Role of the Bank of Lithuania in maintaining financial stability
What is macroprudential policy?
We contribute to the safeguarding of stability of the financial system by implementing macroprudential policy, the goal of which is to enhance the resilience of the financial system and reduce the formation of systemic risk, thereby seeking to ensure a sustainable contribution of the financial sector towards economic growth.
The global financial crisis clearly demonstrated what a significant negative impact financial instability can have on a country’s economic growth and employment. Seeking to diminish the possibility of financial crisis formation, the EU restructured the institutional and regulatory framework for financial sector’s supervision.
One of the key components of this reform is explicit granting of the mandate for macroprudential policy implementation to the responsible authorities in each EU country.
Since 2014 macroprudential policy in Lithuania is carried out by the Bank of Lithuania which was granted a sole responsibility to conduct macroprudential policy by the Law on the Bank of Lithuania.
The primary objective of macroprudential policy is to contribute to the safeguarding of stability of the financial system, including enhancement of the resilience of the financial system and reduction of the formation of systemic risk, thereby seeking to ensure a sustainable contribution of the financial sector towards economic growth.
Macroprudential Policy Strategy
1. to limit and prevent excessive credit growth and leverage;
2. to limit and prevent excessive maturity mismatch, excessive currency and liquidity risk in the financial system;
3. to limit the concentration of assets or other direct and indirect exposures of financial services companies;
4. to limit misaligned incentives of systemically important financial institutions to take excessive risk, with a view to reducing their moral hazard;
5. to strengthen the resilience of financial market infrastructure.
Macroprudential policy instruments
|Instrument||Objective of instrument||Level||Valid from||Legal acts||Related documents|
|Loan-to-value ratio (LTV)||To limit the excess credit risk assumed by financial institutions and develop a responsible borrowing practice by preventing households from becoming overindebted, and thus creating conditions for sustainable credit growth||85%||
1 November 2011
|Debt service-to-income ratio (DSTI)||To limit the excess credit risk assumed by financial institutions and develop a responsible borrowing practice by preventing households from becoming overindebted, and thus creating conditions for sustainable credit growth||40%||
1 November 2011
|Loan maturity||To limit the excess credit risk assumed by financial institutions and develop a responsible borrowing practice by preventing households from becoming overindebted, and thus creating conditions for sustainable credit growth||30 years||
1 November 2015
|Stress test/sensitivity test||50%||1 November 2015|
|Countercyclical capital buffer||To hold a sufficient capital buffer to cover potential bank losses in case of cyclical systemic risk or during an economic downturn||0%||
30 September 2021
Capital buffer of other systemically important institutions (O-SII buffer)
|To increase the resilience of other systemically important institutions in Lithuania to shocks and reduce the probability of their bankruptcy||
(1.0–2.0% from 31/12/2021)
31 December 2016
(by 31/12/2021 AB Šiaulių bankas has to accumulate a higher capital buffer of 1 per cent (instead of the currently applicable 0.5 per cent). Capital buffer requirements set for other banks have to be already accumulated)
|Sectoral systemic risk buffer||To increase financial system resilience in the event of a higher risk of housing market overheating and to reduce the formation of imbalances in the housing loan market||2% of the amount of risk-weighted retail exposures to natural persons in the Republic of Lithuania, which are secured by residential real estate||1 July 2022||Resolution (66.2 KB download icon)|
|Capital conservation buffer||To obligate banks to accumulate additional capital to cover unexpected losses||2.5%||30 June 2015||Resolution (375.5 KB download icon)|
|Assessment of the impact of transactions on systemic risk||To prevent the transactions between banks and banking groups that would increase concentration in the credit institutions sector to an extent that would pose a systemic risk to financial stability||Assessed individually||1 November 2021||
Republic of Lithuania Law on Banks (Article 771)Resolution
Financial stability monitoring
We aim to ensure that credit institutions operate in a competitive yet stable environment. Hence, we strengthen the resilience of both individual credit institutions and the entire domestic financial system to internal and external economic shocks as well as ensure effective allocation of scarce financial resources.
We supervise credit institutions and payment systems, assess potential threats to effective and continuous functioning of credit institutions, conduct surveys of financial market participants, as well as collect and analyse statistical and other information. In cooperation with Lithuanian and foreign institutions, we offer tools that help avoid and mitigate threats to the stability of the financial system.
Analysis of the main risks to the stability of Lithuania’s financial system is presented in the Financial Stability Review, published on an annual basis.