annual report of the bank of lithuania 2009payment cards / 71 table 18. payments by payment cards /...

VILNIUS

2010

ANNUAL REPORT OF THE BANK OF LITHUANIA

2009

© Lietuvos bankas, 2010

ISSN 1392-4702ISSN 1648-9039 (ONLINE)

Annual Report was prepared based on data from the Bank of Lithuania, Department of Statistics under the Government of the Republic of Lithuania, European Central Bank, Eurostat, International Monetary Fund, and other sources.

ContentsFOREWORD / 7

I. REVIEW OF THE ECONOMY AND FINANCE / 11

Global Economic Developments / 11

Review of the Economy of Lithuania / 13

Gross Domestic Product / 13

Aggregate Demand / 13

Aggregate Supply / 14

External Sector / 15

Current Account Balance / 15

Box. Private Transfers from Abroad / 16

Foreign Trade / 18

Financing of the Current Account Deficit / 19

Prices and Costs / 20

Reasons behind the Price Development / 20

Core Inflation / 21

Food Prices / 21

Administered Prices / 22

Prices of Fuels / 22

Labour Market / 23

General Government Finance / 24

Income, Expenses and Deficit / 24

Debt / 26

Household Finances / 27

Assets and Income / 27

Liabilities and Expenses / 28

Households Driven Risk on Credit Institutions / 30

Loan and Deposit Developments, Interest Rates / 30

Loans and Interest Rates on Loans / 30

Deposits and Interest Rates on Deposits / 34

II. FuNCTIONS OF THE BANk OF LITHuANIA / 37

Exchange Rate and Monetary Policy / 37

Exchange Rate Policy / 37

Monetary Policy Instruments / 38

Required Reserves and the Factors that Determine Liquidity Developments

in the Banking System / 39

Foreign Exchange Operations / 41

Supervision of Credit Institutions / 42

Supervision of Credit Institutions: key Trends / 42

Review of Credit Institutions’ Activities / 45

key Indicators of the Banking System / 45

Bank Capital and its Increase / 49

Banks by Market Share / 49

Banks’ Operational Risk Review / 50

Credit Risk / 50

Liquidity Risk / 51

Market Risk / 51

Operational Risk / 52

Operations of the Central Credit union of Lithuania / 52

Activities of Credit unions / 53

Cash Management / 54

Currency Issue and Withdrawal / 54

Banknotes and Coins in Circulation / 55

Collectors (Commemorative) Coins / 57

Counterfeit Litas Banknotes and Coins / 60

Foreign Reserve Management / 60

Official Foreign Reserves / 60

Foreign Reserve Functional Parts and key Management Principles / 61

Liquidity of Foreign Reserves / 61

Safety of Foreign Reserves / 62

Return on Foreign Reserves / 64

Statistics / 65

Payment and Securities Settlement Systems / 66

Payment Systems for Settlements in Litas / 67

Payment Systems for Settlements in Euro / 68

Oversight of Payment And Securities Settlement Systems / 69

Non-Cash Payments / 70

Single Euro Payment Area Project / 72

TARGET2-Securities Project / 72

Administration of the Accounts of the State Treasury and Institutions / 73

Participation of the Bank of Lithuania in the ESCB and International Cooperation / 73

Participation in the ESCB / 73

Participation in the Activities of Eu Institutions / 75

Cooperation with the International Monetary Fund / 76

Relations with Foreign Financial Supervisory Authorities / 77

Cooperation in Other Areas / 78

III. ORGANISATION OF ACTIVITIES OF THE BANk OF LITHuANIA / 79

Staff and Organisational Chart / 79

Mission, Values and Ethics / 79

Staff / 80

Staff Training / 82

Vladas Jurgutis Award and Scholarship / 82

Transparency of Activities and Public Communication / 82

IV. THE ANNuAL FINANCIAL STATEMENTS OF THE BANk OF LITHuANIA 2009 / 87

ANNEXES / 109

Resolutions of the Board of the Bank of Lithuania in 2009, that were published in

Valstybės žinios (Official Gazette) / 109

Legal Tender / 111

Glossary / 114

List of tables and charts

Table 1. Real GDP growth and inflation in selected regions of the world / 11

Table 2. Loan portfolio changes / 32

Table 3. Changes in deposits held with banks / 34

Table 4. Monetary policy instruments of the Bank of Lithuania / 39

Table 5. Net sales of foreign exchange to the Bank of Lithuania / 41

Table 6. Net currency issue and withdrawal (–) / 54

Table 7. Banknotes and coins in circulation / 57

Table 8. Composition of foreign reserves unrelated to liabilities in foreign currencies / 63

Table 9. Average annual MD of foreign reserves and individual portfolios / 63

Table 10. VAR of foreign reserves / 64

Table 11. Return on foreign reserve portfolios / 64

Table 12. Transactions of LITAS-RLS and LITAS-MMS / 67

Table 13. Composition of payments of LITAS-RLS and LITAS-MMS / 68

Table 14. Transactions of TARGET2-LIETuVOS BANkAS / 68

Table 15. Transactions of the LITAS-PHA / 69

Table 16. Non-cash payments / 71

Table 17. Payment cards / 71

Table 18. Payments by payment cards / 71

Table 19. Participation of the Bank of Lithuania in the ESCB committees and their Working Groups / 74

Table 20. Publications of the Bank of Lithuania in 2009 / 83

TABLES

CHARTS

Chart 1. key interest rates of central banks / 12

Chart 2. Contributions to real GDP growth (by expenditure approach) / 13

Chart 3. Contributions to real GDP growth (by production approach) / 14

Chart 4. Components of the current account balance / 16

Chart 5. Foreign trade balance / 18

Chart 6. Current account deficit financing sources / 19

Chart 7. Contributions to the annual inflation based on harmonised index of consumer prices / 20

Chart 8. Contributions of food prices to the annual inflation / 21

Chart 9. Contribution of administered prices to the annual inflation / 22

Chart 10. Global oil price and fuel prices in Lithuania / 23

Chart 11. Wage developments / 24

Chart 12. General government income, expenses and balance / 25

Chart 13. Structure of financial assets of households / 27

Chart 14. Development of wages, the level of unemployment, consumer price index and

onfidence Indicator. / 28

Chart 15. The ratio of the balance of housing loans to GDP in Lithuania and some Eu Member States / 29

Chart 16. Weighted interest rates of over one month on household deposits and loans for house

purchase / 29

Chart 17. Dynamics of credit default swap interest rates in the Baltic States / 31

Chart 18. Dynamics of quoted stock price index in the Baltic States’ securities markets / 31

Chart 19. Household and non-financial corporations’ liabilities to MFIs in Eu member states / 33

Chart 20. Interest rates on new loans to private sector and their evolution by currency / 33

Chart 21. Changes in deposits held with banks / 35

Chart 22. Interest rates on new loans to private sector and their dynamics by currency / 35

Chart 23. Differences of short-term and long-term litas and euro interest rates / 38

Chart 24. Banks’ reserves in litas, held in the Bank of Lithuania / 40

Chart 25. Foreign exchange trading between the Bank of Lithuania, commercial banks,

and other depositors / 41

Abbreviations and other explanations

AB public limited liability company

BIS Bank for International Settlements

CCuL Central Credit union of Lithuania

CSDL Central Securities Depository of Lithuania, AB

ECB European Central Bank

ERM II Exchange Rate Mechanism II

ESCB European System of Central Banks

Eu European union or European Community (Community)

EuR euro

EuRIBOR Euro Interbank Offered Rate

Eurostat Statistical Office of the European Communities

Eurosystem ECB and national central banks of Eu Member States that have introduced euro

GDP gross domestic product

IMF International Monetary Fund

ISIN International Securities Identification Number

JPY Japanese yen

Lt, LTL Lithuanian litas

MFI monetary financial institution

OPEC Organisation of the Petroleum Exporting Countries

SDRs special drawing rights

SEPA Single Euro Payments Area

Statistics Department Department of Statistics under the Government of the Republic of Lithuania

uAB private limited liability company

uSA united States of America

uSD uS dollar

VILIBOR Vilnius Inter-Bank Offered Rate

XAu gold

Chart 26. Dynamics of banks’ assets, loans and deposits / 46

Chart 27. Composition of banks’ assets / 46

Chart 28. Composition of banks’ liabilities / 47

Chart 29. Banks’ net profit / 48

Chart 30. Market share of banks by assets / 49

Chart 31. Structure of capital required to cover market risk / 51

Chart 32. key Indicators of credit unions / 53

Chart 33. Litas in circulation / 55

Chart 34. Value of litas banknotes in circulation / 55

Chart 35. Number of litas banknotes in circulation / 56

Chart 36. Number of litas and centas in circulation / 56

Chart 37. 50-litas silver coin dedicated to Vilnius, European Capital of Culture 2009 / 58

Chart 38. 1-litas coin from alloy of copper and nickel dedicated to Vilnius, European Capital of

Culture 2009 / 58

Chart 39. 100-litas gold coin from the series dedicated to the millennium anniversary of the mention

of the name of Lithuania / 58

Chart 40. 50-litas silver coin dedicated to Tytuvėnai architectural ensemble / 59

Chart 41. 50-litas silver coin dedicated to Lithuanian nature / 59

Chart 42. Numismatic set of circulation coins of 2009 / 59

Chart 43. Foreign reserves / 60

Chart 44. Breakdown of investment by financial instruments / 62

Chart 45. Composition of foreign reserves by rating / 62

Chart 46. Organisational chart of the Bank of Lithuania / 81

Totals/ percentages in some tables and charts may not add up due to rounding.

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FOREWORD

The global economy experienced a severe recession

in 2009, particularly the first half of the year, with the

increasingly stronger effects of the financial crisis on

the real sector. Consumption and investment shrank,

international trade diminished, activity in the indus-

trial sector and other sectors of economy declined

and unemployment rose. Real GDP contracted across

all developed and in many emerging economies. In

order to stabilise the situation, a number of countries hit by the crisis implemented particu-

larly broadly-based measures of economic recovery. These helped to alleviate the tensions in

the international financial markets and fostered the recovery of the global economy in the

second half of the year.

In Lithuania, real GDP contracted by 15% in 2009. The contraction was mainly driven by a

decline in domestic demand – consumption and investment. Private consumption decreased

throughout the year. It was driven by an increase in unemployment and lower wages, tighter

lending standards, and higher debt servicing costs. Investment shrank due to weaker demand

in the context of uncertainty surrounding further economic development, lower production

capacity utilization, and tighter lending standards. A decrease in the liabilities of non-financial

corporations and households exerted major influence on the loan portfolio of the banking

system – the latter shrank most among all the Eu Member States.

The annual decline in government consumption accelerated in the last quarter only. As the

decline in expenditure was more sluggish than that in revenue, the budget deficit increased

and accounted for nearly 9% of GDP in 2009. Income shrank mainly due to a substantial

fall in tax revenues, whereas expenditure growth was driven by higher social payments and

interest payments. To finance the higher deficit, the Government of the Republic of Lithuania

borrowed actively and quite successfully both in domestic and foreign markets. However, the

debt-to-GDP ratio in 2009 was almost two times ahead of the figure for 2008.

As a result of a decline in domestic demand, the external sector balanced over 2009. Foreign

trade deficit narrowed substantially. In the middle of the year some signs of export recovery

occurred, and the decline in imports stabilised. The current account also improved on account

of the Eu structural support funds.

The economic downturn induced the decline in consumer prices. This was mainly driven by

an erosion of the purchasing power of consumers and more cautious expectations. Moreover,

unlike in 2008, price developments were affected by changes in global commodity prices.

Since 28 June 2004 Lithuania has been participating in ERM II and fulfilling its unilateral

obligation to maintain a fixed exchange rate regime and a stable exchange rate of the litas

against its anchor currency, the euro. Monetary policy instruments of the Bank of Lithuania

aim at maintaining a stable litas exchange rate against the euro and help to ensure appro-

priate liquidity in the banking system. Like it was previously the case, the Bank of Lithuania

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exchanged litas into euro and euro into litas without restriction, applied reserve requirements,

and provided overnight lending facility for commercial banks operating in our country.

The Bank of Lithuania pursues a conservative foreign reserve investment policy in terms of risk,

which ensures the safety of investment. High annual investment performance was achieved

due to a successful choice of investments and market trends that were favourable for the

euro area government debt securities.

The Bank of Lithuania’s profit for 2009 makes up LTL 519.44 million. It is the highest profit in

the Banks’ 20 years operation history. In 2010 the Bank of Lithuania transferred to the state

budget nearly a double amount of its profit compared to a year earlier.

In 2009, the amount of currency in circulation contracted. While the impaired value of an

average circulation banknote reflected the lowering demand for the large denomination

banknotes, 100 litas and 200 litas banknotes remained the most popular ones.

Following rather strong growth in the previous years, Lithuanian commercial banks pursued

a conservative credit policy in 2009. As a consequence, the demand for financial resources of

the banks themselves weakened, and the debt to parent banks decreased. The composition

of the banks’ sources of financing changed markedly as well. Banks managed quite success-

fully to attract deposits in the domestic market, although at a high cost.

With an unfavourable turn in the market conditions, banks incurred losses. This was mainly

driven by higher costs as a result of loan impairment. Weaker economic activity and lower

wages, a decline in real estate prices, lower exports, an increase in the number of enterprise

bankruptcies, higher unemployment and conservative estimation of bank loans resulted in

a significant impairment of bank loans not only due to incurred losses but also potential

losses. The loan portfolio quality indicators impaired especially as a result of loans granted

to businesses.

In an attempt to enhance their resilience to potential losses, many banks increased their capital

base in 2009 using various capital instruments. Despite the huge financial losses incurred,

the capital base of domestic banks changed very little over the year. The prudential capital

adequacy of banks against their operational risk increased by more than 1 percentage point

over the year and made up 14.2%. This is more than 6 percentage points above the ratio

set by the Bank of Lithuania.

The Bank of Lithuania’s decisions and actions aimed at limiting the impact of the financial

crisis on the domestic financial system by strengthening the confidence of market participants

comprised three major areas: tighter banking supervision, increase of liquidity, and prepara-

tion for the financial crisis management.

Conducting the supervision of credit institutions, the Bank of Lithuania paid special attention

to the preventive measures for the management of bank risks and increase of the capital of

banks. With this aim in view, additional requirements for strengthening the internal control

and risk management processes in banks and other credit institutions were set. Particular

attention was given to the management of credit and liquidity risks. All banks completed an

Internal Capital Adequacy Assessment Process (ICAAP). During it, they assessed significant

underlying risks and calculated additional capital requirement to cover them. The Bank of

Lithuania, in its turn, conducted each bank’s Supervisory Review and Evaluation Process

(SREP) determining whether the banks manage their risks properly and have adequate capital

against them.

Despite the economic downturn in the country, liquidity in the domestic banking system

increased substantially.

9

In early 2009, the Bank of Lithuania introduced regulations and started to perform the pro-

cedures for crises prevention, deterrence and management established in the Plan for the

Prevention and Management of Financial Crises approved by the Government of the Republic

of Lithuania in November 2008. In July 2009, the Seimas of the Republic of Lithuania adopted

the Republic of Lithuania Law on Financial Sustainability. It provides for the measures of in-

tervention into the banking sector that could be taken by the state to enhance the financial

stability and credibility of the banking system, where appropriate. The Law provides for the

possibilities to issue state guarantees, buy out bank assets, and for the possibility for the

state to acquire a stake in banks. It also provides for the possibility of the takeover of bank

shares for public needs. The intervention measures specified therein shall be applied taking

into account the Bank of Lithuania’s provided assessment of the financial position of banks

and the proposals regarding the applicable measures for enhancing financial stability.

The Bank of Lithuania compiled and published monetary and financial statistics, external

sector statistics as well as other financial statistics. In satisfaction of the growing needs of

the users of statistics, it updated the MFI balance sheet and interest rate statistical reporting

requirements, began collecting the data on the assets and liabilities of collective investment

undertakings applying reporting on a security-by-security basis. The Bank of Lithuania’s

statistical bulletins, websites and statistical information provided to internal and external

users were supplemented with the quarterly financial accounts data on foreign direct invest-

ment, balance of payments and institutional sectors. On its website, in a separate section of

statistics, the Bank began publishing statistical releases of a new form. Seeking to avoid the

increase of the burden of statistical reporting, it paid special attention to the management

of administrative databases and their use in the preparation of financial statistics.

The payment and securities settlement systems supervised by the Bank of Lithuania functioned

in a stable manner. The value of transactions processed in the real-time gross settlement sys-

tem LITAS-RLS, which relates rather with the financial market transactions, remained almost

unchanged, although transactions declined in number. The value of transactions processed

in the retail payment system LITAS-MMS, which is more closely related with real economy,

decreased substantially. The euro payment systems were used much more extensively.

Taking into account the institutional needs and strategy, the staff management policy pur-

sued in the Bank of Lithuania ensures that highly qualified, initiative and creative specialists

are employed in the Bank. They constantly broaden their professional knowledge and skills;

thereby the common values of the national central bank and of the ESCB are cherished.

The Bank of Lithuania continuously provides the media with information on the domestic

banking and financial system as well as on its own activities, announces it on its website and

in its publications. Presentations of new collectors (commemorative) litas coins, articles of

the Bank’s specialists in press and on the Web, replies to the inquiries of the public, lectures

to students and other social groups contribute to informing the public and communicating

with it.

Report 2009 presents in detail the work accomplished by the Bank of Lithuania in implementing

the objectives and performing the functions of the national central bank.

Chairman of the Board of the Bank of Lithuania Reinoldijus Šarkinas

15 April 2010

I. REVIEW OF THE ECONOMY AND FINANCE

11


Global economic Developments

The year 2009 was particularly complicated and changeable for the world economy. As the impact of the financial crisis on the real economy strengthened early in the year, many advanced and emerging economies experienced a particularly severe downturn; business and consumer confidence weakened significantly. Investment and consumption declined, the volume of international trade shrank, industrial activity and activity in other sectors of economy moderated.

