Foreword

Dalintis:

The year 2022 was marked by shocks, in particular by russia’s brutal military invasion of Ukraine and by the subsequent energy blackmail that both our national economy and the global economy were subjected to. Energy and commodity price shocks were the main causes of persistent and rampant inflation. The response to these two shocks – aid to Ukraine and combating inflation and its negative consequences, both for the economy and for the purchasing power of households – comprised the activities of the Bank of Lithuania.

As part of the Eurosystem, together with the ECB and other euro area central banks, we took significant monetary policy decisions in 2022 and early 2023 with the aim of returning inflation back to 2% over the medium term. Such decisions accelerated the normalisation of monetary policy, ending the era of negative interest rates and then gradually tightening monetary policy. As of March 2023, the key ECB interest rate has been raised six times, to 3.0%. In addition, in July 2022, the Governing Council of the ECB suspended net asset purchases under the asset purchase programme, and, as of March 2023, began to reduce the size of the accumulated portfolio. Such decisions and monetary policy instruments mean a tightening of financing conditions for Lithuania and the euro area economy as a whole, but this will help to bring inflation back on track over the medium term.

The new interest rate environment in Lithuania’s banking sector led to the formation of exceptional circumstances that triggered an increase in net interest income and bank profits. Crucially, this was achieved through the exceptional circumstances referred to above – not through usual business development. If these circumstances remain unchanged, profit in the banking sector might rise to around three times the multi-annual average in the coming years. Together with the Ministry of Finance, we have proposed that a solidarity contribution and part of the windfall profits of banks be used to finance military mobility and military transport infrastructure projects.

Having survived energy and commodity price shocks, the Lithuanian economy remained on a growth path in 2022: GDP was 1.9% higher last year than in the previous year. Extremely expensive commodities, especially energy, have led, through production and supply chains, to particularly sharp and strong rises in prices and a reduction in the purchasing power of households. Annual inflation developments in Lithuania in 2022 can be divided into two parts: a consistent increase up to peak inflation in September (22.5%), and a consistent decline in the following months. Rising energy prices were the main contributor to the increase in annual inflation, while the moderation of energy price growth was the main contributor to the decline in annual inflation towards the end of the year. Taking into account the average annual inflation of 18.9%, household consumption was relatively strong, with household consumption expenditure 0.5% higher than a year ago. This resilience was underpinned by the labour market situation, which was favourable for employees. Wages and salaries continued to rise rapidly due to staff shortages – in the period under review, the latter indicator was around 13.4% higher than a year ago. Ukrainian war refugees successfully entering the Lithuanian labour market had a significant influence. This particular contributor led to the country’s number of employed persons to grow to around 1.45 million, which is the highest level recorded since 2008. Wages and salaries are expected to continue rising, and their growth rate is expected to outpace receding inflation by the middle of this year. Therefore, the purchasing power of consumers will start growing again.

Lithuanian banks have so far successfully weathered the challenges posed by russia’s war against Ukraine, are well capitalised and have excess liquidity, most of which is held in particularly liquid form with the central bank. This means that our banking sector is well prepared for various challenges, including financial market tensions in the financial systems of other countries. The higher sectoral systemic risk buffer rate set by the Bank of Lithuania for the housing loan portfolio, stricter down payment requirements for the second and subsequent housing loans, and rising interest rates contributed to the cooling down of the overheated housing market. In 2022, the Bank of Lithuania set a countercyclical buffer rate of 1%, which will help to ensure that the financial system is able to withstand shocks. Banks and central credit union groups operating in Lithuania will have to comply with this requirement from 1 October 2023.

In the first days of russia’s aggression against Ukraine, there was an increase in demand for cash. By meeting the demand promptly and communicating actively, we effectively tackled this challenge in a very short period of time. Moreover, the public was assured that Lithuania’s cash reserves are sufficient, and that the Bank of Lithuania, credit institutions and cash-in-transit companies are prepared to meet even unexpected increases in demand for cash.

Taking into account the importance of cash for certain segments of society and having assessed the level of access to cash in the country, the Bank of Lithuania took the initiative to improve the quality of this service. The Memorandum of Understanding for Ensuring Access to Cash in Lithuania was signed and successfully implemented by the Bank of Lithuania, the Association of Lithuanian Banks and the major financial institutions. This has created the preconditions for significant densification of the network of cash access points in Lithuania and has made it possible for residents in rural areas to access cash in a faster and more convenient way, with the improvement of access to cash to around 250 thousand residents in 40 municipalities across the country. The expansion of the ATM network was focused specifically on the regions, with 100 new ATMs installed in small residential areas where there has never been an ATM previously. Although the vast majority (more than 90%) of the country’s population is now within 10 km of an ATM, we will continue to monitor and assess the situation of access to cash in Lithuania and, if necessary, take initiatives to further improve the accessibility of financial services and means of payment.

With the aim of ensuring better accessibility of financial services to residents and taking into account the valid requirement that salaries must be transferred to accounts, the Bank of Lithuania updated the methodology for calculating the maximum remuneration for the management of the basic payment account and approved a price cap, which came into force from 1 January 2023. As a result of this decision, the commission fee for the basic account service was reduced to €1.37, while this fee for persons receiving social assistance may not exceed €0.68 per month. We have already started working on a proposal for a review of the legal regulation of the basic payment account service, which we will submit later this year, to ensure that basic payment services continue to be provided at an affordable price by securing the protection of the interests of all, including socially vulnerable residents.

The payment patterns of the population are also changing, with increasing numbers of people paying by electronic means. There has been a significant increase in the share of the population prioritising payments by card, mobile phone or smart device, making contactless payments and using mobile apps developed by payment service providers. Three quarters of Lithuanian residents would prefer non-cash payments, up from 50% in 2021.

In 2022, the number of payments executed via CENTROlink, a payment system managed by the Bank of Lithuania, increased by a factor of 1.5, and the number of instant payments more than doubled.

We actively supported the Ukrainians’ fight for freedom. Together with associations of financial market participants and individual financial institutions, at the very start of the war against Ukraine, we prepared relevant information on financial services in Lithuania for Ukrainian citizens fleeing the war. By entering into an agreement with the National Bank of Ukraine, we made it possible to exchange Ukrainian hryvnias into euro at the rate set by the National Bank of Ukraine. In 2022, we issued a collector coin dedicated to Ukraine’s fight for freedom. Most of the proceeds from these coins were allocated to providing aid for Ukraine. Individuals and businesses purchased the total mintage of this coin, raising almost €350 thousand for Ukraine. We have extended the aid initiative into 2023 by issuing a commemorative €2 coin “Together with Ukraine” in March. When this coin is purchased in numismatic packaging, the majority of the purchase amount goes towards providing aid for Ukraine. Under the EU Twinning Project, together with the central bank of Poland, we have helped the National Bank of Ukraine to strengthen its capacities in the following key areas: banking supervision, payment system development, strategic planning, and cooperation with international institutions.

A significant commemoration meant that 2022 was always going to be special for the Bank of Lithuania: this year was the 100th since the Bank of Lithuania, the central bank of the Republic of Lithuania, started its operations. To commemorate this anniversary, we organised international exhibitions, conferences, guided tours and virtual lectures, and issued collector coins commemorating the centenary. We received huge interest when we opened the historic building of the Bank of Lithuania in Kaunas to the public at an open day event. We also published an album The Art Collection of the Bank of Lithuania, which, for the first time in one place, presented to the public works of art collected by the Bank of Lithuania in the interwar period and after 1990. This included paintings, ceramics, sculptures and stained glass.

The Bank of Lithuania’s voice was heard and trusted in 2022. According to public opinion surveys, the awareness of the Bank of Lithuania has reached its highest level in the history of such surveys – 98% of respondents know the Bank of Lithuania. We are a centre of excellence in economics and finance, with more than 70% of respondents indicating that the Bank of Lithuania has the greatest expertise in this area. This trust of society is something which we greatly appreciate, but it is also a responsibility and an obligation for us. We will continue to be an active, modern and open central bank, creating value for society and lending our expertise to contribute to solving economic and financial problems and to work towards our growth as a mature society.

In this foreword, I have reviewed only the most prominent aspects of the activities of the Bank of Lithuania over the last year. The work carried out by the Bank of Lithuania in 2022 is described in greater detail in the remainder of this publication.

Gediminas Šimkus

Chairman of the Board of the Bank of Lithuania

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Strategic directions

In 2022, the Bank of Lithuania not only responded to shocks but also took steps to implement its strategic objectives. The following specialised centres began their work: the Centre for Financial Market Development, the Centre for Financial Literacy and the Climate Change Centre.

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Strategic direction 1. Value

·The Bank of Lithuania increased access to financial services for the population.

·The development of the financial market and the maturity of its participants were improved.

·The Bank of Lithuania promoted financial and economic literacy across society.

In 2022, the Bank of Lithuania transferred a record-high amount of €20.4 million to the state budget.

The Bank of Lithuania initiated the installation of 100 additional ATMs across the country. This project was successfully implemented, improving access to cash for 250 thousand regional residents in 40 municipalities. The list of ATMs is publicly available and provided in open data formats.

The Bank of Lithuania also lowered the maximum price of the basic payment account service, and – having assessed supervisory information on financial market participants over a 2-year period, consumer complaints, and disputes – made concrete proposals to payment service providers on how to improve customer service, enhance the accessibility of services, and strengthen protection against fraud.

Licensed Lithuanian financial market participants provided payment services to 25 million customers across the EU. Lithuania continued to be the EU leader by the number of EMIs and further strengthened its position as a financial technology hub.

The number of payments carried out through the Bank of Lithuania’s CENTROlink payment system increased by a factor of 1.5, the number of instant payments more than doubled, and the value of all payments grew by one third.

The Bank of Lithuania focuses on increasing the maturity of market participants and applies various supervisory measures (consultations, trainings, Dear CEO letters) that would help to ensure good practice standards in the internal governance and control, risk management and compliance functions of financial market participants.

To promote further successful growth of the country’s financial market, the central bank has set up the Centre for Financial Market Development. It actively seeks ways to strengthen existing financial market participants and attract new ones, implements initiatives related to capital market development and promotes sustainable FinTech development. The attention paid by foreign entities to our country is not waning – data from the Bank of Lithuania’s Newcomer Programme shows that Lithuania remains one of the most attractive jurisdictions in this regard. In 2021–2022, the number of foreign entities interested in doing business in our country and applying to the Bank of Lithuania increased.

To improve the financial and economic literacy of society, the Bank of Lithuania set up the Centre for Financial Literacy. It encourages consumers to make financial decisions based on substantiated and objective information and aims to ensure that consumers are aware of the alternatives in financial services and that they make their choices by comparing between several financial market participants. Cases of fraud and their prevention are given a particular focus. Representatives of the Centre actively participate in conferences and give lectures in Lithuanian regions. The Centre for Financial Literacy also initiated a survey on the financial literacy of the Lithuanian population. This survey is intended to measure the level of financial literacy of the country’s residents, to compare it with the results of other countries participating in the survey, and to identify the weakest areas that need to be focused on in order to improve the knowledge and strengthen the skills of the public. The Centre is taking the initiative by engaging in financial literacy events around the world and involving various Lithuanian institutions and organisations, schools and other educational institutions in their events.

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Strategic direction 2. Sustainability

·A particular focus is on climate change risks.

·Aiming at reducing the CO₂ footprint.

The Bank of Lithuania set up the Climate Change Centre to manage and mitigate climate change risks. Climate change risks include damages caused by physical, natural phenomena and financial losses due to changes brought about by the transition to a greener economy. The Climate Change Centre aims to increase ecological sustainability in all areas of the Bank of Lithuania’s responsibilities, including ensuring the resilience of the financial sector to climate risks, investing in foreign reserve assets and the day-to-day functioning of the organisation.

The Bank of Lithuania uses only green electricity for its own needs. It also monitors and publishes the CO2 footprint of the functioning of the organisation, with the aim of reducing it.

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Strategic direction 3. Progress

·Algorithmic trading for smart investment management.

·Effective data management is a priority.

·Implementation of the Data Management Maturity Programme (DAMAMA).

In terms of operating costs and headcount, the Bank of Lithuania is among the three most efficient central banks in the Nordic and Baltic countries.

The Bank of Lithuania was one of the first central banks in the world to test and deploy an advanced investment management innovation – algorithmic trading. In this type of trade, investment and transaction execution decisions are made by computer programmes that operate with minimal or no human intervention. In 2022, algorithmic trading earned €3 million in returns (compared to €1 million in 2021).

The Bank of Lithuania focuses on effective data management and use and aims to achieve concrete results. For example, the introduction of automated data exchange reduces the administrative burden on financial market participants, while the opening up of quality data via the use of convenient standards provides new opportunities for analysts of various fields and for the general public.

The data governance strategy is implemented by the Bank of Lithuania through the Data Management Maturity Programme (DAMAMA). In 2022, centralised units responsible for data collection, data management, the dissemination of data and statistics, and data platforms commenced their operations. The next step will be to develop and integrate the newest technological solutions into business processes. The achievement of the Programme’s objectives is projected by mid-2025.

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1.Economic and financial overview

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1.1.Real economy

·In 2022, Lithuania’s GDP was 1.9% higher than in the previous year.

·The country’s economic development was most constrained by extremely expensive commodities, especially energy, which, through production and supply chains, resulted in particularly sharp and strong rises in prices and a reduction in the purchasing power of households.

·High inflation and uncertainty about the future caused by russia’s war in Ukraine restrained the growth of household consumption.

