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

The Curious Case of the CBBH

Bosnians do not trust their state-level institutions. Polling data are irregular, but results from a 2015 survey show that more than 50 percent of respondents have “no trust at all” in the state government and less than 7 percent of respondents have high levels of trust. ¹ It is hard to blame Bosnians for holding this perspective; the country ranks 111th out of 180 in Transparency International’s Corruption Perceptions Index, while the World Bank’s Worldwide Governance Indicators place Bosnia in the bottom 50 percent of states on measurements of corruption control, government effectiveness, and regulatory quality. ² However, the Central Bank of Bosnia and Herzegovina (CBBH) is a notable exception. Public opinion data on the Bank are elusive, but it is widely lauded in professional circles as a stable, trusted institution, and if one takes bank deposits as a proxy for the public’s overall faith in the banking system—which the CBBH is widely understood to backstop—their rapid growth over the last decade suggests a similar perspective. ³ Furthermore, when confidence in the banking system wobbled during the 2009 financial crisis, the CBBH successfully calmed depositors’ nerves. ⁴

The Dayton Accords, which ended the war in Bosnia in 1995, codified the Bank’s basic structure as an independent currency board, and it began operations in 1997. Since then, the Bosnian convertible mark (konvertibilna marka [KM]) has exchanged, by law, with the euro at a rate of 1.955830 to 1, all types of central bank open market operations are forbidden, and all KM in circulation are fully backed with foreign currency. Under this arrangement, the CBBH is, monetarily speaking, little more than an especially large foreign exchange office. Nevertheless, the Bank is also responsible for operating an efficient national-level payment system and for coordinating bank supervision (which is executed separately by Bosnia’s two constituent elements, the Republika Srpska and the Federation of Bosnia and Herzegovina [FBiH]). ⁵ While this limited mandate might reduce the Bank to a passing curiosity as an economic actor, its status as a well-functioning and trusted state-level organization, in a country where few are perceived as either, makes it worth studying as an institutional one. Why has the Bank succeeded as an institution, where other institutions have failed?

Our findings suggest the answer lies at the intersection of institutional design, trust, and technocracy. Drawing on rational choice and institutionalist literature, we propose a theory of the CBBH in which its status as an impartial third party, or referee, allows it to underwrite trust between Bosnia’s three main ethno-national groups. We test the theory using data from in-depth interviews with Bosnian policymakers, private-sector bankers, and representatives from international financial institutions and find that, while the “Bank as referee” concept applies to its currency board function, it does little to explain the Bank’s role in payment system operation and bank supervision. Here, we document a process characterized by elements of power dividing and Haas-ian neofunctionalism, in which the CBBH has leveraged the technocratic nature of bank supervision to assert itself as an effective state-level institution and has facilitated the market entry of transnational financial actors, who in turn de-ethnicized the Bosnian financial sector.

Before proceeding, a few notes on terminology: Bosnia, Bosnia and Herzegovina, and BiH all refer to the political entity of Bosnia and Herzegovina, either as an independent state or as a unit of Yugoslavia. The adjective Bosnian refers only to that political entity, and the noun Bosnians refers to its inhabitants, regardless of their ethnic background. Bosnian Croat and Bosnian Serb (or simply Croat and Serb) describe those residents of Bosnia who identify as members of the Croat or Serb ethno-national groups. The term Bosniak refers to Bosnia’s “ethnically Muslim” population, and the Central Bank of Bosnia and Herzegovina appears as the Central Bank, the Bank, or the CBBH.

A Theoretical Account of Institutions, Conflict, and Trust

In general, there is strong evidence that conflict reduces institutional trust, and trust in general, by increasing risk perceptions, changing individual and group-level reputations, and reducing institutional quality. ⁶ But among Bosnian state-level institutions, the CBBH is an outlier; Bosnians generally trust it to do its job, and by and large, it does it well. This surprising outcome—an institution that works in an environment where the empirical record, and most available points of immediate domestic comparison, says it should not—raises a broader theoretical question concerning when, and under what conditions, post-conflict institutions can facilitate trust. Research suggests wide cross-national variation, but Bosnia’s story shows there can be meaningful within-country variation, too, across different institutions. ⁷ Consequently, we propose a theory that focuses on institutional-level characteristics to explain when institutions do work to generate trust. Specifically, we hypothesize that post-conflict institutions will successfully facilitate trust when they have institutional characteristics that effectively position them as neutral arbiters, or referees, able to credibly enforce standards of behavior that are acceptable to all sides of the preceding conflict. ⁸

