Bank of Lithuania
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Banks operating in Lithuania and central credit union groups will have to strengthen their financial resilience and accumulate additional capital buffer, i.e. counter-cyclical capital buffer (CCyB). Such a decision was made by the Board of the Bank of Lithuania, which set the CCyB rate of 1%, bringing it back to pre-pandemic levels.

“The financial health of banks remains good, as confirmed by their recent performance: most banks are profitable and their profits are growing. Therefore, now is the time for credit institutions to build up additional capital buffer. These funds would help mitigate the impact of the energy shock on the economy and the financial system, especially in case of protracted tensions over the war against Ukraine and expensive energy resources, and significant impairment of the quality of bank loans,” said Raimondas Kuodis, Deputy Chair of the Board of the Bank of Lithuania.

The European Systemic Risk Board (ESRB) has also warned about the increased risk to financial stability and the probability of tail-risk scenarios materialising at EU level. The ESRB also encourages to impose financial stability and supervisory measures that would sustain and strengthen the resilience of the EU financial sector, so that it can support the financing of the real economy, should financial stability risks materialise.

Banks will have to accumulate the CCyB within one year, as the 1% CCyB rate will come into effect on 1 October 2023. This requirement will allow to additionally accumulate around €118 million of capital, i.e. around one third of the banks’ annual profits. The increased CCyB rate would automatically apply to foreign bank branches and foreign banks lending cross-border in Lithuania. The same rate was applied before the pandemic.

Following a slowdown at the beginning of the pandemic, bank lending has been increasing in the recent period and remains in a cyclical upturn. According to the estimates of Bank of Lithuania economists, the increase in the CCyB rate in the current circumstances will not have a significant impact on crediting and interest rates. In the short term, lending to businesses could slow down by up to 2.5 percentage points and that to households by 1 percentage point, while interest rates on loans would remain broadly unchanged. In the long term, the positive impact on Lithuania’s long-term economic development will be considerably stronger due to increased bank resilience. Stricter capital requirements mean that more funds remain in banks for potential provisions and less is paid out in dividends. Banks already have a sufficient voluntary capital buffer: taking the profits earned in the first half of the year into consideration, banks already far exceed the existing capital requirements. Moreover, banks are profitable and their profitability may improve even further due to rising interest rates.

The applied measure is flexible: in the event of a major shock to economic growth, the CCyB rate can be quickly reduced and credit institutions could divert the freed-up funds to the real economy when it is most needed. For instance, the CCyB rate was reduced from 1% to 0% during the COVID-19 pandemic. This freed up around €86 million of capital, increased the supply of credit and mitigated the adverse impact of the pandemic on the economy.

Read more in the latest Credit and Real Estate Market Review prepared by the Bank of Lithuania.