2007-10-11
1. The Board of the Bank of Lithuania has approved the General Regulations for Undated Debt Securities and their Inclusion into the Bank Capital.
These Regulations establish the procedure on the inclusion of undated debt securities into the bank capital and are meant for the implementation of the General Regulations for the Calculation of Capital Adequacy, approved by the Bank of Lithuania Board on 9 November 2006, and recommendations of the Basel Committee on Banking Supervision.
Undated debt securities are included into Tier II bank capital only with the permission of the Board of the Bank of Lithuania. It has been determined that undated debt securities and privileged shares taken together cannot exceed 30% of Tier I bank capital.
The new document defines the conditions for undated debt securities to be included into the bank capital.
Undated debt securities, like privileged shares, other capital instruments possessing features of both, debt securities and equities, are called hybrid capital instruments or just hybrids. This year the Committee of European Banking Supervisors has performed the quantitative assessment of the own funds of the banks of EU countries. The assessment has revealed, inter alia, that hybrid capital instruments account for 11% on average of the capital base of EU banks.
2. Supplement of the 21 December 2000 Resolution No. 172 “Rules for the Calculation of Capital Adequacy” of the Board of the Bank of Lithuania
The Board of the Bank of Lithuania has supplemented the Rules for the Calculation of Capital Adequacy.
It will be allowed to include undated debt securities into Tier II bank capital only when they comply with particular requirements established in the General Regulations for Undated Debt Securities and their Inclusion into the Bank Capital.
The implementation of this Resolution is expected to have a positive impact on the competitiveness of national banks in the inter-bank market of EU countries, it will also contribute to the strengthening of the capital base of banks and will allow the banks to attain higher financial reliability and reduce the assumed risk.
It has been observed that legal acts of the European Union allow to include undated debt securities into the capital of a commercial bank. However, the amended Rules for the Calculation of Capital Adequacy stick to a conservative approach regarding this issue in order to discourage the growth of crediting.
3. Approval of General Regulations for Stress Testing
The Board of the Bank of Lithuania has approved new General Regulations for Stress Testing. This resolution shall enter into force on 1 December 2007.
As from 2008 a new capital adequacy calculation procedure will come into effect, and each credit institution will be obliged to ensure that an effective and functional mechanism of determining internal capital requirement (internal capital adequacy assessment process) be created inside it with regard to the scope and nature of its activities, assumed risk and performed operations. This mechanism shall have to be approved by management institutions.
An obligatory stress testing of the bank activities is one of the conditions for an adequate capital distribution and risk assessment of the bank activities. With this in regard, frequency of testing, possible testing methods, main testing requirements have been envisaged, those responsible for the organisation of testing in a credit institution have been determined.
It has been envisaged that credit institutions will have to perform stress testing for each material risk type identified during the internal capital adequacy assessment process.
The banks have been obligated to provide information on stress testing to the Bank of Lithuania on an annual basis. Therefore, requirements as to the contents of such information have been determined.