Financial stability instruments
Responsible Lending Regulations
In 2011 the Bank of Lithuania first introduced the Responsible Lending Regulations (399 KB download icon) (with later amendments) seeking to encourage the practice of responsible lending by credit institutions, maintain the market's discipline and ensure transparency of operations, decrease the systemic risk of the credit institutions sector, imbalanced changes in real estate prices and wanting to protect consumers from the excessive burden of financial liabilities.
Responsible Lending Regulations obligate credit institutions to fully assess the ability of credit borrowers to return credit in the long term and pay all related contributions, define the largest permitted loan-to-value ratio as well as the largest debt-service-to-income ratio, defines the highest possible repayment duration and other factors of responsible lending.
The Regulations establish the following requirements:
- loan-to-value ratio – maximum 85 per cent;
- debt service-to-income ratio – maximum 40 per cent;
- credit repayment duration – maximum 30 years;
- other factors of responsible lending.
Countercyclical capital buffer
On 31 March 2020, the Board of the Bank of Lithuania took a decision to set a 0% countercyclical capital buffer (CCyB) rate, with effect from 1 April 2020. It is envisaged that the CCyB rate will not be increased for at least 12 months, i.e. the higher CCyB rate would come into force on 1 April 2022 at the earliest as normally the change takes effect after a transitional 12 month-period. This indicative period will also depend on the further economic and financial developments
The CCyB requirement is intended to ensure that the banking sector accumulates sufficient capital to be able to cover potential losses in case of cyclical systemic risk or during periods of economic downturn or stress. At the end of 2017, the Bank of Lithuania took a decision that, given the then-current economic upturn, with no financial imbalances, relatively high credit and RE market activity and profitable banking activities, banks needed to gradually accumulate a 1% CCyB. From 31 December 2018, national banks became subject to a 0.5% CCyB requirement. Since 30 June 2019 the CCyB rate has been set at 1%. When the positive CCyB rate was set, it was emphasised that the CCyB rate would be further increased if any financial imbalances were to be observed, and, conversely, reduced in view of economic shocks or a shift in the financial cycle to the recession phase.
One of the major intermediate objectives of macroprudential policy is to mitigate and prevent excessive credit growth and leverage. The countercyclical capital buffer is one of the instruments for achieving this objective. The application of the countercyclical capital buffer 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.
By accumulating a sufficient capital buffer to cover potential losses of banks over the crisis period, credit cyclicality is restrained and the resilience of the financial system is strengthened. When faced with economic shocks or recession, the capital requirement would be relaxed, thus widening the possibilities for credit institutions to maintain credit supply. If economic growth and credit growth are sustainable and no cyclical imbalances form in the economy, it is aimed at holding a countercyclical capital buffer of at least 1 per cent accumulated. An additional 1 per cent requirement, which could be reduced when the economy faces unexpected shocks, would help reduce the cyclicality of crediting, and of the economy at the same time. The countercyclical capital buffer rate is an additional requirement to be guaranteed by the Common Equity Tier 1 (CET1) capital of banks.
The countercyclical capital buffer rate is set each quarter. The rate is set on the basis of 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 discussion papers Application of the Countercyclical Capital Buffer in Lithuania (1.1 MB download icon) and Leading Indicators for the Countercyclical Capital Buffer in Lithuania (839.1 KB download icon).
- 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 and 2020, 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.
|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.
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 protection of deposits in case of financial institution insolvency, thus contributing to the stability of the financial market and enhancing the public’s trust in financial institutions. In Lithuania, deposits are insured in the amount of up to EUR 100 thousand, when they are held with a bank, bank branch or credit union. The insured amount is calculated by totalling up the balances on the accounts of the depositor's total deposits with all divisions and branches of that bank. Foreign currency account balances are converted to euro. Deposits of one person, held with different banks or credit unions, are provided individual guarantees, i.e. up to EUR 100,000 with each individual bank or credit union.
With a view to aligning the main principles of deposit insurance across the EU, the Directive on Deposit Guarantee Schemes was adopted in 2014. The aim of the Directive was to make uniform deposit insurance coverage in EU countries and ensure equal conditions of competition for deposit-accepting institutions in different countries.
On 3 December 2015, the provisions of the Directive were transposed to Lithuanian law, amending the Republic of Lithuania Law on Insurance of Deposits and Liabilities to Investors. Under the Law, by June of every year, for one year – from 1 July to 30 June of the next year – the Bank of Lithuania assesses the operating risk of institutions paying premiums into the Deposit Insurance Fund. Financial institutions are assessed in terms of risk to ensure that institutions whose bankruptcy risk is higher would pay higher premiums into the Deposit Insurance Fund than less risky financial institutions. The functions of the administration of the Deposit Insurance Fund and calculation of annual premiums are performed by state company Deposit and Investment Insurance.
This Directive implements some principles of the deposit insurance system:
- a minimum target level of 0.8 per cent of the amount of insured deposits within the deposit insurance system has been set, to be achieved by national deposit guarantee schemes by 3 July 2024;
- when setting insurance premiums, participants of the deposit insurance system are assessed in terms of their risk;
- deposit insurance premiums are paid for insured deposits in the amount of up to EUR 100,000.