“The results of stress testing revealed that Lithuania’s financial system currently has strong immunity to various shocks: its capital holdings are solid and the liquid asset cushion is safe enough. Nevertheless, although the financial system is healthy, some smaller-sized credit institutions, seeking to better prepare for potential unpleasant surprises, will have to find additional capital,” claimed Vitas Vasiliauskas, Chairman of the Board of the Bank of Lithuania.
The Bank of Lithuania tested the resilience of the banking system, taking into account potential internal and external risks. Taking them into account, adverse theoretical scenarios were modelled: how financial institutions would withstand an export or economic downturn, how they would manage a sharp drop in deposits.
The stress testing results showed that the banking sector has sufficient capital and is resilient to economic shocks. Nonetheless, in order to meet capital requirements, some banks would need to increase it. On a system scale, this need would account for an insignificant share (0.8 percent) of the banking sector’s capital. While testing the liquidity status of banks, it was identified that, even where customers would withdraw significant amounts of deposits, all banks would meet the required indicators with a reserve.
Lithuania’s financial system is resilient to Greek issues, as its direct economic and financial relations with this country are not close.
In terms of the potential impact of internal factors on financial stability, the persisting high debts of municipalities in Lithuania and imbalances in the development of credit unions are to be seen as challenges. The highest risk for the activities of the latter stems from significant investment in debt securities. With adverse fluctuations in the cost of this investment, the need for credit unions to attract additional capital would increase much more.
The Bank of Lithuania holds the view that a bubble is not forming in another area, relevant for financial stability – the real estate market.
“While there had been fears before the adoption of the euro, the housing market did not heat up. As the construction of new houses is sufficiently intensive, we continue to observe more of those willing to sell their housing than of those willing to buy it in the market. Although we forecast moderate market growth, we continue to closely monitor the situation and, where appropriate, we are ready to apply preventive measures,” says Vasiliauskas.
According to him, to enhance banks’ preparedness for covering likely losses, the Bank of Lithuania joined other European countries and, as of 30 June 2015, begins to apply a capital conservation buffer of 2.5 percent, which will be used concurrently with the currently established capital adequacy requirement of 8 percent. On 30 June the Bank of Lithuania will start using another instrument, applicable to banks – the countercyclical capital buffer, which will help prevent credit bubbles from inflating. The application of this measure in the country begins half a year earlier than provided in the Credit Requirements Directive. The requirement will be established on a quarterly basis, taking into account the credit market situation. Under normal conditions, the amount of this buffer will vary between 0 and 2.5 percent. Another requirement will be introduced in 2017 – the capital buffer for systemically important institutions. Its purpose is to enhance the resilience of systemically important institutions to potential shocks. This reserve could reach up to 2 percent of all the risk-weighted assets. The amendments to the Responsible Lending Regulations also come into effect on 1 November of this year to reduce the possibility of over-indebtedness and increase the resilience of bank customers to likely interest rate increases.