2014-06-26
The financial system is resilient to shocks, but potential risks must be carefully observed
According to the Bank of Lithuania’s newest Financial Stability Review, Lithuania’s financial system is well-prepared to withstand adverse shocks, but there are processes which require increased vigilance.
“The uncertainties in the economic development of global, and especially Lithuania’s, export partners is one of the most relevant risks; however, testing showed that the country’s financial system is highly resistant to large shocks equivalent to the recent devastating crisis. It has been established that the banking system has a substantial capital shield, while the available liquid holdings would help withstand even a significant decline in deposits,” said Vitas Vasiliauskas, Chairman of the Board of the Bank of Lithuania, in commenting the stress-testing of the financial system.
The resilience of banks is tested by so-called stress tests. Particularly adverse developments were modelled, corresponding to the extent of the 2008–2009 crisis, although the probability of such events is currently low. The results of the tests indicated that even in the worst case scenario the additional capital requirement in the banking system would amount to only 0.9 per cent of the current banking system’s capital.
Watchful monitoring is necessary due to the recent intensification in the real estate market. This market is important for financial stability, because the assets in which it trades often are also the means for securing a loan.
“Currently there is no housing credit boom, which had heated up the real estate market in 2005–2006. More active construction indicated that supply is also reacting without delay to the intensification of the housing market. This is cooling down the market. However, the Bank of Lithuania will continue to monitor the development of the real estate market, and, if necessary, will promptly take measures to prevent new bubbles,” says V. Vasiliauskas.
The Bank of Lithuania in 2011 approved the Responsible Lending Regulations. They are used to limit inadvertent lending and borrowing. Also, additional measures, such as anticyclical capital requirements for commercial banks, to manage the credit market, will be provided to the Bank of Lithuania by the EU’s Fourth Capital Requirements Directive, which should be transferred into Lithuanian legislation this year.
The Financial Stability Review is published by the Bank of Lithuania annually. Its purpose — to assess potential risks to Lithuania’s financial system and identify the possibilities to withstand this risk. The detailed 2014 Financial Stability Review (1.7 MB download icon) is published on the Bank of Lithuania website.