Definitions of trust have proliferated widely. ⁹ Here, we draw on rational choice and institutionalist perspectives, and describe trust as possible when two factors prevail. The first is the ability to make credible commitments—actors must believe that others can, and will, behave as promised and that they will not renege. The second concerns the content of those commitments—for actors to trust their interlocutors, they must believe that the risks of any given interaction are acceptable and that their counterparts will operate within mutually acceptable boundaries. Put more colloquially, trust happens when people can be expected to do what they say and when what they say they will do is acceptable to potential counterparties. These conditions may arise due to actors’ specific knowledge of each other, but institutions can also play a role in creating credible, and mutually acceptable, commitments. ¹⁰

In keeping with rational choice approaches, we posit a prisoner’s dilemma dynamic, in which both parties to an interaction may wish to extend trust, but ultimately decide not to for fear of being on the losing end if their interlocutor plays defect. Here, institutions can make it either more costly to defect, by punishing those who fail to cooperate, or less costly to trust, by bracketing the downside risk of getting cheated. In either case, extending trust becomes relatively more attractive. In a strict rationalist conception of this process, trust is cognitive, and the institution’s effect derives from the impact it has on the information available to each actor about how its counterpart is likely to behave, while historical institutionalist arguments suggest a psychological component, in which citizens’ encounters with, and observation of, (well-functioning) institutions influence their subsequent beliefs about the appropriate level of trust to extend in general. We argue that, in practice, these mechanisms are reinforcing and complementary—that as institutions affect actors’ case-specific calculus about the likely costs and benefits of extending trust, these same interactions, over time, shape pre-cognitive assumptions about the correct amount of trust to extend in the first place. In the absence of institutions, concerns about the trustworthiness of other actors are instead liable to spiral into a suboptimal equilibrium of constant defection. ¹¹

This formulation is theoretically clean, but on its own, it is incomplete. First, it does not acknowledge the risk that the conflicts and trust deficits institutions are supposed to solve will simply be injected into the institutions themselves. ¹² For an institution to operate effectively as a third-party enforcer, it needs to be credibly separate from the conflict it is supposed to be regulating and positioned as a neutral referee. Second, it does not explain which institutional characteristics might help achieve this positioning. As the Bosnian experience suggests, not every institution is well constructed to play the role of a neutral referee. To do it successfully, institutions must operate with procedures that actually engender perceptions of fairness and impartiality in their interlocutors—put another way, for institutions to serve effectively as referees and to sustain adherence to agreements, they need procedural fairness. Psychologists and behavioral economists have grounded procedural fairness in multiple elements, but generally speaking, “ . . . the theoretical literature on procedural [fairness] can be summarized using six broad procedural characteristics: voice, neutrality, consistency, accuracy, reversibility, and transparency.” ¹³ In practical terms, this means that institutions are more likely to succeed in a trust-building role when their operations produce consistent, accurate decisions that are perceived to be neutral by the parties they affect and that result from processes that are clearly understood from an external perspective.

Yet as the discussion in the section “A Neofunctional Interpretation of the CBBH” suggests, the data offer, at best, only partial support for the theory we propose above. Instead, the evidence tells a Haas-ian, neofunctional story. Seeking to explain cycles of European integration in the 1950s and 1960s, Ernst Haas developed a theory in which “. . . the creation of supranational authority leads to changes in the expectations and behavior of social actors, who in turn shift some of their resources and policy efforts to the supranational level.” ¹⁴ As the supranational authority begins to deliver policy solutions that serve the needs of these social actors, they demand additional policy outputs, creating a feedback loop that spurs further power transfer to the supranational entity. In the European context, this process has typically been thought of in economic terms:

Those who seek cross-border transactions experience the absence of European-level rules as a cost or an obstacle to the realization of greater gains. Increasing levels of cross-border transactions and communications by private actors increase the perceived need (or “functional demand”) for European-level rules and policies and for supranational capacity to supply them. ¹⁵

Neofunctionalism has been criticized for lacking theoretical specificity—it is not always clear how long it will take for transnational actors to develop policy preferences or for supranational policymakers to respond accordingly. For some, the fits, starts, and occasional setbacks that have characterized the really existing process of European integration have served as an empirical rebuke to the automaticity of ever further integration, which some see neofunctionalism as assuming. ¹⁶ In the Bosnian context, the relevant entities are sub-national units (Republika Srpska and the FBiH), not sovereign states, and it is not obvious whether Haas’ other scope conditions apply in full. ¹⁷ These critiques notwithstanding, we argue below that the general dynamic he describes is a helpful way to understand how private-sector actors in the banking sector interacted with the Bosnian state (here playing the role of the supranational authority vis-à-vis the country’s two constituent Entities) to drive Bosnia’s integration as a single economic space. In this analysis, the CBBH’s institutional success comes not from its ability to effectively referee between ethnic groups, but from its role in creating conditions that allowed non-ethnic third parties to enter the Bosnian market and to become sources of demand for a de-ethnicized banking industry.

