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Summary

With trade and other geopolitical tensions escalating, the risk of shocks that could adversely affect economic development and financial stability has been elevated. The record-high uncertainty surrounding US tariffs on imports of goods, their size, scope, and potential impact on both the economy and financial stability led to significant volatility in global financial markets in March and April 2025. At the same time, potential new tariffs, disruptions to international trade, and the resulting unexpected shocks could have a negative effect on the economic development and financial stability of countries. This uncertainty may dampen economic growth in the euro area, but the Lithuanian economy remains resilient, and the risk of a more significant economic downturn is mitigated by the fact that Lithuania’s direct dependence on trade with the USA is relatively lower than that of other countries.

Amid economic uncertainty and trade tensions, Lithuania’s private sector, especially companies, may face financial deterioration which could weaken their ability to repay debt, thereby posing the main risk to the country’s financial stability. Although companies have so far managed to remain resilient, trade tensions could significantly weaken the financial situation of manufacturing, transport, and trade businesses directly and indirectly exposed to US import tariffs, and thus their ability to meet their financial obligations. Credit risk is limited by the small share of loans to manufacturing subsectors directly affected by US import tariffs in the total corporate loan portfolio, while the risk of non-repayment in sectors sensitive to a decline in overall export demand is mitigated by low levels of indebtedness, good loan quality, and a low loan-to-value ratio. However, due to interlinkages, losses could spread to other companies and negatively affect financial stability and economic development in Lithuania. Although the purchasing power of households has continued to grow recently and households have remained financially resilient due to the favourable labour market situation and rising wages, if companies encounter difficulties, lay-offs could increase, wages could fall, and the financial situation of households could deteriorate significantly.

In an environment of falling interest rates, credit demand has increased, leading to more borrowing by households and businesses; however, the role of credit institutions in lending to businesses has remained weakened. Following a phase of rising interest rates in 2022–2023, when the number of housing loans granted to households, especially those with lower incomes and secondary housing buyers, declined significantly, there are now signs of recovery. With borrowing conditions improving and household incomes rising, demand for loans, especially for housing and consumption, has increased. The dynamics of corporate lending are different: although the corporate loan portfolio is growing at a fairly rapid pace, businesses continue to face challenges in accessing finance. A survey of enterprises conducted by Lietuvos bankas indicates that approximately one in three companies had their loan applications rejected in 2024, with this figure even higher for micro and small enterprises, and around 17% of the companies surveyed believe that access to credit from credit institutions is completely restricted. High collateral requirements and a lack of assets suitable for collateral limit access to credit for companies and remain pressing concerns, especially for micro and small enterprises. In addition, the decisions of credit institutions to reject loan applications are often a result of the unsatisfactory financial situation of applicant companies and the reduced risk appetite of banks. For these reasons, businesses tend to turn to alternative sources of financing, with the national development bank UAB ILTE playing an increasingly important role.

Risks in the housing market have subsided, but they remain elevated in the commercial real estate (CRE) segment due to oversupply in the office segment and ongoing debt refinancing risks. With borrowing costs falling and affordability improving, activity in the housing market continues to pick up. As the risk of house price correction failed to materialise, the risk of supply shortages has become more relevant in the medium term, which may lead to an increase in house price overvaluation in the long run. Falling borrowing costs reduce the level of risk in the CRE segment, while lower price imbalances lead to more positive expectations among market participants regarding future market developments. On the other hand, the level of risk remains elevated as the profitability of real estate managers continues to be negatively affected by high debt servicing and refinancing costs, while growing office vacancies are putting downward pressure on property prices. However, with banks lending only to the safest CRE projects, the quality of the CRE portfolio is good.

The average liquidity, asset quality, and profitability ratios in the banking sector were among the best in the EU in 2024, but the performance of the largest banks was significantly better than that of smaller banks and the risk of systemic cyberattacks remained elevated. The high profitability level in the banking sector was supported by the still high net interest income of banks, but a relative increase in operating expenses was also observed. Meanwhile, the level of non-performing or impaired loans in the banking sector remains low. Stress testing of the banking sector’s solvency and liquidity conducted by Lietuvos bankas indicates that the sector remains resilient to a deterioration in economic developments or unexpected liquidity shocks of varying durations. Capital depletion under an adverse scenario does not pose a risk to the stability of the sector, while the sufficient level of liquid assets ensures the sector’s strong liquidity position. The risk of cyberattacks remains one of the most important risks for the banking sector, and particular attention is being paid to managing this risk by strengthening cooperation at both the national and international levels and increasing the investments of financial institutions in the protection of IT systems.

The non-banking sector in Lithuania is growing steadily, with significant growth in pension and investment funds and the insurance and credit union sectors. With the fintech sector continuing to expand, the key challenge remains the supervision of higher-risk customers and preventing the evasion of sanctions. Although both assets and deposits raised by credit unions grew last year, strengthening capital and increasing resilience to shocks remain a priority. The growth of pension funds was driven by successful investments and the more active involvement of new participants, but changes to the system under consideration may affect the further development of the sector. In the fintech sector, the drop in the number of market participants is offset by the expansion of existing companies in the sector. In the current volatile geopolitical context, the responsible supervision of higher-risk customers and their payments and the prevention of possible violations is particularly important. Meanwhile, the crypto-asset sector is undergoing a transition period as the licensing process under the new MiCA Regulation requirements is underway. The limited interconnectedness between non-bank institutions and the banking sector helps manage risks to the financial system.

The macroprudential measures in place contribute to the resilience of the Lithuanian financial system, while the amendments to the legislation that were initiated by Lietuvos bankas and have since entered into force ensure that consumers are actually able to choose and improve the terms of their housing loans. The broad set of macroprudential measures applied and regularly reviewed in Lithuania increases the resilience of banks to unexpected shocks and protects consumers from excessive financial liability burdens. Amendments to the Republic of Lithuania Law on Real Estate Related Credit which entered into force in 2025 increased the ability of consumers to choose the most favourable housing loan terms and fostered greater competition among lenders. Since 1 February, individuals have been able to refinance their existing housing loans under a simplified procedure, which has made the refinancing process faster and, in most cases, free of charge. These regulatory changes have led to a significant increase in both the number of housing loans refinanced with a lower margin and the number of renegotiations with the current lender. In addition, since 1 May, lenders have been obligated to provide each customer with at least two interest rate options, i.e. a variable rate and a fixed rate for at least five years, to ensure that consumers can choose the product that suits them better.

1.Status, risks and resilience of the financial system

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

With inflation in the euro area gradually declining towards the 2% monetary policy target, interest rate cuts continued in the first half of 2025. Inflation in the euro area stood at 2.2% in March 2025, broadly unchanged from six months earlier. With the ECB lowering its key interest rates, the 6-month EURIBOR fell from a peak of 4.1% in October 2023 to 2.1% in April 2025 (see Chart 1, left-hand panel). Inflation in the euro area is projected at 2.1% in 2025 and 1.9% in 2026,[1]

[1] Macroeconomic projections of the IMF, April 2025.

leading financial market observers to expect the 6-month EURIBOR to continue to decline until the end of 2025 to 1.7%, before rising slightly next year (see Chart 1, left-hand panel). Inflation is expected to go up slightly faster in Lithuania, where, on the back of the recovery of the prices of energy and other raw materials, annual inflation grew to reach 3.6% in April, the highest level in a year and a half. The rise in annual inflation in Lithuania was mainly driven by higher energy and service prices. The recovery in private consumption and the increased excise duties and other taxes at the beginning of 2025 will also contribute to inflation developments. Against this background, average annual inflation is projected at 3.5% this year, before easing next year to 2.8%.¹

With inflation in the euro area declining towards 2% and the ECB cutting deposit facility and other interest rates, interest rates on new loans to non-financial corporations as well as on housing loans continue to fall.

Chart 1. Loans to the private sector in Lithuania, 6-month EURIBOR and ECB’s deposit facility rates (left-hand panel) and annual inflation in Lithuania and euro area (right-hand panel)

Sources: Lietuvos bankas, ECB, IMF, and Chatham Financial.

Notes: Interest rates on housing loans and loans to non-financial corporations are calculated using a 3-month moving average. Dotted lines indicate the market expectations of Chatham Financial on the left-hand panel and the projections of the ECB and Lietuvos bankas on the right-hand panel.

Trade policy (see Chart 2, left-hand panel) and general uncertainty worldwide, which have reached their peak in recent decades,[2]

[2] World Uncertainty Index. The increase in uncertainty in April and May 2025 was due to changes and volatility of US import tariffs as well as geopolitical tensions due to ongoing wars or military conflicts around the world.

are likely to dampen economic growth globally and in the euro area, with trade tensions having the greatest impact on EU countries with the highest share of direct exports to the USA. The updated projections of international institutions on the possible impact of US trade policy and increased uncertainty point to weaker economic growth in most countries worldwide,[3]

[3] In its assessment report published on 22 April, the IMF revised down its growth projections for the global economy for both this and next year.

with growth in the euro area this year (0.8%)¹ significantly below its long-term average. Drastic changes in international trade[4]

[4] On 2 April 2025, President Trump announced tariffs for almost all countries in the world, followed by a 90-day pause on most tariffs exceeding 10%. In addition, on 13 May, the USA and China agreed to cut tariffs for a period of 90 days, with the USA reducing its tariffs from 145% to 30% and China reducing its tariffs to 10% on many US goods. However, if the trade tensions between the USA and China were to escalate again, the most likely scenario would be a redirection of Chinese exports to Europe. An influx of cheaper Chinese goods would boost competition in the EU market and lower prices, but it would also reduce the competitiveness of EU companies with negative effects on the economy, financial markets, and overall financial stability.

could contribute to slower economic growth in the euro area. The negative impact of tariffs on EU economies will depend on the scope and size of the tariffs imposed by the US and the vulnerability of EU countries due to their dependence on exports to the USA. Tariffs would reduce trade volumes and slow GDP growth through both direct and indirect channels. Exports to the US would decline directly due to higher prices and lower competitiveness, while indirect effects would be felt through the negative impact of tariffs on Lithuania’s main export partners in the EU and disruptions in supply chains. Exporting companies may also be affected by the depreciation of the US dollar. The more significant impact would be felt in the countries that depend most on direct trade with the USA,¹ such as Ireland, Denmark, Cyprus, Finland, Germany, and Sweden, where the USA accounted for more than 10% of total exports at the end of the third quarter of 2024. Manufacturing companies would be particularly affected, and unemployment could rise.[5]

[5] Tariffs would also put upward pressure on inflation if production costs rose. On the other hand, weaker global aggregate demand and slowing growth (both in the EU and China) would act in the opposite direction, dampening inflationary pressures.

So far, the Lithuanian economy has been resilient, and Lithuania’s direct dependence on trade with the USA is relatively lower than that of other EU countries. The Lithuanian economy showed resilience in 2024, with GDP growth at 2.7%. Uncertainty over trade tariffs has not yet had a significant impact on the Lithuanian economy, with 0.6% quarter-on-quarter growth observed in the first quarter of 2025 and 3.2% year on year.[6]

[6] State Data Agency’s data for the first quarter.

Although GDP is projected to grow by 2.8% this year, concerns about the development of the US and euro area economies will constrain the growth of external demand for Lithuanian exports of goods and services. The share of the USA in Lithuania’s export structure is around 5%, but real economic ties between Lithuania and the USA are closer due to Lithuania’s integration into the supply chains for exports to the USA and, consequently, indirect trade with the USA. Lietuvos bankas estimates that Lithuania’s GDP growth could slow down by up to 0.6 percentage points in 2025–2029 as a result of trade tensions between the USA and the EU if the 20% tariffs announced on 2 April 2025 for the EU were to be imposed and certain countermeasures were taken.

Trade tensions and related uncertainty can have a negative impact on the stability of the financial system through the channels of businesses, the banking sector, and financial markets. The corporate sector may be affected through the lower profit margins or even losses of exporting firms and possible difficulties in honouring existing financial liabilities. Lower corporate credit quality would lead to higher provisioning costs for the banking sector and a contraction in lending to the real economy. These effects could materialise in the short to medium term, with financial markets responding most strongly to the uncertainty of US trade policy. The announcement of higher-than-expected US import tariffs had a significant impact on the turbulence in global financial markets in March and April 2025.

Uncertainty and volatility are still high in global financial markets, especially in response to news from the USA. The tariffs announced by the US President at the beginning of April 2025 have created unprecedented uncertainty in the financial markets, prompting market participants to sell off even the safest of instruments, such as US government securities, and the US dollar has depreciated significantly. The S&P 500 fell by 16% in the two months before the beginning of April and the EURO STOXX 50 fell by 8%, while the OMX Vilnius was more resilient (see Chart 2, central panel). It should be noted that equity markets have rebounded slightly following the US President’s change of rhetoric on trade tariffs (the S&P 500 was already down 9% on 28 April and the EURO STOXX 50 down less than 6% from their peak in mid-February, see Chart 2, central panel). Increased geopolitical and trade policy uncertainty is also present in bond markets. Bond markets saw yields rise in the first months of 2025, with particularly strong growth in Europe, where they rose at a record pace following Germany’s announcement of major defence spending plans, including a €500 billion fund to develop its defence capabilities. It should be noted that in the first three months of this year, German government bond yields increased by around 51 basis points, while Lithuanian yields rose by 27 basis points. In contrast, yields of US 10-year debt securities have grown more moderately (by around 21 bps in the first three months of 2025). It should be noted that bond yields in Europe declined in April (the yields of Lithuanian and German 10-year government securities declined by 27 and 26 bps, respectively, during April) as investors looked for safe asset alternatives to US bonds, whose volatile yields reflect the uncertainty of US policy.

