BOSNIA AND HERZEGOVINA FEDERATION OF BOSNIA AND HERZEGOVINA THE BANKING AGENCY OF THE FEDERATION OF BOSNIA AND HERZEGOVINA

Phase 3: 2017 2018

This phase is a final time framework based on a assumption that the FBA and banking system in the Federation of BiH (BiH) have successfully implemented steps from the two previous phases, that they function in a safe and stable manner and that they are largely complied with the standards of the European Union. During this time period, the banking system has to be generally prepared for implementation of advanced approaches from the Basel II. Based on the above- mentioned it is expected that it will take two years or less for implementation of the activities from this phase and once they are done by the end of 2018, implementation of the Basel II will be successfully completed. The activities to be completed in this Phase include: Final adjustment of risk weights in order to be fully harmonized with the requirements from the Basel II and EU directives; Continuous investments in professional development and required technologies; Adjustments with the requirements for advanced risk and capital measurements for group of banks that are eligible for application of the measurement system of the highest level such as: according to the Internal Rating Based Approach (IRBA) for credit risk, Internal Model Approach for market risk, and Advanced Measurement Approach for (AMA) for operational risk according to the principle bank by bank, and depending on the level of capacity for risk management that each individual bank has achieved; To ensure the capacity building within the FBA for giving approvals to banks for application of the most complex approaches according to which, as a rule, banks express the smaller requirements for capital, and in that process close cooperation and coordination with regulators from the EU countries and international organizations will be of great importance; It is necessary to check and revise earlier adopted regulations in order to update them and to be implemented in a more efficient and sustainable manner; To establish a system for risk management in banks based on the exposure towards securities markets in BiH and abroad; by selecting banks whose exposure based on this risk exceeds 25% of total assets (conduct an assessment of the materiality principle of these exposures in relation to the capacities of banks to manage this risk and probably to decrease or increase this percentage); Full usage of ratings by credit rating agencies that are preconditions for calculation of required capital in banks; Usage of ratings by credit rating agencies of corporate emissions of bonds and shares of banks in the BiH market; Compliance with IOSCO standards in all activities and exposures related to securities. * * * By the end of 2018 it is expected that both FBA and banks in the Federation will fully implement the new capital framework Basel II, at least in its form which is in force at the moment of adoption of this Strategy. However, taking into account new indications mostly caused by the global financial crisis and detection of already conspicuous weaknesses of this international document, particularly in the part of the most advanced and the most risk

sensitive approaches for risk measurement, it is realistic to predict its significant modifications. Taking into account the scope and complexity of planned activities, needs for engaging significant resources of the FBA and other resources, both human and financial, and already announced modifications of the current Basel II framework which will take place in the next years, intensity and extent of technical assistance, situation and trends in the banking system of the Federation of BiH and BiH, it is realistic to predict that there will be certain divergences in achieving goals determined by this document. The FBA will carry out its activities (by areas and timeline) in a way to be successful, realistic and if it is possible within shorter timelines than predicted. It will also make efforts that no other factors influence their implementation except ones that are beyond its control.

Adopted On the session of the Management Board of the FBA On December 29, 2008