Summary

The environment of high interest rates has cooled down the accelerated inflation while avoiding a hard landing of the economy and financial cycle, the risk background has become brighter but the heightened geopolitical tensions threaten national economies and financial stability. With the ECB raising the deposit facility rate to 4%, inflation has already fallen to 2.4% in the euro area and 0.4% in Lithuania. As inflation eases, the ECB is also expected to cut interest rates in 2024. A lower cost of borrowing would enable more vigorous economic growth in 2024 and 2025. However, higher interest rates will continue to be the main factor affecting the financial system. In addition, as geopolitical tensions continue to prevail globally, with elections taking place in a number of countries this year and resulting in increased uncertainty, national economies and financial stability remain susceptible to unexpected shocks.

Credit provision to households and businesses has slowed down due to the higher cost of borrowing and easing inflation, but credit demand is expected to recover in 2024. The tightening of borrowing standards has resulted in the slowest growth of the corporate and household debt portfolio in recent years, while the debt-to-GDP ratio has remained stable and is still among the lowest in the euro area. In 2023, the sharp rise of short-term corporate liabilities during the period of high inflation came to a halt, with relatively higher long-term borrowing. As access to bank credit remained one of the worst in Europe, its share in the structure of corporate financial liabilities continued to decline, and the ratio of corporate loans to GDP fell back to the level of 2004. However, as expectations of monetary policy easing have been building in financial markets, banks have reported in surveys that demand for corporate and household credit is expected to pick up in 2024. In addition, state guarantees improve access to finance for SMEs but there is a case for making them more effective.

The frail corporate financial health in a fragile macroeconomic environment with major trading partners facing difficulties remains a risk for the financial system. A prolonged contraction in foreign demand would adversely affect the financial health of Lithuanian businesses operating in export-oriented sectors of manufacturing, trade, and transportation and storage. While the level of debt among businesses in these sectors is typically low, which mitigates risk, the likelihood of default on their debt is increased by significant interdependencies, which could also worsen the financial health of businesses in other sectors in an adverse scenario. On the other hand, while the level of risk remains elevated, non-financial corporations (NFCs) have been profitable so far and have successfully weathered the shocks from the pandemic, war and increasing interest rates, and latest data show no significant signs of an increase in the number of bankruptcies or level of non-performing loans.

The financial situation of households remains resilient thanks to sustained debt levels, growing purchasing power and savings accumulated during the pandemic. Despite the economic stagnation, the employment rate remains high. The purchasing power of households began to increase in the second half of 2023 and helped households with the lowest income make loan repayments on time, even in the face of rising interest rates, while banking regulation and applicable RLR helped avoid risks of over-indebtedness for both households and banks. Households were resilient to the challenges posed by the current macroeconomic environment, and the quality of their loans and resilience to economic shocks remained high. However, the above risks could lead to layoffs by businesses, rising unemployment rate and falling household income. Those working in the accommodation and catering sector would be the most vulnerable to such an adverse scenario.

The housing market is still in the downturn phase and, although a price correction was avoided, the low activity and remaining limited price imbalances continue to pose systemic risks. High interest rates and geopolitical tensions have driven the number of registered housing sales back to the level of 2015, while annual price growth has slowed down and is starting to stabilise at around 5%. With prices rising more slowly than wages from the end of 2022 onwards, housing affordability is starting to slowly improve. For it to remain on an adequate level in the long term, it is important to take targeted measures aimed at ensuring sustainable demand and flexible supply. However, with housing demand still weak and price overvaluation at around 5%, the market remains vulnerable to potential shocks that could lead to a price correction and systemic impact on the financial market.

The increased sensitivity of the CRE market due to high interest rates also poses systemic risks, although a sharp market decline has been avoided so far. The CRE market activity is at its lowest in four years, while the level of risk is higher than in the residential RE market due to disinvestment and deterioration in profitability of RE managers. Although the less-active CRE market has so far withstood the shock of higher interest rates, unlike in the Western countries that have experienced significant downturns of this market, Lithuania has avoided a price correction so far. However, if economic growth slowed down more significantly and RE managers were unable to refinance their financial liabilities, the RE market would face a larger correction resulting in higher credit losses for banks and weaker credit supply to the economy.

Although the economic outlook has worsened, the banking sector, affected by exceptional circumstances, has been extremely profitable and maintained good loan quality and high level of resilience, but banks continue to face systemic risks stemming from the threat of cyberattacks during the russian aggression. The predominant share of loans with variable interest rates, excess liquid funds and funding costs which have risen much more slowly than revenues have resulted in the Lithuanian banking sector earning a profit of almost €1 billion in 2023 (after paying the solidarity contribution), reaching one of the highest profitability levels in the EU. The non-performing loan indicator remained at historical lows. Banks continued to face a higher number of cyberattacks and, while systemic-level effects were avoided, the level of cyber risks, in particular due to geopolitical reasons, remains elevated and poses a systemic risk to the banking sector. Stress testing of the banking sector’s solvency and liquidity conducted by Lietuvos bankas indicates that the banking sector would be able to withstand adverse economic development scenarios, including secondary effects or unexpected liquidity shocks. Capital depletion measured during solvency testing poses no risks to the stability of the sector and a strong liquidity situation, mainly driven by a sufficient level of liquid assets, would allow the banking sector to withstand both short-term and longer-term liquidity shocks.

Assets of the non-banking sector in Lithuania continued to grow but increasing the maturity of the fintech and crypto-asset sectors remains important to mitigate potential reputational risks to Lithuania’s financial system. Pension and investment fund assets displayed the most significant growth over the course of the year. This was due to favourable conditions on financial markets and increased investor interest. While the EMI and PI sector was profitable overall and its share of the payments market grew, almost half of the institutions did not make a profit, while non-resident clients continue to pose a higher risk for many. A significant amount of payment transactions of non-residents are linked to higher risk territories and financial activities. The ML/TF risk potential exists due to a large number of crypto-asset companies established in Lithuania. However, these risks will be mitigated by new operational requirements for crypto-asset institutions that will come into force in the nearest future. Overall, further enhancement of maturity of both the fintech and crypto-asset companies will help limit the potential adverse impact on the reputation of Lithuania’s financial system.

Existing macroprudential measures ensure the resilience of the Lithuanian financial system, and the adoption of new proposals put forward by Lietuvos bankas will address market imperfections. Lietuvos bankas conducts an adequacy assessment of the existing macroprudential measures and regularly reviews their levels. The CCyB rate, which was brought back to the pre-pandemic level of 1%, took effect on 1 October 2023, and the additional capital buffer requirement of 1% applicable to systemically important Revolut Bank UAB from 1 July 2023 was raised to 2% in December 2023 and will take effect on 1 July 2024. Moreover, in response to the existing or temporarily emerging inefficiencies in the Lithuanian financial system, which may adversely affect the development of the financial system and financial inclusion, Lietuvos bankas proactively puts forward proposals for legislative amendments and formulates positions on relevant issues, including on the availability of fixed interest rates on housing loans, as well as improving mortgage refinancing options and allocation of windfall profits generated by the Lithuanian banking sector to the solidarity contribution.

