Bank of Lithuania
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Upon assessment of the development of credit and real estate market, the Board of the Bank of Lithuania decided to obligate credit institutions to accumulate an additional countercyclical capital buffer of 0.5 per cent. This measure, applied for the first time in the history of Lithuania, will help strengthen the resilience of the financial system against potential shocks.

‘There has been an upswing in the financial cycle for some time: lending for households and enterprises has increased, trading in real estate has been active and its prices have been on the rise. Other economic indicators show growth as well. At times such as this, it is important to strengthen the resilience of the financial system and prepare for such a time when the phase of the cycle will change or we face unexpected economic shocks. Strengthening the bank and credit union capital buffer, we will fortify the entire financial system,’ said Vitas Vasiliauskas, Chairman of the Board of the Bank of Lithuania.

According to the Chairman of the Board, the countercyclical capital buffer is currently an optimal measure – strengthening the resilience of financial institutions will entail a marginal impact on current lending volumes or prices. The applied measure is flexible: if economic growth decelerated or in case of a shock, the countercyclical capital buffer rate could be quickly reduced and credit institutions could divert their spare funds to the real economy – this can be done at a time when they are required the most.

Additional capital buffer of 0.5 per cent is to be accumulated by credit institutions (banks and central credit unions) within a year.

If the market trends remain the same: credit will grow, housing prices will rise and the number of transactions will remain large, in other words, if the current temperature in the economy and the financial system remains similar, next year the Bank of Lithuania may decide to raise the countercyclical capital buffer rate to 1 per cent. The aim is to have a countercyclical capital buffer rate of 1 per cent ‘at a good time’ – when the expansion of the financial sector is neither too slow nor too fast.

‘We will continue to keep a close watch on the situation. At present all major credit market participants expect the market to remain in high gear: banks plan a further increase of lending both to households and enterprises, while the main share of households expect housing prices to continue rising,’ said Simonas Krėpšta, Director of the Financial Stability Department of the Bank of Lithuania.

According to the latest data of Statistics Lithuania, in Q3 2017 in Lithuania housing prices rose 8.5 per cent year on year, while the first two consecutive quarters of this year posted a double-digit increase – 10.2 per cent.

The overall portfolio of loans to the private non-financial sector granted by credit unions and banks over the year (in October of this year, compared to the respective period in 2016) grew by 7.4 per cent. Housing loans saw the most substantial increase, rising by 9.0 per cent. The portfolio of corporate loans expanded by 7.0 per cent during this period.

Countercyclical Capital Buffer (2017/Q4)