Abstract
Lithuania showed strong economic growth with low inflation owing to its sound economic policies. Executive Directors commended this development, and appreciated Lithuania for signing the European Union Accession Treaty. They encouraged the authorities to maintain macroeconomic stability and accelerate structural reforms. They welcomed the efforts of the Bank of Lithuania to implement Financial Sector Assessment Program recommendations. They emphasized the need for energy and transport privatization, the modernization of the agriculture sector, and streamlining of the legal framework to enhance transparency, governance, and the overall business environment.
I. Introduction
1. The mission1 conducted a follow-up assessment of issues examined during the November 2001 mission of the Financial Sector Assessment Program (FSAP). This report reviews the developments in the financial markets, including the foreign exchange, money and securities markets; provides an overview of conditions in the banking system; and presents a factual update of progress in implementing recommendations put forth in the assessments of the Basel Core Principles for Effective Banking Supervision and of the International Association of Insurance Supervisors Insurance Core Principles.
2. The mission met with the authorities at the Bank of Lithuania, the Ministry of Finance, commercial banks and the Commercial Bankers’ Association, and the National Stock Exchange of Lithuania. The mission would like to thank all of its counterparts, and in particular the officials of the Bank of Lithuania and the Ministry of Finance, for their excellent cooperation and hospitality.
II. Summary of Findings
3. With the privatizations of the banking sector finalized, the banking system has exhibited steady strengthening since the FSAP. The Bank of Lithuania’s supervisory oversight and careful monitoring of loan quality have contributed to the increased soundness of banking prudential indicators, well-capitalized banks, improved bank profitability, and falling non-performing loans.
4 Measures recommended by the FSAP report as part of the Basel Core Principles (BCP) for Effective Banking Supervision have been largely implemented in the new draft Law on Banks. The draft Law addresses concerns noted in the BCP assessment, incorporating new powers as well as further strengthening existing capacities of the BoL in its supervisory and regulatory capacity. The draft Law incorporates measures to enhance the BoL’s ability to detect and prevent money laundering and financial crimes by strengthening inspections, bank reporting requirements, and cooperative efforts amongst financial and law enforcements agencies.
5. The mission welcomed the discontinuation of the government’s savings securities program. Originally intended to attract the public into the capital markets, it has not served to deepen financial markets, and with past high, administered rates of interest, has instead detracted from savings in the banking system. The cost to the government in terms of commissions, above-market effective returns on securities and the risk of sudden encashment made this an expensive means of raising financing and deepening capital markets.
6. Financial markets in Lithuania have continued their expansion and development while remaining stable. The foreign exchange market has grown considerably since the FSAP and is the most well-developed of the markets, characterized by high turnover, expanding competition and narrowing spreads. The money market remains the weaker of the markets, with limited trading among a few major banks. The Treasury bill market is growing in both breadth of participants and instrument maturities; however, activity is predominantly centered in the primary market, with relatively low and flat secondary market trading during the last two years.
7. Based on recommendations made in the assessment of the International Association of Insurance Supervisors (IAIS) Insurance Core Principles, a new draft Law on Insurance indicates that most of the concerns put forth in the IAIS assessment have been addressed; however, vulnerabilities remain in the insurance supervisory framework and in the supervision of pension funds. The draft Law considerably limits the financial independence SISA. The salary structure and employment of staff will remain determined by the Law on Civil Servants and, as a result, there is concern that salaries are not sufficient to retain highly skilled staff, such as actuaries, and the risk of high turnover remains. This is particularly worrisome in light of the added responsibility of pension fund supervision that will be given to SISA. In the interim period before pension funds are major institutions in the financial market, attention should be given to strengthening the insurance supervisory and legislative infrastructure—including issues arising from pension fund supervision—to ensure the sound oversight of both financial sectors.
III. Banking Sector
A. Background
8 The banking sector remains the largest component of Lithuania’s financial sector, with ten banks and four foreign branch banks. Total bank assets were about 34 percent of GDP as of end-2002. The banking system remains concentrated, although the degree of concentration is declining. The three largest banks held almost 73 percent of assets and almost 79 percent of deposits, as of April 1, 2003, down from 81 percent and 85 percent, respectively, in January 2001. Foreign ownership in the banking system comprised 88 percent of share capital as of April 1, 2003.
9. Lending activity is strongest in the economic areas of manufacturing and wholesale and retail trade, comprising 25 percent and 23.6 percent of total loans, respectively, during 2002, and retaining approximately the same shares through March 2003 (Table 1). The maturity structure of bank lending has also deepened, as the proportion of long-term loans (more than one year) has increased from 51 percent of loans granted, as of January 1999, to about 75 percent as of May 2003. Some banks estimate that 60 percent of loans exceed a maturity of three years; corporate loans of seven years (and a few to 10-12 years) and 25 to 40 year mortgages are now being offered.
Lithuania: Financial Soundness Indicators for the Banking Sector, 1998-2003
(In percent, unless otherwise indicated)
Group A (lower risk) includes in general countries with a rating of at least Aa3 by Moody’s Investor Service or at least AA by Standard & Poor’s, FitchIBCA, or Thomson BankWatch. Groups B (medium risk) and C (high risk) include other countries.
Only transactions in euros and U.S. dollars.