In order to restore financial stability and stimulate the economy, governments and central banks across the world kept increasing their support to the financial sector and implemented measures for economic recovery. The support provided brought confidence back and reduced systemic risk in financial markets spurring economic activity in many advanced and emerg-ing economies in the second half of the year. International trade, manufacturing, and the services sector began to recover. In the United States, economic stabilization began later than in many other advanced economies, yet it was faster. Among the four largest euro area economies, the recovery was strongest in Germany and France. In the Scandinavian coun-tries, economic activity started to increase gradually. In many Central and Eastern European countries the economic situation improved somewhat as well. Among the Commonwealth of Independent States, the Russian economy was the first to begin recovering.

Table 1. Real GDP growth and inflation in selected regions of the world(annual percentage changes)

2008 2009 2010* 2011*

Real GDP

World 3.0 –0.6 4.1 4.3

Euro area 0.6 –4.1 0.9 1.5

Central and Eastern European countries 3.1 –4.1 2.0 3.7

USA 0.4 –2.4 3.0 2.4

Japan –1.2 –5.0 1.7 2.1

Russia 5.6 –7.9 4.0 3.3

Inflation (average annual change in consumer prices)

Euro area 3.3 0.3 1.1 1.3

Central and Eastern European countries 8.1 4.7 5.0 3.6

USA 3.8 –0.3 2.1 1.9

Japan 1.4 –1.4 –1.1 –0.4

Russia 14.1 11.7 7.0 5.7

Sources: IMF and Eurostat.* Forecast.

The risk related to the further development of the global economy is closely related to the time at which the largest economies will stop applying economic stimuli measures.

2009

Annual Report of the Bank of Lithuania

12

Early termination of the support being provided by governments and central banks would trigger interest rate increases and impede economic growth; however, prolonged ap-plication of stimulation measures would jeopardise the sustainability of public finances of individual countries.

In 2009, inflation decreased globally, and in the middle of the year, deflation started in many developed countries. Prices fell driven primarily by weak demand, but deflation trends were short-time. With the start of economic recovery and the improvement of future ex-pectations in the second half of the year, oil prices and other commodity prices began to rise strongly. Over the year, in aggregate terms, the price index for commodities increased by over 50%. The price of Brent crude oil increased by some 80% and stood at uSD 78 per barrel towards the end of the year. Metal prices also went up high in world markets, whereas the increases in the prices of food commodities were more moderate.

Major world central banks continued to pursue the policy of low interest rates. The ECB reduced its key interest rates until the middle of the year. The central banks of the uSA, Japan and England, as their interest rates became close to zero, left them unchanged. However, in order to mitigate the pressure and to restore confidence in financial markets, low key interest rates alone were not sufficient: their impact was strengthened by applying unconventional quantitative monetary policy measures. Banks increased money supply in the market by lending increasingly more to credit institutions and buying private and public sector debt securities. Only late in the year it was decided to start reducing the scale of the application of some instruments supporting market liquidity, although the actions of individual central banks varied. The ECB decided to carry out less longer-term refinancing operations. The uS Federal Reserve System began discussing and testing potential instruments for absorbing excess liquidity of the banking system. By contrast, the Bank of Japan, seeking to recover the economy and arrest deflation, further increased financing to financial institutions towards the end of the year.

Chart 1. Key interest rates of central banks

Early in the year, the foreign exchange market experienced the largest fluctuations; later, exchange rate developments were insubstantial. Early in the year, the currencies of the uSA, Japan and some other largest developed economies depreciated against the euro. The trend of the uS dollar depreciation against the euro and other major currencies per-


13

sisted almost throughout the year. The currencies of the CEE countries which apply the floating exchange rate regime, particularly Poland and Hungary, depreciated substantially against the euro early in the year, but afterwards appreciated again.

Review of the economy of lithuania

In 2009 Lithuania’s real GDP contracted significantly, private consumption and, in particu-lar, investment decreased. Such a shift was driven by a deteriorating environment in the labour market, tighter lending conditions, higher debt servicing costs, and curtailment of foreign demand. Investment slashed due to a significant drop of demand, higher level of unused industrial capacity and uncertainty surrounding further economic development. However, in the environment of lower domestic demand, within a year the external sec-tor imbalances disappeared and prices started to drop.

GRoss Domestic pRoDuct

AggREgATE dEmANd

In 2009 Lithuania’s nominal GDP made up LTL 92.4 billion, and real GDP was 15% smaller then in 2008. Following an abrupt drop in the first two quarters, economic activity stabi-lized in the second half of the year and the annual GDP shrinkage slackened to 12.8% in the fourth quarter. The GDP drop was largely driven by lower household consumption expenses and investment. Net exports were the only factor positively affecting the GDP throughout the entire year because the decline of goods and services exports was slower compared to imports. The strongest impact on the GDP drop was driven by weaker private consumption. For the whole 2009, its annual rate of decrease did not slow down and in the fourth quarter it made up approximately 18%. The main drivers behind the real private consumption shrinkage were very high level of unemployment, smaller wages, stringent lending conditions and uncertainty surrounding the future.

Chart 2. Contributions to real gdP growth (by expenditure approach)(annual change)

2009


14

Real investment remained on a decreasing trend. After an abrupt drop at the start of the year, the decrease of this indicator started to slacken in the second half of the year. However, no signals of recovery were observed yet. Over the year, real expenses for invest-ment slashed by approximately 40%. The fall in investment was mainly driven by a drop of domestic and external demand, uncertainty surrounding their further development, unfavourable credit conditions, and weak industrial capacity utilization, due to a smaller number of orders. Such a significant drop of investment was partly driven also by the fact that within previous years it was highly concentrated into pro-cyclical sectors and non-production activities. The total investment decrease was mainly driven by shrinking investment into buildings and structures, excluding housing. Their drop was basically entailed by curtailed general government investment and excess supply of commercial real estate. Because of worsening industrial activity results and other unfavourable fac-tors, investment into machinery, mechanical appliances and vehicles reduced significantly throughout the entire 2009. Investment into residential buildings dropped slower than other types of investment, thus refraining the total investment decline.

AggREgATE SUPPLy

In 2009 value added decreased practically in all economic activities. According to seaso-nally adjusted data, economic activity shrank severely in the first half of the year, whereas in the second semi-annual period economic stabilization signals were observed. The largest shrinkage was evident in the activities associated with domestic market such as construction, retail and wholesale trade, hotels and restaurants activities. In the context of a significant decrease of external demand and in the endeavour to reduce inventories, quite a significant industrial activity drop was also registered in the first half of the year, particularly in mining and quarrying, as well as manufacturing activities. Solely the agri-cultural activity was resistant to the economic downturn, as its growth was influenced by larger, compared to 2008, crop.

Chart 3. Contributions to real gdP growth (by production approach)(annual change)


15

According to seasonally adjusted data, industry’s value added decline in volume terms, which was observed from the middle of 2008, stabilized in the second half of the year, with total real activity slump in 2009 accumulating to 14.4%. Decline of industrial activity at the beginning of the year was entailed by rapidly shrinking sales in foreign markets and, compared to the second half of 2008, an increasing decline of domestic sales. The demand was immensely pushed down by deteriorating business lending conditions, a smaller number of construction activity orders and dampened competitiveness of indus-trial enterprises after the depreciation of currencies of neighbouring states. Industrial activity stabilized in the second half of the year after the recovery of external demand, as governments of foreign countries began to implement economic stimulus programmes and improved competitiveness of Lithuania’s enterprises due to developments in the labour market. Most of all sales of industrial production started to recover in medium to high technological instansity manufacturing activities. At the same time these activities, were the only industrial activities with real sales exceeding the level reached in 2008: sales of computers, electronic and optical devices grew by 13.0%, basic pharmaceutical products and pharmaceutical preparations increased by 11.9% and of chemicals and chemical products – by 0.1%.

The deepest value added decrease among all economic activities in 2009 was registered in the construction activity – 43.3%. The scope of construction of buildings shrank most of all. These developments were mostly influenced by tighter lending conditions and the essential change of the expectations of market participants in respect of their activ-ity prospects, and the decline of the construction of engineering structures, which was basically driven by the general government sector decisions to reduce expenses for the implementation of infrastructure projects.

The value added of market services curtailed by 15.9 per annum. The activity trends of activities that depend more on domestic demand were worse, compared to activities orientated to foreign demand. Seasonally adjusted value added of wholesale and retail sales, the largest activity of market services, was shrinking from the second quarter of 2008, and the real annual decrease in the third quarter of 2009 made up 23.2%. An increasing level of unemployment, decreasing wages and a pessimistic perception of the future were the basic contributions behind the reduction of the activity.

exteRnal sectoR

CURRENT ACCOUNT BALANCE

In 2009 for the first time since the Bank of Lithuania started to publish current account balance data, this indicator turned to positive and was gradually rising within the whole year. Throughout 2009, surplus of the current account balance accounted for LTL 3.5 billion or 3.8% of GDP (in 2008 current account deficit made up 13%). Such a devel-opment of the current account balance was primarily driven by an immense decrease of trade deficit, because deeper economic difficulties in Lithuania compared to other countries resulted in a more pronounced drop of domestic demand (compared to external demand), causing a more rapid decrease of imports vis-à- vis exports.

Current account balance was more than in previous years positively influenced by current transfers, because larger transfers of Eu structural funds set off lower monetary emigrant remittances to Lithuania. In 2009 the Eu funds absorption was more active, therefore, the balance of current transfers made up approximately 4% of GDP (in 2008 – 2.3%). All in all, current and capital transfers from Eu to Lithuania in 2009 were almost 84% larger than a year ago.

2009


16

Chart 4. Components of the current account balance(compared to GDP)

In 2009 the income balance deficit was smaller than in previous years. In the third quarter it almost disappeared and in the fourth quarter a positive income balance was registered. However, these developments were driven by losses incurred in Lithuania by the banking sector and foreign entities, especially at the year-end. They are recorded into the income balance sheet as positive reinvestment. In the first half of the year, a positive effect of reinvestment was offset by dividends, paid to investors from abroad from the previous profits, thus making the income balance negative.

The services balance in 2009 continued to be positive, and compared to 2008, net income earned from services stepped up. The surplus of transport services accounting for the largest part of the services balance moved up slightly when transport services imports dropped more then their exports. These changes are expected to be closely associated with the developments of goods exports and imports. The movement of travel services imports and exports was similar, therefore, their balance also improved but remained negative.

BOX. PRIvATE TRANSFERS FROm ABROAd

Lithuania’s balance of payments covering all economic transactions of Lithuanian and foreign economic entities, among other indicators also presents private transfers from abroad. Within the recent two decades these flows have been constantly increasing.

The statistical statement of Lithuania’s balance of payments is composed from three accounts – current, capital and financial accounts which are inter-balanced. Monetary income of Lithuania’s population is recorded in two current account items of the balance of payments “Compensation of employees” and ”Workers remittances”. According to the balance of payments data, in 2009 this income grew by LTL 1.3 billion or 1.8 times1

compared to 2004 (basically because of workers’ remittances of individuals residing more


1�

than one year abroad). The balance of payments information is published by the Bank of Lithuania on its website and in publications ”External Statistics”.

Balance of payments data, LTL millions*

2004 2005 2006 2007 2008 2009

Total compensation of employees and workers remittances, received 1,602.2 2,079.0 2,719.7 3,591.1 3,453.0 2,870.9

Compensation of employees 452.0 625.7 677.6 644.7 459.9 454.6

Workers’ remittances 1,150.3 1,453.4 2,042.0 2,946.5 2,993.1 2,416.3Compensation of employees and workers’ remittances, received, % 2.6 2.9 3.3 3.6 3.1 3.1

The item “Compensation of Employees” of the current account covers income received or sent (or brought back) by workers, doing seasonal works in other countries or working in other countries less than one year. This item also includes income received by Lithua-nian citizens hired for work by Lithuania-residing embassies and consulates. The latter payments account only for an insignificant part (about 3%) of the total compensation of employees. Money transferred or brought back by emigrants who have been working in other countries for more than one year is accounted for in the current account item “Workers’ Remittances”.

In Lithuania emigration caused problems and their impact on the country’s economic development have recently been given more attention to – both, mass media and spe-cialists, often mention the volume and dynamics of remittances of Lithuania’s migrants. With this in regard, since 2007 the Bank of Lithuania publishes in a separate table of its quarterly and annual statistical publications ”External Statistics” data on individuals’ cash flows from abroad.

When calculating individuals cash flows from abroad, both, direct data sources and statistical estimates are used. The most important from them is commercial bank data about foreign individuals funds received from abroad. Calculations are made on the basis of information on monetary postal orders of Lithuania’s population, net cash transfers received via monetary transfer systems Western union, Money Gram and other systems of international companies. However, not all cash flows of individuals may be calculated on the basis of reports presented by various entities and banks. Cash brought into Lithua-nia may be evaluated only by statistical methods and auxiliary data sources – foreign currency purchase and sale at monetary financial institutions, exchange of balances of household deposits in foreign currency – as well as information on how to use payment and credit cards issued abroad. Statistical estimates are checked (changed as necessary) after executing household surveys on cash flows from abroad.

Statistical methods of workers’ remittances are enhanced all the time2. When applying estimates, apart from the estimation of cash flows, it is also important to assess gross offset-ting flows to and from Lithuania. Since 2006 the cash flow methodology used in the item ”Workers’ Remittances”, according to which remittances were recorded as the difference of received and transferred funds, was substituted by the gross flow methodology – received funds are recorded in the credit of that item, and transferred funds – in its debit.

1 Dataonworkers’remittancespresentedinthetextandtablehavebeencalculatedonthebasisofthe2006methodology.

2 SurveysareperformedbytheDepartmentofStatisticsundertherequestoftheBankofLithuania.

2009


1�

FOREIgN TRAdE

In 2009 foreign trade deficit was further shrinking rapidly. This indicator was by 80% smaller compared to 2008. Trade balance improved because the economic downturn in Lithuania, entailing the domestic demand reduction, was deeper than in the majority of trade partners. Therefore, nominal imports dropped more abruptly than exports – by 38.2% and 26.6%, respectively. At year-end, the first signals of the recovery of exports were observed, while imports did not show such signs.

Chart 5. Foreign trade balance(compared to GDP)

After an abrupt decrease at the beginning of the year, nominal exports stabilized after-wards and within the last months started to slowly show signals of recovery. Lithuania’s exports were impacted most of all in 2009 by substantially thinner exports of mineral products due to lower oil prices and weaker demand. The decrease of exports, excluding mineral products, was driven by weaker exports of machines and mechanical appliances, transport equipment. The reasons behind this shift were hampering of investment projects in foreign markets and a general shrinkage of foreign demand. Also, exports of chemical products experienced a material decrease, in particular exports of fertilizers accounting for the largest part of these exports, which in the first half of the year shrank immensely because of smaller prices of fertilizers in the international market. At year-end, in the context of a slight rise of prices, exports of these products started to recover. The reco-very of exports that started in the second half of the year was largely driven by a growth of re-exports of transport equipment. This indicator was impacted by the boom of car purchase in Belarus and Kazakhstan that emerged in the last months prior to the rise of tariff prices of import duties. Towards the end of the year, exports of machines and mechanical appliances, metals, plastics and rubber recovered markedly.


19

At the beginning of 2009, Lithuania’s export market shares in the main foreign trade regions shrank. However, in the second half of the year they increased again and reached or even exceeded the level of recent years. Such an export competitiveness development is partly associated with changes of the nominal currency exchange rates of some trade partners, e.g., depreciation of the Polish zloty and Russian rouble at the start of the year and their slow appreciation afterwards. Larger export market shares are a certain indicator of competitiveness enabling to expect a further recovery of Lithuania’s exports.

Decreased domestic demand caused the shrinkage of imports throughout 2009. The largest drop was registered in mineral products. A significant effect was also exercised by a weaker demand of imported machines and mechanical appliances, transport equipment in the context of enterprises hampering investment projects. Based on macroeconomic categories, the largest drop was observed in imports of investment and intermediate consumption goods. Within the second half of the year, imports stabilized but showed no signs of growth so far.

FINANCINg OF THE CURRENT ACCOUNT dEFICIT

The disappearance of the current account deficit in 2009 was followed by a rapid reduc-tion of the volume of loans from abroad of the banks operating in Lithuania. Debts to foreign creditors were repaid by non-financial sector enterprises as well. The cash flow from Lithuania was increased not only by returned loans but also by growing foreign assets of Lithuania’s residents, because banks were searching possibilities to use excess liquidity abroad. However, portfolio investment net flow to Lithuania was expanding. The largest part of this indicator was composed of the Government of the Republic of Lithuania borrowing by selling bonds in foreign markets. In 2009 this investment was larger than in previous years because, due to a broader budget deficit resulting from the economic downturn, the Government of the Republic of Lithuania was borrowing more.

Chart 6. Current account deficit financing sources(compared to GDP)

2009


20

Capital account surplus in 2009 exceeded the previous year level because of more intensive Eu structural funds transfers for the implementation of investment projects. Net foreign direct investment flow to Lithuania almost disappeared. The main flow of this investment to Lithuania in 2009 were funds received from sales of the remaining shares (9.98%) of the oil processing Public Company ORLEN Lietuva to an investor from Poland, and the investment of parent banks into banks operating in Lithuania in order to increase their capital. Foreign direct investment to Lithuania’s equity capital of non-financial enterprises was of the similar size (about LTL 1.2 billion, excluding income for shares of Public Company ORLEN Lietuva) as a year ago. However, new investments were outweighed by negative reinvestment in Lithuania, indicating losses incurred by foreign investors, including banks.

Gross external debt almost did not change in 2009. However, after a buoyant reduc-tion of GDP, external debt stepped up from 71% of GDP at the end of 2008 to 86% of GDP in 2009. Economic problems caused a change of the debt structure by institutional sectors – external debt of banks and enterprises shrank but the government borrowing rose. This shift entailed a slight reduction of gross debt at the start of the year, but from the second quarter it started to grow again. In 2009 the amount of interest paid was less than a year ago.

pRices anD costs

REASONS BEHINd THE PRICE dEvELOPmENT

To compare with 2008, the average annual inflation based on the Harmonised Index of Consumer prices more than halved in 2009, it shrank by 6.9 percentage points to 4.2%. Approximately half of this shrinkage was driven by lower prices of food, beverages and tobacco, another one third of the reduction was caused by core inflation changes.

Chart �. Contributions to the annual inflation based on harmonised index of consumer prices


21

In the first quarter, annual inflation stood at about 8.5%, because in January it jumped after the rise of VAT, excise duties and administered prices. In the fourth quarter, annual inflation accounted for only about 1%.