A Brief Monetary History of Bosnia and Herzegovina

Prior focus on the CBBH as an economic actor notwithstanding, Bosnia offers a strong case for evaluating monetary institutions, as institutions, in the aftermath of ethnic conflict. First, monetary institutions played a deceptively important role in the dissolution of Yugoslavia, so the relevant actors in Bosnia are likely to have been especially aware of the structure and function of the central bank that was constructed in the war’s aftermath. Second, the CBBH was, in its basic structure, essentially forced on Bosnia’s warring parties by the United States and the international community. Third, Bosnia’s main ethnicities mapped almost perfectly onto their own separate wartime monetary institutions. Taken together, this means that Bosniaks, Croats, and Serbs all would have understood the Bank as an important, exogenously imposed national-level institution, which was replacing ones that had previously operated along ethnic lines and under direct ethnic control. In this context, the CBBH sits as an institution positioned in between Bosnia’s opposing sides, to adjudicate between them, in a way that aligns well with our prisoner’s dilemma theoretical framing. The following discussion of Bosnia’s wartime monetary institutions serves to make this clear.

Nineteen ninety was a critical year along Yugoslavia’s path to eventual collapse. Foreshadowing the concerns over monetary control which would shape decisions at the Dayton peace conference, Croatia and Slovenia’s moves to independence were impelled in part by Slobodan Milošević’s brazen looting of the Yugoslav central bank, an episode in which “. . . [O]n Dec. 28, [1990] the Parliament of [Yugoslavia]’s largest republic, Serbia, illegally and secretly approved a law requiring Serbian-controlled national banks to issue $1.8 billion worth of new money without any backing or federal Government approval.” ¹⁸

Bosnia declared independence as the Republic of Bosnia on 3 March 1992, with Bosniak Alija Izetbegović as president, and war followed shortly after. ¹⁹ Mass rape and ethnic cleansing were used as modes of combat, and civilians were indiscriminately targeted. Here it is enough to note that the Bosniak, Bosnian Croat, and Bosnian Serb communities were all subject to violence sufficient to inspire legitimate distrust of each other’s ethno-national grouping’s future intentions. ²⁰

Bosnia’s wartime ethnic divisions extended to the monetary arena. Bosniak-controlled territory used the Bosnian dinar, Bosnian Croat regions first used the Croatian dinar and then the Croatian kuna, and the Republika Srpska adopted the Republika Srpska dinar (although the Yugoslav dinar also remained in widespread use). In all three regions, German Deutsche Marks circulated as the hard currency of choice. ²¹ In the Republic of Bosnia, central banking functions were eventually taken over by the National Bank of Bosnia and Herzegovina (NBBH), which was created on 15 January 1993. ²² The Republika Srpska established the National Bank of the Republika Srpska (NBRS), which issued the Republika Srpska dinar, but, in general, Bosnian Serb territory retained strong links with the banking system of the Federal Republic of Yugoslavia; the Republika Srpska dinar was pegged to the Yugoslav dinar, and Republika Srpska monetary authorities continued to process Yugoslav dinar payments. ²³ Bosnian Croat areas monetarily merged with Croatia proper and did not establish a separate fully fledged central bank, relying instead on the slight repurposing of a Yugoslav-era monetary institution. Located in Mostar, the Mostar ZAP (Zavod za Platni Promet, or “payment bureau”) operated as a quasi-central bank, essentially serving as a large safe-deposit box into and from which funds could be deposited and withdrawn, but by which a fiat currency was not actively managed. “It held a one hundred percent cash reserve against [Deutsche Marks] deposited with it and required (informally) banks in its area to deposit a 45 percent cash reserve. . .against their kuna deposit liabilities.” ²⁴ Until the CBBH was fully established, all three of its predecessors continued to function within their respective territories.

