New Financial Stability Review

According to the Review, the financial system of Lithuania and its most significant component - the banking system - should be assessed as stable and capable of withstanding internal and external shocks. On the other hand, the Review indicates that the risk to the stability of the financial system increased, compared to the beginning of 2006 and 2007, although only moderately.

By publishing the Financial Stability Review, the Bank of Lithuania aims at reviewing the development of the financial system of Lithuania and evaluating its capacity to operate under the conditions of a less favourable macroeconomic environment.

The Review states that the situation of the debtors of domestic banks remains good: the profit of enterprises and household income grew rapidly. The operations of banks were profitable, whereas the capital base strengthened even more in the beginning of the year. However, both external and internal macroeconomic environment changed: increasing evidence implies that the economic growth will be slower, therefore, the risk to the banking system will increase in its own turn in 2008, although only moderately. The main risks to the banking system arise due to higher tension related to the liquidity situation in global markets, as well as a potential more abrupt decline in the loan portfolio quality. It would happen, if the financial situation of enterprises worsened, the rate of unemployment grew and the real income of households declined as a result of a more rapid than forecasted deceleration of the growth of the national economy.

The results of the credit risk stress testing of the banking system showed that the largest banks of the country were resilient to large scale negative changes of the economic situation, such as the fall in the real estate prices and the growth of interest rates. Moreover, the banking system held sufficient reserves of liquid assets, ensuring both the performance of current liabilities and sufficiently high resilience to unexpected shocks related to the reduction in liquidity.

The Review describes the most important financial system risk reduction measures applied in 2007 and the beginning of 2008.

The Bank of Lithuania has been publishing such reviews once per year since 2006. They are prepared by the Economics Department of the Bank in cooperation with other departments.

The Financial Stability Review (2008) and its summary is available on the website of the Bank of Lithuania.