Domestic financial institutions continue viewing a likely drop in profitability due to low interest rates as the major risk for the financial system; however, concerns over potential sharp increases in risk premiums in financial markets lag behind it just slightly, shows the latest survey conducted by the Bank of Lithuania. This is already the second consecutive survey this year; it reveals that financial institutions are also concerned over threats in relation to the risk of unsustainable real estate market developments.
‘While low interest rates are helpful for the euro area and Lithuanian economies, banks and insurance undertakings consider their potentially negative impact on profitability a very significant risk for their activities. Nevertheless, the probability of this risk and its likely negative effects are viewed by respondents as having decreased over the half-year. However, the significance of likely abrupt rises in risk premiums increased; it was especially emphasised by investment management companies, financial brokerage firms, and leasing companies. In other words, financial market participants' concerns that abrupt yield jumps, changed risk assessment and perception may have negative systemic consequences,’ says Tomas Garbaravičius, Member of the Board of the Bank of Lithuania.
The assessment of the respondents is that the likely negative impact of real estate (RE) market imbalances continues to strengthen, although the probability of such imbalances is reported as relatively low, i.e. the RE market is currently not considered as overheated. The Bank of Lithuania closely monitors its developments and will apply available macroprudential policy measures lowering the probability of RE price bubbles and the potential negative impact on financial stability where necessary.
The latest survey also shows that the cybercrime risk is among the three most probable risks to the domestic financial system, while the largest probability of its materialisation was reported by banks. However, the likely negative effects of this risk were reported as relatively insignificant.
More than a third of the respondents expressed a view that the probability of a high-impact event in the domestic financial system increased over the half-year. When asked to indicate the most likely negative high-impact event, financial institutions mainly reported changed political trends after the presidential election in the USA, increased global geopolitical tensions, a deceleration in our country’s economic growth and reforms in Lithuania, if they were implemented improperly.
Detailed review of the survey is presented on the website of the Bank of Lithuania.
The Bank of Lithuania conducts the Survey of Risks to Lithuania’s Financial System in order to assess the views of Lithuania’s financial institutions towards the domestic financial system and likely challenges to its sustainable future development. This survey is conducted on a biannual basis. Banks, insurance undertakings, leasing companies, investment management companies and other financial institutions assess the sources of major risk to Lithuania’s financial system, the probability of the occurrence of adverse events and their potential impact on the domestic financial system over the upcoming six months.