only residents
average daily spread for o/n interbank transactions among residents, per year (quarter)
Lithuania: Financial Soundness Indicators for the Banking Sector, 1998-2003
(In percent, unless otherwise indicated)
| Dec-98 | Dec-99 | Dec-00 | Dec-01 | Dec-02 | Mar-03 | |||
|---|---|---|---|---|---|---|---|---|
| Capital Adequacy | ||||||||
| Regulatory Tier-1 capital / risk-weighted assets | 19.0 | 13.0 | 12.7 | 12.7 | 14.7 | 15.2 | ||
| Total regulatory capital / risk-weighted assets (CAR) | 23.8 | 17.4 | 16.3 | 15.6 | 14.3 | 14.7 | ||
| Total regulatory capital / total assets | 13.9 | 9.9 | 9.2 | 9.4 | 9.9 | 10.2 | ||
| Number of banks with CAR less than 15 % | 0 | 1 | 1 | 4 | 6 | 3 | ||
| Asset Quality | ||||||||
| Sectoral distribution of loans to total loans * | ||||||||
| Manufacturing | 23.9 | 30.2 | 28.4 | 25.6 | 25.0 | 25.6 | ||
| Wholesale and retail trade | 22.1 | 23.0 | 23.8 | 24.3 | 23.6 | 23.7 | ||
| State administration and defense, obligatory social security | … | 6.5 | 9.9 | 8.7 | 5.0 | 43 | ||
| Financial intermediation | 8.3 | 7.4 | 7.9 | 10.9 | 12.4 | 14.4 | ||
| Electricity, gas, and water supply | 63 | 11.5 | 8.6 | 8.3 | 8.5 | 7.1 | ||
| Transport, communication, hotels, and restaurants | 5.9 | 8.4 | 7.5 | 8.2 | 7.7 | 7.5 | ||
| Real estate and leasing | 3.0 | 2.7 | 5.5 | 6.2 | 8.0 | 7.5 | ||
| Construction | 2.7 | 3.5 | 3.5 | 3.3 | 4.6 | 4.8 | ||
| Agriculture, hunting, forestry, and fishing | 4.8 | 4.5 | 2.2 | 1.8 | 2.5 | 2.4 | ||
| Geographical distribution of loans to total loans | ||||||||
| Group A countries 1/ | … | … | 99.38 | 99.99 | 99.90 | 99.97 | ||
| Group B and C countries 1/ | … | … | 0.62 | 0.01 | 0.10 | 0.03 | ||
| Foreign exchange loans to total loans | 52.2 | 59.2 | 65.1 | 59.3 | 48.4 | 48.1 | ||
| Foreign exchange liabilities to total liabilities | 45.4 | 52.9 | 52.6 | 50.1 | 41.2 | 40.3 | ||
| Nonperforming loans to total gross loans | 12.9 | 12.5 | 11.3 | 8.2 | 6.5 | 5.3 | ||
| Nonperforming loans net of provisions to total capital | 22.8 | 38.8 | 34.0 | 25.0 | 24.6 | 19.5 | ||
| Loan loss specific provisions/total loans | 6.15 | 4.67 | 3.91 | 18.2 | 1.2 | 1.1 | ||
| Large exposures to capital | … | … | 106.6 | 196.7 | 194.7 | 190.5 | ||
| Number of banks with credit exposures above 25 percent of capital | 2 | 2 | 0 | 0 | 0 | 0 | ||
| Connected lending / total capital | 3.1 | 2.5 | 2.4 | 28 | 2.1 | 2.4 | ||
| Gross asset position in derivatives to capital | 57.7 | 27.0 | 123.2 | 144.7 | 175.4 | 159.0 | ||
| Gross liability position in derivatives to capital | 55.6 | 25.9 | 126.3 | 144.3 | 168.6 | 146.4 | ||
| Spread ** between highest and lowest interbank rate LTL | 1.4 | 2.2 | 1.6 | 1.3 | 1.2 | 1.3 | ||
| Spread ** between highest and lowest interbank rate FX 2/ | 0.2 | 0.4 | 0.1 | 0.0 | 0.1 | 0.1 | ||
| Spread between reference lending and deposit rate * LTL | 6.0 | 8.1 | 8.1 | 5.4 | 5.0 | 4.7 | ||
| Spread between reference lending and deposit rates FX | 6.0 | 7.1 | 6.2 | 4.0 | 3.9 | 3.2 | ||
| Trading and foreign exchange gains / total income | 9.4 | 4.6 | 6.9 | 4.9 | 6.8 | 7.0 | ||
| Customer deposits / total non-interbank loans | 128.7 | 124.3 | 152.8 | 156.9 | 145.1 | 136.1 | ||
| Total loans / total assets | 44.16 | 48.84 | 41.87 | 41.06 | 44.8 | 48.0 | ||
| Management | ||||||||
| Expenses in revenues | 91.8 | 98.0 | 95.3 | 101.1 | 87.9 | 79.5 | ||
| Personnel expenses / non-interest expenses | 42.2 | 36.5 | 37.1 | 35.9 | 39.0 | 42.0 | ||
| Earnings per employee (thousands of Litas) | 115.9 | 138.3 | 154.8 | 150.3 | 167.0 | 40.9 | ||
| Earnings and Profitability | ||||||||
| Return on average assets | 0.9 | 0.2 | 0.5 | -0.1 | 1.0 | 1.6 | ||
| Return on average equity | 11.9 | 1.3 | 5.0 | -1.2 | 9.8 | 14.1 | ||
| interest margin to gross income | 349 | 41.7 | 36.8 | 35.9 | 38.0 | 37.6 | ||
| Noninterest expenses to gross income | 66.7 | 69.1 | 62.5 | 71.6 | 68.4 | 61.8 | ||
| Liquidity | ||||||||
| Liquid assets to total assets | 36.6 | 27.5 | 32.3 | 33.3 | 30.2 | 27.1 | ||
| Liquid assets to short-term liabilities | 51.0 | 37.6 | 41.0 | 39.9 | 36.3 | 32.7 | ||
| Funding volatility ratio (volatility-liq.assets/liquid assets) | 40.9 | 47.1 | 49.6 | 54.9 | 59.6 | 57.5 | ||
| Demand deposits to total liabilities | 44.0 | 38.1 | 38.2 | 40.5 | 43.1 | 42.8 | ||
| Sensitivity to Market Risk | ||||||||
| Net open position in foreign exchange / total capital | -3.8 | 6.0 | 3.8 | 1.9 | -1.5 | 10.9 | ||
| Net open position in equities / total capital | 13.6 | 18.6 | 15.6 | 13.9 | 12.3 | 11.7 | ||
Group A (lower risk) includes in general countries with a rating of at least Aa3 by Moody’s Investor Service or at least AA by Standard & Poor’s, FitchIBCA, or Thomson BankWatch. Groups B (medium risk) and C (high risk) include other countries.
Only transactions in euros and U.S. dollars.
