Financial Stability Review: risks to the
financial system stability has mitigated endangering the banking system of the
country has mitigated.
The Bank of Lithuania Board approved the
Financial Stability Review 2010, wherein much attention is devoted to the
analysis of key internal and external threats risks to the stability of the
national financial system, surveys evaluation of the financial standing of
borrowers position of bank debtors ? households and non-financial
undertakingscorporations? and to the assessment of the banking system
resilience readiness to act under highlyan unfavourable macroeconomic
environment. When performing
its functions, the Bank of Lithuania aims at a competitive but stable
environment for credit institutions of our country. However, the financial
system stability also depends on the development of the national economy,
stance in global financial markets, fiscal policy pursued by the government
and other factors.
The Review notes that the banking system of
Lithuanian banking system has successfully adjusted to was capable of
accommodating to a changed macroeconomic environment successfully and has
resolved of resolving arising problems independently, regardless of incurred
losses caused by because of an aggravatingdeteriorating loan portfolio quality
of given loans and shrinking falling net interest income.
”A deteriorating financial position of enterprises
in 2009, curtailing falling household income, increasing rate of unemployment
and stagnation in real estate market were the main factors that contributed to
behind the large losses of the banking system incurred in 2009”? commented
?ygimantas Mauricas, Deputy Head of the Financial Stability Division.
According to the Review authors, the next year
should bring higher stability promises for the Lithuanian financial system a
higher level of stability because of an improved situation in global financial
markets, forecasted better growth prospects for Lithuanian economy as well as
the economies growth of economies of the main export partners and attempts of
the government to stabilize the situation of public finances.
The financial system stability is also strengthened
by additional liquid assets and capital reserves accumulated by banks. Credit
risk of enterprisesCorporate credit risk is expected not to grow further on.
However, a high level of unemployment and shrinking household income in 2010
may be behind an increase of cases of household insolvencies in 2010.
In the context of a recovering national economy,
lending volumes and bank income are expected to increase, although the bank
profitability will depend in the future on the capability of a proper
diversification of the loan portfolio and financing of perspective business
sectors.
In order to assess the domestic banking system
resilience to unfavourable shocks, the Bank of Lithuania performs carries out
individual bank level and system level stress testing exercises of both,
individual banks and of the overall banking system on a regular basis.
This year, the possible effects of during testing a
possiblea double economic downturndip recession, characterised by falling
exports, rising interest rates and decreasing real estate prices, has been
assessed risk to the stability of the national financial system stabilityseen
in narrowing exports, rising interest rates and decreasing real estate prices,
was assessed. Stress tTesting results reveal that the banking system liquidity
risk has mitigated and that accumulated capital reserves are sufficient to
cover possible credit risk losses in the case of an unfavourable economic
development scenario.
Notwithstanding this, the maintenance of adequate a required level of capital
reserves remains an important banking business priority because of still
foreseen material loan portfolio impairment losses.
Financial stability reviews are published by the
Bank of Lithuania once per year since 2006. The main Financial Stability
Review objective is to identify both, internal and external threats to the
domestic financial system, to evaluate the system’s ability to withstand the
effects of unfavourable internal and external shocks and to foresee adequate
response methods. determine proper reaction measures.
The importance of the disclosure of stress testing
results to the public as an instrument for the creation of a safer, stronger,
more transparent and responsible financial system, was stressed by heads of
states of the European Union.
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