With some exceptions, prices were decreasing from April 2009, falling to the most in July and October when some administered prices were reduced. In September prices stepped up due to the rise of VAT rate and excise duty on cigarettes.

CORE INFLATION

In January 2009, annual core inflation jumped after the increase of a standard VAT rate and abolishment or increase of reduced VAT rates applied to particular goods and services, e.g., pharmaceuticals, cultural and accommodation services. Afterwards annual core infla-tion was gradually shrinking, excluding September, when the standard VAT rate was raised again. In October, prices of industrial goods and market services became lower than a year ago, while in November and December their annual decrease was even sharper.

FOOd PRICES

Changes in the prices of food products, beverages and tobacco had a significant effect on the decrease of annual inflation. The impact of alcoholic beverages and tobacco prices on annual inflation changed slightly, annual inflation fell due to cheaper food products and non-alcoholic beverages. Prices of these goods were constantly curtailing from March, excluding September when VAT rate increased. These prices fell to the most in summer months in the context of a large decrease of fruits and vegetables prices. For the entire second half of 2009, prices of food products and non-alcoholic beverages were smaller than a year ago (in December the annual drop of them made up 4.4%). Retail trade of food did not show signals of recovery, thus also signs of the re-emerging demand pressures on prices. However, some prices were pushed up by global price developments, e.g., dairy products prices rose in the last months of 2009 after falling for quite a long time.

Chart �. Contributions of food prices to the annual inflation

2009


22

In the first quarter, excise duties on alcoholic beverages and cigarettes went up. Once more the excise duty on cigarettes was raised in September. In 2009, alcoholic beverages were on average by one tenth and tobacco by one fourth more expensive than in 2008.

AdmINISTEREd PRICES

At the beginning of the year, some administered prices went up, e.g., after the abolish-ment of the VAT incentive on passenger transport services, prices of passenger transport by road and railway increased. Also, prices of electricity and natural gas jumped. How-ever, later, in the mid-year they fell (the price of electricity by 5.8%, of natural gas – by 15.9%).

In the fourth quarter, the main developments of administered prices were associated with heating energy. From the second half of 2009, heating prices for consumers may be recalculated every month according to price movements of fuel used for its produc-tion. A significantly lowered heating price was the main reason behind the decrease of the annual inflation in October when the heating season began.

Chart 9. Contribution of administered prices to the annual inflation

PRICES OF FUELS

In January 2009, excise duties on fuels were raised, thus their prices went up. However, in the first ten months of the year, they were smaller than a year ago. In November and December, they were already higher compared to the corresponding period of 2008, mainly due to the base effect.

The global oil price was going up almost every month of 2009. This was caused not only by the global economic recovery expectations but also by OPEC oil supply restric-tions – although extraction quotas of the OPEC member states were unchanged in 2009, it was decided to keep to previous agreements of extraction reduction.


23

Chart 10. global oil price and fuel prices in Lithuania (annual change)

labouR maRket

The situation in the labour market started to deteriorate from mid-2008. In 2009, unemployment rose further, while the employment and job vacancies were shrinking. The most significant changes were registered in the first quarter of the year when the unemployment rate jumped by 4 percentage points. In the next two quarters, the growth of this indicator was slackening. In the fourth quarter it reached 15.6%. The average level of unemployment in 2009 made up 13.7% (in 2008 – 5.8%). This percentage is approximately equal to the level reached in 2002.

In the environment of shrinking economy, possibilities of getting employed were decreas-ing, therefore the unemployment length increased. In 2009, the vacancy rate1 indicating the staff demand was decreasing, however, not so intensely as in the second half of 2008. In the fourth quarter of 2009, in business activities, excluding agriculture, this indicator accounted for 0.3% (a year ago – 0.8%), and the lowest level was observed in construc-tion and services sector.

In the fourth quarter, the number of employed was 8.2% lower than a year ago. This number dropped sharply in the activities which were affected by the downturn the most – construction and industry. In the services sector, the reduction of employed was slight. In agriculture, where the number of employed was gradually curtailing within previous years, it increased. Because of the dominant position of men in the construction and industry, their level of unemployment grew more buoyantly than that of women, unemployment of unqualified also increased. The unemployment rate of the young people was rising more rapidly than that of total population, and in 2009 it was 29.3%, i.e., approximately the same as in 2000–2001.

In 2009, wages were decreasing. In the private sector, this indicator was lower than a year ago from the first quarter, and in the fourth quarter its annual decrease was 8.0%. In the public sector, the annual decrease was observed only from the third quarter when wages were reduced due to administrative decisions. In the fourth quarter, the annual

1 Thelevelofjobvacanciesiscalculatedbydividingthenumberofjobvacanciesbythetotalnumberofunoccupiedandoccupiedjobs.

2009


24

drop of wages in the public sector (10.4%) was already more intensive compared to the private sector. The largest annual fall in wages was in construction and agriculture.

Chart 11. Wage developments (annual change)

GeneRal GoveRnment finance

INCOmE, EXPENSES ANd dEFICIT

According to the data of the Department of Statistics, the general government deficit in 2009 made up 8.9% of GDP2 (in 2008 – 3.2% of GDP). The main reason behind a higher deficit was a particularly large drop of the general government income because of a deep economic downturn. However, expenses shrank not so much. The latter indica-tor turned to be smaller than a year ago only in the second half of 2009, while its gross flow within three first quarters was still somewhat larger than in a respective period of 2008. The largest decrease in expenses was registered in the fourth quarter (17.9%), and their gross flow curtailed by 4.4% per annum. This was influenced by both, a large comparative base (in the last quarter of 2008 expenses were the largest since the start of the general government data publication in 1999) and administrative decisions taken in September to reduce expenses3.

The share of social security funds was expanding, compared to the total general govern-ment deficit: in the first quarter it made up about 1/5th then it jumped and in the fourth quarter was equal already to over 60%. Based on annual data, this share was expand-ing for the third year in turn: in 2007 it accounted for 5,3%, in 2008 – 30,4%, and in 2009 – 36,6%. The budget deficit of the State Social Insurance Fund4 was equal to 3.3% of GDP in 2009. To compare with 2008, the Fund received 1.2% more income, but its expenses increased much more (11.5%). This shift was impacted by both, administrative

2 ItshouldbenotedthatthecalculationofthegeneralgovernmentbalancecomparedtotheMaastrichtTreatycriterion,includesinterestpaymentsrelatedtoswapsandfutures.Thegeneralgovernmentdeficitcalculatedinthementionedwayin2009wasLTL3.5millionhigher.However,itsratiotoGDPdidnotchangematerially.

3 RepublicofLithuaniaAmendmentLawofArticle3ofLawontheBasicSalaryAppliedin2009,ofStatePoliticians,Judges,StateOfficialsandPublicServants(No.XI360),17July,2009.

� 9January2009pressreleaseoftheStateSocialInsuranceFundBoard.


25

decisions taken in 2008 that pushed them up, and social payments that were soaring because of the economic downturn.

Chart 12. general government income, expenses and balance (four-quarter moving sums, compared to GDP)

The income-to-GDP ratio went down in 2008 due to more rapidly than GDP decreased general government income. The largest shrinkage of income was exercised by a significant drop (30.1%) of tax revenues. The loss incurred because of this decrease was partly offset by more abundant than a year ago social contributions and capital transfers. The growth of social contributions was associated with amendments of the Republic of Lithuania Law on State Social Insurance the came into effect at the start of 2009 – the social insurance has been started to apply to Republic of Lithuania residents receiving income from the sports activity, performer activity or earning income on the basis of the author’s contracts5.

As regards tax income, income from direct taxes curtailed – approximately by 1/3rd. The national budget data suggest that this shift was largely influenced by 41.3% smaller than a year ago profit tax revenues and by 1/4th lower income from personal income tax. This development was impacted by a 8.7% annual decrease of wages6. Income from profit tax was reduced by the fact that the number of profitable enterprises decreased and the increased share of tax payers who preferred to pay the advance profit tax according to less profitable results of 20097.

Income from indirect tax shrank by approximately 1/5th on the annual basis, i.e., a bit more compared to the whole domestic economy. Private consumption expenses con-tracted very much per annum, therefore, income from the value added tax reduced by approximately 1/4th and from excise duties – by 3%. A substantially smaller vis-à-vis other taxes excise income decline was driven by higher tax rates raised since the start of the year, their effect compensated the reduction of income (particularly in the groups of energy products and tobacco8) after the drop of sales level.

5 RepublicofLithuaniaLawonStateSocialinsurance(No.I1336),19December2008.6 2�February2010pressreleaseoftheDepartmentofStatistics”Wagesinthefourthquarterof2009”.7 ReportoftheStateTaxInspectorate”SurveyofthecollectionofnationalbudgetincomeadministeredbyStateTax

Inspectorate,2009”,January2010.8 ReportoftheStateTaxInspectorate”SurveyofthecollectionofnationalbudgetincomeadministeredbyStateTax

Inspectorate,2009”,28January2010.

2009


26

The general government expenditure-to-GDP ratio in 2009 was almost 6 percentage points larger than 2008. Expenses experienced the largest push up by increasing social payments and interest payments. Over the year, expenses on pensions stepped up by almost 1/10th, expenses on sickness benefits and maternity (paternity) insurance benefits soared by more than 1/3rd. A buoyant increase of the latter benefits is expected to be influenced by making use of the calculation of procedure gaps9. Also, the number of benefit receivers grew by more than 1/5th. The sum of paid out unemployment insurance payments soared by more than thrice due to buoyant rise of the number of unemployed persons10.

In 2009 general government expenditure on staff wages was approximately 1.8% less than a year ago. The largest drop in this indicator (14.7%) was registered in the fourth quarter after administrative decisions came into force: the basic salary was reduced twice (all in all, in 2009 it was decreased by 8.2 %), basic monthly salary rate was diminished by 4.7% and the basic hourly pay was cut down by 3.9%. Wage coefficients for public servants and public officials were lessened from 2 to 11%. Wages in the public sector, compared to 2008, started to decrease in the second half of 2009, while in the last quarter this indicator plummeted by 1/10th.

Within the first three quarters of 2009, expenses of the general government gross capital formation (investment) were curtailed by more than 1/3rd compared to 2008 and was the main total expenditure reducing contributor. Also, a profound effect was exercised by smaller expenses for the purchase of intermediate goods and services.

dEBT

Based on the data of the Department of Statistics, at the end of 2009 the general govern-ment debt made up LTL 27.1 billion or 29.3% of GDP. To compare with the end of 2008, the debt-to-GDP ratio stepped up by 13.7 percentage points. i.e., it almost doubled. The central government debt, compared to 2008, expanded by 13.3 percentage points and made up LTL 25.7 billion. A large primary general government deficit for the financing of which the Government of the Republic of Lithuania was borrowing intensively and negative interest/growth rate differential were the main reasons behind an abrupt jump of the debt.

The largest increase over the year was registered in foreign liabilities (70.6%) – they ac-counted for the major share of the general government debt. In terms of liabilities maturity, the most quantitative borrowings were for a longer term – these liabilities boosted by more than 60%. This shift was largely impacted by Eurobond issues subscribed in June and October: the total borrowing made up about LTL 5.5 billion. Approximately the same amount the Government of the Republic of Lithuania borrowed in the domestic market by subscribing issues of Government Securities (public issue for LTL 2.2 billion and non-public issue for LTL 2.8 billion). Short term liabilities shrank in 2009 by more than 1/10th. This change in the second half year, compared to the first semi-annual period, was effected by improved Lithuania’s possibilities to borrow in international financial markets.

9 Therefore,thebenefitassigningprocedurewaschangedfrom1Julyandthecompulsoryinsurancetermtoreceivethematernity(paternity)benefitwasprolongedfrom1October.Also,theperiodonthebasisofwhichtheinsuredincomeiscalculatedandthebenefitamountofthematernity(paternity)insurancefortheinsuredpersonwereprolongedfrom1July.

10PressreleaseoftheDepartmentofStatistics”AccordingtotheassessmentsoftheDepartmentofStatistics,theunemploymentlevelboostedwithin2009bymorethan13.7%”,23February2010.


2�

householD finances

ASSETS ANd INCOmE

Financial assets managed by households in the first quarter of 2009 reached their highest value throughout to whole period of monitoring since the end of 2003. However, until the end of 2009 these assets lost 15% of their value. Over the year, compared to the data of the fourth quarters of 2009 and 2008, the value of financial assets managed by households shrank by 3%. Since the autumn of 2008m, households started to more actively invest into long-term and equity securities issued by the Government of Lithuania or foreign states, investment funds and shares. Over the year, the value of long-term securities, excluding shares, held by households almost doubled, net property in pension funds and insurance reserves grew by 48% and 18%, respectively. Household invest-ment into long-term securities are expected to be stimulated by a very low risk and large return proposed, while net equity in pension funds and insurance reserves jumped due to periodic contributions and profitable activities of funds. However, this growth was outweighed by a decreased value of transferable deposits, short-term securities, long-term loans given to foreign countries and of other types of financial assets.

Chart 13. Structure of financial assets of households

In the context of an increased unemployment and decreased wages, a part of households encountered financial problems. In terms of the solvency of individuals in case they lose their job in the future, it should be noted that according to the Republic of Lithuania Provisional Law on the Recalculation and Payment of Social Payments in effect on 1 Janua-ry 2010, unemployment insurance compensations paid to individuals that lost their jobs were almost halved and cannot exceed LTL 650. On the basis of Survey of Households with a Housing Loan, April 2009, the average loan for house purchase contribution amounted to LTL 1.142 thousand. Thus, for households with financial liabilities, the loss of job may entail solvency problems. In the environment of a complicated situation in the labour market, a part of loans that had been re-structured by postponing payments and expecting that loan beneficiaries would find a job or receive larger income will have to be written off into losses.

A part of individuals that lost their jobs and received smaller income reduced their con-sumption for the avoidance of solvency problems. In addition, since April 2009 falling prices of consumer goods (excluding their jump in September when VAT and excise duties were raised) reduced expenses and also had an impact on the improvement of household solvency.

2009


2�

Chart 14. development of wages, the level of unemployment, consumer price index and confidence indicator.

LIABILITIES ANd EXPENSES

Household liabilities were largely composed of loans (78%). Beginning with the third quarter of 2009, their financial liabilities were shrinking slowly, but the composition re-mained unchanged. Since autumn 2007, the share of loans in euro in the total portfolio of loans to households was expanding and, based on the data of 1 January 2010, made up 70%. This was driven by particularly low interest rates on euro loans. The tendency that households prefer borrowing in euro when the spread between interest rates in litas and euro is increasing, and when that spread is insignificant they are more active in borrowing in litas, has become evident.

Most popular among Lithuanian households are loans with a short initial rate fixation period (up to one year). In 2009, on average 85% of new loans to households were loans with the initial rate fixation period of up to one year. This short initial rate fixation period determines a fast response of households to interest rate changes. Fluctuations of short-term interest rates exercised a rather rapid response on the bank borrowers’ debt repayment expenses and financial position of households.

The drop of the borrowing price because of smaller inter-bank interest rates reduced the amount of funds allocated for the repayment of households’ loans for house pur-chase and eased the loan repayment burden. However, increased bank risk premiums, more stringent lending conditions and smaller income were behind the reduction of the households’ possibility to get a loan. It should be observed that the portfolio of households’ loans for house purchase continues to be one of the largest part of the MFIs loan portfolio and it underwent almost no changes, while loan portfolios to other areas (excluding the general government) curtailed. Although the ratio of the balance of household loans to GDP remained insignificant so far compared to other Eu member states, it jumped markedly in 2009 after the reduction of GDP.


29

Chart 15. The ratio of the balance of housing loans to gdP in Lithuania and some EU member States

Results of the Bank Lending Survey, October 2009 revealed that the majority of banks did not change credit standards within the last half year and lending conditions remained to be tight. They are not planned to be softened in the nearest future. However, because of low central bank interest rates and markedly decreased real estate prices, household borrowing for house purchase may intensify. This conclusion was also supported by the results of the Bank Lending Survey: the majority of banks indicated that an increased demand for house purchase should drive the strongest effect on the anticipated growth of the loan portfolio.

Chart 16. Weighted interest rates of over one month on household deposits and loans for house purchase

It should be noted that an extraordinary phenomenon had been observed since autumn 2008 – interest rates paid by banks to households for deposits were larger than the interest

2009


30

rates received for house purchase loans. In the context of such a situation, it is more useful in economical terms to save and place deposits with banks and there is no use to repay loans before the set term. In the autumn of 2009 this trend changed. However, such an interest rate spread was one of the main contributors behind favourable conditions for a slower shrinkage of the loan portfolio.

HOUSEHOLdS dRIvEN RISK ON CREdIT INSTITUTIONS

In the environment of decreasing financial reserves and income of the population and a soaring level of unemployment, insolvency cases of households with financial liabilities may increase. Additionally, the risk entailed by households on credit institutions would also increase if Lithuania’s economic downturn persisted longer than anticipated.

Higher risk for credit institutions is driven by the households which had been issued loans for house purchase after registering a large ratio of loan to mortgaged assets, when prices in the real estate market were on the top. In the context of a further reduction of real estate prices, a probability of the loan sum to become higher than the value of mortgaged assets is increasing. In such a case a cheapening housing may pose problems to the households which attempting to cover debts to credit institutions will be forced to sell their housing.

loan anD Deposit Developments, inteRest Rates

A slowdown in economic activity had a negative effect on financial situation of indi-vidual sectors, leading to an increase of credit risk and tight credit standards. The fall in credit demand, notwithstanding lower interest rates, reflected lower population and businesses’ confidence amid unfavourable investment prospects. Interest rates paid on deposits11 in 2009 rose to record heights for several recent years as banks attempted to balance their assets and liabilities by currency and to raise liquidity. Nonetheless, deposits remained broadly unchanged during the first three quarters of 2009 before starting to grow in the fourth quarter.