only residents
average daily spread for o/n interbank transactions among residents, per year (quarter)
Lithuania: Financial Soundness Indicators for the Banking Sector, 1998-2003
(In percent, unless otherwise indicated)
| Dec-98 | Dec-99 | Dec-00 | Dec-01 | Dec-02 | Mar-03 | |||
|---|---|---|---|---|---|---|---|---|
| Capital Adequacy | ||||||||
| Regulatory Tier-1 capital / risk-weighted assets | 19.0 | 13.0 | 12.7 | 12.7 | 14.7 | 15.2 | ||
| Total regulatory capital / risk-weighted assets (CAR) | 23.8 | 17.4 | 16.3 | 15.6 | 14.3 | 14.7 | ||
| Total regulatory capital / total assets | 13.9 | 9.9 | 9.2 | 9.4 | 9.9 | 10.2 | ||
| Number of banks with CAR less than 15 % | 0 | 1 | 1 | 4 | 6 | 3 | ||
| Asset Quality | ||||||||
| Sectoral distribution of loans to total loans * | ||||||||
| Manufacturing | 23.9 | 30.2 | 28.4 | 25.6 | 25.0 | 25.6 | ||
| Wholesale and retail trade | 22.1 | 23.0 | 23.8 | 24.3 | 23.6 | 23.7 | ||
| State administration and defense, obligatory social security | … | 6.5 | 9.9 | 8.7 | 5.0 | 43 | ||
| Financial intermediation | 8.3 | 7.4 | 7.9 | 10.9 | 12.4 | 14.4 | ||
| Electricity, gas, and water supply | 63 | 11.5 | 8.6 | 8.3 | 8.5 | 7.1 | ||
| Transport, communication, hotels, and restaurants | 5.9 | 8.4 | 7.5 | 8.2 | 7.7 | 7.5 | ||
| Real estate and leasing | 3.0 | 2.7 | 5.5 | 6.2 | 8.0 | 7.5 | ||
| Construction | 2.7 | 3.5 | 3.5 | 3.3 | 4.6 | 4.8 | ||
| Agriculture, hunting, forestry, and fishing | 4.8 | 4.5 | 2.2 | 1.8 | 2.5 | 2.4 | ||
| Geographical distribution of loans to total loans | ||||||||
| Group A countries 1/ | … | … | 99.38 | 99.99 | 99.90 | 99.97 | ||
| Group B and C countries 1/ | … | … | 0.62 | 0.01 | 0.10 | 0.03 | ||
| Foreign exchange loans to total loans | 52.2 | 59.2 | 65.1 | 59.3 | 48.4 | 48.1 | ||
| Foreign exchange liabilities to total liabilities | 45.4 | 52.9 | 52.6 | 50.1 | 41.2 | 40.3 | ||
| Nonperforming loans to total gross loans | 12.9 | 12.5 | 11.3 | 8.2 | 6.5 | 5.3 | ||
| Nonperforming loans net of provisions to total capital | 22.8 | 38.8 | 34.0 | 25.0 | 24.6 | 19.5 | ||
| Loan loss specific provisions/total loans | 6.15 | 4.67 | 3.91 | 18.2 | 1.2 | 1.1 | ||
| Large exposures to capital | … | … | 106.6 | 196.7 | 194.7 | 190.5 | ||
| Number of banks with credit exposures above 25 percent of capital | 2 | 2 | 0 | 0 | 0 | 0 | ||
| Connected lending / total capital | 3.1 | 2.5 | 2.4 | 28 | 2.1 | 2.4 | ||
| Gross asset position in derivatives to capital | 57.7 | 27.0 | 123.2 | 144.7 | 175.4 | 159.0 | ||
| Gross liability position in derivatives to capital | 55.6 | 25.9 | 126.3 | 144.3 | 168.6 | 146.4 | ||
| Spread ** between highest and lowest interbank rate LTL | 1.4 | 2.2 | 1.6 | 1.3 | 1.2 | 1.3 | ||
| Spread ** between highest and lowest interbank rate FX 2/ | 0.2 | 0.4 | 0.1 | 0.0 | 0.1 | 0.1 | ||
| Spread between reference lending and deposit rate * LTL | 6.0 | 8.1 | 8.1 | 5.4 | 5.0 | 4.7 | ||
| Spread between reference lending and deposit rates FX | 6.0 | 7.1 | 6.2 | 4.0 | 3.9 | 3.2 | ||
| Trading and foreign exchange gains / total income | 9.4 | 4.6 | 6.9 | 4.9 | 6.8 | 7.0 | ||
| Customer deposits / total non-interbank loans | 128.7 | 124.3 | 152.8 | 156.9 | 145.1 | 136.1 | ||
| Total loans / total assets | 44.16 | 48.84 | 41.87 | 41.06 | 44.8 | 48.0 | ||
| Management | ||||||||
| Expenses in revenues | 91.8 | 98.0 | 95.3 | 101.1 | 87.9 | 79.5 | ||
| Personnel expenses / non-interest expenses | 42.2 | 36.5 | 37.1 | 35.9 | 39.0 | 42.0 | ||
| Earnings per employee (thousands of Litas) | 115.9 | 138.3 | 154.8 | 150.3 | 167.0 | 40.9 | ||
| Earnings and Profitability | ||||||||
| Return on average assets | 0.9 | 0.2 | 0.5 | -0.1 | 1.0 | 1.6 | ||
| Return on average equity | 11.9 | 1.3 | 5.0 | -1.2 | 9.8 | 14.1 | ||
| interest margin to gross income | 349 | 41.7 | 36.8 | 35.9 | 38.0 | 37.6 | ||
| Noninterest expenses to gross income | 66.7 | 69.1 | 62.5 | 71.6 | 68.4 | 61.8 | ||
| Liquidity | ||||||||
| Liquid assets to total assets | 36.6 | 27.5 | 32.3 | 33.3 | 30.2 | 27.1 | ||
| Liquid assets to short-term liabilities | 51.0 | 37.6 | 41.0 | 39.9 | 36.3 | 32.7 | ||
| Funding volatility ratio (volatility-liq.assets/liquid assets) | 40.9 | 47.1 | 49.6 | 54.9 | 59.6 | 57.5 | ||
| Demand deposits to total liabilities | 44.0 | 38.1 | 38.2 | 40.5 | 43.1 | 42.8 | ||
| Sensitivity to Market Risk | ||||||||
| Net open position in foreign exchange / total capital | -3.8 | 6.0 | 3.8 | 1.9 | -1.5 | 10.9 | ||
| Net open position in equities / total capital | 13.6 | 18.6 | 15.6 | 13.9 | 12.3 | 11.7 | ||
Group A (lower risk) includes in general countries with a rating of at least Aa3 by Moody’s Investor Service or at least AA by Standard & Poor’s, FitchIBCA, or Thomson BankWatch. Groups B (medium risk) and C (high risk) include other countries.
Only transactions in euros and U.S. dollars.
only residents
average daily spread for o/n interbank transactions among residents, per year (quarter)
10. The Lithuanian banking system has exhibited a steady increase in confidence in the litas. Banking system2 assets held in litas have increased from 50.2 to 56.6 percent during January 2002-May 2003, while liabilities have increase from 55 to 64.7 percent over the same period, At the same time, and as noted above, the weakening of the dollar resulted in a move out of dollars and into Euros and during the same period, banking system assets denominated in euros rose from 12.5 to 26.5 percent, while the dollar’s share declined from 36.4 to 15.7 percent. Banking system liabilities experienced a similar but more moderate trend, with Euro liabilities increasing from 11.4 to 16.1 percent and dollar liabilities declining from 32.7 to 18 percent.
