June 25, 2018

IMF published its staff report and selected issues report under the 2018 Article IV consultation with Republic of Lithuania. Directors acknowledged that the financial system is sound and that recent credit and housing market developments do not pose risks to financial stability. However, they encouraged the authorities to continue using macro-prudential policy proactively to address systemic risks and cooperating closely with home-country authorities of banks.

The staff report notes that the authorities are committed to preserving macroeconomic and financial stability. Maintaining financial stability will require close monitoring of housing and parent bank developments and proactive use of macro-prudential policy. The Bank of Lithuania (BoL) should make full use of its broad powers to tighten macro-prudential and supervisory policy to prevent a systemic-risk build-up. BoL has a broad set of countercyclical, sectoral, and liquidity macro-prudential instruments to tackle shocks and should continue using them proactively, as needed. In implementing the macro-prudential policy, the BoL should cooperate closely with the parent banks’ regulators to assess potential spillovers from vulnerabilities in parent banks. Cooperation in the Nordic-Baltic Stability Group (NBSG) should be further enhanced following the conclusion of an MoU on cooperation and coordination on cross-border financial stability earlier this year. Given the fluidity of global markets, the crisis simulation exercise—which includes ECB supervisors covering three quarters of the Lithuanian banking sector—should help ensure crisis preparedness and coordination. Finally, credit union reform, which is gradually strengthening the system, should continue as planned.

The selected issues report reviews Lithuania’s macro-prudential policy framework against international best practices. It finds that Lithuania possesses the powers and tools to manage systemic risks, although the benign post-crisis period offers limited scope for assessing the effectiveness of macro-prudential policy. Lithuania’s institutional framework for macro-prudential policy is strong. It gives BoL the sole responsibility and broad powers to conduct macro-prudential policy, including identification and analysis of systemic risks. The macro-prudential framework also gives BoL a clear objective: to contribute to the stability of the financial system, including strengthening the resilience of the financial system, and mitigating the build-up of systemic risk. Lithuania’s macro-prudential toolkit appears adequate. Lithuania’s systemic risks stem primarily from external shocks through trade channels and volatile financial conditions in the Nordics.

BoL uses the macro-prudential instruments including loan-to-value (LTV), debt service-to-income (DSTI), loan maturity, stress test/sensitivity test, countercyclical capital buffers (CCyB), other systemically important institutions buffer, and capital conservation buffer. Moreover, the macro-prudential policy in Lithuania has not been recalibrated frequently in recent years, given the benign environment that has prevailed after the crisis. Hence it is difficult to fully assess its effectiveness. The infrequent recalibration of macro-prudential policy reflects weak credit growth in the post-crisis years. Regarding the recent increase in the CCyB, BoL appropriately addressed the emergence of risks related to credit growth through broad-based tools (which affect all credit exposures) such as the CCyB. Still, the increase is unlikely to have a significant impact on bank behavior because most banks hold significant capital buffers. BoL also proceeded cautiously by phasing the cost of adherence to the new regulation. 

 

Related Links

Keywords: Europe, Republic of Lithuania, Banking, Article IV, Macro-prudential Policy, CCyB, Financial Stability, Systemic Risk, IMF

Related Articles
News

BCBS and IOSCO Extend Implementation of Final Phase of Margin Rules

BCBS and IOSCO agree to one-year extension of the final implementation phase of the margin requirements for non centrally cleared derivatives.

July 23, 2019 WebPage Regulatory News
News

APRA Proposes Stronger Remuneration Requirements in Australia

APRA is proposing to strengthen prudential requirements for remuneration across all APRA-regulated entities in the banking, insurance, and superannuation industries by issuing CPS 511, a new prudential standard on remuneration.

July 23, 2019 WebPage Regulatory News
News

PRA Consults on Availability of Group Own Funds Under Solvency II

PRA published a consultation paper (CP16/19) that sets out its proposed approach to the determination of the availability of subordinated liabilities and preference shares in group own funds.

July 22, 2019 WebPage Regulatory News
News

EIOPA Consults on Methodological Principles for Insurer Stress Testing

EIOPA published a discussion paper on the methodological principles for stress testing the insurance sector in EU.

July 22, 2019 WebPage Regulatory News
News

US Agencies Adopt Rule to Exclude Community Banks from Volcker Rule

US Agencies (CFTC, FDIC, FED, OCC, and SEC) adopted a final rule to exclude community banks from the Volcker Rule, in line with amendments to certain sections of the Economic Growth, Regulatory Relief, and Consumer Protection (EGRRCP) Act.

July 22, 2019 WebPage Regulatory News
News

US Agencies Adopt Amendments to Simplify Regulatory Capital Rules

US Agencies (FDIC, FED, and OCC) adopted a final rule that reduces regulatory burden by simplifying several requirements in the regulatory capital rules for banks.

July 22, 2019 WebPage Regulatory News
News

IA of Hong Kong Delegates Inspection and Investigation Powers to HKMA

HKMA and IA of Hong Kong jointly issued a statement announcing the delegation of the inspection and investigation powers of IA to HKMA, pursuant to the statutory regulatory regime for insurance intermediaries under the Insurance Ordinance.

July 19, 2019 WebPage Regulatory News
News

FSB Extends Implementation Timeline for Policy Recommendations on SFTs

FSB announced adjustments to the implementation timelines for its recommendations on securities financing transactions (SFTs), specifically those related to the minimum haircut standards for non-centrally cleared SFTs.

July 19, 2019 WebPage Regulatory News
News

EBA Single Rulebook Q&A: Third Update for July 2019

EBA published answers to six questions under the Single Rulebook question and answer (Q&A) tool this week.

July 19, 2019 WebPage Regulatory News
News

EBA Report Assesses Regulatory Framework for Fintech Activities

EBA published the findings of its analysis on the regulatory framework applicable to fintech firms when accessing the market.

July 18, 2019 WebPage Regulatory News
RESULTS 1 - 10 OF 3494