Šimonyte: Lithuanian central bank eyes euro ambition

Lucy Fitzgeorge-Parker
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Bank of Lithuania deputy chief Ingrida Šimonyte discusses the country’s euro-adoption plans, the challenges for the foreign-owned banking system, and the asset quality review in a wide-ranging interview.

Do you expect Lithuania to receive approval for euro adoption in 2015? What do you expect to be the impact of euro adoption on Lithuania’s banking sector, in financial and regulatory terms?

We are looking for approval for euro adoption in 2015 and are taking all necessary steps to become a member of the euro-area and, consequently, to join the banking union.

First of all, we expect that joining the euro-area and the SSM [single supervisory mechanism] will help to increase public confidence and strengthen resilience of the banking sector to external shocks. In addition to that, Lithuanian banks shall get access to ECB lending facilities, which would stand as an additional guard against possible liquidity risk.

Bank of Lithuania deputy chief Ingrida Šimonytė
As for the possible negative impact on the Lithuanian banking sector, it is likely that costs for the banking sector will increase (costs related to the introduction of the euro and costs related to the access to the SSM: asset quality review (AQR) exercise with participation of external experts from international audit companies, supervisory fee paid to the ECB, adoption of IT systems for the new ECB reporting requirements). Nevertheless, we expect it would be offset by the positive effect.

As for regulatory environment, we should take into account risks related to the one-size-fits-all approach to financial supervision. It is important that local authorities that are in a better position to spot the local sources of unstable lending booms would retain sufficient policy space to take preventive actions. Hopefully, we will reach a common view on the sharing of supervisory duties with our counterparties from the ECB, which will be responsible for the direct supervision of a major part of our banking sector.

Lithuania’s banking sector is majority-owned by banks outside the eurozone. What are the implications of this for the sector if Lithuania does adopt the euro? And what challenges would this present in the event of further steps towards banking union within the eurozone?

We belong to the Nordic- Baltic region which is likely to remain very heterogeneous in the nearest future. Some of the Nordic-Baltic countries are members of the euro-area and the banking union, and some will remain outside both structures. In this regard, it is particularly important to ensure equal treatment among all member states.

In our view, the recently adopted SSM strikes a good balance between different views, and responds to our earlier concerns about the equal treatment of euro ins and outs to the extent possible under the EU Treaty. However, we still need to reach an agreement on EU-level backstop arrangements that would not discriminate non-euro member states of the SSM and SRM [single resolution mechanism]. We also see a challenge related to the final agreement on how costs of resolving cross-border financial institutions will be shared among different member states.

Does Bank of Lithuania support further steps towards banking union within the eurozone? Does the bank support other forms of coordination and integration between national regulators?

That’s true – the Bank of Lithuania sees the membership at the banking union as part of euro introduction project. In case, as anticipated in the most probable scenario, our country will become a member of the euro-area, we will join the SSM, the first pillar of banking union. We are of the opinion that joining SSM would help to strengthen our national supervisory framework.

Since the EU financial markets are highly integrated, responsibility for supervision cannot remain purely national, but needs to be dealt with at the European level. Inadequate supervision of parts of the European banking sector allowed problems to fester, while uncoordinated national responses intensified fragmentation within the single market in the area of bank lending and funding.

We see many advantages of SSM compared to individual national supervision regimes: high-quality and uniform supervision across the eurozone (single rule book, common supervisory standards); preconditions for more efficient control of risks assumed by national banks and at the same time minimizing risks to the public sector; the problem of fragmentation of national financial market supervision systems is being solved and overall functioning of the financial services market is assured.

The creation of the second pillar, SRM, at the European level is a crucial element in the designing of the banking union. Therefore, we support the intention to have a strong and harmonized resolution mechanism with adequate financing resources. We see SRM as an effective layer to ensure financial stability in case of a failure of domestic Sifi.

We strongly support the notion that the cost of resolving banks, first of all, should be borne by the shareholders and creditors (bail-in tool will be available starting from 2016), whereas taxpayers should be protected and the SRF should be created within a reasonable timeframe. In our view, it is of the utmost importance to make the SRM decision-making process efficient, effective and speedy.