B. Banking Supervision
11. Since the FSAP assessment, banking system soundness has continued to improve. Regulatory Tier-I capital to risk weighted assets has increased steadily over recent years and the capital adequacy ratio (CAR) remains well above the 10 percent requirement set by the BoL (Table 1).3 Asset quality has also improved, as reflected in a decline in NPLs from 8.2 percent of total loans at the time of the FSAP to 5.3 percent as of March 2003, while the ratio of NPLs net of provisions to total capital declined from 25 to 19.5 percent over the same period. The difference between gross asset and liability positions in derivatives has widened since 2001 reflecting increased relations with foreign counterparts and parent banks overseas and the growing popularity of derivatives, particularly swaps.4 Banks’ net open position in foreign exchange to total capital has increased with the growing development and usage of the foreign exchange market, but remains well below the BoL’s 25 percent aggregate net open currency position limit. The mission recommended that these positions be supervised regularly by the BoL as the market progresses.
12. Following the bank privatizations and the necessary restructuring of portfolios, banks’ profitability improved modestly during 2002 and into the first three months of 2003, as reflected in the return on average assets, while return on equity grew more strongly. Banks are liquid, with assets to current liabilities remaining above the 30 percent BoL requirement. The decline in liquidity over recent years reflects the fact that when commercial banks were preparing for privatization, they were limited to more liquid investments. In the early period under the new ownership, banks’ lending practices were conservative. However, there has since been an increase in lending activity with the strong expansion in the economy. This change in liquidity is reflected in the growth of loans as a share of total assets and the corresponding decline in the ratio of liquid assets to total assets. The mission encouraged the BoL to maintain rigorous banking supervision in order to ensure financial sector stability, particularly in view of the rapid growth of money and credit.
13. Banking sector interests have also been expanding as banks have acquired ownership of insurance companies, with two of the three largest banks operating in the insurance sector. At present, there is room for some consolidation in the insurance sector-too many small firms to remain profitable given the size of the market. However, such a consolidation is not viewed by the BoL as a potential source of instability to the banks, as insurance companies represent a small proportion of banking interests
C. Basel Core Principles
14. Since the assessment of the Basel Core Principles (BCP) conducted as part of November 2001 FSAP, the Bank of Lithuania has implemented recommendations set forth in the FSAP assessment (Box 1). A draft Law on Banks will be submitted by the government to the parliament in the fall of 2003 that addresses the concerns noted in the BCP assessment and further strengthens the Credit Institutions Supervision Department (CISD) in its supervisory and regulatory capacity.5 The BoL has also undergone a Peer Review by the European Union of its banking supervisory capacities. Issues raised by the BCP assessment that remain are minor, but comply with EU directives. In addition, the CISD formulated an action plan for the banking sector as part of the Review.
15. The BoL has incorporated new banking supervisory and regulatory powers into the draft Law on the Banks, as well as strengthened previously established capacities. The draft Law includes additional requirements in granting licenses; regulating the establishment and activities of credit institutions through establishing prudential requirements and the accumulation of the information necessary to effectively supervise credit institutions; strengthening the legal capacities of the BoL in responding to bank distress; and introducing mandatory stress testing as part of financial statements for 2002. New regulations enable banks to develop their own rules on assessment and classification of doubtful assets and the formation of specific provisions, and banks now required submit to the BoL their bank rules, collateral valuations rules, and doubtful assets classification and specific provisions formations of the last reporting period by October 15, 2003. From September 2002, CISD bank examinations include the inspection of risk management in information technologies and electronic banking as well as the internal control system and operational risk management. Transparency has been enhanced through stricter publication requirements of credit institutions, in both quality and frequency of their publications.
Implementation of Recommendations from the Basel Core Principles Assessment (FSAP)
CP 1 Objectives, Autonomy, Powers and Resources
The Draft Law on Banks (Articles 43,44 and 46) includes more stringent requirements for: granting licenses, including additional background information on applicants; regulating the establishment and activities of credit institutions through more rigorous criteria on bank insolvency and the accumulation of the information necessary for effective supervision; strengthening the legal capacities of the BoL in responding to bank distress; the introduction of mandatory stress testing as part of financial statements for 2002; and the application of measures for those institutions with compliance failures. Art. 65 of the Draft Law provides for legal protection of BoL staff functioning in accordance with legal acts.
CP 3 Licensing Criteria
The Draft Law widens the statutory criteria for bank license applications, including requirements on internal controls, accounting systems, risk management system, security measures, operational plans, as well as on minimum capital and bank shareholders.
CP 4 Ownership
Art. 28 of the Draft Law gives the BoL the right to apply to the courts with the requirement that a shareholder sell his holdings to a person or persons as specified by the supervisory authority when the bank shareholder does not meet requirements as set out in law. The coercive sale of bank shares is regulated by the Civil Code.
CP 5 Investment Criteria
Art. 32 of the Law on Financial Institutions, adopted on September 10, 2002 (and in Draft Law Art. 25), sets forth requirements on a financial institution for evaluating and limiting risk arising from the investments into the capital or voting rights of other companies. In addition, Art. 7 sets criteria for the qualified portions of the authorized capital and/or voting rights of a financial institution. However, the BoL does not have the power to deny a bank’s acquisition of another financial institution. The BoL’s view is that its supervisory criteria, including those on bank ownership, provide sufficient safeguards.
CP 8 Loan Evaluation and Loan Loss Provisioning
On March 20,2003, the BoL approved new general regulations enabling banks to develop their own rules on assessment and classification of doubtful assets and the formation of specific provisions. Minimum requirements are established in the Bank Rules on Assessment and Classification of Doubtful Assets. The new resolutions come into effect as of December 31,2003, and by October 15, 2003, banks must furnish the BoL with bank rules, collateral valuations rules, and doubtful assets classification and specific provisions formations of the last reporting period, both according to the methods applied by the bank and according to the new methods developed by the bank.
Art. 31 of the Draft Law provides that the bank supervisory council must ensure an effective internal control system, including developing the monitoring and control system used for identifying, measuring and controlling risks; setting risk ceilings; and maintaining the clear assignment and performance of rights and responsibilities of staff. The BoL is currently drafting guidelines for operational risk management for bank boards.
CP 9 Large Exposure Limits
Resolution of the Board of the BoL No.91 On Maximum and Large Exposure Requirements (adopted July 4, 2002) reduced the maturity for interbank loans, for the purpose of large exposure limits, to 14 calendar days.