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1.Status, risks and resilience of the financial system

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1.1.Development of the Lithuanian and international macroeconomic environment and financial markets

As inflation in the euro area moves back towards the 2% target, interest rates are also expected to fall.

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Higher cost of borrowing has led to sluggish growth of national economies.

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1.2.Credit and indebtedness development

In an environment of higher interest rates and macroeconomic uncertainty, the financial cycle in Lithuania slowed down in 2023 and was consistent with a soft-landing scenario. The financial cycle index calculated by Lietuvos bankas (see Chart 3, left-hand panel) declined in 2023 and was still at its lowest level in early 2024. The slowdown of the cycle was mainly due to a reduction in demand from borrowers as a result of higher interest rates since the lending capacity of banks was not overly constrained. Overall, the indebtedness of businesses and households remained stable as indicated by the 61.6% debt-to-GDP ratio (see Chart 3, central panel), while the ratio of bank loans to GDP was still among the lowest in the euro area (35.6%). The ratio of bank loans to households and businesses to GDP has been below its long-term trend in recent years, which has kept credit imbalances at bay (see Chart 3, right-hand panel). Bank funding has also been sustainable, with the ratio of bank loans to local deposits standing at 79%.

As the financial cycle slowed down, credit growth was weaker than that of the economy, and gaps between credit and the long-term trend remained negative.

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In 2023, the sharp rise of the corporate short-term liability portfolio seen during the period of high inflation practically came to a halt, while an uptick in long-term borrowing was observed. In the fourth quarter of 2023, the total corporate liability portfolio grew at an annual rate of 4%, the slowest pace since 2020. With weakening financing through accounts payable and trade credits, the growth of the corporate short-term liability portfolio effectively stalled (growing at an annual rate of 1.4% in the fourth quarter of 2023 to €45.7 billion). On the other hand, the substitution of peer-to-peer business loans for credit from other financial institutions and foreign credit resulted in further growth of the long-term liability portfolio at a relatively high annual rate of 10% to €21.2 billion (see Chart 4, left-hand and central panels). Total corporate financial assets, in particular unlisted shares, grew twice as much as total corporate liabilities in 2023 (€4.9 billion and €2.5 billion respectively), resulting in a 17.5% increase in corporate net financial assets (c.f. €15.7 billion in the fourth quarter of 2023). Thus, overall businesses are financing their operations in a sustainable manner, meanwhile weaker growth of financial liabilities is mainly explained by lower inflation.

In 2023, businesses borrowed more on a long-term basis, while the importance of bank credit in the structure of corporate financial liabilities continued to decline.

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In 2023, bank lending to businesses and housing loans to households slowed down with only consumer lending showing more significant growth. As high interest rates reduced credit demand, bank lending moderated in 2023. The annual growth rate of the MFI loan portfolio to businesses was 4.3% in the fourth quarter, a decrease of 14 percentage points compared to the previous year. Meanwhile, the growth rate for loans to households stood at 6.7% (down by 4.5 percentage points year-on-year, see Chart 5, left-hand panel). In the fourth quarter of 2023, the number of new loans to businesses fell by a sixth year-on-year, but the value of new credit increased by more than a quarter. Accordingly, the number and value of new housing loans were roughly by a sixth lower year-on-year due to weaker demand and tighter lending standards (see Chart 5, central and right-hand panels). However, the results of the Bank Lending Survey show that demand for housing credit picked up in the first quarter of 2024 and lending standards eased after a period of two years on the back of expectations of monetary policy easing. Over the year, the number of households with a housing loan in Lithuania declined slightly: at the end of 2023, 228,000 (around 15%) households had at least one housing loan and the residual value of these loans accounted for 68% of the total value of household debt. Almost two-fifths (38%) of households with housing loans also have a consumer loan, and the number of such new loans in 2023 was historically high as their nominal flow to Lithuanian residents rose by more than a sixth over the year. This was strongly driven by increased lending by newer banks and a higher number of consumer loans with a value of over €5,000 and maturity of over three years. Looking ahead, the banks surveyed by Lietuvos bankas expect demand for all types of new loans to increase in the nearest future.

With the rise in borrowing costs, the supply of MFI credit has been subdued for nearly two years but credit demand from household is expected to increase in the first half of 2024.

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Lending for new-build housing in city municipalities has had the most significant impact on the increase of energy-efficient RE collateral in the housing loan portfolio.

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1.3.Resilience of businesses and households

Data from business surveys show improving expectations of Lithuanian trade companies and deteriorating expectations of construction and services companies as well as negative sentiment among foreign trading partners.

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Corporate vulnerability and default risk may be exacerbated by significant mutual liabilities and a possible increase in the share of illiquid assets. In the majority of economic sectors, debt to other NFCs makes up a large part of corporate liabilities (see Chart 8, left-hand panel), with only the RE operations sector standing out for its relatively high share of debt owed to credit institutions (34% of total liabilities). The sectoral interlinkages are also reflected in the structure of assets, where the shares of and loans to affiliated companies are important as they range from 10% of total assets in the industrial sector to 60% in the professional, scientific and technical activities sector (see Chart 8, central panel). In recent years, the importance of shares of and loans to affiliated companies has been increasing in the asset structure of the industrial, construction, transport and storage, and RE operations sectors. If interlinked businesses in one sector faced financial difficulties and were unable to meet their existing liabilities, this could affect other associated companies which could further translate into losses for financial institutions. Moreover, although the trade and manufacturing sectors have a large share of liquid assets in the form of cash and inventories, a contraction in export demand may make the inventories, which make up around a quarter of total assets of these sectors, illiquid, thereby reducing the ability of companies in these sectors to repay their debt.

Low indebtedness and profitable operations reduce, while mutual liabilities increase the default risk of NFCs.

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The level of non-performing loans in the portfolio of bank loans to NFCs and the number of corporate bankruptcies remained low, but a limited deterioration in the quality of loans in the manufacturing sector and an increase in the number of bankruptcies in the transport sector were recorded. In 2023, the level of non-performing loans in the portfolio of bank loans to NFCs remained low and stood at 1.3% at the end of the year (see Chart 9, central panel), while the number of bankruptcies, which had been halved during the pandemic period as a result of moratoria, increased slightly but was still below the pre-pandemic levels (see Chart 9, right-hand panel). Although the total number of non-performing loans and bankruptcies of companies remained stable, there were changes in economic sectors. The share of non-performing loans in the construction and accommodation and catering economic activities, which are often viewed with more caution by banks due to potential risks and weaker financial situation, remained among the highest in comparison with other sectors. However, this share fell by more than 4 percentage points over the year to 3.4% and 4.3% respectively, and the number of bankruptcies of companies operating in accommodation and catering service activities declined significantly in 2023. On the other hand, the decline in export volumes and increased debt servicing costs had a negative impact on the development of the manufacturing and transport and storage sectors, as reflected in the level of non-performing loans in these sectors. However, it should be noted that loans to sectors with higher levels of non-performing loans account for a relatively small share of the total portfolio of bank loans to NFCs (see Chart 9, left-hand panel). According to the latest data for the first quarter of 2024, the overall number of corporate bankruptcies remains stable but the RE operations and transport and storage sectors stand out with an increase in the number of corporate bankruptcy proceedings by a factor of 2 and more than a factor of 2.5 respectively compared to the data for the first quarter of 2023. The deteriorating financial situation of the transport sector was also reported by one third of the banks taking part in the survey in the first quarter of 2024.

