The financial system crisis deranges cash settlements of
economic entities, narrows possibilities to develop business by way of credit,
poses concerns about the safety of savings and hampers the economic development.
Therefore, the current conception of financial stability as one of the main
functions of a central bank is inseparable from the financial system crisis
prevention and management.
Integration, innovations and increasing complexity of the
financial architecture - features characteristic to a present financial system –
improve the efficiency of resource allocation and risk management but all
together broaden the range of vulnerability sources and spill-over channels,
therefore require a thorough crisis management preparation. Episodes of the
financial crises evidence that problems in the financial system may emerge
unexpectedly and spread very rapidly. The speed of the crisis expansion highly
rests on the banks and other financial institutions interdependence and level of
integration – the higher the level, the stronger is a probability of a systemic
crisis. Therefore, it is important to identify reasons, the likely course and
consequences of a potential crisis, and try to simultaneously minimize its
effect on the domestic financial system and economy as a whole.
The Bank of Lithuania preventive activities in the area of
crisis management cover the supervision of commercial banks operating in
Lithuania, analysis of the banking system performance, identification of
external and internal shocks endangering the financial system, stress testing of
the entire financial system and individual financial institutions, as well as
the oversight and stress testing of the payments system.
International cooperation is becoming extremely important in
order to be adequately prepared for the financial system crisis management since
the share of foreign banks in the Lithuanian financial system is substantial.
Depending on the origin and the scope of the financial system crisis, the crisis
situation management may require action coordination among several countries and
joint measures application. The crisis management on an international level is
documented in memoranda of understanding and individual agreements of banking
supervision institutions.
Seeking to maintain financial stability the European Union encourages cooperation between the responsible institutions of Member States, establish common procedures and practical preparation for crisis management and decision making. On June 1 2008 Memorandum of understanding on cooperation was established between the financial supervisory authorities, central banks and finance ministries of the European Union on cross-border financial stability.
Inter-institutional cooperation, covering the supervision of
credit and financial institutions and exchange of information, is envisaged in
the agreement between the Bank of Lithuania, the Securities Commission of the
Republic of Lithuania and Insurance Supervisory Commission of the Republic of
Lithuania.
Practical preparation for the crisis management is tested and
continuously enhanced by internal and international crises management simulation
exercises.
References:
Memorandum of Understanding on Cooperation between the Financial Supervisory Authorities, Central Banks and Finance Ministries of the European Union on cross-border Financial Stability
Memorandum of Understanding between the European Union
Banking Supervision Institutions, Central Banks and Ministries of Finance on
Cooperation in the Management of Financial Crisis situations
Memorandum of Understanding between Central Banks of
Estonia, Latvia, Lithuania and Sweden
Deposit insurance scheme
