A Balkan Neofunctional Success Story or the Curious Case of Bosnia’s Central Bank

Abstract

Bosnians show little faith in their state-level institutions, and with good reason, as the country ranks poorly on measures of corruption, regulatory quality, and government efficacy. However, the Central Bank of Bosnia and Herzegovina (CBBH) is a notable exception. In a country where the state is still often paralyzed by ethnically aligned obstructionism, the Central Bank is widely lauded as an effective state-level institution, and it backstops, and oversees, a stable, trusted, pan-Bosnian banking system. To explain the Bank’s success, we draw on rational choice and institutionalist literature to propose and test a theory of the “CBBH as referee” in its three main functional areas: currency board maintenance, payment system operation, and the coordination of banking supervision. We find evidence for this mechanism in the context of currency board operations, and we also document a Haas-ian neofunctional process, in which the Bank has interacted cyclically with foreign banks to unintentionally de-ethnicize the Bosnian financial sector. Initial Bank reforms facilitated foreign banks’ market entry, and their subsequent lack of interest in hewing to prior ethnic divisions served to cement a unified Bosnian financial space. We substantiate this argument with data drawn from interactive interviews with Bosnian policymakers, financial sector experts, and banking sector participants, and in so doing, also show how the commercial behavior of transnational actors can have unexpected policy impacts.