98302 FINANCIAL SECTOR ASSESSMENT PROGRAM BOSNIA AND HERZEGOVINA BCBS – IADI CORE PRINCIPLES FOR EFFECTIVE DEPOSIT INSURANCE SYSTEMS TECHNICAL NOTE JUNE 2015 This Technical Note was prepared in the context of a joint World Bank-IMF Financial Sector Assessment Program mission in Bosnia and Herzegovina during October – November, 2014 led by Michael Edwards, World Bank and Sonia Munoz, IMF, and overseen by Finance and Private Sector Development Vice Presidency, World Bank and the Monetary and Capital Markets Department, IMF. The note contains technical analysis and detailed information underpinning the FSAP assessment’s findings and recommendations. Further information on the FSAP program can be found at www.worldbank.org/fsap. THE WORLD BANK GROUP FINANCE & MARKETS GLOBAL PRACTICE Contents GLOSSARY................................................................................................................................... 1 I. EXECUTIVE SUMMARY .................................................................................................... 2 II. INTRODUCTION AND PRECONDITIONS .................................................................... 8 A. INTRODUCTION .......................................................................................................................... 8 B. PRECONDITIONS FOR AN EFFECTIVE DEPOSIT INSURANCE SYSTEM ..................................... 10 III. MAIN FINDINGS ................................................................................................................ 14 A. ASSESSMENT OF THE OBSERVANCE OF THE CORE PRINCIPLES..................... 14 TABLE 1: DEPOSIT INSURANCE SYSTEMS ASSESSMENT TABLE .................................................. 15 TABLE 2: SUMMARY OF COMPLIANCE WITH THE DEPOSIT INSURANCE CORE PRINCIPLES ..... 24 TABLE 3: RECOMMENDED CORRECTIVE ACTION PLAN TO IMPROVE COMPLIANCE WITH THE DEPOSIT INSURANCE CORE PRINCIPLES ..................................................................................... 25 TABLE 4: DETAILED ASSESSMENT OF DEPOSIT INSURANCE PRINCIPLES .................................. 28 1 GLOSSARY BARS Banking Agency of Republika Srpska BCP Basel Core Principles for Effective Banking Supervision BiH Bosnia and Herzegovina CAR Capital Adequacy Ratio CBBH Central Bank of Bosnia and Herzegovina DGSD EU Directive on Deposit Guarantee Schemes 2014/49/EU DIA Deposit Insurance Agency of Bosnia and Herzegovina DIS Deposit Insurance System EBRD European Bank for Reconstruction and Development EU European Union FBA Banking Agency of the Federation of Bosnia & Herzegovina FSAP Financial Sector Assessment Program LDI Law on Deposit Insurance in Banks of Bosnia and Herzegovina LOB Law on Banks MoF Ministry of Finance MoU Memorandum of Understanding NPLs Non-performing Loans P&A Purchase and Assumption PPOs Public Policy Objectives SCFS Standing Committee for Financial Stability 1 2 I. EXECUTIVE SUMMARY 1. The FSAP team found the DIA is to be Compliant or Largely Compliant with 12 out of 16 applicable Core Principles and Materially Non-Compliant with three Core Principle.1 The DIA has constantly been working on its framework and capacity. In particular, the team would like to note favorably the many accomplishments of the DIA, including: i) Development of a sound governance framework and basic coordination arrangements with other financial safety-net participants; ii) A well designed depositor reimbursement system capable of prompt payouts which includes the regular testing of Member Banks’ depositor data; iii) Building up of capabilities and analyzing skills to analyze bank reports, supervisory reports and general audits as well as its own rating system for Member Banks. 2. However, the team found a number of areas where some deficiencies exist in the deposit insurance system and financial safety-net arrangements and accordingly is proposing a corrective action plan to address these areas (see Tables 1 and 2). These deficiencies lie mostly outside the sphere of the Agency but can be found in the broader legal framework of BiH. The major findings are: i) The deposit insurance framework is not mandatory for all banks operating in BiH as it is linked to the fulfillment of special membership criteria. One bank in BiH is currently operating without being a member of DIA. Authorities should find a solution for this problem and change the membership rules. Membership in the DIA should be linked to the licensing process. ii) The payout timeframe in which depositors have to be reimbursed by DIA is with 90 days too long and it should be significantly shortened. The current timeframe does not support consumer confidence and financial stability. For example, in the European Union 1 Core Principle 16 Effective resolution processes was non-compliant. Core Principles 2 (Mitigating moral hazard), Core Principle 8 (Compulsory membership) and Core Principle 15 (Early detection and timely intervention) were materially non-compliant. Core Principle 10 (Transitioning from a blanket guarantee) and Core Principle 7 (Cross- border issues) were not applicable. Core Principle 6 (Relationship with other safety-net participants), Core Principle 11 (Funding), Core Principle 12 (Public Awareness), Core Principle 17 (Reimbursing Depositors), and Core Principle 18 (Recoveries) were largely compliant. All remaining Core Principles were fully compliant. 2 3 deposits are currently reimbursed within 30 working days at the latest, but EU Member States will shorten the pay-out delay to 7 working days within the next 10 years. DIA has already in place a software system to identify insured deposits and is receiving from Member Banks deposit data at an on-going basis. The DIA seems therefore capable to meet shorter pay-out deadlines, as for example the 30 working day period. DIA should aim to find ways to further shorten the pay-out timeframe in the future to 7 days. iii) As the EBRD back-up line runs out end of 2017, DIA should start now to explore possible ways to secure proper back-up funding in the future. DIA should also abolish the possibility to invest its funds into private banks and their bonds. iv) Information sharing and coordination arrangements with the Banking Agencies, CBBH and MoF need to be updated and enhanced. Furthermore, all problem banks in Bosnia and Herzegovina should be regularly discussed in the Standing Committee for Financial Stability. v) As the Bosnian banking sector is dominated by foreign banks, it is paramount that DIA via the Banking Agencies receives information about the situation of the owners its Member Banks. If there is a problem with the main office of a local subsidiary there needs to be some ability for the deposit insurer to coordinate communication with the home country DIS when questions from depositors come in. vi) There are significant deficiencies in BiH’s current early intervention and bank resolution regime, and draft legislation is in the process of being developed to address them and establish a bank resolution framework. The role of the DIA in future resolution process (e.g. financing of resolution measures) has yet to be defined. vii) As there has not been a payout event for the DIA since its founding in 2002, contingency planning and crisis exercises become key. DIA is already active in this field (e.g. testing depositor data on a regular basis). But in addition to its internal stress testing, DIA should also start with external stress tests which should include other safety-net participants. Furthermore, crisis simulations for all safety-net participants should be conducted. viii) To clarify the rank of the DIA in bankruptcy proceedings, the revised Law on Banks should precisely define the term “secured creditor" which are ranked in second class before the DIA’s claims (such a definition is currently missing in the law). Furthermore, it should be legally regulated that costs which are connected to the 3 4 reimbursement process (e.g. the costs to engage an agent bank) have to be borne by the insolvent Member Bank. The provisional administrator and the bankruptcy trustee should be obliged by law to cooperate with the deposit insurer to facilitate the reimbursement process. Bosnia and Herzegovina: FSAP Key Recommendations [Key: C = Compliant; LC = Largely Compliant; MNC = Materially Non-compliant; NC = Non-compliant; NA = Not Applicable] Principle Compliance Recommendations Time 1 1. Public C Policy Objectives 2. Mitigating MNC There are a number of deficiencies in the supervisory framework I Moral Hazard (e.g. need to enhance the powers of the Banking Agencies) which needs to be addressed and a bank resolution framework is missing. The weaknesses in supervision and resolution do appear to be serious and pose limited restraint on risk taking. In addition, DIA is not applying risk weighted premiums and the deposit insurance fund is missing an official target ratio. 3. Mandate C 4. Powers C 5. Governance C 6. LC As the MoU between DIA and the other financial safety-net I Relationship participants is over 10 years old, the financial safety-net with Other participants should revise the memorandum. The current Safety Net exchange of information should be enhanced and be on an Participants automatic basis. Regular meetings should be used to discuss and exchange views on all problem banks. Once the coordinated contingency plan is drafted and the new Law on Banks is adopted, the financial safety-net participants should engage in joint crisis simulation exercises. Furthermore, all problem banks in Bosnia and Herzegovina should be discussed in the SCFS. 4 5 7. Cross- NA From DIA’s 26 Member Banks 15 banks are foreign owned border Issues (majority foreign capital). Due to the high concentration of foreign-owned banks in BiH, the Banking Agencies should be in a position to exchange information about the financial health of the parent companies of foreign subsidiaries and inform the DIA accordingly (for example via the SCFS). There is a need for stronger cross border supervisory cooperation (e.g. MoU with the Austrian authorities). 8. MNC All banks which are allowed to collect deposits in BIH should I Compulsory be members of the DIA. For the one remaining bank outside the Membership DIA a solution has to be found by the competent Banking Authority. In future, the membership within the deposit insurance system should be linked to the issuance (and withdrawal) of the bank’s operating license. 9. Coverage C 10. NA Transitioning from Blanket Guarantee 11. Funding LC As the EBRD back-up line runs out end of 2017, DIA should NT start now to explore possible ways to secure proper back-up funding in the future. In the light of the need to reduce the payout period in the future, the payout period for any back-up founding source will also have to be shortened accordingly. DIA should also abolish the possibility to invest its funds into private banks and their bonds. Furthermore, the Agency should explore the possibility to move its assessment base for annual premiums from “eligible” to “covered” deposits. DIA’s deposit insurance fund is missing a public and transparent fund reserve ratio. 12. Public LC The public awareness program should be evaluated on a regular I Awareness basis for its effectiveness. 13. Legal C Protection 14. Dealing C with Parties at Fault 5 6 15. Early MNC NT Detection and Deficiencies in early detection and timely intervention should Timely be addressed through the development of draft legislation for an Intervention enhanced early intervention and resolution regime (Law on and Banks). Resolution 16. Effective NC The Federation of BiH and the Republika Srpska should develop NT Resolution a comprehensive resolution framework in line with international Processes best practice (Currently, with the help of the IMF the new Law on Banks is drafted and shall include such provisions.). If a role for the DIA or the use of its funds for the purpose of bank resolution is foreseen in the future resolution framework, the provisions should be in line with the revised and soon to be published IADI Core Principles for Deposit Insurance Systems (CP 9 Sources and Uses for Funds, EC 8). Proper safeguards should be foreseen so that the DIA is able to perform its role as a deposit insurer and its funds are not depleted through a bank resolution. For example, the deposit insurer should be informed and involved in the resolution decision-making process. Where a bank is resolved through a resolution process other than liquidation, the resolution results in a viable, solvent and restructured bank, which limits the exposure of the deposit insurer to contribute additional funding in respect of the same obligation. Furthermore, contributions should be restricted to the costs the deposit insurer would otherwise have incurred in a payout of insured depositors in a liquidation net of expected recoveries (least cost rule). Contributions should not be used for the recapitalization of resolved institutions unless shareholder’s interests are reduced to zero and uninsured, unsecured creditors are subject to parri passu losses in accordance with the legal claim priority. The use of the deposit insurer’s funds should be transparent and documented and be clearly and formally specified; it should be subject to an independent audit and to ex- post review. 6 7 17. LC The payout timeframe should be aligned with international best I Reimbursing practice and shortened (e.g., to a maximum of 30 working days Depositors as it is the norm now in the European Union). DIA should aim to further shorten the payout delay in line with emerging international best practice of a payout of 7 days. DIA should in addition to its internal stress testing also start with external stress tests which should include other safety-net participants. 18. LC The revised Law on Banks should precisely define the term Recoveries “secured creditor". Furthermore, the Law on Bankruptcy Proceedings (or the revised Law on Banks) should clarify that costs which are connected to the reimbursement process have to NT be borne by the insolvent Member Bank. The provisional administrator and the bankruptcy trustee should be obliged by law to cooperate with the deposit insurer to facilitate the reimbursement process. 1 I-Immediate” is within one year; “NT-near-term” is 1–3 years; “MT-medium-term” is 3–5 years. 7 8 II. INTRODUCTION AND PRECONDITIONS A. INTRODUCTION During October 29 - November 18, 2014 an assessment under the IMF/World Bank Financial Sector Assessment Program (FSAP) was conducted for Bosnia and Herzegovina. As part of the FSAP, the deposit insurance system was assessed against the BCBS-IADI Core Principles for Effective Deposit Insurance Systems from 2010. 1. The assessment was conducted by a team of experts from the World Bank and IMF.2 The team held meetings with officials from the Deposit Insurance Agency of Bosnia and Herzegovina (DIA), the Ministry of Finance (MoF) of Republika Srpska, the MoF of the Federation of Bosnia and Herzegovina, the Central Bank of Bosnia and Herzegovina (CBBH), the Bank Agency (BA) of Republika Srpska, the BA of the Federation of Bosnia and Herzegovina, the Banks Association of Bosnia and Herzegovina and a number of commercial banks. The assessment team would like to thank the authorities and the staff of the DIA in particular for their help and cooperation during the mission. 2. The team found the DIA is Compliant or Largely Compliant with 12 out of 16 applicable Core Principles and Materially Non-Compliant with three Core Principles.3 This report is made up of a review of the background and structure of the DIA, a review of preconditions for effective deposit insurance systems, a summary of key finding and recommendations and a section providing the detailed assessment of the Core Principles. Background and Structure of the DIA 3. The 1995 Dayton Peace Agreements, which ended the war in BiH, created a uniquely complex institutional structure. As a result, the country is divided into two main semi- autonomous political entities - the Federation of Bosnia and Herzegovina (the ‘Federation’) and the Republica Srpska (‘RS’). In addition, there is a central - or “state” level administration headed by a rotating presidency, but with few enumerated powers. This framework has allowed each entity to adopt measures generally independent of one another. 2 The assessment was conducted by Jan Philipp Nolte (World Bank). The FSAP was led by Michael Edwards (World Bank) and Sonia Munoz (IMF). 3 Core Principle 16 (Effective resolution processes) was non-compliant. Core Principles 2 (Mitigating moral hazard), Core Principle 8 (Compulsory membership) and Core Principle 15 (Early detection and timely intervention) were materially non-compliant. Core Principle 10 (Transitioning from a blanket guarantee) and Core Principle 7 (Cross- border issues) were not applicable. Core Principle 6 (Relationship with other safety-net participants), Core Principle 11 (Funding), Core Principle 12 (Public Awareness), Core Principle 17 (Reimbursing Depositors), and Core Principle 18 (Recoveries) were largely compliant. All remaining Core Principles were fully compliant. 8 9 4. As it regards the financial sector environment, only the CBBH and DIA are responsible across BiH. The regulatory and supervisory responsibilities for banking, insurance and capital markets are separately undertaken in each entity in accord with their respective laws and regulations, though each is said to be harmonized to varying degrees. 5. The DIA was established in 2002. This time saw the rapid closure of banks in Bosnia and Herzegovina. From 1998 to 2004, 37 banks were closed. Therefore strict membership criteria for DIA were created to prevent unstable banks entering the deposit insurance system thereby preventing the risk of depletion of the Deposit Insurance Fund. Membership is compulsory for all domestic banks which fulfill the membership criteria. Currently, one bank operates in Bosnia and Herzegovina which is not a member of the DIA. 6. The DIA was established as an independent, non-profit, legal entity with full authority under the Law of the State of Bosnia and Herzegovina. The DIA operates at the state level. It comprises of the Head Office and Branch Offices in each entity (RS and Federation). The DIA is governed by a Management Board of up to five persons. Members of the Management Board include the Governor of the CBBH, Minister of Finance and Treasury of Bosnia and Herzegovina, Minister of Finance of Republika Srpska, the Minister of Finance of Federation of Bosnia and Herzegovina and a member on behalf of Governing Board of CBBH. DIA has currently a staff of 19 full-time employees. 7. Information sharing and coordination arrangements are established and include provisions for information sharing and coordination within the financial safety-net. In addition, a Standing Committee for Financial Stability Committee (SCFS) is used as a coordination mechanism for promoting financial stability and crisis preparedness (with members from the MoF, CB and Banking Agencies). The DIA is a permanent member of the SCFS. 8. As of 31 October 2014, the membership included 26 domestic banks. There are no foreign bank branch DIA members presently. Coverage is limited to the KM 50,000 (or about EUR 25,000). In addition to the coverage limit per depositor per bank on the level of coverage, the scope of coverage is restricted (e.g. depositors who are deemed professional financial market participants, bank management as well as its shareholders/stakeholders are not covered). 9. The DIA is a “paybox” system.4 Its present responsibilities include: collecting deposit insurance premiums; inspecting depositor information; analyzing data on its member banks; conducting on- as well as off-site risk assessment; and reimbursing insured depositors. Legislation is under development to create a bank resolution regime in BiH as such a framework is currently not in place. 4 According to the definitions of deposit insurer mandates in the FSB Thematic Review on Deposit Insurance Systems (2012) the DIA presently fits into the category of a “pay-box”. 9 10 10. The DIA has comprehensive funding resources. Its Deposit Insurance Fund is ex-ante funded by Member Banks. Emergency back-up funding is available from the EBRD of up to EUR 50 million. The DIA is not applying a differential “risk-adjusted” premium system. DIA funds are sufficient to cover the payout of guaranteed deposits up to the 7th largest bank in Bosnia and Herzegovina (reflecting an ex-ante coverage ratio – the proportion of guaranteed deposits covered – of 4.6 percent). The Deposit Insurance Fund is operating without a public target fund ratio as none is determined by the Law. This target would serve as a guide for the authorities in determining if additional funds are needed and a guide to private depositors, giving them assurance that funding will be available. This is particularly important in Bosnia and Herzegovina, where the central bank has no LOLR facility. 11. Depositor reimbursement systems are developed and capable of payouts within the given timeframe. Payout processes are highly supported with banks required to report to the DIA depositor data on an ongoing basis, and data quality is monitored by the Agency. A Single Customer View (SCV) system is in use. The payout process is capable of reimbursing depositors within a maximum of 90 or in special cases 150 days. Depositors are informed on an ongoing basis about the existence of the DIA and terms and conditions of coverage through a wide range of communication vehicles (e.g. DIA membership logo in branches, brochures, web sites, prints). 12. The DIA has been active in implementing measures to further boost depositors’ confidence and enhance its capacity. These include: (i) a €50 million stand-by line of credit with the European Bank for Reconstruction and Development as backstop to the Deposit Insurance Fund; (ii) the increase in the deposit insurance coverage to KM 50,000, effective as of January 1, 2014; and (iii) amendments to the DIA Law to, among other things, ensure both that coverage is extended to small- and medium-sized enterprises and that all banks are members of the deposit insurance scheme, including those that may fall under provisional administration. The Law on Deposit Insurance was last amended in 2013. B. PRECONDITIONS FOR AN EFFECTIVE DEPOSIT INSURANCE SYSTEM Banking System 3. BiH’s banking sector remains the dominant segment of the financial sector, comprising about 87 percent of total financial system assets and 89 percent of GDP at end- 2013. The banking system is dominated by foreign banks in the form of subsidiaries accounting for 90.5 percent of banking sector assets. Bank concentration is one of the lowest in the region, with top three banks holding about 41 percent of the market share, while top five hold about 53 10 11 percent as of mid-2013. There are 27 banks operating in both Entities. 5 The lower level of concentration as well as high number of banking institutions serving a country of just under four million people is partly a result of BiH’s fragmented political structure and banking sys tem with two banking authorities (one in each Entity) in charge of licensing, regulation and supervision of its own banks. Furthermore, subsidiaries of foreign banks (some of which are separately licensed to operate in each Entity) are still reliant on parent bank support, rendering the banking system vulnerable to external developments from the jurisdictions where these banks operate. 4. There are four public owned banks operating in BiH with a total market share of about 5 percent at end-2013 (or about one-half of the domestic owned banking sector), two of which are development banks. Over the last decade, the majority of public owned banks have been privatized in BiH (down from 12 public banks in 2002). However, existing governance weaknesses of public banks are believed to be many and can be crystallized through two key facts: (i) one bank has operated until recently for more than 12 years under provisional administration for several years without deposit insurance coverage; and (ii) the recent nationalization of the rather small Balkan Investment Bank (BIB) through its (off-budget) recapitalization by the RS government owned Investment Development Bank. These and other cases highlight the need for further analysis of current governance structures, internal control and risk management systems, transparency and financial reporting of public banks. Sound Governance of Agencies Comprising the Financial Safety Net 5. BiH has a split system of banking supervision, with the CBBH playing a coordinating role. Each entity maintains separate bank supervisory agencies (Banking Agencies) and separate banking laws and regulations, although they generally work closely together and aim to harmonize their regulatory frameworks. While the CBBH has no supervisory powers, it is tasked with coordinating jointly with the Banking Agencies matters of financial stability in the context of the Standing Committee on Financial Stability (SCFS). Furthermore, the CBBH performs top-down credit risk stress tests on the basis of bank data provided by the Banking Agencies. MoUs have been signed between the Agencies and the CBBH and the Agencies are obliged by law to provide information to the CBBH in order for it to fulfill its stability mandate. 