Bosnia and Herzegovina (BiH) is stilldealing with the aftershocks of the global financial crisisthat have weakened financial sector asset quality andprofitability. System-wide solvency and liquidity indicatorsappear broadly sound, but significant pockets ofvulnerability exist among domestically-owned banks. Bankingand insurance oversight have improved since the 2006financial sector assessment program (FSAP), but a number ofimportant shortcomings in some segments remain. Decisive andimmediate actions to deal with weak banks are critical forpreserving financial stability. The legal frameworkgoverning creditor and debtor relationships iscomprehensive, however neither debt resolution, businessesreorganization, nor bankruptcy liquidation work effectively.The financial reporting framework has improved recently andis substantially aligned with the acquis communautaire andharmonized between the two entities. Governance processes ofstate-owned banks reveal a number of concerns. There is aneed to further strengthen the supervisory board selectionprocess and internal audit functions of state banks. TheDevelopment Bank of the Federation of BiH is only partiallysupervised by the Banking Agency of the Federation of BiH(FBA). Specific strategies and exit plans for the RepublikaSrpska (RS) government’s support of the financial sector are undefined.
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