The Trade Policy Uncertainty Index has reached historical highs, with significant volatility in financial markets as a direct result.

Chart 2. Trade Policy Uncertainty Index (left-hand panel), stock indexes (central panel), and yields of 10-year government securities (right-hand panel)

Sources: Trade Policy Uncertainty Index, London Stock Exchange Group, and Lietuvos bankas.

Note: Central and right-hand panels: share values and values of indexes of government securities yields on 28 April 2025.

Left-hand panel: Values of the Trade Policy Uncertainty Index as of 2 May 2025. The index measures the total monthly share of the number of articles in seven US newspapers referring to trade policy uncertainty (100=1%).

Although the cost of servicing Lithuania’s public debt is expected to rise in the near future due to high borrowing costs and rising defence spending, the low level of indebtedness mitigates the risk of debt unsustainability. With the decline in key interest rates, the yields of Lithuanian 10-year government bonds declined slightly over the year to 3.4% in April 2025 (down from 3.6% year on year and from 4.1% in April 2023). In addition, the risk premium required by lenders due to Lithuania’s geographical proximity to the aggressor countries has almost disappeared as the yield spread between Lithuanian and German 10-year government bonds fell to 85 basis points (down from 170 in April 2023, while the average in 2015–2021 was 80 bps). On the other hand, the cost of borrowing remains relatively high (see Chart 2, right-hand panel) and refinancing existing liabilities makes debt servicing costlier. Nevertheless, the challenges of debt management are mitigated by the low level of indebtedness. Lithuania’s sovereign debt remains one of the lowest in the euro area, resulting in significantly lower debt servicing costs, with annual debt principal and interest payments amounting to 4.3% and 0.7% of GDP, respectively (see Chart 3, left-hand and central panels), compared to the euro area average of 11.6% and 1.5% of GDP, respectively.

Financial links between Lithuanian banks and the public sector are limited, so the risk to financial stability from government defaults or a decline in the value of liquid assets is low. Financial links between banks and the Lithuanian public sector are low by historical standards: in the third quarter of 2024, Lithuanian sovereign debt accounted for 2.8% of total bank assets, whereas in 2013–2016, the linkages were twice as high, and in 2004–2005, they were three times higher. The current level of exposure is broadly in line with the euro area average and significantly lower than, for example, in Italy and Greece, where domestic government debt account for around one-tenth of bank assets (see Chart 3, right-hand panel). In addition to Lithuanian sovereign bonds, Lithuanian banks have also accumulated smaller but still significant (1% of assets) positions in the government debt of other Baltic countries. In the event of geopolitical escalation in the region, this could increase the losses of banks operating in Lithuania. On the other hand, the vast majority of sovereign debt held by Lithuanian banks are held to maturity, so only banks that are more engaged in trading it on the secondary market are exposed to revaluation risks.

Compared to the major euro area countries, the financial links of banks operating in Lithuania with the domestic government sector are not significant, and the cost of public debt servicing is among the lowest.

Chart 3. Ratio of public debt principal (left-hand panel) and annual interest payments (central panel) to GDP, bank links to the public sector and sovereign indebtedness in the euro area (right-hand panel)

Source: ECB Statistical Data Warehouse.

Notes: The right-hand panel shows data for the third quarter of 2024, the left-hand and central panels show 12-month moving averages. In the right-hand panel, domestic debt is deemed to be the liabilities of the general government of the country of establishment to the banks operating in that country.

1.2.Credit and indebtedness development

As the volume of new lending increased, there were signs of the recovery of the financial cycle in Lithuania in 2024. Over the same period, the financial cycle index calculated by Lietuvos bankas (see Chart 4, left-hand panel) began to climb from its lowest point, which was reached in 2023. The nominal annual growth rates of the MFI loan portfolio remain rapid: in March 2025, the annual growth of the housing loan portfolio was 10.2%, while for consumption[7]

[7] After removing the effect of the Lithuanian branch of TF Bank. In October 2024, when TF Bank established a branch in Lithuania, the bank’s consumer loan portfolio was included in the overall consumer credit statistics.

this figure was 24% and for non-financial corporations it was 14.7% (up by 4.3, 6, and 6.9 percentage points, respectively, year on year, see Chart 4, central panel). The recovery of the cycle was mainly driven by rising demand for loans on the back of lower interest rates, particularly in the segment of new housing loans, which were granted more actively. Overall, business and household indebtedness increased slightly from the lowest point reached in 2023, but the MFI credit-to-GDP ratio remained one of the lowest in the euro area (36.5%, up 1.9 percentage points compared to the beginning of the year) in the fourth quarter of 2024, while the total debt-to-GDP ratio stood at 63.5% (up 2.2 percentage points year on year, see Chart 4, right-hand panel). Overall, the MFI credit-to-GDP ratio remained below the long-term trend, and lending did not contribute to imbalances.

The improving financial situation of households and more favourable borrowing conditions led to an increase in demand for loans and the faster growth of lending to households. Along with rising real incomes and a more favourable situation on the housing market, lending standards eased and demand for loans to households increased. Lower margins on new housing loans (averaging 1.5% in March 2025) encouraged residents to negotiate more favourable terms for their existing loans. With the entry into force of changes to simplified housing loan refinancing in early 2025, the number of housing loans refinanced increased sevenfold in March compared to January, and renegotiation flows reached a record high of €374 million, i.e. four times more than the average monthly renegotiation flows in 2024 (€94 million, see Box 4 for more details).

As new lending accelerates, the financial cycle is gradually moving into a growth phase, and with household and corporate debt remaining at low levels, there are still no signs of excess lending.

Chart 4. Lithuania’s MFI credit-based financial cycle index and its composition (left-hand panel), annual change in the portfolio of MFI loans (central panel), and structure of the ratio of credit in Lithuania to annual GDP (right-hand panel)

Sources: State Data Agency and Lietuvos bankas.

Notes: The left-hand panel shows the ratio of new loans to households to GDP, which is calculated excluding the impact of loan renegotiation as from the second quarter of 2024; the central panel shows the consumer loan portfolio calculated excluding the impact of the Lithuanian branch of TF Bank; the right-hand panel shows broad credit, which includes all credit issued to businesses and households regardless of the credit provider.

The number of companies with loans from credit institutions remained unchanged, with most loans granted to companies registered in the counties of Vilnius and Kaunas. With the average loan amount increasing, the flows of new loans to companies continued to grow (annual change of 5%), but the number of companies with loans from credit institutions remained largely unchanged in 2024 and stood at around 25,000. The majority of all corporate loans (76% of the portfolio) were issued to companies registered in the counties of Vilnius and Kaunas, and both counties stand out significantly from the others in terms of the ratio of the loan portfolio to the gross value added created in the county (their average is 24%, while that of other counties is 14.2%, see Chart 5, central panel).

The volume of bank credit provided to non-financial corporations remains low compared to Lithuania’s economic growth, and companies are facing difficulties when seeking to borrow from credit institutions. The banking sector’s risk appetite when lending to companies has declined significantly over the last decade. Moreover, businesses MFI credit-to-GDP ratio has fallen by a quarter since 2014 and is one of the lowest in the euro area (16% compared to around 31% for the euro area as a whole, see Chart 5, left-hand panel). A survey of enterprises conducted by Lietuvos bankas indicates that approximately 34% of companies had their loan applications rejected in 2024, with this figure even higher for micro and small enterprises (40% and 37%, respectively). Additionally, around 17% of the companies surveyed believe that access to credit from credit institutions is completely restricted. Loan applications are more frequently rejected for smaller companies, those that have been operating for a shorter period of time, as well as loss-making companies and those that assess their financial situation as being poor. It should be noted that the share of loan applications rejected for companies that approached three or more lenders was almost 50% lower than those who did not. A survey by the European Investment Bank indicates that the share of finance-constrained companies in Lithuania remains among the highest in the EU (see Chart 5, right-hand panel), with smaller companies more often reporting that they did not seek external finance as they thought borrowing costs would be too high or that they would be turned down.

Compared to the euro area average and in terms of gross value added in counties, there is still room for growth in business financing in Lithuania, while the share of finance-constrained companies remains among the highest in the EU.

Chart 5. Ratio of the portfolio of MFI loans to NFCs to annual GDP in euro area countries (left-hand panel), ratio of the portfolio of corporate loans to gross value added in Lithuanian counties (central panel), and comparison between the shares of finance-constrained companies in Lithuania and the EU (right-hand panel)

Dalintis:

Sources: European Investment Bank 2024 survey, State Data Agency, and Lietuvos bankas.

Notes: The central panel shows the estimated corporate loan portfolio as a percentage of gross value added. The right-hand panel shows finance-constrained companies, including the following: those that are dissatisfied with the amount of finance obtained; those that sought external finance but did not receive it (application rejected), and those that did not seek external finance because they thought borrowing costs would be too high or that they would be turned down (did not try to borrow because they believed that they would not be financed).

Companies are increasingly turning to alternative sources of financing, the range and demand for which have expanded in recent years. In 2024, MFI credit accounted for 17.1% of the total corporate liabilities, down from 27% in 2014 (see Chart 6, left-hand panel). Internal resources remain the main source of financing for companies, and with limited access to traditional financial products, alternatives to loans from credit institutions are increasingly being sought. In 2024, companies increased their short-term financing mainly by accounts payables and trade credits, while their long-term financing needs were met by increased MFI lending and loans from other NFCs (see Chart 6, central and right-hand panels).[8]

[8] Overall, both the short- and long-term liabilities of companies grew at an average annual rate of around 9% in 2024.

In 2024, companies raised nearly €400 million through bond issuance. This accounts for around 11% of the financing provided by credit institutions to companies.[9]

[9] The average cost of funding on the Baltic bond market has been 4–4.5 percentage points higher than at credit institutions over the past few years, while the average difference in the euro area as a whole was 1 percentage point.

The national development bank UAB ILTE is partially contributing to reducing the shortage of financing for companies, as it allocated around 63% (€289 million)[10]

[10] See 2024 m. ILTE didžiąją dalį finansavimo skyrė smulkiajam ir vidutiniam verslui.

of its business funds to SMEs in 2024.[11]

[11] Larger companies find it easier to accumulate capital, are less risky to lend to, and are more financially literate, therefore allowing them more diverse options to finance their activities.

The role of UAB ILTE should increase significantly in 2025–2026 due to the Billion for Business financial instrument, which is expected to provide approximately €1 billion in direct loans to eligible companies. In order to address the challenges of insufficient financing of the economy, UAB ILTE could also focus more on creating and developing instruments that complement market financing (co-financing, risk sharing).

Companies actively borrowed for both the short and long term and also sought alternatives to traditional financing via MFI loans.

Chart 6. Structure of liabilities of NFCs (left-hand panel), annual change in short- (central panel) and long-term (right-hand panel) financial liabilities

Source: Lietuvos bankas.

Box 1. How did the rise in interest rates in 2022–2024 affect the provision of housing loans?

During the period of high interest rates, fewer housing loans were granted, but the real average loan value remained similar when taking into account the growth in real estate prices. In the second half of 2022, interbank interest rates rose sharply and the number of housing loans granted declined by almost 27% over a year and a half (from the fourth quarter of 2022 to the first quarter of 2024) compared to the period of low interest rates (from the fourth quarter of 2020 to the first quarter of 2022). Although the average nominal value of housing loans increased by almost 26%, this increase in value was mainly driven by the strong growth of house prices. By contrast, the average value of housing loans at constant prices[12]

[12] The value of a loan is calculated at 2019 prices using the regional house price deflator.

(hereinafter – the real loan value) decreased by 3%. However, the data indicate that changes in the value and number of loans varied across different loan and borrower groups.[13]

[13] An econometric model is used to assess statistically significant differences in changes in the value and number of loans across different borrower groups, taking into account the effect of other factors. In Box 1, the low interest rate environment is considered to be the period from the fourth quarter of 2020 to the first quarter of 2022, and the high interest rate environment is considered to be the period from the fourth quarter of 2022 to the first quarter of 2024.

Although the change in the real loan value was similar across all household income groups, the number of loans issued to lower income earners contracted slightly more (see Chart A, top left-hand panel). In the high interest rate environment, individuals earning below the average wage received 31% fewer loans than in the same period before the interest rate increase. Households with above-average incomes experienced a smaller contraction of around 26%. People earning more than two average wages were least affected by the rise in interest rates (23%). This difference was statistically significant even when other factors, such as household composition and the geography of loan collateral, were taken into account. One of the most important reasons for this was likely the 69% increase in average monthly housing loan payments due to a rise in interest rates. With debt servicing costs rising significantly, some of the lowest-income households may have decided to postpone taking on new debt in the high interest rate environment. At the same time, some households that had intended to take out a loan were likely unable to meet the requirement of a maximum of 40% DSTI, which became more restrictive as interest rates rose.

With the rise in housing loan interest rates, the number of loans granted for the purchase of secondary housing fell by almost half.[14]

[14] Secondary housing loans are loans for the purchase of housing for rental purposes, for sale, or as second housing.

