Bank of Lithuania introduces new macro-prudential policy instrument

Bank of Lithuania
DELFI / Kiril Čachovskij

As of 30 June 2015, the applicable buffer rate will be 0 percent, Lithuania’s central bank reports.

“This is an additional measure to ensure that the banking system can absorb losses during the downswing of the financial cycle without constraining the flow of credit to the economy. Every quarter, the Bank of Lithuania, after assessing whether there is a build-up of system-wide risks associated with excessive credit growth, will set an appropriate countercyclical capital buffer rate. Since currently there are no signs of the excessive credit growth, even to the contrary – the credit portfolio continues to shrink, it was decided to establish a 0 percent rate,” said Tomas Garbaravičius, member of the Board of the Bank of Lithuania.

The countercyclical capital buffer rate is applied to banks’ exposure, but not to individual institutions. Thus this requirement also directly affects bank branches’ and foreign banks’ lending in Lithuania. If bank branches or banks operating in Lithuania lend to Lithuanian residents, and a rate not above 0 percent is established in Lithuania, they will have to apply it to those positions. If banks lend abroad, they will have to apply the countercyclical buffer rate applicable in those countries.

According to Garbaravičius, if sustainable credit growth were identified in Lithuania, this buffer rate would be increased up to 2.5 percent and, where appropriate, more, in order to accumulate sufficient capital buffer against potential losses of banks and to mitigate the contraction in credit volumes during the crisis period.

As of 1 January, 2016, the countercyclical capital buffer rate will have to be applied by all EU member-states.

In addition to the countercyclical capital buffer rate of 0 percent, a capital conservation buffer requirement of 2.5 percent will be applicable to Lithuanian institutions as of 30 June, 2015; its aim is to enhance the banking sector’s overall resilience to potential losses.

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