·High energy prices significantly constrained the development of goods and services exports, although they were 11.3% higher than in 2021 thanks to a very favourable comparative base effect.

·Slower growth in Lithuania and its main trade partners, uncertainty about the further development of the economies of Lithuania’s main trade partners, and uncertainty about the course of russia’s war in Ukraine limited investment incentives for companies.

Dalintis:

Unfavourable global trends, including extremely high inflation, determined by russia’s war in Ukraine, dampened Lithuania’s economic development in 2022. In 2022, Lithuania’s GDP was 1.9% higher than in the previous year. The country’s economic development was most constrained by extremely expensive commodities, especially energy, which, through production and supply chains, resulted in particularly sharp and significant rises in prices and a reduction in the purchasing power of households. As these trends were not exclusive to Lithuania, but also affected Lithuania’s main trade partners, especially in Europe, the demand for goods and services produced in Lithuania also declined in these markets. The development of the economies of both Lithuania and its main trade partners was also influenced by the decisive actions of monetary policymakers in normalising and later tightening monetary policy. However, it should be noted that the weakening of economic activity has not yet had a significant impact on the labour market situation, while both the operating surplus and mixed income, calculated at current prices, have continued to increase. 

High inflation and uncertainty about the future caused by russia’s war in Ukraine restrained the growth of household consumption. However, a significant proportion of the unfavourable effect of these factors was outweighed by the strong increase in the disposable income of households. In 2022, nominal disposable income was likely to be almost 16% higher than in 2021. The main contributor to the increase in disposable income was the growth of the wage bill, which was boosted by both employment growth and wage growth. While rising wages and employment accounted for almost two thirds of the total increase in disposable income, households’ incomes also increased from other sources of revenue, including economic activities, property income, and social and current transfers. It is also noteworthy that there was no sign of a higher share of households facing financial difficulties in 2022. For example, the results of the European Commission’s consumer survey show that in December 2022, households rated their financial situation better than in 2019, before the COVID-19 pandemic.

High energy prices significantly constrained the development of goods and services exports, although they were 11.3% higher than in 2021 due to a very favourable comparative base effect. In early 2022, Lithuanian exports of goods and services maintained favourable trend, which had been observed in 2021. However, after the outbreak of russia’s war in Ukraine, growing headwinds began to constrain the development of exports. Sanctions against the aggressor and Belarus, introduced in the first half of the year, led to the temporary closure of AB LIFOSA and severely constrained exports of transport services. As of the second half of the year, exports of goods and services were negatively affected by the loss of price competitiveness for some exporters due to high energy prices, and by reduced foreign demand. The latter was mainly influenced by slower growth in the economies of Lithuania’s main trade partners, where soaring prices, tighter monetary policy and uncertainty about the course of russia’s war in Ukraine severely constrained domestic demand. As a result, the volume of exports for many goods produced in Lithuania started to decline. The development of re-exports was much more favourable, with significant growth observed in the second half of 2022. Re-exports of mineral products, chemical and other non-metal mineral products, vehicles and parts thereof, machinery and equipment, and food rose significantly. The growth of re-exports of mineral products was observed mostly to neighbouring countries, while other goods were mainly re-exported to countries in the Commonwealth of Independent States, excluding russia, but re-exports to other regions declined.

Uncertainty about the future development of the economies of Lithuania and its main trade partners, which were all experiencing weaker growth, and uncertainty about the course of russia’s war in Ukraine limited the incentives of businesses to invest. However, high energy prices forced some businesses to upgrade their existing energy generation and consumption facilities. The synergy of these factors led to rather sluggish investment, which in 2022 was only 2.6% higher year on year. Investment in vehicles declined the most. This fall should be associated with the entry into force of the EU Mobility Package and difficulties in acquiring the required number of vehicles due to supply chain bottlenecks. Investment in engineering buildings and structures was also lower, partly constrained by continued increases in investment project cost estimates, while investment in information and communication technology (ICT) equipment remained unchanged. Only investment in housing and other capital goods was higher than in 2021. The increase in housing investment was mainly due to the willingness of real estate developers to complete projects already in progress. Higher investment in other capital goods was influenced by the rise in incentives of businesses to use energy more efficiently due to higher energy prices.

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1.2.Price dynamics

·russia’s war against Ukraine led to a sharp rise in the prices of various commodities, especially energy, pushing average annual inflation up to 18.9% in 2022.

·In 2022, annual inflation rose consistently until September and, after reaching its peak of 22.5%, declined in each successive month for the rest of the year.

·Energy prices rose at an annual rate of 56% in 2022 and were the main driver of inflation.

·Following an increase in food commodity prices, food prices rose at an annual rate of 22% in 2022.

·Core inflation stood at 10.5%, amid rapid wage rises and growth in other costs.

Dalintis:

As russia’s war against Ukraine led to a rise in the prices of various commodities, especially energy, average annual inflation reached the level of 18.9% in 2022. The evolution of annual inflation in Lithuania in 2022 can be divided into two parts: a consistent increase until the peak in September (22.5%) and a consistent decline for the remainder of 2022. Rising energy prices were the main factor behind the increase in annual inflation, while the decrease in energy price growth was the main contributor to the decline in annual inflation at the end of the year.

Energy prices rose at a high average annual rate (56%). This factor accounted for 6.5% of headline inflation in 2022 and served as its main contributor. When russia began to curb its gas supply to Europe as early as in the second half of 2021, gas prices on the market started to rise faster. When russia launched its war against Ukraine, amid the enhanced energy blackmail against Europe and threats of possible gas shortages in the winter, prices of energy resources soared even higher. In 2022, market prices for gas were almost 3 times higher, and electricity 2.5 times higher, than in the previous year. This also affected energy prices for consumers. In 2022, electricity prices for consumers were, on average, 46% higher than in the previous year, while gas prices were 76% higher and heat 83%. The increase in gas prices on the market led to a significant increase in demand for solid fuels, mainly firewood, as an alternative energy source. This resulted in higher prices for solid fuels, which were 127% more expensive in 2022 than in the previous year. The rise in oil prices on the markets also led to an increase in the prices of oil-intensive products such as fuels, which were 35% higher than in the previous year. As for an analysis of the year-on-year evolution of energy prices, it should be noted that the peak of growth in energy prices, as well as in headline inflation, was reached in September. Energy prices then rose at an annual rate of 73%. In the fourth quarter, the annual energy price growth started to moderate, mainly due to lower heat energy prices. The prices of heat energy fell by 15% in December compared to its September peak, while the annual price increase, together with the base effect, fell from 131% (in September) to 34% (in December). Heat energy prices were influenced by decisions that optimised the fuel structure used for the generation of heat energy, including the use of alternative fuels such as fuel oil, as well as by the drop in gas prices on the market at the end of 2022.

As food commodity prices grew, the average annual rate of increase in food prices stood at 22% in 2022, contributing significantly to the growth in annual inflation. In 2022, farm-gate prices for whole milk and grain in Lithuania rose at an annual rate of 51% and 55% respectively. Increases in other costs, such as wages and energy, led to a rise in food prices for consumers, which stood at 22% in 2022, contributing 6 percentage points to headline inflation. In the fourth quarter, food prices became the main driver of inflation in the context of declining annual growth in energy prices. Prices for milk, dairy products and eggs, as well as oil and other fats, saw particularly strong growth, at an average annual rate of 38% and 36% respectively.

Core inflation linked to domestic economic developments, which excludes the most volatile commodity prices such as energy and food, also grew to stand at 10.5% in 2022. In the case of services, one of the components of core inflation, price growth was particularly strongly affected by a rapid increase in wages and salaries (13.4%), as their costs comprise a large share of the cost of services. Price developments of industrial goods, another component of core inflation, were significantly affected not only by domestic factors but also by external ones, such as higher prices of various metals and other industrial commodities. These developments were also affected by supply bottlenecks, which were gradually easing, with the prices of freight carriage by shipping containers falling by a factor of approximately four in December 2022, compared to January.

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1.3.Labour market

·The ongoing refugee crisis, the biggest since World War II, has had a significant impact on Lithuania’s demographic situation: in 2022, the migration balance was at a record high due to the arrival of Ukrainians fleeing the russian aggression.

·Lithuania’s population has shrunk by a quarter since restoration of Independence, but in 2022, due to a record-high balance of foreign migration, the number of permanent residents in Lithuania increased by as much as 2% over the year.

·Favourable migration dynamics had a positive impact on employment developments: in contrast to the first and second waves of the pandemic, employment in Lithuania grew faster due to the war refugees employed since the outbreak of russia’s war in Ukraine.

·Unemployment fell markedly as a result of a significant increase in employment: by mid-2022, the country’s unemployment rate had fallen as low as 5.2%, with such a low unemployment rate last recorded in Lithuania 15 years ago.

·The average monthly gross wage in the country’s economy grew at a two-digit rate, by 13.4%.

The record-high annual growth in the number of permanent residents was determined by favourable migration trends. In 2022, there were around 18 thousand more deaths than births in Lithuania, but this difference was close to the long-term average of negative natural population change. Despite the lower overall birth rate (around 6% fewer births in 2022 compared to 2021) and a high mortality rate, the recorded overall increase in the number of permanent residents was at its highest since the beginning of data publication. The annual population growth of almost 2% was mainly driven by favourable migration trends. Abundant flows of foreign immigrants led to a record-high migration balance: in 2022, around 72 thousand more people arrived in Lithuania than left it. The difference between immigrant and emigrant Lithuanian citizens was positive for the third year in a row, exceeding 1,000 persons, and there were around 71 thousand more foreigners who arrived in the country than left it. As a result, the overall net migration balance, as well as the population rate, increased significantly last year due to the arrival of foreigners.

Dalintis:

The war in Ukraine triggered an increase in the immigration of foreign citizens, especially Ukrainians, Belarusians and russians, as well as changes in emigration directions. According to provisional data of the State Data Agency, around 95 thousand people immigrated to Lithuania in the period under review, which is 60 thousand, or 2.1 times, more than in 2021. Of these, around 3% were russian citizens, and almost one in ten immigrants was a citizen of Belarus. Moreover, 85% of all immigrants were foreign citizens, 76% of whom were Ukrainians. Around 72 thousand war refugees from Ukraine obtained registration with the Migration Department in Lithuania. However, the mentioned number of refugees does not reflect the share of short-term migrants (those who left or were not registered with the Migration Department). In view of the preliminary annual statistics, every fifth war refugee who arrived in Lithuania stayed temporarily. There were also changes in emigration directions. In 2022, 23 thousand permanent residents emigrated from Lithuania, which was around 9% less than in the previous year. The largest emigration flows were to Ukraine (around 20% of the total number of emigrants), the UK and Belarus (12% of the total number of emigrants). Compared to 2021, the largest decreases in the number of emigrants were to the UK (2.1 times), Germany (1.5 times) and Norway (1.3 times).

The increase in the number of people employed was particularly significant, although more moderate growth was recorded at the end of the year. Following the growth in the labour force, there was a significant increase in the number of people employed in 2022. The record-high growth of this indicator in the first half of 2022 (a year-on-year increase of 5.6% in the second quarter of 2022) pushed the number of employed persons up to levels not seen in a long time. According to the data from the labour force survey, the number of people employed amounted to around 1,445 thousand in the third quarter of 2022 (seasonally adjusted data), up by around 10 thousand quarter on quarter, which is the highest level recorded since 2008. In particular, the number of employees increased, but the share of self-employed persons also rose significantly. However, according to the latest data, annual employment growth in the country slowed down to almost 3% in the last quarter of 2022. This slower, but still strong, hiring was driven by a technical factor, i.e. the fading of the low comparative base effect which formed due to the exceptionally rapid decline in employment in the first half of 2021. Weaker growth in economic activity and persisting uncertainty due to geopolitical reasons also contributed to such employment developments. Nevertheless, the successful integration of war refugees into the Lithuanian labour market prevented employment growth from slowing down further.

In the second half of 2022, the country’s unemployment rate started to rise slightly, mainly due to unskilled workers, as there was still a shortage of highly skilled specialists. From the end of the pandemic year until the second half of 2022, the number of unemployed people in the country steadily decreased. By mid-2022, the country’s unemployment rate had fallen as low as 5.2%, with such a low unemployment rate last recorded in Lithuania 15 years ago. The strong growth in the labour force (annual growth of 2.2% recorded in the fourth quarter) only moderately pushed the unemployment rate up, which remains relatively low. According to the State Data Agency, unemployment stood at 6.4% in the fourth quarter, being 0.6 percentage points lower than a year ago, but 0.4 percentage points higher than in the third quarter, excluding seasonal effects. This annual change in the unemployment rate at the end of the period under review was mainly underpinned by somewhat slower, but still strong, employment growth and a decline in the labour force participation rate: these indicators pushed the unemployment rate down by around 2.4 and 0.3 percentage points respectively over the year. The still relatively low unemployment rate in the country and the high level of hiring led to the fact that a significant number of companies faced labour shortages. The current shortage of skilled workers in particular reflects the fact that the supply of them is not as high as that of unskilled workers. The unemployment rate for skilled workers is around 6%, twice as low as for unskilled workers.

