Survey: greatest risk to financial system — impact of protracted low interest rates period on profitability
Financial institutions indicated the potential negative impact of the protracted period of low interest rates as the most significant risk to Lithuania’s financial system shows the Survey of Risks to Lithuania’s Financial System conducted by the Bank of Lithuania. According to financial system participants, the potential impact of the risk related to geopolitical tensions in Eastern Europe is reducing, yet the cybercrime risk has increased.
‘Even though Lithuanian financial institutions indicate that the impact of low interest rates on their profitability currently poses the greatest challenge, the banking sector is successfully dealing with this problem. In Lithuania, operations of banks were profitable and in the fourth quarter of 2016 they even managed to increase their net interest income. This was driven by the growing loan portfolio, zero threshold for the EURIBOR rate established in new loan agreements, and lower interest rates on deposits’, said Tomas Garbaravičius, Member of the Board of the Bank of Lithuania.
The low interest rate environment could also have an impact on insurance corporations. In 2012–2015, the share of life assurance products with guaranteed interest rates, which could have a direct impact on the stability of the insurance sector, reduced, yet it remains significant (more than a fifth of all life assurance premiums written in 2015).
The surveyed financial system participants believe the cybercrime risk to be of great importance as well. Financial institutions view this risk as one of three most likely risks that could have a negative effect on the financial system. Compared to other financial institutions, banks saw this risk as slightly more important.
Having been viewed as the most likely, in this Survey the risk related to geopolitical tensions in the East and the imposition of economic sanctions remains one of the major risks. However, according to the respondents, the probability of such a risk, compared to the previous half-year, has diminished. Financial institutions note geopolitical threats in other regions as well. Among events that could have a negative impact on the financial system, financial institutions also indicated the possibility of the UK leaving the EU (almost a fifth of the respondents) and the aggravation of the refugee crisis in Europe (a tenth of the respondents).
Financial institutions also saw the upcoming autumn Seimas elections (7% of the respondents) and potential changes in the regulatory environment (11% of the respondents) as risks that could have a negative impact on Lithuania’s financial system.
Over the half-year, financial institutions’ concern over the deterioration of the financial situation of both enterprises and households: financial institutions believe that their financial situation should not worsen. Just like a year ago, financial system participants are of the opinion that unsustainable credit and property market growth is unlikely.
According to financial institutions, the importance of permanent risks related to the macroeconomic environment, changes in the financial market, credit risk, etc. for Lithuania’s financial system diminished somewhat over the half-year.
The Bank of Lithuania conducts the Survey of Risks biannually. The Survey is conducted in order to assess the views of financial institutions towards the domestic financial system and likely challenges to its sustainable future development. More information on the survey results is presented in the latest Review of the Survey of Risks to Lithuania’s Financial System.