Bank of Lithuania
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Since the economic upturn in Lithuania is currently overshadowed with challenges of COVID-19, the Bank of Lithuania has decided to release the countercyclical capital buffer (CCyB), reducing the rate from 1% to 0%. The €86 million reserve that banks accumulated during an upswing will help them ensure stable operation and give a stronger footing to maintain sufficient lending to the real economy. Due to notification procedures, the relaxed CCyB requirement will come into force on 1 April 2020.

“The released buffer would allow banks to provide up to €1 billion in loans to businesses and residents, thus partly offsetting the adverse impact of COVID-19 on the country’s economy,” said Vitas Vasiliauskas, Chairman of the Board of the Bank of Lithuania. According to him, the CCyB ensures that banks stock up for a rainy day while the economic skies are still bright. This has indeed been done – the banking sector has reasonable capital reserves to support stability and lending to the economy in a worsening situation. The capital level of banks in Lithuania is high, yet in the face of heightened uncertainty, more extreme economic scenarios may unfold, hence banks must be ready to withstand them. 

The shock caused by the COVID-19 outbreak will undeniably lead to economic contraction, which may turn out to be quite substantial if the current disruption drags on both on a national and international level. Stress tests run by the Bank of Lithuania have shown that banks in Lithuania have adequate buffers to absorb potential losses. However, if faced with a severely adverse scenario, their reserves would drop significantly. According to current forecasts, which have been based on an optimistic short-term shock assumption, should the country’s GDP decline by 1.2% in 2020, banks’ capital adequacy ratio would shrink to 18.7%; under a more acute scenario similar to the 2009 crisis, it would decrease to 11.3%.  

“We expect that the release of the CCyB will prompt banks to use last year’s retained earnings as a source of financing their activities for the remainder of 2020. Given the high uncertainty surrounding future economic developments and having assessed the impact of the more severe scenario on the capital adequacy ratio, we urge banks not to pay out dividends but to use them for strengthening their capital base,” said Vasiliauskas. 

Since 30 June 2019, national banks have been subject to a 1% CCyB rate. Set in view of the prevailing financial and economic trends, the CCyB requirement is intended to ensure that the banking system accumulates sufficient capital to be able to cover potential losses in case of cyclical systemic risk or during periods of economic downturn or stress.

This decision is subject to notification to the European Central Bank according to Article 5 of the SSM Regulation.