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New Banking Law of the Federation of Bosnia and Herzegovina in Light of Corporate Governance

New Banking Law of the Federation of Bosnia and Herzegovina in Light of Corporate Governance

Bosnia and Herzegovina

The latest financial crisis revealed a number of weaknesses in the Bosnia and Herzegovina banking system, just as it did in most developed countries. In an attempt to preserve a sound banking system in the Federation of Bosnia and Herzegovina (‘FBiH’), both BiH Entities have adopted new Banking Laws.

Although the major changes in the new FBiH Banking Law (the “Law”) affect corporate governance, capital adequacy, bank operations, protection of rights and interests of users of banking services, accounting, auditing, and reporting, as well as the supervision of banks, this article focuses on the new corporate governance system and the establishment of control functions in banks in the FBiH and extension of the powers vested in the Banking Agency (the “Agency”). 

It has been established, particularly after the bankruptcy of the three banks in Republika Srpska (RS), that the existing mechanisms are neither sufficient nor adequate for tackling problematic banks, as they do not allow for a sufficiently quick and efficient intervention by the competent authorities and do not provide for maintenance of the bank’s key functions to the extent necessary, and thus fail to preserve financial stability. In this light, bank operations have been aligned with the requirements of the IMF and the World Bank, and partly with the relevant EU acquis sources and relevant Directives. Accordingly, changes to bank governance are the most significant that the banks have been required to introduce in order to comply with the newly adopted Law within nine months of its entry into force.

Aiming to ensure greater importance of control functions, the provisions adopted will strengthen the role of Supervisory Boards and the Agency by expanding the competencies of the Supervisory Board and improving the definition of its composition (going forward, it must include at least two independent members, one of which must be proficient in one of the official languages of the FBiH and reside on the territory of the FBiH), and involving the Agency in the work of the Supervisory Board and the Assembly to strengthen their professionalism, independence, and objectivity.

The bank’s bodies remain the same: the Assembly, the Supervisory Board, and the Management Board. Unlike under the former legal provisions, however, the position, rights, and responsibilities of the Secretary, Procurator and bank associations are defined. Furthermore, the Agency is entitled: to request that the Supervisory Board include certain issues of relevance to the compliance of the bank’s operations with regulations and regulatory requirements in the agenda of the Annual Assembly Meeting; to attend the meetings of the Assembly and the Supervisory Board; and to address the shareholders as necessary. Although representatives of the Agency do not have the right to vote in these bodies, their presence can raise the quality of decisions relevant to the bank’s operations. 

The introduction of new committees (Risk Management Committee, Remunerations Committee, Appointment Committee, Voting Committee, and other specialized committees) in addition to the Audit Committee, will further strengthen the control function. 

Furthermore, provisions referring to bank Management Boards have been amended, and going forward, Management Boards will be composed of the president and at least three Management Board members, instead of directors and executive directors. Unless otherwise provided by the Statute, the Management Board members will jointly represent the bank in legal transactions. However, no Management Board member can be authorized to represent the bank individually within the overall scope of banking operations. 

By adopting the Law, the legislator created a sound legal framework aimed at ensuring a stable financial sector by strengthening the role of the Supervisory Board and increasing the Agency’s authority in the area of control and prevention. However, a successful outcome of these amendments will largely depend on the readiness and capacities of banks as well as adequate education of bank employees to implement the Law, as well as the Agency’s role in this process. 

By Sead Miljkovic, Attorney at Law, Law Office Miljkovic & Partners 

This Article was originally published in Issue 5.2 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

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