2006-11-09
1. The Board of the Bank of Lithuania reviewed the results of the inspection of Medicinos bankas and instructed the bank to remove the inspection report-specified shortcomings of the activities by 1 April 2007.
The inspection focused on the credit risk and bank management, as well as the internal control in relation to these risks.
2. Regarding general provisions on Capital Adequacy Rules
The Board of the Bank of Lithuania approved General Provisions on Capital Adequacy Rules and two statement forms. The above decision was taken to conform to the requirements of the Basle Committee on Banking Supervision, known as Basel II, as well as the EU directives relating to the new framework of the capital adequacy of banks.
Lithuanian banks are to switch to the new document requirements on 1 January 2008.
The Provisions stipulate for banks and the Central Credit Union to carry the assessment of credit, market and operational risks while calculating the capital adequacy. The absolutely new capital adequacy framework concept which focuses on more risk-sensitive capital adequacy requirements, as provided for in the Provisions, stipulates for the risk assessment necessity in future. The dynamic nature of risks requires taking into account potential losses and, after having analysed the risk development trend, ensuring stability and reliability of banking operations.
The Provisions contain an absolutely new credit risk assessment concept. To do the credit risk assessment banks will be able to apply both the standardised approach focusing on the use of the external credit risk assessment authorities-prepared ratings of credits granted to borrowers while determining the risk capital need and internal ratings-based methods providing for the development of internal rating systems. Permission of the Bank of Lithuania will be needed to apply the latter.
For credit assessment banks will be able to use an innovative method such as mitigation of credit risk taking into account the security measures.
Moreover, having in mind a wide-spread securitisation practice in Europe, which is undoubtedly to become important to Lithuanian banks in a short-run, the Provisions provide the methodology for calculating capital demand for securitisation exposures in the light of credit risk assessment.
Market risk assessment methods virtually have not changed. It means that: banks will be further allowed using standardized or internal risk-based models to measure this type of risks, however, if we look into the latest market development trends, we would notice that the procedures for calculating the need for risk capital of counterparties have become more complicated. To calculate the counterparty’s need for risk capital, banks will be able to use their own internal models (upon the permission of the Bank of Lithuania) rather than standard procedures only.
The capital adequacy calculating rules which were in force until now did not provide for banks an opportunity to carry out an assessment of the operational risk, which, based on the recent practices, can lead to material loss for banks. The new procedures offer to banks three methods for evaluation of operational risk, which are as follows: the anchor indicator-based method, the standardised approach, and the advanced measurement approach. Banks will be allowed to use the advanced measurement approach only upon receiving permission of the Bank of Lithuania.
General Provisions for Calculating Capital Adequacy have been worked out in implementing the Directive 2006/48/EC of the European Parliament and of the Council of 14 June 2006 relating to the taking up and pursuit of the business of credit institutions (recast) and Directive 2006/49/EC of the European Parliament and of the Council of 14 June 2006 on the capital adequacy of investment firms and credit institutions (recast). The above documents have been adopted taking into account the recommendations of Basel II.
Taking into account the requirements laid down in the above directives, the date of entry into effect of the Provisions was set for 1 January 2007 except for the provisions relating to the application of the progressive internal ratings-based approach used for credit risk evaluation and progressive method for measuring operational risks, which shall come into effect on 1 January 2008.
Five meetings between experts of the Bank of Lithuania and representatives of commercial banks were held in recent three years to discuss draft Provisions to get them acquainted with the planned changes in the capital adequacy calculation system. Commercial banks contributed to gradual improvement of the draft.
3. Regarding procedures for recognition of external credit risk assessment institutions
The Bank of Lithuania approved The Procedures for Recognition of External Credit Risk Assessment Institutions. They constitute one of the components of the new procedures for calculating capital adequacy.
To calculate capital adequacy using the regulations of the directive of the European Parliament and of the Council relating to standard credit risk evaluation method and set risk coefficients for securitisation procedures, banks will be llowed to use services of external credit risk evaluation authorities and apply credit risk ratings issued to borrowers by these authorities.
The approved document establishes minimal requirements for external credit risk evaluation authorities in order to ensure the rationale of the calculation of the capital adequacy of Lithuanian banks, which is regulated by the directive of the European Parliament and of the Council.
