. the additional reason is that the currency board arrangement is important for bih economy and it is a base for continuation of maintaining and improving financial stability, through which the development of other sectors of economy is influenced. required reserves the required reserve is the only instrument of monetary policy available in bih, within the currency board arrangement. the purpose of the required reserve is to provide appropriate liquidity of the banking sector and accomplish the global financial stability in the country. one of the most significant changes in monetary policy which is related to required reserve will start as of 01 june. the goals to be achieved by the suggested measures are the following : – efficiency and stability of monetary policy within the currency board arrangement. the aim is to give more flexibility to the cbbh so that it can react to prompt changes in the surrounding ; – harmonization aimed at adjusting the regulations on the required reserve to the european standards ; and – financial stability, meaning that global financial stability should be increased by means of banks'required reserves. in order to achieve the mentioned goals, the cbbh has made four changes in the implementation of banks'required reserves : 1. the base for required reserve is expanded to include also foreign exchange deposits, in addition to km deposits. the defined required reserve in the previous period ( 10 % on deposits and borrowed funds in km ) fulfilled its function and did not endanger the liquidity. however, as only local currency km was included in the base for required reserve settlement, it resulted in unequal position of the local currency compared to deposits in foreign currency. 2. cash held by banks in their vaults will no longer be eligible for maintenance of required reserves. it will be possible to meet the requirement only with deposits held by banks in the reserve accounts with the cbbh. 3. now, the cbbh can determine the rate at any level within the scope of 0 - 20 %. this change will provide more flexibility to our governing board. the required reserve rate has already been defined. from 01 june, it will be 5 % on the expanded base, instead of the previous 10 % on km deposits. 4. the central bank has more flexibility to determine compensation to be paid to banks on reserve deposits. results of monetary policy the successful monetary policy has influenced the improvement of situation in the banking sector. the consolidation of the global banking sector has taken place, as it follows : – privatization of banks has been completed ; – minimum capital requirement was increased to km 15 million ; – merger of banks ; –

peter nicholl : is the capital in bosnia and herzegovina expensive? speech by mr peter nicholl, governor of the central bank of bosnia and herzegovina, at the conference “ is the capital in bosnia and herzegovina expensive? ”, sarajevo, 13 october 2004. * * * is the price of capital in bih high? based on a simple comparison with western europe and a number of the countries in eastern europe that are further down the reform path than bih, the answer is clearly yes. given the risks and uncertainties that still exist in the political, economic and legal systems in bih the answer is no. what we need to focus on today is what are these risks and uncertainties and how can we work together to reduce them. this meeting today is focusing on the banking sector. there are a lot of improvements that still need to be made in the bih banking sector. but we also need to remember that reform in the banking sector has gone further and faster than reform in any other sector of the economy. as a consequence of that, both the availability and the cost of capital has come down substantially in bih over the last few years. the first area to focus on therefore is the reform of the rest of the economy. the banking sector is extremely liquid at present - even though their lending is growing at a rate that worries the imf. they are holding km 790 million more on their reserve deposits at the cbbh than required by our 10 % reserve ratio. they are also holding substantial short - term funds abroad. one of the reasons for this is that there is still a shortage of credit - worthy borrowers. it is easy for a bank to lend money. the challenge for a successful bank is to make sure the borrowers will be able to pay it back. while this simple rule seems blindingly obvious, the bih banking system in the past was burdened by bad debts because this simple banking rule was ignored. what needs to be done to increase the number of credit - worthy borrowers in bih? a ) company registration process ( and the process for closing a company ) : a simplified system is under preparation but i am very surprised by how slow the process has been. the banks and the central bank together reformed the internal payments system in bih over nine months. the issue of simplifying the company registration process has been talked about for about four years. it is time some of these reforms were completed rather than just talked about. b )