This figure was significantly more than loans for first housing (see Chart A, bottom left-hand panel) and changed depending on the composition of the household. The segment of single-person households stood out the most. These households continued to receive a similar number of loans for the purchase of their first house, although the number of loans granted for secondary housing fell by as much as 60% in the high interest rate environment. Similar structural differences were seen in the group of households with two or more adults, although they were not as pronounced. Nevertheless, these changes in lending trends may have been at least partly related not only to the increase in interest rates, but also to the stricter downpayment requirements for second and subsequent housing loans that came into force in February 2022[15]

[15] A housing loan is considered a second and subsequent if the borrower has another outstanding housing loan. A secondary housing loan may not be a second or subsequent loan for the borrower if, for instance, the first housing was purchased without a loan or an earlier loan has been repaid.

(see Chart 27 in Section 2.1).

With the rise in interest rates, the number of housing loans granted declined significantly, especially for people with lower incomes and buyers of secondary housing, with significant differences in the real average loan value in some regions.

Chart A. Actual and model-estimated changes in the real loan value and number of loans by household income group and purpose of loan (left-hand panel), and geographic location of loan collateral (right-hand panel)

Source: Lietuvos bankas’ calculations.

Notes: Diamonds in the panels show actual changes in the respective groups, vertical lines show model estimates, and horizontal bars show the 95% confidence band for the estimates.

The number of loans granted decreased by a similar amount (around 30%) in all counties of Lithuania following the increase in interest rates, but there were statistically significant differences in the real average loan values in some regions of the country. For instance, in the city of Vilnius, the average loan value of households at constant prices fell by 7%, although no significant changes in value were recorded in other parts of Vilnius county when interest rates rose (see Chart A, right-hand panel). Since the number of loans granted in the city of Vilnius and the rest of the county fell by a similar margin (around 30%), it can be concluded that, with the increase in interest rates, households in the city of Vilnius were more likely than those in other parts of the county to take out loans to purchase cheaper and/or smaller housing. The seven smallest counties in Lithuania also stood out, where, unlike in Vilnius county, the real loan value remained almost unchanged in the centres, while in the periphery it increased by more than 7%.

Box 2. Role of RE in corporate credit

Stringent collateral requirements and a lack of assets suitable for collateral limit access to credit for companies and are a pressing problem, especially for micro and small enterprises. Company surveys indicate that collateral requirements, which remain tight, continue to pose challenges for companies seeking external financing. According to the results of an EIB survey, as many as 12% of companies in Lithuania that use external financing are dissatisfied with the collateral requirements for loans. This share has remained largely unchanged since 2019 and is twice as high as the EU average. In the 2024 Review of the Survey of Enterprises of Lietuvos bankas, as many as 97% of companies indicated that insufficient collateral was a somewhat significant or very significant factor in their decision to use internal financing. In December 2024, according to new LRDB data, the portfolio of loans to NFCs amounted to €14.4 billion,[16]

[16] Loan collateral in the form of RE is considered significant if it has a unique number under which it is classified as residential or non-residential RE by the State Enterprise Centre of Registers and constitutes at least 20% of the loan value. Loans secured by RE collateral of lower-value or unregistered buildings are classified as loans secured by other types of collateral.

half of which were loans with significant[17]

[17] The portfolio consists of loans from banks (€11.6 billion), credit unions (€0.5 billion), leasing companies (€1.6 billion), and other creditors (€0.7 billion).

RE collateral. Another 41% of loans were secured by other types of collateral, while loans without collateral accounted for only one tenth of the NFCs loan portfolio.

Collateral is often required for loans, and companies in the RE operations and construction sectors most often use RE collateral to finance loans, while companies in other sectors use other types of assets.

Chart A. Portfolio of loans to NFCs by type of collateral, size of company, and economic sector

Sources: New LRDB, State Enterprise Centre of Registers, and Lietuvos bankas’ calculations.

Notes: Other collateral is defined as non-RE collateral according to the classification of the new LRDB, such as gold, cash and deposits, securities, loans, equity instruments and investment fund shares, financial guarantees, other physical securities, and non-RE type protection. Loans with other types of collateral also include loans with less than 20% of the loan value secured by RE collateral or unregistered buildings.

The structure of loans granted by credit institutions to NFCs by type of collateral is closely linked to the economic activity of the company. In September 2024, as much as 72% of the loan portfolio of companies operating in the RE operations and construction sectors was composed of loans with significant RE collateral (see Chart A, left-hand panels). Loans with other types of collateral dominated the loan portfolio of companies operating in other sectors[18]

[18] Other collateral is defined as non-RE collateral according to the classification of the new LRDB, such as gold, cash and deposits, securities, loans, equity instruments and investment fund shares, financial guarantees, other physical securities, and non-RE type protection. Loans with other types of collateral also include loans with less than 20% of the loan value secured by RE collateral or unregistered buildings.

(see Chart A, right-hand panel). Between September 2019 and September 2024, the RE operations and construction sectors recorded the highest growth in loans secured by energy-efficient RE, with the amount of such loans increasing by €1 billion. Nevertheless, loans with less energy-efficient collateral still dominated in these sectors, with a portfolio of around €2 billion in September 2024. Loans to SMEs accounted for the majority (around 80%) of the loan portfolio of companies in the RE operations and construction sectors. In other sectors, the loan portfolios of large companies and SMEs were similar in size. Overall, the majority of loans to SMEs were secured by RE or other collateral, but the share of unsecured loans increased by 7 percentage points in 2019–2024 (in September 2024, this share accounted for 13% of the SME loan portfolio).

Between September 2019 and September 2024, new loans with significant RE collateral accounted for around one third of the total value of new loans, and their average value was significantly higher than that of loans without RE collateral (see Table A). During this period, there was also a significant correlation between the average value of new loans secured by RE and the quality of collateral. The average value of loans with the highest energy efficiency collateral was €1.2 million, and this decreased in line with the quality of RE collateral: RE collateral of B–C energy efficiency was used for loans averaging €0.5 million, while RE collateral with the lowest energy efficiency was used for loans averaging €0.25 million. The average value of loans with other types of collateral was €86,000, while the value of unsecured loans was the lowest and stood at around €22,000.

Table A. Indicators of new loans to NFCs granted between September 2019 and September 2024 based on the new LRDB

Collateral	Average loan value, EUR millions	Number of loans, units	Loan value, EUR millions	Average loan-collateral ratio, %		Average interest rate, %
				Only RE collateral	Total collateral	SME	Large	4 banks*	Others
A, A+, A++	1.202	1,551	1,864	66	42	6	4.4	4.7	6.9
B–C	0.535	4,361	2,332	75	50	5.9	5.7	4.5	6.6
D–G	0.253	7,225	1,828	84	58	6.1	5.8	4.7	6.6
Other	0.086	118,505	10,244	–	83	4.7	3.7	4.1	5.1
No collateral	0.022	110,992	2,469	–	–	6.6	4.4	7.5	5.6
Total	0.077	242,634	18,737	79	80	5.6	3.8	5	5.5

Source: New LRDB, State Enterprise Centre of Registers, and Lietuvos bankas’ calculations.

Note: The group of four banks consists of: Swedbank AB (including Swedbank lizingas, UAB); AB SEB bankas; AB Artea bankas, formerly Šiaulių bankas AB (including UAB SB lizingas); and the Lithuanian branch of Luminor Bank AS (including Luminor Lizingas UAB).

Other types of assets were often pledged together with the RE collateral, and the interest rate was probably affected more by other characteristics of the borrower and the creditor than by the quality and type of RE collateral. During the period under review, the average loan-to-value ratio of new loans with the highest energy performance collateral was 66%. However, when taking into account the additional collateral of other types of assets for these loans, the loan-to-total collateral ratio was on average 24 percentage points lower. A similar difference was observed for loans secured by lower-quality RE collateral. This suggests that companies seeking higher levels of funding or other more favourable loan terms are still faced with relatively tight collateral requirements, irrespective of the energy performance of the collateral. In addition, RE collateral is likely to be required to obtain a significantly larger loan. By contrast, the loan interest rate, unlike the loan-to-collateral ratio, was not as strongly related to the quality and type of collateral and depended on other characteristics of the loan and the borrower, with loans to large companies on average having a lower interest rate. This may be partly related to the fact that large companies are more likely to borrow from large lenders. In September 2024, 84% of the loan portfolio of large companies was made up of loans from the four largest lenders.

1.3.Resilience of businesses and households

Lithuanian non-financial corporates have remained resilient despite difficulties faced by trading partners and sluggish growth in the euro area. In the second half of 2024, services, trade, and industrial companies saw their sales grow, while slightly slower but still positive export growth was supported by rising external demand. Higher exports of goods of Lithuanian origin, driven by the recovery in foreign demand, along with stabilised re-exports are projected[19]

[19] Macroeconomic projections of Lietuvos bankas, March 2025.

to accelerate the growth of real exports to 1.6% in 2025, compared to 0.3% in 2024. However, heightened trade policy uncertainty is forcing companies to overhaul their supply chains and weigh the potential impact of tariffs. In 2025 and 2026, the euro area economy is expected to grow at a slower pace than anticipated at the end of last year, with growth rates of 0.9% and 1.2%, respectively.[20]

[20] Macroeconomic projections of the ECB, April 2025.

Confidence among Lithuanian industrial companies deteriorated again in early 2025, while optimism in the services segment has also been declining lately. The perception of the future of Lithuania’s main trading partners remains mixed: Germany’s industrial and retail sectors are the most pessimistic in the euro area, while the Netherlands and Latvia have more favourable growth expectations (see Chart 7). In Germany, these trends are strongly influenced by the projected stagnation of the economy (GDP growth will be close to zero in 2025 and 0.9% in 2026).[21]

[21] Macroeconomic projections of the IMF, April 2025.

This is mainly due to the structural challenges currently faced by the German industry, reduced competitiveness in global markets, and the potentially more significant impact of US trade policy.

US import tariffs have not yet had a significant impact on the expectations of Lithuania’s main trading partners.

Chart 7. EU industrial confidence and overall economic sentiment indicators

Source: Eurostat.

Note: The economic sentiment indicator is a composite indicator calculated by weighting the economic sectors differently – industry at 40%, services at 30%, consumers at 20%, and construction and retail at 5% each.

The main risk to Lithuania’s financial stability stems from economic uncertainties and trade tensions which could lead to a deterioration of the financial health of companies. The direct and indirect effects of trade tensions could lead to the significant deterioration of the financial health of manufacturing, transport, and trade companies, and thus the reduction of their ability to meet their financial obligations. In 2024, the USA was Lithuania’s most important non-EU trading partner, with direct exports to the USA amounting to €1.67 billion, or 6.9% of total exports of goods of Lithuanian origin. Lithuanian companies engaged in the production of petroleum products, chemicals, furniture, machinery, and equipment make up the largest share of trade with the USA, and these sub-sectors of the manufacturing industry[22]

[22] For the purposes of this review, sub-sectors are defined as units (divisions) at the second level of economic activity according to the Classification of Economic Activities (NACE Rev. 2.1).

are the most exposed to direct US tariff policies. Although Lithuanian exports are characterised by a high degree of diversification both in terms of products exported and geographical export markets, the concentration of goods exported to the EU market, taken as a whole, is high, as it accounts for almost two thirds of exports. For both EU and non-EU firms, Lithuanian businesses produce intermediate goods that are integrated into products exported to the USA. Germany and Sweden, whose exports to the USA account for more than 10% of their total exports, import a significant share of exported goods of Lithuanian origin (almost 16% in 2024), and, if they were to lose out due to the US tariffs, Lithuanian manufacturing and transport companies would also potentially be negatively affected. If other Lithuanian trading partners faced significant difficulties, the impact on the mentioned sectors would be even more pronounced, while the contracting re-exports would also hamper demand in the trade companies segment. The increased trade policy uncertainty[23]

[23] See The Trade Policy Uncertainty Index.

has so far not had a significant negative impact on the Lithuanian economy, with sales growing in the first quarter of 2025 for most economic activities, including manufacturing. Nevertheless, the revenues of some manufacturing companies may have risen partly due to preparations for possible US import tariffs, as US companies sought to build up inventories with goods before their prices went up.[24]

[24] See US economy contracts at 0.3% rate as Trump’s tariffs prompt import surge and US factory activity shrinks as tariffs weigh on demand and hiring plans.

The share of manufacturing sub-sectors directly affected by US import tariffs in the corporate loan portfolio is limited, but the impact could be much more significant through indirect channels.

Chart 8. Shares of the main manufacturing sub-sectors exporting to the USA in total exports to the USA and their shares in the total corporate loan portfolio (left-hand panel), and shares of loans to economic sectors in the total corporate loan portfolio (right-hand panel)

Sources: State Data Agency, LRDB, and Lietuvos bankas.

Note: “Other industry” includes the mining (B), energy (D), and water supply and waste management (E) sectors (according to NACE Rev. 2.1).

