Text by Governor for „Oslobođenje“: Required reserve – an instrument of the CBBH monetary policy

Required reserve – an instrument of the CBBH monetary policy

Required reserve is an instrument of the monetary policy of the Central Bank of Bosnia and Herzegovina by which commercial banks, according to Article 36 of the Law on the Central Bank of Bosnia and Herzegovina, are obliged to hold a part of their deposits in reserve accounts with the Central Bank of Bosnia and Herzegovina. These are funds of banks, i.e. depositors holding their deposits with commercial banks (households, companies, state). One of the required reserve functions is liquidity management in the banking system and impact on banks' lending. Banks manage their excess holdings above the required reserve independently, and the Central Bank of Bosnia and Herzegovina has no direct influence on that.

The required reserve base is currently around KM 2.8 billion. Banks have been holding significant amounts exceeding the defined level for a number of years. The main reasons for the banks' excess holdings above the required reserve level is in the regulations of the Entity Banking Agencies defining increased liquidity of banks

The current holdings above the reserve requirement amount to around KM 3.4 billion, implying that commercial banks in Bosnia and Herzegovina are currently holding in their accounts with the Central Bank around KM 6.2 billion.

From the beginning of 2020 to date, the average required reserve amounted to KM 2.7 billion, while excess reserves amounted to KM 2.8 billion. From 31 May 2020, when the lowest required reserve was recorded, until 30 April 2021, the required reserve increased by around KM 142 million, meaning that deposit base increased by around KM 1.42 billion.

All the deposits which had been withdrawn during April and May 2020 (KM 530 million) due to the nervousness related to the lockdown of economies and banks, were returned, and deposits also increased by additional KM 890 million. Sources of banks funding are stable,and the pandemic had no significant negative effects related to deposits.

All these data show that banks are highly liquid and have no needs for additional liquid assets. Credit growth has slowed down, both in supply and demand for loans. For those reasons, additional liquidity for banks would not be desirable and it would be counterproductive. It would produce additional costs for commercial banks, which, automatically, would transfer such costs to their customers. The consequence would be a growth of interest rates on loans or a growth of fees and commissions charged by commercial banks to their customers. In current economic conditions which households and the real sector of the country are exposed to, such decision by the Central Bank of Bosnia and Herzegovina would be counterproductive indeed.

The Governing Board of the Central Bank of Bosnia and Herzegovina, respecting the provisions of the Law on the Central Bank of Bosnia and Herzegovina, and analysing the situation in the market, will make decisions on amendments of required reserve policy when it is really needed. The current data show that the 10% required reserve rate is quite adequate.