The Banking Sector of Bosnia and Herzegovina: The Dominant Role of Austrian Banks

This study analyzes the development of the banking sector of Bosnia and Herzegovina until the end of 2004. After a brief description of the institutional and macroeconomic background, it covers the ownership structure and concentration in the banking sector, the degree of financial intermediation, the structure of the aggregated balance sheet and the role of foreign exchange in the banking sectors' balance sheet. Finally, this paper investigates the development of capital adequacy and profitability. The author finds that macroeconomic stabilization (on the back of a currency board arrangement) and the market entry of foreign banks supported the reform process in the banking sector and helped deepen financial intermediation, while leading to a relatively high concentration of banking sector assets. The author argues that the main challenges for the banking sector in Bosnia and Herzegovina are first, to increase (longer-term) lending to nonfinancial corporations; second, to keep its overall net foreign currency position under control amidst the domestic household lending boom; third, to closely monitor the development of asset quality; and fourth, to further improve the banking sector's operational efficiency.