Financial stability instruments
Responsible Lending Regulations
In 2011, the Bank of Lithuania approved the Responsible Lending Regulations (252.8 KB download icon) (as subsequently amended and supplemented), the aim of which is to promote responsible lending practices of credit institutions, market discipline and transparency in activities with a view to minimising systemic risk of credit institutions, preventing unsustainable developments in real estate prices and over indebtedness of borrowers.
The Responsible Lending Regulations require credit institutions to fully assess the ability of a borrower to repay the credit in the long term and pay all related contributions, define the maximum loan-to-value ratio and the maximum debt service-to-income ratio as well as set the maximum credit repayment duration and other factors of responsible lending.
The Regulations establish the following requirements:
- the maximum loan-to-value ratio (LTV) – 85%;
- the maximum debt-service-to-income ratio (DSTI) – 40%;
- the maximum credit repayment duration – 30 years, and
- other factors of responsible lending.
Amendments to Regulations as of 1 February 2022:
A higher minimum down payment requirement of at least 30% is applicable to the second and subsequent housing credit agreements as well as in cases when the amount of previous housing loans is being increased.
- to borrowers with the outstanding amount of each previous loan lower than 50% of the value of housing purchased using that loan. The second and subsequent housing loans of such borrowers are subject to the minimum down payment requirement of 15%;
- in cases when the borrower increases the amount of their first and only housing loan without mortgaging real estate that belongs to them. This essentially allows increasing the amount of a single previous housing loan for repair, construction, reconstruction or other purposes but does not open up a possibility to circumvent more stringent regulation of secondary loans by increasing the amount of available credit with the purpose of using it to fund the acquisition of other real estate.
These amendments to the Responsible Lending Regulations came into force on 1 February 2022. However, the expectations of those households that took decisions on housing acquisition prior to the publication or entry into effect of these amendments have been taken into consideration. Therefore, the new requirements are not applicable to those who received binding proposals from credit issuers or where decisions to grant a credit were taken before the entry into effect of this resolution (i.e. 1 February 2022). This also includes cases when a preliminary purchase-sale agreement concerning mortgaged real estate had been signed prior to the date of the adoption of this resolution (i.e. 11 November 2021). More information on issues related to these amendments can be found here.
Countercyclical capital buffer
Current countercyclical capital buffer (CCyB) rate in Lithuania is 0%.
The CCyB requirement is intended to ensure that the banking sector accumulates sufficient capital to be able to cover potential losses in case of the materialisation of cyclical systemic risks or during periods of economic downturn or stress.
By accumulating a sufficient capital buffer to cover potential losses of banks in the crisis period, the resilience of the financial system is strengthened and crediting cyclicality is mitigated. When faced with economic shocks or recession, the capital requirement would be relaxed, thus widening the possibilities for credit institutions to maintain credit supply.
In an economic upturn, when no financial imbalances are observed, but there is a relatively high credit and real estate market activity and profitable banking activities, banks need to gradually accumulate a 1% CCyB. If credit growth is sustainable and no cyclical imbalances form in the credit market, a CCyB of at least 1% should be accumulated. The CCyB rate would be further increased to over 1%, if any financial imbalances were observed. The CCyB rate would be reduced in view of economic shocks or a shift in the financial cycle to the recession phase.
The CCyB rate is reviewed each quarter on the basis of a detailed analysis of the situation in the financial and real estate sectors, carried out using quantitative and qualitative information. More information on the setting of the countercyclical capital buffer rate in Lithuania is available in the Bank of Lithuania occasional papers Application of the Countercyclical Capital Buffer in Lithuania and Leading Indicators for the Countercyclical Capital Buffer in Lithuania.
One of the major intermediate objectives of macroprudential policy is to mitigate and prevent excessive credit growth and leverage. The CCyB is one of the instruments for achieving this objective. The CCyB is an additional capital requirement for banks, central credit unions and central credit union groups which consists of Common Equity Tier 1 (CET1) capital. The application of the CCyB is regulated by the Rules for the Formation of Capital Buffers, adopted by Resolution No. 03-51 of the Board of the Bank of Lithuania of 9 April 2015. Since 1 October 2021, a resolution by the Board of the Bank of Lithuania on the setting of the CCyB is adopted only if the CCyB rate is changed.
- Applicable and announced countercyclical capital buffer rates in EU countries
- Applicable and announced countercyclical capital buffer rates in Basel Committee on Banking Supervision member jurisdictions
Decisions for setting the countercyclical capital buffer rate:
Identification of third countries material for Lithuania's banking sector
In December 2015, the European Systemic Risk Board (ESRB) adopted Recommendation ESRB/2015/1 to standardise decisions by individual Member States on the countercyclical capital buffer to be applied to exposures to non-EU countries (‘third countries’). The Recommendation provides that the designated national authorities identify on an annual basis the third countries to which their domestic banking sectors are materially exposed and monitor the risks stemming from excessive credit growth towards these countries. The procedures regarding the identification of material third countries, recognising and setting the countercyclical buffer rates thereof and communication of relevant decisions have been set up in the Bank of Lithuania in accordance with this recommendation.