The insufficient supply and the high demand for workers had a significant impact on the country’s rapid annual wage growth. In the period under review, wages and salaries were around 13.4% higher than in the previous year. In 2022, wages in the private sector grew significantly faster (14.8%) than in the public sector (10.5%). The main reason for the slowdown in public sector wage growth was the lower wage growth of education and health workers. According to the State Social Insurance Fund Board (Sodra), at the end of the year, wages and salaries in the country were around 13% higher than in the previous year, and as much as 45% above the pre-pandemic average. One of the main reasons for the robust wage growth in Lithuania was labour shortages. A drop in unemployment and a strong supply of job vacancies were among the main reasons behind the increased pressure on employers to raise wages. At the beginning of 2022, the job vacancy rate – an indicator of the share of vacancies among total jobs – reached a historical high of 2%, once again catching up with the record of 2% recorded in the third quarter of 2008. Wage developments were also affected by the increase of the minimum monthly wage by 13.7% at the beginning of 2022. However, real wages did not increase in 2022, with a 4.5% decrease compared to 2021. This signals that nominal wage growth was offset by soaring inflation; therefore, the purchasing power of workers did not increase.

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2.Key functions of the Bank of Lithuania

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2.1.Monetary policy of the Eurosystem

2.1.1.Decisions

In 2022 and early 2023, the Eurosystem adopted significant decisions to accelerate the normalisation of monetary policy and then to gradually tighten it:

·From July 2022, the Governing Council of the ECB started raising key interest rates and adopted a new monetary policy transmission protection instrument.

·The key ECB interest rate was raised to 3% until March 2023, with the aim of bringing inflation back to the target of 2% over the medium term.

·In July 2022, the Governing Council of the ECB discontinued net asset purchases under the asset purchase programme (APP) and, from March 2023, started to reduce the size of the accumulated APP portfolio.

Dalintis:

In July 2022, the Governing Council raised interest rates for the first time in more than a decade and approved a new instrument to protect the monetary policy transmission. All three key interest rates were raised by 0.5 percentage points, which meant an exit from the negative interest rate environment. This decision was prompted by the fact that inflation had started to significantly exceed the target level and expectations had risen about its future developments, and by the fact that the effectiveness of the monetary policy transmission would be further enhanced by the new policy transmission protection instrument. This new instrument will ensure that the Eurosystem will be able to make purchases, if necessary, of securities from euro area countries experiencing a deterioration in financing conditions not warranted by fundamentals, which will help to ensure a smooth monetary policy transmission to all euro area countries.

Key ECB interest rates were raised five more times by the end of March 2023, up to 3%, with the aim of bringing inflation back to the target of 2% over the medium term. Rising inflation in the euro area (annual inflation reached its peak of 10.6% in October 2022) and the outlook for higher inflation in the future prompted further increases in key ECB interest rates. Following the first interest rate hike in July 2022, the key ECB interest rate was raised by 75 basis points in September and October, and by a further 50 basis points in December, to reach 2%. While gas and electricity prices on wholesale markets went down in early 2023, underlying inflationary pressures remained strong. Against this backdrop, the key ECB interest rate was raised by 50 basis points to 3% at each of the February and March 2023 meetings. Moreover, in the context of heightened uncertainty in the financial system, the March meeting underlined that all available tools can be used to ensure financial stability and the smooth transmission of monetary policy to the real economy. In the medium term, the aim is for inflation to gradually return to 2% as the impact of higher interest rates materialises.

In 2022 and early 2023, the Governing Council of the ECB also reduced the monetary stimulus through decisions on the APP. In March 2022, the decision was taken to accelerate the reduction of net asset purchases under the APP, taking into account the upward revision of inflation expectations and the upside risk on inflation projections. Net asset purchases under the APP have been suspended since July 2022. In March–June 2023, the reinvestment volume under the APP was reduced by €15 billion per month. Together with interest rate hikes, these decisions ensure an appropriate monetary policy stance and contribute to the objective of bringing inflation in the euro area sustainably back to 2% over the medium term.

(annual percentage change, excluding the unemployment rate)

	2022	2023	2024	2025
Real GDP	3.6	1.0	1.6	1.6
HICP	8.4	5.3	2.9	2.1
Unemployment rate	6.7	6.6	6.6	6.6
Compensation per employee	4.6	5.3	4.4	3.6

2.1.2.Instruments

·To implement its objectives, the Eurosystem uses a set of monetary policy instruments, consisting of open market operations, standing facilities and minimum reserves.

·In 2022, the Eurosystem’s counterparties borrowed less through longer-term refinancing operations, but started using the overnight deposit facility.

·The Eurosystem’s portfolio of securities held for monetary policy purposes continued to grow over the period under review.

In 2022, the Eurosystem carried out 156 open market operations. At the end of the year, the outstanding amount borrowed by the Eurosystem’s counterparties under 1-week main refinancing operations (MROs) was €2.41 billion (€0.39 billion at the end of 2021), and through long-term refinancing operations (LTROs), including targeted ones, this figure was €1,321.42 billion (€2,201.5 billion at the end of 2021). Following the raising of key interest rates by the ECB, the counterparties started to make active use of the overnight deposit facility from mid-September, and such deposits amounted to €3,778.8 billion by the end of the year.

The Bank of Lithuania counterparties also participated in MROs and LTROs, but at the end of the year only their LTROs were outstanding, in the amount of €1.6 billion. The Bank of Lithuania’s counterparties, like the counterparties of the Eurosystem, made use of the overnight deposit facility, with the amount of such deposits standing at €11.3 billion at the end of the year.

Dalintis:

In the first half of 2022, active purchases under the APP were still continuing. In March, the Governing Council of the ECB decided to reduce the volume of asset purchases under the APP and to suspend net purchases under the APP from July. The Eurosystem’s monetary policy securities portfolio grew over 2022, reaching €4,937 billion at the end of the year, a year-on-year increase of €223.7 billion. The larger share of this change (€100 billion) was comprised of purchases under the Pandemic Emergency Purchase Programme and the public sector purchase programme (€97.5 billion).

The monetary policy securities portfolio of the Bank of Lithuania increased by €7.4 million to €13.0 billion. This included €7.1 billion (an increase of €0.7 billion) in government securities of the Republic of Lithuania or guaranteed securities and €5.9 billion (a decrease of €0.6 billion due to maturity redemptions) in bonds issued by European institutions.

Indicator	Region	Volume at the end of the year, EUR	Annual change, %	Annual average, EUR	Highest value, EUR	Lowest value, EUR
Minimum reserves	Eurosystem	168.1 billion	8.2	160.3 billion	168.1 billion	154.0 billion
	Lithuania	439.4 million	29.5	368.6 million	439.4 million	339.3 million
Current account holdings	Eurosystem	218.9 billion	-93.8	2,843.7 billion	4,176.6 billion	182.1 billion
	Lithuania	1,091.3 million	-93.0	10,313.4 million	15,762.4 million	947.2 million
Recourse to deposit facility	Eurosystem	3,778.8 billion	384.7	1,832.1 billion	4,704.8 billion	523.5 billion
	Lithuania	11.4 billion	100.0	2.6 billion	11.4 billion	0.0 billion
Recourse to marginal lending facility	Eurosystem	0.5 billion	100.0	0.0 billion	0.5 billion	0.0 billion
	Lithuania	0.0 million	0.0	0.0 million	0.0 million	0.0 million

2.1.3.Impact

As the Eurosystem’s monetary policy stance became more restrictive in 2022 and early 2023, financing conditions in Lithuania’s and euro area economy as a whole tightened, but this will help to bring inflation back on target in the medium term:

·As key ECB interest rates rose, credit institutions in Lithuania, as in the entire euro area, began to increase lending rates.

·With higher interest rates and the upward revision of their expectations, borrowing cost in financial markets for governments increased.

·The ECB calculations suggest that monetary policy decisions will help to reduce inflation in the medium term.

From mid-2022, lending rates in Lithuania, as in the entire euro area, began to rise significantly. This rapid increase in interest rates was determined by the rise in the variable component of lending rates as a result of the actions of monetary policy: around 90% of loans in Lithuania were granted at a floating rate (mostly 3-, 6- or 12-month EURIBOR). As most loans in Lithuania are linked to floating interest rates, the ECB’s interest rate hikes are transmitted more quickly to the instalments of existing housing loans and loans of non-financial corporations. Allocating a larger share of income to loan instalments reduces people’s ability to allocate their income on consumption and limits the growth potential for real estate prices. Rising interest rates are also likely to contribute to lower investment by enterprises and declining business expansion. However, rising interest rates also determine higher nominal income from new deposit facilities or investments in fixed-income instruments (e.g. bonds issued by governments or companies). The future dynamics of interest rates on loans and deposits will depend on the monetary policy stance and economic developments, as well as the competitive environment in Lithuania’s banking sector.

Dalintis:

The borrowing cost in financial markets for governments also went up, which should lead to more prudent fiscal policy. In March 2023, the yield on 10-year Lithuanian government bonds was around 3.9%, while it was close to 0% at the beginning of 2021. This cost of borrowing is higher than in Germany (2.3%), but slightly lower than in Italy (4.2%). Against the backdrop of higher interest rates, fiscal policy should be more prudent. For example, the ECB recommends that government support measures to protect the economy from high energy prices should be temporary, targeted and aimed at further reducing energy consumption.

ECB calculations suggest that monetary policy decisions will help to reduce inflation in the medium term. Amid high uncertainty in these estimates, the ECB’s monetary policy normalisation decisions implemented between December 2021 and November 2022 are expected to result in euro area inflation standing at around 1.2 percentage points lower in 2023 and 1.8 percentage points lower in 2024, with the downward impact on real GDP growth being around 1.5 percentage points on average over three years. While the Eurosystem’s monetary policy tightening is slowing down economic growth in the euro area, including in Lithuania, this tightening is necessary in order to ensure that the rise in inflation does not affect longer-term inflation expectations, that actual inflation in the euro area returns to the 2% target over the medium term, and that real consumer incomes start to rise again.

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2.2.Macroprudential policy

·The main risks to Lithuania’s financial system are posed by high inflation and the rising interest rate environment, by a potential recession in the country and in important foreign markets, and by an increase in cyber-attacks since the start of the war in Ukraine.

·Housing market activity declined in 2022 and, while still strong, the rate of house price growth also slowed down gradually, increasing the risk of price correction.

·While the growth of the business and household credit portfolio in 2022 was at its strongest since the financial crisis, there were increasing signs at the end of the year and in early 2023 that the financial cycle was entering a slowdown phase.

·The banking sector has so far successfully withstood the challenges posed by russia’s war against Ukraine, while good loan quality, material capital buffers, high liquidity and projected growth in profits point to banks’ resilience to potential future surprises.

·The Bank of Lithuania’s preventive financial stability measures help to ensure that the financial system is able to withstand shocks, and these measures were tightened in 2022.

The main risks to Lithuania’s financial system are posed by high inflation and a rising interest rate environment, by a likely recession in Lithuania and in foreign markets important to Lithuanian businesses, and by an increase in the number of cyber-attacks since the start of the war in Ukraine. In 2022, Lithuania recorded one of the highest inflation growth rates in the euro area, with average annual inflation as high as 18.9%, compared to the euro area average of 8.4% (for more details, see the chapter “Economic and financial overview”). High inflation, possible re-increases in energy prices and continued uncertainty about the economic outlook are constraining the abilities of firms and households to build up financial buffers and are limiting the purchasing power of households, which may make it more difficult to meet financial liabilities. The ECB aims to contain inflation and inflation expectations and is therefore tightening monetary policy by raising reference interest rates (for more details, see the chapter “Monetary policy in the Eurosystem”). As the majority (around 90%) of housing and corporate loans in Lithuania are granted at variable interest rates, rising reference interest rates affect the majority of loan holders who are subjected to rising debt service costs in addition to other rising costs. While the environment of high inflation and rising interest rates has had a noticeable impact on individual Lithuanian business sectors, with business confidence indicators still at low points and manufacturing and retail trade turnovers contracting, the economy experienced a year-on-year growth, despite the quarterly contraction of 0.5% recorded in the fourth quarter of 2022. Declining but still high inflation and tighter financing are slowing down economic growth and increasing the likelihood of a recession in the euro area countries that are important for Lithuania’s economy, which also increases the risk of loss for creditors. The outbreak of the war in Ukraine was also followed by an increase in cyber-attacks targeted at financial institutions. According to a survey of financial institutions, the number of institutions reporting an increase in cyber-attacks as a result of the outbreak of the war almost doubled in the second half of 2022, with as many as 42% of respondents having been exposed to a cyber-attack. Cyber incidents of systemic importance continue to threaten the accessibility of services provided by market participants and undermine confidence in the financial sector as a whole.

Although the annual rate of house price growth remains strong, amid the decline in housing sales there are more signs of normalisation in house price growth, and the likelihood of price correction is increasing. According to different data sources, the annual growth rate of house prices during the period from the end of 2022 to the beginning of 2023 was 16%. While this growth rate is still high, it slowed down gradually in 2022. In addition, monthly frequency data increasingly point to a stabilisation or even a slight decrease in prices. This signals that the peak in house price growth is over and that growth is gradually normalising. The latest Bank of Lithuania estimates show that house prices were still 2% above their values based on economic factors in the fourth quarter of 2022. However, overvaluation is declining, with the estimate being 7 percentage points lower than in the respective period of 2021. The lower rate of house price growth was mainly due to a slowdown in housing market activity, which returned to its pre-pandemic level: in 2022, a total of 47 thousand dwellings were sold, 14% fewer than in the historically active year of 2021 and the same number as in the pre-pandemic year of 2019. The return of sales to a more regular level was determined by the deterioration of affordability due to increased house prices, the declining real incomes of households, rising interest rates, russia’s war against Ukraine, and the negative impact of the latter on the confidence of the population. If housing market activity remains relatively subdued in the longer term, economic development will be slower than expected, the financial situations of households will worsen, a larger correction in house prices, which remain slightly overvalued, might be triggered.