6. The Banking Agencies and DIA are provided with a range of powers to support financial system stability. They perform financial stability analysis and data collection. The DIA manages the deposit guarantee system in BiH and is integrated into the nascent crisis preparedness 5 17 banks operate in the Federation and 10 banks operate in RS. One bank is currently not a member of DIA (see CP 8 – Compulsory membership). 11 12 and management framework. The safety-net participants exhibit operational independence and accountability and have transparency and disclosure frameworks. 7. Bosnia’s regulatory, supervisory, and resolution frameworks are influenced by developments at the European Union (EU) level. Not being a member of the EU, BiH is not obliged to comply with EU directives when they come into force. However, the legislation is influenced by the EU legal texts. Prudential Regulation and Supervision 8. Oversight of the banking sector is mainly the task of the Banking Agencies. They are responsible for prudential supervision as well as for competition, conduct of business, consumer protection issues. BiH has adopted a comprehensive strategy to safeguard financial sector stability and strengthen banking legislation and supervision. A very important element of improving banking regulation and aligning BiH with the European Union (EU) framework for bank supervision is the passage of new Law on Banks in both entities. The Banking Laws need to strengthen supervisory powers, prudential and bank governance requirements, and to establish a clear legal framework for addressing a failing bank. 9. The Banking Agencies have intensified their supervisory approach and improved since the last FSAP in 2006. Nevertheless, there are a number of areas that need to be addressed such as deficiencies in the powers of the Banking Agencies in the course of ongoing supervision. In particular, the laws of the Agencies should clearly define the regulatory instruments available to the Banking Agencies for conducting ongoing bank supervision. Neither do the laws on the Banking Agencies explicitly provide for powers to intervene in the operations of a bank. During this FSAP a BCP Assessment was also completed, which elaborates further on this issue. Legal Framework 10. Banking laws and regulations in BiH are updated as necessary to ensure that they remain effective and relevant to a changing industry; however, the legal framework needs improvement in areas such as corporate governance, early intervention and resolution. The Banking Act is silent regarding fit-and-proper criteria for members of the banks’ governing bodies. A resolution framework is nonexistent. The legal framework needs to be improved in a number of key dimensions to ensure sound and consistent requirements in the above-mentioned areas. 11. Participants in the financial safety-net are entitled to protect depositors through depositor reimbursement and there is room for improvement in the framework for bank resolution. A future resolution framework should provide flexible resolution tools and powers. The Bosnian authorities are in the process of drafting a new Law on Banks which will include resolution provisions. The CBBH does not have lender of last resort responsibilities. Moreover, banking regulation, supervision and licensing are separately performed by agencies in the two 12 13 entities, notwithstanding increased cooperation between the authorities. Ongoing efforts to improve the existing crisis management framework should continue, and there is a need to continue pursuing stronger cross-border supervisory cooperation. 12. Some information exchange between the financial system safety-net participants is provided in order to protect depositors and enable safety-net participants to intervene in bank failures. But there is room for improvement in regard to the involvement of the DIA (see assessment of CP 6). All communications between safety-net participants are subject to confidentiality provisions. All safety-net participants have developed their own financial crisis contingency plans which are used to create a single (master) plan for Bosnia and Herzegovina. 13. Debt resolution, businesses reorganization and bankruptcy liquidation do work effectively The Law on Bankruptcy Proceedings, court procedures as well as the debt enforcement process need improvement. A separate assessment of the insolvency and creditor/debtor regime will be provided as part of the FSAP. Sound Accounting and Disclosure Regimes 14. Accounting and disclosure regimes support the ability of the supervisor and deposit insurer to adequately evaluate the health of individual banks and the banking system as a whole. Audited financial statements of banks and similar financial institutions must be published. With respect to the DIA a comprehensive deposit insurance information system has been developed allowing access to detailed information about deposits on an ongoing basis. There is a sound process in place to examine and verify the quality of data by the DIA. 13 14 III. MAIN FINDINGS A. ASSESSMENT OF THE OBSERVANCE OF THE CORE PRINCIPLES 1. The ratings for compliance were awarded according to the methodology prescribed in the Core Principles Methodology (December 2010). This methodology established five levels of compliance: compliant, largely compliant, materially non-compliant, non-compliant and not applicable. The criteria for awarding these ratings are as follows:  Compliant – When the Essential Criteria are met without any significant deficiencies.  Largely Compliant – When only minor shortcomings are observed and the authorities are able to achieve full compliance within a prescribed time frame.  Materially Non-compliant – Severe shortcomings which cannot be rectified easily.  Non-compliant – No substantive implementation of the Core Principle.  Not Applicable – Not considered given the structural, legal and institutional features of the deposit insurance system. 14 15 TABLE 1: DEPOSIT INSURANCE SYSTEMS ASSESSMENT TABLE Core Principle 1: Public policy objectives. The first step in adopting a deposit insurance system or reforming an existing system is to specify appropriate public policy objectives that it is expected to achieve. These objectives should be formally specified and well integrated into the design of the deposit insurance system. The principal objectives for deposit insurance systems are to contribute to the stability of the financial system and protect depositors. Description The public policy objectives for the DIA are formally specified, publically disclosed and well integrated into the design features of the deposit insurance system. Assessment Compliant Comments The DIA’s two public policy objectives are protecting depositors and contributing to financial stability. Core Principle 2: Mitigating moral hazard. Moral hazard should be mitigated by ensuring that the deposit insurance system contains appropriate design features and through other elements of the financial system safety net. Description The design of the deposit insurance system recognises the existence of moral hazard and mitigates it as much as possible, in line with public policy objectives. However, certain deficiencies with the supervisory and regulatory system identified in the FSAP need to be addressed in order to mitigate moral hazard more effectively. This is of particular importance given that the coverage limit is relatively high, covering 98.9 percent individual depositor accounts and 56.2 percent of the total value of deposits in the banking system. Assessment Materially non-compliant Comments There are a number of deficiencies in the supervisory framework (e.g. need to enhance the powers of the Banking Agencies) which needs to be addressed and a bank resolution framework is missing. The weaknesses in supervision and resolution do appear to be serious and pose limited restraint on risk taking. In addition, DIA is not applying risk weighted premiums and the deposit insurance fund is missing an official target ratio. Core Principle 3: Mandate. It is critical that the mandate selected for a deposit insurer is clearly and formally specified and that there is consistency between the stated public policy objectives and the powers and responsibilities given to the deposit insurer. Description The DIA’s mandate as a pay box is clearly specified in the LDI and consistent with the public policy objectives and the DIA’s powers and responsibilities. 15 16 Assessment Compliant Comments The DIA has a narrow “pay box” mandate, meaning it can only pay-out insured deposits when the system is triggered. Core Principle 4: Powers. A deposit insurer should have all powers necessary to fulfil its mandate and these should be formally specified. All deposit insurers require the power to finance reimbursements, enter into contracts, set internal operating budgets and procedures, and access timely and accurate information to ensure that they can meet their obligations to depositors promptly. Description The LDI provides the DIA with all powers necessary to fulfil its mandate and DIA Management Board is making use of this powers effectively. Assessment Compliant Comments The DIA is an independent legal entity with full-authority under the law of BiH. DIA has all necessary powers to fulfill its narrow “pay box” mandate, e.g. calculating premiums and paying out insured depositors. Core Principle 5: Governance. The deposit insurer should be operationally independent, transparent, accountable and insulated from undue political and industry influence. Description The governance structure of the DIA is overall compliant and demonstrates operational independence, transparency, accountability and integrity. Assessment Compliant Comments The DIA’s Management Board is well balanced and consists of representatives of all important members of the financial safety-net. The LDI should clarify that no active banker can be member of DIA’s Management Board. Core Principle 6: Relationships with other safety-net participants. A framework should be in place for the close coordination and information sharing, on a routine basis as well as in relation to particular banks, among the deposit insurer and other financial system safety-net participants. Such information should be accurate and timely (subject to confidentiality when required). Information-sharing and coordination arrangements should be formalized. Description Formal information sharing is foreseen in the LDI. Coordination agreements have been developed between the DIA and the safety-net participants which support the DIA in fulfilling its mandate. DIA is a full member of the Standing Committee of Financial Stability (SCFS) and 16 17 participates in the Coordination Committee of Banking Supervision. There is frequent exchange of information, however not on an automatic basis. Assessment Largely Compliant Comments As the MoU between DIA and the other financial safety-net participants is over 10 years old, the financial safety-net participants should revise the memorandum. The current exchange of information should be enhanced and be on an automatic basis. Regular meetings should be used to discuss and exchange views on all problem banks. Once the coordinated contingency plan is drafted and the new Law on Banks is adopted, the financial safety-net participants should engage in joint crisis simulation exercises. Furthermore, all problem banks in Bosnia and Herzegovina should be discussed in the SCFS. Core Principle 7: Cross-Border Issues. Provided confidentiality is ensured, all relevant information should be exchanged between deposit insurers in different jurisdictions and possibly between deposit insurers and other foreign safety-net participants when appropriate. In circumstances where more than one deposit insurer will be responsible for coverage, it is important to determine which deposit insurer or insurers will be responsible for the reimbursement process. The deposit insurance already provided by the home country system should be recognized in the determination of levies and premiums. Description Currently, there are no branches of banks from BiH operating outside the country where DIA could be responsible to insure the deposits held in such branches. All foreign banks in BiH operate via subsidiaries which are full members of DIA. As there are no current cross-border issues this Core Principle is not applicable. In case the situation would change, DIA would have the (legal) capacity to enter into cooperation agreements (e.g. MoU with the Austrian authorities). Assessment Not Applicable Comments From DIA’s 26 Member Banks 15 banks are foreign owned (majority foreign capital). Due to the high concentration of foreign-owned banks in BiH, the Banking Agencies should be in a position to exchange information about the financial health of the parent companies of foreign subsidiaries and inform the DIA accordingly (for example via the SCFS). There is a need for stronger cross border supervisory cooperation. 17 18 Core Principle 8: Compulsory membership. Membership in the deposit insurance system should be compulsory for all financial institutions accepting deposits from those deemed most in need of protection (e.g. retail and small business depositors) to avoid adverse selection. Description Membership in the DIA is compulsory for all banks licensed by the Bank Agencies which meet the DIA’s membership criteria. There is currently one bank operating in BiH which is accepting deposits while not being a member of DIA as it does not fulfill the membership criteria. Assessment Materially Non-compliant Comments All banks which are allowed to collect deposits in BIH should be members of the DIA. For the one remaining bank outside the DIA a solution has to be found by the competent Banking Authority. In future, the membership within the deposit insurance system should be linked to the issuance (and withdrawal) of the bank’s operating license. Core Principle 9: Coverage. Policymakers should define clearly in law, prudential regulations or by-laws what is an insurable deposit. The level of coverage should be limited but credible and be capable of being quickly determined. It should cover adequately the large majority of depositors to meet the public policy objectives of the system and be internally consistent with other deposit insurance system design features. Description Insured (guaranteed) deposits are clearly defined in law and public decisions of the management board. Assessment Compliant Comments Coverage is limited to KM 50,000 per depositor per bank which is relatively high (e.g., covering 98.9 percent of individual depositors and 56.2 percent of the total value of deposits). Thus it is imperative that safety-net participants maintain an effective supervisory and regulatory system and other measures to mitigate moral hazard. Core Principle 10: Transitioning from a blanket guarantee to a limited coverage deposit insurance system. When a country decides to transition from a blanket guarantee to a limited coverage deposit insurance system, or to change a given blanket guarantee, the transition should be as rapid as a country’s circumstances permit. Blanket guarantees can have a number of adverse effects if retained too long, notably moral hazard. Policymakers should pay particular attention to public attitudes and expectations during the transition period. 18 19 Description The Core Principle is not applicable as there is no blanket guarantee in BiH. Assessment Not Applicable Comments Core Principle 11: Funding. A deposit insurance system should have available all funding mechanisms necessary to ensure the prompt reimbursement of depositor’s claims including a means of obtaining supplementary back-up funding for liquidity purposes when required. Primary responsibility for paying the cost of deposit insurance should be borne by banks since they and their clients directly benefit from having an effective deposit insurance system. For deposit insurance systems (whether ex-ante, ex-post or hybrid) utilizing risk-adjusted differential premium systems, the criteria used in the risk-adjusted differential premium system should be transparent to all participants. As well, all necessary resources should be in place to administer the risk-adjusted differential premium system appropriately. Description The DIA is well funded and has a variety of funding mechanisms available, including access to supplementary back-up funding, to ensure the prompt reimbursement of depositors claims. Assessment Largely Compliant Comments As the EBRD back-up line runs out end of 2017, DIA should start now to explore possible ways to secure proper back-up funding in the future. In the light of the need to reduce the payout period in the future, the payout period for any back-up founding source will also have to be shortened accordingly. DIA should also abolish the possibility to invest its funds into private banks and their bonds. Furthermore, the Agency should explore the possibility to move its assessment base for annual premiums from “eligible” to “covered” deposits. DIA’s deposit insurance fund is missing a public and transparent fund reserve ratio. Core Principle 12: Public Awareness. In order for a deposit insurance system to be effective it is essential that the public be informed on an ongoing basis about the benefits and limitations of the deposit insurance system. Description The DIA undertakes a range of good practices to promote public awareness on an ongoing basis about deposit insurance. Assessment Largely compliant Comments The public awareness program should be evaluated on a regular basis for its effectiveness. 19 20 Core Principle 13: Legal Protection. The deposit insurer and individuals working for the deposit insurer should be protected against lawsuits for their decisions and actions taken in “good faith” while discharging their mandates. However, individuals must be required to follow appropriate conflict-of-interest rules and codes of conduct to ensure they remain accountable. Legal protection should be defined in legislation and administrative procedures, and under appropriate circumstances, cover legal costs for those indemnified. Description The DIA and individuals working for it are protected against lawsuits for their decisions and actions taken in “good faith” while discharging their mandates. Legal protection is defined in legislation and administrative procedures, and under appropriate circumstances, legal costs for those accused are covered. Assessment Compliant Comments Core Principle 14: Dealing with parties at fault in a failure. A deposit insurer, or other relevant authority, should be provided with the power to seek legal redress against those parties at fault in a bank failure. Description The relevant authorities (i.e., the public prosecutor) and the administrator (in a liquidation or bankruptcy) are provided with appropriate powers to seek legal redress against those parties deemed to be at fault in a bank failure. Assessment Compliant Comments Core Principle 15: Early detection and timely intervention and resolution. The deposit insurer should be part of a framework within the financial system safety net that provides for the early detection and timely intervention and resolution of troubled banks. The determination and recognition of when a bank is or is expected to be in serious financial difficulty should be made early and on the basis of well-defined criteria by safety-net participants with the operational independence and power to act. Description The deposit insurer is part of a framework within the financial safety-net and provides to early detection via its own analysis of Member Banks. The 2014 BCP assessment identified a number of deficiencies in the supervisory framework regarding early detection and timely intervention which need to be addressed. 20 21 Assessment Materially Non-compliant Comments Deficiencies in early detection and timely intervention should be addressed through the development of draft legislation for an enhanced early intervention and resolution regime (Law on Banks). Core Principle 16: Effective resolution processes. Effective failure-resolution processes should: facilitate the ability of the deposit insurer to meet its obligations including reimbursement of depositors promptly and accurately and on an equitable basis; minimise resolution costs and disruption of markets; maximise recoveries on assets; and, reinforce discipline through legal actions in cases of negligence or other wrongdoings. In addition, the deposit insurer or other relevant financial system safety-net participant should have the authority to establish a flexible mechanism to help preserve critical banking functions by facilitating the acquisition by an appropriate body of the assets and the assumption of the liabilities of a failed bank (e.g. providing depositors with continuous access to their funds and maintaining clearing and settlement activities). Description Republika Srpska and the Federation of BiH do not have a bank resolution framework. Assessment Non-compliant Comments The Federation of BiH and the Republika Srpska should develop a comprehensive resolution framework in line with international best practice (Currently, with the help of the IMF the new Law on Banks is drafted and shall include such provisions.) If a role for the DIA or the use of its funds for the purpose of bank resolution is foreseen in the future resolution framework, the provisions should be in line with the revised and soon to be published IADI Core Principles for Deposit Insurance Systems (CP 9 Sources and Uses for Funds, EC 8). Proper safeguards should be foreseen so that the DIA is able to perform its role as a deposit insurer and its funds are not depleted through a bank resolution. For example, the deposit insurer should be informed and involved in the resolution decision-making process. Where a bank is resolved through a resolution process other than liquidation, the resolution results in a viable, solvent and restructured bank, which limits the exposure of the deposit insurer to contribute additional funding in respect of the same obligation. Furthermore, contributions should be restricted to the costs the deposit insurer would otherwise have incurred in a payout of insured depositors in a liquidation net of expected recoveries (least cost rule). Contributions should not be used for the recapitalization of resolved institutions unless shareholder’s interests are reduced to zero and uninsured, 21 22 unsecured creditors are subject to parri passu losses in accordance with the legal claim priority. The use of the deposit insurer’s funds should be transparent and documented and be clearly and formally specified; it should be subject to an independent audit and to ex-post review. Core Principle 17: Reimbursing depositors. The deposit insurance system should give depositors prompt access to their insured funds. Therefore, the deposit insurer should be notified or informed sufficiently in advance of the conditions under which a reimbursement may be required and be provided with access to depositor information in advance. Depositors should have a legal right to reimbursement up to the coverage limit and should know when and under what conditions the deposit insurer will start the payment process, the time frame over which payments will take place, whether any advance or interim payments will be made as well as the applicable coverage limits. Description DIA has developed an automated system for the payment of insured deposits and is performing inspections how Member Banks keep depositor records. Procedures for informing depositors about reimbursement processes are specified in DIA’s contingency plan. The LDI provides for three pay-out timeframes: The first two options (Article 12.2.1 and 12.2.2) provide that the reimbursement process must begin within 60 days from the date of revocation of license and completed within 90 days from the date of revocation of license. The third situation (Article 12.2.3) provides that the reimbursement process must begin and end within 60 days from the date of revocation of the operating license. The current framework requires reimbursement of depositors is too long to promote public confidence and financial stability. Assessment Largely Compliant Comments The payout timeframe should be aligned with international best practice and significantly shortened (e.g., to a maximum of 30 working days as it is the norm now in the European Union). DIA should aim to further shorten the payout delay in line with emerging international best practice of a payout of 7 days. DIA should in addition to its internal stress testing also start with external stress tests which should include other safety-net participants. Core Principle 18: Recoveries. The deposit insurer should share in the proceeds of recoveries from the estate of the failed bank. The management of the assets of the failed bank and the 22 23 recovery process (by the deposit insurer or other party carrying out this role) should be guided by commercial considerations and their economic merits. Description The DIA shares in the proceeds of recoveries from failed banks. Asset management practices emphasize maximizing economic returns. Assessment Largely Compliant Comments The revised Law on Banks should precisely define the term “secured creditor". Furthermore, the Law on Bankruptcy Proceedings (or the revised Law on Banks) should clarify that costs which are connected to the reimbursement process have to be borne by the insolvent Member Bank. The provisional administrator and the bankruptcy trustee should be obliged by law to cooperate with the deposit insurer to facilitate the reimbursement process. 