Lithuania’s financial system could withstand a series of international and domestic shocks, including a sudden deep recession according to the chairman of Lithuania’s central bank.
“Banks can withstand large shocks. Our stress tests shows that even if the economy was struck by a sudden and deep recession, and the number of insolvent borrowers increased significantly, the banks would still have sufficient capital to absorb the losses,” said Chairman of the Board of the Bank of Lithuania, Vitas Vasiliauskas.
In a hypothetical scenario where export markets collapsed, domestic demand contracted and domestic real estate fell over two consecutive years the economy would contract by around 5% but Lithuania’s banks would be able to withstand the shock.
“Under this scenario, the banking sector would face a loss of around €650 million,” said Vasiliauskas, but he said the country’s banks have enough capital to withstand such a shock.
Vasiliauskas said that Lithuania’s banking sector faced four major risks, the Nordic real estate bubble, low interest rates, a failing in Lithuania’s credit union sector and the threat to cyber security.
“If the bubble exploded, it would affect the volume of credit available in Lithuania,” he said.
With continuing low interest rates. “Bank interest income fell significantly. Obviously, this is a challenge,” said Vasiliauskas. Lithuanian banks may have to rethink their business models and find new strategies.