IMF: Lithuania’s financial system is strong, though vulnerabilities call for vigilance
According to the IMF Staff Report for the 2018 Article IV Consultation, Lithuania’s financial stability indicators remain strong, its banking system is well capitalised, liquid, and profitable as well as fully equipped to support credit growth over the near term.
As stated in the in-depth IMF report on economic policy pursued in Lithuania, the main risks to the domestic banking system could arise from the acceleration in housing prices and credit, as well as spillovers from developments in Nordic countries through parent banks. Such assumptions matched the ones proposed in the Bank of Lithuania’s Financial Stability Report for 2018.
The IMF report notes that in recent years, the number of transactions in the real estate market rose substantially and neared the pre-crisis peak. Housing prices, especially in major urban centres, also followed an upward trend. Nonetheless, the level of corporate and household indebtedness is still modest. Private debt to banks comprised 41% of GDP, falling well below the level recorded during the pre-crisis boom when it exceeded 60% of GDP. Similarly, housing prices remain significantly below their 2007 peak, especially when adjusted for inflation.
Even though there are no signs of financial imbalances emerging, the Bank of Lithuania should remain vigilant and monitor developments in the housing and credit markets for any signs of overheating.
In this regard, the Bank of Lithuania has a broad set of supervisory and macroprudential (countercyclical, sectoral and liquidity) instruments to tackle potential shocks. In view of the active credit and real estate markets, high profitability of banks and the current market situation, the Bank of Lithuania has already raised the countercyclical capital buffer to 0.51%. According to the IMF, the Bank of Lithuania should continue to proactively use the instruments at hand so as to ensure the resilience of the domestic financial system and prevent the build up of imbalances.
In the assessment of the IMF, increasing reliance of Nordic subsidiaries on domestic funding is a positive development, limiting risks from adverse developments in Nordic countries. The IMF experts encourage the Bank of Lithuania to maintain close cooperation with regional regulators and actively participate in the Nordic-Baltic financial stability fora.
Finally, the report states that the ongoing reform of the credit union sector has had an overall strengthening effect.
The latest IMF Staff Report for the 2018 Article IV Consultation in Lithuania is available here.