OREANDA-NEWS. On June 15, 2009 A report of the Bank of Lithuania on the implementation of its primary objective, performance of its functions, and the situation of the banking system (May 2009) was presented to the Seimas of the Republic of Lithuania (hereinafter - the report), reported the press-centre of Bank of Lithuania.

While delivering the report, the Chairman of the Board of the Bank of Lithuania Reinoldijus Sarkinas commented on the issues of the global and Lithuania’s economies, reviewed the development and stability of domestic commercial banks.

The report notes that the economic recession rapidly reduces cyclical imbalances that increased in several recent years, and the inflation changes quickly. In the nearest years, deflation will create conditions in labour and goods markets for the wages to return to the level that corresponds to productivity and will ensure long-term open sector competitiveness in export markets.

When reviewing the operation of the banking sector, Mr. Reinoldijus Sarkinas stated that the trends of decline in bank assets and liabilities were already noticeable at the end of 2008. In the first quarter of 2009, the rate of decline in major indicators (with the exception of deposits) was higher than in the last quarter of 2008: assets shrank almost by 2 per cent to LTL 88 billion and loans granted to customers by 3.5 per cent to almost LTL 69 billion. The amount of deposits held with banks declined by 4.7 per cent to LTL 38.2 billion in 2008, whereas in the first quarter of 2009 they decreased by a further 0.6 per cent to almost LTL 38 billion.

Bank operations brought losses for the second consecutive quarter. The loss suffered in the first quarter of 2009 was determined by a significant rise in losses related to loan impairment and lower net interest income. The deterioration of bank loan portfolio quality indicators was related to deteriorating financial situation of borrowers, disrupted or overdue settlements among enterprises and the rising number of enterprise bankruptcies.

The report indicates that the Bank of Lithuania, taking into account the situation in the market, urged banks to pursue more conservative credit risk management and asked them to avoid allocation of the 2008 profit for the payment of dividends, when submitting proposals on profit allocation to general shareholders’ meetings, and instead leave it in banks for strengthening their capital base. Banks took into account the proposals of the Bank of Lithuania and none of them allocated profits for the payment of dividends. Instead, they directed the remaining undistributed profits to the strengthening of the capital base and accumulated additional reserves for covering potential losses. Banks also did not pay tantiemes to their governors.

In order to ensure stable and reliable functioning of the credit institution system during the period of economic crisis, the Bank of Lithuania continued credit institutions supervision based on preventive and prudential measures. For this purpose, during the supervisory review and assessment process of each bank the Bank of Lithuania assessed whether banks properly ensure risk management and have sufficient capital for risk coverage.

The Chairman of the Board of the Bank of Lithuania delivers reports at the Seimas of the Republic of Lithuania twice a year.