In the aftermath of the financial crisis, Lithuania‘s banking sector faced structural changes related to higher concentration, decreased interconnectedness and lower risk appetite. At the same time banks were able to maintain strong profitability levels measured by the EU standards largely due to increased efficiency, very low funding costs, reduced impairments and stable commission income. This paper describes the banking sector of Lithuania in the post-crisis environment and argues that the post-crisis structural changes in general had positive effects on the banking sector’s resilience and in the first instance on profitability. In particular, high concentration of the sector was likely to help banks achieve higher efficiency while reduced risk tolerance had direct positive effects on lower impairments as well as indirect effects on lower funding costs. On the other hand, good profitability of the sector has been largely dependent on two largest market participants while smaller banks and branches had less prosperous profitability prospects. In the environment where large banks appear to have particularly good cost management practises, the possibilities for entry of new market players of significant size are plausible only if the newcomers are able to reach the prevailing level of high efficiency. However, without a sizeable market share this might be difficult to achieve.
The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.
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