Overall, it should be noted that the main risks to corporate financial health are posed by the fragile macroeconomic environment and potential further decline in real exports due to the difficulties faced by the main trading partners, while the level of risk remains elevated. A possible prolonged contraction in foreign demand could lead to a deterioration in the financial health of Lithuanian companies operating in the export-related sectors of manufacturing, trade, and transport and storage. While the low level of debt among businesses in these sectors mitigates the risks, the likelihood of default on their debt is increased by significant interdependencies, which could also worsen the financial health of businesses in other sectors in an adverse scenario. On the other hand, while the level of risks remains elevated, NFCs have been profitable so far and have successfully weathered the shocks from the pandemic, war and increasing interest rates, and latest data show no changes in the number of bankruptcies or level of non-performing loans.

The level of non-performing loans and number of bankruptcies of NFCs remain low.

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The savings built up during the pandemic and recent rapid wage increases have boosted household purchasing power and eased the burden of higher interest rates on loans.

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The housing loan portfolio of households remains resilient to potential macroeconomic shocks supported by the RLR limiting over-indebtedness. Econometric testing has shown that in the event of a macroeconomic shock (see Table 1 in Section 1.5.1), the median probability of a household being overdue on housing loan payments at least once would increase marginally, below 2%, compared to the baseline scenario (see Chart 11, left-hand panel). A significant fall in housing prices under the adverse scenario would lead to a marked increase in expected housing loan losses. However, both bank self-regulation in the granting of housing loans and the RLR, which set the minimum collateralisation requirements for loans, would lead to potential losses amounting to merely 0.075% of the value of the housing loan portfolio (see Chart 11, right-hand panel). Moreover, based on the model output, the housing loan portfolio of banks of systemic importance is more resilient than that of less important banks and credit unions, with the expected losses for these groups of creditors amounting to 0.043% and 0.153% of the portfolio’s value respectively under the adverse scenario.

Loans of households employed in the accommodation and catering sector are the most vulnerable, while the most resilient are those of employed in the information, communication and financial activities sectors. The probability of housing loans of residents employed in the accommodation and catering sector becoming non-performing is the highest under the adverse scenario, around 40% higher compared with the total portfolio. In addition, it is equal to more than 20% for the one-tenth most risky borrowers in this sector (see Chart 12, left-hand panel). This is partly due to the average wages being among the lowest compared to other economic sectors and to a faster staff turnover. In addition, the share of housing loan losses of households employed in this sector, compared to the value of the portfolio of the corresponding sector, is, under the adverse scenario, 1.5 times higher than that of households employed in other sectors (see Chart 12, right-hand panel). However, it is important to note that the housing loans of borrowers in this sector account for merely 2% of the total household housing loan portfolio. Members of households employed in the information, communication and financial activities sectors have the best credit risk indicators for housing loans.

The credit quality of housing loans of households is good, and the loans are resilient to economic shocks.

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In conclusion, the main contributors to the financial resilience of the population were the rising purchasing power and built-up savings, which kept the overall level of risk low, while a significant deterioration in the financial outlook for companies could pose challenges going forward. Strong income growth, favourable labour market situation and built-up savings have allowed households to maintain their consumption patterns. The purchasing power of households began to increase in the second half of 2023 and helped households with the lowest income make loan repayments on time, even in the face of rising interest rates, while the RLR requirements helped avoid risks of over-indebtedness for both households and banks. Households were resilient to the challenges posed by the current macroeconomic environment and the quality of their loans and resilience to economic shocks remained high. If the economic situation of Lithuania and its main export partners were to deteriorate significantly in the future, Lithuanian companies could face financial problems leading to increased layoffs and a more significant rise in the unemployment rate. Those working in the accommodation and catering sector would be the most vulnerable to such a severe scenario.

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1.4.Trends in housing and CRE markets

High interest rates, geopolitical tensions and macroeconomic uncertainties led to a further decline in housing demand in 2023. Throughout 2023, the number of dwellings sold was by 14% lower than in 2022 and the lowest since 2015. The number of sales in the first quarter of 2024 did not increase and fell by a quarter year-on-year. The decline in the number of sales is affected by the reduced availability of credit, as the attainable loan amount has fallen to the level of 2020 (see Box 2 for more details), as well as uncertainty due to the prevailing geopolitical tensions. Nevertheless, not all market segments recorded the same contraction in the number of sales. The most significant drop is recorded in sales of old-build housing in Lithuania (excluding Vilnius), which fell to the level of 2013 (see Chart 13, left-hand panel). Sales of new-build housing in this region shrunk the least, to the level of 2020. In Vilnius, sales of both new-build and old-build housing fell to the level of 2015–2016. Trends on the primary market are driven by virtually the same factors as on the secondary market. The number of deals has shrunk significantly with the start of russia’s war against Ukraine and the subsequent rise in interest rates but has remained relatively stable since early 2023. However, sales in the first quarter of 2024 were the strongest in the last two years, possibly signalling that buyers are slowly returning to the market.

The number of dwellings sold is still down, but legal entities are particularly active in purchasing housing in Vilnius.

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In the context of fewer sales, the annual growth rate of housing prices slowed down in 2023 and started to stabilise in early 2024. According to the State Data Agency, housing prices rose by 8.3% in 2023 (see Chart 14, left-hand panel). With prices growing more slowly than wages for five consecutive quarters, housing affordability is starting to improve (see Box 2 for more details). The growth of prices of old-build housing has broadly returned to the level recorded in 2018–2019. Meanwhile, the prices of new-build houses are increasing at a faster pace, similar to that of early 2021. The faster growth of new housing prices may be due to the formal completion of previously concluded preliminary agreements. Looking at the latest data from Lietuvos bankas and market participants, the annual price growth is no longer slowing down and is settling down to a certain stable level in line with current market conditions (around 5%). This shows that, despite the prevailing geopolitical tensions and macroeconomic uncertainties, households and developers are not feeling any pressure to sell.

The growth rate of housing prices is slowing down but prices are still slightly overvalued.