CP 10 Connected Lending
The Draft Law (Art. 51) has strengthened the assessment of risks of connected lending by requiring ceilings set by the supervisory council and requisite approval by the council of the conditions and procedures for such lending. As part of consolidated supervision of a financial group, Art. 52 permits the supervisory authority to set limits on connected lending to the parent company of the bank and companies controlled by the parent.
CP 12 Market Risks
The Draft Law on Banks provides that the BoL has the right to define individual bank limit requirements for a bank’s net open currency positions.
CP 13 Other Risks
The BoL requires stress testing by banks including interest rate gap calculations and the effects of operational and liquidity reduction risks and has approved the General Provisions for the Monitoring and Management of the Risk Involved in Electronic Banking, requiring banks to evaluate the monitoring and management of risks stemming from electronic banking services. Since September 2002, CISD examinations include the inspection of risk management in information technologies and electronic banking. The obligatory internal control system is regulated by Art 35 of the Draft Law, and fines may be imposed on a bank or its senior managers for violations.
CP15 Money Laundering
BoL examiners have participated in seminars abroad on anti-money laundering (AML) and Art. 4 of the Law on the Prevention of Money Laundering (March 28, 2002) states that the BoL issues methodological recommendations to banks on their AML responsibilities. CISD’s amended inspection manual provides AML measures, including a separate evaluation of a bank’s AML procedures and an evaluation of the bank’s customer identification capacity, i.e., “know your customer” principle.
The BoL participates in a working group on the prevention of money laundering that includes 14 financial, legal and law enforcement agencies and the Financial Crime Investigation Authority ensures day-to-day coordination among the members in accordance with the AML Law (Art. 6).
CP 20 Consolidated Supervision
The Law on Financial Institutions (2002) provides that if at least one of the financial institutions in a financial group is a credit institution, consolidated supervision is undertaken of the whole group with the right to receive all necessary information. The BoL may establish different capital adequacy ratios for the separate institutions in accordance with capital and risk distribution in the group. The Draft Law grants the BoL the right to inspect subsidiaries or controlling holding companies engaged in mixed activities if the whole financial group is subject to BoL supervision. The Regulations on Drawing up Consolidated Statements and Consolidated Supervision have been revised accordingly.
CP 21 Accounting Standards
The Key Principles on Financial Accounting and Reporting Policy of Credit Institutions were supplemented, requiring credit institutions to follow IAS and provide accounting and reporting policies regarding assets, property and liabilities, fair value methods, risk assessment and hedging methods, etc. Bank financial statements for 2002 were compiled in observance with IAS 39.
In February 2002, the resolution On Minimum Requirements for Public Information set minimum criteria on the disclosure of information and on the quality, content and frequency of its publication. At least quarterly (or after year-end), banks must disclose data of the parent bank and the consolidated bank group including the balance sheet, profit and loss statement, and key indicators of asset quality and profitability.
CP 22 Remedial Measures
The Draft Law (Art. 73) allows the BoL to apply enforcement measures to licensed banks and foreign bank branches, including penalties on the board, administration and managers of foreign bank branches.
CPs 24 and 25 Host Country Supervision and Supervision over Foreign Banks’ Establishments
The conditions for the application of penalties on banks are set forth in the Draft Law (Art.78) and are determined based on the nature of the violation. The BoL has signed cooperation agreements with all foreign supervisory agencies of banks operating in Lidiuania and has conducted joint inspections with Polish, Estonian and Latvian supervisory authorities. Cooperation agreements have been signed with authorities in Sweden, Poland, Belarus, Russia, Finland, Latvia, Estonia and Germany and permit joint bank supervision and exchange of information.
16. The BoL has also strengthened its ability to detect and prevent money laundering and Financial crimes by strengthening inspections, bank reporting requirements, and cooperative efforts amongst financial and law enforcement agencies. The Law on the Prevention of Money Laundering (March 28, 2002) empowers the BoL to issue methodological recommendations to banks on their anti-money laundering (AML) responsibilities and requires credit and financial institutions to appoint persons responsible for the implementation of measures for the prevention of money laundering and to liaise with the Financial Crimes Investigation Authority. CISD has amended its inspection manual to include a separate evaluation of a bank’s AML procedures, on-site inspection of the documentation for the opening of customers’ accounts, and an evaluation of the bank’s internal control procedures to ensure the proper customer identification capacity, i.e., “know your customer” principle. The BoL participates in a domestic working group on the prevention of money laundering, which includes 14 financial, legal and law enforcement agencies. The Financial Crimes Investigation Authority ensures day-to-day coordination with the members in accordance with the AML Law (Art. 6). BoL examiners have also participated in seminars and conferences abroad on anti-money laundering procedures.
IV. Securities Markets
A. Treasury Bill Auctions
17. Primary auctions of government securities are conducted weekly and have been progressively expanding as the government has extended the maturity structure of its borrowing. Government securities are offered in maturities of 6- and 12-month bills, and three, five, seven and 10 year bonds, of which the latter two maturities are the least frequently auctioned. Not all maturities are auctioned weekly and eligible maturities are rotated on a predetermined schedule made available to market participants. Participation is strongest in the shorter maturities. While all maturities tend to be oversubscribed, with maturities of up to three years significantly so, the 12-month bills see the most competition as exhibited in the tightest spreads across bids. There are six primary dealers—one brokerage firm and five commercial banks—that serve the retail market and stand ready to buy and sell across all maturities.
18. Commercial banks are the dominant purchasers, comprising 64 percent of the total market as of March 31, 2003, with insurance companies holding the next largest portion, at a significantly lower 17 percent share. Insurance companies are becoming an increasing presence in the market, especially in the longer maturities, holding 37 percent of the longest maturities and banks holding 31 percent The outstanding stock of government securities stood at LTL 2.4 billion at end-2002, sold almost entirely to residents. Thirty-five percent of outstanding securities will mature in two to five years, while 17 percent will mature in one to two years.
19. Despite the declining trend in nominal interest rates for treasury bills, interest rate movements since the February 2003 issue of 10-year treasury bonds indicate an increasing spread over base currency instruments of approximately 180 basis points, well in excess of the 60 to 70 basis points accounting for credit risk.6 One factor behind this trend seems to reflect the weaker demand for such a long maturity—banks’ portfolios do not match such a maturity structure and these bonds are less attractive. Conversely, insurance companies are the predominant purchasers of these long term bonds, reflecting the complementarity of their activities and long-term investments. In addition, some players base their bids on the results in the previous auction without gauging interest rate trends in the broader overseas market. As a result, competition does not yet seem significant enough to drive yields down and, based on the recent bidding, market players are unlikely to do it voluntarily. The government’s need to offer 10 year bonds to meet EU accession criteria is a factor that plays to the advantage of market players. This is of particular concern as the government can raise funds more cheaply abroad in the Eurobond market that it can at home, of which the domestic market should be made aware.