In 2019, 2020 and 2021, the Bank of Lithuania did not identify any material third countries for Lithuania's banking sector (the Russian Federation was identified as material third country for Lithuania in 2017 and 2018).
The identification of the material third countries is made in accordance with the criteria laid down in Decision ESRB/2015/3 and used by the ESRB to identify the third countries material to the European Union. More information on the methodology used for the identification of material third countries is available in the Background Material for Decision on Countercyclical Capital Buffer.
Buffer of other systemically important institutions
In seeking to increase the resilience of systemically important banks to negative shocks, the EU countries’ macroprudential policy makers identify systemically important financial institutions and set additional capital buffers for these institutions. At EU level, additional capital buffers for systemically important institutions are provided in Capital Requirements Directive IV. They are set taking into account the importance of systemically important institutions as well as potential harm to the country’s financial sector and economy as a whole on the back of the downfall of a particular institution. The additional capital buffer enables these institutions to cover sizeable potential losses, thus reducing the probability of their bankruptcy.
In determining the systemic importance of financial institutions, the Bank of Lithuania uses the following criteria:
- importance to the EU or Lithuanian economy;
- importance of cross-border activities;
- interconnectedness of an institution or financial group and the financial system.
The process of determining the systemic importance of financial institutions is detailed in the Guidelines of the European Banking Authority of 16 December 2014 and the occasional paper Application of the capital buffer requirement for other systemically important institutions in Lithuania (614.6 KB download icon) of the Bank of Lithuania. The application of the capital buffer of other systemically important institutions is regulated by the Rules for the Formation of Capital Buffers (280.9 KB download icon), adopted by the Board of the Bank of Lithuania on 9 April 2015.
Other systemically important institutions were identified for the first time in Lithuania in 2015. They had to meet their additional capital buffer requirements starting from 31 December 2016.
The list of other systemically important institutions and the size of the capital buffer set for them is reviewed and published at the end of each year.
The history of Resolutions on the identification of other systemically important institutions and the setting of capital buffer rates for them is presented below.
Systemically important institutions and their additional capital buffers*
– 0.5 per cent by 30/12/2021 (inclusive);
– 1 per cent from 31/12/2021.
– 0.5 per cent by 30/12/2021 (inclusive);
– 1 per cent from 31/12/2021.
|Resolution (61.8 KB download icon)|
|Q2 2020||The entry into force of the capital buffer of 1 per cent of the total risk-weighted exposure amount was postponed; it will come into force on 31 December 2021.||Resolution (94 KB download icon)|
– 0.5 per cent by 30/12/2020 (inclusive);
– 1 per cent from 31/12/2020.
|Resolution (190.2 KB download icon)|
– 0.5 per cent by 30/12/2020 (inclusive);
– 1 per cent from 31/12/2020.
(as of 2 January 2019, Luminor Bank, AB, operating in Lithuania was merged with Luminor Bank AS which is licensed in Estonia, therefore, the O-SII buffer requirement is no longer applicable to the Lithuanian branch of Luminor Bank AS from this date.)
|Resolution (128 KB download icon)|
||Resolution (128.7 KB download icon)|
Capital buffers came into force on 31/12/2016.
Capital buffers came into force on 31/12/2016.
* Applied in terms of the highest consolidation level in the country and calculated from the total risk-weighted exposure amount.
Sectoral systemic risk buffer
On 25 November 2021, the Board of the Bank of Lithuania took a decision (66.2 KB download icon) to set a sectoral systemic risk buffer, with effect from 1 July 2022. The objectives of the buffer are the following:
- To increase financial system resilience in the event of a higher risk of potential housing market overheating, i.e. to have sufficient capital buffer to cover potential losses and a rise in capital need in the event of emergence of systemic housing market risks or during economic downturns (the requirement would also help mitigate a potential decline in the supply of credit to the economy in the said unfavourable scenarios);
- To contribute to the reduction of fast housing credit growth and to help prevent the formation of imbalances in the housing loan market.
The new capital buffer has been set considering the persistent fast growth of the housing loan portfolio and the acceleration of its growth in 2021, a faster rise in housing prices and the related signs of their deviation from fundamental values, a significant growth in the share of housing loans in the loan portfolios of credit institutions and other housing market-related indicators.
