Bank of Lithuania
2011-06-08

In the Financial Stability Review 2011, the Bank of Lithuania states that the domestic financial system remained stable. The loan portfolio is expected to grow and its quality to improve. 

“Even operating under unfavourable circumstances, the banking sector remained stable and is beginning to show obvious signs of recovery”, Chairman of the Board of the Bank of Lithuania Vitas Vasiliauskas said while commenting on the Financial Stability Review. However, he stressed that “today’s good news do not provide grounds for relaxing, and banks, in order to maintain sustainability, must adequately assess their losses on impaired loans and attract additional capital”.

With the aim of assessing the risks and the preparation of domestic banks to withstand them, the Bank performed stress testing of the financial system. It was analysed how banks would be affected by a sharp and considerable decline in the country’s exports, a strong rise of the interest rates due to higher risk premia, a potential sharp correction of real estate prices in the Scandinavian countries and other threats.

The results of the stress testing revealed that, in the event of an extreme decline in exports, the banking system would need to attract around LTL 230 million of additional capital by the end of 2012, whereas in the case of a drastic rise of the interest rates about LTL 650 million would be needed to cover its potential losses. However, risks of such an extent are unlikely.

“If bank loan impairment losses are assessed conservatively under the main economic development scenario, additional capital of around LTL 60 million is needed to cover them. Although it is just 0.8 per cent of the current capital base of the system, such an increase of the capital would help addressing balance sheet problems and ensuring a safe and stable environment for the operation of banks”, Vitas Vasiliauskas stated.

The Financial Stability Review also emphasises that banks must extend the maturity of their liabilities and lend responsibly. This would help avoiding past mistakes, such as a rapid increase in real estate prices and unfounded market speculations.

Taking into consideration the experience of Lithuania and other countries gained during the recent global economic crisis, the Bank of Lithuania aims at reducing the probability of future large-scale crises by undertaking preventive measures in advance. With this aim in view, the Guidelines for Responsible Lending were drawn up and other macro-prudential measures are under discussion.

According to Vitas Vasiliauskas, the principles of responsible lending that are based on the loan to value ratio, the debt to income ratio, and the rules of adequate disclosure of information and risk management will enhance the domestic financial system’s resilience to potential market imbalances, particularly those related to price bubbles.

The Financial Stability Review is published by the Bank of Lithuania annually. Its purpose is to assess the potential risk to Lithuania’s financial system and to analyse its possibilities to cope with it.

For more information on the Financial Stability Review, see the website of the Bank of Lithuania.