OREANDA-NEWS. June 25, 2010. The Bank of Lithuania Board approved the Financial Stability Review 2010, wherein much attention is devoted to the analysis of key internal and external threats risks to the stability of the national financial system, surveys evaluation of the financial standing of borrowers position of bank debtors households and non-financial undertaking corporations and to the assessment of the banking system resilience readiness to act under highly an unfavourable macroeconomic environment, reported the press-centre of Bank of Lithuania.

When performing its functions, the Bank of Lithuania aims at a competitive but stable environment for credit institutions of our country. However, the financial system stability also depends on the development of the national economy, stance in global financial markets, fiscal policy pursued by the government and other factors.

The Review notes that the banking system of Lithuanian banking system has successfully adjusted to was capable of accommodating to a changed macroeconomic environment successfully and has resolved of resolving arising problems independently, regardless of incurred losses caused by because of an aggravating deteriorating loan portfolio quality of given loans and shrinking falling net interest income.

”A deteriorating financial position of enterprises in 2009, curtailing falling household income, increasing rate of unemployment and stagnation in real estate market were the main factors that contributed to behind the large losses of the banking system incurred in 2009” commented Mauricas, Deputy Head of the Financial Stability Division. 

According to the Review authors, the next year should bring higher stability promises for the Lithuanian financial system a higher level of stability because of an improved situation in global financial markets, forecasted better growth prospects for Lithuanian economy as well as the economies growth of economies of the main export partners and attempts of the government to stabilize the situation of public finances.

The financial system stability is also strengthened by additional liquid assets and capital reserves accumulated by banks. Corporate credit risk is expected not to grow further on. However, a high level of unemployment and shrinking household income in 2010 may be behind an increase of cases of household insolvencies in 2010. In the context of a recovering national economy, lending volumes and bank income are expected to increase, although the bank profitability will depend in the future on the capability of a proper diversification of the loan portfolio and financing of perspective business sectors.

In order to assess the domestic banking system resilience to unfavourable shocks, the Bank of Lithuania performs carries out individual bank level and system level stress testing exercises of both, individual banks and of the overall banking system on a regular basis.

This year, the possible effects of during testing a possible a double economic down turn dip recession, characterised by falling exports, rising interest rates and decreasing real estate prices, has been assessed risk to the stability of the national financial system stability seen in narrowing exports, rising interest rates and decreasing real estate prices, was assessed. Stress tTesting results reveal that the banking system liquidity risk has mitigated and that accumulated capital reserves are sufficient to cover possible credit risk losses in the case of an unfavourable economic development scenario. Notwithstanding this, the maintenance of adequate a required level of capital reserves remains an important banking business priority because of still foreseen material loan portfolio impairment losses.

Financial stability reviews are published by the Bank of Lithuania once per year since 2006. The main Financial Stability Review objective is to identify both, internal and external threats to the domestic financial system, to evaluate the system’s ability to withstand the effects of unfavourable internal and external shocks and to foresee adequate response methods. determine proper reaction measures.

The importance of the disclosure of stress testing results to the public as an instrument for the creation of a safer, stronger, more transparent and responsible financial system, was stressed by heads of states of the European Union.