Dalintis:

While the financial cycle in Lithuania remained at a high level in the last quarter of 2022, mainly due to abundant lending between companies and the still significant annual growth of housing prices, the start of 2023 signalled the subsiding of credit and the possible transition of this cycle into a slowdown phase. In 2022, the portfolio of MFI loans to households and non-financial corporations grew at an annual rate higher than any since the financial crisis, but the pace of credit growth was dampened at the end of the year by rapidly rising interest rates and uncertainty surrounding future economic developments. Annual growth of the household loan portfolio was mostly hindered by an 11.2% contraction in the flow of new housing loans in the final quarter of 2022. This was substantially affected by the rise in interest rates on new housing loans, which were still the highest in the euro area (4.4%) in December 2022. The increased cost of borrowing had a downward impact on demand for housing loans, which, according to the Bank of Lithuania’s Review of the Bank Lending Survey, was the lowest since the outbreak of the pandemic in the fourth quarter of 2022. Meanwhile, the annual growth rate of the portfolio of loans for consumption and other purposes fell to 2.4% in January 2023. On the other hand, the portfolio of loans granted by MFIs to non-financial corporations still grew at a historically high annual rate in the fourth quarter of 2022, but the contraction in demand for investment loans and the rising interest rate (5% in December 2022) dampened the demand for new loans for firms. The annual growth rate of the portfolio of loans to companies slowed down significantly to 11.4% in January 2023. However, the annual growth of the overall credit of companies was as high as 35% in the third quarter of 2022 and exceeded the nominal growth of the economy for the fourth consecutive quarter. Despite these dynamics, companies’ borrowing needs can be expected to be dampened by rising borrowing costs, declining inflation (especially falling energy prices) and postponed investment.

(January 2010–January 2023)

Dalintis:

The ECB’s tightening monetary policy in the context of high liquidity in the banking sector has led to an unexpected increase in banks’ profits in 2022, and they are expected to grow even further in 2023. High liquidity, which accelerated during the COVID-19 pandemic through a material fiscal stimulus, trade surplus and the ECB’s liquidity provision policy, lead to an exceptional situation in the banking sector. To contain inflationary processes, the ECB began to raise its reference interest rates in 2022. As a result, rising interbank rates being offered, with a prevailing variable interest rate loan portfolio, translate quickly into net interest income, and credit institutions earn positive returns due to material liquid fund reserves at the central bank. Excess liquidity and a lack of competition in the banking sector led to a lag in deposit rate growth, thus contributing to unusually low interest expenditure. All of these factors created conditions in which the banking sector is earning, and, should the circumstances remain unchanged, may continue to earn significantly (up to 3 times) higher profits in 2023 than in 2021.

Rising interest rates increase the loan burden on households, but Responsible Lending Regulations (RLR) help to ensure borrowers’ resilience to interest rate fluctuations. Since 2015, the RLR have stipulated that a sensitivity test must be carried out when granting a housing loan so as to ensure that borrowers will be able to pay increased loan instalments even if the interest rate rises to 5%. The sensitivity test tool was designed to prevent possible over-indebtedness in a low interest rate environment; thus, the quality of housing loans remains good in the current context, where interest rates and essential expenses have already risen. Loans granted after the entry into force of the RLR 2011 accounted for 83% of the total housing loan portfolio as of December 2022, while housing loans granted since the beginning of the pandemic accounted for 42% of the total housing loan portfolio. In 2021, in order to harmonise the riskiness of the first and subsequent mortgage loans and to further restrict housing investment transactions financed with loans, a stricter down payment requirement of 30% was imposed on the second and subsequent housing loans. After the entry into force of this amendment to the RLR on 1 February 2022, the share of second housing loans slightly decreased compared to the period before the publication of the amendment.

Dalintis:

The Bank of Lithuania, together with the Competition Council, monitored progress in the implementation of the recommendations of the Study on the financing of small and medium-sized enterprises. The summary and assessment of the responses provided to the Bank of Lithuania by the institutions concerned (the Ministries of Economy and Innovation, Finance and Justice) on behalf of the Government of the Republic of Lithuania showed that most of the recommendations are planned to be implemented. In order to monitor the progress of the implementation of the recommendations and to monitor the broader situation, the Bank of Lithuania organised meetings with experts from the Ministry of Finance and representatives of UAB Investicijų ir verslo garantijos, the Ministry of Economy and Innovation and the Association of Lithuanian Banks. The Bank of Lithuania has also been involved in the development of the Plan for the Financial Education of the Public, which will also cover the financial literacy of small and medium-sized enterprises.

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2.3.Management of financial assets

·In managing financial assets, the Bank of Lithuania seeks to ensure the stability of the financial system, create conditions for smooth monetary policy implementation, ensure financial independence and provide a buffer against economic shocks.

·The Bank of Lithuania invests financial assets with the aim of diversifying risk and increasing expected return over a rolling 3-year investment horizon. The 3-year return in this period was 0.04% (€6.5 million).

·The main bulk of the Bank of Lithuania’s financial assets was invested in money market instruments and US government debt securities. The Bank of Lithuania holds 5.8 tonnes of gold.

·In 2022, the Bank of Lithuania invested €117 million in targeted bond issues, the use of the proceeds of which was related to the consequences of the war in Ukraine.

The Bank of Lithuania invests financial assets with the aim of diversifying investment risk and increasing expected return over a 3-year investment horizon. Due to potentially higher yields in the medium term, the Bank of Lithuania tolerates the risk of short-term loss, the size of which, with high probability, should not exceed the risk budget predefined in its investment policy.

The 3-year return on the Bank of Lithuania’s financial assets not related to monetary policy operations and liabilities was 0.04%. The investment profit generated by the Bank of Lithuania over this period was €6.5 million.

In 2022, the Bank of Lithuania’s financial assets not related to monetary policy operations and liabilities amounted to, on average, €4,457 million. The return on these assets in euro terms (adjusted for exchange rate changes but non‑adjusted for gold price changes) was negative and stood at -5.05% (positive return of 5.21% was recorded in 2021). The return on financial assets excluding liabilities and not related to monetary policy operations (non-adjusted for exchange rate and gold price changes) was also negative in 2022, at -5.91% (positive return of 1.07 % was recorded in 2021).

Dalintis:

Developments in financial markets over the reporting year were particularly unfavourable for investors. The Bank of Lithuania’s return on investment was negatively affected by the increase in yields on government securities due to the increased tightening of monetary policy by central banks so as to curb rising inflation, and by the pessimistic sentiment prevailing in equity markets, i.e. the decline in equity prices. The strongest positive effect on return on investment came from the appreciation of the US dollar against the euro for the second consecutive year.

In terms of financial instruments, the majority of investments made in 2022 were in government bonds and money market instruments. The Bank of Lithuania invested in securities issued by various governments, government agencies, international organisations and municipalities. Money market instruments mainly consisted of deposits with other central banks and international organisations.

Dalintis:

In 2022, the Bank of Lithuania invested in targeted bond issues, the use of the proceeds of which was related to the consequences of the war in Ukraine. This included €100 million in a €1 billion social inclusion bond issue issued by the Council of Europe Development Bank and CAD 25 million (currently around €17 million) in a CAD 500 million bond issue issued by the Government of Canada (currently around €345 million). These funds will be allocated to Ukraine’s basic needs, such as pensions, energy resources and the reconstruction and maintenance of the energy infrastructure destroyed by russian missile attacks.

The Bank of Lithuania’s gold reserves remained unchanged and amounted to 5.8 tonnes. The return on the gold portfolio stood at 6.64% in 2022. This return, in euro, was stimulated by the strengthening US dollar. Lithuania’s gold is held at the Bank of England. Under favourable market conditions, gold is invested in gold deposits, thus earning interest, or through gold swaps, i.e. temporarily exchanging gold into other currencies and then investing them.

In 2022, the main bulk of the Bank of Lithuania’s investments (73% on average) was in euro and other currencies (US dollars, pound sterling and Canadian dollars), with unhedged currency risk. The majority of investments with hedged currency risk were in US dollars (12%), Japanese yen (9%), Canadian dollars (5%) and pound sterling (1%). The exposure to China was closed in the second quarter of 2022.

Dalintis:

The security of financial assets is ensured through diversifying investments, concluding transactions with high investment rating financial institutions that are of good repute, and investing only in debt securities with a high investment rating. At the end of 2022, 62% of investments were rated AAA, the highest rating (59% in 2021), 26% were rated A (27% in 2021), while the remainder were rated AA.

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2.4.Payments

·In the digital euro project, decisions on the key features of the digital euro were approved.

·The Bank of Lithuania updated the methodology for calculating the maximum fee for the basic payment account service and approved the maximum fee which came into effect from 1 January 2023.

·The number of payments executed in the Bank of Lithuania’s CENTROlink payment system grew by a factor of 1.5, and instant payments are rapidly replacing regular payments.

·The Bank of Lithuania’s Proxy Lookup Service was updated with the latest technologies, allowing payments to be initiated based on the mobile phone number of the payee.

·The Bank of Lithuania, together with the central banks of Latvia, Estonia and Iceland, completed a cyber resilience assessment of the securities settlement systems operated by Nasdaq CSD SE.

Lithuania’s non-cash payments market continued to grow in 2022, as did the number of Lithuanian residents preferring non-cash payments. The non-cash payment habits of Lithuanian residents and businesses and the use of payment services are most accurately reflected by domestic non-cash payment transactions, i.e. payment transactions executed between the customers of Lithuanian payment service providers (PSPs). In 2022, compared to 2021, the total number of domestic non-cash payments went up by 22%, standing at nearly 903 million, with a value of €373.1 billion. Card payments accounted for 58%, credit transfers for 37%, and other payment services for 5% of all domestic payment transactions carried out in Lithuania in 2022. Pursuant to a representative survey of Lithuanian residents commissioned by the Bank of Lithuania and conducted in 2022, while 96% of respondents reported the use of cash in their daily activities, three quarters of Lithuanian residents said they would prefer to use non-cash payments (their share was 50% in 2021).

In 2022, the main work on the investigation phase of the Eurosystem’s digital euro project was carried out and the Governing Council of the ECB approved the main technical design features of the digital euro. The main objectives of the digital euro are to preserve the role of central bank money as the monetary anchor for the payment system and to ensure the resilience and independence of the euro area in the provision of payment services. This work included an investigation of user experience to be enabled by possible technical functionalities, conducting market research in Europe, defining a possible operating model for the digital euro and analysing legal aspects thereof, adopting part of the decisions on the technical design of the digital euro, and prototyping some of the technical solutions. Areas where the digital euro could be actively used as a payment instrument were identified: firstly for person-to-person transfers and payments in e-commerce, followed by the possibility of settlement at physical points of sale and with the state sector. The ECB’s Governing Council agreed that, once the digital euro has been issued, it should be possible to use it both online and at physical points of sale or offline. Privacy in respect of the Eurosystem would be ensured, but anonymity would not be allowed due to the potential risk of fraud and ML/TF. To manage risks to financial stability, limits on the digital euro balance are being considered. The digital euro would be distributed by financial intermediaries (PSPs) which would provide access to the digital euro for citizens and businesses. The Eurosystem would define the operating model rules that would establish a uniform user payment experience regardless of the intermediary. The aim is for the digital euro to be a free means of payment for citizens using basic payment services, just like cash.

The Bank of Lithuania updated the methodology for calculating the maximum fee for the basic payment account service and approved the maximum fee which came into effect from 1 January 2023. Furthermore, it is drafting a proposal for a review of the regulation of the basic payment account service. In view of the effective requirement that wages and salaries must be transferred to an account, the Bank of Lithuania decided to amend the Methodology for the Calculation of Maximum Monthly Fee for the Basic Payment Account Service (hereinafter – the Methodology). The updated Methodology stipulates that when calculating the maximum fee for the basic payment account service, the average of the fees of the payment service packages available on the market are taken into consideration, including the payment service packages intended for persons who are paid their wages and salaries into their accounts. In accordance with the updated Methodology, the maximum fee for the basic account service was reduced to €1.37, while the fee for persons receiving social assistance may not exceed €0.68 per month. In order to ensure that the basic payment services continue to be provided to Lithuanian residents at an affordable price and to guarantee the protection of socially vulnerable persons, the Bank of Lithuania intends to submit a proposal for a review of the regulation of the basic payment account service later this year.

The Bank of Lithuania takes an active part in the discussions in the EU Council on the Instant Payments Regulation. The proposal for the Regulation provides that all EU credit institutions offering a credit transfer service will also be required to offer an instant credit transfer service. The Bank of Lithuania supports this initiative and, in the negotiations on this piece of legislation, sides with the proposal that instant transfers should not cost more than regular SEPA credit transfers. The Bank of Lithuania also supports the functionality of checking if the beneficiary’s name and account number match when executing instant payments, which is proposed for the protection of payers; maintains the position that this functionality should be free of charge for payers and should be applied broadly, including for ordinary credit transfers; and observes that it is important to ensure that this is applied to cross-border payments. The implementation of the Regulation will ensure that the instant transfer service is accessible to all EU citizens. In Lithuania, major banks and other PSPs already provide instant transfer services. Over the period under review, the share of instant transfers executed by Lithuanian PSPs accounted for around 60% of all interbank credit transfers.