20. The mission believes that if the government were to utilize its primary dealer system to signal to the market that yields for 10-year bonds will gradually decline, these treasury bonds would still be an attractive option for purchase, in light of the limited alternative domestic instruments in which to invest. In this manner, the government would be able to ease its financing costs while continuing to deepen the domestic debt market. As banks’ portfolios lengthen in maturity, insurance companies expand their presence in the market and the eventual entry of pension funds, it would be expected to see further depth and competition in the longer term markets.
21. At present, final investors dominate the securities market and as a result, secondary market activity is small. The average number of weekly trades has remained unchanged over the last two years at 27-28 trades per week and an average weekly turnover of LTL 19 million in 2001, rising to LTL 26 million in 2002. At end-2002, total turnover in the secondary market was LTL 1.5 billion as compared to an outstanding stock of securities of LTL 2.7 billion, slightly down from the share of outstanding stock relative to 2001. While activity is still low, the growing presence of insurance companies, and the entry of pension funds in the future, have the potential to add depth and liquidity to the market and enable it to serve as a source for the pricing of securities.
B. Savings Securities
22. Following discussions with the authorities, the mission welcomed the discontinuation of the government’s savings securities program, as these securities do not fulfill the original intent of the instruments. The savings securities do not help deepen the financial markets as they cannot be traded and are a buy-and- hold instrument held to maturity. They are debt backed by the government, and as such, would be considered the safest of domestic instruments in which to invest, yet have traditionally been offered at rates higher than those on other riskier investments. Furthermore, there is a lack of transparency in the setting of interest rates for these instruments. While originally set in line with deposit rates, the interest rates on these securities are not market determined and, until very recently, set at rates above comparable bank deposit rates, competing with banks for savings. Of significant concern to the budget is that these instruments can be encashed at any time. If interest rates rise, the risk of encashment increases as other instruments become more attractive and the encashment could impose a significant cost on the budget. This cost is exacerbated by the substantial increases in the volume of recent purchases.7 Lastly, the combination of encashment risk, interest payments, and the government’s payment (to banks) of the buyers’ commission fees (only recently decreased from 1.5 to 0.7 percent of sales)8 make these a rather costly means by which the government raises financing and furthers financial market development.
23. The mission recommended that the government promote treasury bills as an alternative savings option for the public. As new issues of savings securities are ended, outstanding savings securities would be held until maturity for encashment with no option for rollover, resulting in the gradual redemption of the residual stock over the next three years. In addition, the shift to Treasury bills should be relatively straightforward as participation in the savings securities is similar to that of the t-bill market with respect to the administrative procedures required by banks and to the minimum purchase requirements of LTL 100.
V. Money and Foreign Exchange Markets
A. Foreign Exchange Market
24. The foreign exchange market is the most well-developed of the financial markets, supported by the strength and credibility of the currency board regime operating in Lithuania. Turnover in the foreign exchange market was approximately LTL 226 billion in 2002, increasing almost 170 percent from levels in 2001, an extraordinary increase over the 41 percent increase in turnover between 2000 and 2001. The first five months of 2003 had turnover of LTL 93.6 billion. Margins have narrowed and are on the order of 10 basis points, levels comparable to more developed markets. The dominant trading currency is now the Euro, comprising 83 percent of all trades. Transactions in US dollars have declined reflecting both the repegging and its recent weakening against the Euro, and now represent only 16 percent of foreign exchange trading, compared with 87 percent in 2001. Banks noted that foreign exchange trades are predominantly customer driven and that banks usually do not take positions in the market for themselves.
25. Non-cash trading dominates the market at 97 percent of all transactions, although spot transactions are still 87 percent of all non-cash trades. The remaining 13 percent took the form of foreign exchange derivative instruments, which are slowly increasing in usage, following losses resulting from unhedged US dollar positions in recent periods. Major banks actively promote hedging for customers subject to currency exposure and hedging arrangements are a slow but growing component of transactions with corporates.
26. Swaps account for 85 percent of foreign exchange derivatives instruments (LTL 26 billion in 2002), while outright forwards account for the remainder of the market. Furthermore, the foreign exchange swap market is the most frequently used means by which banks manage their liquidity, trading foreign exchange swaps for litas liquidity (although it should be noted that much of banks’ liquidity management is centralized in the parent company overseas).9 Options were popular throughout 2001, but have seen little market activity during 2002, as parent companies of some banks constrained the use of options for risk reasons. However, there is some evidence that interest is picking up in options, and some banks are examining the introduction of interest rate swaps and nondeliverable forwards in the future.
27. The interbank market for foreign exchange is dominated by the three major banks, comprising roughly 80 percent of the market. These banks have established credit lines amongst each other for unsecuritized lending. The smaller commercial banks, in contrast, operate similar to any other corporate client of the large banks, and have reduced credit lines and sometimes required securitization. Turnover in 2002 was LTL 8 billion, with overnight activity comprising about 80 percent of turnover. Derivatives account for over half of all interbank trades and are almost entirely comprised of swap transactions.
B. Interbank Market for Litas
28. In contrast to the foreign exchange market, which serves as the banks’ primary means of managing liquidity, banks’ liquid positions in litas have contributed to a weak interbank market. Turnover was LTL 14.7 billion in 2002 and was characterized by bid offer spreads on the order of 120 basis points. Overnight lending dominates the market, at LTL 8.7 billion or 77 percent of activity. Contracts with maturities of up to one week account for LTL 1.8 billion (15 percent), but there is little activity beyond a one month time horizon. No derivative instruments are offered in the money market.
29. The money market exhibits volatility in interest rates reflecting the fact that the market is thin with three banks dominating the activity. Fluctuations in government deposits impact on bank liquidity and exacerbate the volatility in interest rates in the interbank market. The authorities acknowledge the less liquid conditions in the money market, but recognize that banks predominantly use the foreign exchange market for managing their liquidity, as well as the litas market’s eventual disappearance with the accession to the EU and the adoption of the euro. Nevertheless, it would be desirable if Treasury balances were kept more stable and closer coordination between the government and the BoL in regards to the government’s financial flows would help to smooth these fluctuations.
