2020-03-16
In an effort to mitigate the negative impact of the coronavirus (COVID-19) outbreak on the domestic economy, today the Bank of Lithuania and the European Central Bank (ECB) are launching additional stimulus measures to boost lending to the real economy. The detrimental impact may be first and foremost alleviated by the Government’s stabilisation tools that will be used to preserve jobs and maintain the viability of businesses. In this rapidly changing situation, many unknowns remain, yet according to current Bank of Lithuania calculations, the coronavirus spread will force the country’s economy to contract by at least 1.2% in 2020.
“We are closely monitoring the current economic situation as well as evaluating potential scenarios, and thus can already state that the Lithuanian economy is set to shrink due to the coronavirus impact. We are collaborating with the Government on the adoption of fiscal measures that should be the first and most effective aid in such a situation. As a central bank, we also have other tools at our disposal to ensure financial stability and more favourable financial conditions: some of them have already been implemented, while the rest might be used later,” said Vitas Vasiliauskas, Chairman of the Board of the Bank of Lithuania.
In order to boost corporate and household lending, the Bank of Lithuania will take a more flexible approach in terms of some capital and liquidity requirements imposed on banks and will relax additional capital buffers (e.g. the countercyclical capital buffer rate) if deemed necessary. This would allow banks to provide additional €2 billion in loans to businesses and residents.
Vasiliauskas noted that banks currently have sufficient capital and liquidity buffers to ensure operational stability. Stress testing results have shown that the banking system is fully equipped to withstand severe economic shocks. Even in case of recession similar to the 2009 crisis, the banking system’s capital adequacy ratio would remain at around 12%, still significantly above the minimum requirement.
If needed, the Bank of Lithuania, together with the ECB, could grant banks cheap liquidity loans against collateral at very favourable rates in order to further ensure sufficient lending to the real economy. According to the Bank of Lithuania, banks could thus borrow more than €1 billion which could be used for corporate and household loans. The Bank of Lithuania and the ECB will also provide additional monetary injections into Lithuania’s economy, in turn boosting government bond purchases in the secondary market.
The Bank of Lithuania also urges creditors to look to understand the situation of each customer facing financial difficulties on a case-by-case basis, offering them loan repayment deferrals or mortgage holidays with no interest increases or reassessment of their creditworthiness.
The Bank of Lithuania will also reschedule its routine on-site inspections, provide some leeway in terms of reporting deadlines and take other measures to alleviate the immediate regulatory burden for financial institutions at this challenging juncture.