The Bank of Lithuania shall be responsible for the recognition of external credit risk evaluation authorities only when it deals with the calculation of capital adequacy, that is, it will decide whether to recognise or not recognise the suitability of such institutions in case the latter are rendering rating services to banks willing to use the above institutions-issued credit risk ratings to calculate their capital adequacy.
4. Regarding Provisions on Evaluation of Reliability and Inspection
The Board of the Bank of Lithuania approved Provisions on Evaluation of Reliability and Inspection. The provisions shall be applied to banks which use internal ratings-based (IRB) approach and advanced measurement approach (AMA) to credit risk.
Under the Provisions, banks which use IRB approach to calculate their capital adequacy will have to evaluate the reliability of internal rating systems and processes used by them, whereas those preferring the AMA approach will have to evaluate the reliability of all basic elements (internal and external data, scenario analysis, business environment and internal control factors) used by them in order to find out whether these systems, processes and basic elements are suitable and are in line with the existing requirements.
The Provisions establish that a bank must have a system for evaluation of the reliability of the IRB method, whereas the Bank of Lithuania shall be responsible for the review of this system and its separate components (the methods and their rationale, data used, reporting, regularity, independence, scope, results and actions taken with regard to the received obtained).
5. Regarding inclusion of subordinated loan in the capital of AB Sampo bankas
The Board granted permission to AB Sampo bankas to include the subordinated 8-year loan of EUR 7.240 million (LTL 25.00 million) received from Sampo bank plc in Tier 2 capital of the Bank.
Sampo bankas
notified the Bank of Lithuania of an agreement concluded regarding the subordinated loan equal to the above mentioned sum with the parent institution Sampo bank plc, and asked for permission to include it into the bank’s capital. According to the bank, additional interest expenses arising from the subordinated loan will not have negative effect on the bank’s financial standing; instead the loan will guarantee the bank’s further development.
The Board of the Bank of Lithuania gives permission to include a subordinated loan into a bank’s capital provided that such a loan is deemed not to have any negative effect on the bank’s financial standing and meets the conditions set for inclusion of subordinated loans into a bank’s capital.
6. On granting permission to register changes in the Articles of Association of Snoro bankas
The Board of the Bank of Lithuania permitted AB Snoro bankas to register amendments to its Articles of Association, relating to the increase of the bank’s authorised capital to LTL 157,267,200, which was approved during the general meeting of the shareholders on 15 March 2006.
Currently, the authorised capital of Snoro bankas makes up LTL 137,267,200 divided into 13,726,720 ordinary shares with nominal value of LTL 10.
The general meeting of the shareholders of Snoro bankas of 15 March 2006 adopted a decision on boosting the bank’s authorised capital by LTL 20.00 million with additional monetary contributions by placing 2 million of 10% non-cumulative preference shares of a nominal value of LTL 10 each without the voting right, and adopted a decision to make changes to the bank’s Articles of Association. The bank’s request for permission of the Bank of Lithuania to register the changes to its Articles of Association indicated that the increase of the bank’s authorised capital would have positive effect on meeting the prudential requirements, allow for more rapid development of the bank, will ensure the bank operations, their safety and stability, and have no negative influence on the bank operations.
7. Regarding rotation of shareholders of ABSnoro bankas
The Credit Institutions Supervision Department presented to the Board of the Bank of Lithuania information on the rotation of shareholders of Snoro bankas.
The Board of the Bank of Lithuania gave its consent for Mr. Vladimir Antonov to acquire 1/2 and Mr. Raimondas Baranauskas to acquire 1/5 of the qualifying share and/or voting rights of the authorised capital of Snoro bankas.
Such decision allows the first one to acquire 50% and more shares, whereas the other one may acquire 20% to 33% of the bank shares.
The above two shareholders of Snoro bankas submitted a request to the Bank of Lithuania for permission to acquire a qualified share of the authorised capital and (or) voting rights of the authorised capital of Snoro bankas to gain the control of the bank and hold 93.75% of the bank’s authorised capital and (or) voting rights (68.65 percent for Mr. Vladimir Antonov and 25.10 percent for Mr. Raimondas Baranauskas).
The Board's decision on its consent to grant permission regarding the acquisition of the qualified share of the authorised capital and (or) voting rights of Snoro bankas includes requirements regarding the improvement of the bank’s management, greater transparency of the shareholder structure and operational reliability.