VI. Insurance Sector and Insurance Supervision
30. As of end-December 2002, there were 31 insurance companies operating in Lithuania—nine life insurance and 22 non-life insurance. Three of the latter were only writing credit insurance. In 2002, insurance premiums amounted to LTL 773.8 million, growing about 62 percent in 2002, of which non-life insurance exhibited the stronger of the two. Insurance penetration remains small, as gross written premiums increased from one percent of GDP to 1.53 percent between 2001 and 2002 (of which life accounts for 28 percent and non-life for 1.25 percent of the total).
31 The insurance market is still highly concentrated in the three largest companies. In 2002, these companies comprised 62.4 percent of gross premiums in the non-life insurance market and almost 77 percent in the life insurance market. The share of foreign capital control in the insurance sector is 52 percent, of which Germany is the largest share at almost 18 percent, followed by Denmark and Poland.
32. The assessment of compliance with the International Association of Insurance Supervisors (IAIS) core supervisory principles undertaken during the November 2001 FSAP indicated weaknesses in the regulatory and supervisory practices of the insurance supervisory agency (SISA). Based on recommendations in the IAJS assessment, a new draft Law on Insurance is being formulated.10
33. Most of the concerns put forth in the IAIS assessment have been addressed in the draft Law reviewed by the mission and it is close to achieving the desired level of compliance. (Box 2) The supervisory powers of SISA11 have been strengthened, including tighter fit and proper tests and licensing criteria, a required internal audit service, and the establishment and confirmation by the directors of the independent risk management strategy of the insurance company. Procedures for monitoring, inspections and sanctions have been strengthened and a sanctions manual is being considered for development.
Implementation of Recommendations from the International Association of Insurance Supervisors (IAIS) Assessment
Organization of an Insurance Supervisor (CP 1)
The Draft Law on Insurance states that the State Insurance Supervisory Authority (SISA) shall be named the Insurance Supervisory Commission under the Government of Republic of Lithuania (hereinafter referred to SC). SC is a public institution accountable to the Government.
The Draft Law specifies the conditions for the appointment of officials, stating that the chairman of SC shall be elected for a five-year term of office and recalled before the end of the term of office by the Government on the proposal of the minister of finance. The deputy chairman and three other members shall be elected for a five-year term of office and can be recalled before the end of the term of office by the Prime Minister on the proposal of the chairman of SC.
According to the Draft Law, only qualified citizens of the Republic of Lithuania with impeccable reputation may become members of SC.
The ability of SC to establish its budget, which shall be in coordination with the Government, is provided in the Draft Law.
The Draft Law specifies that SC has the right to define regulations on all aspects of prudential supervision, including the ability of SC to outsource its supervisory functions.
Specific provisions for dealing with consumers’ complaints are introduced in the Draft Law.
The salary system of SC members is regulated in accordance with the Law on Remuneration of State Politicians, Judges and State Officers. Under the Draft Law, the salary structure and employment of SC staff will remain under the Law on Civil Service.
The legal protection scheme for SC staff will not be changed under the Draft Law, but will remain within the Law on Civil Service.
Licensing and Changes in Control (CPs 2–3)
Fit and proper tests for owners, directors and senior management are established in the Law on Insurance, which are currently in force. Also, according to the Draft Law, SC is granted with the power to refuse to issue or revoke a license where owners, directors and senior management do not meet fit and proper requirements.
Grounds for refusing a license are expanded in cases of: 1) unsatisfactory results of control of sources of funds; 2) the organizational or group structure of the applicant hinders effective supervision; 3) principles of anti-money laundering regulation are not met; 4) owners, and/or directors, and/or senior management are not fit and proper for their role; and 5) outsourcing contracts are thought to reduce the efficiency of the new entrant. SC cannot refuse a license for reasons pertaining to the economic environment, e.g., market size.
The time limit to process a license is extended up to six months from the submission of the application and other relevant documents.
An insurance company shall inform SC of all its outsourcing contracts. In accordance with grounds established by the Draft Law, SC is entitled to require insurance company to revoke such contracts.
Regarding a “file and use” approach for new products, SC shall have no right to require prior approval for standard conditions of an insurance contract, premium rates and other documents used in normal insurance contractual relations. SC shall have the right to verify correspondence of the submitted documentation on the provisions regulating insurance contractual relations. Submission of this information should not be a prior condition for the insurer’s activity.
Corporate Governance and Internal Controls (CPs 4-5)
According to the Draft Law, the board of directors is required to pay due attention to the policyholders’ interests.
Insurance companies shall have an internal audit service, which shall report certain information to the management board of the insurance company and SC.
The board of directors shall establish and review the independent risk management strategy of the insurance company, and establish the order of conclusion of insurance contracts by paying particular attention to the disclosure of information to the insured, equal and kind treatment of the insured, and the protection of interests of the insured. The Draft Law also requires that investment policies be established by the board.
Insurance companies shall have an internal auditor whose functions and duties are defined in the Draft Law.
An insurance company shall have a chief actuary, whose duties are defined in the Draft Law. At this stage of the Draft, it is not yet clear whether the actuary will be internal or external. However, in all cases, the chief actuary will be approved by the SC and required of all insurance companies.
Prudential Rules (CPs 6–10)
Asset valuation standards are established in the Government Resolution on Financial Accountability. According to the Draft Law on Insurance, SC will adopt a special regulation redrafting the Government Resolution by defining asset valuation standards more precisely.
The use of custodians was selected as an alternative form for custody and safekeeping of assets.
The investment limit on real estate was reduced from 40 percent to 20 percent of technical provisions (Order No 192 on Investment of Insurance Technical Provision Funds, approved on 27 June 2002 by the Minister of Finance).
The management board of the insurance company shall establish the strategic goals of the insurance company, the means to achieve these goals, and the supervision of the means and the evaluation of results. SC also will be entitled to adopt regulations concerning issues of management strengthening and transparent, reliable, and cautious management of the insurance company.
According to the Draft Law on Insurance provisions, SC sets orders and conditions, as well as restrictions and foreign currency matching criteria for asset cover, on insurance company’s technical provisions.
If, due to the specifics of an insurance company’s activities and insufficient application of standard solvency requirements, there is a threat that interests of the insured, covered person, beneficiary or the aggrieved third person will not be satisfied, SC has the right to require the insurance company to establish a higher than minimal solvency margin reserve. This is set out by acts of law-16 percent of premiums and 4 percent of technical provisions for life insurance, in compliance with EU directives. (This is not yet imposed.) Capital levels must always remain above the Guarantee Fund.
According to the provisions of Draft Law on Insurance, SC shall be empowered to pursue additional supervision of companies that belong to an insurance group.