In 2022, the number of payments executed via CENTROlink, a payment system managed by the Bank of Lithuania, increased by a factor of 1.5, and the number of instant payments more than doubled. There were over 276.3 million (186.1 million in 2021) SEPA payments (credit transfers, instant credit transfers and direct debits) executed via the CENTROlink system, the value of which stood at €476.7 billion (€358.2 billion in 2021). There was an increase in the volume of payments executed by financial institutions already using the system. At the end of 2022, 148 PSPs (149 in 2021) from 19 EEA countries were using CENTROlink services. The CENTROlink payment system has direct links with Europe’s main SEPA instant payment systems – RT1 and TARGET (Instant Payment Service, TIPS). Therefore, financial institutions operating in the system are provided with the possibility of offering SEPA credit transfer and direct debit services, as well as SEPA instant payment services as one-stop-shops. In 2022, compared to 2021, the number of instant payments rose from 63.4 million to 128.1 million, and their total value increased from €77.5 billion to €137.6 billion. Instant payments rapidly replaced credit transfers, accounting for 46% of total CENTROlink payments (34% in 2021), while credit transfers accounted for 48% (56% in 2021). At the end of 2022, 64 Lithuanian and EEA credit institutions, PIs and EMIs were able to provide instant payment services to their customers via CENTROlink.

Dalintis:

The development of the CENTROlink payment system and the expansion of instant payments benefit from the contribution of the upgraded Proxy Lookup Service (PLS) provided by the Bank of Lithuania. This allows initiating payments according to the mobile phone number of the beneficiary of funds. In order to use the alias payments service, the user has to agree to link their phone number to the selected account in the bank’s mobile application. To transfer money, one only needs to select the recipient from the contact list in their mobile app or enter the payee’s phone number. A payment is possible if the payee has also linked their phone number to an account. At the end of 2022, the number of phone numbers linked to IBAN account numbers stored in the PLS database reached 530 thousand, while the number of PSP customer contacts to the PLS per day went up from 20 thousand (at the beginning of 2021) to 53 thousand (at the end of 2022). Currently, customers of two of the largest banks in Lithuania have access to the payment by phone number service. Access to innovative payment services for the public would be expanded if other banks and EMIs operating in Lithuania were to join the PLS system. In addition, PSPs could offer these services for settlements with small businesses at physical points of sale and of service provision.

To ensure the reliability of the payment system, the Bank of Lithuania, as the operator of the CENTROlink payment system, applies measures on its own initiative to manage the risk of ML/TF. It should be noted that the management of ML/TF risks is not a routine or mandatory function carried out by payment systems. However, a risk assessment is carried out for each PSP wishing to access CENTROlink, including the identification of beneficial owners, managers and an assessment of their reputation, an analysis of the PSP’s business model, the customer profile, and the AML/CTF measures in place. In 2022, 11 PSPs received a positive decision regarding their applications to gain access to CENTROlink, while 5 PSP applications were rejected (16 and 9 respectively in 2021). The risk assessment of PSPs connected to CENTROlink is an ongoing and continuous process; therefore, the risk of 47 PSPs already connected to CENTROlink were reassessed in 2022 (75 in 2021). At the end of each risk assessment, a risk score (from low to high) is given to the PSP, which determines continuous risk management measures. If a high risk is identified during the risk assessment and risk mitigation measures cannot be applied, the termination of the business relationship shall be initiated. Based on the actual date of termination of the contract, this measure was applied to 6 PSPs in 2022 (4 in 2021).

The Bank of Lithuania has a strong focus on the cyber resilience of financial market infrastructures. The Bank of Lithuania, together with the central banks of Latvia, Estonia and Iceland, completed an assessment of the cyber resilience of the securities settlement systems operated by Nasdaq CSD SE against the Cyber Resilience Oversight Expectations (CROE) approved by the ECB. This assessment showed that Nasdaq CSD SE ensures compliance with the applicable (advanced level) CROE requirements. However, the central banks that carried out the assessment provided several recommendations and observations as to where the central securities depository could further enhance and improve its cyber resilience capacity.

In 2022, the Payments Council prepared recommendations on improving the accessibility of data held in state registers and other state-owned information systems to financial market participants. According to the Payments Council, the process of opening and obtaining open data processed by the state in Lithuania is adapted to the needs of financial institutions, but the accessibility of data processed by the state is not sufficiently centralised and standardised in Lithuania. The availability of accessible data for the financial sector is crucial for improving the quality, diversity and development of financial services. The Payments Council has prepared recommendations to the relevant state authorities suggesting the development of functionalities for: searching for the data needed by data recipients and for submitting data needs; evaluating the possibility for the financial sector to use the tools of the platform managed by the State Data Agency; reviewing the range of data provision services provided by the State Enterprise Centre of Registers and the pricing thereof; and making it possible to access all the data processed by the state information systems and registers via API interfaces. In addition, the Payments Council encourages financial market participants to actively use Lithuania’s open data portal. The Payments Council will monitor progress in implementing the recommendations in 2023.

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2.5.Supervision

2.5.1.Financial market participants

·At the end of 2022, the Bank of Lithuania supervised 824 financial market participants.

·Information on the operating results of financial market participants and overviews of their activities are published on the Bank of Lithuania’s website.

·A range of supervisory arrangements are in place to bring the maturity of the financial sector to a qualitatively new level, for it to be in line with the highest supervisory standards and best practices.

In 2022, 67 new financial market participants entered the financial sector. Of these participants, 16 licences (authorisations) were issued to banks, EMIs and PIs, financial brokerage firms and management companies, and 51 companies (crowdfunding platform operators, P2P lending platform operators, intermediaries of EMIs and PIs, consumer credit providers, etc.) were included in the public lists. The Bank of Lithuania has been successfully providing electronic licensing services: now, all companies are able to take care of the necessary paperwork and procedures electronically.

Dalintis:

Over the period under review, 5 applications for a banking/specialised bank licence were received and 1 preliminary assessment of a potential application for a specialised bank licence was carried out. The final decision on the licensing of banks/specialised banks is taken by the ECB.

Dalintis:

The Financial Market Supervision Committee of the Bank of Lithuania has approved the financial sector maturity scoreboard for 2022–2025. Its aim is to set maturity assessment criteria and estimation targets for the main supervised financial sectors for the 2023–2025 period to be used to assess the maturity of the financial sectors in 2022 and to monitor the progress of maturity until 2025. The results of this scoreboard are already being used in the supervisory action planning process. Having identified the financial sectors with low maturity, supervisory measures to promote the maturity of the relevant financial sector have been determined.

2.5.2.Prudential supervision

·The banking sector has successfully withstood the shocks of the pandemic and the war and is now recording exceptionally high profitability indicators in the context of high inflation and weaker economic growth.

·The first phase of the systemic reform of credit unions has been completed, with no more credit unions operating independently.

·The number of EMIs and PIs is declining, but revenue from licensing and turnover is increasing. Through various supervisory measures, the Bank of Lithuania is moving towards its strategic goal – the maturity of the EMI and PI sector.

Banks

The challenges encountered by the banking sector due to the COVID-19 pandemic were replaced in early 2022 by indirect challenges posed by russia’s war against Ukraine. The most significant of these challenges were the impact of the war on the performance of economic sectors, the implementation of international sanctions, cyber-attacks, and the excess liquidity of major banks.

Currently, the liquidity situation of banks remains very good, and their liquidity buffers are more than sufficient; therefore, banks are safe against the backdrop of the recent global financial turmoil. All banks are in compliance with the capital adequacy requirements set for them, and banks’ capital adequacy levels remain high.

Amid weaker growth and rising inflation, the banking sector recorded exceptionally high profitability ratios as the ECB passed the decision to raise interest rates. The banking sector’s unaudited profit was €468 million, or 42.7% higher than in 2021. The banking sector’s profitability was mainly driven by rapid growth in net interest income, with a particularly strong increase in the final quarter of 2022.

Dalintis:

The banking sector remains concentrated, but new market participants are consistently increasing existing assets. As a result of the reorganisation of the group’s companies in Lithuania, the market share of Revolut Bank UAB increased significantly in the second quarter of 2022, making the bank the third largest participant in the market in terms of assets. The volume of the bank’s assets and liabilities (especially non-resident deposits in EU countries) has a material impact on the performance indicators of Lithuania’s banking sector.

Dalintis:

The challenges that arose in 2022 did not suspend lending activity: the loan portfolio increased considerably. Weakening economic activity and rising interest rates have so far not had a major downward impact on the quality of the banking sector’s loan portfolio. Deposits also continued to grow at a similar pace as in 2021.

The number of cyber incidents affecting financial market participants increased in 2022. In response to increased cyber risk, the Bank of Lithuania initiated a discussion on increased information sharing on cyber threats. In cooperation with the National Cyber Security Centre, banks will test dedicated state-of-the-art technical and organisational tools. The Bank of Lithuania also assessed how credit institutions, insurance companies, selected financial brokerage firms and EMIs manage ICT and security risks and provided recommendations for strengthening the management of these risks.

Credit unions

On 1 January 2023, the first phase of the systemic reform of credit unions was completed, with no more credit unions operating independently. During the transition period, credit unions that had been operating independently joined groups of central credit unions (CCUs). The completion of this phase of systemic credit union reform has strengthened cooperative banking, increased the importance of self-regulation and enhanced the role of CCUs. Over the period under review, the credit union sector grew consistently, with assets increasing by 14% to €1,270.3 million. Deposits from credit union members continued to be the main source of financing. As a result of the rise in interest rates, deposits were opted for more and more often – not only by residents, but also by businesses as a means of saving and investing funds. In pursuit of their common goals, credit unions demonstrated flexibility by adapting to changing conditions and continued to successfully increase their lending to both residents and businesses. The loan portfolio of credit unions increased by nearly 17%, to €930.3 million. Increased lending was the main contributor to the operating results of the credit union sector. Credit unions generated 26% more net interest income and 8% more net service and commission income. The credit union sector earned an unaudited profit of €10 million in 2022, which was 8% higher than in 2021.

Insurance undertakings

Despite unfavourable risk factors, all supervised insurance undertakings with a significant margin complied with the compulsory solvency capital requirements in 2021 (as of 31 December 2022, the solvency ratio of life assurance undertakings was 2.03, and the solvency ratio of non-life insurance undertakings was 1.4).

The Lithuanian insurance market as a whole, in terms of underwritten premiums, grew by 18.6% in 2022 – twice as fast as in the previous year, with premiums amounting to €1.23 billion. In the non-life insurance market, premiums remained on an upward path throughout 2022, with premiums for all types of insurance (mainly motor third party liability, Casco, property and medical expenses) increasing by almost a quarter, up to €894.9 million. Compensation, which grew at almost the same rate to €503 million, was driven (through inflation and geopolitical factors) by higher insurance damage expenses (reimbursement or restoration of the value of lost or damaged property or services) and operating costs, and by the 8.3% increase in the number of compensation payments due to an increase in the number of insurance contracts entered into. The life assurance sector grew more moderately in 2022, with premiums increasing by 6.4% and amounting to almost €340 million. The growth of unit-linked life assurance premiums was slower than in 2021 (up to €236.5 million), and the volume of concluded contracts continued to be the key growth factor in 2022. As a result of the increase in compensation under terminated contracts, including partial withdrawal of accumulated amounts, there was an increase of €40 million (or almost 29%) compared to 2021 in unit-linked life assurance and with-profit insurance compensation. This upward trend in compensation was the result of the reduced attractiveness of investments due to their impairment and of people’s increased need to use their savings to finance their expenditure, which grew under the effect of inflation. According to unaudited financial statements, the aggregate financial result of all insurance undertakings amounted to €40 million (before tax). Seven out of nine insurance undertakings ended 2022 in profit. Total assets managed by insurance undertakings amounted to €1.9 billion.

Dalintis:

As of 31 December 2022, there were 102 insurance brokerage firms operating in the insurance market, of which 93 were profitable. Over the period under review, insurance brokerage firms generated sales revenue of €82.3 million and a net profit of €14.3 million (an increase of over 57%).

EMIs and PIs

While the EMI and PI sector contracted over the year, with a loss of 10 institutions (3 EMIs and 7 PIs), excluding Revolut Payments UAB, there was an increase of €405.2 million in income from licensed activities, which is 1.6 times more than in 2021. The sector’s payment transactions amounted to €110 billion (a 1.3-fold year-on-year increase). Importantly, the 5 EMIs and PIs which are the largest by payment transaction turnover generated more than 54% of the sector’s total turnover, while the 5 EMIs and PIs which are the largest by licensed income generated 39% of the sector’s total income.

Dalintis:

Dalintis:

The Bank of Lithuania continues to strive to increase the maturity of the sector and encourages operating institutions to put a greater focus on and to devote more resources to the most pressing areas: anti-money laundering, compliance with the requirements for equity capital and for the protection of customer funds, internal control requirements, and compliance enhancement. In line with the Financial Sector Maturity Scoreboard, which measures maturity, to maintain the upward trend in compliance efforts will be made to improve the compliance of the EMI and PI sector in the areas identified (reporting, audit reporting, capitalisation, performance of licensed activities) and to implement a cycle of inspections (with the aim of inspecting the highest-risk institutions within a 3-year cycle).

In order to increase the maturity of EMIs and PIs, the Bank of Lithuania applies a number of supervisory instruments. One of these is a second Dear CEO Letter sent to all EMIs and PIs operating in Lithuania. The Letter emphasises issues related to the implementation of business plans, the provision of licensed services, a change of business model, the safeguarding of customer funds, internal audit and internal control, risk management (including ML/TF, ICT, and security) and reporting, as well as the requirements of legal acts.

