vitas vasiliauskas : monetary policy and financial stability in the time of covid - 19 keynote address by mr vitas vasiliauskas, chairman of the board of the bank of lithuania, at the 8th regional meeting of regional governors and bankers, virtual, 2 october 2020. * * * good morning, governor vujcic, dear governors, central bankers, banking sector representatives, it is my great honour to finally join you today – even if only virtually. i was scheduled to address this very meeting back in march and give a talk about financial stability and the real estate market. i had my speaking points written down, my flight booked – all ready to meet you and share perspectives on the topic we had chosen. i was also keen to visit rovinj and gaze for a moment at its venetian architecture. and then … we all know what happened. the world has turned upside down. i will try to reflect on this new world in my brief intervention today. i will first mention the lessons learned during the global financial crisis ( gfc ) in terms of banking sector regulation and how they enabled us to stand our ground in the face of the covid - 19 shock. i will then cover the actions taken on the monetary policy front by the european central bank ( ecb ). i will remind of the limits to what monetary policy authorities can do, stressing the importance of fiscal policy, sound investment strategies, and structural reforms. finally, i will turn to macroprudential policy as the last – but not least – piece of the puzzle. i will zoom in on lithuania specifically, where macroprudential decisions had increased the resilience of the financial sector prior to the pandemic - induced downturn and helped deliver a timely countercyclical response. the effect of regulatory reforms since the gfc dear colleagues, despite all the turmoil, the global financial system has got through the immediate shock, preventing a health crisis from turning into a systemic financial crisis. this is in part due to the international regulatory reforms implemented over the past decade. in europe, banks entered the year 2020 in much better shape compared to the beginning of the great recession. they improved asset quality, strengthened capital positions and increased liquidity buffers. for instance, 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, well above

to 16 % of the total mortgage flow, pointing to possibly speculative housing purchases with credit. to tame such behaviour, we have decided to impose a stricter loan - to - value ( ltv ) requirement for all second or subsequent mortgages, except to those borrowers whose primary loans are significantly amortized. in addition to this, we plan to introduce a sectoral systemic risk buffer requirement to banks and credit union groups operating in lithuania, applicable to their overall mortgage portfolio. this sectoral systemic risk buffer would contribute to financial sector resilience to housing market turbulence. the official decisions will be made after ongoing consultations with market participants, the ecb, and other authorities. these measures will come into force next year. at the same time, to discipline speculative tendencies in the housing market in general, our government is considering revising its real estate taxation policy. proposals currently focus on increasing taxation for those owning multiple residential properties, rather than on taxing properties only in situations where property value exceeds a certain threshold. if implemented, such fiscal policy measures, in combination to the intended changes in the borrower - based instruments, would have a powerful impact in cooling the currently heated housing market. if fiscal and macroprudential policy work together, they have the potential to achieve maximum impact. but let me return to the status quo. the currently binding framework for housing loans in lithuania is nicely summarized in this slide. we have an ltv limit of 85 %, dsti of 40 %, and maximum mortgage maturity of 30 years. this framework helped in creating a level playing field for mortgage lenders and propagated more prudent lending and borrowing practices since 2011. the world today, however, is not as it was in 2011. therefore, we gather here not only to share our experiences and views on current borrower - based measures, but also to look ahead and consider possible enhancements to the use of macroprudential instruments in the future. dear colleagues : i see three main challenges we must consider when revising the macroprudential policy framework. first, we need to consider the effectiveness of macroprudential instruments to tackle systemic risks arising from the low interest rate environment. second, we need to think how to minimize distributional consequences of the borrower - based instruments. and third, we need to investigate to what extent macroprudential instruments can mitigate climate change risks. regarding the first challenge, no eu member state so far has explicitly used macroprude