Although the share of loans to companies exporting to the USA in the total portfolio is limited, the indirect effect of US tariffs could be more significant and losses could spill over to other companies due to interlinkages. Loans to manufacturing sub-sectors directly vulnerable to US import tariffs[25]

[25] The sub-sectors of the manufacturing industry with the largest share of exports of goods of Lithuanian origin to the USA are considered to be directly vulnerable, collectively accounting for more than 90% of the value of exports to the USA.

represent only 4.4% of the corporate loan portfolio, and the exposure of credit institutions to the vulnerable manufacturing sub-sectors is even smaller given the shares of these sub-sectors in exports to the USA (see Chart 8, left-hand panel). More than a third of the total corporate loan portfolio is concentrated in the manufacturing (13%), transport (9%), and trade (17%) sectors, which are particularly vulnerable to the indirect impact of the US tariffs (see Chart 8, right-hand panel). Therefore, the inability of some companies in these sectors to fulfil their obligations would expose credit institutions to losses. Moreover, due to interlinkages within the corporate sector, such shocks could spill over to other companies.

The risk of debt default in sectors vulnerable to a decline in export demand is mitigated by low leverage and high collateral-to-loan ratios. The share of unsecured loans was low at the end of 2024, accounting for around 13% of the total corporate loan portfolio. In the portfolio of directly vulnerable sub-sectors of the manufacturing industry, this share was slightly higher, at 16%, while the share of the whole manufacturing industry stood at 14% (see Chart 9, left-hand panel). The majority of the portfolio of directly vulnerable companies in the manufacturing sub-sectors consists of loans with collateral amounting to 100% or more of the loan value, with such loans accounting for 78%. According to balance sheet statements of NFCs of 2023, the manufacturing and transport sectors were the least leveraged, with liability-to-asset ratios of 39% and 43%, respectively. Meanwhile, their share of debt owed to group or other companies was lower than the overall average for all NFCs. The resilience of the corporate sector was further supported by the fact that total corporate financial assets grew slightly faster than total corporate liabilities in 2024 (by 9.7% and 8.8%, respectively) and corporate net financial assets increased by 15.4% (to €20.4 billion in the fourth quarter of 2024), indicating that companies have sufficient reserves should the situation deteriorate.

Risks are mitigated by the good quality of the loan portfolio and the high degree of collateralisation in vulnerable sectors.

Chart 9. Structure of loan portfolio in directly vulnerable manufacturing sub-sectors by collateral value-to-loan ratio (left-hand panel) and level of non-performing loans of companies in major sectors (right-hand panel)

Sources: LRDB and Lietuvos bankas.

By the end of 2024, the share of non-performing loans to NFCs returned to historical lows. At the beginning of 2025, there was no increase in the number of bankruptcies of companies in sectors more vulnerable to US import tariffs,[26]

[26] Data of the Authority of Audit, Accounting, Property Valuation and Insolvency Management.

but there was a significant increase in the share of companies in the services sector reporting financial difficulties.[27]

[27] Data of business surveys of the State Data Agency.

Overall, the level of corporate non-performing loans remained at a historically low level of 1.4% at the end of 2024, while the share of loans whose credit risk has increased significantly (see Section 1.5 for more details) in the second half of 2024 reached its lowest level since the beginning of russia’s large-scale military invasion of Ukraine (10.4%). The level of non-performing loans in the manufacturing sector dropped by nearly 50% in the second half of 2024 and stood at 1.9% at the end of the year (see Chart 9, right-hand panel), while that of directly vulnerable manufacturing sub-sectors accounted for just 1.1%. In the fourth quarter of 2024, the level of non-performing loans of transport and construction companies fell by 1 percentage point, with the latter reaching an all-time low.

Overall, Lithuanian companies remain resilient amid elevated trade policy uncertainty. Manufacturing sub-sectors directly vulnerable to US import tariffs are characterised by low leverage and good credit quality, so the direct impact of US tariffs on the financial system is limited. Greater risks could arise through indirect channels, affecting export-dependent manufacturing, transport, and trade companies, most of whose exports are directed to Lithuania’s main foreign trading partners, who themselves are more vulnerable to US tariffs. However, in the current environment of uncertainty, indirect channels and their impact on Lithuanian companies are difficult to assess.

The favourable labour market situation has contributed to a rapid increase in the purchasing power of the population, ensuring their financial resilience and creating conditions for allocating more income to savings or other long-term goals. The labour market in Lithuania remains resilient, with the unemployment rate falling to 6.9% at the beginning of 2025, down 1.3 percentage points year on year[28]

[28] Youth unemployment remained the highest among all age groups and stood at around 13%.

(see Chart 10, left-hand panel). At the end of 2024, real wages (after taxes) continued to grow, up 9.9% year on year (see Chart 12, left-hand panel), and the growth rate in Lithuania continued to be the strongest in the Baltic countries, with wages rising by 25% from 2019. Strong income growth has led to active borrowing for housing and consumption, with the financial liabilities of households rising by 12.6% in 2024 (see Chart 10, central panel). The loan repayment burden for 68% of households with financial obligations to credit institutions[29]

[29] In the third quarter of 2024, 251,000 households had at least one housing loan, and 568,000 households had loans for consumption and other purposes.

is below 35% of income, while the environment of floating interest rates and reduced margins allowed residents with a housing loan to reduce the cost of meeting their existing obligations. With the increase in salaries, residents not only took on new financial commitments, but also saved money, with financial assets growing by almost 10% in 2024 and personal deposits with credit institutions increasing to 33% of GDP by the end of 2024. In order to take care of their future financial well-being, the population increasingly chooses to keep their savings in the form of time deposits (with a 19.3% annual increase in their balance) and to actively save in their 2nd and 3rd pillar pension funds (see Section 1.6 for more details). Although the consumer confidence index dropped to -0.1% in April on the back of the more pessimistic expectations of the population about the financial condition and the general economic situation (the lowest reading since the end of 2023), Lithuania ranks second in the euro area in terms of consumer confidence.

Strong wage growth and a favourable labour market have strengthened the financial resilience of the population, but people working in export-dependent sectors may face higher risks in the future.

Chart 10. Unemployment rate and wage developments (left-hand panel), financial assets and liabilities of households (central panel), and the share of workers in the sectors most sensitive to US import tariffs and their financial liabilities to credit institutions (in terms of the residual loan value) (right-hand panel)

Sources: State Data Agency, Household Financial Monitoring Information System, Eurostat, and Lietuvos bankas’ calculations.

The future financial resilience of the population will depend on changes in the macroeconomic situation of Lithuania and its main export partners, as well as the state of the labour market. The imposition of US import tariffs could affect Lithuanians working in sectors mostly exporting to the USA, in particular at manufacturing companies, and also, as a result of the indirect impact of the tariffs, those working in the trade and transport sectors. These sectors make up a significant share of the labour force in Lithuania and account for around one third of total household liabilities (see Chart 10, right-hand panel). Some workers in the sectors most sensitive to US import tariffs could lose their jobs or suffer wage cuts, which would have a direct impact on their compliance with their commitments (in 2024, more than 4,000 workers in tariff-sensitive sectors had housing loans). A deterioration in the economic outlook could lead to financial difficulties for companies, leading to more lay-offs, a more significant increase in the unemployment rate, and wage cuts.

1.4.Trends in housing and CRE markets

Housing market activity is increasing rapidly, but overall housing demand is growing at a sustainable pace. In 2024, the number of housing units sold was a tenth lower than in 2023, and the lowest since 2012. However, the housing market rebounded from the trough in the summer of 2024, and in the first quarter of 2025 the number of sales on the primary and the secondary markets grew by 50% and a third year on year, respectively (see Chart 11, left-hand panel). Market activity is driven by the falling cost of borrowing, with new housing loan rates having fallen to 4% since their peak of 5.9% in autumn 2023, and the number of issued loans already above the long-term trend. The improving affordability of housing in the closest future supports the expectations of further sales growth. On the other hand, in the face of geopolitical tensions, market is developing sustainably, with no sudden increase in demand as was observed during the pandemic.

The subdued investment activity is contributing to the sustainable growth of demand. First-time buyers returned to the market as the cost of borrowing declined. In the fourth quarter of 2024, the share of such acquisitions was 65% in Lithuania and 59% in Vilnius (see Chart 11, central panel). On the other hand, the interest of investors who were active in the market until the summer of 2022 remains subdued. In both Vilnius and Lithuania as a whole, the share of investment transactions by residents in summer 2022 was 32% and 26%, respectively, while by the fourth quarter of 2024 it had shrunk to 29% and 25%, respectively. There has also been a significant decrease in the number of housing purchases by companies. This trend is probably due to a deterioration in the attractiveness of housing investment: for instance, in Vilnius, rental yields were negative in 2022–2024 (when buying a house with a loan), and only recovered to zero in 2025 (see Chart 11, right-hand panel). Survey data confirm this trend: although housing is still the most attractive investment for the majority of the population, its attractiveness decreased in 2023–2024.

As the housing market activity increases, more housing units are purchased for individual needs, but overall market development is sustainable.

Chart 11. Monthly number of housing purchases in Lithuania (left-hand panel), composition of buyers in Vilnius (central panel), and rental yields in Vilnius (right-hand panel)

Sources: State Enterprise Centre of Registers, UAB Inreal, UAB OBER-HAUS nekilnojamas turtas (Ober-Haus), and Lietuvos bankas’ calculations.

Notes: The darker curves on the left-hand and central panels are 12-month moving averages. Rhs – right-hand scale.

With housing sales prices rising faster than rental prices, price imbalances began to widen slightly in 2025. The pace of house price growth picked up slightly with increasing market activity, but remains moderate, with the LB RSHPI and Ober-Haus house price indices growing 4.3% and 4.9% year on year, respectively, in April 2025 (the averages for 2015–2025 are 7.2% and 8.8%, respectively). Rising expectations of purchasing a home among households put downward pressure on rental prices, as they rose more slowly than sales prices from autumn 2024 onwards (see Chart 12, left-hand panel). Overall, the growth of both housing sales and rental prices has stabilised and is moderate. However, in the absence of a price correction, housing sales prices are still at their historical highs, as reflected in the LB RSHPI-based estimates, which suggest that house prices may be overvalued by around 5% (see Chart 12, central panel).

House prices are rising moderately and affordability is improving, but price imbalances persist.

Chart 12. Sales and rental prices of housing in Lithuania (left-hand panel), overvaluation of house prices according to different indices (central panel), and the average space of housing affordable when buying with a loan (right-hand panel)

Sources: Lietuvos bankas, Ober-Haus, State Data Agency, and Lietuvos bankas’ calculations.

Notes: The left-hand panel shows the purchase price data from LB RSHPI and rental price data from Ober-Haus; in the central panel, the overvaluation is calculated as the median of six different indicators, see here for more details; in the right-hand panel, the average wage is used for calculations, with the RLRs in force from 2015 for all periods; HPI stands for the house price index.

With personal incomes rising faster than house prices for almost two years now, housing affordability continues to improve. The ratio of house prices to annual net income fell to 5.8 in the fourth quarter of 2024 in Lithuania (6.9 in Vilnius) and is expected to return to its historical high[30]

[30] Under the most likely scenario of projections.

(which was observed in 2020) by the end of 2025. The falling cost of borrowing is also improving the affordability of housing when buying with a loan: on average, people can now afford a home of 70 sq. m – up by 18 sq. m from the summer of 2023, when affordability was at its lowest point (see Chart 12, right-hand panel). Affordability should continue to improve in the near future, driven by wage increases outpacing house prices and decreasing borrowing prices

The accumulated housing supply should help to meet the demand increase in 2025. The supply of housing on the primary market of major Lithuanian cities amounted to 7,200 housing units in March 2025.[31]

[31] According to UAB Inreal, around one fifth of housing units in Vilnius and around 40% of housing units in Kaunas and Klaipėda have already been reserved.

As the number of sales exceeded new supply in spring 2025, the supply stock started to shrink, but it remains historically high (see Chart 13, left-hand panel). Supply is sufficient for now, but if demand were to reach the level of 2021–2022, this would result in a shortage of housing on the primary market in just over a year.[32]

[32] Assuming that the pace of construction remains in line with the long-term average, demand will reach the level of 2021–2022 and supply will fall by half.

The cyclical risk of supply shortages is mitigated by an increase in the amount of new construction. In Vilnius, the construction of 5,700 housing units began in 2024 (25% more than in 2023). On the other hand, future supply shortages may be caused by intensifying urbanisation: in Vilnius, for instance, the volume of housing development is not increasing despite faster population growth (see Chart 13, central panel). The persistently high level of house price increases may make it difficult to develop new projects (see Chart 13, right-hand panel).

Accumulated home supply has so far limited larger price hikes, but intensifying urbanisation may lead to shortages in the future and increase upward pressure on prices.

Chart 13. Housing supply on the primary market of major Lithuanian cities (left-hand panel), housing supply and population growth in Vilnius (central panel), and annual growth of housing construction prices (right-hand panel)

Sources: UAB Inreal, State Data Agency, Vilnius Territorial Health Insurance Fund, and Eurostat.

Notes: The right-hand panel includes Germany, France, Italy, and Spain in the category of major EU countries.

As the outlook for the RE market improves, the risk of credit losses for banks and RE funds is decreasing, while the higher value of collateral allows for more abundant financing for the real economy. Banks in Lithuania are the main providers of funding for RE activities: compared to RE funds, which collectively held €2 billion worth of RE at the end of 2024 (see Box 3 for more details), banks operating in Lithuania have granted €13 billion in housing loans as well as €4 billion in loans for CRE construction and acquisition. Thus, in total, loans for RE purchase and construction account for 61% of the bank portfolio of credit to the private non-financial sector (see Chart 14, left-hand panel). In addition, banks widely use RE as collateral for loans to companies, with up to 70% (€9 billion) of loans to companies secured by CRE.[33]

[33] According to the broadest definition in the ESRB Recommendation ESRB/2019/3, CRE loans include loans to legal entities secured by commercial and residential RE as well as by land and some types of unfinished structures.

