FBiH Banking Agency's response to possible increase in interest rates - Decision on temporary measures to mitigate increasing interest rate risk
With a view to providing the public with adequate and timely information about the measures adopted by the Banking Agency of the Federation of Bosnia and Herzegovina (hereinafter referred to as the “Agency”) and related to mitigating the risk caused by a possible increase in reference interest rates, inflationary pressures and other disturbances that may have adverse effects on the BiH market, we inform the public that the Management Board of the Banking Agency of the Federation of Bosnia and Herzegovina, at the session held on 28 September 2022, adopted the Decision on temporary measures to mitigate the risk of increasing interest rates.
The primary Decision's objectives are to avoid a sudden increase in interest rates in the Federation of Bosnia and Herzegovina, i.e. to protect financial service users, stabilize the banking system in terms of the Decision's effects on the banks' loan portfolio quality and achieve macroeconomic balance.
Due to the increased impact of interest rate risk and appreciating the institutional and regulatory framework disallowing inflation to be managed through interest rates and the real causes of inflationary pressures spreading across our market, it was considered necessary by the Agency to act upon possible adverse effects on the financial system, financial service users and the BiH economy. Taking into account the supervisory and regulatory function within its competences prescribed by the Law on the Banking Agency of the Federation of Bosnia and Herzegovina, as well as the analysis of potential shocks due to increasing interest rates, this Decision aims at timely managing credit risk, allocating additional provisions for expected credit losses and mitigating the consequences of a potentially significant increase in the amount of debt repayment. In addition, by applying this Decision, banks are required to strengthen processes and controls in order to plan, analyze and monitor the effects of disturbances related to increasing interest rates and other macroeconomic disturbances. It is expected that the adopted measures by the Agency will limit the banks' actions that could have adverse effects on retail and corporate segments, and ultimately, on an increase in systemic risks as well.
The Decision provides for an increase in the minimum rates that banks are obliged to apply for expected credit losses in case of a significant increase in interest rates. The provisions of the Decision particularly affect the protection of financial service users, implying that a bank will not increase the interest rate above a level considered significant if it estimates that the said increase in the interest rate will have an impact on the creditworthiness of a financial service user and will result in default status by the financial service user. Accordingly, the bank can offer such financial service user the possibility of credit exposure modification. In addition, the Decision aims at further stimulating banks to find a way to keep interest rates at reasonable levels in order to avoid adverse effects on retail and corporate segments, directly affecting the avoidance of the risk of losing a bank due to the inability to meet obligations towards the bank.
It is necessary for banks to plan adequate management of interest rate-induced credit risk, which implies, inter alia, a comparison of the current interest rate level in relation to the interest rate levels at the reference date, projections of interest rate increase and the effects of increased credit risk. Accordingly, the bank will take measures to reduce credit risk and the consequences upon loan users. Through the preventive and planned actions provided by this Decision, economic disruptions, due to increasing interest rates, will be reduced with regard to the banking system of the Federation of Bosnia and Herzegovina and potential long-term damages, caused by the share increase of non-performing assets in the banks' balance sheets, will be avoided.
The adopted Decision represents the first temporary response to the expected economic circumstances. On the basis of previous experiences regarding the natural disasters in 2014 and the “COVID-19” pandemic, the Agency will be implementing enhanced supervisory measures, especially in the first quarter of 2023, with a view to monitoring the Decision’s implementation and effects. In accordance with its objectives, the Agency expresses its special readiness to further act in case of other circumstances unforeseeable at the moment of adopting this Decision for the purpose of retail and corporate protection and the stability of the financial system.
BANKING AGENCY OF THE FEDERATION OF BOSNIA AND HERZEGOVINA