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While some countries recorded declines in housing prices in 2023, low household indebtedness and modest price overvaluation contribute to price resilience in Lithuania. As the ECB interest rates turned positive, the decline in price growth was more pronounced in countries where household indebtedness was higher when interest rates started to rise (see the Chart 15, left-hand panel). In Lithuania, household indebtedness is low and prices continue to rise at a relatively fast pace. Compliance with the RLR helps ensure the sustainable level of debt in Lithuania (see Chapter 2 for more details). It is also evident that the share of housing purchased with a loan in Lithuania has not changed significantly and in 2023 accounted for 37% of the total number of deals, or 55% of the value of deals. However, indebtedness in Lithuania was low before the financial crisis as well but the price drop was one of the largest. A further analysis of the relationship between the housing price overvaluation and price changes shows that countries with a higher overvaluation have experienced a greater slowdown in the price growth (see Chart 15, central panel). In Lithuania, unlike before the financial crisis, the pandemic did not lead to any major price overvaluation. Therefore, the resilience of housing prices in the face of higher interest rates in Lithuania can be explained by low household indebtedness and modest price overvaluation. However, housing prices are also affected by a number of other factors, such as the growth of personal income, etc. The increased profitability of RE companies (see Chart 15, right-hand panel) has also contributed to the resilience of prices to the downward trend, as it has helped them build up liquidity buffers and feel less need to reduce housing sales prices.

As interest rates started to rise, the growth of housing prices slowed down or prices declined in countries with higher levels of household indebtedness and price overvaluation.

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The probability of a correction of slightly overvalued housing prices remains elevated, in line with the prevailing risks which could have an adverse effect on economic developments and lead to a further contraction in demand for housing. Households remain vulnerable to the possibility of a larger economic shock. The number of housing sales has already contracted, and a deterioration of the labour market situation and a rise in the unemployment rate would further reduce the demand for housing. In the event of a larger shock, households with loans may not be able to meet their financial liabilities which have already increased as a result of higher loan repayments. In this case, they may have to sell their housing and, given weak demand, housing prices could fall further. In addition, with housing sales still at a low level, developers with smaller liquidity buffers may be forced to reduce housing prices in order to boost sales. As a result, other market participants may also have to reduce their prices which could trigger a price adjustment spiral.

The drop in demand is discouraging developers from launching new projects, which reduces the probability of a larger price correction. However, as demand recovers, the supply may not be able to match it, which could lead to a faster price increase. In 2023, 15,400 dwellings were completed (see Chart 16, left-hand panel). A historically better result was only recorded in 2022 (17,000 dwellings). This high number of completed dwellings is likely due to the completion of projects started several years ago. However, seeing a drop in sales, developers are not taking on new projects that they may ultimately fail to sell (see Chart 16, central panel). The number of houses under construction in 2023 (10,800) was the lowest since 2017, while the number of building permits issued (11,800) was the lowest since 2014. This response of the supply to the reduced demand prevents an oversupply and reduces downward pressure on prices. On the other hand, the share of residents considering buying housing has not fallen significantly (see Chart 16, right-hand panel). News that positively affects the sentiment of buyers, such as the ECB’s interest rate cut or the easing of geopolitical tensions, could encourage them to purchase housing. If new supply does not gain momentum, as was the case during the pandemic, house prices could rise faster.

In response to the fall in sales, fewer new housing projects are being developed but households are not abandoning their plans to purchase housing.

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The level of risk in the CRE market remains elevated but lower than in Western Europe and North America where significant downturns were observed. The CRE market has been facing cyclical and structural challenges for two years now. High borrowing costs, slow economic growth, and reduced demand for office and traditional retail spaces continue to put downward pressure on property prices. Geopolitical tensions and a reduced risk premium (the spread between CRE and yields on government securities is still by around 3 percentage points below the pre-inflationary period) have brought the investment activity back to the level of 2017 as investment deals concluded in 2023 were worth €355 million, i.e. almost half their value in the record-setting years of 2021 and 2022. On the other hand, unlike in the euro area, where CRE sales prices have already fallen by around 10%, Lithuania has not yet seen a broad price correction. A significant and sharp downturn in the CRE market seems to have been avoided but the likelihood of a prolonged stagnation is high and the vulnerability to further shocks is elevated.

The activity of the CRE market has been sluggish since the summer of 2022, which increases the likelihood of a price correction. Since its peak in early 2022, the volume of sales in the office, retail and industrial segments has fallen by 17%, 31% and 33% respectively (see Chart A, left-hand panel). Lietuvos bankas’ calculations show that historically prices react most strongly to declining sales volumes after two to three quarters, but so far only the industrial segment, which experienced an exceptional price spike in 2022, has seen a negative impact on prices as the sales prices in this segment fell by 8% in 2023. On the other hand, prices of office and retail spaces continued to rise: in 2023, they increased by 6% and 11% respectively (average annual growth rates of 12% and 7% respectively in 2012–2022). The spread of prices, which has reached historic highs, reflects increased price volatility and potentially increasingly divergent price expectations of sellers and buyers (see Chart A, right-hand panel). This suggests that, as market liquidity improves, we may eventually see a more widespread price correction than has been the case so far.

The number of CRE transactions has been contracting for the second consecutive year but, with the exception of an industrial segment, no price correction has been recorded so far.

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The price imbalances that may have emerged in individual commercial segments increase the risk of a disorderly price correction and create preconditions for RE companies to increase their leverage in an unsustainable manner. Relative market development indicators show that A-class offices in Vilnius are overvalued by around 18% (see Chart B, left-hand panel). This price imbalance is mainly driven by the increase in the sales prices of A-class offices in Vilnius, which has outpaced the increase in rents and employment level (in 2020–2023, the working population in Vilnius increased by 8%, the rent of A-class offices by 19% and the sales price by more than 50%). In the event of further economic shocks, such price imbalances could lead to a larger price correction causing more significant damage to the financial system. In addition, companies may take advantage of the excessive growth in the value of CRE collateral and increase their leverage in an unsustainable manner. Nevertheless, compared to the RE market, banks tend to assess the value of CRE collateral less frequently and more conservatively, which limits the ability of RE companies to take advantage of rapidly rising prices to increase their leverage (see Chart B, right-hand panel).

CRE prices may be overvalued in individual segments but RE managers have only limited ability to take advantage of the increased market value of collateral to increase financial leverage.

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The prolonged economic slowdown may make it more difficult to absorb the outstanding supply of office and industrial space as it has expanded significantly during recent years. The stock of commercial space has doubled over the last decade, with retail space expanding at the slowest pace (growing at an average annual rate of 3.2%) and office and industrial space doubling in size (growing at an average annual rate of 12% and 8% respectively). The segments that were developed faster are currently facing greater difficulties in filling up. The vacancy rate of A-class offices in Vilnius grew to 6.4% in the first quarter of 2024, and as companies are shifting their focus away from trade with Belarus and Russia, it also rose to 3.5% in the industrial segment (see Chart C, left-hand panel). However, unlike in the euro area, where rental prices have been dropping (over 2023, the rent of A-class offices fell by 2% and B-class offices by 8%), in Lithuania, rental prices in Vilnius have risen by 10% for A-class offices, 20% for B-class offices and by an average of 7% for all office space (see Chart C, right-hand panel). The fact that RE managers in Lithuania are still able to increase rents suggests that the resulting supply-demand imbalance is temporary rather than structural.

The vacancy rate of commercial space increased in the second half of 2023, but rising rents suggest that the demand for buildings has not fallen significantly.

