Analytics, Banks, Direct Speech, Financial Services, Lithuania

Another systemic risk continues to be unfavourable development in the Nordic RE market, which through parent banks may negatively affect our domestic economy.

Meanwhile, an increasingly more threatening challenge is cybersecurity.

 ‘Both the growing economy and the new stress tests, showing how our banks would withstand potential shocks, prove that Lithuania’s financial sector is strong. However, we must stay alert on the back of rapidly growing credit and ensure that the lending policy bar is high. Banks should not forget their past experience, lessons that they have learnt, and having entered into the expansionary phase of the financial cycle, be prepared for possible challenges,’ said Vitas Vasiliauskas, Chairman of the Board of the Bank of Lithuania.

Over 2016, the volume of lending to households and corporates grew by more than 8%, exceeding the GDP growth rate by two times. Last year, the RE loan portfolio recorded most significant increases. Meanwhile, the quality of the loan portfolio was improving as well – the amount of bad loans reduced.

‘In Lithuania, the RE market is heating up, yet it is too early to talk about actual overheating. Nevertheless, if the RE market temperature were to exceed the safety margin, we are prepared to take immediate actions and limit too-risky RE market and lending development. We have all the necessary tools,’ said Mr Vasiliauskas.

Every year, the Bank of Lithuania performs stress testing of banks operating in Lithuania, indicating how they would hold up under unfavourable conditions. The latest calculations show that banks and the country’s entire financial system are resilient to shocks. If Lithuania’s GDP were to drop to 10%, export, income and consumption would decline significantly, while RE prices would fall by 17%, and banks would experience a loss of around EUR 730 mln. Despite this, the capital adequacy ratio would remain high, while the need for additional capital – low, amounting to EUR 3.1 mln. Such a need is linked to the smallest banks, which are advised by the Bank of Lithuania to strengthen their capital.

Negative consequences for Lithuania may be borne by the high and still-growing housing prices in Sweden and Norway and resident indebtedness. If RE prices in these countries were to suddenly drop significantly, the main channel which would affect Lithuania would be smaller lending volumes in our country. In addition, Lithuania might also see an increase in loan prices.

With information technologies evolving, and more and more services being provided electronically, the threat of cybercrime grows. In a May 2017 survey conducted by the Bank of Lithuania, financial market participants named it the greatest risk to the country’s financial system.

‘It is only natural that threats come hand in hand with technologies. Therefore, we must properly assess and prevent them. The Bank of Lithuania was first in the euro area to perform a comprehensive cybersecurity check of domestic banks. It was not mandatory; however, all key market participants agreed to participate. The results were satisfactory, yet we cannot drop our guard, as cybercriminals advance together with technology. For our part, we will continue to carefully assess the situation and investigate market participant preparedness for cyberattacks,’ said Mr Vasiliauskas.

Last year Lithuania’s financial system was reinforced by the increasing profitability of the banking sector. Compared to 2015, the profits of banks operating in Lithuania grew by 17 % in 2016, amounting to EUR 252.2 mln – banks managed to significantly reduce interest expenditure, their operational efficiency became one of the highest in Europe. Reducing of interest expenditure was underpinned by smaller deposit interest rates offered. 

Administrative expenses grew only slightly, but due to a more significant increase in income, the bank operational efficiency indicator improved.

The Bank of Lithuania publishes the Financial Stability Review on an annual basis. It is aimed at assessing potential risks to Lithuania’s financial system and identifying possibilities to withstand them.