With lower likelihood of price correction, the quality of collateral and the availability of credit are improving, which is stimulating investment and growth in the real economy (the RE sector alone accounts for around 8% of Lithuanian GDP, see Chart 14, right-hand panel). As the real estate market enters a growth phase, the profits of RE companies should increase and the risk of credit losses in the financial sector should decrease.

The sustainable development of the RE market is important for the stability of the financial system and economic growth.

Chart 14. Share of RE loans in bank credit portfolio (left-hand panel), and share of RE activities in GDP (right-hand panel)

Sources: Lietuvos bankas and State Data Agency.

Notes: The left-hand panel shows the share of loans by type in the total bank portfolio of loans to the private non-financial sector.

Box 3. RE funds: A significant financing source for RE projects

Over the last decade, RE funds have become a popular way to finance RE projects in Lithuania. RE funds are collective investment undertakings (CIUs) that aim to raise capital from investors to finance the development or management of RE. Funds typically operate for a period of 6–10 years, and on completion of the project the investment return is paid to shareholders. In addition to RE funds, the investment policy also distinguishes between funds investing in equities, bonds, and innovation (e.g. technology or green energy). The most rapid expansion of RE and other types of funds started in 2017 with the entry into force for CIUs of the additional corporate tax relief and the extension of the existing relief.[34]

[34] The reliefs defined in Articles 12(5) and (18) of the Republic of Lithuania Law on Corporate Income Tax.

Since then, the CIU market in Lithuania has grown significantly, and by the end of 2024 RE funds collectively managed €2 billion of assets. In terms of the net asset value, this represented around half of the total CIU sector (see Chart A, left-hand and central panels).

The importance of non-bank financing for RE activities is also increasing in other euro area countries. After the financial crisis of 2008, banks in Lithuania, as in other European countries, slowed down lending to RE projects (see Chart A, right-hand panel). In Lithuania and the euro area, the bank portfolio of credit to RE activities[35]

[35] Credit to RE operations and construction companies.

has shrunk to 5% and 12% of GDP, respectively (11% and 20% in 2012). This is due to the collapse of the property bubble after the financial crisis, the weakening risk appetite of banks to finance the shock-prone sector, and regulatory changes. Bank credit was partly offset by a rapid increase in RE fund investments. In Lithuania, the ratio of net asset value of RE funds to GDP increased to 2% in 2024 (compared to 7% in the euro area). The Lithuanian market of RE funds is still shallower than in the major euro area countries, but the slowdown in the RE market observed in 2022–2023 did not hinder the pace of expansion in Lithuania.

RE funds are becoming an important source of financing for RE activities and an alternative to bank credit.

Chart A. Value of assets managed by RE funds registered in Lithuania (left-hand panel), structure of the Lithuanian CIU sector (central panel), and sources of funding of RE activities in Lithuania and the euro area (right-hand panel)

Sources: Lietuvos bankas, ECB Statistical Data Warehouse, and Eurostat.

Notes: CIUFIIs – CIUs for informed investors; ACIUs – alternative CIUs; right-hand panel shows credit to RE operations and construction companies allocated to RE activities; EA – euro area; LT – Lithuania.

Funds in Lithuania manage RE mainly by financing special purpose vehicles (SPVs) as this helps manage financial risk and use the beneficial tax environment. Two thirds of the investments of RE funds are managed indirectly by providing funding to SPVs. RE funds invest in SPVs by taking an equity stake as well as by providing loans to them and buying SPV bonds. Indirect RE management is attractive to funds because it allows them to limit the financial risks of a project at the level of the individual company. In addition, when capital is invested in SPVs in the form of a loan, interest can often be deducted from taxable income. Around one third of the premises and land of RE funds is also managed directly. Direct asset management is encouraged by the availability of the full benefit of Article 12(5) of the Republic of Lithuania Law on Corporate Income Tax, which exempts property rental or sales income from taxation.

RE funds are mainly financed by shareholders’ capital. The share of equity in the overall funding structure of funds has historically varied between 60% and 75%, with other funding needs being met by loans (mainly from banks, see Chart B, left-hand panel). In terms of leverage (the ratio of assets under management to the value of net assets), Lithuanian RE funds rank alongside more highly leveraged euro area countries: in the third quarter of 2024, the average leverage ratio in the euro area was 124%, while in Lithuania it was 140% (see Chart B, central panel). On the other hand, the risks arising from higher leverage in Lithuania are concentrated in a few funds: one large higher-leveraged fund and several small higher-leveraged funds, which together manage 15% of the sector’s total assets (see Chart B, right-hand panel). With some RE funds approaching their closing dates, the last two years were important for refinancing or repaying liabilities to banks. The latest data indicate that, despite tensions on the RE market, the funds have successfully refinanced their largest liabilities.

The low prevalence of open-ended RE funds significantly reduces the level of risk to the financial system in Lithuania. With falling RE investment returns and deteriorating fund performance, investment funds may face pressure from investors to redeem their shares, which may trigger asset sell-off. Given the relatively low liquidity of RE as an asset class and a lack of liquid assets in funds, a rush to sell RE could cause prices to fall sharply. However, 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 6–10 years, and shareholders have very limited options to redeem the investment prematurely. This means that, as the real return on RE as an asset class declines, forced sales of assets are less likely in Lithuania, and the risk of liquidity mismatches is less relevant.

Lithuanian RE funds are on average more leveraged than the euro area average, but in general most funds are small and have low leverage.

Chart B. Leverage structure of Lithuanian RE funds (left-hand panel), average leverage and its spread across euro area countries (central panel), RE funds in Lithuania by assets under management and leverage (right-hand panel)

Sources: Lietuvos bankas and ECB Statistical Data Warehouse.

Note: Right-hand panel shows data for September 2024. Small RE funds are those with assets under management of up to €50 million, while low-leverage funds are those with a ratio of assets under management to net asset value of 200% or less.

As in the euro area generally, assets managed by Lithuanian RE funds and their investors are mainly local. In the third quarter of 2024, €1.4 billion (or 75%) of RE investments managed by Lithuanian funds were located in Lithuania, and this share has remained broadly unchanged over the past five years. A significant portion of managed assets was also concentrated in the other Baltic countries, with Latvia and Estonia accounting for 13% and 3% of total assets, respectively, and Poland accounting for 5%. In terms of geography, asset distribution trends in Lithuania do not differ significantly from those in the euro area countries, with most assets being managed in the same country in which the RE fund is established. Lithuanian RE funds are mainly financed by Lithuanian capital, and the relative importance of foreign capital has been declining: in the third quarter of 2024, Lithuanian capital accounted for 83% of the investor base of Lithuanian RE funds (up from around 50% in 2018). The importance of foreign investment in Lithuania is slightly lower than in the euro area as a whole, where it accounts for around one third of investment on average.

RE funds are becoming a significant and relatively safe alternative for financing RE activities. The RE fund market has grown rapidly since 2017, with the value of assets under management in the sector reaching €2 billion at the end of 2024. Compared to the euro area as a whole, Lithuanian RE funds are more leveraged, but the overall level of risks associated with the sector’s development is low due to the prevalence of closed-end funds and limited links with banks and foreign markets. The sector remained resilient in 2023–2024 when, despite tensions on the RE market, funds successfully refinanced or repaid their largest loans. This indicates that there is currently no need to apply macroprudential policy measures to RE funds.

Activity on the CRE market remains subdued and is still constrained by a reduced investment risk premium and geopolitical tensions. With the decline in yields of government bonds, the risk premium on CRE investments increased slightly in 2024 but remained around 2 percentage points lower than in the period before the tightening of the monetary policy (see Chart 15, left-hand panel). As investors sought more attractive alternatives, the volume of CRE investment transactions fell to its lowest level in a decade: in 2024, transactions worth €210 million were concluded, i.e. a value three times less than that of the record years of 2021 and 2022. On the other hand, there are signs that the trough has already been reached as the volume of transactions in the first quarter of 2025 alone reached €150 million. In addition, the latest figures on the number of transactions (see Chart 15, central panel) also indicate a gradual increase in market activity (especially in the retail segment).

Following a price correction in the office segment, price imbalances decreased but did not disappear. Unlike in the euro area as a whole, where CRE purchase prices fell by around 10%, no widespread price correction has been observed in Lithuania to date (see Chart 15, right-hand panel). On the other hand, the office segment is more vulnerable due to oversupply of leasable space. For instance, prices for A-class offices in Vilnius fell by 10% in 2024. Despite the price correction, prices in this segment were still potentially overvalued by 12% in the fourth quarter of 2024 (down by 11 percentage points year on year[36]

[36] Calculations are based on the development of relative market indicators (for more details see Commercial real estate risk supervision framework).

). The price imbalance is driven by the increase in property purchase prices, which has outpaced the increase in rents and the employment level (in 2014–2024, the working population in Vilnius increased by 25%, the rent of A-class offices by 32%, and the sales price by more than 100%).

Activity in the CRE market remains subdued but there has been no broad negative impact on prices.

Chart 15. CRE risk premium and investment volume (left-hand panel), number of CRE purchase transactions in major Lithuanian cities (central panel), and purchase prices (right-hand panel)

Sources: Refinitiv, Colliers, State Enterprise Centre of Registers, and ECB.

Notes: In the left-hand panel, the risk premium is considered to be the difference between the average CRE rent and the yield of 10-year government securities; in the central panel, the industrial premises segment is defined as CRE for manufacturing and logistics purposes.

The growing vacancy rate of office and industrial premises is cutting into the income of RE managers and increasing downward pressure on the prices of these premises. Despite tensions on the RE market, the development of commercial premises has continued in recent years as the stock of office and industrial premises in Lithuania’s major cities increased by 30% and 52%, respectively, in 2020–2024 (the development of retail premises was slower, with a recorded increase of 13%). Hybrid work is reducing the demand for offices, but around 150,000 sq. m of leasable space is expected to be added to the market in 2025 alone (10% of the total current stock). With difficulties in absorbing the new supply, vacancy rates are rising: for instance, they rose to 11% in the first quarter of 2025 in secondary class offices in Vilnius (up from 9% a year earlier, see Chart 16, left-hand panel). Vacancy rates also increased in the industrial premises segment, but remain relatively low. On the other hand, rental prices remain stable in Lithuania, unlike in the euro area as a whole where they have adjusted slightly, indicating that the supply and demand imbalance is not profound (see Chart 16, right-hand panel).

With office supply exceeding demand, the vacancy rates of these premises are rising, but stable rental prices indicate that property managers are not facing any serious difficulties.

Chart 16. CRE vacancy rate (left-hand panel), and CRE rental prices (right-hand panel)

Source: Colliers.

Note: In the left-hand panel, the columns show the spread of historical values since 2011. “All classes” means the weighted average vacancy rate of all classes of space in Lithuanian major cities.

As the expectations of banks regarding CRE price developments have improved, lending for CRE construction and purchase has accelerated. With survey data indicating that no banks expect a CRE price correction, the values of credit portfolios for CRE construction and purchase reached €0.9 billion and €2.9 billion, respectively, in the fourth quarter of 2024 (with year-on-year growth rates of as much as 34% and 21%, respectively, due to the larger individual loans granted, see Chart 17, left-hand panel). The quality of the CRE credit portfolio remained historically good (non-performing loans accounted for 0.4% of the portfolio) and the number of loans for which original provisions had been increased also declined. With credit conditions improving, the share of CRE transactions involving loans has almost returned to the level seen before the tightening of the monetary policy (see Chart 17, central panel). In addition, cheaper borrowing facilitates debt refinancing and improves the profitability of RE managers. For instance, the rental yield for prime office space in Vilnius is already almost 2 percentage points higher than the cost of borrowing from banks (see Chart 17, right-hand panel).

Risks in the housing market have subsided but remain elevated in the CRE segment due to the supply-demand imbalance in the office segment and ongoing refinancing risks. With borrowing costs falling and affordability improving, activity in the housing market continues to pick up. As the risk of house price correction fades, the risk of supply shortages becomes more relevant in the medium term, which may lead to an increase in house price overvaluation in the long run. Falling borrowing costs reduce the level of risk in the CRE segment, while lower price imbalances lead to more positive expectations among market participants regarding future market developments. On the other hand, the level of risk remains elevated as the profitability of RE managers continues to be negatively affected by higher debt servicing costs, while growing office vacancies are putting downward pressure on property prices. However, with banks lending only to the safest CRE projects, the quality of the CRE portfolio is good, and, compared to housing loans, CRE credits account for a smaller share of the total loan portfolio. Therefore, even under an adverse scenario, the losses of banks should not significantly destabilise the financial system.

With borrowing costs going down, the risk of CRE loan refinancing has eased somewhat.

Chart 17. CRE-secured bank loan portfolio (left-hand panel), share of loan-based CRE purchase transactions (central panel), CRE yields and cost of debt (right-hand panel)

Sources: Lietuvos bankas, State Enterprise Centre of Registers, Colliers, and Nasdaq Baltic.

Note: The darker curve in the central panel shows the 1-year moving average, calculated using the value of transactions.