23 24 TABLE 2: SUMMARY OF COMPLIANCE WITH THE DEPOSIT INSURANCE CORE PRINCIPLES [Key: C = Compliant; LC = Largely Compliant; MNC = Materially Non-compliant; NC = Non-compliant; NA = Not Applicable] 1. Public Policy C Objectives (PPOs) 2. Mitigating Moral MNC Hazard 3. Mandate C 4. Powers C 5. Governance C 6. Relationship with LC Other Safety Net Participants 7. Cross-border Issues NA 8. Compulsory MNC Membership 9. Coverage C 10. Transitioning from NA Blanket Guarantee 11. Funding LC 12. Public Awareness LC 13. Legal Protection C 14. Dealing with Parties C at Fault 15. Early Detection and MNC Timely Intervention and Resolution 16. Effective Resolution NC Processes 17. Reimbursing LC Depositors 18. Recoveries LC 24 25 TABLE 3: RECOMMENDED CORRECTIVE ACTION PLAN TO IMPROVE COMPLIANCE WITH THE DEPOSIT INSURANCE CORE PRINCIPLES CP 2: Mitigating Moral There are a number of deficiencies in the supervisory framework Hazard (e.g. need to enhance the powers of the Banking Agencies) which needs to be addressed and a bank resolution framework is missing. The weaknesses in supervision and resolution do appear to be serious and pose limited restraint on risk taking. In addition, DIA is not applying risk weighted premiums and the deposit insurance fund is missing an official target ratio. CP 6: Relationships As the MoU between DIA and the other financial safety-net With Other Safety Net participants is over 10 years old, the financial safety-net Participants participants should revise the memorandum. The current exchange of information should be enhanced and be on an automatic basis. Regular meetings should be used to discuss and exchange views on all problem banks. Once the coordinated contingency plan is drafted and the new Law on Banks is adopted, the financial safety- net participants should engage in joint crisis simulation exercises. Furthermore, all problem banks in Bosnia and Herzegovina should be discussed in the SCFS. CP 7: Cross-border From DIA’s 26 Member Banks 15 banks are foreign owned Issues (majority foreign capital). Due to the high concentration of foreign-owned banks in BiH, the Banking Agencies should be in a position to exchange information about the financial health of the parent companies of foreign subsidiaries and inform the DIA accordingly (for example via the SCFS). There is a need for stronger cross border supervisory cooperation (e.g. MoU with the Austrian authorities). CP 8: Compulsory All banks which are allowed to collect deposits in BIH should be Membership members of the DIA. For the one remaining bank outside the DIA a solution has to be found by the competent Banking Authority. In future, the membership within the deposit insurance system should be linked to the issuance (and withdrawal) of the bank’s operating license. 25 26 CP 11: Funding As the EBRD back-up line runs out end of 2017, DIA should start now to explore possible ways to secure proper back-up funding in the future. In the light of the need to reduce the payout period in the future, the payout period for any back-up founding source will also have to be shortened accordingly. DIA should also abolish the possibility to invest its funds into private banks and their bonds. Furthermore, the Agency should explore the possibility to move its assessment base for annual premiums from “eligible” to “covered” deposits. DIA’s deposit insurance fund is missing a public and transparent fund reserve ratio. CP 12: Public The public awareness program should be evaluated on a regular Awareness basis for its effectiveness. CP 15: Early Detection Deficiencies in early detection and timely intervention should be and Timely Resolution addressed through the development of draft legislation for an enhanced early intervention and resolution regime (Law on Banks). CP 16: Effective The Federation of BiH and the Republika Srpska should develop a Resolution Processes comprehensive resolution framework in line with international best practice (Currently, with the help of the IMF the new Law on Banks is drafted and shall include such provisions.). If a role for the DIA or the use of its funds for the purpose of bank resolution is foreseen in the future resolution framework, the provisions should be in line with the revised and soon to be published IADI Core Principles for Deposit Insurance Systems (CP 9 Sources and Uses for Funds, EC 8). Proper safeguards should be foreseen so that the DIA is able to perform its role as a deposit insurer and its funds are not depleted through a bank resolution. For example, the deposit insurer should be informed and involved in the resolution decision-making process. Where a bank is resolved through a resolution process other than liquidation, the resolution results in a viable, solvent and restructured bank, which limits the exposure of the deposit insurer to contribute additional funding in respect of the same obligation. Furthermore, contributions should be restricted to the costs the deposit insurer would otherwise have incurred in a payout of 26 27 insured depositors in a liquidation net of expected recoveries (least cost rule). Contributions should not be used for the recapitalization of resolved institutions unless shareholder’s interests are reduced to zero and uninsured, unsecured creditors are subject to parri passu losses in accordance with the legal claim priority. The use of the deposit insurer’s funds should be transparent and documented and be clearly and formally specified; it should be subject to an independent audit and to ex-post review. CP 17: Reimbursing The payout timeframe should be aligned with international best Depositors practice and shortened (e.g., to a maximum of 30 working days as it is the norm now in the European Union). DIA should aim to further shorten the payout delay in line with emerging international best practice of a payout of 7 days. . DIA should in addition to its internal stress testing also start with external stress tests which should include other safety-net participants. CP 18: Recoveries The revised Law on Banks should precisely define the term “secured creditor". Furthermore, the Law on Bankruptcy Proceedings (or the revised Law on Banks) should clarify that costs which are connected to the reimbursement process have to be borne by the insolvent Member Bank. The provisional administrator and the bankruptcy trustee should be obliged by law to cooperate with the deposit insurer to facilitate the reimbursement process. 27 28 TABLE 4: DETAILED ASSESSMENT OF DEPOSIT INSURANCE PRINCIPLES Principle 1 Public policy objectives The first step in adopting a deposit insurance system or reforming an existing system is to specify appropriate public policy objectives that it is expected to achieve. These objectives should be formally specified and well integrated into the design of the deposit insurance system. The principal objectives for deposit insurance systems are to contribute to the stability of the financial system and protect depositors. Description The public policy objectives for the DIA are formally specified, publically disclosed and well integrated into the design features of the deposit insurance system. Assessment Compliant Comments The DIA’s two public policy objectives are protecting depositors and contributing to financial stability. Essential 1. The public policy objectives of the deposit insurance system are clearly Criteria defined and formally specified, for example, through legislation or documents accompanying legislation.6 Description The public policy objectives of the deposit insurance system are clearly defined and formally specified in the Law on Deposit Insurance (Art. 1 (2) LDI). These objectives are: i) the protection of deposits of natural and legal persons in banks licensed either by the Banking Agency of the Federation of Bosnia and Herzegovina or the Banking Agency of the Republika Srpska, and 6 The public policy objectives of the deposit insurance system refer to the objectives or goals the system is expected to achieve. The mandate of the deposit insurer refers to the set of official instructions or statement of purpose describing its roles and responsibilities. There is no single mandate or set of mandates suitable for all deposit insurers. Existing deposit insurers have mandates ranging from narrow, so-called “paybox” systems to those with broader powers or responsibilities, such as preventive action and loss or risk minimisation/ management, with a variety of combinations in between. 28 29 ii) thus to contribute to the preservation of the overall financial stability. Comments Essential 2. The public policy objectives of the deposit insurance system are Criteria publically disclosed. Description Public policy objectives are disclosed in the LDI and in DIA’s annual reports, flyers and the website of the DIA all of which are accessible by the public. Comments Essential 3. There is a review of the extent to which a deposit insurance system is Criteria meeting its public policy objectives on a regular basis (e.g. between two to five years or on a more frequent basis as deemed necessary). This review takes into consideration the views of stakeholders. Description The Management Board is reviewing the public policy objectives and how well they are met in the course of its semi-annual and annual business reports. Art. 18.4 LDI also foresees an annual review of the LDI in relationship to the Law on Banks of both entites. Other stakeholders (on state and on entity level) are involved in this process via their seats in the Management Board of DIA (see CP 5 – Governance). Comments Principle 2 Mitigating moral hazard Moral hazard should be mitigated by ensuring that the deposit insurance system contains appropriate design features and through other elements of the financial system safety net (see Core Principles for Effective Deposit Insurance Systems “Preconditions” paragraph 16). Description The design of the deposit insurance system recognises the existence of moral hazard and mitigates it as much as possible, in line with public policy objectives. However, certain deficiencies with the supervisory and regulatory system identified in the FSAP need to be addressed in order to mitigate moral hazard more effectively. This is of particular importance given that the coverage limit is relatively high, covering 98.9 percent individual depositor accounts and 56.2 percent of the total value of deposits in the banking system. 29 30 Assessment Materially non-compliant Comments There are a number of deficiencies in the supervisory framework (e.g. need to enhance the powers of the Banking Agencies) which needs to be addressed and a bank resolution framework is missing. The weaknesses in supervision and resolution do appear to be serious and pose limited restraint on risk taking. In addition, DIA is not applying risk weighted premiums and the deposit insurance fund is missing an official target ratio. Essential 1.The design of the deposit insurance system recognises the existence of Criteria moral hazard and mitigates it as much as possible in-line with public policy objectives. Specific design features that mitigate the risk of moral hazard may include: limited deposit insurance coverage and scope; where appropriate, deposit insurance premiums that are assessed on a differential or risk- adjusted basis; and, minimizing the risk of loss through timely intervention and resolution by the deposit insurer or other participants in the safety net with such powers. Description The deposit insurance system in BiH recognises the existence of moral hazard and has a number of features mitigating the effect of moral hazard arising from deposit insurance, these include: i) Limited coverage – the amount based on the LDI, decided by the Management Board of DIA and published in the Official Gazette of BiH is KM 50.000 (USD 33.100) per depositor, regardless of the balance and number of accounts in which the depositor keeps funds in a given bank or the number of claims to which said depositor has legal rights with respect to this bank (Art 4 LDI). The scope of deposit insurance is also limited (Art. 5 LDI) including the types of bank customers whose deposits are not covered (e.g., professional financial market participants, bank management as well as its shareholders), ii) the application of set-off when calculating the pay-out amount (Art. 4 (1) LDI), iii) the basis for calculating the annual premium contributions could take into account risk (Art. 10 LDI)7, 7 Currently, DIA is not making use of this provision as more harmonization of the banking supervisory practices in both entities is needed before DIA can apply a uniform rating methodology for the whole banking sector. 30 31 iv) banks’ obligations to inform clients who use or are interested in using their services about the limited insurance coverage (Art. 9 LDI), v) the DIA possesses inspection powers with respect to banks in terms of data correctness (Art. 7a LDI), vi) the liability in case of non-performance or improper performance by a bank of obligations (Art. 24 LDI), and vii) the cooperation with other safety-net participants. Besides the design of the DIA itself, there are other factors mitigating moral hazard through minimising the risk of loss, including but not limited to: i) banking supervision – banks’ obligations as well as requirements for them, and the powers of domestic banking supervision (the Banking Agencies of Republika Srpska and the Federation of BiH) are specified in the Law on Banks of the Federation of Bosnia and Herzegovina and the Law on Banks of Republika Srpska, however supervisory practice are lacking effectiveness, ii) administrative powers of the Banking Agencies towards banks in the event of a breach of supervisory regulations, and iii) the DIA supports bank supervision by collecting and analyzing information about Member Banks which aims to identify the significant risks in a single bank. Indications obtained from these findings are shared with the Banking Agencies. The DIA participates as a full member at the meetings of the Standing Committee of Financial Stability (SCFS) and is a permanent participant in the Coordination Committee of Banking Supervision. Comments There are a number of deficiencies in the supervisory framework (e.g. need to enhance the powers of the Banking Agencies) which needs to be addressed. The weaknesses in supervision pose limited restraint on risk taking of banks which could not effectively limited by introducing risk-based contribution by DIA. Essential 2. The financial safety net creates and supports appropriate incentives to Criteria mitigate moral hazard. These may include: the promotion of good corporate governance and sound risk management of individual banks, effective market discipline and frameworks for, and enforcement of, strong prudential regulation, supervision and laws and regulations (to be assessed through a review of “Preconditions”, see pages 8-9.). 31 32 Description The financial safety net creates and supports incentives to mitigate moral hazard, which are as follows (apart from the features enumerated in EC1): i) operationally independent, transparent and accountable financial safety-net participants, ii) the existence of a variety of information sharing and coordination arrangements (see CP6), iii) prudential regulations for banks, defined in the Law on Banks of the Federation of BiH and the Republika Srpska, and iv) requirements regarding internal inspection/internal audit in banks. The 2014 FSAP (BCP assessment) showed that the system of banking supervision oversight has significantly improved since the last FSAP review in 2006, but shortcomings remain. Both supervisory authorities have made progress in enhancing the regulatory framework and supervisory processes since the 2006 FSAP. However, the FSAP identified the following shortcomings:  Cooperation and coordination among the various institutions involved in banking oversight is very complex, having potential repercussions in times of financial sector stress.  Information asymmetries are created as the banking agencies do not always share the full information on individual bank financial conditions (e.g., CAMEL ratings) with relevant stakeholders (the other banking agency, CBBH, and the DIA).  Several problem banks are identified and placed under special supervision; however banks may remain in the category for an extended period.  Supervisory activities frequently identify related and connected party violation of regulatory limits. In addition, the domestic banking sector has an opaque ownership structure. Root cause of this problem seems to lie at the licensing and approval process that has been mostly formal instead of substantial, and inadequate corporate governance and risk management.  Enforcement powers are limited when addressing individual supervisory board members and controlling owners. Regulations establish requirements on internal controls and governance and the responsibilities of the supervisory board. However, the enforcement 32 33 powers of the Agencies are limited for imposing penalties and fines on supervisory board members. The authority for replacing or restricting the powers of controlling owners outside of provisional administration is also lacking.  Under the legal framework the agencies possess operational independence, however government actions may impact future independence. The authorities in BiH are currently working on a revised Law on Banks that should address the deficiencies in the supervisory powers, resolution tools, and consolidated supervision. This is a welcomed first step, but substantial improvements in prudential rules and in supervisory practices are necessary to mitigate moral hazard effectively. Comments While the measures taken with respect to promoting sound risk management and prudential regulation provide mitigation to moral hazard, there are a number of deficiencies in the supervisory framework (e.g. need to enhance the powers of the Banking Agencies, create a bank resolution framework) which need to be addressed. Principle 3 Mandate It is critical that the mandate selected for a deposit insurer is clearly and formally specified and that there is consistency between the stated public policy objectives and the powers and responsibilities given to the deposit insurer. Description The DIA’s mandate as a paybox is clearly specified in the LDI and consistent with the public policy objectives and the DIA’s powers and responsibilities. Assessment Compliant Comments The DIA has a narrow “pay box” mandate, meaning it can only pay-out insured deposits when the system is triggered. Essential 1. The deposit insurer has a mandate that is clearly defined and formally Criteria specified, for example, through legislation or documents accompanying legislation. The mandate clarifies the role and responsibilities of the deposit insurer within the financial safety net. 33 34 Description The DIA has a “paybox”8 mandate which is clearly defined and formally specified in the LDI. The mandate provides for: 1) the functioning of an obligatory and contractual guarantee system for all banks in BiH which fulfill the membership criteria (Article 3, 6 LDI), including: i) specifying the amount of mandatory annual contributions payable to DIA by the entities covered by the guarantee system, ii) specifying the amount of coverage, iii) insuring deposits in Member Banks under the conditions stipulated in LDI, iv) issuing and revoking membership certificates for financial institutions which fulfil the membership criteria to join the insurance system, and v) invest the assets of the Deposit Insurance Fund. 2) Inspecting the correctness of depositor data included in banks’ IT systems and analyse other bank reports or audits (Art. 7a LDI). Comments Essential 2. The mandate is consistent with the stated public policy objectives and Criteria the powers, roles and responsibilities given to the deposit insurer. Description The mandate is consistent with the stated public policy objectives (see CP1). The protection of depositors and financial stability is maintained through the provision of the depositor reimbursement arrangements and supported by data 8 Mandates can range from narrow “pay box” systems to those with extensive responsibilities, such as preventive action and loss or risk - minimisation/ management, with a variety of combinations in between. These can be broadly classified into four categories: a. A “pay box” mandate, where the deposit insurer is only responsible for the reimbursement of insured deposits; b. A “pay box plus” mandate, where the deposit insurer has additional responsibilities such as certain resolution functions (e.g. financial support); c. A “loss minimiser” mandate, where the insurer actively engages in a selection from a range of least-cost resolution strategies; and d. A “risk minimiser” mandate, where the insurer has comprehensive risk minimisation functions that include risk assessment/management, a full suite of early intervention and resolution powers, and in some cases, prudential oversight responsibilities. 