LOANS ANd INTEREST RATES ON LOANS

In response to the intensification of the financial crisis, its global impact and its after-effects on real economy, a number of countries implemented unprecedented measures aimed at enhancing economic growth. An expansionary fiscal and notably more liberal monetary policies, as well as other measures allowed to improve liquidity positions, raise guarantees for and capital of individual participants of the financial system, which in turn inspired confidence in international financial markets. The very first signs of macroeco-nomic recovery observed in the second half of the year enhanced expectations that the global economic downturn had already hit the bottom before starting to grow again. More liberal risk assessment and higher level of risk tolerance prompted a rapid rise in gain of stock market indices. However, the reliance of expansionary policy on market-based financing led to an increase in budget deficits and a rise of uncertainty about assumed liabilities and meeting them in future. Cautious interpretations of economic recovery possibilities as well as constrained reaction of investors had a dampening impact on credit expansion.

11TheevolutionofloanportfolioanddepositshasbeenexaminedbasedonthedataofotherMFIs(commercialbanks,branchesofforeignbanks,creditunions.Owingtothepeculiaritiesandscopeofthedatacollection(e.g.theloanportfolioispresentedinnominalterms,includingspecialprovisions,butexcludingforeignbankbrancheswhichdonotcollectdeposits)theevolutionofthebanksystem’sloanportfolioanddeposits,aspresentedhere,differsfromtheevolutionoftheloanportfolioanddepositsaspresentedinthebanks’financialstatements.


31

Chart 1�. dynamics of the credit default swap interest rates in the Baltic States

Chart 1�. dynamics of quoted stock price index in the Baltic States’ securities markets

Despite of historically low levels of the key ECB interest rates (1%) crediting remained hampered in many countries. Although loan portfolios in the Eu-27 stayed basically unchanged over 2009, they can mask different developments across the individual coun-tries. The annual growth rate of the loan portfolio in larger member states such as Italy, united kingdom, and France decelerated, but remained in the positive territory, while liabilities to the banking systems in Lithuania and Latvia that showed a rapid growth during previous periods declined considerably.

In Lithuania, MFIs’ loan portfolio has kept declining for twelve consecutive months12 driven both by the demand and the supply. On one hand, uncertainty about the future of economics, a record low business and population confidence, and bleak investment prospects had a dampening impact on the borrowing demand. On the other hand, weak financial situation of individual sectors and losses incurred by MFIs as a result of deterio-rated loan portfolio quality contributed to the tightening of credit requirements, which

12ExcludinganegligiblehikeinAugust2009.

2009


32

led to a decrease in market-based debt financing opportunities. Regardless of interest rates on loans going down, MFIs’ loan portfolio declined over 2009 by LTL 6.3 billion or 8.8% mainly due to the decline of lending to non-financial corporations.

Table 2. Loan portfolio changes

2008 2009

Q3 Q4 Q1 Q2 Q3 Q4

Loans (end-of-period); LTL billions 69.8 71.1 68.9 67.4 66.5 64.8

Total loans; annual percentage change 27.7 19.1 9.8 0.6 –4.7 –8.8Loans to non-financial corporations (end-of-period); LTL billions 35.4 35.7 34.8 33.7 33.1 32.4Loans to non-financial corporations; nnual percentage changes 26.3 15.8 8.1 –0.9 –6.4 –9.4

Loans to households (end-of-period); LTL billions 29.8 30.2 29.9 29.5 29.2 28.9

Loans to households; annual percentage changes 30.2 20.6 13.1 4.5 –2.1 –4.3

Total loan to GDP ratio; percentages 63.4 64.0 64.1 65.7 68.7 70.2

Annual loan flow to GDP ratio; percentages 13.8 10.3 5.7 0.4 –3.4 –6.8

Sources:DepartmentofStatisticsandBankofLithuaniacalculations.

The economic downturn prompted a decline in consumption and a fall in sales, while weak financial situation of non-financial corporations deteriorated further as a result of the losses incurred through financial and investment activities. A significant rise in the number of bankruptcies and solvency problems faced by corporations resulted in an increase of non-performing loans within the MFIs’ loan portfolio and a negative impact on borrowing opportunities. A particularly rapid decline in loan portfolio was observed in manufacturing, trade, and real estate sectors after an especially robust lending in previous periods. The slowdown of economic activity made enterprises to limit their investments and market-based debt financing despite of interest rates going down to the levels observed in mid-2006.

Downward wage trends and growing unemployment have changed the borrowing habits of households. The worsening financial situation led to an increase in the share of non-performing loans within the MFIs’ loan portfolio, while tight credit standards hampered the borrowing opportunities. On the other hand, amid pessimistic future expectations an the further decline of interest rates, households avoided assuming extra financial li-abilities despite of a significant decline of interest rates. In fact, the decline of the MFIs’ loans to households was a result of a decline in lending for other purposes since the portfolio of loans for house purchase remained basically unchanged.

Household and non-financial corporations’ liabilities to MFIs were decreasing at a slower pace than economy, therefore the private sector’s debt (credit to GDP ratio) in 2009 kept increasing more rapidly than in the previous period. Nevertheless, at the end of 2009 household and non-financial corporations’ liabilities accounted for 66.3% of GDP, a considerably low level compared with the situation in many other Eu member states.

Some easing of tensions over the sustainability of the Baltic States’ economy triggered the narrowing of the gap between interbank interest rates in national currency and in euro. The latter remained historically low as the ECB did not change monetary policy keeping the key interest rate at a low level.

After a notable decline, interest rates on new loans to Lithuania’s private sector reached the level seen three years ago, and by the end of 2009 they were at 5.4%. This led to


33

the narrowing of the gap between interbank interest rates in litas and euro: since its highest level in June 2009, it shrank nearly twice by the end of the year. Weighted aver-age interest rates went down too. Nevertheless, interest rates in litas continued to be higher than interest rates in euro, thus, liabilities to MFIs in national currency continued to decrease.

Chart 19. Household and non-financial corporations’ liabilities to mFIs in EU member states (end-of-2009; compared with four-quarter GDP amount)

Chart 20. Interest rates on new loans to private sector and their evolution by currency

2009


34

The fast fall of interest rates was contained by risk premia which hiked slightly amid subdued economic activity: risk premia for households went up higher than for non-financial corporations.

dEPOSITS ANd INTEREST RATES ON dEPOSITS

As a result of the weakening in economic activity, operational results of financial sector enterprises in many countries were deteriorating too with some enterprises going bank-rupt. This pushed up the lack of confidence in international financial markets and a need for liquid funds as the value of managed assets went down and borrowers encountered solvency problems. In 2009, banks operating in Lithuania were trying to raise liquidity through collection of deposits in the domestic market. Fierce competition over financial resources of depositors led to a rapid increase in interest rates on deposits, which reached the highest level in several recent years. Central government boosted its deposits with the bank system during the first three quarters of 2009, but due to the withdrawals by other depositors, the total amount of deposits remained unchanged.

Amid increasing signs of economic stability and growing confidence, a growth of deposit amount was observed in the last quarter with total amount of deposits in the banking system broadly growing in 2009 by 8.2% to LTL 39.3 billion at the end of the year. The major depositors of the banking system such as households and non-financial corpora-tions which boosted their deposits despite of the fall of interest rates were the biggest contributors to the growth.

Table 3. Changes in deposits held with banks

2008 2009

Q3 Q4 Q1 Q2 Q3 Q4

Deposits (end-of-period), LTL billions 38.6 36.3 36.1 36.5 36.4 39.3

Deposits; annual percentage change 14.1 –1.3 –1.7 –3.5 –5.9 8.2

Deposits of non-financial corporations (end-of-period), LTL billions 9.3 8.6 8.5 8.4 8.4 9.4Deposits of non-financial corporations; annual percentage change 9.1 –13.2 –6.9 –5.3 –10.9 8.8Deposits of households (end-of-period), LTL billions 25.1 24.7 24.4 24.4 24.0 25.5Deposits of households; annual percentage change 16.0 5.2 3.5 –1.3 –4.2 3.4

Deposits to GDP ratio; percentages 35.1 32.7 33.6 35.6 37.5 42.6

Sources: Department of Statistics and Bank of Lithuania calculations.

The evolution of borrowing requirements of the banking system and low confidence in the sustainability of national currency prompted some changes in the deposit structure. In order to get higher return on financial assets and considering sharp increases in inter-est rates on longer-term deposits, households increased the longer-term lending to the banking system for an agreed period: this was done partly by reducing overnight deposits. However, households’ response to interest rate changes varied. Despite nearly two-fold higher interest rates for deposits in national currency, a reduction in deposits of households was observed. uncertainty regarding further economic development and sustainability of the national currency were the major driving forces behind such preferences.

In the fourth quarter, when the tension eased, the situation changed: in view of the continued difference between interest rates on deposits in litas and other currencies,


35

an increase in litas lending by households to the banking system was observed, while deposits in other currencies remained broadly unchanged.

Chart 21. Changes in deposits held with banks

Chart 22. Interest rates on new loans to private sector and their dynamics by currency

A fall in demand within domestic and international markets and lower sales led to the deterioration of the financial situation of non-financial corporations. Nevertheless, the amount lent by them to the banking system in 2009 made up LTL 0.8 billion. The faster growth of overnight deposits may have be driven by a wish of non-financial corpora-tions to boost their solvency as payments by other business partners was becoming continuously more and more irregular, and the agreed maturity deposits by non-financial

2009


36

corporations remained unchanged in 2009 despite of the interest rates reaching record heights in the several previous years.

On one hand, boosting deposits in foreign currencies was pushed by uncertainty regarding the prospects of economic development, which prevailed in the first half of the year. On the other hand, the reduction of the amount of deposits in litas of non-financial corpora-tions continued for the second year, which might have been driven by sectors open to foreign trade and their need to hold financial assets in other currencies than litas.

II. FUNCTIONS OF THE BANK OF LITHUANIA

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II. FuNCTIONS OF THE BANk OF LITHuANIA

exchanGe Rate anD monetaRy policy

The primary objective of the Bank of Lithuania, which is to seek price stability, is imple-mented using a fixed exchange rate strategy. Law of the Republic of Lithuania on the Credibility of Litas which came into effect on 1 April 1994 provides legal grounds for the fixed exchange rate of the litas. It sets an obligation for the Bank of Lithuania to ensure full backing (100%) for the litas put into circulation with gold and foreign reserves and exchange of the anchor currency into litas at a fixed exchange rate. These principles help to maintain a stable exchange rate of the litas. As of 2 February 2002, the euro is the anchor currency for Lithuania.

under the conditions of the fixed exchange rate regime the Bank of Lithuania cannot directly regulate the litas market interest rates and the amount of litas in circulation as the latter is determined by changing money demand. Due to this reason, it does not have a possibility of making a direct impact on aggregate demand and price level. However, a fixed exchange rate means that the primary objective is pursued indirectly, i. e. it helps to keep export and import prices stable and encourages international trade, it also helps to anchor inflation expectations and support confidence in Lithuanian economic policy. Therefore, the fixed exchange rate of the national currency allows ensuring relative price stability in a long-term. The following features of the economy of Lithuania ensure suc-cessful application of such strategy since April 1994: the openness of its economy and relative flexibility of prices and wages.

exchanGe Rate policy

The objective of joining the euro area as soon as Lithuania complies with the convergence criteria is one of the main goals of the state macroeconomic policy. The introduction of the single currency will allow Lithuania to benefit from the advantages the single currency offers: no exchange rate risk, cheaper borrowing in the domestic market, no currency exchange costs, and cheaper cash transfers for settlement with key trade partners in Europe. This will give a boost to the trade and financial integration of Lithuania, increase attractiveness of the country to investors and the welfare of its residents.

One of the conditions for the adoption of euro is the country’s participation in the ERM II. Lithuania participates in the ERM II and maintains the fixed exchange rate regime and a stable exchange rate of the litas against the euro, which is LTL 3.45280 for EuR 1 since 28 June 2004.

In its convergence programmes the Government of the Republic of Lithuania has stated many times Lithuania’s plans to continue its participation in the ERM II and maintain the fixed exchange rate of the litas against the euro at the current rate. The Bank of Lithuania ensures the maintenance of institutional capacities for smooth and rapid cur-rency changeover in case the Eu Council adopts a decision to introduce the euro in the country.

2009


3�

The tensions within global and domestic financial markets significantly decreased fol-lowing the improvement of the expectations over global and local economic prospects as well as productive efforts of governments and central banks to mitigate the economic crisis. The litas and euro interest rate differences and risk premia in case of Lithuania’s sovereign credit default swaps declined 3-4 times reaching the level observed in October 2008. Against this background, the currency board arrangement preceding the introduc-tion of the euro in Lithuania continues to be an important stability factor.

Chart 23. differences of short-term and long-term litas and euro interest rates

In May and June 2009 a temporary hike in VILIBOR and EuRIBOR was observed as a result of the concerns of market participants regarding Latvia’s possibilities to receive the second tranche of the international bailout and vulnerability of economies of Lithuania and other Central and Eastern European states in case of adverse developments. Starting with July, the spread of interest rates in litas and euro has declined rapidly. Latvia received access to the cross-border support funds. In 2009, particularly in the second half, large amount of long-term funds were injected into Lithuania’s economy. They came from the Eu structural funds and regional development banks as well as the Government of the Republic of Lithuania, as the latter used the inflows from the Eurobond issues in June and October. In January-February, the spread of interest rates in litas and euro continued to decline.

monetaRy policy instRuments

Monetary policy instruments of the Bank of Lithuania aim at maintaining a stable litas exchange rate against the euro and help to ensure appropriate liquidity in the banking system. The Bank of Lithuania exchanges litas into euro without restrictions upon request of commercial banks established in the country and foreign credit institution branches (hereinafter referred to as banks), applies reserve requirements, and provides overnight lending facility.

In implementing the stable litas exchange rate regime, the Bank of Lithuania has as-sumed a commitment in respect of the banks, to which it applies reserve requirements, to buy and sell anchor currency without restrictions at the official exchange rate. The net


39

result of the euro purchase or sale by the Bank of Lithuania over a certain period directly depends on the change of the autonomous factors of the banking system reserves in litas13, required reserves and excess reserves.

The Bank of Lithuania made available the facility of overnight lending for the collateral of eligible securities to banks participating in the payment system LITAS-RLS, so that it is possible to ensure stable settlements among banks, if necessary. Banks however did not apply for overnight lending facility either in 2008 or 2009. Required reserves, an efficient interbank settlement system and the anchor currency exchange facilities at the Bank of Lithuania enabled banks to manage their liquidity reliably by themselves.

Table 4. Monetary policy instruments of the Bank of Lithuania

Provision of liquidity

Absorption of liquidity

Maturity Frequency Procedure

Standing facilities for banks

Anchor currency sale to the Bank of Lithuania

Anchor currency purchase from the Bank of Lithuania

– Access at the discretion of counterparties

Bilateral transactions, the Bank of Lithuania purchases euro and settles on trade date or the second day following trade date and sells euro and settles on the second day following trade date

Overnight repurchase agreements

– Overnight Access at the discretion of counterparties

Bilateral transactions

Required reserves

Banking system liquidity stabilisation

The reserve base consists of the liabilities of banks established in Lithuania, except liabilities to the Bank of Lithuania and other credit institutions that are subject to reserve requirements applied by the Bank of Lithuania. Zero reserve requirement ratio is applied to the following: 1) deposits with an initial maturity of over two years or with the redemption notice term specified in a relevant agreement of over two years; 2) debt securities issued with an initial maturity of over two years; 3) repurchase agreements.The reserve requirement ratio of 4% is applied to other liabilities of the base. Required reserves are held in litas on settlement accounts of banks with the Bank of Lithuania. Maintenance period: from the 24th calendar day of a month to the 23rd calendar day of the consecutive month, inclusive. Compliance with the reserve requirement is assessed on the basis of the averaging provision.

RequiReD ReseRves anD the factoRs that DeteRmine liquiDity Developments in the bankinG system

Although the Bank of Lithuania reduced reserve requirement ratio to 4% in 2009, the volume of required reserves of the banking system changed only marginally. However, this had an impact on the composition of bank liabilities. At the end of January 2010 required reserves totalled LTL 1.934 billion, a decrease of 3% compared to the end of 2008 mainly due to a decline in banking liabilities with initial maturity of up to two years, which are subject to reserve requirements. The decrease in liabilities to foreign banks and other residents seems to be largely offset by an increase in resident deposits which grew over the year by 70% to 80%.

Long-term liabilities of banks with initial maturity of over two years, which are subject to zero required reserve ratio, after an impressive 23% growth in 2009 declined in a similar way as short-term liabilities, with their composition changing only slightly. At the end

13AutonomousfactorsofthebankingsystemreservesinlitasaretheBankofLithuaniaoperationsthathaveanimpactontheamountofreservesofthebankingsysteminlitas,butarenotperformedduetotheneedsofthebankliquiditymanagement.ThemainautonomousfactorsaretheamountofcurrencyincirculationandthetransferofthegeneralgovernmentfundsfromthebankingsystemtotheBankofLithuaniaorfromtheBankofLithuaniatothebankingsystem.

2009


40

of 2009, long-term liabilities of banks totalled LTL 28 billion, a year-on-year decrease of 3.7%. The change was the result of a decline in liabilities of banks to foreign banks and in long-term bonds in circulation.

The share of long-term liabilities in the composition of banking liabilities (37%) has re-mained broadly unchanged, much like the share of similar liabilities of credit institutions of the euro area (in December 2009, they made up 36%). Same as earlier, the largest share of long-term liabilities of banks (90%) consisted of the funds lent by foreign banks, mainly parent banks, while the funds atracted through long-term bonds and long-term deposits accounted for 5% each.

The Bank of Lithuania also applies a zero reserve requirement ratio to the banking funds attracted through repurchase agreements. This type of agreements traditionally made up a small share of bank liabilities that are subject to zero reserve requirement ratio with their share fluctuating during the period under review from 0.3 to 0.7%.

Chart 24. Banks’ reserves in litas, held in the Bank of Lithuania

In 2009 autonomous factors had significantly larger impact on an increase in the sup-ply of banking reserves in litas compared to 2008, while banks, with self-regulation of money supply being ensured by the currency board, bought respectively more euro from the Bank of Lithuania. During the period, autonomous factors led to an increase of LTL 13.7 billion in banking reserves (in 2008 banking reserves grew by 2.9 billion). Due to the economic downturn in 2009, the demand for cash went down by 17.6% (LTL 1.7 billion) with cash going back to banks’ settlement accounts with the Bank of Lithuania contributing to a boost in the surplus of required reserves in litas. By exchang-ing the funds received from the Eu structural funds and the funds borrowed in foreign currency into litas and by using them in the domestic market, the Government of the Republic of Lithuania made the bank reserves in litas to climb in 2009 by LTL 12 billion from LTL 3.4 billion in 2008. Since the volume of required reserves as it was mentioned previously changed insignificantly, the amount of euro bought by banks from the Bank of Lithuania exceeded the amount sold to it by LTL 14.3 billion consequently reducing the reserve surplus in litas.