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Lithuanian banks have close ties to the CRE market, so a prolonged market downturn can increase losses of credit institutions and limit the provision of credit to the real economy. In Lithuania, banks are the main providers of funding for CRE activities. Compared to RE funds, which collectively managed €1.2 billion of CRE at the end of 2023, banks operating in Lithuania have granted €3 billion in loans for the construction or acquisition of RE which are secured by the collateral of around €6 billion (see Chart D, left-hand panel). In addition, banks widely use this asset class as collateral for loans to companies, with around 70% (or over €8 billion) of loans to companies secured by commercial real estate. If borrowers were to default on their obligations in the event of a further deterioration of the RE market outlook and a stagnating economy, banks could incur significant losses as the loans backed by CRE represent around 12% of total bank assets. Moreover, if a correction of CRE prices were to eventually occur, the depreciation of collateral would limit corporate borrowing which could undermine the growth of the real economy.

Locally focused CRE financing by banks and closed-end nature of RE funds reduce the risks associated with contagion from foreign markets and liquidity mismatches. The vast majority of the CRE-backed loan exposures of Lithuanian MFIs are located in Lithuania (see Chart D, right-hand panel), so banks operating in Lithuania are immune to the contagion that could come from more depressed commercial real estate markets in Western European or Nordic countries. Moreover, unlike the major euro area economies, Lithuania is dominated by closed-end RE funds, i.e. fixed-term funds where investments are “locked in” for 5–7 years, and shareholders have very limited options to redeem the units of the managed fund prematurely. This means that, as the real return on CRE as an asset class declines, forced sudden sales of fund assets are less likely and the risk of liquidity mismatch is less relevant. CRE exposures of insurance undertakings and pension funds are not significant in Lithuania, which further reduces the likelihood of a sudden asset sell-off and potential negative impact on real estate prices.

Around €8 billion in loans of banks operating in Lithuania are covered by CRE worth over €15 billion, which is concentrated mainly in Lithuanian major cities.

Dalintis:

The main challenge for CRE managers is the cost of debt servicing and refinancing which is in line with the CRE yields (and often higher on capital markets). For instance, the rental yields of A-class offices in Vilnius are almost equal to the bank funding cost which has an adverse effect on profit margins of RE companies (see Chart E, left-hand panel). As RE managers react to the increased cost of lending, the share of leveraged CRE purchase transactions has fallen to the level of 2021 (see Chart E, central panel). Refinancing their unamortised liabilities may pose a greater challenge for RE companies: the repayment of this type of loans means that the total principal amount is paid with the last instalment, thus the borrower faces a sudden need for funds at maturity. Around €0.5 billion of non-amortised CRE-backed loans mature in 2024 (see Chart E, right-hand panel) but only a fraction (€60 million, or 2% of the total portfolio of this type of loans) of them are intended for the construction or purchase of CRE. Therefore, despite a higher risk profile, non-amortised loans represent a small share of banking assets and, in general, the banks operating in Lithuania are more conservative in this respect than others in the euro area, for instance, in Germany, where almost half of CRE loans are non-amortised.

CRE managers face the greatest challenges in terms of increased debt servicing costs, while refinancing unamortised financial liabilities can be most difficult.

Dalintis:

CRE managers could face additional challenges if banks were to withdraw funding, but the negative impact on the provision of credit is weaker than during the pandemic. In December 2023, the bank portfolio of loans for the CRE construction or purchase amounted to €3 billion, or about a third of the total portfolio of CRE-backed loans (see Chart F, left-hand panel). The increased cost of borrowing has had a more negative impact on lending for the CRE construction as the value of new construction loans has fallen by a third and their number halved since the summer of 2022 when the monetary policy tightening began (the value and number of loans for the CRE purchase have fallen by a fifth and a quarter respectively, see Chart F, central panel). Despite the slowdown in lending, the construction loan portfolio was still growing at an annual rate of 6.7% in December 2023, broadly in line with the general trend in corporate lending (see Section 1.2 for more details), while the portfolio of loans for purchasing was growing at a very high (25.6%) annual rate. The pandemic (when the CRE credit portfolio was contracting and new lending was almost at a standstill for a while) seems to have constrained CRE financing more than the monetary policy tightening.

The risk level of the CRE credit portfolio remains elevated but the quality of the portfolio is good as the share of non-performing loans is at historical lows. As of December 2023, 15.5% and 11.7% of CRE construction and purchase loans respectively were rated as prone to higher risk, i.e. the provisions previously set aside for these loans were increased. While the share of such loans is still higher, it has been retreating since its peak reached in the summer of 2022 and the increase so far can be seen as the preparation by banks for potential credit losses associated with a tighter monetary policy. Overall, the good quality of the CRE credit portfolio is reflected in the share of non-performing loans which is historically low despite the pandemic and higher borrowing costs: among the loans for CRE construction and purchase they stood at 0.2% and 0.3% respectively in December 2023 (see Chart F, right-hand panel).

The financial situation of RE companies could be further complicated by the withdrawal of bank funding, but banks do not appear to have significantly restricted CRE lending.

Dalintis:

The risk level is considered to be elevated due to the ongoing downturn in the CRE market and the severity as medium due to the potential for significant losses of banks. The profitability of CRE managers has been adversely affected by the rising vacancy rates and higher debt servicing and refinancing costs. On the other hand, RE companies have built up financial buffers (2021 and 2022 were historically profitable for them) and, despite the lower market activity, the flow of income is positively affected by the continued increase in rental and sales prices. In addition, banks are well capitalised and prepared to absorb both expected losses and potential losses under the adverse scenario. Therefore, even if the risks materialise, bank losses related to CRE credit are unlikely to significantly destabilise the financial system. It would be more challenging if the cost of debt refinancing were to increase for a longer period than currently expected and, in the event of bankruptcies of RE companies, the quality of banking assets were to suffer.

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1.5.Banking sector developments and resilience

The high concentration of loans and deposits in the banking sector has somewhat declined due to increased competition from existing medium-sized banks and new market participants. Since 2018, with the addition of ten newcomers to the banking sector mainly specialising in consumer loans and loans for SMEs, and the increased presence of existing medium-sized market players, the concentration in these loan portfolios has started to slowly decrease (see Chart 23, central panel). In the housing loan segment, where the large banks are still the most active, concentration levels were still the highest. However, from 2020 onwards, declining margins on housing loans indicate stronger competition among banks in this segment as well (see Chapter 2 for more details). Concentration of time deposits has also been declining (see Chart 23, right-hand panel). This is due to the higher return offered by the small market participants on time deposits and, at the same time, the relatively lower need for large market participants to attract depositors due to their high liquidity buffers. However, when excluding banks attracting a significant share (over 70%) of deposits on foreign deposit platforms which are dominated by time deposits of foreign residents, the impact on concentration is lower. At the same time, excluding the significant influence of Revolut Bank UAB, the concentration of current deposits is still high and has remained broadly stable recently.

In 2023, the performance indicators of the Lithuanian banking sector remained among the best in the EU but the level of concentration was still significant.

