Last week the Bank of Lithuania announced that banks operating in Lithuania and central credit union groups will have accumulate additional capital buffer, i.e. counter-cyclical capital buffer (CCyB). Such a decision was made by the Board of the Bank of Lithuania, which set the CCyB rate of 1%, bringing it back to pre-pandemic levels.
The timing is right, as the effect of the potentially adverse economic effects have not yet shown up on the balance sheets of banks. NPLs are said to be at lowest levels recorded, while the effects of the COVID pandemic have, for the most part, dissipated for many Lithuanian companies.
What is the effect on banks in the short term? Besides the nudge from Bank of Lithuania to be more cautious, this will push the banks to additionally accumulate around EUR 118 million of capital, i.e. around one third of the banks’ annual profits (as calculated by Bank of Lithuania). According to the estimates of Bank of Lithuania economists, the increase in the CCyB rate in the current circumstances will not have a significant impact on crediting and interest rates. In the short term, lending to businesses could slow down by up to 2.5 percentage points and that to households by 1 percentage point, while interest rates on loans would remain broadly unchanged. In addition, the increased CCyB rate would automatically apply to foreign bank branches and foreign banks lending cross-border in Lithuania.
Finally, banks will have a year’s time to make necessary adjustments, as the 1% CCyB rate will come into effect in October 2023.
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