Over the period under review, there were more supervisory activities of the Bank of Lithuania in this sector (inspections, investigations, documentary analyses, written dialogues, drawing the attention of institutions to weaknesses in their performance). The Bank of Lithuania carried out 31 individual and thematic inspections and 4 sectoral analyses by assessing the compliance of these institutions with the requirements for money laundering risk management, customer knowledge and fraud risk management, equity capital, safeguarding of customer funds and the assurance of internal audit and control. Moreover, the bank imposed 17 fines (€614,500), withdrew the licenses of 5 institutions, issued warnings to 4 institutions, and made public announcements on 3 infringements. It should be noted that the Bank of Lithuania seeks to improve the communication and reachability of the sector not only through sanctions, but also by organising a number of training cycles on relevant topics, publishing the latest relevant information for market participants, regularly updating the frequently asked questions, and publishing recommendations.

Dalintis:

Anti-money laundering and sanctions

By fulfilling the functions entrusted to the Bank of Lithuania by the Republic of Lithuania Law on the Prevention of Money Laundering and Terrorist Financing, the institution continued to enhance the legal framework for AML/CTF in Lithuania and supervise AML/CTF in the financial sector in 2022. One of the Bank of Lithuania’s strategic directions for 2022–2025 is the creation of value for society, which is expected to be achieved by increasing the compliance maturity of financial market participants, including the appropriate management of ML/TF risks in the financial sector. To increase the maturity of financial market participants in the area of AML/CTF and to identify, appropriately manage and respond more quickly to ML/TF risks in the financial sector, the Bank of Lithuania has been carrying out AML/CTF supervision activities, i.e. conducting inspections of financial market participants, training and educating them, cooperating and exchanging information at the national and international levels, developing guidelines and interpretations, as well as focusing on fraud prevention.

The Bank of Lithuania supervised the implementation of international sanctions in the financial sector. Due to russia’s war in Ukraine, which began in 2022, and both tightened and new sanctions and restrictive measures against russia and Belarus and/or related entities due to actions undermining the territorial integrity, sovereignty and independence of Ukraine, the Bank of Lithuania, within its competence, has been actively working to ensure that financial market participants duly comply with the international sanctions and restrictive measures imposed. As part of its supervision based on risk assessment, the Bank of Lithuania published an analysis of the implementation of international sanctions in financial institutions. Therein, the Bank of Lithuania provides key insights into the measures taken by financial market participants in implementing international sanctions and restrictive measures. The Bank of Lithuania actively participated in meetings of national authorities and working groups, and organised training sessions and meetings with financial market participants and associations on issues related to the implementation of international sanctions. The Bank of Lithuania is actively involved in the meetings of the sanctions working group of the Baltics, within the work stream established by the European Banking Authority for the issues of international sanctions and the development of related guidelines. In 2022, the Bank of Lithuania published various analyses and recommendations related to ML/TF risk management, the monitoring of customer business relationships and transactions, and the implementation of international sanctions (for more information, see the Bank of Lithuania website).

2.5.3.Financial services and market supervision

·The Bank of Lithuania promotes capital market development in order to create a competitive, attractive funding and investment alternative.

·The Bank of Lithuania actively pursues a de-risking policy and aims to improve communication between payment service users and payment service providers.

·The first pension fund management company operating exclusively under the Republic of Lithuania Law on the Supplementary Voluntary Accumulation of Pensions was set up to manage 2nd and 3rd pillar pension funds.

·Taking into account the inadequate market practices revealed during the secret purchase of a unit-linked life assurance product, the Bank of Lithuania has prepared proposals for improving the functioning of the unit-linked life assurance market.

In May 2022, the Bank of Lithuania announced the Capital Market Development Action Plan, the implementation of which is expected to bring important changes to the country’s financial system: the capital market would grow significantly and become more attractive to domestic and foreign investors, alternative financing channels would be created for businesses, and investment alternatives would be provided for individuals. At the end of 2022, one of the first actions foreseen in the Plan was implemented with the establishment of the Capital Market Council, which will take care of the overall strategy for the development of Lithuania’s capital market and oversee the overall implementation of the Plan. It is comprised of high-level representatives of state authorities and financial markets. The Bank of Lithuania is one of the parties participating in the Capital Market Council.

From mid-2022, the Bank of Lithuania has been actively cooperating both at the institutional level in Lithuania and at the level of the Baltic States in the implementation of the Capital Market Development Action Plan. Meetings of the Baltic supervisors are held regularly to harmonise requirements and supervisory practices in the field of the Market Abuse Regulation and the Markets in Financial Instruments Directive (MiFID) and in the field of national requirements for securities offerings up to €8 million.

The Bank of Lithuania, monitoring the de-risking policy situation in Lithuania and taking into account the views expressed during the public consultation, has developed an action plan for 2022–2024. The aim of these actions is to improve communication between payment service users and PSPs, to simplify the provision of KYC information to financial institutions, to avoid unjustified and/or unreasonably prolonged account limitations and/or the suspension of transactions, and to monitor the situation of risk mitigation policy in Lithuania. The following priority actions were implemented in the second half of 2022: (1) a Dear CEO Letterwas sent to financial institutions which addressed, inter alia, the strengthening of communication in the context of the implementation of AML/CTF, the simplification of the provision and updating of the KYC information, the non-application of de-risking, etc.; (2) 4 individual meetings were organised with selected banks for the issues of improving their experience in the field of AML/CTF; and (3) an amendment to Article 10(4) of the Republic of Lithuania Law on the Prevention of Money Laundering and Terrorist Financing (regarding the possibility of obtaining documents, data or information necessary to identify a customer or beneficiary directly from the state information systems or registers without the person’s signature) was initiated.

In monitoring the provision of payment services and in order to improve the quality of the provision of payment services, to enhance the experience of payment service users, and to ensure the compliance of PSPs with the requirements, the Bank of Lithuania sent a Dear CEO Letter to the heads of PSPs in the fourth quarter of 2022. In this letter, the Bank of Lithuania drew the attention of the financial institutions to the observed deficiencies of their activities and possible improvements in the relevant areas of supervision and provided recommendations which, in the opinion of the Bank of Lithuania, would help to improve the quality of payment services, enhance the customer experience, and ensure the smoother delivery of payment services. The bank also formulated proposals to the financial institutions on specific measures that would be in line with the market’s best practices. An analysis of the implementation of the recommendations of the Dear CEO Letter will be carried out in 2023.

A new pension accumulation company was set up. On 24 May 2022, a management company licence was granted to Goindex, UAB. This is the first pension fund management company to operate exclusively under the Republic of Lithuania Law on the Supplementary Voluntary Accumulation of Pensions and to manage 2nd and 3rd pillar pension funds. Furthermore, the process of amending the pension fund rules was simplified in order to make supervisory activities more efficient and sustainable. Over the period under review, 2 meetings of the Collective Investment Market Forum and 10 meetings of the Collective Investment Market Forum’s working group of lawyers were held to discuss issues relevant to the market and supervision, with a view to achieving sustainable market growth and the balanced protection of investors’ legitimate interests.

Active relicensing process for crowdfunding platform operators is taking place. Re-licensing of companies under the Crowdfunding Regulation, which started in 2021, continues. The transitional period for crowdfunding platform operators, during which they can operate under the national regime established by this Regulation, expires on 10 November 2023. After this period is over, only entities licensed in accordance with this Regulation will be able to provide services. In 2022, 13 entities applied for a crowdfunding service provider licence.

The portfolio of consumer credit providers – non-credit institutions, including peer-to-peer lending platform operators – grew by almost 25%, and amounted to €936 million at the end of the year (for more details, see the section performance indicators of consumer credit providers on the Bank of Lithuania website).

A mystery shopping campaign was carried out to purchase unit-linked life assurance products. Taking into account the size of the unit-linked life assurance market (more than 415 thousand persons have unit-linked life assurance contracts, and 40 thousand to 50 thousand new unit-linked life assurance contracts have been concluded annually in recent years), the Bank of Lithuania initiated a mystery shopping campaign in 2022 with the aim of assessing whether life insurers, when distributing unit-linked life assurance products, adequately comply with the obligations laid down in the legislation regarding the identification of the customer’s needs, the assessment of the product’s suitability and acceptability, as well as the disclosure of precontractual information. The results of the campaign showed that in almost 40% of cases, mystery shoppers were offered a unit-linked life assurance product that was not in line with their needs. In addition, the information necessary to determine customer needs and product acceptability was not always collected. There were cases where insufficient pre-contractual disclosures were made, but the availability of the household income tax relief was strongly emphasised. Taking this into account, the Bank of Lithuania initiated a public consultation on proposals that would reduce the risk of the improper selling of unit-linked life assurance products.

In order to develop appropriate practices in the provision of insurance services, the Bank of Lithuania gives considerable attention to the analysis of the implementation of the relevant requirements in the market. Upon the analysis of insurance product supervision and governance practices in the insurance market, recommendations for best practice were provided. The analysis involved the assessment of the procedures used by insurance market participants to design, test, determine the target market of, monitor, and review insurance products, as well as their compliance with the requirements of behaving in good faith with consumers. The Bank of Lithuania also assessed how the country’s insurance undertakings and insurance brokerage firms provide information and identify and respond to customer needs when offering insurance services online. The central bank published its observations, best practices and recommendations for businesses in a separate publication.  

The Bank of Lithuania has approved the Guidelines  on the Provision of Credit Related to Immovable Property. They were developed taking into account the issues arising in Lithuanian housing credit practice in relation to legal requirements. The purposes of the Guidelines are to form best practices in the provision of credit services; to help credit issuers, peer-to-peer lending platform operators and credit intermediaries operating under the Law on Real Estate Related Credit to properly comply with the requirements of the legislation relating to the provision of such credit; to promote the consistent and uniform implementation of such legislation; to ensure responsible lending practices; and to ensure the protection of consumer rights and legitimate interests.

2.5.4.Supervisory action and consultancy

·The Bank of Lithuania provides advice to financial market participants on matters of supervisory competence, consults and discusses issues relevant to the financial sector with financial market participants.

·Financial market participants are informed in advance of planned inspections and assessment visits as well as planned changes to the financial market regulatory environment.

Dalintis:

The Bank of Lithuania holds annual meetings with supervised financial market participants. The aim of these meetings is to contribute to the prevention of breaches and to boost confidence in the functioning of financial market supervision units as well as to develop a consistent long-term relationship with key stakeholder groups in the financial market. The results of the previous year and supervisory plans for the new (current) year are presented and future changes to the regulatory environment are discussed during these meetings. Periodic meetings are organised with compliance experts of financial market participants to discuss problems faced by financial market participants, expectations of financial market supervisors and other relevant topics.

Every year, in line with the expressed needs of financial market participants, annual consultation events are organised on topics relevant to financial market participants. In 2022, 14 events on different topics were organised for different financial market participants. On average, 108 attendees participated in each event.

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2.6.Settlement of disputes between consumers and financial market participants

·In 2022, the Bank of Lithuania settled 608 disputes regarding contracts for the provision of financial services.

·A record number of decisions, as many as 229, were taken on the substance of disputes.

·The higher number of disputes was due to disagreements over payment services, in particular cases related to financial fraud.

·A record number of amicable settlements per year was achieved, i.e. 171 disputes (28% of all disputes settled).

Insurance companies accounted for the largest share of all disputes settled (40%), while disputes with banks accounted for 38% and disputes with other financial market participants accounted for 22%. Compared to the results of 2021 (451 dispute settled), the total number of disputes settled increased by 34%. This increase was mainly driven by the growth in the number of disputes with banks and other financial market participants, up by 131% and 72% respectively. Disagreements with insurers fell by 11%.

Units

Dalintis:

Disagreements over payment services were exceptionally numerous in 2022, with the number of disputes settled in relation to payment services having increased more than six times over the past five years, and this figure is almost three times higher than in 2021. One of the reasons for the increase in such disagreements was the significant increase in financial fraud in 2022. For example, consumers are talked into investing, or third parties defraud consumers out of personalised security details (card numbers, personal details, Smart-ID PINs), and consumers funds are misappropriated in this manner or in similar ways. Taking into account the prevailing patterns, the Bank of Lithuania applies various preventive measures and considers prevention as one of the most important tasks of its activities.

Units

Dalintis:

More than one in four disputes (171 in total) were resolved by a compromise between the parties or by the satisfaction of the consumer’s claims by a financial market participant. This is the highest number of amicable settlements in one year since 2012, when the Bank of Lithuania started settling consumer disputes. This is an increase of 40% compared to 2021, when 122 disputes were resolved amicably. Amicable settlements accounted for 28% of all disputes handled.

Units

Dalintis:

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2.7.Fraud prevention

One of the Bank of Lithuania’s strategically important areas of activity relates to fraud prevention, the aim of which is to increase the resilience of consumers of financial services and financial market participants to fraud. In pursuit of this goal, the Bank of Lithuania has set up an internal working group to address fraud prevention issues, as well as developed and approved an action plan for creating a dynamic system of various measures covering different areas and utilising the expertise of professionals in various fraud-related areas, including the ability to flexibly innovate and respond to the rapidly developing field and emerging new methods of fraud. Given that fraud is a complex problem, dealing with it and effective fraud prevention and containment must involve multifaceted, coordinated and targeted action by professionals from various fields, both within the Bank of Lithuania and in cooperation with other institutions. Therefore, in the context of various initiatives and measures developed and implemented by professionals and institutions in various fields, a large and significant part of the Bank of Lithuania’s fraud prevention activities is related to the coordination of the development and implementation of such preventive measures, with a view to ensuring that the implementation process as such is effective, smooth and timely.