The sectoral systemic risk buffer may act as a sectoral counter-cyclical capital buffer that is better targeted at the risks emerging in a certain specific sector, whereas the traditional overall counter-cyclical capital buffer could have a disproportionate unfavourable effect on other sectors, e.g. lending to non-financial institutions that is just starting to recover after the pandemic. In the future, when considering the changes to one or both of these buffers, their interaction and combined impact in a specific situation will be taken into account.
The sectoral systemic risk buffer will comprise 2% of the amount of an institution’s risk-weighted retail exposures, which are secured by residential real estate, with respect to natural persons resident in the Republic of Lithuania.
The buffer is applicable to banks and central credit union groups established in Lithuania (at the highest national consolidation level), whose housing loan portfolios are equal or exceed €50 million. According to the current data, the following institutions will be subject to this requirement as of 1 July 2022:
- AB SEB bankas
- Swedbank, AB
- AB Šiaulių bankas
- Lithuanian Central Credit Union group
- United Central Credit Union group
Taking into consideration the fact that one-fourth of housing loans in Lithuania are loans granted by foreign bank branches, the Bank of Lithuania addressed the European Systemic Risk Board, requesting it to issue a recommendation to responsible institutions of other states to recognise the sectoral systemic risk buffer set by the Bank of Lithuania and to apply it to banks established in their jurisdictions that have housing loan portfolios exceeding the above-mentioned significance threshold.
Assessment of the impact of transactions on systemic risk
In order to limit the risk to financial stability that may rise from excessive concentration in the banking sector, the Bank of Lithuania assesses the impact of merger and acquisition transactions planned by banks on systemic risk level.
As laid down in Article 771 of the Republic of Lithuania Law on Banks, banks (including foreign banks, branches established in Lithuania) and subsidiary financial institutions of banking groups supervised on a consolidated basis shall obtain the consent by the Bank of Lithuania in order to enter into the following transactions:
- to reorganise by way of merger;
- to acquire assets, due to which the share of the bank or banking group assets in the Lithuanian credit institutions system would increase by more than 1 percentage point (information on total assets of the Lithuanian banking sector can be found here and on total assets of the credit union sector here);
- to obtain a qualifying holding in the authorised capital and/or voting rights of a credit or financial institution (including foreign institutions that have established a branch in Lithuania), when, as a result, the acquiring institution gains the right to control the activities of another institution.
The principles of and criteria for assessing transactions are laid down in the Description of procedure for systemic risk assessment in the credit institution sector. The assessment is carried out in two stages:
- first, the future importance of the entity in different financial services markets after the transaction is assessed, i.e. what market segment will be enjoyed by the entity after the transaction (higher importance indicates a bigger risk to the financial sector stability, if the entity is faced with financial and other difficulties);
- then, the holistic assessment of systemic risk indicators and the overall scale of the change is conducted.
The higher the importance established in the first stage of the assessment, the more rigorous assessment of criteria is conducted in the second stage. Transactions shall not be authorised if it has been established that they can affect the systemic risk level in the credit institutions system of the Republic of Lithuania.
Application of other EU country macroprudential instruments
We cooperate with the European Systemic Risk Board, which is responsible for macroprudential supervision of the EU financial system, in order to ensure EU Member State recognition and reciprocity of macroprudential policy measures, i.e. instruments to prevent risks to the financial system.
The European Systemic Risk Board (hereinafter – Board) issued a Recommendation to ensure voluntary recognition and reciprocity for macroprudential policy measures among EU Member States. The Board aims to form a practice, where national authorities recognise macroprudential policy measures applied in other Member States as automatically as possible. The Board regularly updates the Recommendation, supplementing it with specific measures applied in other Member States that the Board proposes to recognise.
On 28 June 2017, the Bank of Lithuania adopted its framework (rules) for the reciprocation of other Member States’ macroprudential policy measures in Lithuania. Two core elements of the framework are as follows:
1) other EU Member States’ measures that were recommended to reciprocate by the ESRB will be reciprocated and applied to institutions authorised in Lithuania automatically without adopting any separate decisions;
2) the Bank of Lithuania shall reciprocate these measures applying them to such scope as recommended by the ESRB (in the amendments to the reciprocity recommendation) and without using any exceptions.