CBBH operations commenced on 11 August 1997, but the Bank’s direct roots lay in Dayton, where its basic contours had been enshrined in the country’s founding document. Dayton created a highly de-centralized country, but Richard Holbrooke, the United States’ lead negotiator, insisted that “certain government functions needed to be carried out under the direction of a singular state-level institution, and monetary policy was one of them.” ²⁵ Dayton outlined the Bank’s basic character, but it also outsourced the delineation of its specific responsibilities and future composition to the Parliamentary Assembly, which did not pass the relevant legislation until June 1997. On 11 August 1997, the CBBH commenced operations in Sarajevo, and by December 1998, the CBBH was issuing bills and coins, and “a full range of monetary instruments was available to citizens and businesses . . . ” ²⁶ Getting to this point alone had involved establishing Main Units in Mostar and Pale (the Pale Main Unit is now in Banja Luka), winding down the NBBH and NBRS, and relieving the Mostar ZAP of its quasi-central bank functions. ²⁷ By October 1999, the CBBH was established as the sole monetary authority for Bosnia and Herzegovina and “all interbank payments were in KM.” ²⁸ The financial system handling these payments was still constrained by its reliance on the Yugoslav-era payment bureaus, but at least it was constrained electronically; previous settlement procedures for interbank payments had involved periodic transfers of bundles of Deutsche Marks from one payment bureau to another in the trunk of a Mercedes-Benz. ²⁹

It would be roughly another year until the payment bureaus were eliminated entirely from the Bosnian financial system. By January 2001, a comprehensive reform initiative had created a two-tiered system in which all payments are made by licensed commercial banks. Assessing the results of payment bureau reform in 2010, the U.S. Agency for International Development (USAID) reported that “Today, most transactions are facilitated through the banking system . . . Banking sector deposits are high, consumer loans have been growing rapidly, and foreign banks have entered into the sector to compete for BiH deposits and transactions.” ³⁰ Perhaps most indicative of the reform’s success was the rapid growth in the number and value of the transactions the banking system handled. “In [its] first year of operation almost 12 million payment transactions were made . . . with a total value of almost 17 billion KM. In 2005 these had more than doubled to almost 25 million transactions, with a total value of almost 39 billion KM.” ³¹ By 2019, the payment system was handling 43.6 million annual transactions, for a total value of more than 123 billion KM, reflecting a growth of ~84 percent and 160 percent, respectively, compared with the 2005 figures. ³²

As stated by the Law on CBBH, the FBiH and the Republika Srpska each maintain bank licensing and supervisory agencies, and the Central Bank is tasked with coordinating

the activities of [these agencies] in ways to be determined by the Governing Board of the Central Bank, including monthly meetings of the heads of such agencies with representatives of the Central Bank, and the submission of monthly reports by these agencies to the Central Bank on their activities and on developments at the financial institutions under their jurisdiction. ³³

Coordinating bank supervision is harder to measure than running a currency board, but the banking sector’s relative consolidation, and the strong presence of private capital and foreign banks, suggests broadly favorable performance. ³⁴ In 2013, the European Union (EU) noted harmonized financial reporting between both entities, continuous execution of stress tests, “adequate” bank capitalization, and “satisfactory” overall inter-Entity coordination. ³⁵ By 2020, there were signs of regression, with the EU reporting that “the efficiency of banking sector supervision is impeded by fragmented competences and insufficient coordination,” but system-level capital adequacy is high, non-performing loan ratios are low and declining, and the public continues to demonstrate confidence in the banking system, with deposits growing from ~3.8 billion KM in 2003 to ~24.6 billion KM in the first quarter of 2021. ³⁶

On the Ground in Bosnia

To evaluate how theory compared with the reality on the ground in Bosnia, we dispatched one of the authors to Sarajevo in November 2014 to execute an exploratory institutional ethnography, with what amounted to a convenience sample made up of academics focused on the Bosnian financial sector, current and former bank officials, officials at international financial institutions, and private-sector bankers. ³⁷ Conversations with these subjects (fifteen in total; see the appendix for a complete list) proceeded as interactive interviews, unfolding naturally within a structure informed by broader questions regarding the degree to which ethno-national concerns have affected decision-making in the Bosnian financial sector and the degree to which CBBH policies and actions have reduced their salience.

