"The Bank of Lithuania has been closely monitoring the country's financial system and is ready to immediately employ all of its arsenal of macroprudential instruments in the event of systemic risks, for example, indications of unsustainable development of the credit market," says Tomas Garbaravicius, Member of the Board of the Bank of Lithuania.
The approved Macroprudential Policy Strategy lays down the main guidelines and principles for making and implementing macroprudential policy decisions. In implementing this policy, the central bank will apply macroprudential instruments to financial institutions taking into consideration the development of the economic and financial cycle.
For example, since July of this year it is intended to begin establishing counter-cyclical capital buffers – this will be done on a quarterly basis. This instrument will be aimed at accumulation by banks of an additional capital buffer at a time of strong (excessive) credit growth; it could be used for covering a bank's losses during a downturn. Hence, instruments not only will be tightened, but also mitigated or given up entirely, seeking that the country's financial system is stable and contributes to sustainable economic growth.
The approved Macroprudential Policy Strategy specifies more macroprudential instruments, for example, a financial institution's systemically important capital buffer, systemic risk buffer, liquidity requirements. If necessary, other additional requirements would be applied.
Some instruments for limiting systemic risks have been currently applied by the Bank of Lithuania. The Responsible Lending Regulations, approved in 2011, defined two significant macroprudential policy instruments encouraging credit institutions' responsible lending and consumers' borrowing practices, thereby helping to protect the credit and real estate markets from overheating: the maximum loan-to-value (LTV) ratio of 85% and the maximum debt-service-to-income (DSTI) ratio of 40%.
