Lithuania: High supervisory standards important

29/12/2014

With the adoption of the euro, Lithuania will join the Single Supervisory Mechanism on 1 January 2015. Ingrida Šimonytė, Lietuvos bankas’ Deputy Chairperson, will become a Member of the Supervisory Board. In a web-interview, she talks about the main features of Lithuania’s banking sector and the challenges for ECB Banking Supervision.

What does it mean for Lithuania to become a full-fledged member of the euro area and the Single Supervisory Mechanism (SSM)? How do you feel about joining the Supervisory Board as a member?

Becoming a full-fledged member of the euro area as soon as possible has always been considered one of the major milestones of our European integration, given that we’ve been operating currency board arrangements since 1994 and that the litas has been pegged to the euro since February 2002.

In such circumstances, the objective of a prompt membership in the euro area is a natural strategy, especially as our country has undertaken such great efforts to sustain the peg to the euro during the crisis of 2008-09. Membership in the euro area means the full elimination of foreign exchange risk and transaction costs, and an even more resilient banking sector.

It is fortunate that we are joining the Single Supervisory Mechanism and the Supervisory Board almost from the very outset, as there will be less need to adapt and adjust than would otherwise be the case. I am looking forward to working together with my fellow members in order to carry out the tasks for which the SSM has been created.

The comprehensive assessment was a preview for direct ECB supervision of the three largest Lithuanian banks. How are the banks prepared for the changeover? What was your role in this process?

Two of the largest have their sister banks in Estonia and Latvia, so it was a horizontal exercise for them and the group of SEB and Swedbank, despite the fact that, as a group, they do not fall under the umbrella of the Single Supervisory Mechanism. The third bank – DNB – also participated in the exercise in Estonia. There was scope for synergies in many respects. The banks did well and corrections were minor, even under the stress scenario. In any event, capital remained well above the minima. This represents the fact that they all took a very prudent stance after the global crisis had hit, recognising potential losses under very conservative assumptions, so that there was no real need for any adjustments at this time. I have no doubt that we are joining the SSM from a very sustainable base.

Lietuvos bankas played a very extensive role in the process, given that we had less time for the exercise than other countries, since we started later. Therefore, we were involved not only in coordinating and supervising. We also performed some parts of the asset quality review in order to deliver on time and to have a cost-effective exercise, since it was challenging for local auditors and consultants to provide enough staff at such short notice.

What are the main features of Lithuania’s banking sector and what impact will ECB supervision have?

As I have already mentioned, the pattern of the banking system is similar to that of the other Baltic countries, as even the names of major banks are largely the same. The banking system is dominated by subsidiaries of Nordic banks, with three major banks accounting for approximately 70% of the market share. There are a few smaller banks that will not fall under the definition of systemically important institutions, and some branches.

The banking system showed resilience during the crisis, as losses were in most cases recognised immediately, and capital has been strengthened. Some small banks, however, had to be wound down in 2011-13, because of mismanagement, but that had no systemic negative spillover, and the overall banking system became even more resilient and prudent.

The prudential ratios of banks operating in Lithuania continue to significantly exceed the required minimum amounts. For example, on 1 October 2014, the banking system’s capital adequacy ratio was 20.7%.

Lithuania’s three significant banks are all subsidiaries of foreign banking groups that have their headquarters in non-participating countries. How will cooperation with the home supervisors of these banks work under the SSM?

Cooperation between Lietuvos bankas and the consolidating supervisors of the three largest banks, which are located in Sweden and Norway, has long been in place and serves as a good example of cross-border supervision. The supervisory colleges have ensured an efficient and well-organised dialogue between the national supervisory authorities, and certainly serve their purpose.

Under the SSM, the ECB will become a full-fledged member of these colleges, continuing and contributing to the productive experience. National supervisors from participating countries, including Lietuvos bankas, will remain in supervisory colleges as observers and will fully support the ECB in its active involvement in college activities. The most recent college meetings that the ECB has attended have already shown that productive cooperation is going to continue on the same note.

In general terms, what do you see as the main challenges facing European banking supervision?

I think that it is important to ensure that the ECB is a supervisor that provides both high standards of supervision and a fair treatment of the supervised banks.

There should be no doubts about the strictness and integrity of supervision, but a simplistic approach of “one size fits all” should be avoided at the same time. Decisions should be clear and understandable. The supervised banks should be given a proper say and a high level of cooperation should be ensured.

As one of the youngest leaders in your country, you have already achieved a lot in your career. What motivates you and where do you draw your own inspiration?

Many young people joined institutions and companies when Lithuania regained its independence and fought to build up an institutional framework and business environment of Western standards. As a child under Soviet occupation, I dreamt about the day when my country would become free and able to strive to standards of democracy and prosperity that we knew were given on the other side of the iron curtain. I am lucky that it came to be true, and that I’ve been able to play a part in this phenomenal transition. The enormous change that we have accomplished so far is the major motivating factor for me and my peers.