34 35 quality standards and inspection. The mandate of DIA is also consistent with its powers necessary to fulfil its responsibilities. Comments Principle 4 Powers A deposit insurer should have all powers necessary to fulfil its mandate and these should be formally specified. All deposit insurers require the power to finance reimbursements, enter into contracts, set internal operating budgets and procedures, and access timely and accurate information to ensure that they can meet their obligations to depositors promptly. Description The LDI provides the DIA with all powers necessary to fulfil its mandate and DIA Management Board is making use of this powers effectively. Assessment Compliant Comments The DIA is an independent legal entity with full-authority under the law of BiH. DIA has all necessary powers to fulfill its narrow “pay box” mandate, e.g. calculating premiums and paying out insured depositors. Essential 1. The powers (legal authority) of the deposit insurance system are clearly Criteria defined and formally specified in law or regulation (including approved self-regulation in the context of private or public deposit insurance systems). Description DIA’s powers are clearly defined and formally specified in the Law on Deposit Insurance (LDI). The most important of the LDI’s powers are as follows (see Art. 15 LDI): i) insuring eligible deposits of natural persons and legal entities in member banks, ii) issuing membership certificates to those banks who qualify for participation in the deposit insurance program, iii) revoking membership certificates, iv) investing the assets of the Deposit Insurance Fund pursuant to the restrictions of the Agency’s Investment Policy and in accordance with the LDI, 35 36 v) paying out deposit insurance in the event of a Member Bank’s cessation of operations, and vi) enacting bylaws regulating deposit insurance and the operations of the Agency in accordance with the LDI. In addition, the DIA Management Board is provided with the following important powers (see Art. 18.4 LDI): i) being the sole governing body of DIA, ii) making decision on criteria for banks’ participation in the deposit insurance program with DIA, iii) approving membership participation of banks and membership cessation of Member Banks, iv) making decisions on the insurance premium collected from Member Banks, and v) making decisions on change in the deposit insurance coverage of insured eligible deposits. The DIA Management Board may also institute by-laws and regulations in relation to the management of DIA and related administrative matters. In accordance with the LDI and the Statutes of DIA, the DIA Management Board shall supervise the activities of the DIA and shall also have powers including, but not limited to: i) adopting corporate and financial plans for the DIA, ii) reviewing annually the LDI in relationship to the Law on Banks of Republika Srpska and the Federation of BiH, iii) adopting an investment policy for the Deposit Insurance Fund, iv) approving annually the appointment of DIA’s external auditors, v) appointing an independent auditor for situations of dispute with a Member Bank over reporting accuracy, and vi) appointing members of the Agency’s Violation Committee. Comments 36 37 Essential 2. The powers of the deposit insurer are aligned to its mandate and public Criteria policy objectives. Description The powers of the DIA are consistent with its mandate and public policy objectives as stipulated in the LDI (see also CP1 and CP 3). Comments Essential 3. The deposit insurer has the following minimum powers: Criteria a. compel member banks to comply with their obligations to the deposit insurer, or request that the supervisor or another safety-net participant do so on behalf of the deposit insurer; Description The DIA may compel its members to comply with their obligations (for example, a Member Bank’s obligation on information and record keeping and providing reports) or request that the Banking Agencies do so (Art. 7 (7 and 8) LDI). These powers include: i) a procedure for undertaking actions against a Member Bank based on a decision of the Management Board (Art. 7 (7) LDI, Art. 15 (3) LDI), ii) imposing sanctions through its Violations Committee (Art. 24 LDI), and iii) powers to apply to the Banking Agencies for proposing the revocation of the Member Bank (Art. 7 (9) LDI). Comments b. have the legal authority and capability to reimburse depositors; Description The DIA has the legal authority and capability to reimburse guaranteed funds to depositors (Art. 15 (1e) LDI). Comments c. enter into contracts (e.g., agreements/transactions to obtain goods and services/insurance); Description The DIA is an independent legal entity with full-authority under the law of BiH (Art. 14 (3) LDI) and has the legal capacity to perform acts in law, 37 38 capacity to be a party in court proceedings, enter into contracts and to acquire and to dispose of movable and immovable property. Comments d. set internal operating budgets and internal policies and procedures (e.g. in areas such as human resources and information technology); Description The DIA has an annual budget, which is developed (in the form of a Financial Plan) by the DIA’s Director and is adopted by the DIA Management Board. The financial plan in particular, determines the budget for staff training, investment in IT and staff remuneration which is sufficient for the operations of the DIA. DIA Management Board according to Art. 18 (4) LDI can: i) approve the Agency’s Statute and its other general enactments, ii) approve all regulations, policies, guidelines and fees for the management and operation of the Agency and its Fund as required, iii) approve the salaries and benefits for all of the Agency’s staff upon the recommendation of the DIA’s Director, and iv) adopt the Agency’s financial plan upon recommendation of the DIA’s Director. Comments e. access timely and accurate information to promptly meet their obligations to depositors; Description The DIA can access timely and accurate information on its Member Banks. Prior to the fulfillment of guarantee conditions: i) banks are obliged to provide DIA with reports prescribed by the competent Banking Agency, external audit reports and reports prescribed by DIA itself and within set deadlines (Art. 7a (1) LDI and DIA’s “Guidelines for Monitoring of Banks and Payout of Insured Depositors”), ii) for evaluation of the bank’s eligibility to participate in deposit insurance program, DIA can conduct on-site visitations to a bank to confirm information received from the bank (Art. 7a (2) LDI), 38 39 iii) DIA can prescribe the manner of keeping records on deposits in Member Banks for the reporting of relevant data to DIA (Art. 7a (3) LDI); iv) in order to test the accuracy of reporting to DIA and in accordance with the Contract on Deposit Insurance between DIA and Member Banks and its Annex, the DIA can carry out external and internal controls of the Member Banks, v) Member Banks have to – at all times – make available to DIA information on depositors and their deposits, in the form and manner as DIA requests, and vi) DIA is also receiving information about Member Banks from the Banking Agencies. Comments f. share information with other safety-net participants; Description The scope and procedures of the exchange of information between DIA and other members of the financial safety-net (e.g., Banking Agencies, Central Bank) are defined in Articles 22 and 23 of LDI. In accordance with that provision: i) DIA is required, upon written request, to provide to the Banking Agencies or any other state agency as appropriate, such information that the Agency obtains pursuant to LDI, ii) the Banking Agencies and any other state agency are required, based on mutuality, to provide necessary cooperation to DIA for the accomplishment of the Agency’s responsibilities under this Law, particularly with the purpose of the Agency’s obtaining all necessary standardised reports from the Banking Agencies upon written request, iii) the Central Bank shall, upon request of DIA, provide reports and information it disposes with, that are needed for DIA to monitor banks’ business operations regarding compliance with membership criteria, and iv) the DIA has the legal right to expect that the Banking Agencies will inform it of any action contemplated by the Banking Agencies in response to action planned by the Agency and that was disclosed by 39 40 the DIA to the Banking Agencies or action planned by the Banking Agencies themselves. In addition, the DIA is a permanent member of the Coordination Committee of Banking Supervision and the Standing Committee on Financial Stability (SCSF), where participants of the financial safety-net exchange information. There are no laws or regulation in place which would prevent DIA to exchange information within the financial safety-net and DIA does share information in the above mentioned ways and in the mentioned meetings and committees. The detailed scope of the sharing of information with other members of the financial safety-net is described in CP6 (Relationships with other safety-net participants). Comments g. engage in information sharing and coordination agreements with deposit insurers in other jurisdictions (subject to confidentiality when required); and Description As an independent legal entity, the DIA may cooperate with deposit insurers in other countries. The DIA has the right to conclude agreements on information sharing with those entities, but has not made use of it as there are currently no cross-border issues (see assessment of CP 7). DIA is a full member of the International Association of Deposit Insurers (IADI) and the European Forum of Deposit Insurers (EFDI). Comments h. engage in contingency planning. Description DIA has developed and implemented a detailed contingency plan for its operations. Comments Essential 4. In support of the deposit insurance system, the other participants in the Criteria financial safety-net are provided with all powers necessary to fulfil their mandates (see Preconditions). 40 41 Description The powers of other members of the financial safety-net regarding the deposit insurance system (Central Bank, Banking Agencies, the MoF ) are referenced in the following acts: i) the Law on Banks of the Federation of BiH, ii) the Law on the Banking Agency of the Federation of BiH, iii) the Law on Banks of Republika Srpska, iv) the Law on the Banking Agency of Republika Srpska, and v) the Law on the Central Bank of Bosnia and Herzegovina. Comments An assessment of Preconditions and the review of the supervisory/regulatory system (see CP 2 and CP 15) indicate there are a number of deficiencies in the supervisory framework (e.g. need to enhance the powers of the Banking Agencies, create a bank resolution framework) which need to be addressed. Principle 5 Governance The deposit insurer should be operationally independent, transparent, accountable and insulated from undue political and industry influence. Description The governance structure of the DIA is overall compliant and demonstrates operational independence, transparency, accountability and integrity. The LDI should clarify that no active banker can be member of DIA’s Management Board. Assessment Compliant Comments The DIA’s Management Board is well balanced and consists of representatives of all important members of the financial safety-net. Essential 1. The deposit insurer is able to use the powers and means assigned to it Criteria without undue influence from external parties. There is in practice no significant evidence of government or industry interference in the operational independence of the deposit insurer and its ability to obtain and deploy the resources needed to carry out its mandate. Description The DIA is an independent, non-profit legal entity (Art. 14 (3) LDI) with full authority under the law of BiH. It consists of a head office and of branches in the two state entities. 41 42 Within the scope of its operations the DIA manages its operations on an independent basis (Art. 16 (1) LDI). The sole governing body of DIA is the DIA Management Board (Art. 18 LDI). The Management Board consists of: i) the Governor of the Central Bank, or his / her nominee, is ex officio a member of the Management Board, ii) the Minister for Treasury of the Institutions of Bosnia and Herzegovina, or his / her nominee, is ex officio a member of the Management Board, iii) the Governing Board of the Central Bank has the right to appoint one member of the Management Board, and iv) the Minister of Finance of the Federation of BiH and the Minister of Finance of the Republika Srpska each has the right to appoint one member from their respective entities to the Management Board. Each donor agency or nation has the right to appoint an advisor to the Management Board (Art. 19.3 (10)). Currently there are two advisors one from the German KfW (“Kreditanstalt fuer Wiederaufbau”) and USAID. The Management Board elects a Chairman and a Vice Chairman from among its members. The Directors of the Banking Agencies, should they be appointed to this Management Board by one of the appointing authorities, cannot serve as either Chairman or Vice Chairman of the Board. The Management Board appoints the DIA’s Director (which represents and manages the DIA), approves the Statues and other regulations, approves new Member Banks applications, adopts the investment policy and decides about the insurance premium rate. The DIA is independent in its formulation of the Annual Financial Plan, which constitutes the basis for its financial operations. Independent funding of DIA is guaranteed as its operational expenses are financed from membership fees and returns on investment of the Deposit Protection Fund’s capital. Comments 42 43 Essential 2. The operational funding of the deposit insurer is provided in a manner Criteria that does not undermine its autonomy or independence and permits it to fulfil its mandate. Examples include: a) Salary scales that allow it to attract and retain qualified staff; Description The DIA is independent in its formulation of its Annual Financial Plan, which constitutes the basis for its financial operations. The financial plan is compiled by the DIA’s Director and is adopted by the DIA Management Board. Determining the remuneration levels of DIA employees is the decision of the DIA Management Board upon a recommendation of the Director (Art. 18.4 (1) Nr. 14 LDI). The DIA offers its employees also diverse benefits or compensations (e.g. for meals, transportation). In accordance with the Financial Plan for 2014, expenditures due to DIA employee remuneration amounted to 53 percent of total costs. DIA has currently 19 staff members. Comments b) The ability to hire outside experts to deal with special situations, subject to appropriate confidentiality restrictions; Description The DIA, having legal person status and thereby being fully entitled to enter into legally binding agreements, has the right to contract the services of external experts. According to Art. 2 of the “Regulation on Internal Organisations and Systematization of Working Positions” this hiring is foreseen for technical functions necessary for the Agency’s development that are not available within the existing DIA’s labor pool. Persons providing services to DIA are bound by a confidentiality requirement (Art. 20 LDI) to keep as a business secret all the information that they have gained during their work. Comments c) A training budget and programme that provides appropriate training opportunities for staff; Description According to the Art. 74 of the “Rules of Procedure” the DIA shall constantly try to give opportunities to employees for advanced training. Funds for training are allocated in the financial plan. According to the 2014 Financial Plan, 43 44 expenditures on training courses amounted to 1.2 percent of total costs. In 2013, staff attended seminars in accounting standards, market risks and international standards for financial reporting, electronic archive management and public procurement. Comments d) A budget for computers and other equipment sufficient to equip its staff with tools needed to fulfil its mandate; and Description Funds for capital expenditures on and maintenance of IT hardware and software are allocated in the annual DIA Financial Plan as Current Maintenance Costs. According to the 2014 Financial Plan, expenditures on tangible assets and services in the area of IT amounted to 1.75 percent of total costs. In addition during 2014, DIA has invested in new pay-out software and the supporting hardware. Comments e) A travel budget that allows appropriate on-site work. Description Funds for business travel are allocated in the Annual Financial Plan. According to the 2014 Financial Plan, expenditures on business travel amounted to 5 percent of total costs. Comments Essential 3. The governing statute, internal policies of the deposit insurer or other Criteria relevant laws or policies specify: a. the governing body and management are fit and proper persons and have the requisite knowledge or experience; Description The LDI (Art. 18 (1)) specifies the composition and mode of appointment of the DIA’s governing body – the Management Board – and requirements for persons performing functions in this body. The sole governing body of DIA is the Management Board. The Management Board consists of: i) the Governor of the Central Bank, or his / her nominee, is ex officio a member of the Management Board, 44 45 ii) the Minister for Treasury of the Institutions of Bosnia and Herzegovina, or his / her nominee, is ex officio a member of the Management Board, iii) the Governing Board of the Central Bank has the right to appoint one member of the Management Board, iv) and the Minister of Finance of the Federation of BiH and the Minister of Finance of the Republika Srpska each has the right to appoint one member from their respective entities to the Management Board. Individuals in the DIA’s Management Board, who are not ex officio members, must be individuals who have achieved reputations for financial or banking expertise and who also possess reputations for high moral standards by which to perform their entrusted duties. The Management Board appoints the Director and the two Branch Directors of the DIA taking into consideration their background, e.g., educational, personal reputation and professional background (Art. 17 of DIA Statute). Comments b. members of the governing body (with the exception of ex-officio appointees) and the head of the deposit insurer are subject to limitations on their term of appointment; and Description The mandate of Management Board members, who are appointed by an authority and who are not ex officio, is five years (Art 18 (7 and 8) LDI). Any member who is not an ex officio may be appointed for two consecutive terms only, so that during the appointment for each next mandate, at least two members from a previous mandate of Management Board shall be appointed. The Management Board appoints the Director and Branch Directors of the Agency for a period of five years (Art. 17 of DIA Statute). The Management Board may reappoint the Director and the Branch Directors without any limit as to the number of appointments but the full confirmation process must be repeated at each appointment. Comments 45 46 c. members of the governing body can be removed from office during their term only for reasons specified or defined in law or rules of professional conduct, and not without cause. Description A majority of the members of the Management Board has the right to remove a member of the Management Board for criminal or illegal conduct in breach or contravention of duties in connection with serving on the Management Board (Art. 18 (2) LDI). It is the duty and responsibility of the Management Board to inform the Council of Ministers of BiH of any criminal or illegal conduct of any member of the Management Board. A member of the Management Board shall be automatically suspended if acting in contradiction with any of the provisions on conflict of interest stipulated in Art. 18.1 (10 – 13) LDI. Comments Essential 4. The members of the governing body (e.g., directors or officers) and Criteria management of the deposit insurer are held accountable to a higher authority, whether public or private, through a transparent framework for the discharge of the system’s duties in relation to its objectives and mandate. Description The Management Board is responsible for the activities of the DIA (Art. 18.5 LDI). The Management Board adopts the Annual Business Report and Financial Plan for the next year and submits it for publication in the “Official Gazette of Bosnia and Herzegovina” within three months from the end of the preceding calendar year. The Management Board also provides a copy of its annual business report and its Financial Plan to the Presidency of BiH for information within three months from the end of the preceding calendar year. The Director and the Branch Directors are responsible for their work to the Management Board (Art. 19.2 (7) LDI). Comments 46 47 Essential 5. The deposit insurer operates in a transparent and responsible manner. It Criteria discloses and publishes on a regular basis appropriate information on its activities, governance practices, structure and financial results. Description The Management Board adopts the Annual Business Report and Financial Plan for the next year and submits it for publication in the “Official Gazette of Bosnia and Herzegovina” within three months from the end of the preceding calendar year. The Management Board also provides a copy of its Annual Business Report and its financial plan to the Presidency of BiH for information within three months from the end of the preceding calendar year. The DIA ensures the transparency of its operations in co-operation with media and with informing the public about DIA’s work and operation, as it is foreseen in Art. 20 DIA Statutes. According to its statute, a leading principle is that the DIA’s work and operation is to be made transparent to the public by publishing any information that has not been declared a business secret by the Management Board. Comments Essential 6. The deposit insurer is structured such that the potential for conflicts of Criteria interest for or between members of the governing body and management is minimised and that they are subjected to appropriate codes of conduct/ethics. Description According to Art. 18.1 LDI, Management Board members cannot be related to one another, or to the DIA’s Director or the Branch Directors, by blood or marriage, up to the third degree of consanguinity. Management Board members cannot be executives or members of the supervisory or management board of any Member Bank, or any other bank licensed within BiH, during the course of their mandate. Management Board members cannot own, either directly or indirectly, more than 5 percent of the equity of any Member Bank and must disclose in writing to the Management Board any equity interest that is held in a Member Bank by them or by any one related to them, by blood or marriage, up to the third degree of consanguinity. 47 48 Management Board members must provide to the DIA a written disclosure of all interests they, or any one related to them, by blood or marriage, up to the third degree of consanguinity, have in any other bank or commercial enterprise in which they own more than five percent of a bank’s or an enterprise’s equity. The Director and the Branch Directors cannot be members of the Supervisory or Management Board of any Member Bank or any other bank by themselves or by any one related to them, by blood or marriage, up to the third degree of consanguinity (Art. 19 (5) LDI). The Director or the Branch Directors cannot own, by themselves or by any one related to them, by blood or marriage, up to the third degree of consanguinity, either directly or indirectly, more than 5 percent of the equity of any Member Bank (Art. 19.1 (6) LDI). The Director and the Branch Directors must provide to the DIA a written disclosure of all interests they have by themselves or by any one related to them, by blood or marriage, up to the third degree of consanguinity, in any Member Bank and in any other bank or commercial enterprise in which they own of any share of a bank’s equity or they own more than 5 percent of an enterprise’s equity, or they are members of the supervisory or management boards of any commercial enterprise (Art. 19.1 (7) LDI). The Director and the Branch Directors shall not accept a position in a Member Bank within 2 years after their employment with the Agency has ended without the prior written permission of the DIA’s Management Board (Art. 19.1 (8) LDI). Comments At least in theory, the Central Bank and the two Ministers of Finance of the entities could nominate an active banker to the Board of DIA who is not an executive of a bank (e.g. bank clerk). However unlikely an appointment of such a person is, it is best practice that no active bankers are represented in the Board of a deposit insurer and the LDI should be clarified in that sense. Essential 7. The deposit insurer takes into consideration the views of stakeholders. Criteria Description The DIA communicates and consulates with the Banking Association of BiH on a frequent and constant basis (monthly Banking Coordination meetings, 48 49 annual General Assembly of the Banking Association) and on an ad-hoc basis (e.g. concerning legal changes to the LDI via consultations) which is sufficient for banking sector of the size of BiH. Comments Essential 8. Where decision making is delegated by the governing body of the Criteria deposit insurer to its employees, the governing body has appropriate procedures to oversee the exercise of delegation. Description There is no delegation of decision making processes as the Management Board is the sole decision making body of the DIA (Art. 18 (1) LDI). Comments Essential 9. The deposit insurer is subjected to regular external audits with reports Criteria provided to the authority to which it is accountable. Description There is an annual external audit of DIA, the auditors are appointed by the Management Board (Art. 18.4 Nr. 16 LDI). The reports are – as part of the annual business report – published and sent to the Presidency of BiH. Comments Essential 10. The deposit insurer has a governing body approved strategic plan in Criteria place.9 Description The Management Board adopts a work program on an annual basis which is proposed by the Director which includes strategic aspects. It also identified in its 2013 “Plan for Crisis Situation” activities and recommendations for improvement and development of its operations during the next period. Comments However, a strategic plan which combines and consolidates the strategic planning contained in different documents is missing. 