1.5.Banking sector developments and resilience

Performance indicators of banks operating in Lithuania remained good in the fourth quarter of 2024, with average liquidity, asset quality and profitability indicators among the best in the EU (see Chart 18, left-hand panel), while the high level of profitability in the banking sector was supported by the still high net interest income of banks. In 2024, the annual growth of net interest income in the banking sector (13%) was supported by the strong growth of the loan portfolio in an environment of declining ECB key interest rates, with the total portfolio of bank loans to the private sector increasing by 11% (13% to NFCs and 10% to households). Although the annual growth of deposits was also strong (14%) over the year, time deposits, which drive the growth of the interest expense of banks, account for only around 27% of all private sector deposits (and this share has remained unchanged since the second quarter of 2024). Their growth slowed in 2024, resulting in a slower increase in the interest expenses of banks. In addition to the significant impact of net interest income, bank income was positively affected by higher net fee and commission income, which increased by 52% in 2024. However, as in the previous year, the activities of Revolut Bank UAB had a significant impact on this (if the impact of Revolut Bank UAB were to be excluded, net commission income would have grown by 9%).

The quality of the loan portfolio of banks remains good, with banks incurring virtually no credit losses in 2024. The accumulated liquidity buffers of businesses and households, low leverage, growing real wages, falling interest rates, and the ability of banks to properly assess the risk levels of their customers have contributed to the low rate of non-performing loans. The financial situation of businesses and households remains stable, resulting in a further decline in the share of non-performing loans over the year to 0.9% (see Chart 18, central panel). The share of non-performing loans of NFCs decreased slightly year on year and stood at 1.4% at the end of 2024, while the shares of non-performing housing and consumer loans stood at 0.7% and 2.2%, respectively. The relatively significant (0.6 percentage points) decline in the share of non-performing consumer loans from the peak reached in mid-2024 is related to the sale of the non-performing portion of bank loan portfolios. On the other hand, banks are fairly cautious in their assessment of the situation of their borrowers, as reflected by the significant share of loans whose credit risk has increased significantly since initial recognition.[37]

[37] Loans with significantly increased credit risk comprise Stage 2 loans that have had a significant increase in credit risk since initial recognition but are not impaired.

This figure fell to 7.5% in the fourth quarter of 2024 after a significant increase in the share of such loans in 2022 following the onset of russia’s war against Ukraine (see Chart 18, right-hand panel). The share of such loans to companies continued to decline, reaching 10.4%, while the share of housing loans remained at a similar level of 9.1%. Against the backdrop of heightened geopolitical tensions, banks may tighten their assessment of borrowers’ situations, which could lead to a renewed increase in the share of such loans. However, the ability of banks to absorb a potential deterioration in asset quality is supported by good profitability and strong capital and liquidity buffers (see Sections 1.5.1 and 1.5.2 for more details).

Lithuania’s banking sector performs among the best in the EU, while the level of non-performing or impaired loans remains low.

Chart 18. Comparison of bank performance indicators with EU countries (left-hand panel), share of non-performing loans in the banking sector (central panel), and share of loans with significantly increased credit risk (right-hand panel)

Dalintis:

Sources: European Banking Authority (EBA), Lietuvos bankas, and Lietuvos bankas’ calculations.

Notes: Concentration is measured by the Herfindahl-Hirschman Index (HHI). Green shows Lithuania’s indicator, which is better than in most of the EU Member States, whereas red shows a worse indicator. The Lithuanian banking sector is compared with the EBA sample of other countries. The cost-to-income ratio in the left-hand panel was calculated excluding Revolut Bank UAB due to the specific nature of the bank’s business model, as part of the costs incurred internationally by the Revolut Group are attributed to Revolut Bank UAB operating in Lithuania.

There are clear differences between the profitability, asset quality, and efficiency indicators of systemically important and less important banks,[38]

[38] Systemically important banks: Revolut Bank UAB, Swedbank, AB, AB SEB bankas, AB Artea bankas (formerly AB Šiaulių bankas). Less important banks: UAB Urbo bankas, AB Mano bankas, European Merchant Bank UAB, UAB SME Bank, UAB GF bankas, PayRay Bank, UAB, Saldo Bank, UAB, AB Fjord Bank, Finora Bank UAB.

with the indicators of less important banks being weaker. Four systemically important banks account for more than 80% of the total assets of the banking sector in Lithuania (as of December 2024), and their high profitability indicators also affect the indicators of the banking sector. However, the profitability and efficiency indicators of less important banks are weaker (average return on equity was 3.5% and the cost-to-income ratio was 69%, see Chart 19, left-hand and central panels). Five less important banks ended 2024 with losses. The profitability of small banks is negatively affected by the lower diversification of services provided, the base of higher-risk clients, higher costs, and lower income at the start of activities (where banks have operated for five years or less) until sustainable growth and the scale of services provided are secured. Due to the concentration of their loan portfolios in higher-risk loan segments, new banks[39]

[39] Since 2018, nine new banks and two new branches have opened in Lithuania.

are also characterised by higher credit risk and poorer asset quality, with the share of non-performing loans of less important banks being significantly higher at the end of 2024 (5.4%, see Chart 19, right-hand panel) compared to important banks. Due to the lower diversification of the activities of newly established banks, these banks are more vulnerable to adverse financial cycle developments, and the impact of a deteriorated economic environment is much more quickly reflected in their increased risk or non-performing loan volumes, which may increase the risk to the continued viability of banks with lower capital buffers (see Section 1.5.1 for more detail).

Less diversified services, a base of higher-risk clients, and higher costs lead to significantly lower profitability, efficiency, and asset quality indicators for less important banks.

Chart 19. Indicators of return on equity (left-hand panel), cost-to-income ratio (central panel), and share of non-performing loans by systemic importance of banks (right-hand panel)

Source: Lietuvos bankas’ calculations.

Note: The cost-to-income ratio in the central panel was calculated excluding the solidarity contribution.

The level of concentration in the bank loan market (especially for housing loans) in Lithuania remains one of the highest in the EU, although it has been declining due to stronger competition (see Chart 20, left-hand panel). The intensified competition on the housing loan market was linked to a significant decline in housing loan margins until autumn 2024, but these margins have now stabilised (in March 2025, the median margin on new housing loans was 1.5%, down by 0.9 percentage points compared to mid-2020). With a new market entrant in the housing loan segment in the second half of this year and competition intensifying further, the concentration of the housing loan market is likely to decline more rapidly. Since 2018 – with the addition of 11 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 continued to decrease.

Banks estimate that the most significant risks to the sector and the financial system as a whole in the first quarter of 2025 were trade tensions, cyberattacks, and geopolitical risks (see Chart 20, right-hand panel). Trade tensions were considered to pose the greatest risk to the banking sector as they could adversely affect the quality and profitability of banking sector loans, but large capital and liquidity buffers, high profitability, as well as the low share of loans to companies exporting to the USA reported by banks in their loan portfolio mitigate the potential adverse effects of this risk.

According to the Bank Lending Survey conducted by Lietuvos bankas, the share of banks that encountered cyberattacks increased in the first quarter of 2025, and banks themselves consider this risk as one of the most important (see Chart 20, right-hand panel). From September to December 2024, there was a particularly sharp increase in distributed denial-of-service (DDoS) attacks, which temporarily disrupted the availability of banking services at several financial institutions. In the first quarter of 2025, the number of such incidents continued to increase significantly: although most attacks were not particularly sophisticated, they became more frequent and caused more damage. These types of attacks are highly dynamic and constantly evolving in an effort to circumvent common security tools.

With the growing number of cyber threats, cooperation at the national and international levels is being strengthened and financial institutions are investing more in the protection of their IT systems. On 17 January 2025, the Digital Operational Resilience Act (DORA Regulation) came into force.[40]

[40] In preparation for the implementation of this legal act, banks reviewed their ICT risk management and control systems, updated their contracts with ICT service providers, and prepared to provide information to Lietuvos bankas on major ICT-related incidents.

Together, this Regulation, cyber resilience testing carried out by the ECB, and cooperation between Lithuanian and international institutions in urgently exchanging information on attacks are essential for strengthening the resilience of the financial sector. Lietuvos bankas has also joined the Systemic Cyber Incident Coordination Framework (EU-SCICF), which began operating at the start of 2025 and is designed to coordinate actions between the EU and national authorities in the event of a large-scale cross-border cyber incident and mitigate its risks to the financial sector. Increased investment by banks in strengthening the resilience of IT systems is partly driving their rising operating costs and may affect their profitability in 2025 and beyond.

The risk of cyberattacks continues to be one of the most important risks for the banking sector, and the management of this risk is therefore a major focus.

Chart 20. Concentration of the loan market (left-hand panel), and importance of the risks to the financial system assessed by the main banks (right-hand panel)

Dalintis:

Sources: Lietuvos bankas’ calculations, results of the Bank Lending Survey conducted by Lietuvos bankas in March 2025.

Notes: In the left-hand panel, concentration is measured by the Herfindahl-Hirschman Index (HHI). In the right-hand panel, risks were classified according to the assessment of significance. Assessment of the level of significance of risks: 1 – low; 2 – lower than medium; 3 – medium; 4 – higher than medium; 5 – high.

1.5.1.Bank solvency situation and resilience

The solvency ratios of banks operating in Lithuania, supported by strong profitability, continue to show the good resilience of banks to possible future surprises. The overall capital adequacy ratio increased from 20% to 21.4% in 2024. Top-tier capital instruments continued to dominate in the banks operating in Lithuania, with the common equity tier 1 (CET1) ratio standing at 19.7%. Capital buffers were also boosted by high bank profitability. In 2024, the return on equity, while declining by 3.4 percentage points over the year, remained among the highest in the euro area (20.2%).

A solvency stress test was carried out to assess the capital adequacy of financial market participants operating in Lithuania[41]

[41] The following financial market participants are assessed for the purposes of solvency stress testing at the consolidated level: AB Mano bankas, AB SEB bankas, AB Artea bankas (formerly AB Šiaulių bankas), European Merchant UAB, United Central Credit Union Group, Lithuanian Central Credit Union Group, PayRay Bank, UAB, Swedbank, AB, UAB GF bankas, UAB Urbo bankas.

in the case of an economic shock.[42]

[42] It should be noted that the results obtained through stress testing are not forecasts – they represent an analysis of unlikely events, and the conclusions presented are thus conditional on the scenarios used.

The test covers a three-year period (2025–2027) based on the data for the end of 2024. The test is based on two economic development scenarios: baseline and adverse (see Table 2). The testing does not take into account the amendments to the Capital Requirements Regulation implementing the Basel III reform, which entered into force after 31 December 2024.

The Lithuanian economy would maintain moderate growth under the baseline scenario and would undergo a two-year recession under the adverse scenario. The baseline scenario is based on the official macroeconomic development projections of Lietuvos bankas of March 2025. Under this scenario, the Lithuanian economy would grow on the back of increasing household consumption, private investment, and recovering foreign demand. The hypothetical adverse scenario assumes that Lithuanian exports would contract sharply due to international conflicts and trade tensions. Declining foreign demand would slow down manufacturing and other export-oriented sectors, increase the unemployment level, and reduce domestic demand. Finally, the negative macroeconomic environment and imbalances on the RE market would lead to a correction of RE prices.

Table 2. Evolution of the key macroeconomic indicators under stress test scenarios

(percentages)

Indicator	Actual indicator	Baseline scenario			Adverse scenario
	2024	2025	2026	2027	2025	2026	2027
GDP (annual change)	2.7	2.9	3.0	3.0	-2.5	-2.6	1.6
Exports of goods and services (annual change)	0.3	1.6	3.6	3.6	-14.1	-14.3	-7.6
Private consumption expenditure (annual change)	3.7	4.1	3.8	3.8	-4.0	-8.2	-2.1
Unemployment rate (annual average)	7.1	6.8	6.8	6.6	7.7	10.1	11.4
Compensation per employee (annual change)	10.7	9.4	7.9	7.4	3.7	0.6	4.2
Average annual inflation (based on HICP)	0.9	3.3	2.6	2.6	1.5	2.4	1.6
RE price index (annual change)	9.8	8.4	8.4	10.9	-8.2	-7.7	-5.5

Sources: State Data Agency and Lietuvos bankas’ calculations.

Note: Data on GDP, exports of goods and services, and private consumption expenditure are at constant prices.

The results of solvency testing show that, overall, the system of banks and central credit union groups is well-capitalised and remains resilient to potential shocks, with the system’s capital levels rising under both test scenarios (see Chart 21, left-hand panel). Under the baseline scenario, the capital adequacy ratio (CAR) of credit institutions would be 22% at the end of 2027, while in the adverse scenario the CAR would remain constant at 20% at the end of 2027. However, the analysis of individual institutions shows differences between the responses of significant[43]

[43] Significant institutions include AB SEB bankas, AB Artea bankas (formerly AB Šiaulių bankas), Swedbank, AB. These banks are supervised directly by the ECB together with Lietuvos bankas.

and less significant institutions to the test scenario.

The system of banks and central credit union groups is well-capitalised and remains resilient to potential shocks, but the responses of significant and less significant institutions to a stress test scenario differ.

Chart 21. Changes in total CAR of financial market participants by scenario (left-hand panel), changes in CAR of significant institutions by scenario (central panel), and changes in CAR of less significant institutions by scenario (right-hand panel)

Sources: Bank data and Lietuvos bankas’ calculations.

