IMF Issues Reports Under 2019 Article IV Consultation with Lithuania

The staff report highlights that the financial system remains profitable, well-capitalized, and liquid, with no signs of emerging imbalances. Financial soundness indicators are strong while capital adequacy ratios continue to exceed requirements. The composition of the loan portfolio has increasingly shifted toward mortgages. The favorable economic conditions have contributed to further improving asset quality, with nonperforming loans remaining below the EU average. High profitability is the evidence of bank efficiency being among the highest in EU. Nonetheless, spillovers from real-estate-related vulnerabilities in the Nordic parent banks remain a potential risk. These vulnerabilities improved in 2018, as the housing prices stabilized and the Swedish authorities implemented new mortgage-related macro-prudential policies and increased CCyB. There is a concern that the high concentration in the banking system may be hindering competition. At the end of 2018, seven banks and nine foreign branches were operating, with the three largest banks accounting for 84% of system assets. This level of concentration is relatively high for Europe, albeit not for some small economies similar to Lithuania.

Macro-prudential policy is being used proactively to address systemic risks. The Bank of Lithuania (BoL) has sole responsibility for, and a broad set of, countercyclical, sectoral, and liquidity macro-prudential instruments to tackle a variety of shocks and has been proactively using them. Most banks have large and rising liquidity buffers, given the high deposit growth. The pace of corporate loan growth has moderated but the growth in mortgages remains relatively high. Banks, households, and non-financial corporates have become less vulnerable and more resilient to shocks through deleveraging. Cross-sectoral exposures have also decreased, reducing contagion risks. The authorities have been proactive in developing a fintech industry. With an innovation-friendly business environment, good and improving ease-of-doing-business and technological infrastructure, Lithuania is placing itself as an attractive host of fintech platforms. In 2018, out of the 170 fintech companies operating in Lithuania, 74 were payment service providers, 45 were in lending and banking business, and 18 in blockchain. The authorities are taking a number of steps to facilitate the development of fintech, including the following:

• Providing licenses to fintech companies. In addition to e-money and payment services licenses, the authorities introduced the concept of a “specialized bank” in 2017, with similar functions as a brick-and-mortar bank, but with lower initial capital requirements. In addition, through the 2016 law on crowdfunding, they support the creation of advisory and investment services.
• Supporting the infrastructure for payment services. BoL provides low-service-fees access to the Single Euro Payments Area.
• Fostering innovation through a regulatory sandbox. This allows market participants to test financial innovations in a real environment for a limited time. Moreover, BoL is creating a blockchain sandbox and promoting open banking.
• Reducing red tape through simplified procedures for establishing fintech companies.

Going forward, increased competition is expected in the financial sector, particularly from fintech platforms. Competition is also expected to increase from fintech companies, particularly on payment services, albeit there is also activity on lending and advisory services. The BoL has issued four specialized banking licenses over the last year. Lithuanian banks are increasingly concentrating their business on traditional banking for residents while fintech companies are likely to focus on nonresidents, given the access to the entire EU market and the small size of the Lithuanian market.

Related Links

• Staff Report
• Selected Issues Report

Keywords: Europe, Lithuania, Banking, Article IV, Systemic Risk, CCyB, Fintech, Macro-Prudential, Bank of Lithuania, IMF