9 The term “strategic plan” refers to a document which sets out an organisation’s goals and how it plans to achieve them. 49 50 Essential 11. Regular board meetings are held (e.g. on a quarterly basis or more Criteria frequently as deemed necessary). Description Sessions of the Management Board may be held on an ad hoc basis but must be held at least once each calendar quarter (Art. 18.3 (1) LDI). In practice, 10 to 11 meetings are held every year. Comments Additional 1. The deposit insurer adheres to best practices in corporate governance, Criterion such as: a. Regular assessments of the extent to which the governing body is meeting its objectives are carried out. Systems and practices are in place to facilitate assessments of its effectiveness; Description Not applicable Comments b. The governing body has a well-defined charter that outlines the specific powers reserved for the board and those delegated to management. Description The Management Board has adopted the DIA Statutes which outlines the specific powers. DIA’s “Regulation on Internal Organisation and Systematisation of the DIA of BiH” determines the duties, tasks and conditions for performing the duties of different work positions within the Agency. Comments Principle 6 Relationships with other safety-net participants A framework should be in place for the close coordination and information sharing, on a routine basis as well as in relation to particular banks, among the deposit insurer and other financial system safety-net participants. Such information should be accurate and timely (subject to confidentiality when required). Information-sharing and coordination arrangements should be formalised. Description Formal information sharing is foreseen in the LDI. Coordination agreements have been developed between the DIA and the safety-net participants which support the DIA in fulfilling its mandate. DIA is a full member of the Standing 50 51 Committee of Financial Stability and participates in the Coordination Committee of Banking Supervision. There is frequent exchange of supervisory information, however not on an automatic basis. Assessment Largely Compliant Comments As the MoU between DIA and the other financial safety-net participants is over 10 years old, the financial safety-net participants should revise the memorandum. The current exchange of information should be enhanced and be on an automatic basis. Regular meetings should be used to discuss and exchange views on all problem banks. Once the coordinated contingency plan is drafted and the new Law on Banks is adopted, the financial safety-net participants should engage in joint crisis simulation exercises. Furthermore, all problem banks in Bosnia and Herzegovina should be discussed in the SCFS. Essential 1. A framework for timely information sharing and the coordination of Criteria actions among the deposit insurer and other safety-net participants, on a routine basis as well as in relation to particular banks, is explicit and formalised through legislation, regulation, memoranda of understanding, legal agreements or a combination of these instruments. Description The DIA receives from safety-net participants, as well as from Member Banks directly, information allowing prompt and effective payout procedures. The exchange of information among safety-net participants is formalised through legislation and agreements. The information received includes among other things data on depositors and deposits, reports on banks and the banking sector as well as bank ratings from the Banking Agencies and banks’ external audit reports. However, the exchange is not an automatic one (there is no automatic exchange of bank reports or access of the DIA to these reports), but questions of the DIA directed at the Banking Agencies have always been answered in a timely manner. The fundamental regulations ensuring that the DIA has access to timely information about the possibility of fulfilling the guarantee condition with respect to a bank covered by the deposit guarantee scheme are as follows: i) Art. 22 (3) LDI, stipulating that the Banking Agencies and any other state agency are required, based on mutuality, to provide necessary cooperation to the DIA for the accomplishment of the 51 52 DIA’s responsibilities under the LDI, particularly with the purpose of the DIA’s obtaining all necessary standardized reports from the Banking Agencies upon written request, ii) Art. 22 (5) LDI, stipulating that the DIA has a legal right to expect that the Banking Agencies will inform it of any action contemplated by the Banking Agencies in response to an action planned by the DIA and that was disclosed by the DIA to the Banking Agencies or action planned by the Banking Agencies themselves, iii) Art. 23 (3) LDI, stipulating, that the Central Bank of BiH shall, upon request of the DIA, provide reports and information it disposes with, that are needed for the DIA to monitor banks’ business operations regarding compliance with membership criteria. The Law on the Banking Agency of the Federation of Bosnia and Herzegovina in its Art. 19 b (1d) and the Law on Banking Agency of Republika Srpska in Art. 31 (1d) allow the respective agency to share confidential information with the DIA. The exchange of information between the DIA and the Banking Agencies is further regulated by the “Letter of Agreement on Cooperation” from 2003. The cooperation is based on mutuality and equality. On the basis of this agreement, the main area of cooperation are: i) sharing and exchanging of financial and other information on banks which may have influence on their present or future eligibility for the deposit insurance program of DIA, and conduction of their banking business in general, ii) developing and applying a joint rating system for banks, iii) timely informing each other on intended decisions regarding the issuance or revocation of banking licenses and/or deposit insurance membership certificates, iv) cooperating in the area of information technology, v) cooperating in the area of staff development, and vi) cooperation in the process of bankruptcy and liquidation. So far, a joint rating model has not been developed and each agency applies its own model. The Banking Agencies and DIA exchange information on banks, however this exchange is not automatic. For example, reports from the Banking Agencies are not shared with DIA automatically and sometimes a 52 53 delay in the exchange occurs. On the other hand, all request for information made by DIA have always been answered in a timely manner. The exchange of information between safety-net participants has also been supported by the creation of the Standing Committee for Financial Stability (SCFS). Members of the SCFS are the Fiscal Council of BiH (Minister of Finance & Treasury of BiH, two entity Ministers of Finance), the CBBH, the two Banking Agencies and the DIA. The objective of the Standing Committee is (according to its MoU from 2009) to promote financial stability and crisis preparedness and facilitate crisis management. The parties to the MoU (in normal as well as in crisis times) i) ensure cooperation at all times through appropriate procedures for sharing of information and assessments, ii) prepare common solutions and actions to manage a crisis, iii) coordinate joint public communications, and iv) establish contingency plans (including stress testing and simulation exercises). The SCFS shall meet at least once every quarter to share assessments regarding financial stability issues. Members can request ad-hoc meetings (and DIA has requested so in the past). Issues discussed were the impact of the natural disasters on the financial sector, the results of stress tests, information of the health of the financial sector, and the draft amendments to the Law on Banks. Both entities consider the SCFS a place where only systemic relevant banks (or banks which are active in both entities) are discussed. This leaves the discussion for smaller banks which nevertheless are a Member Bank of the DIA to the entity level. In the Repulika Srpska a special committee has been formed where such banks would be discussed. However, the DIA as an institution at the state level is not a member of this committee. In the Federation of BiH no such committee exists, but non-systemic banks would still be only discussed at the entity level, resulting in the DIA potentially not being involved in discussions of smaller non-systemic banks in the Federation. The DIA is also a member of the Coordination Committee of Banking Supervision, which also includes the CBBH and the Banking Agencies. The Committee meets bi-monthly and even more often when needed. In the 53 54 meetings the state of the banking sector as well as the conditions of individual banks are discussed. Furthermore the DIA is involved in a Working Group comprising all financial safety-net participants which are drafting a new Law on Banks. Comments As the Agreement on Cooperation between DIA and the other financial safety- net participants is over 10 years old, the financial safety-net should revise the memorandum. The current exchange of information should be enhanced and be on an automatic basis. Existing regular meetings should be used to discuss and exchange views on problem banks. The provisions for cooperation should also be included in the new Law on Banks which is currently being drafted. All problem banks – regardless of their systemic relevance – should be discussed in the SCFS. Otherwise the DIA would not be fully involved in the ongoing exchange within the safety net which is key for its payout preparations. Essential 2. Planning and operations of safety-net participants, both individually Criteria and together, not only cover past and ongoing circumstances but also consider plausible future scenarios. Description The individual scope of planning and operations by the DIA encompasses consideration of plausible future scenarios, the central component of which is the DIA’s contingency plan from 2013 (“Plan for Crisis Situation”). The inter- institutional scope of planning and operations by DIA. The DIA carries out effectiveness tests with respect to its data systems, especially in terms of the payout process. For example, depositor data from Member Banks which are considered as problem banks are processed and checked twice a month. DIA is meeting the Banking Agencies on a quarterly basis. Through the SCFS, the Banking Agencies, the CBBH, the Ministry of Finance and Treasury of BiH and the entity Ministries of Finance meet regularly. With the help of the IMF, all members of the financial safety-net have written their own contingency plans. A coordinated plan of action is going to be developed in the future. The CBBH has the coordinating role for the task of 54 55 integrating all the individual plans into a master plan (to be done by the end of 2014). The financial safety-net participants have not yet undertaken joint crisis- simulation exercises. Comments Once the coordinated contingency plan is drafted and the new Law on Banks is adopted, the financial safety-net participants should engage in joint crisis simulation exercises. Essential 3. All deposit insurers are provided with information on a timely basis to Criteria be able to reimburse depositors’ claims promptly including information on the amount of insured deposits held by individual depositors. Description In order to ensure the correctness of information on depositors and on their claims in the event of the guarantee condition being fulfilled, banks covered under the deposit guarantee scheme are obliged to make available at all times information on depositors and deposits to DIA, in a form and manner the Agency requests them (Art. 7a (5) LDI and individual contract between DIA and Member Banks), and DIA has been granted the right to verify the correctness of data with on- and off-site inspections (Art. 7a (4) LDI). The scope and structure of the data that must be contained in a bank’s IT system are prescribed by the DIA (“Contract on Deposit Insurance between DIA and member institutions”, DIA’s “Guidelines for Monitoring of Banks and Payout of Insured Depositors”). The DIA has the right to receive, on an ongoing basis, data contained in bank IT systems that is necessary to carry out disbursement of guaranteed funds, thereby enabling DIA to monitor said data for correctness. The DIA also makes on-site inspection in Member Banks in line with its “Guidelines for Monitoring of Banks and Payout of Insured Depositors” at least once every two years. In practice, when DIA requests data it receives a full set of depositor data within 24 hours. Per month 2 - 5 Member Banks are tested. Problem banks are tested twice a month. The software is able to detect errors (e.g. misspellings of names or addresses). Comments 55 56 Essential 4. Rules regarding confidentiality of information apply to all safety-net Criteria participants and the exchange of information among them. Description The DIA and other financial safety-net participants are obliged to comply with the following legal acts: i) Art. 20 LDI, ii) Art. 4 of the Letter of Agreement on Cooperation between DIA and the Banking Agencies, iii) the Banking Acts – Art. 19 Law on the Banking Agency of the Federation of BiH and Art. 29 Law of the Banking Agency of Republika Srpska, and iv) other legal acts with general rules on confidentiality of information, under which financial safety-net participants operate (e.g. Law on Business Secrets). The above-mentioned acts specify data which are protected by the law. Comments Essential 5. The safety-net participants make information on banks that are in Criteria financial difficulty or are expected to be in financial difficulty available to the deposit insurer in advance and, where confidentiality requirements prevent this, or where the information is not available from other safety-net participants, the deposit insurer has the power to collect information directly from such banks. Description As described in EC1, the DIA with other safety-net participants: i) share and exchange financial and other information on banks which may have influence on their present or future eligibility for the deposit insurance program of DIA, and conduct of their banking business in general, ii) timely inform each other on decisions regarding the issuance or revocation of banking licenses and/or deposit insurance membership certificates Comments 56 57 Additional 1. A deposit insurer with a broader mandate, such as “loss-” or “risk- Criterion minimisation”, has access to timely and accurate information so that it can assess the financial condition of individual banks, as well as the banking industry. These deposit insurers may also need access to information regarding the value of the bank’s assets and the expected time frame for the liquidation process, given that the value of a bank’s assets depends, in part, on the time necessary to liquidate them. Description Not applicable Comments Principle 7 Cross-border issues Provided confidentiality is ensured, all relevant information should be exchanged between deposit insurers in different jurisdictions and possibly between deposit insurers and other foreign safety-net participants when appropriate. In circumstances where more than one deposit insurer will be responsible for coverage, it is important to determine which deposit insurer or insurers will be responsible for the reimbursement process. The deposit insurance already provided by the home country system should be recognised in the determination of levies and premiums. Description Currently, there are no branches of banks from BiH operating outside the country where DIA could be responsible to insure the deposits held in such branches. All foreign banks in BiH operate via subsidiaries which are full members of DIA. As there are no current cross-border issues this Core Principle is not applicable. In case the situation would change, DIA would have the (legal) capacity to enter into cooperation agreements. Assessment Not Applicable Comments From DIA’s 26 Member Banks 15 banks are foreign owned (majority foreign capital). Due to the high concentration of foreign-owned banks in BiH, the Banking Agencies should be in a position to exchange information about the financial health of the parent companies of foreign subsidiaries and inform the DIA accordingly (for example via the SCFS). There is a need for stronger cross border supervisory cooperation (e.g. MoU with the Austrian authorities). Essential 1. Appropriate cross-border bilateral/multilateral agreements are in place Criteria in circumstances where, due to the presence of cross-border banking 57 58 operations, coverage for deposits in foreign branches is provided by the deposit insurer in another jurisdiction or by a combination of deposit insurers in different jurisdictions. For example, where the home country system provides coverage for the branches of its domestic bank, banks in the host countries and/or the host country system provides supplementary coverage for foreign bank branches. Description Not Applicable Comments a. The agreements involve appropriate home and host deposit insurers as well as other appropriate financial safety-net participants when appropriate, including in circumstances where one deposit insurer will be solely responsible for coverage. Description Not Applicable Comments b. The agreements provide for ongoing close coordination and information sharing between home/host deposit insurers and possibly other safety-net participants, as well as in relation to particular banks when necessary. Description Not applicable Comments c. The agreements specify which deposit insurer or insurers will be responsible for reimbursement as well as premium assessment, cost sharing, and the deposit insurance public awareness issues raised by cross-border banking. Description Not Applicable Comments Essential 2. Depositors in the jurisdictions affected by cross-border banking Criteria arrangements are provided with clear and easily understandable information on the existence and identification of the deposit insurance system legally responsible for reimbursement and the limits and scope of coverage. Information on the deposit insurance system’s source of funding and standard claims procedures and reimbursement options is also available to affected depositors (e.g. such as on the deposit insurer’s website, through printed materials or similar means). 58 59 Description Not Applicable Comments Principle 8 Compulsory membership Membership in the deposit insurance system should be compulsory for all financial institutions accepting deposits from those deemed most in need of protection (e.g. retail and small business depositors) to avoid adverse selection. Description Membership in the DIA is compulsory for all banks licensed by the Banking Agencies which meet the DIA’s membership criteria. There is currently one bank operating in BiH which is accepting deposits while not being a member of DIA as it does not fulfill the membership criteria. Assessment Materially non-compliant Comments All banks which are allowed to collect deposits in BiH should be members of the DIA. For the one remaining bank outside the DIA a solution has to be found by the competent Banking Authority. In future, the membership within the deposit insurance system should be linked to the issuance (and withdrawal) of the bank’s operating license. Essential 1. Membership in a deposit insurance system is compulsory for all Criteria financial institutions accepting deposits from those deemed most in need of protection (e.g. retail or individual depositors and small business depositors). Description Membership in the DIA is compulsory for all domestic banks licensed by the Banking Agencies which meet the DIA’s membership criteria (Art. 6 (1) LDI). The DIA must determine that a bank meets all requirements and all safety and soundness criteria established by the LDI as well as the Law on Banks of the Federation of BiH or the Republika Srpska, before issuing a membership certificate to a bank. Newly formed banks have to give evidence of their ability to meet the membership criteria for the next 3 calendar years. Final decision about membership is the sole authority of the DIA (Art. 6 (8) LDI). A newly licensed bank would therefore be without deposit insurance coverage as DIA cannot prevent the issuing of the license, which is not an acceptable praxis. 