Dalintis:

Credit risk rose slightly in all loan segments but the quality of the loan portfolio remained good.

Dalintis:

The continued rise of key interest rates in 2023 led to a significant increase in net interest income of banks operating in Lithuania. The accumulation of significant liquidity buffers, which generated a risk-free high return on holding these funds with central banks, and the predominant share of loans with variable rates in portfolios, in the wake of the rapid rise in the interbank interest rates, led to an almost threefold increase in interest income (€2.9 billion). Interest rates on time deposits were also growing but time deposits held by households and NFCs accounted for only 26% of total bank deposits at the end of 2023, while interest rates on overnight deposits remained close to zero. As a result, interest costs incurred by banks were much lower (€464 million). All this led to a 2.5-fold increase in the banking sector’s net interest income over the year, amounting to more than €2 billion. It should be noted that different business models and scope of the services provided meant that higher interest rates had a different impact on bank performance, with the four largest lenders increasing this income by 131% over the year, while the other banks (excluding the impact of Revolut Bank UAB) saw a rise of 34.4% (see Chart 25, central panel).

Higher key interest rates more than doubled the net interest income and overall performance of banks.

Dalintis:

Intensified cyberattacks could threaten financial stability by potentially affecting confidence in the financial system and disrupting critical infrastructure and services. A high-impact cyberattack (e.g. if sensitive information was leaked, lost or services could not be restored for a long period of time) against systemically important financial institutions or third-party service providers (e.g. companies providing IT services to banks) could lead to significant reputational damage and loss of confidence in individual financial sector participants or in the banking sector as a whole and could lead to a serious liquidity drain. Similarly, the disruption of critical infrastructure often attacked for geopolitical reasons could have negative spill-over effects on the economy as a whole, including the financial sector, if the provision of financial services could not be ensured. According to the 2023 Microsoft report, as many as 41% of the threat messages sent to customers related to state-sponsored actors were sent to critical infrastructure sectors. If the operation of the latter were to be disrupted for a long period of time, this could lead to financial losses not only for banks and their customers but also disrupt the overall economic activity.

In response to bigger cyber threats, initiatives are underway to strengthen international and national cooperation, supervisory action is taken and bank resilience is being strengthened. Since mid-2023, credit institutions in Lithuania have been sharing information on various aspects of cyber security: alerts, configuration tools and other technical data of cyberattacks. Moreover, the ESRB Recommendation on a pan-European systemic cyber incident coordination framework for relevant authorities published in 2022 is currently being implemented and will also ensure the exchange of information internationally. Lietuvos bankas also takes supervisory action, including on-site inspections, issuing recommendations and promoting the sharing of cyber intelligence. Banking sector participants are also enhancing their resilience by reviewing their processes as risk levels change, strengthening the security of IT systems, monitoring and regularly updating business continuity plans.

In the context of ongoing geopolitical tensions, the financial sector continues to face a growth in the number of cyberattacks which increases the risk of potential systemic-level consequences.

Dalintis:

1.5.1.Bank solvency situation and resilience

The solvency ratios of the banking sector, supported by strong profitability, continue to show good resilience of banks to possible future surprises. The CAR remained at a high level at the end of 2023, although it fell from 20.3% to 19.9% year-on-year. This was mainly driven by risk exposures growing faster than the capital base, although most banks enhanced their capital buffers and only a few allocated part of their earnings to dividends despite their good capitalisation and exceptional performance. Moreover, the capital of banks operating in Lithuania is dominated by top-tier capital instruments, with the common equity tier 1 (CET1) ratio of 18.6%, which was similar at the aggregate level for banks of systemic importance and low systemic importance (see Chart A, left-hand panel). The leverage ratio also remained high, increasing by 0.2 percentage points year-on-year to 6%, and was twice the minimum requirement.

The adverse scenario assumes that the Lithuanian economy will experience a two-year contraction driven by a sharp fall in exports, accompanied by a correction in the RE market. Under this hypothetical scenario, the fall in demand in Lithuania’s main trading partners would have a strong and long-lasting adverse effect on Lithuanian exports. Falling foreign demand would slow production and reduce investment. This would reduce the value added generated by the industrial sector. Finally, a negative macroeconomic environment, deteriorating expectations, imbalances on the RE market and the environment of high interest rates would lead to a strong and sustained correction in RE prices. It is assumed that housing prices would decline by 9.7% in 2024 and 7.2% in 2025. The correction in housing prices would have a negative impact on the activity and value added of the construction and RE operations sectors.

(percentages)

	Actual indicator	Baseline scenario			Adverse scenario
	2023	2024	2025	2026	2024	2025	2026
GDP (annual change)	-0.3	1.6	3.1	3.3	-4.7	-1.8	1.3
Exports (annual change)	-4.8	0.2	3.3	3.5	-10.8	-6.7	-1.8
Consumption expenditure (annual change)	-1.1	3.0	3.7	3.7	-5.2	-5.2	-2.9
Unemployment rate (average annual)	6.8	7.0	6.8	6.6	8.9	11.5	13.1
Wages (annual change)	12.9	8.9	7.9	7.9	2.4	-0.8	-0.3
Average annual inflation (based on HICP)	8.7	1.6	2.4	2.4	1.1	0.4	-0.3
Housing price index (annual change)	8.3	6.1	7.5	7.4	-9.7	-7.2	-6.4

Dalintis:

Under the adverse scenario, three less significant institutions could breach the combined microprudential and macroprudential capital requirement at the end of 2025, but the need for additional capital would be below 1% of the current capital level of the system. One of these institutions would breach the minimum requirement, which includes the 8% requirement and the Pillar 2 capital requirement, and would need €0.7 million to meet the requirement. Overall, the tested institutions would need around €20.7 million of additional capital to meet all the requirements (0.7% of the capital currently held by banks and central credit unions). These institutions are recommended to strengthen their business model, improve their risk management and increase their capital buffer.

The estimated credit losses of financial market participants under the adverse scenario would amount to around €861.7 billion in 2024–2025, or around 3.3% of the total loan portfolio at the end of 2023 (7.9% for loans to NFCs, 1.2% for housing loans and 3% for consumer loans). The breakdown of the change in the CAR shows that credit losses would reduce the indicator by over 5.5 percentage points (see Chart 28, right-hand panel). Meanwhile, net interest income would be the main source (+12 percentage points) allowing to absorb the loss incurred due to the changes in loan quality. In addition, in an adverse economic situation, the tested institutions would try to exert stricter control over their administrative costs (-5.6 percentage points) compared to the baseline scenario (-6.4 percentage points). Finally, the temporary solidarity contribution, while slightly slowing down bank capital accumulation under the scenarios, would not have a profound impact on the fulfilment of capital requirements under the test scenarios.

Dalintis:

1.5.2.Bank liquidity assessment

To assess the liquidity resilience of financial market participants operating in Lithuania to potential shocks, two stress testing exercises were carried out: a liquidity coverage ratio test and a cash flow analysis. The LCR test measures the ability of financial market participants to meet their 30-day liquidity requirement, while the cash flow analysis takes into account the different maturities of incoming and outgoing cash over a one-year period.

