Bank of Lithuania

1. The Board discussed the results of the inspection of Bank Snoras carried out from May 12 to June 20, 2003.

The Bank was instructed to assess the shortcomings in the classification of doubtful assets established during the inspection and make the necessary specific provisions by 31 December 2003.

In addition, the Bank was instructed to reduce the amount of loans granted to natural and legal persons or other organisations in offshore and equivalent territories.

The above decision was taken with the aim of gradually reducing the concentration of loans issued to offshore borrowers.

2. The Board approved the General Provisions on Bank Operational Risk Management.

The Provisions were developed with the aim of defining the key principles in managing operational risk, encouraging banks to start the implementation of an effective system for managing them and in this way prepare for the implementation of the New Capital Accord of the Basel Committee, which assumes calculation of capital charges to cover operational risk.

The Provisions also discus operational risk management environment and the procedures for identifying, assessing, monitoring and controlling such risk. Each bank is expected to include operational risk in its stress testing exercises.

To ensure effectiveness of market discipline, the Provisions also set the requirements for published information to include significant information in relation to operational risk management.

The Provisions will become effective as from 31 December 2003.

3. The Board reviewed the performance of credit institutions and the supervision of credit institutions in the second quarter.

More detailed information on the topic is available on the website of the Bank of Lithuania (

4. The Board reviewed the report on the investment of foreign reserves in the first half of 2003.

Over the first half of 2003 foreign reserves went up by EUR 106.7 million (4.6%) and on 30 June 2003 made up EUR 2,427.3 million.

The largest increase occurred in March when the funds from the distribution of the Eurobond issue by the Ministry of Finance of the Republic of Lithuania (EUR 274.6 million) were received. In April the reserves declined by EUR 290 million, mostly due to the redemption of an earlier Eurobond issue (nominal value EUR 250 million).

The reserves were strongly influenced by a growing demand for litas brought by the continuing economic growth. With the rate of inflation remaining low and nominal interest rates declining further, real interest rates went down as well. This encouraged business investment and domestic consumption. These factors increased aggregate demand, which, in turn, increased demand for cash.

Net purchase of foreign exchange by the Bank of Lithuania from commercial banks increased foreign reserves by EUR 46.2 million. The largest purchase of the anchor currency of EUR 63.8 million occurred in February, while the largest sale of EUR 52.0 million was in April.

The development of foreign reserves was also strongly influenced by the operations of Bank of Lithuania depositors. Including foreign exchange, operations of Bank of Lithuania depositors pushed the reserves up by EUR 55.0 million over the period.

The third significant factor was the EUR 43.9 million income of the Bank of Lithuania from foreign exchange investment (EUR 79 million in 2002).

In January the Bank of Lithuania repaid its share of the remaining loan from the IMF, which reduced foreign reserves by EUR 51.1 million.