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Domestic financial system is stable, but global economic developments require special vigilance

June 13, 2012

The domestic financial system is stable, resilient to shocks and capable of functioning under very unfavourable circumstances. Such assessment is presented in the latest Financial Stability Review of the Bank of Lithuania.It indicates potential threats, the biggest challenges and provides recommendations to the financial system – to increase capital buffers of banks by maintaining sustainable crediting and to improve the framework of risk management and financial institutions governance.

“We assessed how our finances were affected by the actually endured test of the shock experienced last November. The conclusion is unambiguous: the system proved to be stable and the markets evaluated it by record low interest rates”, noted Mr. Vitas Vasiliauskas, Chairman of the Board of the Bank of Lithuania.

Stability of Lithuania’s financial system was also recognised by depositors. In December 2012, i.e. 1 month after the suspension of activity of AB bankas SNORAS, the amount of deposits in the system was lower by just 1.1 per cent, whereas recently deposits have been growing. Meanwhile, the analysis of financial crises in various countries performed by the International Monetary Fund indicated that the average decline of deposits related to depositor reaction 1 month after the event usually fluctuated at around 11 per cent. This is the very percentage of decline in deposits in Lithuania, when in 1995 and 1996, after the suspension of activity of the Lithuanian Joint-Stock Innovation Bank and the LITIMPEX bank, their depositors withdrew 11 per cent of the funds held with banks.

The Review indicated that the largest risks for the domestic financial system are currently related to external factors: the continuing sovereign debt crisis in the euro area, a significant contraction of the global trade volume and a potential hike in the prices of energy resources. These risks would affect the domestic financial system primarily through a fall in exports, a rise in interest rates and an increase in the prices of energy resources, which would have a negative influence on the financial situation of the main borrowers, i.e. enterprises and households, and determine larger credit losses of banks.

“The stress-testing results show that our banking system is capable of withstanding severe shocks, however capital buffers should be increased further. According to the most unfavourable scenario, i.e. that of a fall in the demand for Lithuania’s exports and a rise of risk premia, for the capital adequacy level in each domestic bank to be maintained above the minimum ratio of 8 per cent set by the Bank of Lithuania, it would be necessary to attract additional capital of LTL 260 million by the end of 2013”, said Mr. Vasiliauskas.

According to him, a conservative assessment of various risks and formation of the required provisions would facilitate the final solution of the loan impairment problems which emerged during the economic downturn. Larger capital buffers would strengthen resilience of banks to potential shocks, increase confidence of markets and create conditions for sustainable credit expansion in future.

Financial Stability Review is published by the Bank of Lithuania once per year. Its purpose is to assess potential risks to Lithuania’s financial system and indicate its possibilities to counter them.

The Financial Stability Review of 2012 will be available on the Bank of Lithuania website.