The IMF Directors commended the improvements in banking and insurance oversight since the 2006 Financial System Stability Assessment (FSSA), but noted that important shortcomings remain, stated a recent IMF press release after the IMF's Executive Board session on June 29th, where the Financial System Stability Assessment of Bosnia and Herzegovina (BiH) was discussed.

The findings of the latest FSSA with regard to the Bosnian insurance sector show that, despite the progress madem there are still some issues which require further efforts:

• A number of insurance companies have thin solvency margins.
• Banking and insurance oversight have improved during the past years, but supervisors' corrective and enforcement powers are still weak while regulatory and supervisory responsibilities for are fragmented between the two administrative entities of BiH.
• Harmonization in regulation between the entities has been largely achieved and joint planning continues. The current insurance prudential framework, which is based on Solvency I, is not risk-sensitive and is ill-suited for supervision as the market develops. The formal assessment of the real-time gross settlement system suggests that many of the principles are observed, but legal and liquidity risks as well as lack of oversight powers are weaknesses. Institutional fragmentation is delaying much-needed financial sector reforms.
  

The IMF Directors encouraged the authorities to enhance cooperation among supervisors, enact new banking legislation to strengthen supervisors' powers and introduce consolidated supervision, and take further steps to bolster corporate governance and risk management. Directors also recommended monitoring closely thin solvency margins in the insurance sector.

Overall, the financial system in BiH is dominated by the banking sector. Banks account for about 87 percent of financial system assets, equivalent to 84 percent of GDP. The banking system comprises mostly foreign subsidiaries, constituting more than 80 percent of the banking sector assets. Interconnectedness among banks is limited, but linkages between banks and the insurance sector are significant. The Development Bank of Republika Srpska plays a major role through the provision of credit lines, deposits, and capital to the banking system. Banks have notable cross-border exposures. Insurance companies and other nonbank financial institutions play a small role.