An institutional ethnographic approach made sense for three reasons. First, it was flexible—hypotheses generated in conversation with one source could be tested in discussions with others. Second, this was the most efficient way to build rich context; sources could, for example, provide direct knowledge of financial market conditions in the early 2000s in a way that reading newspaper articles or poring over banking sector statistics would not. Third, it was the best way to get direct insight into decision-makers’ thought processes and into the internal mechanics of observable outcomes.

Still, methodological limitations mean that the conclusions we suggest below should be taken as provisional. The most glaring issue is selection bias. We used Google searches, LinkedIn, newspaper articles, and government reports to identify potential sources, but this does not guarantee a comprehensive sample, and the fifteen sources we spoke with are simply those who agreed to do so. It could be the case that the people most likely to have unfavorable views of the CBBH are also those least likely to be interested in speaking with a foreigner. The source pool’s ethno-national composition could also be an issue—excluding foreign nationals, our contacts were predominantly Bosniak, which may have generated an unrepresentatively rosy picture of the Bank. Even if the sample were representative in its ethnic composition, it would still be very small. Over the years, the CBBH has employed hundreds of staffers, and thousands more people have interacted with it, or had their behavior shaped by it, as bankers and private-sector participants in the Bosnian financial sector. The fifteen sources we spoke with represent a small slice of that collective experience, and there is no guarantee their perspectives would be widely endorsed. This methodology also does not lend itself to precise measurement. It is one thing for sources to consistently observe that the CBBH’s currency board structure boosted trust in the Bosnian financial sector; it is another thing to be able to quantify that effect.

Nevertheless, qualitative evidence can still illuminate what makes the Bank work as a state-level Bosnian institution and whether it works in the referee capacity we specify above. Here, for each of the three main policy areas (currency board, payments, banking supervision), we outline the types of claims and feedback from primary sources that would constitute theory-affirming evidence. If data along these lines are lacking or absent entirely, then our theory is unlikely to hold.

In post-Dayton Bosnia, a currency board structure was appealing because it prevented the Central Bank from extending credit and creating money. Had it been able to do either, it would have been, in theory, an attractive target for ethno-national competition, for three main reasons. First, the group that could determine the availability of credit would also exercise substantial control over real economic activity and government finances. Second, in a crisis, it would be difficult to guarantee that emergency liquidity (extended by the central bank as the lender of last resort) would be made available impartially to banks associated with all ethnic groups. Third, the exchange rate itself could become an object of ethno-national contestation; if a particular group dominated the export trade, it might prefer a weaker currency. Commentary that indicates these were real fears, and that the Bank’s design and subsequent operations alleviated concerns about them, would support the claim that the referee model applies to its currency board operations.

In the payments domain, giving the CBBH responsibility for operating an efficient, market-based system represented a major shift from the politicized Yugoslav-era one. As post-Dayton politics have tended to instantiate ethnic divisions, the “Bank as referee” hypothesis suggests that moving to a system in which payments are executed by private market participants (licensed banks), on infrastructure overseen by an independent central bank, would decrease ethno-nationally derived transaction risk and allow interactions with a wider range of economic agents, independent of their ethno-national identity. With banks competing to offer reliable transaction services for a fair price, customers will prefer to optimize for performance, not ethnic alignment, and market incentives will militate against delivering irregular service quality on the basis of customer ethnicity. Here, confirmatory evidence would validate fears that the payment bureaus would not reliably execute transactions, or that they would execute them in ways that favored co-ethnics. In addition, it would also clearly identify the Bank’s role as payment system operator as an important factor in allowing for arms-length economic transactions that were not previously possible.

Finally, Dayton left banking regulation to be executed at the Entity level, by the Republika Srpska and the FBiH, respectively. Because tougher banking regulation could be a deterrent to attracting banking business, it is possible to imagine an ethnically tinged race to the bottom, in which each Entity enacts successively more lenient policies to attract banks to its territory. Against this backdrop, the “Bank as referee” hypothesis would posit that, by coordinating bank supervision, the CBBH has provided a medium through which the two Entities can avoid imposing regulations with asymmetrical effects. Supporting evidence here would indicate that the Entities have pursued, or have at least considered, meaningfully different regulatory strategies in an effort to win banking business. Furthermore, it would identify the CBBH, in its coordinating role, as an important actor in making sure this did not happen.