In implementing the measures envisaged in the action plan for fraud prevention, the Bank of Lithuania carried out international analyses of the practices of alternative dispute resolution entities and the best practices in the application of fraud prevention measures, which were aimed at gaining insights into how to make the process of resolving disputes concerning financial fraud (consumer damages) and the process of fraud prevention as fair and efficient as possible, i.e. ascertaining which measures contribute to the most effective achievement of the fraud prevention goals and in what way they should be implemented. In addition, an analysis was performed as to how financial market participants are implementing the requirements of Commission Delegated Regulation (EU) 2018/389 of 27 November 2017 pertaining to authorisation tools and the monitoring of payment transactions. Market recommendations were produced on the basis of this analysis. It should also be noted that in 2022, the Bank of Lithuania established the Centre for Financial Literacy, one of the main areas of activity of which is dedicated to educating consumers of financial services about the risks associated with fraud and to drawing the attention of financial market participants to the proper setting of fraud prevention measures. In order to effectively manage risks related to fraud, the Bank of Lithuania published a review of fraud and the risk of provision of illegal services and prevention thereof in the first quarter of 2022. This review looks at the main risks of fraud and the illegal provision of financial services – in particular investment fraud – and outlines possible prevention measures. To protect consumers from investment fraud, malicious websites continue to be blocked and removed from the Google search engine. In addition, a pilot project was carried out using the Google Ads service: after typing keywords into the search engine, a Bank of Lithuania advertisement was displayed on the Bank of Lithuania’s website, inviting users to check the trustworthiness (the right to provide investment services) of the entity being searched for. It is also worth mentioning the Bank of Lithuania’s Confirmation of Payee (CoP) initiative, which is intended to help the payer to determine the actual ownership of the IBAN account based on the name and surname provided by the recipient of funds.

The Bank of Lithuania experts who coordinate the fraud prevention direction also participate in the activities of the tactical groups of the Centre of Excellence in Anti-Money Laundering and cooperate with financial market participants and other institutions. The Bank of Lithuania is actively involved in significant legislative initiatives and inter-institutional cooperation in order to ensure that the objective of fraud prevention is properly achieved.

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2.8.Resolution of financial institutions

·Two new and three updated resolution plans for domestically owned banks and CCUs of medium and lower significance were prepared in 2022.

·MREL was set for eight credit institutions, including three systemically important banks.

·The Single Resolution Fund accumulated €66 billion in contributions paid by banking union state banks.

·The Bank of Lithuania has started to perform the functions set for a resolution authority for central counterparties.

In carrying out its mandate as a resolution authority, the Bank of Lithuania helps to ensure that significant financial institutions in difficulty can be resolved swiftly, by ensuring continuous operations without the government’s assistance. To this end, early preparation work for potential unforeseen events continued in 2022, by revising and further developing resolution plans for credit institutions. In the resolution planning cycle, two new and three updated resolution plans for domestically owned banks and CCUs of medium and lower significance were prepared. Resolution plans for the three major banks of systemic importance were revised in cooperation with the Single Resolution Board, the central resolution authority for the euro area countries, and, for banks belonging to cross-border groups, with the national resolution authorities in Sweden, Latvia and Estonia. The resolution plans in place cover 99% of the assets of the banking and CCU sector.

(market share by assets, %)

Dalintis:

In 2022, binding minimum requirements for own funds and eligible liabilities (MREL) were set for eight credit institutions, including three banks of systemic importance – AB SEB bankas, Swedbank, AB, and AB Šiaulių bankas. The MREL is important in protecting the stability of Lithuania’s financial system and state funds, and its aim is to ensure that credit institutions encountering difficulties have the reserves to absorb losses and further carry out their operations after resolution. The deadline for the accumulation of the MREL under the new Bank Recovery and Resolution Directive is 1 January 2024.

At the end of 2022, the Single Resolution Fund (SRF) stood at around €66 billion. The SRF ensures that credit institutions contribute to the costs of stabilising the financial system and that the resolution authority is able to apply resolution tools and powers effectively, where necessary, and without using taxpayers’ money. In 2022, banks and CCUs operating in Lithuania contributed €7.3 million to the SRF, while the total amount of contributions collected from all banks in the banking union countries was €13.67 billion. By the end of 2023, the size of the Fund should reach its target level of €80 billion, i.e. 1% of the amount of insured deposits of banks in the banking union.

In 2022, work on the implementation of the Regulation on a framework for the recovery and resolution of central counterparties was finalised, with participation in the development of the recovery and resolution regime for insurance undertakings. At the end of 2022, amendments to the Law on Financial Sustainability and other related laws came into force, implementing the provisions of the Regulation on a framework for the recovery and resolution of central counterparties in Lithuanian law. In accordance with the amendments to the laws, the Bank of Lithuania has started to perform the functions set for a resolution authority for central counterparties (CCPs). Currently, there are no CCPs established in Lithuania, but the Bank of Lithuania would participate in CCP resolution colleges in other countries if the resolution of those CCPs would have an impact on financial stability in Lithuania. In 2022, the Bank of Lithuania also provided expert support to the Ministry of Finance representing Lithuania’s position in the drafting of the Insurance Recovery and Resolution Directive, the aim of which is to create a recovery and resolution framework for insurance and reinsurance undertakings.

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2.9.Cash

·As of 31 December 2022, the total value of euro banknotes and coins issued into circulation by the Bank of Lithuania amounted to €7,477 million.

·The expansion of the network of cash access points implemented in Lithuania made access to cash faster and more convenient for people in the regions: around 250 thousand residents in 40 municipalities across the country were provided with improved access to cash.

·The number of counterfeit euro banknotes detected fell by almost one tenth.

·LTL 6.9 million were exchanged into euro, i.e. 11% more than in 2021, bringing the total value of litas in circulation to LTL 406 million as at 31 December 2022.

·5 collector and 3 commemorative coins dedicated to special topics as well as a numismatic set of circulation coins were issued.

Dalintis:

In 2022, the expansion of the network of cash access points implemented in Lithuania made access to cash quicker and more convenient for people in the regions: around 250 thousand residents in 40 municipalities across the country were provided with improved access to cash. Taking into account the importance of cash for a part of society and having assessed the level of cash accessibility in the country, the Bank of Lithuania took the initiative to improve it. The Bank of Lithuania, the Association of Lithuanian Banks, and major financial institutions signed a Memorandum of Understanding for Ensuring Access to Cash in Lithuania (hereinafter – the Memorandum). Prior to the Memorandum, ATMs were available in 91 locations (mostly in large towns); after the implementation of the Memorandum, ATMs are now available to residents in as many as 191 localities. The ATM expansion was focused on regions, with 100 new ATMs installed in localities with fewer than 4,000 inhabitants (fewer than 2,000 in most of them) that have never previously had an ATM. People can withdraw cash from the new ATMs under the same conditions as from the ATMs of their credit institution. After the implementation of the Memorandum, 91% of the population can reach an ATM within 10 km, and 99% can do so within 20 km (these figures were 82% and 95% respectively before the Memorandum). The list of ATMs is published on the website administered by the independent supplier and on the website of the Bank of Lithuania. The Bank of Lithuania, for its part, will continue to assess the situation of access to cash in Lithuania and, if necessary, will take initiatives to improve the accessibility of financial services and payment instruments.

Dalintis:

The Bank of Lithuania installed an advanced cash management information system, which is also used in other euro area countries. In upgrading and improving cash circulation processes, the Bank of Lithuania began to use CashSSP (Cash Single Shared Platform) and thus joined the eleven other national central banks of the Eurosystem that use this system. The installation of CashSSP in the Bank of Lithuania is another step towards achieving one of its strategic goals: digitising the Bank of Lithuania’s processes and services. The new system makes it possible to increase the efficiency of business processes, make even more rational use of financial and human capital, and contribute to the drive to become greener. The vision of the Bank of Lithuania – an innovative, proactive and open Eurosystem central bank – is thus being implemented.

The increased demand for cash has been met and Lithuania has sufficient cash reserves. During the first week of russia’s war in Ukraine, when the demand for cash in Lithuania temporarily increased, the Bank of Lithuania, credit institutions and cash-in-transit companies ensured that ATMs were refilled with cash promptly. The Bank of Lithuania provided transport and logistical assistance to cash-in-transit companies to speed up the filling of ATMs with euro. Lithuania has sufficient cash reserves and the Bank of Lithuania, credit institutions and cash-in-transit companies are prepared to meet the demand for cash.

The coin issued by the Bank of Lithuania helped to raise almost €350 thousand for aid to Ukraine. The Bank of Lithuania, after distributing the entire mintage of the €10 silver collector coin dedicated to Ukraine’s fight for freedom (excluding coins intended for museums and representation), transferred €346,290 to a humanitarian aid account opened by the National Bank of Ukraine.

Ukrainian citizens fleeing the war took the opportunity to exchange their Ukrainian hryvnia to euro at the exchange rate set by the National Bank of Ukraine. In 2022, the Bank of Lithuania and the National Bank of Ukraine signed an agreement on the exchange of hryvnia, under which hryvnia was exchanged into euro at the exchange rate set by the National Bank of Ukraine, as provided for in the agreement, between 10 October and 5 December 2022. Ukrainian citizens exchanged 719 thousand Ukrainian hryvnias to euro. After the expiry of the agreement, the exchange offices and banks providing this service continue to exchange Ukrainian hryvnia into euro at the market rate.

The number of counterfeits detected in Lithuania is decreasing. In 2022, 1,073 euro counterfeits (822 banknotes and 251 coins) were investigated and withdrawn from circulation at the Bank of Lithuania, which is 9% less than in 2020. The majority of euro counterfeits (49%) consisted of €50

banknotes. In 2022, the Bank of Lithuania examined 28 thousand notes and coins upon receiving applications from natural and legal persons to exchange worn or damaged currency.

The Bank of Lithuania issued into circulation 5 collector and 3 commemorative euro coins dedicated to special topics, as well as a numismatic set of circulation coins. Numismatic items commemorate prominent figures and anniversaries of historical events. They can be purchased on the Bank of Lithuania’s e-shop.

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2.10.Statistics

·Payment statistics were significantly expanded following the implementation of the Official Statistics Programme.

·The first analytical calculations on the greenhouse gas (GHG) intensity (GHG-to-loan ratio) were produced.

·The implementation phase of the DAMAMA programme was launched.

·Over the year, 15 datasets were published on Lithuania’s open data portal.

·91% of surveyed users trust the data published by the Bank of Lithuania.

Under the Official Statistics Work Programme, the Bank of Lithuania further developed statistics as envisaged:

- in particular, collecting and reporting to the ECB of payments and payment fraud statistics were expanded, with more than 1 million data series produced and sent in 2022 (1,977 in 2021);

Dalintis:

- 480 data series were added to the granular data of the MFI balance sheet statistics; 

- external statistics were extended to provide the ECB with more than 3,000 data series (indicators on special purpose entities and international investment position by currency);

- financial accounts statistics were expanded to provide the ECB with around 1,000 data series;

- at the request of users loans by economic activity broken down by the book value of the loans, the margin applied to the loans, the average duration of the loans and other indicators, as well as monthly and annual changes in repeat sales house price indices were compiled and published;

- in climate change and statistics, the first analytical calculations on the GHG intensity were produced. The information provided to the ECB on securities issued and available in Lithuania and loans granted relates to experimental sustainable finance indicators (using the ECB’s official green bond statistics) as well as to analytical indicators on carbon (CO2) footprint and physical hazards.

As a data-centric organisation, and in response to the changing needs of data control and data processing, the Bank of Lithuania is implementing DAMAMA, the Data Management Maturity Programme. Following the completion of the planning process, the DAMAMA programme was launched: upon the identification of operating needs, technical specifications for the planned acquisition of solutions were developed, related procurements were announced, and strategic partners for implementing the changes in the information system were selected. The core components of the data platform were put in place and preparations are underway for the migration of the first uses of data.

Dalintis:

The Bank of Lithuania continued to ensure the implementation of data governance principles in line with best practices: a data governance framework was developed, organisational changes were made, specific data owners were appointed, the Data Governance Group and the Data Governance Committee launched their activities, a data process map was produced, and the collection of part of the reports was centralised. The chosen technological solutions are expected to facilitate, as much as possible, the processes of data collection, storage, analysis and provision to interested institutions and authorities.

By participating in the open data initiative, the Bank of Lithuania aims to ensure that the data available to it creates more value added, stimulates interest and encourages the development of new and innovative solutions. Over the year, 15 datasets were published on Lithuania’s open data portal. Actual data on ATM addresses, payment service rates, Lithuania’s financial accounts, payments, direct investments, banks and other MFIs, insurance undertakings, pension and investment funds and other statistics are available to users in open formats.

The regular online user survey was complemented by live interviews with several groups of users. As part of this survey, 10 interview sessions were organised with a total of 20 various financial market participants, representatives of the investment management industry and the open data community participating therein. The survey identified that 91% of the surveyed users trust the data published by the Bank of Lithuania.

Dalintis:

Dalintis:

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2.11.Fiscal agent

·In 2022, the Bank of Lithuania administered accounts of public entities and carried out financial operations for public entities under the procedure and conditions laid down by the Bank of Lithuania.

·The Bank of Lithuania offers the following banking services to public entities: transfers funds in accordance with payment instructions from resource managers, credits accounts, exchanges currencies, as well as compiles and provides statements of accounts and other information.

