OREANDA-NEWS. On October 01, 2008 A report of the Bank of Lithuania on the implementation of its primary objective, performance of its functions, and the state of the banking system this year was delivered to the Seimas of the Republic of Lithuania, reported the press-centre of Bank of Lithuania.

While delivering the report, the Chairman of the Board of the Bank of Lithuania, Reinoldijus ?arkinas commented on the topicalities of the global and Lithuanian economies, reviewed the development and stability of domestic commercial banks.

“While the global financial market situation has been quite tense, the functioning of Lithuania?s interbank market is sufficiently normal, as the recent shocks have not had any marked direct effect on the Lithuanian banking system”, the Chairman of the Board of the Bank of Lithuania said.

He presented data that the domestic banks’ investment in the US bank “Lehman Brothers” made up EUR 2.94 million, which accounts for a very insignificant share of the assets of the domestic banking system. The banks had not invested in the crisis-struck financial instruments.

Reinoldijus Sarkinas emphasised that the banking sector was a very sensitive financial link; banks operate in the market together with other financial sector participants, and problems faced in securities or insurance markets may also negatively affect the banking system.

One major factor, which reflects the ability of banks to cover potential losses, is the bank capital adequacy ratio. Currently, the capital adequacy ratio of the banking system is quite high - 12 per cent, and the minimum ratio established by the Bank of Lithuania is 8 per cent. In the current situation, banks would be able to assume additional asset risk in the amount of LTL 24.4 billion. Given the international financial market situation and the slowdown in credit growth, banks are likely to give up any notable asset risk, Reinoldijus ?arkinas said.

He pointed out that the Bank of Lithuania, without prejudice to the capital adequacy ratio, would be able to cover potential losses by about LTL 1.9 billion of its available capital.

While credit growth has become weaker, the operation of the banking system has remained profitable. Over 8 months of the current year, banks earned profits 19.6 per cent higher year on year. Banks are likely to continue directing the largest portion of their profits earned for strengthening their capital base in the form of reserves (98.5% directed in 2007).

Reinoldijus Sarkinas mentioned that while financing is likely to become more expensive, this should not raise particular concerns for bank subsidiaries operating in Lithuania so far. On the other hand, banks need to consider the possibilities for their financial risk diversification and look for alternative sources of financing.

The Chairman of the Board of the Bank of Lithuania informed members of the Seimas that in the near future meetings with the management of each commercial bank were envisaged, during which the present financial situation, the issues of risk management and particularly of liquidity would be discussed.

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

The text of the report is made available on the website of the Bank of Lithuania.