Bank of Lithuania
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Lithuania’s banking sector is faced with exceptional circumstances: due to particularly high liquidity and predominance of floating-rate loan portfolio of banks, the increased interest rates have been passed on to borrowers very quickly, while the rise in interest rates on deposits has been much slower. Similarly, as the key interest grows, excess liquidity generates unexpected returns. This leads to a significant increase in the banking system’s profits. In the view of the Bank of Lithuania, should the circumstances remain unchanged, it is appropriate to consider the necessity of fiscal measures and to implement measures promoting competition and enhancing consumer choice.

“The unusually strong growth in the profits of the country’s banks is due not only to business decisions but also to exceptional circumstances. We therefore urge banks to take into account the peculiarities of this period and to shape the pricing of financial services in a socially responsible way. If the windfall profit surge continues this year, it is appropriate to redistribute it through fiscal measures,” says Gediminas Šimkus, Chairman of the Board of the Bank of Lithuania.

According to Šimkus, lending rates in Lithuania are rising because the European Central Bank is tightening monetary policy to bring inflation back to 2%. The consequences of the pandemic and russia’s war against Ukraine have led to an unusual situation that resulted in excess liquidity of banks, high inflation and the need to tighten monetary policy. Banks currently hold €11 billion more in resident deposits than in loans and keep this surplus mainly in the central bank. The unusually high liquidity in the context of rapidly rising key interest rates forms atypical circumstances that lead to unexpected returns for some banks. Should the circumstances remain unchanged, banks’ profits might nearly double this year compared to 2022. This situation also highlights the peculiarities of the local financial market, such as high market concentration, low choice of savings instruments, and limited financial literacy, which make the widening of the gap between loan and deposit rates more marked and likely to persist longer than in other countries.

In this situation, the Bank of Lithuania proposes two courses of action: promoting competition and consumer choice, and actions on windfall profits of banks. To promote competition and increase consumer choice, the Bank of Lithuania will review the fixed-rate loan product with the aim of fixing a larger proportion of interest rates on new loans for a period longer than 1 year on more attractive terms than up until now. The interest rates on deposits with banks and credit unions will be published on the website of the Bank of Lithuania to make it easier for consumers to compare the terms of different credit institutions. In the view of the Bank of Lithuania, it is appropriate to create a safe alternative to savings, so that people can lend to the state. This could contribute to reducing excess liquidity in the banking sector and encourage banks to raise deposit rates. The Bank of Lithuania draws consumers’ attention to the fact that opportunities provided by the market are already available. Saving is possible not only by keeping deposits, but also by choosing other low-risk saving means, such as buying Lithuanian government bonds, which are a safe financial instrument with a relatively high annual yield of around 4%.

For those who have loans and are planning to borrow, it is worth knowing that in Lithuania housing loans are provided not only by several largest banks but also by a total of seven banks, as well as credit unions. For those who have a housing loan, it is worth looking into refinancing options or negotiating a better margin with their current bank.

With regard to banks’ windfall profits, the Bank of Lithuania:

(1) proposes to consider increasing the rate of bank contributions to the Deposit Insurance Fund, thus strengthening the Fund and the reserves for potential future shocks. A temporary increase in the contribution rate would help to ensure that the target level of the Fund set by the European Union regulation (0.8%) is maintained and that the national target level (2%) is reached within the statutory time frame;

(2) urges banks to take into account the peculiarities of the exceptional period and to shape the pricing of loan margins and commission rates in a socially responsible way;

(3) will review the regulation on the pricing and composition of regulated basket of payment services. The Bank of Lithuania will put forward a proposal taking into account the social aspect;

(4) if the windfall profit surge continues in 2023, it would be appropriate to redistribute it in a fiscal way, e.g. by imposing a temporary super-levy until the situation normalises.