More intensive impact of autonomous factors contributed to the Lithuanian banking system’s larger surplus of required reserves in litas in 2009 as compared to previous


41

years. Monthly average of the required reserves surplus of the banking system made up 10% during the period, while in the period from 2005 to 2008 it fluctuated from 1.7 to 4%.

foReiGn exchanGe opeRations

Same as in previous years, the amount of foreign exchange bought by the Bank of Lithuania from the Ministry of Finance of the Republic of Lithuania was higher than the amount sold, while the amount of euro sold to banks was higher than the amount purchased from them; however, the economic downturn and lower money demand had an impact on the amount of foreign currency in net terms, which was higher than in 2008. In 2009 the sale of foreign exchange to banks by the Ministry of Finance of the Republic of Lithuania and other depositors totalled LTL 11.7 billion, while the purchase of euro by banks exceeded the sales by LTL 14.3 billion. Consequently total sale of foreign exchange by the Bank of Lithuania to commercial banks exceeded total purchase by LTL 2.6 billion in 2009, a year-on-year increase of LTL 0.4 billion.

Table 5. Net sales of foreign exchange to the Bank of Lithuania LTL millions

2008 2009

Q1 Q2 Q3 Q4 Q1–Q4

By domestic banks –3,643.7 –4,321.9 –3,799.6 –2,367.6 –3,802.4 –14,291.5By other depositors of the Bank of Lithuania 3,283.2 2,309.1 3,233.0 1,689.4 4,498.8 11,730.3

Total –360.5 –2,012.8 –566.6 –678.2 696.4 –2,561.2

Source:BankofLithuania.

The amount of foreign exchange transactions concluded by the Bank of Lithuania to-gether with domestic banks and its other depositors in 2009 totalled LTL 68.5 billion, a decrease of 7% compared to 2008. An average amount of its transaction with banks was LTL 68.5 million, 19% lower than in 2008.

Chart 25. Foreign exchange trading between Bank of Lithuania, com-mercial banks, and other depositors

2009


42

supeRvision of cReDit institutions

When exercising the supervision of credit institutions, the Bank of Lithuania acts within the limits of the powers conferred upon it, and monitors credit institutions’ compliance with laws and requirements laid down by legal acts of the Bank of Lithuania, the Interna-tional Accounting Standards and recommendations of the Basel Committee on Banking Supervision regarding safe and reliable banking practices. It also submits proposals on preventive measures designed to allow effective and reliable functioning of individual banks and the entire banking system.

supeRvision of cReDit institutions: key tRenDs

The Bank of Lithuania pays much attention to the preventive measures designed to manage bank risks and increase banks’ capital (capital base).

To improve risk management in banks and other credit institutions, extra requirements for boosting internal control and risk management processes were put in place in 2009 focusing on credit and liquidity risks management, setting new requirements regarding the management of previously unregulated risk types and additional requirements for the management of operational risk. Banks had to take commitment to revise their risk man-agement process and limits of trading operations, and implement other requirements.

Having in mind a robust economic growth in previous years and a risk of overheating, the Bank of Lithuania instructed banks to boost their capital to ensure the coverage of potential losses. The decision has proved effective: the banking system remained stable throughout 2009, and did not need help either from the Bank of Lithuania or the Government.

During 2009, banks put in place the Internal Capital Adequacy Assessment Process (ICAAP) to assess the underlying risks and calculate capital requirement to cover them. Along with the ICAAP results they submitted to the bank of Lithuania their plans on how they were going to boost their capital. The internal capital adequacy requirements set by banks in Lithuania are 9.5% to 10%, higher than the minimum prescribed level. After approaching the level, solutions are to be found to increase the capital or reduce the asset risks. One of the key goals of the ICAAP is to assess the underlying risks and identify the measures to manage them, as well as define internal capital requirements. They are calculated not only for credit, market and operational risks, but also for risks that banks have overlooked or understated in the General Regulations for the Calculation of Capital Adequacy, such as concentration risk, interest rate risk defined in the banking book, strategic, goodwill risk, and other risks.

The Bank of Lithuania in turn conducted the Supervisory Review and Evaluation Process (SREP) to determine whether banks can properly manage their risks and whether their capital holdings are enough to cover these risks. Both during off-site inspections, when an initial ICAAP review is conducted in an individual bank, and on-site inspections, the analysis of the assumptions that are used to identify the underlying risks in all fields of banking activities and decide upon the risk assessment and management methods, as well as risk mitigation measures in banks was done.

Along with SREP, the central bank once a year carries out full-scope and target on-site inspections in all banks. During target inspections special focus was given to the manage-ment of individual risks, certain fields of bank activities, as well as other issues. As stated above, the issues related to the management of credit and liquidity risks were given par-ticular attention in 2009. During general on-site inspections the highest risk bearing areas of banking operations were a matter of primary interest, as well as the control of credit


43

and liquidity risks, market and operational risks, and internal control. Risk management systems were examined to find out whether they are sound and effective, and whether they allow for timely risk identification, assessment, and management, and whether banks ensure compliance with the requirements of legal acts regulating banking operations, internal regulations, and whether the statements submitted to the Bank of Lithuania are drawn up correctly. Also, during inspections the Bank of Lithuania acts in cooperation with supervising authorities in other countries notifying them of planned inspections, and later of their results, and exchange other relevant information with them.

In order to objectively assess liquidity problems faced by banks, the latter are requested to send basis additional information on structural changes in their assets and liabilities on a daily basis. In case that any major changes in the asset and liabilities’ structure are detected, banks are requested to provide explanations as well as decide on measures to be taken to cover potential liquidity risk. The Bank of Lithuania holds on a regular basis individual meetings with heads of all the banks operating in our country. Given the economic downturn-determined negative changes in the Lithuanian market and re-lated foreign markets, these meetings are held to find out about the banks’ operational prospects and present to their management the Bank of Lithuania’s stance on the issues it considers the most urgent for the period by emphasizing the need to improve credit and liquidity risk management, further increase banks’ capital, etc.

After considering unfavourable and fast developments in financial markets and based on the data available on 1 July 2009, banks performed stress testing for all types of risks. The exercise revealed that capital adequacy ratio would be respected both in case of a standardised scenario and extreme stress scenario.

In order to ensure that compensation for bank employees was linked to their perform-ance results and to avoid assuming unreasonable risk, the Bank of Lithuania established Minimum Remuneration Policy Requirements for Employees of Credit Institutions. They must be applied to banks, foreign bank branches, and the Central Credit union of Lithua-nia, that hold a licence issued by the Bank of Lithuania. Paying bonuses or making other payments to employees whose performance may have a major impact on the assumed risk, credit institutions must comply with minimum requirements.

Given the recent trends in the operations of financial sector enterprises, that reflect increasing use of outsourcing ancillary services to the third parties, and in order to re-main in control of risks related to outsourcing, new outsourcing regulations have been introduced. The regulations specify the key principles to be followed by an outsourcing bank. It has been specified that outsourcing of bank ancillary services shall be conducted in accordance with the policies approved by the bank, which must cover every aspect of outsourcing relating to both significant services and those that do not have significant influence for determining proper risk management mechanism for this process. Consid-ering the amendments to the Law of the Republic of Lithuania on Credit unions, these regulations are also to be applied to credit unions.

The approval of the Financial Crises Prevention and Management Plan by the Govern-ment of the Republic of Lithuania at the end of 2008 was followed by the approval of the Procedure for Setting Financial Crises Prevention and Management Stages and for Information Exchange by the Bank of Lithuania.

To maintain stability of the financial sector the institutions in charge of the supervision of the Lithuanian financial market agreed on cooperation and information exchange in relation to crises prevention and control within the financial sector. The aim of agree-ment-based cooperation is to monitor the health of the financial sector, to protect public

2009


44

interest and public finances against negative consequences of the financial sector crisis and, if necessary, to take measures to enhance the financial sector’s stability and reliability. For financial crises prevention purposes the identification and assessment of the banking system’s risk level, referring to the incoming documents, is done on a regular basis.

In view of the economic situation within the country and revised Law of the Republic of Lithuania on Credit unions, the Bank of Lithuania worked out the following legal acts that regulate operations of credit unions: new financial statements, rules for calculating prudential and loan assessment requirements. The recast of the law provides for the new credit union membership requirements, a wider circle of potential debtors of credit unions and higher credit risk. The Loan Assessment Requirements have laid down major principles to be followed by credit unions when calculating changes in the loan value. Also, the rules for calculating liquidity and capital adequacy ratios have been tightened, as well as requirements for loans the payment of which considering the developments in real estate market must be secured by real estate. The extension of the range of services provided by credit unions was followed by the revision of the balance sheet positions, specification of information about deposits, loans and changes in their value, as well as different disclosure of equity components.

In 2009, the Bank of Lithuania continued to work on the approval of internal ratings based credit risk assessment approach for one of the banks. Its employees participated in meetings between representatives of supervisory institutions from Estonia, Latvia, Sweden, and representatives of the applicant bank to discuss the countries’ attitudes towards requirements for IRB approach and documents to be submitted. The submission of the application for approval to use this was followed by the document check-up and a target on-site inspection of the bank that was granted permission to apply the IRB approach to separate position groups.

When preparing to implement provisions of the Eu directive on payment services in the internal market and following the approval by the Seimas of the Law of the Republic of Lithuania on Payments (recast) and amendments and supplements to other laws, the Board of the Bank of Lithuania adopted legal acts regulating the issuance of licences to payment institutions, their operations, calculation of equity capital, internal control and risk management, reorganisation and winding-up procedures, as well as other require-ments to be met by payment institutions to ensure that their operations are stable, reliable and secure. Also, financial statement forms for payment institutions, such as forms for balance sheet, profit (loss) statement, protection of incoming funds and capital calcula-tion, have been prepared.

The banking sector accounts for a significant part of Lithuania’s financial sector with the latter being one of the most vulnerable sectors of economy because of the role it plays in building the population’s and agents of economy confidence in the domestic financial system and its sustainability. Considering this and in order to ensure proper and timely use of the financial system stability enhancement measures, the Bank of Lithuania staff and experts of the Finance Ministry of the Republic of Lithuania prepared a draft law on the financial sustainability, which was approved by the Seimas in the middle of the year. In 2009, experts of the Bank of Lithuania took part in preparing the by-laws required for implementing the above law.

In implementing the Eu directive as regards procedural rules and evaluation criteria for the prudential assessment of acquisitions and increase of shareholdings in the financial sector, amendments and supplements were have been made to the Law on Banks in Lithuania. It has been laid down that a person or the persons acting in concert, who have


45

taken a decision on the acquisition of a qualifying holding in a bank’s authorised capital and/or voting rights or to increase it so that the proportion of the bank’s authorised capital and/or voting rights held by him would reach or exceed 20%, 30% or 50% of the holding or so that the bank would become controlled by him, must give a written notice thereof to the Bank of Lithuania. Amendments to respective legal acts of the Bank of Lithuania have been adopted, considering amendments to the above law.

The IMF mission that visited Lithuania in June 2009 to analyse the country’s macroeco-nomic and financial stability, gave their evaluation of the general economic forecasts and implementation of economic policy measures. A series of meetings was held with the Board of the Bank of Lithuania to discuss situation in the banking sector. The mission concluded that the Bank of Lithuania took proper measures to safeguard the banking system during the economic downturn: it raised capital adequacy requirements and extended the list of assets eligible as collateral for maintaining liquidity resources, whereas early identification of potential loans related problems helped banks to take necessary measures in time.

Review of cReDit institutions’ activities

There are 9 commercial banks, 8 foreign bank branches, and 5 representative offices of foreign banks operating in our country, which hold the Bank of Lithuania-issued bank-ing licences. As of 1 January 2010, the Bank of Lithuania had received 229 notifications from the supervisory authorities in Eu Member States regarding intentions to provide services in Lithuania without establishing branches.

KEy INdICATORS OF THE BANKINg SySTEm

unlike in previous year, 2009 could not be rated as very successful for the country’s banking system. Conservative crediting practice that was followed that year led to a significant decrease in credit supply as well as the demand for financial recourses in banks. This prompted the reduction of debt to parent banks, a significant worsening of the loan portfolio quality, and banks reporting losses instead of profits.

The assets and loan portfolio of the banking system kept decreasing throughout 2009. Its assets fell by 6.1% to LTL 84.2 billion on 1 January 2010, while loans issued to bank customers went down by 13.8% to LTL 61.4 billion. However, the growth of deposits in 2009 has completely offset the decline of deposits in the fourth quarter of 2008, triggered by a sudden withdrawal of significant amount of deposits from banks. Over the year, deposits grew by 7.4% to LTL 41.1 billion. In 2009, the deposit growth was observed in all depositor groups, although the highest increase was observed in funds deposited by general government; they went up to LTL 1 billion or 1.9 times. A significant increase was also observed in deposits of private enterprises (of LTL 798.5 million or 7.5%) and deposits of individuals (of LTL 607.7 million or 2.5%).

Banks previously oriented towards encouraging crediting and boosting the loan share in their assets, shifted in 2009 to another crediting policy: they significantly limited crediting focusing on liquidity management, which means that they increased their reserves in the form of liquid assets to use them in case of a sudden run on banks without incurring significant losses. Thus, the shrinking of the banks’ loan portfolio was followed by a de-crease of the share of loans in their assets, while the share of liquid assets kept growing leading to an increase in the share of the banks’ (mainly in parent banks’) holdings of funds and debt securities. During the year, the share of loans dropped by 6.5 percentage points to 73.1%, while funds held with banks grew by 3.5 percentage point to 10%, and the share of debt securities went up by 2.5 percentage points to 9.2%.

2009


46

Chart 26. dynamics of banks’ assets, loans and deposits(end-of-period)

In issuing loans, banks that operate in Lithuania focus mainly on domestic market, although an increase in funds kept in foreign banks and investments into securities of foreign issuers led to the growth of the share of assets invested abroad from 11.9 to 17.4%. In addition, a further growth was observed in the banks’ assets in foreign currency (mainly in euro): during 2009, its share went up by 8.4 percentage point to 72.9% of total assets.

Chart 2�. Composition of banks’ assets(end-of-period)

In 2009, a significant change was also recorded in the composition of the banks’ sources of financing. Banks were successful at collecting (a very costly process) deposits within internal market, however the scope of their activities decreased making banks reduce their debt to other banks (parent banks among them). In 2009, debt to banks and other credit institutions went down by LTL 6.7 billion or 17.1%, while a big share of funds


4�

repaid to banks went to parent banks: during the year, the amount paid by Lithuanian banks to their parent institutions made up LTL 6.1 billion. This led to an annual decrease of debt to banks by 6.2 percentage points to 41% of total balance sheet liabilities. De-posits as a share of liabilities continued to grow too: deposits of residents and private enterprises, as a share of liabilities, respectively grew by 2.1 and 1.6 percentage points, while the share of other deposits went up by 2 percentage points.

Such changes significantly pushed that share of loan portfolio, which is financed by deposits, up: a year ago, customer deposits were the main financial resource for 53.5% of that time loan portfolio, while the remaining portion of the portfolio was financed with other bank resources (mainly funds from parent banks), while in 2009 the share of the loan portfolio financed with deposits made up 66.7%. Furthermore, due to the above changes in the composition of banks’ financing resources the Lithuanian banking system became less reliant on the financing from other countries: on 1 January 2010, the funds of non-residents accounted for 46.2% of the banking system’s liabilities, a drop of 6.0 percentage point year on year.

Irrespective of the fact that deposits with banks were pushed up in 2009 mainly by the funds collected within domestic market, there was some decrease in litas deposits, while deposits in foreign currencies posted an increase. In the first half of 2009, deposits in litas showed an apparent downward trend, while deposit in euro demonstrated an upward trend; situation reversed in the second half, and deposits in litas started growing: during the fourth quarter, deposits grew practically only due to an increase in litas deposits.

Chart 2�. Composition of banks’ liabilities (end-of-period)

In 2009 two banks and three foreign bank branches reported profit, while other seven banks and five foreign bank branches were in the red. In 2009, the entire banking system operated in the red with total operational loss having reached LTL 2.9 billion. Excluding the losses of a subsidiary of one of the country-operating banks, which were covered by extra contributions made by the shareholder of the parent bank, the loss of the bank-ing system went up even higher, to LTL 3.6 billion. In 2008 the banking system earned profit of LTL 0.9 billion.

2009


4�

Chart 29. Banks’ net profit(end-of-period)

The major factor behind such a large loss (ten times compared to 2008) of the banking system in 2009 was the growth of assets (loans, investments into subsidiaries, and good-will) depreciation expenses. In 2009 they were close to LTL 5 billion, i. e. a year-on-year increase of LTL 4.4 billion. This type of expenses went up by LTL 3.5 billion mainly on the back of the increase in loan impairment. Operations of some subsidiary enterprises of banks (mainly enterprises engaged in financial lease or leasing) operated at a loss in 2009; therefore banks used extra contributions to boost their capital and investments into them, although after the revision of the investments value the banks formed provi-sions of LTL 772.7 million against the impairment, the amount of which went up by LTL 748.8 million compared to 2008. Moreover, in 2009 one of the biggest banks operating in the country performed a write-down of the calculated goodwill leading to a fall in the goodwill value by LTL 169.6 million. The operational profit of the banking system amounted in 2009, prior to the assets depreciation, to LTL 1.3 billion staying broadly unchanged compared to 2008, when it was 1.4 billion.

Poor results of banking operations were determined by a decline in operational income, i. e. net interest rate income and net income from services and commission fees. Banks earned interest rate amounted to LTL 1.3 billion, a fall of 35.4% compared to 2008. This happened mainly because of shrinkage of the loan portfolio, while unfavourable situ-ation in the market was the major factor behind a decrease in spread between interest rate income and interest rate expenses or the real interest margin. On 1 January 2010 it reached 1.3%, the lowest level by historical standards.

