prospect for stronger credit activity and development of the banking sector will certainly depend for some time on the future business strategy of foreign banking groups towards their subsidiaries in BiH. This dependence, and thus the risk to financial stability, will weaken to the extent that adequate opportunities are found for banks to finance themselves from domestic sources.

Stress tests are an integral part of the Report and represent one of the basic tools for identifying vulnerabilities in the banking system, used to assess the system's ability to absorb shocks from the macroeconomic environment, of low probability but with a large negative impact on the system. The findings of these tests are interpreted in terms of systemic risks and serve entity banking agencies as an auxiliary supervisory tool for assessing risks in banks under their jurisdiction. The results of the latest stress tests indicate that the BiH banking sector remains stable and capable of amortizing unlikely but possible assumed shocks from the macroeconomic environment.

The text was prepared by the Central Bank of BiH