Acting as the fiscal agent under the Republic of Lithuania Law on the Bank of Lithuania, in the period under review, the Bank of Lithuania administered accounts of public entities and carried out financial operations for public entities under the procedure and conditions laid down by the Bank of Lithuania. The Bank of Lithuania provides banking services to the following public entities: the Ministry of Finance by administering the accounts of the State Treasury of the Republic of Lithuania, national promotional institutions and other public sector institutions managing statutory funds, as well as EU institutions, and foreign central banks within the Eurosystem Reserve Management Services framework.

As of 31 December 2022, the Bank of Lithuania administered 90 accounts of public entities (82 accounts as of 31 December 2021). These accounts have been opened and administered at the Bank of Lithuania in accordance with the legal acts of the Republic of Lithuania, the Bank of Lithuania and the ECB.

The Bank of Lithuania offers the following banking services to public entities: transfers funds in accordance with payment instructions from resource managers, credits accounts, exchanges currencies, and compiles and provides statements of accounts and other information. In the course of 2022, the Bank of Lithuania executed 438.7 thousand credit transfers under the payment instructions of public entities; their total value amounted to €33.3 billion.

Dalintis:

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3.Organisation of activities

·The staff turnover rate was 12.1%.

·There were structural changes in the Data and Statistics Department and Information Technology Department.

·A new collective agreement was signed and a Description of procedures for the implementation of the violence and harassment prevention policy at the Bank of Lithuania was approved.

·Together with the other Eurosystem central banks, the Bank of Lithuania signed the Equality, Diversity and Inclusion Charter.

Dalintis:

In 2022, the structures of the Data and Statistics Department and the Information Technology Department were rearranged. In order to increase the level of maturity of the Bank of Lithuania’s data management, to make the work with data more efficient and to meet the related strategic objective of the Bank of Lithuania, the Data and Statistics Department was reorganised by centralising the functions related to the data value chain, such as data governance, data collection and data dissemination. This department is now comprised of the Data Governance Division, the Data and Reporting Collection Division, the Macroeconomic Statistics Division, the Monetary and Financial Statistics Division, and the Data and Statistics Dissemination Division.

In order to increase the maturity level of the Bank of Lithuania’s information technology management by applying progressive information technology management practices and enhancing information technology architecture management, information technology product development, changes management and the quality of services provided by third parties, the Information Technology Department was reorganised. This department is now comprised of the Architecture and Information Systems Security Division, the Data Platform Division, the Information System Support Division, the Infrastructure Division, the Payment Systems Division, the Management Division, and the Operational Information Systems Division.

A new collective agreement was signed and a Description of procedures for the implementation of the violence and harassment prevention policy at the Bank of Lithuania was approved. It covers possible forms of violence and harassment and the ways of identifying them, establishes procedures for reporting and handling reports of violence and harassment, sets out safeguards, and lays down general principles for the conduct of the Bank of Lithuania’s staff with a view to avoiding cases of violence and harassment.

Together with the other Eurosystem central banks, the Bank of Lithuania signed the Equality, Diversity and Inclusion Charter, which is aimed at ensuring equal opportunities and diversity and creating a common corporate culture of inclusion and diversity at central banks.

In 2022, management and hybrid leadership competences were enhanced, practical hybrid working tools continued to be implemented, and attention was paid to supporting the emotional well-being of staff. Leadership competence development programmes were successfully implemented to develop management and leadership competences. Lectures and presentations were organised for staff members on the topics of emotional well-being and fostering a culture based on the values of the Bank of Lithuania. In order to improve working conditions for staff, taking into account the changed working environment and the lessons learned during the pandemic, the remote work rules were updated to address the conditions and possibilities of hybrid working.

Dalintis:

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4.Research activities

·Economic research at the Bank of Lithuania is primarily conducted at the Centre for Excellence in Finance and Economic Research (CEFER) and the Applied Macroeconomic Research Division (TMTS).

·In cooperation with Vilnius University and Kaunas University of Technology, CEFER aims to attract internationally acclaimed researchers, thus raising the quality of economic and financial research, changing the academic culture, stimulating expert discussions and ultimately positioning itself as the hub of economic and financial sciences in the Baltic region.

·The results of TMTS research help in making monetary and other economic policy decisions, and the models it develops help to improve the accuracy of projections for the Lithuanian economy.

·The main fields of expertise: macroeconomic and econometric modelling; international economics and microfinance; household assets, consumption and income inequality; performance, growth and dynamics of firms; labour market and reform impact assessment.

Dalintis:

Top-tier international publications. The scientific publications published by CEFER and TMTS in 2021 included 14 working, occasional and discussion papers and 8 articles in top-tier international journals (such as Journal of Financial Economics, Labour Economics, Small Business Economics, Oxford Economic Papers, Journal of Comparative Economics, Journal of Financial Services Research, Journal of Housing Economics).

High-level conferences, seminars, workshops and research clusters across the Baltics. On 22–23 September 2022, the 4th International Conference “New Dimensions of Monetary Policy” was held in Warsaw, organised by the Bank of Lithuania together with CEPR and CEBRA economic research organisations and the central bank of Poland. During the conference, works were presented in four sessions by distinguished academics from European central banks and Canada’s central bank, US and European universities, and international institutions, and plenary sessions were led by renowned professors from Harvard Business School and the London School of Economics and Political Science. In December, the annual Winter session of the Economic Research Conference was attended by over 40 economists from universities in the UK, the US, Hong Kong, Italy, the Baltic States, etc., and from Lithuania. The majority of the participants were members of the Lithuanian diaspora conducting economic research at universities abroad. Overall, 18 papers were presented in the following sessions: “Government Intervention”, “Alternative Labour”, “Market and Real Efficiency”, “Gaining and Losing Welfare”, “Global Shocks and Micro Adjustments”, as well as a presentation of and discussion on the Lithuania 2050 Strategy.

The promotion of quality research in economics and finance. The promotion of economic science is ensured through visits by foreign researchers, presentations, workshops, reading groups on the latest economic literature, and training sessions, all of which are open to all interested parties, including external researchers and experts. To encourage high-quality research, the Bank of Lithuania granted an award (€5,000) for a dissertation in the field of economics entitled “Estimation and Inference for High Dimensional Mixed Frequency Data Models”. The dissertation discusses several new areas of empirical application, one of which is forecasting GDP growth in the current period (nowcasting), which can help to obtain more accurate projections compared to the methods currently used by central banks. This can also help banks to monitor economic activity in real time.

Lectures and updated study programmes. In cooperation with Vilnius University, the Bank of Lithuania further implemented the bachelor’s programme in Quantitative Economics. This programme is taught by Bank of Lithuania researchers with PhDs from leading US and European universities. The programme is unique in its structure as it combines open-source economics studies, which help to develop economic intuition, with a unique blend of mathematics, statistics, economics and data science. The CEFER also initiated joint Vilnius University and Kaunas University of Technology doctoral courses in econometrics, methodology and macroeconomics. In spring 2022, the planned annual CEFER Challenge team competition took place for the first time, inviting undergraduate and postgraduate students from a wide range of disciplines to take part and apply the knowledge acquired in their lectures to real-life climate change problems, and to answer questions such as: “Why should central banks and financial supervisors be concerned about climate change?” and “How can monetary policy be reconciled with an assessment of long-term climate change processes and their effects?”.

Household Finance and Consumption Survey. In 2022, Lithuania’s second wave of the Household Finance and Consumption Survey was completed. The analysis of the data collected will make it possible to assess the dynamics and drivers of Lithuanian household income and wealth, as well as the impact of the pandemic on household finances.

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5.Other important events

·The Bank of Lithuania marked its centenary.

·Other international conferences organised by the Bank of Lithuania were held.

·Technical cooperation remains a key area of the Bank of Lithuania’s activities.

The year 2022 marked the 100th anniversary of the Bank of Lithuania, the central bank of the Republic of Lithuania. To commemorate this anniversary, the Bank of Lithuania organised international exhibitions and conferences, an open day at the Bank of Lithuania building in Kaunas, guided tours and virtual lectures as well as issued collector coins to commemorate the centenary. The National Museum of Lithuania in Vilnius opened an international exhibition “100 Years: Litas, Lats, Kroon”, intended to commemorate the anniversaries of the currencies of the Baltic States. The exhibition was organised by the Money Museum of the Bank of Lithuania together with colleagues from Latvia and Estonia and the National Museum of Lithuania. This exhibition was the first international exhibition where the exhibits of the Money Museum of the Bank of Lithuania (coins, money-making instruments and artefacts testifying to the history of banking in Lithuania) were displayed. An international conference “Future of Central Banking” was organised together with the Bank for International Settlements on the occasion of the centenary of the Bank of Lithuania. This conference was attended by the heads of the BIS System and other global central banks, experts from international bodies, policymakers, decision-makers, representatives of state authorities and the academia, to discuss the development of central banking in light of current challenges. On the occasion of the centenary, the Bank of Lithuania opened the doors of its historic premises in Kaunas to the public and invited them to an open day. There were guided tours, quizzes, educational activities, and a virtual 3D tour of the Bank of Lithuania’s building in Kaunas Palace created on the occasion of its centenary. A scientific conference “The Litas: A Century-Long Way” was organised as well. Scholars and professionals from different fields presented various aspects of the history of the litas and the challenges that the Lithuanian monetary system was exposed to. In December 2022, the album “The Art Collection of the Bank of Lithuania” was published. For the first time, it presents works of art collected by the Bank of Lithuania in the interwar period and after 1990 in a concentrated way. This includes paintings, ceramics, sculptures, stained glass. As Kaunas became the European Capital of Culture, the installation “Ex It” by the world-renowned artist Yoko Ono was launched in the main operations hall of the historical interwar Bank of Lithuania building in Kaunas. Residents and visitors to Kaunas could not only see this installation but could also attend guided tours in the Kaunas building throughout the year.

Dalintis:

The fourth biennial international conference “New Dimensions of Monetary Policy” was organised together with the National Bank of Poland on 22–23 September 2022. Keynote speeches were given by Alberto Cavallo, Associate Professor at Harvard Business School, and Ricardo Reis, Professor at the London School of Economics and Political Science.

The 10th Annual Bank of Lithuania Real Estate Conference was held on 17 November 2022. In the conference, presentations were made on the housing market situation in the current macroeconomic environment, and there were discussions as to how price growth will be managed. Moreover, the real estate market policy was examined and targeted measures to increase housing affordability were discussed, including the state’s financial aid for buyers and renters of housing, the benefits and costs of development requirements, and the impact on the supply and quality of housing.

On 21 September 2022, together with 19 ESCB national central banks and the ECB, the Bank of Lithuania launched an EU-funded “Programme for strengthening the central bank capacities in the Western Balkans with a view to the integration to the European System of Central Banks. Phase II”. As a follow-up to the programme completed on 16 December 2021, it is intended to strengthen the institutional capacity of central banks and banking supervisory agencies in six Western Balkan countries, in particular by improving their analytical and policy tools and by transposing best international and European standards into national practices.

The consortium of the national central banks of Lithuania and Poland continued to implement the EU Twinning project “Strengthening the institutional and regulatory capacity of the National Bank of Ukraine to implement the EU-Ukraine Association Agreement” launched on 1 October 2020. This project aims to support the capacities of the National Bank of Ukraine in the following key areas: banking supervision, payment system development, strategic planning, and cooperation with international institutions. The project was suspended following the outbreak of russia’s war in Ukraine on 24 February 2022, but upon the assessment of the National Bank of Ukraine’s abilities to continue the project, as well as an assessment of changed needs, it was relaunched and supplemented with a new area – SEPA – on 1 July 2022.

The consortium of the national central banks of Lithuania, Romania and the Netherlands continued to successfully implement the EU Twinning project launched in 2021 “Strengthening supervision, corporate governance and risk management in the financial sector” in Moldova. The project aims to support the National Bank of Moldova in strengthening its capacity in macroprudential oversight, the supervision of the insurance sector, non-bank credit institutions, payments and financial market infrastructure.

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Annual financial statements of the Bank of Lithuania

Annual financial statements of the Bank of Lithuania are available here.

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Annexes

Collector and commemorative coins issued in 2022

The list of collector and commemorative coins put into circulation is available here.

Resolutions adopted by the Board of the Bank of Lithuania and made publicly available on the Register of Legal Acts in 2022

In 2022, the Bank of Lithuania took active legislative actions and adopted regulatory Bank of Lithuania legal acts. In 2022, the Board of the Bank of Lithuania adopted 89 resolutions that regulate the activities of banks and other financial market participants; they are made publicly available on the Register of Legal Acts.

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Abbreviations

AB                    public limited liability company

ABSPP               asset-backed securities purchase programme

AML/CTF           anti-money laundering/counter-terrorist financing

APP                  asset purchase programme

CBPP                covered bond purchase programme

CCU                  central credit union

CSPP                corporate sector purchase programme

ECB                  European Central Bank

EEA                  European Economic Area

EMI                  electronic money institution

ESCB                European System of Central Banks

EU                    European Union

EURIBOR          euro interbank offered rate

Eurosystem      European Central Bank and euro area central banks

FinTech            financial technology

GDP                  gross domestic product

GHG                 greenhouse gas

HICP                 Harmonised Index of Consumer Prices

ICT                   information and communication technology

MFI                   monetary financial institution

ML/TF               money laundering and terrorist financing

MREL                minimum requirement for own funds and eligible liabilities

MRO                 main refinancing operations

O-SII                other systemically important institution

P2P                   peer-to-peer

PEPP                 Pandemic Emergency Purchase Programme

PI                     payment institution

PSP                   payment service provider

PSPP                 public sector purchase programme

SEPA                Single Euro Payments Area

SMP                  securities market programme

UK                    United Kingdom

US                    United States of America