Although banks continued to increase service fees, a reduced economic activity and a consequent fall in the demand for banking services led to a drop in net income of services and commission fees in 2009. In 2009 total amount of this type of income by banks made up LTL 648.2 million, a 6.6% drop year on year.

In the light of unfavourable conditions in the market and a significant decline in the banks’ operational results nearly all of the banks started in 2009 gradually reducing operational expenses in an attempt to offset the continued fall of their income. They fell in 2009 by 10.4%. Banks managed to significantly curtail their operational expenses at the expense of staff costs. Overall number of employees within the banking system (excluding em-ployees in foreign bank branches) went down during the year by 803 or 8.5%.


49

Due to loss-making operations in 2009, the ROA and ROE ratios in the banking system were respectively –4.2 and –48.4% on 1 January 2010.

BANK CAPITAL ANd ITS INCREASE

On 1 January 2010, the non-resident share in the banking assets accounted for 87.4%. The Scandinavian investors’ capital continued to dominate the Lithuanian banking system.

The banking operational risk is limited by Bank of Lithuania which establishes a capital adequacy ratio. In 2009, the established capital adequacy ratio was met by all the banks with a considerable room left for meeting them in future. During the year, the capital adequacy ratio grew by 1.3 percentage point to 14.2% on 1 January 2010. Moreover, the capital adequacy ratio has been raised.

In an attempt to enhance their resilience to potential losses, in 2009 many banks used various capital instruments to increase their capital base: they boosted their authorised capital by LTL 966 million, reserve capital by LTL 190 million, Tier II capital by including new subordinated loans (LTL 101.8 million) and undated debt securities (LTL 72.5 mil-lion); a shareholder of one of the banks used his own funds (LTL 690.6 million) to cover the current year financial loss of the subsidiary bank. All these steps helped to retain the banking capital base broadly unchanged (a slight decline of 3.9% was observed) during the year despite huge financial losses. The country’s banking system structure is sound as up to 73.3% of its capital is made up of Tier I capital.

The capital adequacy ratio increased during the year due to a decrease in risk assumed by banks: The banking assets (mainly loans) which declined significantly in 2009 led to a decrease in capital requirements for credit risk.

When carrying ICAAP, banks calculated extra capital requirement for various types of risks which was overlooked or understated in accordance with the General Regulations for the Calculation of Capital Adequacy.

BANKS By mARKET SHARE

As in the wake of the economic downturn the largest banks abandoned active expansion plans and foreign bank branches further intensified their operations, the concentration of the banks that occupied the largest market share in 2009 decreased across the major market segments. During the year, their market share declined by 1.2 percentage point to 64.3%, while loans and deposit shares went down by 0.4 percentage point each (accounting respectively for 66.1 and 65.7%). Meanwhile, the market share of foreign bank branches grew over the year in all the major segments.

Chart 30. market share of banks by assets(end-of-period)

2009


50

BANKS’ OPERATIONAL RISK REvIEW

Credit risk

Although the amount of loans issued by banks in 2009 totalled LTL 6.8 billion, however the payment of loans from previous years and increasing special provisions led to a year-on-year decrease in loan portfolio by LTL 9.9 billion (13.8%). For comparison: during 2008 it grew by LTL 11.3 billion.

The fall in loans to businesses was deeper (LTL 6.2 billion) than in other segments of the loan portfolio, consequently their share within the loan portfolio shrank over the year by 1.8 percentage point to 50.5% on 1 January 2010. Loans to households were decreasing slower than loans to businesses; consequently their share within the loan portfolio went up over the year by 3.8 percentage point to 43.8% on 1 January 2010. Loans to finance institutions went down during the year twice or by LTL 1.9 billion. Their share in the banking system’s loan portfolio decreased from 5.4 to 3.2%. This was determined by a drop in bank loans to subsidiary enterprises engaged in financial lease or leasing opera-tions. The contribution of other segments of loan portfolio to the banking system’s loan portfolio was less pronounced: lending to general government and municipal enterprises grew over the year by LTL 123.7 million, while lending to government institutions fell by LTL 154.0 million. On 1 January 2010 these types of lending accounted respectively for 0.6 and 2.0% of the banking system-issued loans.

Housing loans decreased over the year only by 2.1%. Few reasons could stand behind this relatively insignificant fall of the loan portfolio. First, these are long-term loans; therefore compared to other loans the repaid amount is moderate, while the remain-ing repayable amount is melting slowly. Second, a relatively slight deterioration of the quality of this type of loan portfolio was observed in 2009, i. e. an increase in special provisions had a less of an impact on the value of these loans compared to other loan portfolio segments.

In 2009, interest rates on litas loans were well above interest rates on euro loans, which led to some changes in the loan portfolio structure by currency: the share of litas loans shrank over the year by 9.1 percentage point to account of 26.3% of the loan portfolio on 1 January 2010.

Weaker economic activity and export, a decline in real estate prices, an increase in the number of enterprise bankruptcies, higher unemployment, lower wages, and conserva-tive estimation of bank loans and losses that some banks have incurred or may incur, resulted in a significant impairment of bank loans. During 2009, special provisions by banks went up by LTL 3.9 billion to LTL 4.7 billion on 1 January 2010, while special provisions to loans ratio made up 7.2%. For comparison: according to the data as of 1 January 2009, this ratio was 1.2%.

Other indicators that show the quality of loan portfolio continued to deteriorate rapidly. The impaired loans to loan portfolio ratio increased over the year from 3.4 to 15.8%, and the loans overdue for more than 60 days14 to loan portfolio ratio hiked from 1.1 to 3.5%.

The loan portfolio quality indicators were mostly pushed down by loans granted to businesses. According to the data in the Loan Risk Database, the liabilities to banks by enterprises that went bankrupt or were under restructuring in 2009 made up ap-

1�Loansoverdueformorethan60daysbecomesubjectforanalysisonlyincasetherehavebeennospecialprovisionsmadeagainstthemonanindividualbasis.


51

proximately LTL 2 billion (6.5% of the portfolio of loans to enterprises) compared to LTL 0.3 billion in 2008.

The data available on 1 January 2010 show that banks without breaching the capital adequacy ratio were capable of withstanding credit risk losses in the amount of LTL 2.4 billion, i. e. they were able to raise special provisions by 50% or to increase the volume of special provisions by LTL 26.0 billion.

Liquidity risk

Despite the economic downturn in the country, liquidity in the domestic banking system continued to improve during 2009. upon their return, the cash flows from loans were used for the acquisition of more liquid assets, such as debt securities, and were directed mainly to the accounts in parent banks, rather than to be used for further crediting. Furthermore, a continued decline of current liabilities was observed mainly due to the funds repayment to parent institutions in 2009, as the crediting crunch led to a decline in banks’ demand for the said funds.

The Bank of Lithuania has set a minimum liquidity ratio of 30% to be met by all the banks and foreign bank branches operating in the country. In 2009 they complied with this ratio. The liquidity ratio of the Lithuanian banking system continued to be above 40%, while on 1 January 2010, it went up as high as 49.9% (the highest level since autumn 2001).

In the context of adverse market developments, banks tend to boost their resilience to liquidity risk by raising their reserves of liquid assets thus ensuring that meeting of liabilities is not hampered. Subsidiary banks may expect under necessity a support from their parent banks, whereas local capital banks are more vulnerable in this respect. The latter hold larger reserves of liquid funds compared to banks that belong to foreign bank groups.

Market risk

According to the capital adequacy report, on 1 January 2010, the capital required to cover market risks amounted to LTL 328 million or 7.2% of the overall capital require-ment for all types of risks, as calculated by banks.

Chart 31. Structure of capital required to cover market risk(end-of-period)

During the year the amount of capital needed for reducing risks associated with interest rates declined by LTL 11.4 million to LTL 95.8 million on 1 January 2010. The share of the overall market risk capital required to cover interest rate risk contracted by as much

2009


52

as 33.9 percentage points to 29.2%. Although capital need to cover foreign exchange rate risk was higher than capital need to covering interest rate risk, nevertheless when building their forecasts of potential losses the banks operating in Lithuania consider interest rate risk more important.

As already mentioned above, the largest share of market risk capital was used to cover foreign exchange risk, and according to the accounts available until 1 January 2010 it amounted to LTL 226.6 million or 69.2% of the total market risk capital. This entire market risk capital amount (LTL 226.6 million) was formed as a result of the open position in euro. Many banks as well as the entire banking system have maintained a long position in euro. Its further growth in some of the banks was a result of their asset structure being increas-ingly dominated by euro (loan currency switching between litas and euro led to an increase in euro holdings in parent banks), as well as an opposite trends regarding liabilities (the currency of attracted funds was being switched between euro and litas). The overall open foreign currency position (excluding euro) in the banking system was short accounting for 0.8% of the banks’ capital (maximum allowed position makes up 25%). An open position in uSD accounted for the largest share of the overall open foreign currency position.

The equity securities’ price risk assumed by banks operating in Lithuania is insignificant (LTL 5.3 million only or 1.6% of market risk capital for covering risks associated with equity securities price), as the largest share (91.1%) of equity securities represent invest-ments into subsidiary enterprises, that are recorded in the banking book.

OperatiOnaL risk

upon the migration to Basel II capital adequacy regime in 2008, banks started measuring operational risk as a distinct class of risks, and calculate capital requirement for cover-ing potential losses that arise due to human fault, systems, resulting from inadequate or failed internal processes, and from external events, including legal risk. The capital adequacy report showed that on 1 January 2010, 6.9% of the banking system’s capital requirement was sufficient to cover operational risk.

To ensure adequate management of operational risk the Bank of Lithuania requests the banks, including banks that use less sophisticated quantitative methods to compute capital requirements for operational risk to continuously improve their operational risk management system: to store internal information about real losses incurred by banks as a result of operational risk; to carry reviews of information systems to adapt them better to specific needs of information management, storage and analysis; to work out plans for stress-testing and business continuity; to give proper attention to management of a risk associated with outsourcing of ancillary services, etc.

opeRations of the centRal cReDit union of lithuania

Over the year, the assets held by the CCuL grew by 49.3% to LTL 205.1 million. Any changes in the CCuL’s assets have a direct bearing on the developments of their main source of financing or deposits held with credit unions (members of the CCuL). Approxi-mately 83% of the CCuL’s assets are financed by using deposits. Over 2009 deposits surged by 54.3% to LTL 170.8 million. However, downward trends were observed in the loan portfolio of the CCuL too: since second quarter 2009 the loan portfolio contracted by 43.8% to LTL 45.9 million on 1 January 2010.

The number of the CCuL’s members (credit unions) remained unchanged over the year standing at 61, while total additional share capital (LTL 9.6 million) belonged to 59 credit unions. On 1 January 2010, the Government of the Republic of Lithuania had one main share worth LTL 1,000.


53

Even during the economic downturn the quality of the CCuL’s loan portfolio remained good. For the first time, the CCuL has formed special provisions of LTL 0.2 million against loans issued by one credit union. The special provisions to loan portfolio ratio continued to be very low standing at 0.5% on 1 January 2010. On 1 January 2010, the CCuL had no loans that were overdue by more than 60 days.

An increase in the scope of credit unions’ activities was accompanied by the growth of the CCuL’s Liquidity Support Reserves and Stabilisation Fund, that are formed of contributions of its members, respectively by LTL 6.4 million and LTL 4.7 million on 1 January 2010. During 2009 five credit unions were granted approximately LTL 1 million in subordinated loans by the Stabilisation Fund. In 2004 the CCuL helped twenty three credit unions to deal with liquidity problems by providing liquidity loans.

Over 2009 the CCuL earned in profit LTL 955 thousand, almost twice higher amount than in 2008, when its profit totalled LTL 599 thousands. The major factor behind the profit growth was a hike in net interest income which went up following an increase in the volume of operations of the CCuL.

In 2009, the CCuL complied with all the prudential requirements set by the Bank of Lithua-nia, and there was still ample room for meeting liquidity and capital adequacy ratios.

activities of cReDit unions

In 2009 the number of credit unions operating in the country remained unchanged: on 1 January 2010, there were 67 credit unions with the total of 103 thousand members, quite a moderate year-on-year increase of 7.7 thousand. Farmers have continued to be the most active participants of credit unions since the engagement in agricultural activi-ties is one of the membership requirements in many credit unions. On 1 January 2010, asset holdings of credit unions accounted for 1.1% of the banking system assets.

Chart 32. Key Indicators of credit unions(end-of-period)

Despite unfavourable economic situation in the country, credit unions have managed to maintain the growth trend although its pace as compared to previous years has notably slowed down. The assets managed by credit unions went up 17.4% to LTL 933 million at the end of the year, the volume of loans increased 1.1% to LTL 599.5 million, and the volume of deposits rose 29.8% to LTL 773.8 million.

2009


54

The growth of credit unions’ assets was largely driven by the assets growth of the ten largest credit unions; this was the reason for the concentration in the credit union sector to increase over 2009 by 2.9 percentage points to 50.7%.

The growing number of credit union members and the efforts of credit unions to strengthen their capital base through increasing shares that are necessary to get loans resulted in a 16.8% rise of credit unions’ share capital to LTL 108.0 million on 1 January 2010.

Due to unfavourable economic situation in the country the borrowers of credit unions could not afford repaying loans in time, which was the major reason behind the worsen-ing of the loan portfolio quality indicators. Over 2009 special provisions by credit unions against loans went up by 69.2% to LTL 8.8 million, while the special provisions to loan portfolio ratio hiked from 0.9 to 1.4%.

In 2009 credit unions posted a loss of LTL 5.3 million (in 2008, they earned profit of LTL 0.7 million). Loss was reported by 34 credit unions, while 33 credit unions ended year in the black. Similar to the banking sector, their operations were loss-making due to an increase in loan impairment. Net interest income that went down owing to a 2.3% decline in real interest margin was another factor behind the negative impact on operational results.

According to the data as of 1 January 2010, all credit unions complied with the prudential requirements set by the Bank of Lithuania. Liquidity ratio was 42.0%, 12.0 percentage points above the minimum level of 30%. Capital adequacy requirement for credit unions is higher than for banks. The required ratio should be no less than 13%. On 1 January 2010, this ratio equalled to 18.6%, i. e. the set minimum ratio was met with a rather high reserve.

cash manaGement

Implementing its exclusive right to issue banknotes and coins, the Bank of Lithuania puts into and withdraws from circulation banknotes and coins of the Republic of Lithuania, establishes the denominations of banknotes and coins, organises production of banknotes and coins, their transportation and storage and forms reserve funds of banknotes and coins according to the procedure established by law.

cuRRency issue anD withDRawal

In 2009, the value15 of banknotes and coins in circulation decreased by LTL 1,697.3 million. The Bank of Lithuania issued into and withdrew from circulation LTL 1,145.6 million and LTL 2,842.9 million respectively. Over the year, the value of currency decreased by 17.6% (in 2008 it increased by 5%). As at 31 December, the value of currency in circulation including collectors (commemorative) coins and numismatic sets made up LTL 7,932.2 million, compared to LTL 9,629.5 million one year ago.

Table 6. Net currency issue and withdrawal (–) LTL millions

Year Quarter

I II III IV I–IV

2008 –468.3 224.0 120.1 585.3 461.1

2009 –1,306.4 –316.0 –271.6 196.8 –1,697.3


15Includingcollectors(commemorative)coinsandnumismaticsets.


55

The value of currency in circulation decreased most significantly in the first quarter of 2009 and increased before the Christmas and New Year holidays.

Chart 33. Litas in circulation

banknotes anD coins in ciRculation

As at 31 December, the number of banknotes in circulation totalled to 73.4 million, with the value of LTL 7,735.3 million. From the beginning of the year, the number of banknotes dropped by 9.5 million (11.4%) and their value decreased by 1,697.9 million (18.0%). With the diminishing demand for high denomination banknotes, the average value of a banknote in circulation decreased from LTL 113.8 to LTL 105.4 over the year.

Chart 34. value of litas banknotes in circulation

As a number of litas banknotes in circulation decreased currency issuance from and ac-ceptance to the Bank of Lithuania was lower compared to the previous year. In 2009, the Bank issued 166 million (186 million pcs. in 2008) and accepted 175 million pieces of banknotes (185 million pcs. in 2008). The average return frequency of banknotes in circulation shows how many times on average banknotes in circulation return to the Bank of Lithuania during the year. This process is advantageous since authenticity of banknotes

2009


56

and their fitness for further circulation can be verified more often. In 2009, as in 2008, the same banknote returned to the Bank of Lithuania 2.4 times on average.

Chart 35. Number of litas banknotes in circulation

unfit rate of banknotes in circulation indicates the share of banknotes returning to the Bank of Lithuania unfit for further circulation. In 2009, the average unfit rate of ban-knotes increased from 18% to 23%. Over the year, 46.2 million of the total 175 million banknotes accepted by the Bank of Lithuania were acknowledged as unfit for further circulation and destroyed (26.5 million pcs. in 2008).

As at 31 December 2009, 200 litas banknotes accounted for the largest share of the total value of banknotes in circulation. Over the year, their share increased from 48.4% to 49.1%. Over the year, the share of 100 litas banknotes in circulation increased by 1.6 percentage points. The share of 500litas banknotes in circulation decreased by 3.1 percentage points.

As at 31 December, the number of circulation coins in circulation totalled to 927.1 mil-lion, with the value of LTL 186.3 million. From the beginning of the year, the number of coins increased by 28.6 million (3.2%) while their value shrank by 0.5 million (0.3%).

Chart 36. Number of litas and centas in circulation


5�

1 and 2 centas coins accounted for the largest share of the total number of circulation coins in circulation (38.6% and 20.5% respectively). In 2009, the demand for these coins made up nearly 88% of the total demand for coins. The hugest amount issued was that of 1 centas coin: 16 million pieces (35 million pieces in 2008). The average number of litas and centas circulation coins per capita in Lithuania increased by 3%, i.e. to 273 coins of which 105 coins were 1 centas coins.

At the end of the year, 1, 2 and 5 litas coins accounted for nearly three fourths (73.3%) of the total value of coins in circulation. Over the year, the share of 5 litas coins increased by 0.1 percentage point, the share of 2 litas coins decreased by 0.4 percentage point and the share of 1 litas coins in circulation left unchanged.

