The Bank of Lithuania, established in March 1990, has continued the traditions of the central bank operating in the period between two world wars. From 1990 to 1992, when Lithuania was still in the rouble zone, the Bank of Lithuania was not able to pursue an active monetary policy, and its main efforts were aimed at preparing for the introduction of the national currency. In 1992 the temporary currency, the talonas, was introduced, which allowed the Bank of Lithuania to perform the functions of an independent central bank. The litas was introduced in 1993, triple-digit inflation was curbed and the exchange rate of the litas was stabilised.
Seeking relative price stability over a longer period, the Litas Credibility Law of 1994 pegged the litas to the US dollar at a fixed exchange rate; pursuant to this Law, the litas is issued into circulation with a 100 per cent backing with gold and convertible currency reserves, and the main source of issue is the purchases of foreign exchange by the Bank of Lithuania. The international reserves, initially consisting of the inter-war Bank of Lithuania gold and foreign exchange that were returned by other central banks, were continuously supplemented with foreign exchange reserves accumulated by the Bank of Lithuania and invested following the international practices of central banks.
The sector of commercial banking, having gone through the first demanding trials in 1995, has become stable and continued to expand, building on the adopted decisions towards strengthening the capital base, tightening of prudential requirements and supervision and the introduction of the established international standards of safe banking. An interbank funds transfer and settlement system has been developed and is now used by all commercial banks and foreign bank branches operating in Lithuania.
The new Law on the Bank of Lithuania adopted in 2001 granted greater independence to the central bank and wider possibilities to be active in implementing monetary policy. With Lithuania’s continuing integration in the Western structures, development of economic relations with the European Union Member States and corresponding changes in trade currency structure, on 2 February 2002 the litas was pegged to the euro, while the fixed exchange rate regime was retained.
On Lithuania's accession to the European Union (EU) on 1 May 2004 the Bank of Lithuania became a member of the European System of Central Banks (ESCB), which comprises the European Central Bank (ECB) and the national central banks of all EU Member States.