Note: The minimum requirements consist of an 8% minimum capital requirement and a Pillar 2 capital requirement. The structural macroprudential capital requirements consist of the capital conservation buffer and the other systemically important institutions buffer. The total capital adequacy requirement consists of minimum requirements, structural macroprudential capital requirements, CCyB, and sectoral SRB requirements.

Under the adverse scenario, several less significant institutions could breach the combined capital requirement at the end of 2027, and the need for additional capital would be around 1.2% of the current capital level of the system. Less significant institutions are more vulnerable (see Chart 21, right-hand panel) and could face the need for additional capital in the event of an adverse scenario. Their CAR at the end of 2027 would be 12.5%, 1.6 percentage points below the total capital adequacy requirement, and the institutions tested would need around €39.6 million in additional capital to meet all the requirements.[44]

[44] If the CCyB and sectoral SRB requirements were relaxed, the need for additional capital would amount to €25.5 million.

Two of the tested institutions would also breach the minimum individual requirement, comprising the 8% minimum requirement and the individual Pillar 2 capital requirement, and would need €7.6 million to meet this requirement. The higher sensitivity of less significant institutions under the adverse scenario is partly due to their relatively higher administrative costs and larger credit losses. The institutions that breached capital requirements under the adverse scenario are recommended to strengthen their business model, improve risk management, and increase their capital buffer.

The breakdown of the change in CAR (see Chart 22) indicates that interest income would allow the banking sector to absorb the increase in credit losses under the adverse scenario. Under the baseline scenario, institutions would consistently increase their loan portfolios during the test period, while their sufficiently high profitability would still allow them to increase their already high CAR. Under the adverse scenario, capital increases would be most constrained by higher credit losses, which would amount to around €1.2 billion over the entire test period (around 4.2% of the total loan portfolio at the end of 2024). In the adverse scenario, net interest income would decline but still remain significant, which would offset credit losses at the financial system level.

Significant interest income would allow the banking system to absorb the increase in credit losses under the adverse scenario, resulting in an increase in the CAR under both the baseline and adverse scenarios.

Chart 22. Breakdown of financial market participants’ CAR under the baseline (B) and adverse (A) scenarios

Dalintis:

Sources: Bank data and Lietuvos bankas’ calculations.

1.5.2.Bank liquidity assessment

The systemic liquidity risk in the Lithuanian banking sector is currently considered to be low, even against the backdrop of high uncertainty and significant volatility in global financial markets. The background of trade tensions is causing more pronounced volatility in USA and European equity and bond markets and is increasing the vulnerability of financial markets, which may lead to an increase in market liquidity in Europe and contagion risks in Lithuania. However, this risk is not significant as Lithuanian banks rely almost exclusively on deposit financing, while the share of market funding in Lithuania is significantly lower than in the euro area (currently accounting for just over 5%, whereas the euro area average is around 24%). The potential market liquidity risk is also mitigated by the very small share of the trading portfolio in the balance sheets of banks, which accounts for only one tenth of a percent.

The sources of financing for the Lithuanian banking sector remained stable in 2024. The ratio of loans issued by banks to deposits held by Lithuanian residents increased marginally and stood at 81%. Meanwhile, the significant share of reserves held at the central bank (see Chart 23, left-hand panel), even with a decline in excess liquidity, ensures a stable source of liquidity. Banks in Lithuania rely almost exclusively on deposit financing, with deposits accounting for almost 90% of total liabilities. The potential risk of deposit outflows is mitigated by the small share of deposits of non-residents and the significant share of insured deposits (see Chart 23, central and right-hand panels). It should be noted that insured deposits account for around 50% of total liabilities and 60% of total deposits, which is higher than the euro area average (40% of total liabilities). The majority of deposits (around 93%, excluding Revolut Bank UAB, where the deposits of non-EU residents account for as much as 98% of total deposits) are deposits of Lithuanian residents, while a significant portion of the non-resident deposit portfolio consists of deposits attracted through deposit platforms from residents of other EU countries.

The banking sector’s liquidity buffers remain high, and their funding sources are resilient to fluctuations in global financial markets.

Chart 23. Banking sector’s share of liquid assets and funds with central banks (left-hand panel), share of non-residents in the deposit structure (central panel), and share of insured deposits in the structure of liabilities (right-hand panel)

Dalintis:

Sources: Lietuvos bankas and ECB.

The system of banks and central credit union groups[45]

[45] The following institutions are included in the assessment of liquidity of credit institutions: AB Fjord Bank, Finora Bank UAB, AB Mano bankas, AB SEB bankas, AB Artea bankas (formerly AB Šiaulių bankas), European Merchant Bank UAB, United Central Credit Union Group, Lithuanian Central Credit Union Group, PayRay Bank, UAB, Saldo Bank UAB, Swedbank, AB, Revolut Bank UAB, UAB GF bankas, UAB SME Bank, UAB Urbo bankas.

has maintained significant liquid asset reserves. The liquidity coverage ratio[46]

[46] The LCR reflects the ability of a credit institution to meet its 30-day liquidity requirement, taking into account cash inflows, outflows, and reserves of liquid assets.

(LCR) of the system reached its highest level since April 2024 (at 420% in February 2025) and exceeded the regulatory requirement of 100%[47]

[47] The LCR value must not be below 100%, i.e. a credit institution's reserves of liquid assets must not be lower than net cash outflows over 30 calendar days of the stressed period.

by more than four times. If Revolut Bank UAB, which has a very high liquidity ratio due to its specific business model, were to be excluded, the system’s LCR would be lower (292% in February 2025), but would still be significantly above the requirement.

Stress tests of the liquidity of banks and central credit union groups showed that credit institutions in Lithuania are able to withstand potential short-term liquidity shocks.[48]

[48] For more information on the methodology for LCR stress tests, see the 2024 Financial Stability Review of Lietuvos bankas, while the assumptions for the adverse scenario are presented in the 2023 Financial Stability Review of Lietuvos bankas

Following a decline in the value of liquid assets and a sharp increase in deposit withdrawals, the system’s LCR during the test period from March 2024 to February 2025 would have been significantly lower, but still at least twice as high as the regulatory requirement (excluding Revolut Bank UAB, the LCR of this system would have fallen to 134%, see Chart 24, left-hand panel). Although, historically, two credit institutions would have slightly breached the regulatory requirement over a one-year period, their LCR would not have fallen below the 90% threshold, and in the last five months all credit institutions would have exceeded the 100% requirement in the adverse scenario. In the event of a liquidity shock, the main channel of vulnerability for credit institutions remains the contraction of deposits, which are the main source of bank funding. Additional liquidity buffer adequacy testing, which assesses only potential deposit withdrawals, showed that the reserves of liquid assets of banks and central credit union groups would be sufficient to cover approximately 44% of the decrease in deposits (32% excluding Revolut Bank UAB, see Chart 24, central panel).

Credit institutions are prepared to withstand longer-term liquidity shocks through their cash flow management. An analysis of the cash flow management of the system of banks and central credit union groups helped assess the ability of credit institutions to maintain sufficient liquidity in a scenario of a possible three-month increase in liquidity needs.[49]

[49] For more information on the methodology used for the cash flow analysis and assumptions underlying the adverse scenario, see the 2024 Financial Stability Review of Lietuvos bankas.

The test results indicate that the liquid asset reserves of this system would decline most significantly in the first month after the liquidity shock, but no credit institution would use them all up. Furthermore, signs of recovery would already be visible after three months, and by the end of the year liquidity buffers would almost return to their initial levels (see Chart 24, right-hand panel).

The system of banks and central credit union groups is characterised by a high degree of resilience to liquidity shocks, with most credit institutions able to withstand them with a margin.

Chart 24. LCR distribution in the system of banks and central credit union groups (left-hand panel), decline in deposits that credit institutions could withstand (central panel), and changes in the ratio of liquid assets to total assets under a three-month liquidity shock scenario (right-hand panel)

Sources: Bank data and Lietuvos bankas’ calculations.

Note: The minimum LCR distribution in the left-hand panel and the deposit decline distribution in the central panel show the breakdown of the minimum LCR and deposit decline values of individual credit institutions that would be required to use up their liquid assets over a one-year period from March 2024 to February 2025.

1.6.Trends in the non-banking sector

The assets of credit unions operating in Lithuania increased in 2024, with particularly rapid growth in deposits, but the sector still needs to strengthen its resilience to shocks. The assets of the credit union sector grew by almost 13% during the period concerned and amounted to €1.6 billion at the end of the year, or 2.2% of the banking sector’s assets. The most significant part of credit union assets (73%) consisted of loans, the majority of which (66%) continued to be credit to households, but lending to legal entities grew faster (17%) than lending to individuals (6%) for the fourth consecutive year. At the same time, loan quality indicators deteriorated slightly in 2024, with the share of non-performing loans of credit unions[50]

[50] Non-performing loans include unimpaired loans overdue for more than 60 days and impaired loans.

increasing from 12% to 16%. Nevertheless, the sector’s capitalisation level remained relatively high, with the CAR declining only slightly to 18% over the period. This indicator was positively affected by the sector’s total profit of €14.4 million generated last year (down by 18% from 2023). One of the main reasons for the decline in profits was higher interest expenses. Deposits accepted by credit unions amounted to €1.3 billion at the end of 2024, with an annual growth rate of 19%. In summary, although the credit union sector has so far successfully weathered the challenges posed by the geopolitical situation and its adverse effect on the economy, strengthening capital, operational efficiency, and resilience to economic shocks (see Section 1.5.1 for more details) remain the priority objectives for the sector.

In 2024, pension funds in Lithuania increased the volume of managed assets to 9.4% of the total assets of the financial system (see Chart 25, left-hand and right-hand panels). For the second year in a row, the assets managed by growing pension funds increased significantly (21%) to €9 billion. The growth of pension funds was driven by the growing number of active participants (the number of participants in 2024 increased by 3.9% compared to 2023, with more active participation in the third pillar) and the increased success of investments, as last year’s average return of pension funds was 17%. Pension funds invested mostly (over 82%) in CIU units. Overall, the pension fund market in Lithuania grew steadily in 2024, but amendments to the pension fund system under consideration for 2025–2026 could significantly reduce the number of contributors and assets managed by pension funds.

The value of assets managed by investment funds increased by a fifth over the year, driven by both the growing number of fund participants and the rapid growth in the value of managed assets. At the end of 2024, investment funds managed a total of €3.5 billion in assets (of which €2 billion was managed as investments in RE, with the remainder mainly in the form of shares and bonds). The sector’s growth was supported by a large influx of new participants into the funds: for instance, the number of participants in CIUs and CIUFIIs rose by 63% and 17%, respectively, in 2024. Positive investment returns also increased the volume of assets under management, with the average value of fund units increasing by 20%, and the units of funds investing in equities saw the highest increase (36%). Overall, the investment fund sector is developing sustainably, and the low prevalence of open-ended investment funds significantly reduces the level of risk to the financial system (see Box 3 for more details).

In 2024, the volume of total assets managed by all types of financial institutions increased to over €100 billion.

Chart 25. Assets of financial institutions (left-hand panel), and share of financial institutions in the financial sector as a whole (right-hand panel)

Source: Lietuvos bankas.

Notes: The financial account data used exclude non-financial assets as well as holding companies. Financial auxiliaries include insurance brokers and agents, pension fund and CIU management companies, operators of crowdfunding and peer-to-peer lending platforms, etc. Other financial intermediaries include financial leasing companies, factoring companies, venture capital companies, etc.

In 2024, the insurance sector in Lithuania maintained its growth trend, with assets increasing by 7.5% over the year to almost €2 billion and the sector’s resilience remaining high. Total investment in the insurance sector grew by 8%, with no changes in the investment structure. Government securities accounted for almost 50% of investments, and investments in shares and CIUs accounted for slightly more than 33%. Compared to 2023, the largest increase was in investments in shares and CIUs, while the total amount of time deposits fell by the largest margin. The number of insurance contracts concluded during the year rose by 4%. In 2024, there were no loss-making insurance companies and the sector’s total profit for the year increased by 36.6%. The majority of the profit (more than 67%) was earned by non-life insurance companies whose insurance portfolios consisted mainly of property insurance in terms of insurance premiums (motor vehicles, housing, etc.). All insurance companies met solvency capital requirements: compared to 2023, solvency ratios remained stable and stood at 1.5 in the non-life insurance sector and 2 in the life insurance sector in 2024. Overall, the insurance sector remained resilient and diversified in 2024 and continued to strengthen its role in the Lithuanian financial system.

The fintech sector continued to grow, with the decline in the number of market participants offset by the expansion of existing companies in the sector. Despite the decline in the number of participants in the sector (from 125 to 119), the financial capacity of fintech companies continued to grow significantly in 2024: compared to the previous year, the sector’s income from licensed activities increased by a quarter (see Chart 26, left-hand panel), slightly more than half of the companies in the sector were profitable, and the value of payment transactions amounted to €152 billion, up 33% over the year. However, the total value of payments sent and received by the sector still accounted for a relatively small share of the total financial system and stood at 5.2% at the end of 2024 (a decrease of 3.7 percentage points from the end of 2022). The majority of payment transactions in the sector were international: the share of international payments sent and received by EMIs and PIs accounted for 17.9% of total international payments in the financial market at the end of 2024. The increasing maturity of institutions in the sector is demonstrated by the fact that, for the first time, all institutions complied with the own funds requirements at the end of the year (CAR was above 1.1), while the ratio for eight institutions ranged between 1 and 1.1.