SC has the right to oblige an insurance company to change or cancel concluded reinsurance contracts in the cases provided by the Draft Law.
Market Conduct (CP 11)
The management board of the insurance company shall establish the order of conclusion of insurance contracts, which shall also be applicable to companies of insurance agents, with particular attention to the disclosure of information. This implies equal and kind treatment of the insured, the protection of interests of the insured, and shall also establish the procedures for the examination of complaints submitted by the insured, covered persons, beneficiaries, and injured parties; this procedure shall be publicly announced.
Relations with policyholders are monitored according to the Order for Conducting Inspections in the Insurance Companies and Insurance Brokers, adopted by SISA and to be established in the recast Order adopted by SC.
The development of standards of market conduct will be the responsibility of the industry’s self-regulatory body.
Monitoring, Inspection, and Sanctions (CPs 12–14)
Statistical information, as regards direct insurance activity, can be filed electronically by the insurance company.
The Draft Law on Insurance defines precise grounds for supervisory intervention and the development of a sanctioning manual is under consideration by SISA.
With a view to preventing the insolvency of insurance companies or a situation when the assets appropriated to a branch of a foreign insurance company fall below the branch’s obligations and/or with a view to ensuring protection of the interests of the insured, covered person, beneficiary, and injured parties, SC shall have the right to oblige the insurance company or the branch of the foreign insurance company to transfer rights and duties stemining from insurance contracts to entities intending to take them over.
SC shall nominate to the court the candidates for the post of liquidator or of liquidation commission and its chairperson. Having passed a decision to liquidate an insurance company, to appoint a liquidator or liquidation commission and its chairperson, the court must notify SC in writing within three working days.
Cross-Border Operations, Supervisory Coordination and Cooperation, and Confidentiality (CPs 15–17)
SC shall refuse to issue authorization for the insurance activity of a branch where the competent authority of the foreign state does not implement efficient supervision of that insurance company and does not protect the interests of the insured, covered person, beneficiary, and injured parties.
34. However, the draft Law considerably limits the financial independence of the insurance supervisory agency. While the commissioner of SISA will be regulated in accordance with the Law on Remuneration of State Politicians, Judges and State Officers, the salary structure and employment of staff will remain determined by the Law on Civil Servants.12 As a result, salaries do not appear to be sufficient to retain highly skilled staff, such as actuaries, an issue identified in the IAIS assessment conducted during the FSAP. There is a risk of high turnover as skilled staff leaves the supervisory agency for the more lucrative private sector, leaving SISA faced with the repeated retraining of new staff. This is particularly worrisome in light of the added responsibility of pension fund supervision that will be given to SISA. As in the FSAP, the mission recommended that SISA be allowed to establish an independent remuneration system.
35. While tax revenues from the insurance industry go directly to SISA’s budget, SISA can access only those funds approved by the budget. The new supervisory agency will be financed by a fee of up to 0.5% of gross premium income and will be able to hire external advisors at will. However, it will not be able to charge individual companies for ad hoc activities that cannot be conducted in house by the new supervisory agency. This ability should be available to the agency.
36. With the introduction of voluntary pension funds, SISA will also undertake supervision and regulation of pension funds within life insurance companies.13 Although pension funds are a new area for SISA, they are related to the unit-link products currently offered by insurance companies and regulated by SISA. At present, there are no pension funds, although there are some pension instruments offered by life insurance companies. However, they are not very active, with only about 1,000 written contracts.
37. Legislation will be required regarding the regulatory structure of pension funds. Areas of concern need to be clarified to provide a framework for pension funds, including figures establishing administrative costs of pension funds versus investment activity; fee structures will need to be clarified for accounting purposes; and rules and formulas for the valuation of assets. At present, SISA does not have the right to deny the acquisition of a pension fund by an insurance company. Legislation should be drafted on the licensing of pensions funds and the necessary requirements for establishment.
38. At the time of the mission, there was no expectation of strong growth of pension funds in the next year or two. Funds in the second pillar are estimated to be only LTL 20 million in 2004. Significant growth is not expected until 2005-06. Therefore, concerted efforts to strengthen the infrastructure of insurance and pension supervision need to be made in the interim period. Legislation must be in place establishing the general regulatory framework, including rules and licensing to be prepared for these pension funds coming on line. In addition, SISA would need assistance to strengthen its supervisory capacity to properly supervise these areas, and would require adequate numbers of highly-trained staff, and salaries to ensure retention of staff.
The mission visited Vilnius from June 3 – 12, 2002 and included Ms. Jodi Scarlata (MFD) as a member of the European II Article IV Consultation mission. Ms. Zuzana Brixiova, IMF Resident Representative, and her staff assisted in the work of the mission.
Excluding foreign bank branches.
In 2001, the calculation methodology for the CAR changed to correspond with the introduction of the Capital Adequacy Directive (CAD) II, which incorporated market risk. As a result of the change in the calculation, there was an increase in the number of banks with a CAR of less than 15 percent in 2001.
The CISD noted that this results from maturities differing over the reporting periods, data were not available on individual banks’ maturities breakdown, but the divergence was known to CISD and was not considered of concern.
A complete translation of the draft Law was not available to the mission.
Bank of Lithuania figures.
In 2002, the stock of securities outstanding increased from approximately LTL 174 million to LTL 477 million. However, in the first five months of 2003, the outstanding stock increased to LTL 784 million, as of end-May. According to the BoL, there are approximately 17,000 holders of these securities, making the average holding almost LTL 44 thousand per person, a significant per capita purchase. (In 2002, average monthly wages were LTL 1,119 or US$307.)
A primary difference (and a significant one) between the savings securities and Treasury bills is the commission charged by commercial banks to customers on t-bill transactions, a fee which is not born by the customer purchasing savings securities. Instead, the government pays the commercial banks for the transactions fees involved in conducting the sales of savings securities, making the effective yield on savings securities even higher.
The abolition of fixed fees on currency trading has furthered the use of foreign exchange to manage liquidity as the fees had been prohibitive, especially since positions are reversed in a few days.
The draft Law has been undergoing several stages of significant revisions and, at the time of the mission, the draft was not finalized. A complete translation of the latest version of the draft Law was not available to the mission, only the translation of the earlier (and unrevised) version was made available.
To be renamed the Insurance Supervisory Commission (SC) under the new Law.
This is in line with the arrangements for the Securities and Exchange Commission, but differs from that of the Bank of Lithuania.
New pension funds (outside of insurance companies) will be regulated by the Securities and Exchange Commission.