Table 7. Banknotes and coins in circulation

Denomination 31 12 2008 31 12 2009 31 12 2008 31 12 2009

LTL millions

Percentage share

LTL millions

Percentage share

Million pcs.

Percentage share

Million pcs.

Percentage share

Banknotes

LTL 1 2.6 0.0 2.6 0.0 2.6 3.2 2.6 3.6

LTL 2 2.6 0.0 2.6 0.0 1.3 1.6 1.3 1.8

LTL 5 2.2 0.0 2.2 0.0 0.4 0.5 0.4 0.6

LTL 10 101.7 1.1 98.7 1.3 10.2 12.3 9.9 13.4

LTL 20 202.3 2.1 202.1 2.6 10.1 12.2 10.1 13.8

LTL 50 487.1 5.2 413.6 5.4 9.7 11.8 8.3 11.3

LTL 100 2,188.5 23.2 1,921.3 24.8 21.9 26.4 19.2 26.2

LTL 200 4,566.1 48.4 3,794.6 49.1 22.8 27.6 19.0 25.9

LTL 500 1,880.0 19.9 1,297.6 16.8 3.8 4.5 2.6 3.5

Total banknotes 9,433.1 100.0 7,735.3 100.0 82.9 100.0 73.4 100.0

Coins

LTL 0.01 3.4 1.8 3.6 1.9 342.5 38.1 358.1 38.6

LTL 0.02 3.6 1.9 3.8 2.0 180.2 20.1 189.6 20.5

LTL 0.05 3.6 1.9 3.7 2.0 71.5 8.0 74.6 8.1

LTL 0.1 14.2 7.6 14.3 7.7 142.5 15.9 143.1 15.4

LTL 0.2 13.4 7.2 13.5 7.3 66.9 7.4 67.5 7.3

LTL 0.5 11.0 5.9 10.8 5.8 22.0 2.5 21.6 2.3

LTL 1 38.6 20.6 38.5 20.6 38.6 4.3 38.5 4.2

LTL 2 49.0 26.2 48.1 25.8 24.5 2.7 24.0 2.6

LTL 5 50.1 26.8 50.1 26.9 10.0 1.1 10.0 1.1

Total circulation coins 186.8 100.0 186.3 100.0 898.5 100.0 927.1 100.0Collectors (commemorative) coins and numismatic sets 9.5 10.6 0.2 0.3


collectoRs (commemoRative) coins

The Bank of Lithuania issued four collectors (commemorative) coins in 2009: one gold coin (Au 999.9) and three silver coins (Ag 925). The quality standard of the coins was proof (a mirror surface with mat relief). A 1 litas circulation commemorative coin made from alloy of copper and nickel was also issued. All coins were minted at the Lithuanian Mint.

On 17 March, the Bank of Lithuania issued 50 litas silver coin and 1 litas coin from alloy of copper and nickel dedicated to Vilnius, European Capital of Culture 2009 (diameter 38.61 mm, weight 28.28 g, mintage 10,000 pcs.).

2009


5�

The obverse of the coin features a stylised coat of arms of the state Vytis while the reverse features a drawing Muse symbolising the conception of European culture, i.e. antique culture, and the easel imitating the contours of the Gediminas Castle – the symbol of Vilnius. The edge of the coin bears the inscription VILNIuS – METROPOLIS CuLTuRAE EuROPENSIS

The designer of the coin is Vytautas Narutis.

Chart 3�. 50 litas silver coin dedicated to vilnius, European Capital of Culture 2009

Diameter of 1 litas circulation commemorative coin is 22.30 mm, weight 6.25 g, mint-age 1 million pcs.

The designer of the coin is Vytautas Narutis.

Chart 3�. 1 litas coin from alloy of copper and nickel dedicated to vilnius, European Capital of Culture 2009

On 26 June, the Bank of Lithuania issued the third 100 litas gold coin from the series dedicated to mark millennium anniversary of the mention of the name of Lithuania (diameter 22.30 mm, weight 7.78 g, mintage 10,000 pcs.).

The obverse features the coat of arms of the state Vytis, improvised for the first time calligraphically. The reverse features an extract from the act restoring the independence of the state of Lithuania displayed in the form of a plastic metaphor, a monograph of the 11th of March Act, designed by Bronius Leonavičius, and the Gediminian Columns. The edge of the coin bears the inscription LIETUVOS VARDO TŪKSTANTMETIS (millenniumofthenameofLithuania).

The designers of the coin are Bronius Leonavičius and Giedrius Paulauskis.

Chart 39. 100 litas gold coin from the series dedicated to the millennium anniversary of the mention of the name of Lithuania

Continuing the series “Historical and Architectural Monuments of Lithuania”, 50 litas silver coin dedicated to the Tytuvėnai Architectural Ensemble – the eighth in the series – was issued on 15 September (diameter 38.61 mm, weight 28.28 g, mintage 10,000 pcs.).

The obverse of the coin features a stylised coat of arms of the state of the 17th century on a shield. The reverse features artistically depicted fragment of the Tytuvėnai Architec-


59

tural Ensemble. The edge of the coin bears the inscription ISTORIJOS IR ARCHITEKTŪROS PAMINkLAI (historicalandarchitecturalmonuments).

Designer of the coin is Rytas Jonas Belevičius.

Chart 40. 50 litas silver coin dedicated to Tytuvėnai architectural ensemble

On 8 December, the Bank of Lithuania issued 50 litas silver coin dedicated to Lithuanian nature (diameter 38.61 mm, weight 28.28 g, mintage 10,000 pcs.).

The obverse of the coin features the symbol of the coat of arms of the Republic of Lithua-nia Vytis. The reverse features Silenelithuanica–a plant included in the Red Data Book of Lithuania. The edge of the coin bears the inscription LIETuVOS GAMTA (Lithuaniannature)(twice); dividers – blossoms of Silenelithuanica.

The designer of the coin is Giedrius Paulauskis.

Chart 41. 50 litas silver coin dedicated to Lithuanian nature

On 4 May, a numismatic set of circulation coins of 2009 was issued into circulation (Bu and proof-like quality). The mintage of the set is 5.5 thousand pieces.

Chart 42. Numismatic set of circulation coins of 2009

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60

counteRfeit litas banknotes anD coins

In 2009, 1,958 counterfeit banknotes and 1 counterfeit 5 litas coin were identified in Lithuania. The number of counterfeit banknotes was close to the average number of counterfeit banknotes (1,993 pcs.) calculated from the date of the introduction of the litas. As in the previous year, the largest share of counterfeits consisted of 100 litas ban-knotes of the 2000 issue that accounted for 60% of all counterfeit banknotes. Counter-feit banknotes were most often printed using inkjet printers and sometimes contained imitations of banknote security features (watermark, security thread, fluorescent security features visible when exposed to uV light, etc.). The quality of counterfeit banknotes was low, therefore, they could be easily distinguished from the genuine ones by doing “feel-look-tilt” test and comparing them to genuine banknotes.

In 2009, identified counterfeits accounted for around 0.002% of the total number of banknotes in circulation: one counterfeit banknote per 37,500 (15,000 banknotes in euro area) banknotes in circulation. The overall level of counterfeiting in Lithuania remains relatively considerably lower compared with other Eu member states.

foReiGn ReseRve manaGement

One of the functions of the Bank of Lithuania is the management, use and disposal of the foreign reserves of the Bank of Lithuania. The Bank aims to invest foreign reserves safely, liquidly and profitably and thus ensure a smooth functioning of exchange rate regime.

official foReiGn ReseRves

In 2009, official foreign reserve assets (hereinafter referred to as “foreign reserves”) increased by EuR 66.2 million (LTL 228.6 million) or 1.5%. At the end of the year they made up EuR 4,639.2 million (LTL 16,018.3 million).

Chart 43. Foreign reserves

Foreign reserves increased due to the following: increase of central government depo-sits – by EuR 384.0 million (LTL 1,326.0 million), allocation of the special drawing rights by IMF – by EuR 150.1 million (LTL 518.0 million), change in non-resident deposits – by EuR 81.7 million (LTL 282.0 million) and other factors – by EuR 82.8 million (LTL 285.9 mil-lion). Foreign reserves shrank due to the following: decrease of currency in circulation – by


61

EuR 491.8 million (LTL 1,698.1 million) and change in other MFI deposits – by EuR 140.5 million (LTL 485.0 million).

foReiGn ReseRve functional paRts anD key manaGement pRinciples

The main objective of the Bank of Lithuania in managing foreign reserves is to ensure such an amount of liquid foreign resources that is sufficient to maintain the fixed exchange rate of the litas against the anchor currency at any time. Therefore, foreign reserve man-agement is primarily guided by liquidity and safety principles. Subject to meeting these requirements, foreign reserves are managed to achieve maximum return.

In determining the foreign reserve investment strategy, the Bank of Lithuania takes into consideration the fact that under the fixed exchange rate regime frequent interventions in the domestic currency market evoke fluctuations in the amount of foreign reserves. However, even in cases of turbulent domestic financial markets, a part of the foreign reserves remains untouched. Taking that into account, foreign reserves have been split into three functional parts: liquidity, investment and gold portfolios.

Functional parts of foreign reserves are subject to different requirements. Foreign reserves in the liquidity portfolio are primarily meant to satisfy the Bank of Lithuania’s urgent liquid-ity need emerging from the performing of operations in the domestic foreign exchange market and managing accounts of depositors. Holdings in the liquidity portfolio may be needed at any time therefore a one-month investment horizon is applied when deter-mining an investment strategy of the portfolio. The Bank of Lithuania seeks to manage the liquidity portfolio in a way that portfolio return over the period of one month never turns negative and systematically exceeds the return on risk-free investments (overnight interbank deposit rate).

If necessary, holdings of the investment portfolio may be used for interventions in domestic foreign exchange markets and other purposes, but, as they are unlikely to be needed within the established period, the priority is given to the profitability requirement. An investment horizon of one year is applied when defining an investment strategy for the investment portfolio. Investment portfolio is managed so as to ensure that, within this period, portfolio return has low probability to turn negative and that over the reason-ably long term the average annual return on the portfolio exceeds the average annual return on an investment into a highly secure financial instrument with the maturity of one calendar year.

Gold is invested into time deposits or gold swaps.

LIqUIdITy OF FOREIgN RESERvES

Following the liquidity principle, the Bank of Lithuania manages foreign reserves so that, if needed, investments can be liquidated promptly and without significant costs, and the proceeds received can be used for interventions in the foreign exchange market or for other purposes.

The Bank invests the major part of foreign reserves into highly liquid financial assets. This ensures that almost all foreign reserves can be liquidated in a very short time and at relatively low cost even during the period of financial market turbulence. In 2009, the share of investment in particularly liquid government bonds accounted for 65% of foreign reserves.

The liquidity requirements applied by the Bank of Lithuania ensure that regular-size in-terventions in the domestic foreign exchange market are made and its liabilities vis-à-vis its depositors can be met without liquidating any investments.

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62

Chart 44. Breakdown of investment by financial instruments (31 December 2009)

SAFETy OF FOREIgN RESERvES

When investing foreign reserves, the Bank of Lithuania faces risks of several types, i.e. credit, exchange rate and interest rate risks. Adhering to the safety principle applied to foreign reserves, it sets requirements and limits to manage all these risks.

Credit risk is limited by compiling lists of eligible counterparties and issuers and estab-lishing investment concentration and individual limits. The list of counterparties and issuers includes only those counterparties and issuers, which have been assigned high credit ratings by international rating agencies. In 2009, investment in the most secure financial instruments, i.e. those rated Aaa, accounted for 55%. The average credit rating of the Bank of Lithuania foreign reserve investment was Aa3.

Chart 45. Composition of foreign reserves by rating (31 December 2009)

Credit risk is reduced through a wide application of the diversification principle. Ac-cording to this principle, investment limits are assigned to financial instruments, issuers, counterparties and their groups as well as to issuers and counterparties of the same country. In 2009, investment was made in various financial instruments of 15 countries. Individual limits established for each counterparty prevent excessively high concentration of investment and operations.

Like many other central banks, the Bank of Lithuania faces foreign exchange rate and gold price risks. Due to unfavourable developments in exchange rates, the value of fo-


63

reign reserves measured in the national currency may decline. As our country has a fixed exchange rate of the litas against the euro, the Bank of Lithuania reduces the currency risk to the minimum by investing almost all foreign reserves (excluding gold) – unrelated to liabilities in foreign currencies – in euro denominated assets.

Gold price in euro terms grew by 25.3% and the value of gold held by the Bank of Lithuania increased over the year by LTL 100.8 million.

Table 8. Composition of foreign reserves unrelated to liabilities in foreign currencies (31 December 2009; percentages)

Currency 2008 2009

Euro 97.1 96.3

Gold* 2.9 3.7

Total 100.0 100.0

Source:BankofLithuania.*Changeintheshareofgoldisrelatedtothechangeinthepriceofgoldandliabilitiesinforeigncurrencies.TheamountofgoldheldbytheBankofLithuaniadidnotchangeovertheyearandis5.8t.

The Bank of Lithuania as an agent of the State Treasury manages accounts of the State Treasury, public funds and some government institutions. It also acts as a depository for funds received from IMF on behalf of the Republic of Lithuania. In 2009, 137.2 million of SDR were transferred into the account of the Republic of Lithuania which is managed by the Bank of Lithuania.

In order to avoid the exchange rate risk, assets corresponding to liabilities in foreign cur-rencies are invested in the currency of liabilities. At the end of the year, the breakdown of liabilities in foreign currencies was as follows: 81.2% in euro, 16.0% SDR and 2.9% in uSD.

To ensure the safety principle, the Bank of Lithuania, apart from credit and exchange rate risks, also controls the interest rat risk. The latter is managed by establishing a benchmark for each functional part of the foreign reserves, its modified duration (MD), the allowed deviations (in terms of MD for benchmarks) and the maximum maturity of individual investment.

Table 9. Average annual MD of foreign reserves and individual portfolios (31 December 2009)

Functional parts 2008 2009

Liquidity portfolio 0.24 0.29

Investment portfolio 1.30 1.31

Gold portfolio 0.07 0.02

Totalforeignreserves 1.10 0.97


MD index indicates investment sensitivity to changes in fixed interest rates although it does not provide comprehensive risk assessment. The VAR helps to get a more comprehensive assessment of the assumed risk and, in addition to the investment sensitivity to changes in interest rates, takes into account interest rate volatilities and their interaction.

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Table 10. VAR of foreign reserves (31 December 2009; EUR millions)

2008 2009

Liquidity portfolio 0.1 1.0

Investment portfolio 4.4 2.5

Gold portfolio 3.8 2.5

Diversification effect –2.8 –2.1

Totalforeignreserves 5.5 3.9

Source:BankofLithuania.Note:VARcalculationisbasedonparametricalapproachapplyingRiskMetricsmethodologyanddata.Thisindexindicates95%ofpredeterminedprobabilitythatduetothechangesofinterestrates,goldpriceandexchangeratesvalueofforeignreserveswillnotchangebymorethantherespectiveEURamountduringthenextbusinessday.

At the end of 2009, VAR of foreign reserves was lower compared to the end of 2008. This was mostly influenced by considerably lower fluctuations in interest rates and gold price and a slightly smaller MD of foreign reserves.

RETURN ON FOREIgN RESERvES

upon reaching compliance with the key requirements of safety and liquidity applied to the foreign reserve management, the foreign reserves are managed adhering to the principle of profitability, i.e. they are invested so that the earnings are maximised over the long term.

In 2009, return on the foreign reserve investment was 3.85%. High return on foreign reserves was determined by a successful foreign reserve investment policy and favour-able market conditions.

Table 11. Return on foreign reserve portfolios(percentages)

2005 2006 2007 2008 2009

Liquidity portfolio 2.05 2.91 4.05 4.09 0.19

Investment portfolio 2.15 2.01 3.76 5.57 4.47

Gold portfolio 0.00 0.00 0.04 0.09 0.04

Total* 2.11 2.38 3.81 5.00 3.85

Source:BankofLithuania.*In2008,returnontheforeignreserveinvestmentwaslargerthanin2009,howevertheprofitoftheBankofLithuaniain2009wasbigger.Thatwasduetothefactthatunrealisedrevaluationlossesofsecuritiesattheendoftheyeararerecognisedasexpenditurewhileunrealisedrevaluationgainsofsecuritiesareleftintherevaluationaccount..In2008,unrealisedrevaluationgainsofsecuritiestotalledtoLTL188.0million(LTL97.8millionin2009).

The Bank of Lithuania pursues a conservative investment policy, i.e. its investment is always exclusively made in the highly secure financial instruments. In 2009, 80% of foreign reserves were invested in government debt securities of economically developed states. Central banks and governments of economically developed countries continued to pursue expansionary monetary and fiscal policy. It justified itself and helped to stabilise a situation in the financial sector and created more favourable conditions for economic activity. Demand for more risky investment recovered in financial markets, risk premiums decreased, however, fluctuations remained relatively marked. Considerable excess liquidity in the Eurosystem pushed the interest rates down. Particularly interest rates decreased over the first half of the year. Interbank overnight interest rates decreased by as much as 195 basis points and two-year German Government securities yields shrank by 42 basis


65

points, therefore, prices of all securities of shorter-term maturity raised significantly. The spreads between yields on German government and governments of other euro area government bonds, government agency and covered bonds also shrank considerably over 2009. Lower interest rates as well as narrower yield gap were particularly favourable to the available investment return outcome.

The return on foreign reserves functional parts fulfilled the main requirements. Liquidity portfolio did not suffer loss for any single month and was consistently higher than the return on risk-free investment (overnight interbank deposit rate). The return of invest-ment portfolio was positive over the long period of time (i.e. since 2002) and its return exceeded the annual return on a one year investment on a one-year investment in a highly secure financial instrument.

statistics

One of the major tasks of the Bank of Lithuania is to meet needs of the users for com-prehensive financial statistics that would be compliant with the international statistics standards and comparable with the statistics of other Eu Member States. The scope of statistics prepared by the Bank corresponds to that of the ESCB statistics. The Bank of Lithuania collects, compiles, publishes and disseminates to internal and external users the statistical information on MFI balance sheet and interest rates, securities, payment instruments, money and foreign exchange markets, official reserve assets, balance of pay-ments and international investment position, gross external debt and quarterly financial accounts of institutional sectors. It also prepares and disseminates statistical publications (http://www.lb.lt/lt/leidiniai/index.htm) and publishes statistical information on its website (http://www.lb.lt/lt/statistika/index.htm).

