Monetary policy instruments

---

1. The only monetary policy instrument that the Central Bank of Bosnia and Herzegovina has at its disposal is the required reserve. The reserve requirement is one of the indirect instruments of monetary policy. Economic growth is not one of the goals of indirect monetary policy instruments. The main advantage, compared to direct instruments, is more efficient monetary control. On the other hand, they are not particularly effective in influencing the money supply; in the case of a currency board they have no influence. More at: https://cbbh.ba/Content/Read/14

2. The importance of required reserves as a monetary policy instrument depends on the characteristics of the financial system. The reserve requirement rate can be uniform or differentiated. In terms of this, the reserve requirement can be applied to the total deposits of residents and non-residents, or to part of them, and can also be applied to other liabilities of banks, such as liabilities of banks on borrowings. Changes in reserve requirements affect the reduction or expansion of the commercial banks credit potential, and the liquidity of banks.

3. The excess required reserves are part of the liabilities of the Central Bank of Bosnia and Herzegovina towards a part of its depositors, commercial banks. Since the balances on the reserve account are the property of commercial banks, the Central Bank of Bosnia and Herzegovina cannot force them to lend to the economy and other domestic sectors. The surplus above the required reserve is not necessarily present only because banks do not have sufficient quality investment projects, but also because of law regulations, which primarily concern liquidity risk management. The regulators' legal requirements in this segment prevent banks from accumulating significant differences in maturities between their liabilities and assets. If the sources of financing, primarily bank deposits, are extremely short-term, such as transaction and demand deposits, these funds cannot be allowed to be placed for a significantly longer period. This would lead to an unacceptably high risk that depositors would not be able to obtain their funds on demand, or at least not without a significant cost for the bank itself. In the absence of alternatives, banks held quite a lot short-term sources of funds in accounts with the Central Bank of Bosnia and Herzegovina in the form of excess required reserves.