59 60 Member Banks, in addition to being licensed by the competent Banking Agency, must meet the following criteria (“quality standards”) laid down in Art 7 (1) LDI (which the DIA has further specified in its “Decision on Bank’s Participation Criteria in the Deposit Insurance Program”) : i) capital, ii) liquidity, iii) asset quality, iv) governance, v) profitability, vi) accounting standards, vii) reserve and market risks. For example, a bank can participate in the deposit insurance program as a Member Bank only if its latest and currently still valid CAMEL rating given by the competent Banking Agency is rated 3 or higher and with no individual rating component rated 5 (Art. 7 (3) LDI). In addition, no bank under provisional administration may apply for membership participation. When a bank passes the criteria, the DIA and each Member Bank sign a membership contract which defines the membership rights and obligations (Art. 8 LDI). The membership contract is identical for each Member Bank. The DIA provides the bank with a certificate that evidences the bank’s membership in the DIA. DIA is on an ongoing basis monitoring the Member Banks’ business operations in regard to their compliance with the membership criteria (Art. 7 (6) LDI). The DIA can verify the accuracy of reporting with off-site and on-site examination at Member Banks. Member Banks are obliged to make available to the DIA information on depositors and their deposits at all time and in the form and manner as requested by DIA (Art. 4 Decision on Bank’s Participation Criteria). In the case of status changes in Member Banks (e.g., a merger or acquisition) membership in the deposit insurance program of the newly formed bank has to be confirmed by the Management Board with a formal decision. When DIA finds that the Member Bank has seriously deteriorated criteria (e.g. the bank is undercapitalised or has insufficient liquidity) the DIA informs the bank about it and the Member Bank has to provide DIA with an acceptable rehabilitation plan within 30 days (Art. 5 Decision on Bank’s Participation 60 61 Criteria). If the bank does not submit or implement the rehabilitation plan, the DIA informs the respective Banking Agency which might lead to a revocation of the banking license (Art. 6 Decision on Bank’s Participation Criteria). As of 31 October 2014, the membership included 26 banks. When the DIA was established in 2002, the banking market in BiH was in turmoil and a several banks were under temporary administration. These were banks that did not meet the basic business criteria and were considered unstable. In order to deal with these problems but also to protect the Deposit Insurance Fund from immediate depletion, the decision was made that banks have to fulfil strict membership criteria to join the DIA. There was the (political) understanding at that time that the banks not qualifying for membership in DIA would soon be closed and liquidated. However, currently one bank (PBS in the Federation of BiH) still operates in the banking market which is not a member in the deposit insurance scheme. It is expected by the DIA that in the near future the remaining non-member bank will improve its business operations and thus fulfill the requirements for membership in the deposit insurance program or it will finally be resolved. As the DIA is legally bound to apply its membership criteria it is in the responsibility of the competent Banking Authority to find a solution for that bank which for 12 years has been unable to meet the membership criteria. The DIA proposes to change the LDI after a solution has been found and link the membership within the deposit insurance system with the issuance (and withdrawal) of the bank’s operating license. Comments For the one remaining bank outside the DIA a solution has to be found by the competent Banking Authority. In the near future, the membership within the deposit insurance system should be linked to the issuance (and withdrawal) of the bank’s operating license. Essential 2. Policymakers determine whether eligible banks will be given Criteria membership as a part of the licensing process or upon application to the deposit insurer. Description See EC 1. Banks are given membership upon application to the deposit insurer. Comments 61 62 Essential 3. Criteria for membership that detail the conditions, process and time Criteria frame for attaining membership are explicitly stated and transparent. Description See EC 1. Membership criteria are clearly defined in Art. 6 and 7 LDI and the “Decision on Bank’s Participation Criteria in the Deposit Insurance Program”. Comments Essential 4. If the deposit insurer does not control membership (i.e. cannot refuse Criteria membership), the law or administrative procedures describe a clear time frame in which the deposit insurer is consulted about or informed in advance of “newly licensed” banks. Description Not applicable as DIA is controlling membership. The final decision about membership is the sole authority of the DIA (Art. 6 (8) LDI). Comments Essential 5. When deposit insurance membership is terminated by the deposit Criteria insurer, arrangements are in place that provide for coordination in withdrawing the bank’s operating license by the relevant authority. If relevant, an appropriate general notice is given to depositors (e.g. on the deposit insurer’s website) to inform them that any new deposits issued will not receive deposit protection. Description The LDI foresees different ways to terminate membership in the deposit insurance scheme: i) Art. 12 LDI regulates the termination of membership in the deposit insurance program when one of the Banking Agencies suspends a Member Bank’s operating license and a pay-out of deposits becomes necessary. After the official notification of the suspension (in the respective Law on Banks it is regulated that the competent Banking Agency notifies the DIA about revocation of the license), the DIA Board decides about the termination of membership. The decision is published in the Official Gazette of Bosnia and Herzegovina and the Banking Agencies are informed. Art. 12.1 (4) LDI stipulates that the Member Bank, when it receives the notice of termination of its participation in deposit insurance, is obliged to immediately notify in writing all existing depositors. ii) Art. 13 LDI regulates a termination of membership by decision of the DIA Management Board which is not resulting in a deposit pay- 62 63 out. This termination of membership in this case is limited to situations where the member bank is not paying its deposit insurance premiums (Art. 13.2 and 13.3 LDI) and if external measures are imposed (Art. 13.4 LDI). In these cases the DIA has to inform the Banking Authorities about its decision and publish the decision in the Official Gazette of Bosnia and Herzegovina. The Bank has to make a public announcement that new deposit will not be insured. Comments Art. 12 and 13 should be revised and clarified. Art. 13 raises concerns as the termination of membership by DIA without withdrawing the bank’s operating license will result in banks doing business without offering insurance for new deposits. In principal all banks operation in BIH should be covered by the deposit insurance system. In the revision, the provisions of Art. 13.4 LDI should be dropped as the underlying reason for this provision seems to no longer exist. Essential 6. All financial institutions accepting deposits are subject to strong Criteria prudential regulation and supervision and are financially viable when they become members of a deposit insurance system.10 Description All deposit-taking financial institutions are subject to supervision by the Banking Agencies and must meet the requirements stipulated in the respective Banking Laws and the strict membership criteria in the LDI. However, weaknesses in the bank supervision framework and its implementation need to be addressed. Comments Principle 9 Coverage Policymakers should define clearly in law, prudential regulations or by-laws what is an insurable deposit. The level of coverage should be limited but credible and be capable of being quickly determined. It should cover adequately the large majority of depositors to meet the public policy objectives of the system and be internally consistent with other deposit insurance system design features. 10 See discussion “Preconditions”. 63 64 Description Insured (guaranteed) deposits are clearly defined in law and public decisions of the management board. Assessment Compliant Comments Coverage is limited to KM 50,000 per depositor per bank which is relatively high (e.g., covering 98.9 percent of individual depositors and 56.2 percent of the total value of deposits). Thus it is imperative that safety-net participants maintain an effective supervisory and regulatory system and other measures to mitigate moral hazard. Essential 1. Insured deposits are clearly and publicly defined. This comprises the Criteria level and scope of coverage. If certain depositors are ineligible for deposit protection, the criteria are clearly defined. Description The scope and limit of coverage is clearly defined in law and public decisions of the management board. The level of coverage is limited to KM 50,000 per depositor per bank. Deposits denominated in foreign currency are converted into KM for the purpose of a payout. In addition to the KM 50,000 limit on the level of coverage, the scope of coverage is restricted following the scope of the EC Directive of Deposit Insurance 94/19. The DIA covers natural and legal persons, but not depositors who are deemed professional financial market participants, like government and insurance companies, bank management as well as its shareholders (Art. 5 LDI). Comments Essential 2. The definition of “insured deposit” reflects the public policy objectives Criteria of protecting depositors and promoting public confidence and financial stability (e.g. protect small transaction accounts). Description The definition of insured deposits is based on EC Directive 94/19 (which BiH being not an EU member is not obliged to follow) and reflects the public policy objectives of protecting depositors and promoting financial stability. Comments Essential 3. The level of coverage is limited but credible (e.g. the level of coverage Criteria is high enough to maintain confidence, but limited to maintain market 64 65 discipline). The level of coverage is consistent with the deposit insurer’s public policy objectives. Description Based on the data provided by the DIA, the current limit covers 98.9 percent of depositors and 56.2 percent of the total value of deposit liabilities (as of beginning of 2014). The coverage limit was raised by the Management Board to KM 50,000 beginning of 2014. Comments Essential 4. Depositors have sufficient information readily available to determine Criteria the amount of coverage for their individual deposits. Description The level of coverage is clearly described in the website of the DIA, in brochures, booklets and in information provided by banks. Comments Essential 5. The coverage limit applies equally to all banks in a deposit insurance Criteria system. Description There is only one coverage limit for all banks. Comments Essential 6. The deposit insurance system does not incorporate co-insurance, where Criteria depositors absorb some portion of the loss under the coverage limit in the event of bank failure.11 Description Co-insurance is not part of the design features of the DIA. Comments Essential 7. Deposit insurance coverage is reviewed periodically to ensure that it Criteria can meet the public policy objectives of the deposit insurance system. Description Twice a year as part of its target ratio analysis DIA reviews if the coverage level is sufficient. This analysis takes into account among other things the 11 Although the use of co-insurance can encourage depositors to monitor bank risk taking, it presents a number of serious problems. In order to provide effective market discipline it assumes that depositors will have access to the necessary financial information and that most retail/individual depositors can accurately assess risk. And, even when depositors are in a position to make such determinations, co-insurance provides strong incentives for depositors to run on a bank to avoid even a small loss of their funds. 65 66 coverage level in neighboring countries, the European Union and the effects of an expanded coverage on the Deposit Insurance Fund. Comments Additional 1. If set-off is utilized by the deposit insurance system, it is consistent Criterion with the prevailing legal framework. Description DIA utilizes set-off which is in line with the national insolvency laws (Art. 4 (1) LDI). DIA’s pay-out software allows it to calculate the set-off amount and still be able to compensate depositors within the given time frame.. The maximum amount of an insured deposit, including any accrued interest, to be reimbursed by the DIA per depositor is the eligible deposit less legal or contractual debt owed to the Member Bank by the depositor up to the amount determined by the decision of the Management Board of the Agency or whichever is smaller. Set-off is only utilized with claims due at the time of the compensation event. Comments Additional 2. In the event of a merger of separate banks that are members of the Criterion deposit insurance system, depositors of the merged banks enjoy separate coverage (up to the maximum coverage limit) for each of the banks for a limited but publicly stated period in which case the merging banks must be held responsible for notification of affected depositors, including the date at which time the separate coverage will expire. Description Not assessed (such a provision does not exist in LDI). Comments DIA should consider to introduce such a regulation. Principle 10 Transitioning from a blanket guarantee to a limited coverage deposit insurance system When a country decides to transition from a blanket guarantee to a limited coverage deposit insurance system, or to change a given blanket guarantee, the transition should be as rapid as a country’s circumstances permit.12 Blanket 12 A “blanket guarantee” is a declaration by authorities that in addition to the protection provided by limited coverage deposit insurance or other arrangements, certain deposits and perhaps other financial instruments 66 67 guarantees can have a number of adverse effects if retained too long, notably moral hazard. Policymakers should pay particular attention to public attitudes and expectations during the transition period. Description The Core Principle is not applicable as there is no blanket guarantee in BiH. Assessment Not Applicable Comments Essential 1. A situational analysis of the economic environment as it affects the Criteria banking system is conducted before a country begins a transition from a blanket guarantee to limited coverage. Description Not Applicable Comments Essential 2. The situational analysis assesses structure and soundness of the banking Criteria system including an evaluation of the condition of banks’ capital, liquidity, credit quality, risk management policies and practices, and the extent of any problems; and an evaluation of the number, type and characteristics of banks. Description Not Applicable Comments Essential 3. The situational analysis assesses the strength of prudential regulation Criteria and supervision, the effectiveness of the legal framework, and the soundness of the accounting and disclosure regimes. Description Not Applicable Comments Essential 4. The pace of the transition to limited coverage is consistent with the Criteria state of the banking industry, prudential regulation and supervision, legal framework and accounting and disclosure regimes. Description Not Applicable will be protected. A wide range of factors need to be considered when introducing blanket guarantees, including decisions on the scope of the guarantee (e.g. the type of institutions, products and term maturities covered) and whether the banks utilising the guarantees will be required to contribute in some manner to the costs of providing the guarantees. 67 68 Comments Essential 5. Policymakers are aware of the tradeoff between the length of time it Criteria takes for the transition to the limited coverage system and the degree of moral hazard in the system, and have planned the transition accordingly. Description Not Applicable Comments Essential 6. Policymakers are aware of and anticipate the reaction of the public to a Criteria reduction in coverage levels. Policymakers develop effective communication strategies to mitigate adverse public reaction to the transition. Description Not Applicable Comments Essential 7. Where there is a high level of capital mobility, and/or a regional Criteria integration policy, the decision to lower coverage levels (and/or scope) considers the effects of different countries’ protection levels and related policies. Description Not Applicable Comments Essential 8. The new limited-coverage deposit insurance system has access to Criteria adequate funding during and after the transition. Policymakers consider the capacity of the banking system to fund a limited-coverage deposit insurance scheme. If the banking system is unable to fund the cost of the blanket guarantee, government funding may be needed. Description Not Applicable Comments Principle 11 Funding A deposit insurance system should have available all funding mechanisms necessary to ensure the prompt reimbursement of depositors’ claims including a means of obtaining supplementary back-up funding for liquidity purposes when required. Primary responsibility for paying the cost of deposit insurance should be borne by banks since they and their clients directly benefit from 68 69 having an effective deposit insurance system. For deposit insurance systems (whether ex-ante, ex-post or hybrid) utilising risk-adjusted differential premium systems, the criteria used in the risk-adjusted differential premium system should be transparent to all participants. As well, all necessary resources should be in place to administer the risk-adjusted differential premium system appropriately. Description The DIA is well funded and has a variety of funding mechanisms available, including access to supplementary back-up funding, to ensure the prompt reimbursement of depositors claims. Assessment Largely Compliant Comments As the EBRD back-up line runs out end of 2017, DIA should start now to explore possible ways to secure proper back-up funding in the future. In the light of the need to reduce the payout period in the future, the payout period for any back-up founding source will also have to be shortened accordingly. DIA should also abolish the possibility to invest its funds into private banks and their bonds. Furthermore, the Agency should explore the possibility to move its assessment base for annual premiums from “eligible” to “covered” deposits. DIA’s deposit insurance fund is missing a public and transparent fund reserve ratio. Essential 1. Funding arrangements for the deposit insurance system are provided on Criteria an ex-ante or an ex-post basis or some (hybrid) combination of these and are clearly defined and established in law or regulation. Description The Deposit Insurance Fund’s primary source of funding is the insurance premium paid by its member banks on a quarterly basis (ex-ante funding). The funding is regulated in Art. 10, 11, 21 LDI, the “Contract on Deposit Insurance” between the DIA and the individual member banks and the decisions made by the Management Board on the amount of the insurance fee. The premiums collected are not risk-based. The funding arrangements are published in the Law and the Official Gazette of Bosnia and Herzegovina. For the year 2014 the annual insurance fee is 0.26 % on the basis of average eligible deposits at the end of each month including interest. Apart from premium fees the DIA receives membership fees (Art. 8 (3) LDI), return on investments of the Deposit Insurance Fund’s capital, recoveries from 69 70 past bank insolvencies (there has been none since the introduction of deposit insurance) and donations (Art. 11 (3) LDI). DIA has also established various ways of back-up funding. Comments As the DIA is able via its IT system and deposit reports of its Member Banks to identify the covered deposits held with each bank it should explore the possibility to use covered deposits (instead of eligible deposits) as the assessment base for its annual insurance fee. Thereby the DIA would collect an insurance premium only for the actual risk which is insured. A move to this assessment base would have to include an adjustment of the current fee level as the DIA will still need enough annual premiums to meet its obligations. Essential 2. Funding arrangements for the deposit insurance system ensure the Criteria prompt reimbursement of depositors’ claims and include a pre-arranged and assured source(s) of back-up funding for liquidity purposes. Such sources may include a funding agreement with the central bank, a line of credit with the government treasury, or another type of public fund or market borrowing. If market borrowing is used by the deposit insurer it should not be the sole source of back-up funding. The deposit insurer should not be overly dependent on a line of credit from any single private source. Description The coverage ratio (relation between the capital of the Fund and potential liability of the DIA) amount to 4.6 % as per December 31, 2013. The supplementary sources of DIA funding are as follows: i) A credit line from the European Bank for Reconstruction and Development (EBRD). On 27 January 2010, DIA has signed a loan agreement with the EBRD for a period of seven years, which enables the DIA in case of an insufficiency of funds to pay-out the the insured deposits. The DIA may, at any time, withdraw a loan of up to EUR 50 million. The loan is available within 15 business days upon request without any further conditions to be met. For the credit line the State of BiH has provided a guarantee. ii) The DIA has the possibility of calling for extraordinary premiums from Member Banks. In accordance with Art. 10 (10) LDI, in the case when the capital of the Fund is not sufficient for the pay-out of insured deposits, additional funds are to be provided by an extraordinary collection of insurance premiums from the Member Banks. The decision of the extraordinary collection of premiums, its 70 71 amount and modalities of collection shall be decided by the DIA’s Management Board. iii) The DIA has the option of taking loans and guarantees in accordance with Art. 21 (8) LDI, thereby using future premium payments as a security and as the source for debt repayment. DIA is considering introducing a legislative proposal that allows issuance of bonds as a form of back-up funding in the future. Due to its limited mandated, CBBH cannot act as a lender of last resort. Comments As the EBRD back-up line runs out end of 2017, DIA should start now to explore possible ways to secure proper back-up funding in the future. The 15 day payout period for EBRD loan is only acceptable because the payout period is 60 days. In the light of the need to reduce the payout period in the future, the payout period for any back-up founding source will also have to be shortened accordingly. Essential 3. Primary responsibility for funding the deposit insurance system is borne Criteria by member banks and is enforceable by the deposit insurer. Description The main source of funding of the Deposit Insurance Fund is borne by member banks. Comments Essential 4. If an ex-ante deposit insurance fund is established the size of the fund Criteria (e.g. the fund reserve ratio) is defined on the basis of clear, consistent and well-developed criteria that aim at meeting the public policy objectives. If an ex-post funding arrangement is used the main source of funding is credible and readily available. Description The DIA has no pre-defined target fund level defined in the LDI. But DIA performs twice a year a mandatory analysis for the purpose of determining the insurance coverage, the premium rate and the adequacy of the current Fund level. The analysis is based on an evaluation of the quality of the entire banking sector and the risk of the Deposit Insurance Fund. It is the DIA’s conclusion that a fund reserve ratio of 5.85 percent is the worst case scenario the Fund would have to pay-out. As of December 31 2013, the financial resources at DIA’s disposal amounted to KM 285 million (USD 182 71 72 million) in total. The total amount of funds at DIA’s disposal has been increasing steadily. The DIA’s ex-ante coverage ratio for guaranteed (i.e. insured) deposits is currently 4.6 percent (in comparison the new EU Directive on Deposit Guarantee Schemes only foresees a coverage ratio of 0.8 %). The current level would allow the payment of the guaranteed deposits of up to the 7th largest bank. Including the credit line from EBRD in an emergency case, DIA would be able to cover all guaranteed deposits up to the 4th largest bank. The DIA can cover from its own assets simultaneously the potential liability of the eight smallest banks (including EBRD credit line: simultaneously the nine smallest banks). DIA has a credible plan in place to reach the fund reserve ratio of 5.86 percent. Comments DIA’s deposit insurance fund is missing a public fund reserve ratio. Essential 5. The deposit insurance fund has sound investment policies and Criteria procedures, internal controls and disclosure and reporting systems. These are approved by the deposit insurer’s governing body and subjected to regular review by an independent party. Investment policies emphasise the need to ensure the preservation of fund capital and liquidity. Description The DIA’s investment policy and guidelines are clearly defined in the LDI (Art. 11 LDI) and the DIA’s Investment Policy adopted by the Management Board (“Regulation on the Investment Policy for the Capital of the Deposit Insurance Fund” from November 26, 2008). All investments of the fund shall be undertaken with the view of preserving its capital and maintaining liquidity (Art. 11 (8) LDI). The investment policy for the Deposit Insurance Fund is based on achieving the following goals: i) Safety; ii) Liquidity; iii) Low volatility; iv) Transparency; v) Performance. 