Analysis of the liquidity coverage ratio

The test results show that financial market participants are well prepared to withstand short-term liquidity shocks (see Chart 29, left-hand panel). According to the data for the end of 2023, none of the tested institutions would breach the 100% LCR requirement under all scenarios. In the most severe combined shock scenario (S4), the average LCR of the financial market participants would fall from 248% to 163%. Under scenarios S1 to S3, the liquidity situation of the financial market participants would be most affected by higher-than-normal outgoing cash flows (scenario S2) and least by the liquid asset shock scenario (S1).

Dalintis:

While the liquidity situation of financial market participants was good at the end of the year, a small number of market participants were slightly more vulnerable considering a longer horizon. In the second half of 2023, the actual LCR median of the institutions tested varied between 212% and 262% (Chart 29, right-hand panel), while in the stress scenario it varied between 134% and 163%. However, in different months three to four financial market participants would have breached the minimum requirement of 100% in the most severe scenario S4.

Cash flow analysis

Dalintis:

The analysis was carried out using two stress scenarios: 3-month and 6-month liquidity shock scenarios (see Table 2). Each liability class and each maturity segment are multiplied by the outflows run-off rate which determines the cash outflow under the scenario. The corresponding reduction in inflows represents the loss of cash inflows by financial market participants. In addition, under stressed market conditions, some classes of liquidity buffer may become illiquid or may be converted into liquid assets at less favourable prices. It is assumed that a systemic liquidity shock affects all financial market participants equally but the outcome of one institution does not affect the others. Therefore, the testing results can only be interpreted from the perspective of one financial market participant. The scenarios are calibrated against the LCR test scenario, scenarios used by the IMF, ECB and other national central banks in stress testing cash flows.

The cash flow testing shows that, under both liquidity shock scenarios, financial market participants are largely resilient to longer-term liquidity shocks (see Chart 30). The institutions tested would only experience a short-term (up to 1 month) decrease in liquid assets, but in the longer term (after 3 months) the incoming cash flows could restore the initial liquidity loss. Operational deposits would be the main source of liability reductions or cash outflows (23.5% of total outflows). The strong liquidity situation was mainly due to a sufficient level of liquid assets (27.3% of total assets on average) combined with a high volume of stable retail deposits, which represent around 52.4% of total liabilities. Only one of the less significant institutions would face a liquidity shortage in the adverse scenario, i.e. its liquidity buffer would not be sufficient to cover the cash flows under both adverse scenarios, and this institution is advised to strengthen its liquidity management by increasing the available liquid asset buffer.

Dalintis:

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1.6.Trends in the non-banking sector

In 2023, assets of all types of non-bank financial institutions increased (see Chart 31, left-hand panel), especially of pension and investment funds. Assets managed by pension funds grew by 27%. This increase was driven by favourable conditions on the financial markets and the resulting 7.4% increase in the weighted unit value. Assets managed by investment funds increased by 20% over the period. This was due to the favourable conditions on the financial markets and higher investor interest, with a 23% rise in the number of investors in CIUs for informed investors. The most significant increases during the year were in the values of investment fund units issued by bond funds (36%) and equity funds (34%). In contrast, the slowing growth of RE markets led to the smallest increase of 13% in the value of units issued by RE funds. Assets of financial auxiliaries grew by the smallest amount (1%). Banks and other MFIs continue to account for the largest share (76%) of the Lithuanian financial market, a share that has remained largely stable over the last four years (see Chart 31, right-hand panel).

In 2023, assets of all types of financial institutions grew.

Dalintis:

Non-resident customers, whose payment transactions are linked with higher-risk territories and financial activities, pose a serious challenge for the sector. Lithuanian fintech companies go beyond the national territory and actively serve foreign citizens: in terms of number of clients, non-residents accounted for 86% and the value of their transactions for 79% of the entire fintech sector in 2023. While the majority of non-resident clients are from the EEA, services are also provided to individuals residing in third or high-risk countries and territories. The current geopolitical environment therefore calls for particular caution in assessing clients and their payments related to higher ML/TF risk regions as well as monitoring the compliance of fintech institutions with the international sanctions. The range of activities in which the fintech clients engage also poses reputational risks. Although the number of clients involved in high-risk activities is low, their share of the value of transactions in the fourth quarter of 2023 represented almost half of the value of transactions of non-resident fintech clients. The majority of payments made by non-residents are related to other financial institutions and transfers between fintech companies. Financial institutions are served both within and outside Lithuania. In addition, around 12% of the value of payments relates to lottery and gambling activities and the provision of crypto-asset services. At the same time, the value of transactions by clients in Lithuania (residents) engaged in high-risk activities is much lower, accounting for 13% of the total value of transactions made by the sector. The majority of the value of transactions carried out by the sector’s clients residing in Lithuania is related to the providers of crypto-asset services. It is important to properly assess these risks in order to prevent fintech companies from being involved in illegal schemes. Additional reputational challenges could also arise from the continued lack of maturity of the sector and weaknesses in supervisory measures. In the context of the ongoing russia’s war against Ukraine and the continued heightened risk of cyberattacks (see Section 1.5 for more details), improving the fintech sector’s cyber vulnerability control processes is particularly relevant.

The profitability of the fintech sector and the scale of sanctions imposed have increased, while new operational standards will be applied in the re-emerging crypto-asset sector.

Dalintis:

To mitigate the emerging risks in this sector, Lietuvos bankas, together with other institutions, has developed a package of measures to tighten supervision of crypto-asset service providers. Before the entry into effect of the requirements of the European Regulation on markets in crypto-assets (MiCA), draft legislative amendments have been submitted to introduce new performance requirements for crypto-asset service providers and to establish a licensing process for them. One of the measures is the new amendments to the Law on AML/CTF aimed at establishing uniform performance requirements for crypto-asset service providers across the EU. Starting from 1 May 2024, they will be required to maintain a minimum equity level of €125,000 at all times. This is to reduce the number of cases where the authorised capital is created only temporarily and then transferred. Once the amendments to the performance standards come into effect, Lietuvos bankas will be responsible for the supervision and licensing of crypto-asset service providers operating in Lithuania, and the number of licensed crypto-asset service providers is likely to drop substantially.

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2.Improving financial stability

Since 2014, Lietuvos bankas has been given a macroprudential policy mandate to strengthen the safeguarding of the stability of the financial system as a whole. Macroprudential policy allows for the early detection of threats to the financial system and the adoption of appropriate measures to manage these risks. Therefore, Lietuvos bankas continuously assesses the adequacy of macroprudential policy measures used in Lithuania (see Chart 33) and regularly reviews the levels of the measures. Lietuvos bankas also actively seeks to respond to inefficiencies emerging in the Lithuanian financial system that have an adverse effect on the balanced development of the financial system or financial inclusion. To this end, Lietuvos bankas proposes amendments to legal acts and formulates positions on relevant issues.

