Bank of Lithuania
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Activity in the credit and real estate (RE) market remains high, the economy is growing, and the financial performance of credit institutions is good. It is therefore now the right time for them to accumulate additional capital reserve – a counter-cyclical capital buffer. By decision of the Board of the Bank of Lithuania, the buffer requirement has been raised from 0.5% to 1%. Additional capital buffer will have to be accumulated in a year.

‘The financial sector has been exhibiting sustainable growth: the loan portfolio has been growing, the RE market remains active, and housing prices have been rising moderately. Now is the right time to accumulate a capital buffer that could be used during an economic slowdown,’ says Tomas Garbaravičius, Member of the Board of the Bank of Lithuania.

According to him, having set the countercyclical buffer rate at 1%, the Bank of Lithuania holds a position it announced when setting this requirement (in December 2017) that this is the desirable rate to be held ‘in good times’, i.e. when the financial sector development is neither too weak nor too strong. As a result of raising the countercyclical capital buffer rate from 0.5% to 1%, financial institutions will have to put aside additional €60 million by the end of June 2019. The absolute majority of financial institutions already now hold capital sufficient to meet the above-named requirement thus strengthening financial sector resilience, whereas the impact of raising the capital buffer on lending volumes and the cost of lending will be marginal.

The number of housing transactions this year has been among the largest since 2008; the interest rates on housing loans, after edging somewhat up recently, still remain at historical lows, slightly above 2%. With growth in residents’ income and improving expectations, the housing loan portfolio has been growing steadily around 8% for almost a year. While lending increases and RE market activity remains high, growth in housing prices has recently been weaker than wage growth. Nevertheless, as housing market activity stabilises, the number of constructed new flats not yet sold has been growing in Vilnius – the country’s major RE market. Towards the end of the first quarter of 2018, the number for such flats has been one of the largest in the last few years.

With Lithuanian residents’ income posting one of the fastest rates across the EU and the interest rates and credit standards further remaining attractive, housing market activity is likely not to decelerate significantly, to stay close to the levels observed in early 2018.

‘We have been closely monitoring the financial sector ‘temperature’ and would take additional action should the market start overheating. Nevertheless, the latest credit and housing market indicators show no signs of excessive risk,’ says Mr Garbaravičius.

The Bank of Lithuania revises its countercyclical capital buffer rate on a quarterly basis in view of the credit and RE market situation.