Academic journal article UTMS Journal of Economics

Financial Soundness Indicators in Bosnia and Herzegovina Banking Sector

Academic journal article UTMS Journal of Economics

Financial Soundness Indicators in Bosnia and Herzegovina Banking Sector

Article excerpt

INTRODUCTION

A recent financial crisis has shown importance of appropriate risk management techniques. That has, also, emphasized role of adequate regulations according to risk aspects of each bank. Therefore, financial soundness indicators have become one of the main tools for bank business tracking. Theoretical and practical results imply positive relation between market expansion and rate of non-performing loans which can only be explained by market expansion caused by approving credit to risk groups. On the other hand, capital adequacy is positively correlated with market concentration. Emerging- market countries have only a precarious hold on wealth, but they are weaklings globally. When they get into trouble, they quite literally mn out of money or at least out of foreign currency, without which they can't survive (Johnson 2009). The credit boom explanation is the most plausible predictor of crises since the late nineteenth century; global imbalances have only a weak correlation with financial distress compared to indicators drawn from the financial system itself (Taylor 2013). Specific covariates are found meaningful. Recommendations include the policy steps to complement the sound financial system with a healthy macroeconomic environment to reduce non-performing loans in commercial banks in Pakistan. Moreover, need is highlighted for a policy approach with emphasis on the opposite credit culture and lending policy designed with pertinent economic and financial factors (Mehamood, Zahid and Nisar 2013). Therefore, significance of financial soundness indicators monitoring arise.

FINANCIAL SOUNDNESS INDICATORS

Financial soundness indicators are the one which reflect the current financial health of financial institutions in a country. Those indicators are calculated and disseminated in support of macro prudential analysis that presents the assessment of strength and vulnerability of the financial system, in order to preserve financial stability, and in particular to prevent possible collapse of the financial system. The type and scope of the indicators that are compiled and disseminated varies across countries. Financial soundness indicators for depository institutions (especially basic set) are considered key indicators to analyze the status of any financial system. In Bosnia and Herzegovina Central bank is the main institution for financial soundness indicators compilation on the State level.

With the recommendation of the IMF, Central bank of Bosnia and Herzegovina began with a compilation of selected F SI exclusively for the banking sector, primarily because the share of this sector in the overall financial system. In order to calculate those indicators aggregation and data consolidation were used. Aggregation is the summarization of data, so that the overall position of one or transaction for any group of reporting units is equal to the sum of data for all individual units within the group. Consolidation refers to the elimination of transactions between group members in order to express financial situation and performance of the group as one of the accounting subject in relation to other businesses outside the group, for statistical purposes. Consolidation of data is carried out on a group and sector level. The group consists of basic bank (central) and all its organizational parts (branches, etc.).

Financial soundess indicators-foreign exchange risk

Financial soundness indicators, which measures exposures to foreign exchange risk are FSI's who follow the sensitivity of the financial sector to market risks or the sensitivity to movements in exchange rates, interest rates and capital markets. Compiled FSI's which measure foreign exchange risk are as follows:

a) Loans in foreign currency and indexed loans to total loans are an indicator that calculates the share of loans in foreign currency and indexed loans to total loans. In countries where lending in foreign currencies are allowed, especially is important to monitor residents' share of loans denominated in foreign currencies in total loans, due to the increased risk of repayment of such loans in the context of a large devaluation or lack of earnings in foreign currencies. …

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