The supervision of client payments related to higher-risk areas and financial activities as well as the prevention of possible violations remain a significant challenge for the sector. Lithuanian fintech companies continue to actively serve residents of foreign countries: they accounted for 88% of the number of clients, and the value of their transactions amounted to 67% of the entire fintech sector in 2024. Although there are not many non-resident clients involved in high-risk activities in the fintech sector (only 0.3% of all non-resident clients and 6% of legal entities), the value of their transactions accounted for 34% of the total value of the transactions of non-resident clients in the sector in the fourth quarter of 2024.[51]

[51] Around 17% of the value of payments relates to other financial institutions, 5% each to lottery and gambling and IT marketing services, and 4% to the provision of virtual asset services.

With russia’s ongoing war against Ukraine and other conflicts in various regions of the world, the share of payment transactions in the fintech sector related to the Commonwealth of Independent States has been growing. Therefore, given this geopolitical environment, special attention is paid to ensuring that service providers comply with the instructions on the implementation of international sanctions.

The crypto-asset sector in Lithuania is in a transitional period, with more applications being submitted for operating licences, while the risks posed by the sector’s lack of maturity are mitigated by its limited links with the banking sector. Although the requirements of the EU MiCA Regulation entered into force on 30 December 2024, some additional requirements have applied since 30 June 2024. As a result of these changes and other additional requirements, the sector shrank from 588 service providers in mid-2024 to 374 companies at the end of the year (see Chart 26, right-hand panel). Most EU countries, including Lithuania, decided to apply a transitional period during which institutions in the sector could apply to Lietuvos bankas for licences. Although the application process was sluggish at the beginning of the year, 20 applications had already been filed by March, and up to 40 applications are expected by the end of the transitional period on 1 June 2025. The sector’s lack of maturity, the risk of fraud, and the evasion of sanctions remain the most pressing challenges for the financial system. There is growing interest among households in Europe in purchasing crypto-assets, and the increasing availability of regulated products related to crypto-assets may encourage traditional financial market participants to invest there in the future. However, the link between the crypto-asset sector and the banking sector remains limited in Lithuania and across Europe, while the implementation of the MiCA Regulation will contribute significantly to increasing the resilience of institutions in the sector and preventing risks.

The fintech sector has continued its financial expansion, while the crypto-asset sector has been affected by a reduction in the number of service providers and a transitional period for licensing.

Chart 26. Income of fintech companies from licensed activities and number of licences (left-hand panel), and number of crypto-asset service providers in Lithuania (right-hand panel)

Sources: State Data Agency and State Enterprise Centre of Registers.

Note: In the left-hand panel, Revolut Payments UAB is no longer a member of this sector as of 1 July 2022 and is classified in the banking sector as Revolut Bank UAB.

2.Improving financial stability

Since 2014, Lietuvos bankas has been given a macroprudential policy mandate to strengthen 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 27) and regularly reviews the levels of these measures. Lietuvos bankas also actively seeks to respond to factors hindering the efficiency of 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.

2.1. Application of macroprudential measures

Applicable capital buffers increase the resilience of banks to unforeseen shocks, and RLR measures protect consumers from being overburdened by financial liabilities.

Chart 27. Macroprudential policy measures applied in Lithuania

* The exemption to this requirement will only be granted in cases where the outstanding amount of each previously taken loan is lower than 50% of the value of housing purchased using that loan.

Following a regular review in the second half of 2024, Lietuvos bankas decided to maintain the same 2% sectoral systemic risk buffer rate. This buffer took effect on 1 July 2022 for banks and central credit union groups with housing loan portfolios exceeding €50 million and is calculated as 2% of the amount of retail exposures to natural persons resident in the Republic of Lithuania, secured by residential RE.[52]

[52] Currently the requirement is applicable to AB SEB bankas, Swedbank, AB, AB Artea bankas (formerly AB Šiaulių bankas), UAB Urbo bankas as well as the Lithuanian Central Credit Union and the United Central Credit Union groups.

Following a regular biennial review, the decision was made not to change the buffer rate in view of the recovery of housing credit and house price growth after a short-term slowdown and the persistence of structural risks: the high share of housing loans in the overall loan portfolio (over 44% at the time of the review) and the overvaluation of house prices (7.6% at the time of the review). Stress testing showed that, in the event of a shock, losses in the housing loan sector would reach and slightly exceed the combined capital buffer requirement[53]

[53] The combined capital buffer requirement is the sum of all applicable macroprudential capital buffers (capital conservation, countercyclical, O-SII, and systemic risk).

for the respective housing portfolios. Thus, the capital buffer requirements for housing portfolios with the current level of the sectoral SRB rate are deemed to be appropriate in view of potential losses. Also, with high bank profitability and relatively high capital levels above the requirements, maintaining the current sectoral SRB level will not adversely affect lending to the economy and is therefore conducive to preservation of the accumulated capital reserve. It should be noted that Lithuania has an average level of combined capital buffer requirement compared to other European countries (see Chart 28, left-hand panel). All banks meet the existing requirements with a margin of safety (see Chart 28, right-hand panel).

Lithuania has an average level of combined capital buffer requirement compared to other European countries, while the banks meet the existing requirements with a margin.

Chart 28. Spread of the combined capital buffer requirement across European countries[54]

[54] The levels of combined capital buffer requirement for specific banks within a country vary depending on the nature and significance of their activities.

(left-hand panel), and the development of macroprudential capital buffers and other capital requirements in Lithuania (right-hand panel)

Dalintis:

Sources: European Systemic Risk Board and Lietuvos bankas.

Note: In the left-hand panel, the spread of the combined capital buffer illustrates the distribution of macroprudential capital requirements applicable to individual banks operating in specific countries. The lower distribution value indicates the value of the bank with the lowest combined capital buffer requirement in that country, while the upper value indicates the value of the bank with the highest combined capital buffer requirement in that country.

As interest rates begin to recede, the average LTV and DSTI ratios for new housing loans are moving closer to their long-term averages. In addition, this scenario causes interest expenses to account for a progressively smaller share of monthly loan payments, allowing a larger share to be allocated to loan repayment, which enables households to borrow more even if their income remains unchanged. In January–February 2025, the average DSTI for new housing loans was 29.9%, down 2 percentage points from December 2023, when the DSTI reached its highest level in the last interest rate hike cycle (see Chart 29, central panel). With interest expenses declining and the DSTI requirement becoming less of a factor limiting the maximum available loan, households can borrow more and purchase the same housing by contributing less of their own funds. In January–February 2025, the LTV of new housing loans was around 74.2%, up 2.5 percentage points from December 2023, when the lowest LTV level since the start of the interest rate hike cycle was observed (see Chart 29, left-hand panel).

As 2024 saw interest rates decline, the flow of second and subsequent housing loans increased. In 2024, the annual growth of the flow of new second and subsequent housing loans reached around 18% (see Chart 29, right-hand panel), and these loans accounted for around 21% of the total flow of new housing loans in January–February 2025, up around 8 percentage points from the average flow of 2024. The DSTI of residents taking out a second or subsequent loan is often higher than that of residents taking out their first loan, and they are more sensitive to changes in interest rates, so when interest rates start to fall, it is likely that some residents seeking to take out a second loan may be able to borrow larger amounts.

As interest rates declined, the LTV and DSTI of new housing loans in 2024 approached the levels prevailing before the interest rate increase.

Chart 29. LTV ratio of new housing loans (left-hand panel), DSTI ratio (central panel), and loan flow by number of loans and housing units (right-hand panel)

Dalintis:

Source: LRDB.

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

On 1 February 2025, amendments to the Republic of Lithuania Law on Real Estate Related Credit came into force, enabling residents to refinance their housing loans under a simplified procedure.[55]

[55] More detailed information on the refinancing procedure is available on the website of Lietuvos bankas.

The refinancing of housing loans has not been common in Lithuania historically. According to the survey of consumers and financial institutions conducted by Lietuvos bankas, this process was significantly hampered by refinancing costs, the complexity of the process, and a lack of information. Even when the market situation was favourable when the median housing loan margins fell significantly due to increasing competition after peaking in 2020, the scale of refinancing and renegotiation with the same lender for a lower margin remained very limited. The lack of consumer mobility meant that this market segment was less efficient and opportunities for consumers to save money were not exploited.

Legal amendments initiated by Lietuvos bankas have created favourable conditions for the mobility of housing loan holders and strengthened their bargaining power when renegotiating with lenders on the terms of existing loans. Following the entry into force of the amendments, the refinancing process has become simpler for consumers (lenders are required to exchange the necessary information directly, without involving the consumer) and free of charge (lenders can no longer charge their fees and must cover the fees charged by third parties such as notaries and registries) in most cases. The simplification of refinancing is also already having a significant impact on the ability of consumers to seek a reassessment and reduction of the interest rate on their existing housing loan without changing their credit provider. Initial lenders, knowing that the customer does not face significant obstacles to refinance their housing loan with another lender, often have an interest in retaining the existing customer and renegotiating loan terms to be more favourable for consumers. Thus, the balance of bargaining power has shifted significantly in favour of consumers, which is conducive to stronger competition among lenders.

On 1 May 2025, amendments to the Republic of Lithuania Real Estate Related Credit came into force, requiring lenders to offer customers at least two types of interest rates when offering housing loans: a variable rate and fixed rate for at least five years. This requirement applies to lenders with a housing loan portfolio of more than €50 million, and the different interest rate options must be tailored to the individual (or joint borrowers). This requirement will ensure that consumers have a real, rather than theoretical, choice of the type of interest rate that is most acceptable to them. The amendments to this law also stipulate that lenders will have to regularly (on the date of the loan interest rate change) inform borrowers about the prevailing lending conditions on the market. These regulatory requirements, together with the approved simplified refinancing procedure, help address inefficiencies in the housing loan market due to structural and other reasons and ensure better consumer protection in the financial services sector, as well as sustainable contribution of the financial system to economic growth.

Box 4. Simplified procedure for refinancing housing loans

Residents are actively taking advantage of the opportunities offered by the simplified refinancing procedure, which has led to a significant increase in the volume of loan renegotiations and refinancing. Since February 2025, when the amendments to the Republic of Lithuania Law on Real Estate Related Credit came into force, there has been a significant increase in the number of both renegotiations with current lenders and loans refinanced at other banks. The volume of renegotiations in February and March jumped by more than 50% compared to January, with more than 10,000 loans with a total value of over €700 million renegotiated, accounting for 5.4% of the total housing loan portfolio. Compared to the monthly average of last year, the volume of renegotiations increased by several times. This trend has been observed since the beginning of 2024, when the amendments to the refinancing procedure were initiated. Since then, almost a fifth of the total housing loan portfolio has been renegotiated. In February, compared to January, the number of refinanced loans increased threefold, and in March it doubled again and was four times higher than the monthly average of 2024. As the refinancing process itself may take some time, it is likely that the impact of the refinancing processes initiated in February and March will become more apparent in the coming months.

By refinancing their loans and renegotiating with current lenders, consumers significantly improved their housing loan terms. In February–March 2025, consumers renegotiated their loan terms and reduced their margins by 0.3–0.35 percentage points on average, which will allow them to save up to €4,000 on average over the entire loan period. Residents who refinanced their loans also significantly reduced their margins (by an average of 0.5 percentage points) and will be able to save up to €7,000 on average over the entire loan period. In total, more than 25,000 consumers already took advantage of loan refinancing or renegotiation on more favourable terms between 2024 and March 2025, which will save them a total of €150 million over the entire loan period (see Chart A).

Since 1 February, more than 10,000 consumers have refinanced their housing loans or renegotiated their terms with their current lenders.

Chart A. Impact of changes to the simplified refinancing procedure

Dalintis:

Source: Lietuvos bankas.

Abbreviations

AB public limited liability company

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

CAR capital adequacy ratio

CCyB counter-cyclical capital buffer

CIU collective investment undertaking

CMC Capital Market Council

CRE commercial real estate

DSTI ratio debt service-to-income ratio

EC European Commission

ECB European Central Bank

EMI electronic money institution

ESCB European System of Central Banks

EU European Union

fintech financial technology

FMP financial market participant

GDP gross domestic product

HICP Harmonised Index of Consumer Prices

IMF International Monetary Fund

IT information technology

LB RSHPI repeat sales house price index of Lietuvos bankas

LRDB Loan Risk Database

LTV loan-to-value ratio

MFI monetary financial institution

MiCA Regulation Markets in Crypto-Assets Regulation

PF pension fund

PI payment institution

PSP payment service provider

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

UK United Kingdom

USA United States of America

Gedimino pr. 6, LT-01103 Vilnius

www.lb.lt

The Financial Stability Review looks at the developments in the banking sector, companies and households and the situation in RE markets, identifies the key risks and challenges that could affect the operation of Lithuania’s financial system, especially banks, and the financial system’s ability to withstand shocks. The material presented in this review is the result of statistical data analysis, modelling and expert assessment. The review is prepared by Lietuvos bankas.

The cut-off date for the data used in the publication is 1 May.

Reproduction for educational and non-commercial purposes is permitted provided that the source is acknowledged.

ISSN 1822-5241 (online)

Financial Stability Review (2025)

1.5.1.Bank solvency situation and resilience

2.Improving financial stability