72 73 In accordance with Art. 11 (6) and (7) LDI, the DIA shall invest the capital of the Fund in fixed income securities issued by, or guaranteed by, member countries of the European Union, European Union governmental agencies, and European supranational agencies as well as in fixed income securities issued or guaranteed by the government or governmental agencies of the United States of America. All instruments must be denominated in Euro. Participation of fixed income securities – government (sovereign) bonds, must be represented in portfolio with at least 50% of total portfolio and 75% of total portfolio being rated with at least A. The DIA may also invest the capital of the Fund in fixed income securities or other debt instruments issued by European Union banks or companies or United States of America based banks or companies with the highest ratings. Such banks or companies must have a minimum quality rating of “A-”, according to an internationally recognized bond-rating agency. The DIA is allowed to deposit money of the Deposit Insurance Fund with the CBBH (Art. 11 (1) LDI and to keep operational accounts with Member Banks (Art. 5 (2) DIA Statute). The premium of Member Banks are collected at the account at the CBBH. Deposits with commercial banks are permitted (in accordance with minimum credit risk permitted) with 10% of total portfolio at maximum, and deposits with one bank cannot be more than 3% of portfolio. In order to implement the investment policy, the DIA established an Investment Committee of the DIA which comprises of: i) Director of the DIA, ii) Representative of the Central Bank of BIH, iii) Directors of DIA’s Branch Offices, iv) Advisors to the DIA, as members. The Investment Committee has the following authorities: i) on an ongoing basis monitoring the investment process and realization of the investment performance of the capital of the 73 74 Deposit Insurance Fund in accordance with the adopted Investment Policy, ii) preparing and making recommendations to the agency’s Director about initiating recommendations toward the Management Board for enacting or changing decisions and bylaws that regulate investment field, iii) on an ongoing basis following and analysing the compliance and relevance of the “Regulation on Investment of the Capital of the Deposit Insurance Fund” and making recommendation to the Director for changing the same, iv) following-up on the overall performance of the Asset Manager and making recommendations to the Director for operational work of the Asset Manager, v) making recommendation to the Management Board of the DIA for taking up the procedure for changing the Asset Manager; vi) participating in the selection and dismissal of the Asset Manager as an advisor, vii) analysing the performance and investment strategy on a monthly, quarterly and annual basis, viii) submitting the business report to the Management Board at least twice a year, and ix) submitting Information on Investment Income Performance to the Management Board on a quarterly basis. The Investment Committee is responsible for its work to the DIA’s Management Board. The DIA has appointed Deutsche Asset Management International GmbH as investment manager (“Agreement on Asset Management”) and gives it written instruction to monitor and make investment and reinvestment of the funds. The asset manager delivers investment reports once a month and investment review reports quarterly. There is a benchmark for the performance of the manager and room for decisions is limited. The DIA manages liquidity risk by investing into short-term deposits with international banks and into securities with average portfolio maturity of five years and maturity of individual bonds of 10 years at maximum. 74 75 The DIA is not carrying any currency risks (FX risks) as it only reimburses in KM (Art. 4 (4) LDI). The KM is also linked to Euro with a fixed exchange rate, so investments in Euro are not enhancing the currency exposure. The DIA’s investments are part of the external annual audit. Comments DIA should abandon the policy to invest money or debt instruments issued from banks. Essential 6. For deposit insurers that use risk-adjusted differential premium Criteria systems: a. the system for calculating premiums is transparent to all participants; Description Not Applicable. The DIA is not using its power (Art. 10 (9) LDI) to use risk- based contributions. It already has developed a framework to introduce such a premium system. Supervisory practices in the two entities have to be more aligned to create a level-playing field in the whole of BiH to ensure equal treatment of Member Banks. Comments b. The ratings and rankings resulting from the system pertaining to individual member banks are kept confidential; and Description Not Applicable Comments c. policymakers ensure that the deposit insurer has the necessary authority, resources and information in place to carry out its responsibilities with regard to the operation of such systems. Description Not Applicable Comments Essential 7. In so far as the funds of the deposit insurer may be used by other Criteria members of the safety net for the purposes of depositor protection and/or bank resolution, those circumstances are clearly stated and public and known to member banks. The deposit insurer has adequate information to: 75 76 Description Not Applicable. DIA’s Fund can only be used for the pay-out of deposits (Art. 21 (3) LDI. Comments a. understand the use of the funds; Description Not Applicable Comments b. seek reimbursement for the estate of the failed bank or participate in recoveries from the bank; Description Not Applicable Comments c. restrict the resolution or depositor reimbursement amount to the costs the deposit insurer would otherwise have incurred without such intervention or resolution. Description Not Applicable Comments Principle 12 Public awareness In order for a deposit insurance system to be effective it is essential that the public be informed on an ongoing basis about the benefits and limitations of the deposit insurance system. Description The DIA undertakes a range of good practices to promote public awareness on an ongoing basis about deposit insurance. Assessment Largely compliant Comments The public awareness program should be evaluated on a regular basis for its effectiveness. Essential 1. The deposit insurer is responsible for promoting public awareness of Criteria the deposit insurance system and how the system works, including its benefits and limitations, on an on-going basis. Description The DIA as well as banks participating in the deposit guarantee system in Bosnia and Herzegovina conduct (in accordance with the obligations imposed 76 77 on them by the LDI) information and promotion actions of the deposit guarantee system. Art. 9 of the LDI obliges Member Banks to provide information to depositors and other interested parties on deposit insurance, and in particular information on the amount and manner of payment of insured deposits. The information must be comprehensible and available in writing and cannot be used by the Member Banks for advertising purposes, or in a way that threatens the stability of the banking system and the confidence of depositors. In accordance with the LDI, the DIA provides promotional material, which is mandatory to be exhibited by the Member Banks. This material is in the form of leaflets, guidelines, manuals, posters, stickers, etc. Additionally, the public is informed through DIA’s official website, which is regularly updated, and through public announcements of the Agency. The DIA also provides a logo, that must be exhibited prominently and all times by all Member Banks. A Member Bank may also provide its own display material evidencing its participation in deposit insurance scheme. All display material is to be approved by the DIA as regards contents and usage. According to Art. 20 of the DIA Statutes, the DIA secures the transparency of its operations in co-operation with media and informing the public about the Agency’s work and operation. Comments Essential 2. The objectives of the public awareness programme are clearly defined Criteria and consistent with the public policy objectives and mandate of the deposit insurance system. Description The communication plan was updated 2013 when developing the Contingency Plan. The plan is divided into communication in normal and in times of crisis. It defines the communication objectives, the target audience and their interests and needs, the necessary information to reach target audiences and communication channels used by the communication team. Comments 77 78 Essential 3. The public awareness programme or activities convey information Criteria about the following: a. which financial instruments are covered by deposit insurance and which are not (e.g. whether the system covers foreign deposits); b. which financial institutions offer insured deposits and how they can be identified; c. deposit insurance coverage limits and the potential for losses on deposits in excess of those limits; and d. the reimbursement process – how, when and where depositors may file claims and receive reimbursements in the event of a bank failure. Description Information on membership, coverage terms and limits and reimbursement processes is provided by the DIA and communicated to bank customers by Member Banks, pursuant to the Art. 9 LDI. Information it is made public by the DIA via: i) DIA website, ii) brochures and leaflet inserts, iii) articles in daily newspapers, mass media interviews (radio and TV) and public appearances. The list of all banks covered by the DIA’s guarantees is available on the websites: http://www.aod.ba/index.php?option=com_content&view=article&id=2&Itemi d=4&lang=en Comments Essential 4. There is an effective contingency planning process for public awareness Criteria and communication that addresses plausible future scenarios and that involves the cooperation and coordination of other safety-net participants as appropriate. Description The DIA has prepared a scenario in its “Plan for crisis situations”. The “Guidelines for the monitoring of banks and payment of insured deposit” clearly define cooperation and coordination in communication with other members of the financial safety network. Moreover, additional contingency planning is undertaken among all safety net participants through the SCFS and includes consideration of public awareness planning for both, single bank failures and in systemic circumstances. All individual contingency plans of the 78 79 safety-net participants are in the process of being consolidated in a master contingency-plan. Comments Essential 5. The deposit insurer works closely with member banks and other safety- Criteria net participants to ensure consistency in the information provided and to maximize awareness on an ongoing basis. Description The DIA works closely with its Member Banks and others to ensure consistency in the information provided to maximise awareness. This includes the preparation and distribution of DIA brochures which are distributed through bank branches and the authorisation of Member Bank’s information material. Cooperation with other financial safety-net participants takes place primarily through the SCFS. Comments Essential 6. The deposit insurer receives or conducts a regular evaluation of the Criteria effectiveness of its public awareness programme or activities. Description Research on public awareness about the DIA program was last conducted in April 2002. In the following years DIA concentrated its limited resources on building up fund capital and invest in IT and payout capacities. If a crisis situation or an insurance event occurs, the Contingency Plan states that the DIA, after completion of the payment of insured deposits, shall evaluate the effect of its crisis communication. Comments DIA should start evaluate regularly its public awareness program for its effectiveness. Additional 1. The public awareness program is tailored to the needs of clearly defined Criterion target audience and utilises a variety of communication tools. The desired level of visibility and awareness among the target audiences is a primary factor in determining the budget for the public awareness programme. Description Not applicable Comments 79 80 Principle 13 Legal protection The deposit insurer and individuals working for the deposit insurer should be protected against lawsuits for their decisions and actions taken in “good faith” while discharging their mandates. However, individuals must be required to follow appropriate conflict-of-interest rules and codes of conduct to ensure they remain accountable. Legal protection should be defined in legislation and administrative procedures, and under appropriate circumstances, cover legal costs for those indemnified. Description The DIA and individuals working for it are protected against lawsuits for their decisions and actions taken in “good faith” while discharging their mandates. Legal protection is defined in legislation and administrative procedures, and under appropriate circumstances, legal costs for those accused are covered. Assessment Compliant Comments Essential 1. The deposit insurer and individuals working for the deposit insurer are Criteria protected against lawsuits for their decisions and actions taken in “good faith” while discharging their mandates. Description Art. 16 (2) LDI ensures that the Director of the DIA, its Branch Directors and its staff, as well as other individuals appointed by the agency to perform certain activities within the scope of the LDI, cannot be prosecuted in a criminal or civil law procedure, for any action conducted in good faith, and in accordance with this law, during the execution or implementation of any task within their authority. This protection also extends to former or retired staff as the law determines the protection only on the grounds if the person was a staff member at the time the decision or action was taken. Comments Essential 2. Individuals are required to follow appropriate conflict-of-interest rules Criteria and codes of conduct to ensure they remain accountable. 80 81 Description Persons performing functions in the Management Board of the DIA and its Directors cannot perform functions in the governing bodies of or be employed by banks (Art. 18 LDI and Art. 17 of the DIA Statutes). Comments Essential 3. Legal protection is defined in legislation and administrative procedures, Criteria and under appropriate circumstances, cover legal costs for those indemnified. Description Legal protection is defined by the LDI (see EC 1). The DIA shall bear the expenses for any of its staff for any legal proceedings initiated against the employee for actions conducted in good faith in executing or implementing their duties within the scope of the LDI (if those expenses are not reimbursable from the party(ies) which bring suit against the staff) (Art. 16 (3) LDI). Comments Principle 14 Dealing with parties at fault in a bank failure A deposit insurer, or other relevant authority, should be provided with the power to seek legal redress against those parties at fault in a bank failure. Description The relevant authorities (i.e., the public prosecutor) and the administrator (in a liquidation or bankruptcy) are provided with appropriate powers to seek legal redress against those parties deemed to be at fault in a bank failure. Assessment Compliant Comments Essential 1. The conduct of parties responsible for or who contributed to the failure Criteria of a bank (e.g. officers, directors, managers, auditors, asset appraisers and related parties of the failed bank) are subject to investigation by the deposit insurer or other relevant national authority. The investigation of the conduct of such parties may be carried out by one or more of the following: the deposit insurer, supervisor or regulatory authority, criminal or investigative authorities, or a professional or disciplinary body, as applicable. Description The DIA is not an authority responsible for carrying out investigations and criminal proceedings against persons who contributed to the failure of the 81 82 bank. In BiH the public prosecutor and police are responsible for investigating criminal offences based on the national criminal laws. Comments Essential 2. If identified as culpable for the failure of a bank, such parties are Criteria subject to sanction and/or redress. Sanction or redress may include personal or professional disciplinary measures (including fines or penalties), criminal prosecution, and civil proceedings for damages Description The failure of a bank, as such is not an offence. But it may be caused by unlawful actions by parties at fault. Depending on the type of action, laws and regulations provide the following types of punishment of persons managing a bank: i) criminal liability, e.g., imprisonment, restriction of liberty, ii) civil liability, e.g., compensation, court invalidation of civil actions. Comments Failure The deposit insurer may, but often does not, perform many or most of the roles resolution identified in Core Principles 15 and 16. However, it is essential that one or more of the financial safety net participants performs these roles. Principle 15 Early detection and timely intervention and resolution The deposit insurer should be part of a framework within the financial system safety net that provides for the early detection and timely intervention and resolution of troubled banks. The determination and recognition of when a bank is or is expected to be in serious financial difficulty should be made early and on the basis of well defined criteria by safety-net participants with the operational independence and power to act. Description The deposit insurer is part of a framework within the financial safety-net and provides to early detection via its own analysis of Member Banks. The 2014 FSAP (BCP) assessment identified a number of deficiencies in the supervisory framework regarding early detection and timely intervention which need to be addressed. Assessment Materially Non-compliant 82 83 Comments Deficiencies in early detection and timely intervention should be addressed through the development of draft legislation for an enhanced early intervention and resolution regime (Law on Banks). Essential 1. The deposit insurer is part of a framework within the financial system Criteria safety net that provides for the early detection and timely intervention and resolution of troubled banks (failure resolution framework). Description Most of the responsibilities covered in EC 1 are conducted by the Banking Agencies. However, the DIA plays a role in the early detection of risks in the banking sector through the process of collecting and analyzing information on its Member Banks. The DIA and other participants of the safety-net do in practice exchange information on banks on a regular basis, but there is room for improvement (see. Assessment of CP 6). The FBA has a number of enforcement tools to require banks to effect corrective action but powers concerning individual supervisory board members and controlling owners is limited. The FBA can impose fines, issue orders requiring increases in capital, cease and desist unsafe and unsound practices, impose temporary management and revoking the license. However, outside temporary administration, the banking law limits ability to replace or restrict powers of controlling owners and sanctioning individual supervisory board members. The FBA has not developed a remedial action program that aggregates all the tools, describes circumstance when they may be applied and outlines benchmarks for applying a hierarchy of actions. While FBA decisions and the banking law address situations that may be subject to sanctions and enforcement action, a comprehensive remedial action program would provide transparency, ensure consistency in application, provide clear internal guidance and facilitate timely corrective action. Problem banks may remain in that status for extended periods without defined prospects for recovery or resolution. Supervision of problem banks is labor- intensive and resolution costs tend to increase the longer the unstable situation is permitted to exist. Recovery or resolution options should be evaluated early and executed. Allowing banks that may no longer be viable to continue to operate results in increased risk as the bank may undertake transactions to raise 83 84 funds or increase capital with back-to-back operations with other banks that may result in double gearing. The BARS has available a range of tools to require corrective action from banks, implementation could be enhanced by detailing a remedial action program. Existing regulations should be amended to implement a comprehensive remedial action program and clarify the hierarchy of enforcement actions and introduce new tools. Additionally, enforceable guidance to communicate the expectations of BARS on standards for corporate governance, risk management and other policy areas should be issued to support supervisors’ judgment concerning unsafe and unsound practices and facilitating enforcement. Comments The Banking Laws, and related laws, should be revised to incorporate a comprehensive set of tools and powers for early intervention. The supervisor should be empowered to take early corrective action (“early intervention”) when there are signs that a bank faces difficulties. In the present Banking Laws, there is no clear differentiation between early intervention and resolution. Essential 2. The failure resolution framework is established by law or regulation, Criteria and is effective at the early detection and timely intervention and resolution of troubled banks. The failure resolution framework is insulated against legal actions that aim at the reversal of early and timely decisions related to corrective procedures, interventions and resolutions of troubled banks. Description The supervisory powers of the Banking Agencies to verify the financial condition of banks and apply early intervention measures are stipulated in the respective Banking Acts on the entity level. However, there are gaps in the early intervention powers and a resolution framework is missing (see CP 16). Comments Essential 3. The safety-net participants have the operational independence and Criteria power to perform their respective roles in the failure resolution framework and a clearly defined early intervention mechanism exists (including resolution tools) to ensure that appropriate action is taken (to allow the orderly resolution of a troubled bank) by the responsible party without delay. 84 85 Description All safety-net participants (the Banking Agencies and DIA) have operational independence and power to perform their roles. Significant gaps are present in BiH with respect to the scope of intervention measures by the Banking Agencies that is being addressed through the development of draft legislation for an enhanced resolution regime (Law on Banks). For example, the current Laws in Banks in both entities do not provide a clear and explicit basis for the exercise of supervisory powers by the Agencies in the course of ongoing supervision. Neither do the laws on the Banking Agencies explicitly provide for powers to intervene in the operations of a bank. Comments Essential 4. The failure resolution framework includes a set of criteria that are used Criteria to identify banks that are or are expected to be in serious financial difficulty and are used as a basis to initiate some form of early intervention or corrective action to reduce the likelihood that a resolution would be necessary. Such action should minimize losses to the deposit insurance fund. Description A comprehensive failure resolution framework for the banking sector is currently missing. The authorities are working on provisions to be incorporated in a new Law on Banks. The DIA has set up system to identify problem banks which do not fulfill the membership criteria (under-capitalised bank, bank with insufficient liquidity, bank with inadequate rating) depending on the findings of DIA’s on-going monitoring efforts. Comments a. The criteria are clearly defined in law or regulation and are well understood by banks and their stakeholders; and Description The criteria are clearly defined with in the LDI and regulation. Both are transparent and published on the website of DIA. Comments b. The criteria will be country specific and may reflect concerns about a bank’s capital, liquidity, and asset quality, among other factors. Description The criteria the DIA uses are country specific. 