Nordic bubble ‘a hazard’ to Lithuanian banking

Vitas Vasiliauskas, the president of the Bank of Lithuania, presented an overview of the country’s financial system on Tuesday, saying most commercial banks are in a good shape.

Vasiliauskas said that their capitalization is sufficient and the loan portfolio is healthy enough.

“If in 2010, about 15% of all loans were insolvent, the share now is only 5-6%. The number of insolvent mortgages is even lower, 2-3%. This indicates that the system is stable,” Vasiliauskas said.

He said there were four main sources of risks for Lithuania’s banking sector: the housing bubble in Sweden and Norway, the prolonged low interest rate environment, credit risks due to falling demand in export markets, and a sudden surge in risk premiums.

“Real estate prices continue to rise in Sweden, they grew some 15% last year. Over the past three years, the rise has been 36%. Where’s the risk in that? If the bubble bursts, it could affect crediting conditions in Lithuania,” Vasiliauskas said.

As many of Lithuania’s biggest commercial banks are owned by Scandinavian groups, the risk is that they may redirect funds to their home markets in case of an emergency.

On the bright side, according to Vasiliauskas, Lithuanian businesses are funding only 12% of their operations with bank loans and overall private debt in the country is much smaller than it was before the 2008 crisis, which reduces the exposure to the risks in Scandinavia.

Moreover, Lithuanian banks are preparing for possible risks in Scandinavia, reducing their dependence on mother companies, according to Vasiliauskas.