Prudential requirements and ratios
All banks are subject to capital, liquidity coverage and other requirements that banks must observe. These requirements serve as safeguards that help ensure safe and sound banking activities.
Banks are subject to the following ratios and prudential requirements:
- Capital or own fund requirements. Banks must hold sufficient capital for covering unexpected losses and remaining solvent during a crisis period. Banks must satisfy the following own funds requirements:
- a Common Equity Tier 1 capital ratio of 4.5 per cent. This is the ratio between Tier 1 equity capital and risk weighted assets and off-balance sheet liabilities of the bank;
- a Tier 1 capital ratio of 6 per cent. This is the ratio between Tier 1 capital and risk weighted assets and off-balance sheet liabilities of the bank;
- a total capital ratio of 8 per cent. This is the ratio between the own funds and risk weighted assets and off-balance sheet liabilities of the bank.
- In addition to the capital requirement, to which the ratio of 8 per cent is further applied, banks must meet additional capital buffer requirements:
- capital conservation buffer of 2.5 per cent. The purpose of this requirement is to obligate banks to accumulate additional capital for covering unexpected losses. It is uniform across all EU banks;
- institution’s special countercyclical capital buffer requirement. The supervisory authorities of Member States may, at their own discretion, set the amount of a specific countercyclical capital buffer for a particular institution or a group of institutions, thereby mitigating the risk of unsustainable growth and securing the banking sector and the economy against a credit boom. Currently, a special countercyclical capital buffer requirement of 0 per cent is applied;
- other systemically important institutions buffer requirement. The purpose of this requirement is to obligate banks to accumulate additional capital to cover losses arising from the impact of the bank’s financial difficulties on the EU market or a particular domestic financial market. It is set on an individual basis – up to 2 per cent of risk weighted assets.
- Liquidity requirements. Banks must hold sufficient liquid assets to be able to cover net cash outflows under gravely stressed conditions within 30 days. The value of the liquidity coverage ratio (LCR) must not be below 100 per cent, i.e. a credit institution’s reserves of liquid assets must not be lower than net cash outflows over 30 calendar days under gravely stressed conditions.
- The large exposure requirement. Exposure to a client or a group of connected clients, i.e. loans granted, also any asset or off-balance-sheet asset share cannot exceed 25 per cent of the institutions eligible capital, or EUR 150 million, whichever the higher, provided that the sum of exposure values.
The Bank of Lithuania may set other ratios without contradiction to the recommendations of the Basel Committee on Banking Supervision and European Union directives.