The Bank of Lithuania retains the right to decide not to reciprocate the recommended measure or use exceptions if deemed necessary. In addition to this, the reciprocated measures shall come into force three months after the recommendation is published in the EU Official Journal (if the recommendation does not include a different time frame).
|Date||Recommendation||Implementation of the Recommendation|
|21 December 2018||Recommendation ESRB/2018/5 on the recognition and reciprocation of Belgian macroprudential policy measure||
The Bank of Lithuania implemented the Recommendation and, according to its framework (rules) for the reciprocation of other Member States' macroprudential measures, obligated IRB banks operating in Lithuania to apply as of 21 December 2018 a risk-weight add-on for retail exposures secured by residential immovable property located in Belgium.The add-on is composed of two components:
|1 May 2019||Recommendation ESRB/2018/8 on the recognition and reciprocation of French macroprudential policy measure||
French measure - a tightening of the large exposure limit provided for in Article 395(1) of Regulation (EU) No 575/2013, applicable to exposures to highly-indebted large non-financial corporations having their registered office in France to 5 per cent of eligible capital, applied in accordance with Article 458(2)(d)(ii) of Regulation (EU) No 575/2013 to global systemically important institutions (G-SIIs) and other systemically important institutions (O-SIIs) at the highest level of consolidation of their banking prudential perimeter. Financial service providers that fall under the scope of this Recommendation (namely O-SIIs) in Lithuanian jurisdiction are exempted from applying this measure (following the proposed combined materiality thresholds) due to negligible exposures to France (in sum constituting only EUR 31 million). However, the Bank of Lithuania is committed to review the changes in exposures’ size annually and begin applying the measure if the exposures become relevant.
|20 June 2019||Recommendation ESRB/2019/01 on the recognition and reciprocation of Swedish macroprudential policy measure||The Bank of Lithuania implemented the Recommendation and, according to its framework (rules) for the reciprocation of other Member States' macroprudential measures, obligated IRB banks operating in Lithuania to apply as of 20 June 2019 a credit institution-specific floor of 25 per cent for the exposure-weighted average of the risk weights applied to the portfolio of retail exposures to obligors residing in Sweden secured by immovable property.|
|Recommendation||Implementation of the Recommendation|
|24 June 2016||Recommendation ESRB/2016/4 on the recognition and reciprocation of the 1-per cent systemic risk buffer rate in Estonia||
This measure expired 1 May 2020.
The Bank of Lithuania implemented the Recommendation and, by Resolution of the Board of the Bank of Lithuania, obligated banks operating in Lithuania to apply as of 3 July 2017 a 1 per cent systemic risk buffer rate for all positions held in Estonia.
|2 May 2018||Recommendation ESRB/2018/1 on the recognition and reciprocation of the 15-per cent floor for the average risk-weight in Finland||
This measure expired 1 January 2021.
The Bank of Lithuania implemented the Recommendation and, according to its framework (rules) for the reciprocation of other Member States' macroprudential measures, obligated IRB banks operating in Lithuania to apply as of 3 May 2018 a 15 per cent floor for the average risk-weight on loans secured by a mortgage on housing units in Finland.
The aim of deposit insurance is to ensure the protection of depositors’ funds in the event of insolvency of credit institutions (banks and credit unions), thereby contributing to maintaining financial market stability and enhancing public confidence in credit institutions. In Lithuania, deposit insurance is governed by the Republic of Lithuania Law on Insurance of Deposits and Liabilities to Investors, which transposes the provisions of the Deposit Guarantee Schemes Directive (adopted in 2014) harmonising the basic principles of deposit insurance across the EU.
Deposits held with banks and credit unions established in Lithuania are insured for the amount of up to €100,000 and, in certain specific cases, up to €300,000 (see Article 4(2) of the Law on Insurance of Deposits and Liabilities of Investors). Deposits held with branches of foreign banks operating in Lithuania are insured in the country where the bank is established and, in accordance with the Directive, the amount of insurance may not be less than €100,000. The sum insured is calculated by aggregating the balances of all the depositor’s deposit accounts in all offices and branches of that bank. Balances in foreign currencies are converted into euro. Deposits of one person held with different banks or credit unions are covered by separate guarantees, i.e. in the amount of up to €100,000 with each bank or credit union.
In the event of an insured event, deposit insurance benefits are paid from the Deposit Insurance Fund, which is administered by the state company Deposit and Investment Insurance. The Deposit Insurance Fund is funded from the contributions paid by participants in a deposit insurance scheme, i.e. banks and credit unions established in Lithuania. The annual contribution rate is set annually by the Ministry of Finance and is valid for the period from 1 July of the current year to 30 June of the following year. The annual rate is set with a view to accumulating in the Deposit Insurance Fund, by 3 July 2024, the minimum target level of 0.8% of total insured deposits as required by the Directive and, by 3 July 2038, the national target level of 2% of total insured deposits.
The Bank of Lithuania annually assesses the relative risk of operations of the institutions participating in the deposit insurance system and determines operational risk weights, which are one of the factors used to calculate the amount of contributions to the Deposit Insurance Fund for specific institutions. The purpose of the application of operational risk weights is to ensure that institutions posing relatively higher risk to the Deposit Insurance Fund pay relatively higher contributions than institutions posing lower risk. Relative operational risk weights are determined using the methodology approved by the Board of the Bank of Lithuania developed in accordance with the Guidelines of the European Banking Authority.