It aims to curb the concentration of banks in Lithuania: it cannot be “too big to fail”

This is foreseen in the draft Banking Law, which was adopted by the Seimas in early January for consideration by consensus. It proposes that the national central bank be empowered to assess mergers in light of their systemic risk and decide whether to grant consent.

As explained in the explanatory memorandum of the project, the concentration of banks may currently increase due to the ongoing reorganization of the bank through a merger; as well as through the acquisition of control or transfer of assets.

Edita Bačkieriūtė, chief economist of the Macroprudential Policy Division of the Bank of Lithuania, said that he initiated the project together with the Ministry of Finance because he saw the need to expand regulation in the area of ​​prevention of bank concentration to include more types of transactions than only full mergers.

“In practice, we have seen banks grow in other ways, such as through portfolio acquisitions, which has led to these new changes,” he told Delfi.

Under the new proposal, the supervisor could assess the change in systemic risk in the financial sector in all cases where the bank is reorganized through a merger, a significant acquisition of a bank’s assets (more than 1 percentage point) or the qualified capital stock of another bank. . and / or the acquisition of a stake in the voting rights.

“The proposed new powers should allow the Bank of Lithuania to prevent excessive growth in the concentration of the banking sector in the future, but this is not a means to change the current situation.

The Bank of Lithuania assesses concentration from the perspective of systemic risk for the financial sector, one of the key aspects of which is the so-called risk of formation of institutions that are too big to fail (due to the negative impact on the rest of the financial system).

The Competition Council continues to assess the impact of the concentration on competition, ”commented E. Bačkieriūtė.

He taught that the Bank of Lithuania has other tools to manage the already existing systemic risk arising from the high concentration of banks, that is, additional capital requirements (up to 2% of risk-weighted assets) are established for more institutions. large: systemically important banks. , thus increasing the resilience of these banks.

“Also to reduce concentration in the Lithuanian financial services market, the Bank of Lithuania, together with other institutions, has been making consistent efforts to systematically promote the activities of other financial market participants that could create a competitive counterbalance for the large banks.

For example, the category of specialized banks focused on retail services has been legalized and the legal framework for non-bank fintech payment service providers and alternative financers, such as mutual lending or crowdfunding platforms, has been improved.

At the same time, the credit union sector was reformed and strengthened. We are already seeing the results: these market segments have grown significantly in recent years, ”said a representative of the Bank of Lithuania.

Banks are not opposed

Eivilė Čipkutė, president of the Lithuanian Banking Association, said she had no comment on the draft.

“It is intended to provide an additional function to the supervisory authority, that is, the Bank of Lithuania.

We believe that the proposal to entrust the evaluation of the transactions of financial market participants to the competent authority that supervises this area is consistent and reasoned, ”he said.

The explanatory memorandum for the project also mentions that the Lithuanian banking sector has historically been highly concentrated.

“In recent years, a further increase in bank concentration has been observed: according to Bank of Lithuania data for the second quarter of 2019, the share of the assets of the two largest banks by assets increased from 56.8 % in year. up to 61.1 percent.

With the merger of the large banks and the withdrawal of some players from the banking sector, the number of large market participants has decreased and concentration has increased. The Lithuanian banking sector is currently the third most concentrated in the European Union after Estonia and Greece.

Furthermore, as a result of increased concentration, mortgage rates, which were among the lowest in the euro area in 2015, have risen almost one and a half times in 4 years and are now significantly higher than in the euro area (Similar trends are observed in the non-financial business sector).

The high concentration in a given market has a direct impact on systemic risk, which, together with other emerging macro risk factors, can have a negative impact on financial stability ”, says the document.

According to the Bank of Lithuania, there are currently five authorized banks in the Republic of Lithuania: SEB, Swedbank, Šiaulių bankas, Medicinos Bankas and PayRay Bank.

Eight banks in the European Union and the European Economic Area have branches in the country: Luminor, Citadele, Danske Bank, Inbank, Corporate Bank, Bigbank and PayEx Sverige.

There are also five specialized banks: GF Bank, Mano Bank, Revolut Bank, Fjord Bank and European Merchant Bank.