Housing credit issuers will need to accumulate a higher capital buffer
The Board of the Bank of Lithuania officially implemented its earlier intention to apply an additional capital buffer of 2% to housing loan portfolios of credit issuers, in order to cool down the heating housing market and reduce financial stability risks. As of 1 July 2022, this requirement will be applied to credit institutions with the housing loan portfolio exceeding €50 million. Currently, there are five such institutions.
“This year is exceptional in terms of housing market activity, which is followed by a significant price growth acceleration. If such trends continue, the risk of housing market overheating will increase. At the same time, the share of housing loans in bank balances is constantly growing, making them more sensitive to potential shocks in this market segment. Therefore, an additional capital buffer targeted directly at the housing loan portfolio will strengthen financial system resilience and contribute to the reduction of the risks of market overheating and the formation of imbalances,” says Gediminas Šimkus, Chairman of the Board of the Bank of Lithuania.
This capital requirement will be applied under a similar principle as the countercyclical capital buffer. However, this capital buffer will be calculated for retail exposures to resident natural persons which are secured by residential property instead of all exposures.
The capital buffer requirement will not be applicable to those institutions whose housing loan portfolio comprises a very small share of the sector’s housing loans, i.e. when their portfolio is lower than €50 million, which currently accounts for around 0.5% of total housing loans in Lithuania. Thus, this requirement will not affect those market participants whose impact on the market’s systemic risk is insignificant. According to the current data, the capital buffer will be applicable to 5 institutions: AB SEB bankas, Swedbank, AB, AB Šiaulių bankas and Lietuvos centrinė kredito unija and Jungtinė centrinė kredito unija credit union groups.
The intention of the Bank of Lithuania to apply a sectoral systemic risk buffer to housing credit issuers was publicly announced at the end of September. The planned decision was notified to the European Systemic Risk Board and coordinated with the European Central Bank. Also, taking into consideration the fact that one-fourth of housing loans in Lithuania are loans granted by foreign bank branches, the Bank of Lithuania addressed the European Systemic Risk Board, requesting it to issue a recommendation to responsible institutions of other states to recognise the sectoral systemic risk buffer set by the Bank of Lithuania and to apply it to banks established in their jurisdictions that have housing loan portfolios exceeding the above-mentioned significance threshold in Lithuania.
Additional capital buffer requirements to systemically important institutions will remain unchanged
According to the Rules for the Formation of Capital Buffers, the Bank of Lithuania reviewed the systemic importance of Lithuania’s credit institutions, same as each year. It was decided to leave the size of the buffer for systemically important institutions unchanged.
Taking into account their systemic importance, AB SEB bankas and Swedbank, AB will continue to be subject to the previous capital buffer requirement of 2%, which is the maximum requirement allowed by legal acts, whereas AB Šiaulių bankas is required to increase the capital buffer from 0.5% to 1% as of 31 December 2021.