2015-04-09
The Board of the Bank of Lithuania has laid down new requirements regarding banks’ capital buffers and banks’ internal management. The requirements have been approved with two resolutions designated for the implementation of the Capital Requirements Directive IV, a key document of the European Union in the field of banking activity.
Capital buffers will have to be formed for protecting the financial system
Taking into account the increasing importance of regulating systemic risk, banks, the Central Credit Union and financial brokerage firms, besides the minimum capital requirement, to which the 8 per cent ratio continues to be applied, were instructed to form additional capital buffers, as established in the Capital Requirements Directive IV.
The purpose of the capital buffer is to regulate the economic cycle, protect the financial system from the risk of disruption, which could have serious negative consequences to the financial system and the economy. The European Union institutions will have to calculate and form five capital buffers: capital conservation buffer, an institution’s special countercyclical capital buffer, globally systemically important institutions buffer, other systemically important institutions buffer and systemic risk buffer. Since there are no globally systemically important institutions in Lithuania, the appropriate buffer is not relevant.
On 30 June 2015, a 2.5 per cent capital conservation buffer requirement will be applied to institutions in Lithuania. Decisions on the prospects for the application of other capital buffers in Lithuania are planned to be adopted over 2015.
Small investment companies operating in Lithuania are exempt from the calculation of an institution’s special counter-cyclical capital buffer.
If institutions violate the capital buffer requirements, they will be subject to the limitation of the payment of dividends and application of other remuneration measures. In that case, institutions will have to present to the Bank of Lithuania a capital conservation plan, which will have to present well-grounded proof that, given the existing situation, their capital will be properly protected or it will be sufficiently increased to the required secure, in the opinion of the Bank of Lithuania, level.
On 31 December 2014, the capital adequacy ratio of the banking system was 21.3 per cent.
Banks will strengthen shareholder control and internal management
The requirements of the Capital Requirements Directive IV related to strengthening of banks’ internal management and shareholder control were transposed into national law.
The banks, which, according to the requirements of laws regulating bank’s activities and the requirements of the supervisory institution’s legal acts, will be recognised as other systemically important institutions, will be required to found appointment, remuneration and risk committees. The risk committee will have to advise bodies of a bank on the institution’s overall current and future risk tolerable to it and strategy, and help supervise how this strategy is implemented by the senior management. The appointment committee will propose candidates to free positions in the bodies of the bank and recommend to the bodies of the bank or general meeting of the shareholders (members) to consider them; it will also assess the structure, size, composition and operating performance of the bodies of banks and present to the bank bodies recommendations on necessary changes. The remuneration committee will assess the remuneration policy and practice at the bank; it will have to ensure that the remuneration system takes into account all types of risk.
Only members of the supervisory council of a bank will be able to be members of these committees. They will have to ensure that the bank’s actions and decisions related to risk management, establishment of remuneration and appointment of heads of the bank are in line with the interests of the bank’s shareholders and are consistent with the safe and sound activity of the bank. For banks which belong to financial groups, the opportunity is foreseen for the functions assigned to the committees to be performed through committees established at parent banks, if the financial group is subject to joint (consolidated) supervision and compliance with the requirements established for these committees is ensured at the parent banks.
For members of the bodies of the banks which will be recognised as other systemically important institutions, additional requirements to limit professional responsibilities have been established, i.e. the largest acceptable number of positions (in boards and/or supervisory councils) for one member of a bank’s body has been established. This number will not be limited, if the responsibilities are to be performed within the same financial group.