Vitas Vasiliauskas: Introductory remarks - Cyprus Annual Banking
Conference and FinTech EXPO
Introductory remarks by Mr Vitas Vasiliauskas, Chairman of the Board of the Bank of Lithuania, at
the Cyprus Annual Banking Conference and FinTech EXPO, 15 January 2021.
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Good morning, dear listeners, fellow Governors,
I would like to thank the Governors for their insights in this panel, and also the organisers of the
conference for inviting me.
Discussing the role of banks in the time of COVID-19 is indeed vital. Banking is as important to
the economy as the heart is to the human body.
And just like cardiovascular diseases, which are the leading cause of mortality in Europe,
diseases of the banking sector often stand behind the deepest crises in our history. In 1930s, the
Great Depression was significantly amplified by bank runs. In 2008, subprime mortgage loans
extended by banks created the US housing bubble that brought down the entire global financial
system. In Europe, a heavily bank-based system, the infamous sovereign-bank nexus resulted in
a prolonged European sovereign debt crisis.
The COVID-19 crisis was not, of course, caused by the banking system. But it could have greatly
amplified the shock if it was not resilient enough. Moreover, a weak banking system would
diminish prospects of a sustained recovery.
This is why the role of banks is so critical in the current context. In this light, I would like to make
three points in my brief intervention:
• First, we learnt our lessons from the previous crisis - and this contributed to banks' resilience
during the current one.
• Second, swift regulatory responses to such shocks as COVID-19 can further help the banking
system support the shaken economy.
• And third, a truly sustainable long-term economic recovery after this crisis depends on solving
equally long-term issues in the European banking system.
Let us begin with the resilience of banks which has so far prevented a health crisis from turning
into a full-blown systemic financial crisis. The Basel III reforms made sure that the global banking
system was significantly better capitalised than at the onset of the global financial crisis. The
Common Equity Tier 1 (CET1) ratio in the EU banking sector - a key indicator of financial
soundness - rose from 9% in 2009 to nearly 15% in the fourth quarter of 2019, before the
COVID-19 crisis hit. With this amount of capital, banks can generally continue their lending to the
economy even if truly adverse scenarios materialise, as shown by the ECB's vulnerability
analysis published in July 2020.
This shows that in the field of banking regulation, we did not waste the previous crisis and learnt
our lessons well.
My second point relates to regulatory response. The relief package that the ECB Banking
Supervision announced in March was designed to ensure that banks can keep lending to the
contracting economy. For instance, banks were allowed to temporarily operate below the level of
capital defined by the bank-specific Pillar 2 capital requirements, namely Pillar II guidance.
In Lithuania, macroprudential policy was a key domain of the regulatory response package. Prior
to 2020, critics would say that our macroprudential set-up was perhaps too wide-ranging. But
this crisis showed, I believe, that our policy stance was the right one.
First, it helped prevent a deterioration in lending standards and a build-up of systemic risk in the
run up to the COVID-19 shock. And second, when the time came, we implemented
countercyclical policy decisions in line with the intended functioning of the framework. For instance, in
mid-March, the Bank of Lithuania fully released the counter-cyclical capital buffer from 1% to 0%.
Overall, the relaxation of various requirements has increased the lending potential of banks in
Lithuania by €2 billion, or by a third, compared to 2019. Of course, we are talking about potential
here, not the real world. But the real-world data has been encouraging, at least in terms of
lending to households, which has broadly returned to the pre-pandemic levels.
Going forward, policymakers should not "waste a good crisis" this time as well, and take a fresh
look at the existing macroprudential framework. We could even consider novel ways of applying
macroprudential tools - such as the application of borrower-based measures during the cycle,
e.g. relaxing the loan-to-value or debt-service-to-income requirements in times of crisis.
Finally, I would like to make a point on the long-term issues of the European banking sector. The
first issue here is inadequate bank profitability. In this regard, there is a need for consolidation via
mergers and acquisitions to make the European banking sector leaner. Completing the Banking
Union by creating a European Deposit Insurance Scheme (EDIS) would open doors for true
cross border consolidation in Europe.
The second issue is non-performing loans (NPLs) - a long-standing problem in the European
banking sector. To tackle the potential rise in NPLs, the next round of government support should
put more emphasis on solvency rather than liquidity support. In my opinion, the EU should return
to the idea of establishing a European Solvency Support Instrument. There is also a great need
of convergence of various insolvency frameworks across the Member States.
Tackling these issues would allow banks to keep lending for a sustained recovery.
Thank you for your attention!