Financial stability instruments

[[#ex]]

Responsible Lending Regulations

In 2011, the Bank of Lithuania approved the Responsible Lending Regulations (as subsequently amended and supplemented), the aim of which is to promote responsible lending practices of credit providers, market discipline and transparency in activities with a view to minimising systemic risk of credit providers, preventing unsustainable developments in real estate prices and over-indebtedness of borrowers.

The Responsible Lending Regulations require credit providers, when granting real estate-related credit to natural persons, 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) is 85% (i.e. the minimum down payment is at least 15%).
• A lower maximum LTV of 70% (i.e. the down payment requirement of at least 30%) will be applicable to the second and subsequent credit agreements as well as in case the amount of previous housing loans is increased.

The exemptions to this requirements are as follows:

• 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 will be 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 any additional real estate and by mortgaging the real estate that already belongs to them. In principle, this allows to further increase the amount of credit available per person for repair, construction, renovation or other purposes, without a stricter down payment requirement.

• The maximum debt-service-to-income ratio (DSTI) is 40%.

The exemption to this requirement is as follows:

• the ratio of the borrower’s average premium to income may be higher than 40% but must not exceed 60%, where the credit provider has reasonable and sufficient evidence that this does not breach the principles of responsible lending. The amount of such credits granted by the credit provider may not exceed 5% of the total amount of new credit agreements concluded by the credit provider for the purchase of housing in a calendar year.

• The maximum credit repayment duration is 30 years.
• Other factors of responsible lending. 

More information on issues related to the Responsible Lending Regulations can be found here.

Related documents:

Regulations on the Assessment of the Creditworthiness of Consumer Credit Borrowers and Responsible Lending

Republic of Lithuania Law on Real Estate Related Credit

Countercyclical capital buffer

Current countercyclical capital buffer (CCyB) rate in Lithuania is 1%. 

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 2023 and 2024, the Bank of Lithuania considers the United Kingdom a material third country for Lithuania's banking sector. In 2019, 2020, 2021 and 2022, the Bank of Lithuania did not identify any material third countries for Lithuania's banking sector.

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:

1. size;
2. importance to the EU or Lithuanian economy;
3. importance of cross-border activities;
4. 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, 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.

* 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 comprises 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:

• AB SEB bankas
• Swedbank, AB
• AB Šiaulių bankas
• UAB Urbo 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 (ESRB). ESRB upon the request by the bank of Lithuania issued a recommendation to competent authorities 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. Currently the buffer requirement is recognised and applied by Estonian, Latvian and Swedish competent authorities.

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:

1. 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);
2. 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

Voluntary recognition and reciprocity of macroprudential policy measures among EU Member States is ensured in accordance with the ESRB’s Recommendation ESRB/2015/2 on the assessment of cross-border effects of and voluntary reciprocity for macroprudential policy measures, as amended, which recommends the recognition and application of specific macroprudential policy measures adopted by other Member States. 

In order to reduce regulatory arbitrage and ensure equal conditions of competition in the single market, the ESRB’s Recommendation is aimed at ensuring that national authorities automatically recognise macro-prudential policy measures applied by other Member States as far as possible.

In Lithuania, the voluntary recognition and reciprocity of macroprudential policy measures is implemented in accordance with the framework for reciprocation of macroprudential policy measures of other Member States, developed in line with the ESRB’s Recommendation. The main elements of the framework are as follows:

• automatic recognition of measures – the Bank of Lithuania shall automatically recognise and reciprocate macroprudential policy measures applied by other Member States without adopting any additional legislation;

• exemptions for institutions with insignificant exposures – without adopting additional decisions, the Bank of Lithuania shall not apply macroprudential policy measures adopted by other Member States to institutions the respective exposures of which in the countries requesting reciprocation of the measure do not exceed €50 million. This exemption applies only to new measures recommended by the ESRB for reciprocation after 1 January 2021.

In all cases, the Bank of Lithuania retains the right to decide not to reciprocate the recommended measure or apply exemptions if necessary. In addition, reciprocated measures enter into force in Lithuania three months after the date of publication of the ESRB Recommendation in the Official Journal of the EU. 

Measures currently in force

Deposit insurance

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.

[[#ex]]