Economy & Business ISSN 1314-7242, Volume 9, 2015 Journal of International Scientific Publications www.scientific-publications.net CHANGES IN BANK MARKET STRUCTURE UNDER FINANCIAL CRISIS IN BOSNIA AND HERZEGOVINA Igor Živko, Zora Marijanović, Anela Čolak Faculty of Economics Mostar, University of Mostar, Matice hrvatske bb, 88000 Mostar, Bosnia and Herzegovina Abstract Having on mind specific features of financial system in Bosnia and Herzegovina as bank dominate financial system we will analyses changes in structure of banking sector and their behaviour in financial crisis and after. Bank’s stability and managing in conditions of financial crises has requested continues review of elements in banking structure which could have impact on stability of banking sector and possible sources of instability and negative impact on national economy. Author in this paper will analyse structure of banking sector in Bosnia and Herzegovina and their elements concentration, competition, internationalisation, capital, development of products and services, profitability and liquidity. Key words: banking sector, structure, financial crisis, Bosnia and Herzegovina INTRODUCTION Functions of financial system of Southeastern European countries to 1990 were determined by goals of central planning economy. In central planning economy, banks had a passive role. Fulfillment plan of national government determined the financial functions of banks. The allocation of loans at that time for banks was only accounting mechanism for tracking government decisions to allocate resources to different business and sectors. Banks of Southeastern European countries to 1990 operated in mono- banking system, system in which central bank carried out the functions of commercial and central bank. In mono-banking system banks providing payment services, collecting private saving, profits and taxes and transferred them to the state budget or state institutions, reviewed achieving plan and operation of state institutions. Countries of former Republic of Yugoslavia had built a “two-tier” banking system which was consisted of central bank and individual commercial banks. In all these stages, which the banking in former Yugoslavia countries and other countries of region pass to 1991 are marked by administrative regulation of business, losses in bank operation, negative real interest rate – the inflationary financing, difficulties in maintaining liquidity due to excessive exposure to the economy, lending decisions that were influenced by policy, and addiction of economy at banks. The accumulation of bad loans and inadequate regulation and supervision of the banking system resulted by banking crisis. Rehabilitation of failure banks was carried out in two ways: design different models of bank rehabilitation and by opening the banking sector to foreign strategic partners (privatization). The process of rehabilitation lead to their nationalization, average cost of rehabilitation is about 10% of GDP. Early stage of banking sector transition in Southeastern European countries supposed restructuring of state banks and abandoning direct financing. Reconstructing leads to bank privatization and growth of financial markets. The last period of banking sector had significant structural change that outlines some basic features: 1. high share of foreign capital into the banking system 2. decreasing in domestic lending in particular household sector 3. increasing exposure to credit risk and risk of liquidity 4. decreasing profitability and declining rate of capital adequacy 5. credit expansion and growth of risk assets 6. improving the supervisory framework 7. implementing of regulatory standards Page 810