A Neofunctional Interpretation of the CBBH

We focus our empirical analysis on primary source data generated in discussions with bankers, Bank officials, academics, and international organizations involved with Bosnia’s financial sector. Moreover, mapping their commentary to the Bank’s three main policy areas (currency board operation, payment system operation and oversight, and the coordination of Entity-level banking supervision), we find only partial support for the “Bank as referee” hypothesis. While this dynamic does fairly characterize the Bank’s role as a currency board, it does not apply to its activities in payments or bank supervision. Here, reasoning inductively, we propose two alternative interpretations, focused on power-dividing and neofunctional processes. In the former case, public interactions were relegated to the private sphere, to allow for technocratic expertise and business interests to drive mutually acceptable outcomes, beyond totalizing ethnic concerns. In the latter, transnational actors in the form of multi-national banks were incentivized by CBBH reforms to enter the Bosnian market, and their disinterest in sustaining the country’s ethnic divides served to de-ethnicize the financial sector.

What the CBBH Tells Us and Why It Matters

Whatever problems Bosnia may have, the stability of its financial system and the efficacy of its financial institutions are, generally speaking, not among them. The banking sector is dominated by well-capitalized, foreign-owned banks, and the CBBH is one of the most well-regarded state-level institutions. In a country where appeals to ethno-national solidarity can easily serve to undermine cooperation and trust, the CBBH stands as a compelling counterexample. By legally forbidding the CBBH from extending credit or adjusting the exchange rate, its currency board structure credibly committed the Bank to sustaining significant constraints on the range of available policy outcomes. This created a backdrop for ethno-national cooperation by taking the worst possible outcomes off the table and by eliminating the possibility that the Bank’s powers could be deployed to the benefit of some ethno-national groups, and not others. But the Bank’s role with payment system reform and coordinating bank supervision does not conform to what the “Bank as referee” theory implies. In both areas, there is little evidence that market participants or financial sector policymakers understood the CBBH as acting to facilitate inter-ethnic cooperation that would not have happened otherwise. Banks and financial actors largely trusted the payment bureaus to execute their responsibilities fairly and efficiently, and Entity-level harmonization of banking regulation was instead driven by convergence on international regulatory standards and by private-sector banks.

Indeed, the CBBH’s key output in the payments space and with banking supervision was to make Bosnia safe for transnational financial institutions. The payment bureaus might have provided relatively effective service, but foreign banks evaluating the Bosnian market would have been understandably spooked by a system that so closely linked payments and the state. The Central Bank’s coordinating role for banking supervision served a similar function: it demonstrated to foreign banks that they would in fact be operating in a single economic space in Bosnia. The resulting influx of foreign banks in the early 2000s, which, as non-Bosnian financial entities, had no interest in operating within the constraints of either Entity or ethnicity, served to de-ethnicize the Bosnian financial system.

The timing of the CBBH’s formation does illustrate the historical contingency of its present-day success. In the years immediately after Dayton, (re)constructing a unified Bosnian state seemed possible, and the international community was heavily invested in doing so. By the mid-2000s, that was a debatable proposition, and it is reasonable to question whether the CBBH could have been established in the Bosnian political environment that has prevailed since then. “Move fast and break things” may be an irresponsible way to approach state-building, but the experience of the CBBH does suggest that, in a post-conflict environment, speed can be critical.

This contingency notwithstanding, the Bosnian case does produce an important generalizable implication. Practitioners emphasize the value of homegrown institutions, and in the regulatory arena, the risks of relying on transnational private-sector firms are well documented, but Bosnia’s experience suggests that exogenously imposed domestic institutions and external actors can also combine to achieve positive outcomes. ⁶⁴ In the monetary domain, the Bank succeeded as a referee by piggybacking on the credibility of first the Deutsche Mark and then the Euro; in payments and bank regulation, it succeeded by importing foreign banks’ lack of interest in ethnic divisions. In short, even when coming from external sources, post-conflict institutions can help generate trust when they empower private-sector actors whose interests run orthogonally to those defining the preceding conflict. However, this depends on a critical scope condition—physical security. Until it was safe for basic economic activity to take place across the inter-Entity boundary line (and in between ethnic groups), anything the Bank was doing to create a unified economic space was irrelevant—no multi-national was interested in the Bosnian market, and interethnic economic activity was a pipe dream.

The CBBH’s story also suggests that central bank independence is not the panacea it is often positioned as. A standard Lijphartian view of central bank independence assumes an institutional predilection for ruthlessly fighting inflation, but the CBBH’s formation as a currency board indicates that independence itself is not enough and that the goals of that independence are liable to themselves being contested. ⁶⁵ More work is necessary to evaluate, more systematically, how and when central bank independence itself can be a locus of contestation in the aftermath of ethnic conflict.