85 86 Comments Additional 1. A mechanism exists to review decisions taken with respect to the early Criterion detection and timely intervention and resolution of troubled banks. Not applicable Principle 16 Effective resolution processes Effective failure-resolution processes should: facilitate the ability of the deposit insurer to meet its obligations including reimbursement of depositors promptly and accurately and on an equitable basis; minimise resolution costs and disruption of markets; maximise recoveries on assets; and, reinforce discipline through legal actions in cases of negligence or other wrongdoings. In addition, the deposit insurer or other relevant financial system safety-net participant should have the authority to establish a flexible mechanism to help preserve critical banking functions by facilitating the acquisition by an appropriate body of the assets and the assumption of the liabilities of a failed bank (e.g. providing depositors with continuous access to their funds and maintaining clearing and settlement activities). Description Republika Srpska and the Federation of BiH do not have a bank resolution framework in place. Assessment Non-compliant Comments The Federation of BiH and the Republika Srpska should develop a comprehensive resolution framework in line with international best practice (Currently, with the help of the IMF the new Law on Banks is drafted and shall include such provisions.) If a role for the DIA or the use of its funds for the purpose of bank resolution is foreseen in the future resolution framework, the provisions should be in line with the revised and soon to be published IADI Core Principles for Deposit Insurance Systems (CP 9 Sources and Uses for Funds, EC 8). Proper safeguards should be foreseen so that the DIA is able to perform its role as a deposit insurer and its funds are not depleted through a bank resolution. For example, the deposit insurer should be informed and involved in the resolution 86 87 decision-making process. Where a bank is resolved through a resolution process other than liquidation, the resolution results in a viable, solvent and restructured bank, which limits the exposure of the deposit insurer to contribute additional funding in respect of the same obligation. Furthermore, contributions should be restricted to the costs the deposit insurer would otherwise have incurred in a payout of insured depositors in a liquidation net of expected recoveries (least cost rule). Contributions should not be used for the recapitalization of resolved institutions unless shareholder’s interests are reduced to zero and uninsured, unsecured creditors are subject to parri passu losses in accordance with the legal claim priority. The use of the deposit insurer’s funds should be transparent and documented and be clearly and formally specified; it should be subject to an independent audit and to ex-post review. Essential 1. The overall national legal framework ensures the effective and timely Criteria functioning of the failure resolution framework, permitting the orderly liquidation of the bank, the payout or transfer of insured deposits and the intervention by a receiver to carry out the resolution functions. Description Republika Srpska and the Federation of BiH do not have a bank resolution framework in place. Under the current laws, the Banking Agencies have the following options when discovering problems with a bank which cannot be solved through early intervention: i) provisional Administration (Art. 108 Law on Banks Republika Srpska or Art. 53 Law on Banks BiH), ii) liquidation or receivership (Art. 117 Law on Banks Republika Srpska or Art. 61 Law on Banks BiH), or iii) bankruptcy (Art. 109 Law on Banks Republika Srpska or Art. 54 Law on Banks BiH). There is no designated resolution authority in BiH, nor is there a range of resolution tools available (e.g. bridge bank, transfer of assets, P&A). Comments Currently, with the help of IMF the authorities including the DIA have formed a working group to formulate new Law on Banks which will also include provisions for bank resolution. 87 88 Essential 2. The mandate of the deposit insurer or other safety-net participants Criteria allows for the effective resolution of banks of all sizes. Description See EC 1, an effective resolution framework is missing. Comments Essential 3. Bank resolution and depositor protection procedures are not limited to Criteria depositor reimbursement. The deposit insurer or other safety-net participant has effective resolution tools designed to help preserve critical bank functions, to achieve a transfer of accounts or assets/businesses and/or maintain continuity of banking services. Description See EC 1, an effective resolution framework is missing. Comments Essential 4. Where no single authority is responsible for all resolution processes, the Criteria mandate, roles and responsibilities of each safety-net participant is clearly defined and formally specified. Description See EC 1, an effective resolution framework is missing. Comments Essential 5. One or more of the resolution procedures allows the flexibility for Criteria resolution at a lesser cost than otherwise likely on a depositor reimbursement in a liquidation. Description See EC 1, an effective resolution framework is missing. Comments Essential 6. A clear and well-sustained methodology is available to the deposit Criteria insurer or other safety-net participant to provide for the transfer of insured deposits to stronger banks. Description See EC 1, an effective resolution framework is missing. Comments Essential 7. Resolution procedures clearly ensure that bank shareholders take first Criteria losses. Description See EC 1, an effective resolution framework is missing. 88 89 Comments Principle 17 Reimbursing depositors The deposit insurance system should give depositors prompt access to their insured funds. Therefore, the deposit insurer should be notified or informed sufficiently in advance of the conditions under which a reimbursement may be required and be provided with access to depositor information in advance. Depositors should have a legal right to reimbursement up to the coverage limit and should know when and under what conditions the deposit insurer will start the payment process, the time frame over which payments will take place, whether any advance or interim payments will be made as well as the applicable coverage limits. Description DIA has developed an automated system for the payment of insured deposits and is performing inspections how Member Banks keep depositor records. Procedures for informing depositors about reimbursement processes are specified in DIA’s contingency plan. The LDI provides for three pay-out timeframes: The first two options (Article 12.2.1 and 12.2.2) provide that the reimbursement process must begin within 60 days from the date of revocation of license and completed within 90 days from the date of revocation of license. The third situation (Article 12.2.3) provides that the reimbursement process must begin and end within 60 days from the date of revocation of the operating license. The current framework requires reimbursement of depositors is too long to promote public confidence and financial stability. Assessment Materially non-compliant Comments The payout timeframe should be aligned with international best practice and significantly shortened (e.g., to a maximum of 30 working days as it is the norm now in the European Union). DIA should aim to further shorten the payout delay in line with emerging international best practice of a payout of 7 days. DIA should in addition to its internal stress testing also start with external stress tests which should include other safety-net participants. 89 90 Essential 1. The deposit insurer is able to reimburse depositors promptly after the Criteria deposit insurance system is triggered by law, contract or the relevant authority.13 Description DIA has not had to perform an insured deposit payout but has tested its ability to do so. DIA uses a computerized depositor information system to prepare a depositor pay-out. Furthermore, it can oblige Member Banks to keep depositor records in a special format and is performing on-site inspections to assure that banks comply with this format. Through its “Contract on Deposit Insurance”, DIA obliges Member Banks to establish and maintain for each depositor a “Depositor Status Report”, which contains all data of the insured depositors and their deposits which may be relevant in the case of an insurance event. All business transactions regarding deposits have to be recorded in banks’ books on the same day they occurred. These transactions must simultaneously be reflected in the “Depositor Status Report” to display the insured amount per depositor on a daily basis, taking into consideration all the accounts of that depositor maintained with the Member Bank (Single Customer View). The bank’s senior management is responsible for implementation of the IT- program. The DIA has access to the depositors’ records at any time and receives monthly Depositor Status Reports from Member Banks. It can also request for an independent audit to assess the accuracy of the data – with or without prior announcement. Based on the outcome of the audit, DIA can request its Member Bank to improve its data system and report on the measures taken. A follow-up audit could be requested also. In case of a pay-out event, the DIA receives the Depositor Status Report within five days at the latest (in practice, DIA receives the reports within 24 hours). Both branches of the DIA have appointed a “Coordinator for increased bank supervision and insured deposit pay-out” who monitors problem banks and is involved in the pay-out team in case of an insurance event. DIA has 6 analyst who analyse bank financial data on an on-going basis. 13 A prompt reimbursement is defined to be when depositors are reimbursed within a time frame that does not undermine financial stability and the proper functioning of payment systems. 90 91 Comments Essential 2. The time frame for accomplishing the reimbursement process is prompt Criteria and clearly stated to meet the public policy objectives of protecting depositors and promoting public confidence and financial stability of the deposit insurance system. The time frame is made public. Description Based on Art. 12.2 LDI, a pay-out of insured deposits is limited to the following situations: i) loss of the banking license of a Member Bank by action of a Banking, ii) loss of banking license of a Member Bank in a voluntary winding- up of bank’s operations, appointment of Provisional Administrator (PA) of a Member Bank in case the PA recommends revocation of the banking license. The LDI provides for three situations. The first two options (Article 12.2.1 and 12.2. ) provide that the reimbursement process must begin within 60 days from the date of revocation of license and completed within 90 days from the date of revocation of license. The third situation (Article 12.2.3) provides that the reimbursement process must begin and end within 60 days from the date of revocation of the operating license (e.g. when a Provisional Administrator makes recommendation, and the Banking Agency accepts it). This time frame is too long and not in line with international good practice. It is, for example, longer as the maximum 30 working days European Union members have to comply with. Furthermore, the two different pay-out delays (90 and 150 days) might be difficult to understand for depositors. There has been no payout to determine if DIA could meet the current deadline. But the DIA has recently introduced its new pay-out software, has tested it and is regularly checking depositor records at Member Banks. Comments The payout timeframe should be aligned with international best practice and significantly shortened. The different timeframes makes it difficult for depositors to understand how the insurance system works. It is expected that the DIA with its payout software in place is able to reimburse depositors within a shorter timeframe of the proposed 30 working days. DIA should further aim to shorten the payout delay in line with emerging international best practice of a payout of 7 days. 91 92 a. Depositors are provided information after the failure on when and under what conditions the deposit insurer will start the reimbursement process and when the process is expected to be completed; b. Information on coverage limits, scope of coverage and whether advance or interim payments will be made is provided; and c. If there is an interest-bearing account, the deposit insurer shall reimburse depositors for interest as provided by contract, law or regulation up until at least the date the deposit insurance obligation is triggered. Description The LDI and DIA’s “Guidelines for Monitoring of Banks and Payout of Insured Deposits” and the 2013 contingency plan specify the content of information for depositors and when announcement have to be made. The information is available to the depositors via DIA’s webpage, media, displays at the failed bank and letters to the depositors (both insured and non-insured) sent by DIA. The DIA covers interest accruing until the day of the insurance event (Art. 4 (5) LDI). Comments Essential 3. In order to promptly reimburse depositors, the deposit insurer has: Criteria a. Access to necessary data, including deposit account records, to prepare for reimbursing depositors as soon as the supervisor is aware of a likelihood of failure. b. The power to review in advance by itself (or by request from the supervisory authority) the way depositor records are kept by banks to ensure the reliability of records, to reduce the time needed for calculation and verification of depositors’ claims; c. A range of payment methods for reimbursing depositors; and d. Access to adequate and credible sources of funding (e.g. reserve fund, Ministry of Finance, central bank) to meet its obligations under the established time frames. Description The DIA has access to depositor records well in advance of a failure and on a regular basis (see CP 4 EC 3e; Art. 15 (4) LDI). After the failure, DIA has to receive the “Depositor Status Report” within 5 days at the latest. 92 93 In practice, when the DIA requests data it receives a full set of depositor data within 24 hours. Per month, 2 - 5 Member Banks are tested. Problem banks are tested twice a month. The software is able to detect errors (e.g. misspellings of names or addresses). In case of bankruptcy or liquidation, the Banking Agencies are committed via the “Letter of Agreement on Cooperation between the DIA and Banking Agencies” from 2003 to oblige the Provisional Administrator and/or the Liquidator upon his appointment to closely cooperate with DIA with regard to any pay-out activities and strictly adhere to the DIA procedures and regulations. The DIA Management Board can decide about the method of payment and choose between the following options: i) Direct payment to the depositors at the branches of the closed banks, ii) reimbursement via an agent bank, and iii) money transfer (if necessary). The DIA has started the public procurement procedure to choose an agent bank. In future, an agent bank will be contracted for the duration of 3 years. The DIA has also access to credible sources of funding (see CP 11 in detail). Comments The provisional and bankruptcy administrator should be obliged by law to cooperate with the DIA and give its staff access to depositor data when needed. Essential 4. The deposit insurer has the capacity to carry out the reimbursement Criteria process in a timely manner, including: a. Adequate information technology; and b. Adequate personnel (in-house or contractor). Description The DIA has designed and implemented an internal IT system for the purpose of reimbursement. The scope, data and structure are based on the regular reports it receives from Member Banks (“Depositor Status Report”). The DIA is monitoring banks’ data quality on a constant basis. Problem banks are monitored twice a month. The DIA IT system helps to process data 93 94 received from the bank into the depositor lists for prompt reimbursements (Single Customer View, SCV). Both branches of the DIA have a designated “Coordinator for increased bank supervision and insured deposits pay-out” who is monitoring problems bank and then would be part of the pay-out team. The DIA employs a suitably qualified and experienced in-house IT staff to support its reimbursement system. Databases are maintained at both DIA branches and according to international IT (safety) standards. Comments Essential 5. In situations where there may be extended delays in reimbursements, Criteria the deposit insurer can make advance, interim or emergency partial payments. Description The DIA has not emphasized a formal interim payment system – although such arrangements could be utilized if needed. Comments Additional The deposit insurer has contingency plans as well as regularly scheduled tests Criteria of its systems. Description The DIA has a contingency plan, written in 2013, and its “Guidelines for Monitoring of Banks and Payout of Insured Deposits”. On a monthly basis DIA performs a test of its systems with a select group banks. Data of problem banks are checked twice a month. In 2013, the DIA used the data of a bank (then under provisional administration) to test the promptness and efficiency of its payment systems and crisis communication. Comments DIA should in addition to its internal stress testing also start with external stress tests which should include other safety-net participants. Additional The reimbursement process is audited by an independent auditor or authority. Criteria 94 95 Description DIA has not had to perform a reimbursement yet. If such a payout would occur it would be covered by the annual audit and therefore controlled by an independent authority. Comments Principle 18 Recoveries The deposit insurer should share in the proceeds of recoveries from the estate of the failed bank. The management of the assets of the failed bank and the recovery process (by the deposit insurer or other party carrying out this role) should be guided by commercial considerations and their economic merits. Description The DIA shares in the proceeds of recoveries from failed banks. Asset management practices emphasize maximizing economic returns. Assessment Largely Compliant Comments The revised Law on Banks should precisely define the term “secured creditor ". Furthermore, the Law on Bankruptcy Proceedings (or the revised Law on Banks) should clarify that costs which are connected to the reimbursement process have to be borne by the insolvent Member Bank. The provisional administrator and the bankruptcy trustee should be obliged by law to cooperate with the deposit insurer to facilitate the reimbursement process. Essential 1. If the deposit insurer plays a role in the recovery process, its role is Criteria clearly defined in law or regulation and the deposit insurer maximises recoveries to the extent that it can from the failed bank on a commercial or economic basis. Description The DIA’s role in the recovery process is clearly defined in the following legal acts: i) the LDI – according to which DIA is subrogated to the rights of depositors in the amount of reimbursed deposits (Art. 12.2 (4) LDI), ii) the Law on Banks of the Federation of BiH and Republika Srpska which define the class of the DIA’s claims (Art. 63 or 119), iii) the Law on Bankruptcy Proceedings which describes the rights and duties of creditors in the event of the bank’s bankruptcy. 95 96 Principles concerning pursuit of claims against insolvent debtors (including banks) are specified in the Law on Bankruptcy Proceedings. Activities in the bankruptcy proceedings are carried out by the administrator, appointed, directed and supervised by a court. The proceedings should be conducted in a manner which provides for the maximum satisfaction of the creditors’ claims (Article 2 of the Law on Bankruptcy Proceedings). The law also specifies rights of creditors. Comments Essential 2. The deposit insurer shares in the proceeds of the recoveries arising from Criteria the failure of its member banks. The deposit insurer is clearly recognised as a creditor of the failed bank for the reimbursement of losses and costs it incurs; and receives recoveries from the estate of the failed bank directly. Description Article 12.2 (4) LDI ensures that DIA is sharing in the proceeds of the recoveries arising from the estate of the failed bank. The creditor ranking of the DIA in a Member Bank’s insolvency is stipulated in Art. 63 of the Law on Banks of the Federation of BiH and Art. 119 of the Law on Banks of the Republika Srpska. The DIA claims rank within class three (class one encompasses primarily the costs of bankruptcy proceedings, class two claims by secured creditors). The DIA claims are in a higher claim class in bankruptcy proceedings than the claims of uninsured depositors, other creditors and shareholders. However, the term “secured creditor” is not defined in the Law on Banks at all. This might lead to problems in a bankruptcy procedure when determining who benefits from being a class two claim and needs therefore a clarification. DIA would try to claim the costs of activities related to the preparation and execution of disbursement of guaranteed funds, but it is uncertain if the bankruptcy trustee would accept this claims. Comments The revised Law on Banks should precisely define the term “secured creditor ". Furthermore, the Law on Bankruptcy Proceedings (or the revised Law on Banks) should clarify that costs which are connected to the reimbursement process have to be borne by the insolvent Member Bank. The provisional 96 97 administrator and the bankruptcy trustee should be obliged by law to cooperate with the deposit insurer to facilitate the reimbursement process. Essential 3. The deposit insurer has at least the same or comparable creditor rights Criteria or status as a depositor in the conduct of the estate of the failed bank, and has access to information to make and pursue its recovery claim against the estate and to exercise the appropriate degree of influence on the conduct of the estate. Description See EC 2. The DIA is via the “cessio legis” of depositor claims enjoying the same rights as other creditors of the failed bank. The DIA would probably have a strong position as a major creditor which is a consequence of the fact that the portion of DIA claims in the overall amount of claims encumbering the bankruptcy estate would be large. The aggregate size of DIA claims would enable the Agency, for instance, to become a member of the Creditors’ Committee. Comments Essential 4. If, in addition to creditor status, the deposit insurer is the Criteria receiver/liquidator/ conservator of the failed bank or of only some assets of the failed bank, then: Description Not applicable; DIA is only involved as a creditor. Comments a. the role played by the deposit insurer for asset management and recovery is clearly defined in law or regulation; and Description Not applicable Comments b. its asset management and recovery approaches are guided by such factors as: the quality of the assets, market conditions, expert advice, and any legal requirements.14 Description Not applicable Comments 14 In some circumstances the deposit insurer may seek to pursue the parties responsible for fraud or misconduct even though costs may exceed recoveries. 97 98 Essential 5. In determining the asset management and recovery approaches, the Criteria interests of all creditors are given appropriate weight and decisions on asset disposal are made using concepts such as net present value to balance the competing goals of securing maximum value and early disposal. Description Bankruptcy proceedings are conducted in accordance with the Law on Bankruptcy Proceedings and should be conducted in a manner which provide for the maximum satisfaction of the creditors’ claims. The bankruptcy trustee is obligated to exercise a due diligence to enable the optimal management of the assets of the bankruptcy estate in order to satisfy creditor claims to the greatest possible extent, in particular by minimizing the costs of bankruptcy proceedings. Only persons who have appropriate professional qualifications and business experience can be appointed bankruptcy trustees from a list of certified trustees compiled by the Ministry of Justice of each state entity (Art. 23 (1) Law on Bankruptcy Proceedings). The conduct of proceedings by the trustee of the bankruptcy estate is subject to court supervision (Bankruptcy Judge, Art. 22 and 26 Law on Bankruptcy Proceedings). An additional form of supervision is imposed on the actions of the trustee by the Creditors’ Committee (of which DIA might become a member). A separate assessment of the insolvency and creditor/debtor regime will be provided as part of the FSAP. Comments Additional 1. The deposit insurer is entitled or authorised to be a member of the Criterion committee of creditors to follow the liquidation process of the failed bank as it is usually subrogated to the rights of the insured depositors. Description The DIA may become a member of the Creditors’ Committee (appointed by the bankruptcy judge) being potentially one of the biggest creditors of the estate after it has reimbursed the insured depositors. Comments 98 99 99