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2.1.Application of macroprudential measures

In 2023, the 1% CCyB rate took effect bringing it back to the pre-pandemic level, and the capital buffer for systemically important institutions was raised from 1% to 2% for Revolut Bank UAB and will take effect on 1 July 2024.

Dalintis:

Capital buffers increase the resilience of banks to unforeseen shocks.

Dalintis:

The RLR requirements designed to enhance borrower protection contribute to the resilience of borrowers in the environment of high interest rates. In 2015, when interest rates were low, the RLR introduced the requirement for lenders to conduct an interest rate sensitivity test, whereby the lender assesses whether the borrower will be able to make housing loan repayments if the interest rate rises to 5%. This requirement implies that in a low interest rate environment, with interest rates below 3.2%, the maximum loan available to the borrower cannot exceed their annual income by a factor of 7.8. This allows limiting the over-indebtedness of residents when interest rates are low. When interest rates are higher, over-indebtedness is limited by the 40% DSTI requirement which steadily reduces the amount of the maximum available loan as interest rates rise, thus ensuring that borrowers are able to repay their loans in the event of a significant rise in interest rates. This setup strengthens the resilience of borrowers: even in the face of rapidly rising interest rates, the share of non-performing housing loans was historically low.

As a result of constantly rising interest rates, in 2023 the DSTI ratio of new housing loans was moving closer to, and the LTV ratio away from, the limits set by the RLR, which protect borrowers from excessive financial burden.

Dalintis:

In 2023, the flows of loans for first and secondary housing were declining, but the standards for first housing loans were more often close to the limits set by the RLR. In 2023, as the cost of borrowing rose and demand for housing fell, the flow of housing loans both among the first and secondary housing buyers declined at a similar pace, with the flow of new loans for the first housing falling by 19% and that for the secondary housing by around 16% year-on-year (see Chart 36, left-hand panel). The rising interest rates put upward pressure on the share of new housing loans for which all lending standards (LTV, DSTI and maturity) are high, i.e. close to the limits set by the RLR. While the share of such loans accounted for only 1.6% of the flow of housing loans for both the first and secondary housing in 2020–2021, the shares of these loans were 18% and 12.4% respectively in December 2023 (see Chart 36, right-hand panel). The lower share of such loans among secondary housing loans is partly related to the stricter down payment requirement of at least 30% of the value of housing which came into effect in February 2022 for households taking out secondary housing loans. However, as interest rates stabilised and the average DSTI of new loans started to fall, the share of new housing loans with lending standards close to the limits set by the RLR dropped to 12% in the first quarter of 2024.

In the context of rising interest rates, the flow of new housing loans decreased, while the share of loans with indicators (LTV, DSTI and maturity) close to the limits set by the RLR increased.

Dalintis:

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2.2.Other measures proposed by Lietuvos bankas for the financial sector

In early 2023, Lietuvos bankas took note of the exceptional circumstances in the Lithuanian banking sector, which resulted in the sector generating windfall profits, and proposed, together with the Ministry of Finance, a draft temporary bank solidarity contribution model. The law adopted by the Seimas of the Republic of Lithuania sets the period of application of the contribution between 16 May 2023 and 31 December 2024. Due to exceptionally high profitability of the Lithuanian banking sector, the actual collection of the contribution for 2023, i.e. for the period between 16 May and 31 December 2023, amounted to €250 million, slightly above Lietuvos bankas’ original projections, and a further €220 million is expected to be collected for 2024. The funds of the temporary solidarity contribution are earmarked to finance Lithuania’s military mobility and military transport infrastructure projects.

The decisions taken by Lithuanian authorities in recent years have helped to improve access to finance for SMEs but, a more significant breakthrough is needed in certain areas. In 2021, Lietuvos bankas and the Competition Council published a study assessing access to finance for SMEs in Lithuania in 2018–2019 and factors limiting access. In addition, proposals have been put forward for measures to reduce long-term (structural) bottlenecks which would contribute to improving access to credit for SMEs. Changes in the institutional setup are in line with the recommendations of the study; for instance, the implemented consolidation of national development bodies has enhanced the simplicity and clarity of access to state aid measures, while the establishment of the Innovation Agency has contributed to the spread of information on financing opportunities for SMEs. However, progress has been slower in some areas as regards the recommendations. For instance, it remains vital to apply the measures under the Republic of Lithuania Law on Companies more rigorously to companies operating with negative own funds and to carry out regular ex post assessments of the effectiveness of state aid measures. The implementation of such measures could contribute to better access to finance for SMEs.

Lietuvos bankas has put forward proposals on improving access to fixing loan interest rates and refinancing. The analysis carried out to assess the problems of fixed-rate housing loans and increasing refinancing opportunities showed that the popularity and trends of fixed-rate and variable-rate housing loans in Lithuania differ significantly compared to other EU countries: in most euro area countries, people tend to choose to fix the interest rates on new loans for a period of more than one year, while in Lithuania, on the contrary, variable-rate loans are becoming increasingly prevalent. Therefore, to ensure that consumers are able to choose a fixed-rate loan or to refinance an existing loan on better terms, Lietuvos bankas has drawn up its proposals and made them available for public discussion (see Box 4).

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Abbreviations

AB                    public limited liability company

CAR                  capital adequacy ratio

CCyB                counter-cyclical capital buffer

CIU                   collective investment undertaking

CRE                  commercial real estate

DSTI ratio         debt service-to-income ratio

EC                    European Commission

ECB                  European Central Bank

EEA                  European Economic Area

EIF                   European Investment Fund

EMI                  electronic money institution

ESRB                European Systemic Risk Board

EURIBOR          Euro Interbank Offered Rate

Eurostat           statistical office of the European Union

Eurosystem      European Central Bank and euro area central banks

GDP                  gross domestic product

HICP                 Harmonised Index of Consumer Prices

IMF                   International Monetary Fund

IT                     information technology

LRDB                Loan Risk Database

LTV                   loan-to-value ratio

MFI                   monetary financial institution

ML/TF               money laundering and/or terrorist financing

NACE                classification of economic activities

PI                     payment institution

RE                    real estate

RLR                  Responsible Lending Regulations

SDA                  State Data Agency

SME                  small and medium-sized enterprise

SRB                  systemic risk buffer

UAB                  private limited liability company

Country codes

AT                                Austria

BE                                Belgium

BG                                Bulgaria

CY                                Cyprus

CZ                                Czech Republic 

DE                                Germany

DK                                Denmark         

EA                                euro area

EE                                Estonia

ES                                Spain

EU                                European Union

FI                                 Finland

FR                                France

GB                                Great Britain

GR                                Greece

HR                                Croatia

HU                                Hungary

IE                                 Ireland

IT                                 Italy

LT                                 Lithuania

LU                                Luxembourg

LV                                Latvia

MT                                Malta

NL                                The Netherlands

NO                                Norway

PL                                 Poland

PT                                 Portugal

RO                                Romania

SE                                Sweden

SI                                 Slovenia

SK                                Slovakia

US                                United States of America