In December 2009, The Board of the Bank of Lithuania approved the revised general provisions of the MFI balance sheet and interest rate statistical reporting and reporting forms. They were prepared following the ECB’s regulations and guidelines on monetary and financial statistics. The main changes of the MFI balance sheet statistics reporting are related to the additional data about financial instruments, particularly, that about loans (e.g. loans backed by real estate collateral, syndicated loans, revolving loans and overdrafts, convenience and extended credit card credit, and transferable deposits). Statistical report-ing for the MFI interest rates on loans and deposits is renewed by a larger-scale grouping of interest rates on loans by purpose, amount of a loan and interest rates with fixation period and supplemented with data on interest rates on loans backed by the collateral and guarantees. Revisions of the MFI balance sheet statistical reporting were discussed during the meetings with the representatives of the reporting agents. The data according to the revised statistical reporting requirements will be started to be collected since mid-2010.

In 2009, the Bank of Lithuania started to collect data on assets and liabilities for collec-tive investment undertakings (CIu) under the security-by-security approach. Following the ECB guidelines on monetary and financial statistics, the Bank of Lithuania prepares and provides to the ECB the short-term statistics on investment funds’ balance sheets. In order to avoid an increase in the statistical reporting burden, the Bank of Lithuania uses additional sources of information and brakes down the CIus’ asset and liability data by balance sheet item, maturity, counterparty’s residence and sector. Such information is used as a feedback to institutions that were previously engaged in its collection.

The Bank of Lithuania improved the statistics on money and foreign exchange markets: it started to collect data about interbank lending and borrowing as well as data about

2009


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currency markets according to the new reporting forms, and changed the form for the provision of data on the internet site with a more comprehensive and more attractive one for users.

The quality of the data of the Balance of Payments of the Republic of Lithuania and the scope of the provided information received good evaluation in the Annual Report by Eurostat. The report pinpoints to the fact that “errors and omissions“ in the balance of payments are insignificant and tend to decrease, which shows the balance of payments to be balanced internally.

The Bank of Lithuania continued to improve management of the databases on securities and foreign loans, and further improved quality of that data. This information is used to compile statistics on investment funds, securities issue, external sector statistics, and country’s quarterly financial accounts. In the long run, it will lead to more comprehensive, accurate statistics that meets user needs: a possibility will arise to prepare statisticson the basis of information from administrative registers.

In 2009, the Bank of Lithuania further improved loan risk data base , seeking not just to increase the number of data providers and extend the scope of information but to reduce the burden to data providers and to refuse excess information. Statistical information pro-vided in bulletins and on the internet web site of the Bank of Lithuania, as well as the one transmitted to the ECB was further improved. The External Statistics yearbook published for the first time balance of payments by individual countries and their groups, i. e. main trading partners of Lithuania. In order to meet increasing needs of users, the internet site was supplemented by more comprehensive data about quarterly financial accounts of the country: they are grouped by institutional sectors and subsectors. In the field of external sta-tistics sector, the Bank compiled a preliminary external debt-service payment schedule.

On its website (http://www.lb.lt/statistika/pranesimai.htm), in a separate section of sta-tistics, the Bank of Lithuania began publishing statistical releases of a new form. They are comprehensive, with diagrams and tables, and users may effectively obtain the latest information on the most urgent economic issues.

To improve the data quality and avoid boosting workload for providers of statistical information, the Bank of Lithuania has increased the use of other institutions-collected data on pension funds, securities, general government finance, and external economic relations. In 2009, the Bank signed agreements with the Securities Commission of the Republic of Lithuania and the Statistics of Lithuania on the exchange of statistical infor-mation and data.

At the end of 2009, during the traditional Bank of Lithuania meeting with the compilers and providers of statistical information participants discussed changes in official statistics of Europe, main novelties in financial and external sector statistics, as well as urgent issues of supervision and activities of payment institutions, decrease of administrative burden for respondents, improvement of quality management, and other actual issues.

payment anD secuRities settlement systems

One of the functions of the Bank of Lithuania is to encourage stable and efficient ope-ration of payment and securities settlement systems. In performing this function, the Bank of Lithuania provides settlement services, conducts the oversight of payment and


6�

securities settlement systems and coordinates the participation of market entities in international projects.

payment systems foR settlements in litas

The Bank of Lithuania owns the real-time gross settlement system LITAS-RLS and the designated time retail payment system LITAS-MMS and performs the function of the operator of these systems. It ensures reliable operation of the systems, consults their participants, maintains management information, ensures business continuity of the systems and performs other administrative tasks.

At the end of 2009, the systems LITAS-RLS and LITAS-MMS included 24 participants each: the Bank of Lithuania, 9 commercial banks, 5 foreign bank branches, “Lietuvos centrinis vertybinių popierių depozitoriumas” (Central Securities Depository of Lithuania (CSDL)), the CCuL and 7 financial brokerage companies. Compared to the end of 2008, 3 financial brokerage companies discontinued their participation, and one foreign bank branch became a new participant.

The number of payment orders processed by the system LITAS-RLS decreased, but the value remained basically the same. Compared to 2008, the daily average volume processed by the system decreased by 11.2%; while the daily average value increased by 0.8%. The highest payment traffic (2,6 thousand payments) in this system was recorded on 13 November, the highest value of payments (LTL 2.9 billion) was processed on 18 March.

The number of payment orders processed by the system LITAS-MMS changed relatively marginally, but the value decreased significantly. Compared to 2008, the daily average vol-ume processed by the system decreased by 0.8%; while the daily average value decreased by 18.1%. The highest volume (174 thousand payments) was recorded on 30 December and the highest value (LTL 1.4 billion) of payments was processed on 1 October.

Table 12. Transactions of LITAS-RLS and LITAS-MMS.

Year Volume of transactions, thousand Value of transactions, LTL millions

Total Daily average Concentration ratio*, %

Total Daily average Concentration ratio, %

2008 335 1.3 66.8 322,231 1,294.1 52.6 (LITAS-RLS)

26,946 108.2 72.8 237,755 954.8 66.0 (LITAS-MMS)

2009 302 1.2 65.1 330,161 1,305.0 53.3 (LITAS-RLS)

27,169 107.4 72.6 197,950 782.4 61.0 (LITAS-MMS)

Source:BankofLithuaniacalculations.*Concentrationratioistheshareoftransactionsofthreebankswiththelargestvolumeofpaymentsintotalpaymenttransactions.

The structure of LITAS-RLS and LITAS-MMS operations is different. usually, larger value payments are made in real time, i.e. via the system LITAS-RLS (interbank operations, euro exchange transactions leg in litas, settlements for issuing and redemption of securi-ties). The average value per payment in LITAS-RLS made up LTL 1.09 million and LTL 7.3 thousand in LITAS-MMS.

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Table 13. Composition of Payments of LITAS-RLS and LITAS-MMS.(Compared to the total volume and the total value of payments; percentages)

System Payment transactions

Up to LTL 5,000 LTL 5,001– 100,000

LTL 100,001–1,000,000

Over LTL 1,000,000

LITAS-RLS Volume 66.3 21.8 6.3 5.7

Value 0.1 0.5 1.9 97.5

LITAS-MMS Volume 90.8 8.5 0.6 0.1

Value 9.2 22.5 23.0 45.3

Source:BankofLithuaniacalculations.

payment systems foR settlements in euRo

Two euro real-time gross settlement systems operate in Lithuania: TARGET2-LIETuVOS BANkAS and LITAS-PHA. They enable domestic financial institutions to provide better services to their customers making settlements in euro. Since the beginning of their operation (in November 2007), systems are used more actively.

The system TARGET2-LIETuVOS BANkAS is a component system of TARGET2. The Bank of Lithuania is an operator of this system; however, it performs only a part of the op-erator’s functions, i.e. participant administration and support (including contingencies). The Single Shared Platform of the system is maintained by 3 national central banks of the Eurosystem: Banca d’Italia, Banque de France and Deutsche Bundesbank.

Taking into consideration requests of TARGET2 participants, the Single Shared Platform was enhanced two times, i. e. on 11 May and 23 November. The said releases allowed to offer new services and improve those that have already been provided. The Bank of Lithuania coordinated the preparation of participants from our country for the new releases and provided consultations to them, monitored their testing, performed central bank actions necessary for the performance of tests.

At the end of the year, as in the previous year, TARGET2-LIETuVOS BANkAS included 5 participants: the Bank of Lithuania, 2 commercial banks, 1 foreign bank branch and the CSDL.

The payment traffic processed by the system TARGET2-LIETuVOS BANkAS increased rapidly. The daily average volume of submitted payments processed by the system was 90 payments with the value of EuR 371 million. The average value per payment was EuR 4.1 million. Compared to 2008, the daily average represents an increase of 39.8% in terms of volume and 142.7% in terms of value. The daily average volume of cross-border payments received by the system was 360 payments with the value of EuR 365 million. The average value per payment was EuR 1 million. Compared to 2008, the daily average represents an increase of 9.5% in terms of volume and 144.6% in terms of value.

Table 14. Transactions of TARGET2-LIETUVOS BANKAS

Year Volume of transactions Value of transactions, EUR millions

Payment orders submitted Cross-border payments received

Payment orders submitted Cross-border payments receivedDomestic Cross-border Total Domestic Cross-border Total

2008 2,499 13,976 16,475 84,064 967 38,167 39,134 38,168

2009 4,620 18,406 23,026 92,039 1,657 93,330 94,987 93,346



69

The system LITAS-PHA was developed by the Bank of Lithuania. This system enables finan-cial institutions to make settlements in euro via the Bank of Lithuania as a direct participant of TARGET2-LIETuVOS BANkAS. Credit institutions may also receive intraday credits in euro in settlement accounts opened in the system LITAS-PHA. In line with the TARGET2 releases in 2009, LITAS-PHA participants were provided more services as well.

At the end of the year, LITAS-PHA had 14 participants: the Bank of Lithuania, 8 com-mercial banks, 3 foreign bank branches, the CCuL and 1 financial brokerage company. Compared to the end of 2008, the number of participants did not change.

In 2009, participants used the services of the system more actively. The daily average volume of submitted payments processed by the system was 17 payments with the value of EuR 21.7 million. The average value per payment was EuR 1.3 million. Compared to 2008, the daily average represents an increase of 22.6% in terms of volume and 190.5% in terms of value. The daily average volume of cross-border payments was 74 payments with the value of EuR 19.6 million. The average value per payment was EuR 265 thousand. Compared to 2008, the daily average represents an increase of 20.9% in terms of volume and 164% in terms of value.

Table 15. Transactions of the LITAS-PHA

Year Volume of transactions Value of transactions, EUR millions

Payment orders submitted Payments received from TARGET2

Payment orders submitted Payments received from TARGET2Domestic To TARGET2 Total Domestic To TARGET2 Total

2008 602 2,981 3,583 15,681 17.6 1,898.6 1,916.2 1,900.1

2009 463 3,930 4,393 18,951 567.5 4,999.6 5,567.1 5,015.6


oveRsiGht of payment anD secuRities settlement systems

The Bank of Lithuania conducts the oversight of 4 payment systems (LITAS-RLS, LITAS-MMS, LITAS-PHA and kuBAS16) and the securities settlement system17. The Bank of Lithuania also participates in the oversight of the system TARGET2 together with the Eurosystem.

In 2009, the Bank of Lithuania performed regular monitoring of these systems. It was determined that the systems operated in a stable manner (without critical incidents), their operators complied with the requirements established by the Republic of Lithuania Law on Settlement Finality in Payment and Securities Settlement Systems.

An assessment of compliance of the systems of the Bank of Lithuania (LITAS-RLS and LITAS-MMS) with the Core Principles for Systematically Important Payment Systems es-tablished by the BIS (thereafter referred to as the Core Principles) and Business Continuity Oversight Expectations for Systematically Important Payment Systems approved by the Governing Council of the ECB (hereinafter referred to as Business Continuity Oversight Expectations) was performed. The assessment was made in accordance with the meth-odology approved by the ECB. The results demonstrated that LITAS-RLS and LITAS-MMS observed all relevant Core Principles applicable to them. The operator of the system manages appropriately legal, financial and operational risks and encaurages to do the same the participants of the systems. By the Business Continuity Oversight Expectations, the former business continuity provisions established by the BIS were strengthened. The assessment showed that the Bank of |Lithuania properly formulated objectives of busi-

16TheCCUListheownerandoperatorofthesystemKUBAS.17TheCSDListheownerandoperatorofthesecuritiessettlementsystem.

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ness continuity of the systems, was ready to incident management and communication while preparation of the plans for business continuity, their testing and updating thereof need additional attention.

After conducting an assessment of securities settlement system in 2008, the Bank of Lithuania prepared proposals to the CSDL, NASDAQ OMX Vilnius and the Securities Commission of the Republic of Lithuania. When implemented, the aspects related to securities clearing and settlement would comply with all recommendations established by the BIS. In 2009, report on the implementation of the measures was prepared. Con-sidering the implemented measures and changes in the market, amendments to the assessment of three recommendations of BIS were introduced. As a result the securities settlement system of CSDL observed 16 recommendations out of 19 established by BIS, one (third18) recommendation was broadly observed, one (ninth19) was partly observed and one recommendation (fifth20) was not applicable.

Cooperation with other supervisory institutions was extended in 2009. In the light of the oversight policy of the Eurosystem in the field of card payment schemes, the Bank of Lithuania signed a Memorandum of understanding with the ECB and the Nationale Bank van België/Banque Nationale de Belgique in September 2009 aiming at exchange of Information in the field of international card payment schemes oversight. In addition, at the end of the year the Bank of Lithuania signed a Memorandum of understanding with Securities Commission of the Republic of Lithuania on cooperation in the field of securities settlement systems oversight.

non-cash payments

In 2009, the volume of non-cash payments in Lithuania was 217.2 million, of which 210.9 million (97%) were domestic payments and 6.3 million (3%) were cross-border payments. The value of these payments amounted to LTL 1,456 billion, of which LTL 1,320 billion (91%) were domestic payments and LTL 136 billion (9%) were cross-border payments. Over the year, compared to 2008, the total volume of non-cash payments increased by 3.5%, the volume of domestic payments went up by 3.5%, and the vol-ume of cross-border payments grew by 5.8%. The total value of non-cash payments decreased by 22.2%, the value of domestic payments dropped by 20.3%, and the value of cross-border payments shrank by 36.4%.

Electronic means of payment were chosen more often, among them direct debit expanded most rapidly. Paper based (and often more expensive) payment instruments (credit transfers initiated in banks’ offices and cheques) were less popular, and decrease in the use of bank cheques was particularly visible. The turnover of all payment instruments decreased. The decline in the value of operations of direct debit and payment cards was the smallest.

Structure of payment instruments changed only slightly. Credit transfers accounted for the largest share (52.3% of the total volume of non-cash payments) of transfers, and card payments gradually approached (43.0% of the total value of non-cash payments).

At the end of 2009, the number of payment cards increased to 4.3 million, i. e. by 1.4% compared to the end of 2008. All prepaid cards were withdrawn from the market.

For the first time since the start of compilation of such statistics in 2001, the number of debit cards decreased marginally (by 0.2 %) and accounted for 86% of the total number of

18Thirdrecommendationrelatingtosettlementcycles.19Ninthrecommendationrelatingtoriskmanagementmeasuresincaseswhenparticipantsfailtosettle.20Fifthrecommendationrelatingtosecuritieslending.


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payment cards. Over the year, the market share of Visa and MasterCard debit cards remained almost unchanged and was 69.7 % and 30.3 % respectively at the end of the year.

Table 16. Non-cash payments

Volume of transactions Value of transactions Average value per transaction, LTL thousandsMillions Compared to 2008;

more, less (–), %LTL millions Compared to 2008;

more, less (–), %

Total non-cash payments 217.18 3.5 1,455,764 –22.2 6.7

Credit transfers 111.48 2.0 1,446,178 –22.2 13.0

Non-paper based 76.86 6.3 495,546 –32.6 6.4

Paper based 34.16 –6.5 950,631 –15.4 27.5

Direct debits 12.10 10.1 2,157 –7.4 0.2Payment cards (debit, credit and virtual) 93.46 4.7 5,752 –13.3 0.1

Cheques 0.19 –20.8 1,677 –34.7 8.6

Source:BankofLithuaniacalculations.Note:DatasubmittedinTable15(NonCashPayments)oftheAnnualReportoftheBankofLithuania2008arenotapplicableduetolatercorrectionsmadebyreportingagents.

Like in the previous year, the number of credit cards was increasing. Compared to 2008, their number grew by 13.0% and accounted for 13.3% of all payment cards at the end of 2009. The market share of MasterCard, Visa and American Express credit cards remained almost unchanged and was 59.5%, 36.4% and 4.2% respectively at the end of 2009.

There were 1,305 payment cards per 1,000 population in Lithuania at the end of the year (compared to 1,278 cards in Lithuania and 1,460 cards in the Eu in 2008).

Table 17. Payment cards(end-of-period)

2008 2009

Total payment cards 4,282,382 4,343,587

Debit cards 3,726,238 3,720,200

Credit cards 509,620 575,762

Prepaid cards 10,414 0

Virtual cards 36,110 47,625


Over the year, compared to 2008, the volume of payments by all types of payment cards increased, especially that of credit cards, however, the value of such payments – mostly of virtual cards – went down.

Table 18. Payments by payment cards

Volume of transactions Value of transactions Average value per transaction, LTLThousands Compared to 2008;

more, less (–), %LTL millions Compared to 2008;

more, less (–), %

Debit cards 84,718 3.5 4,554.2 –13.0 54

Credit cards 8,418 18.7 1,149.2 –13.1 137

Virtual cards 322 0.9 48.3 –37.4 150

Source:BankofLithuaniacalculations.Note:DatasubmittedinTable17(PaymentsbyPaymentCards)oftheAnnualReportoftheBankofLithuania2008arenotapplicableduetolatercorrectionsmadebyreportingagents.

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At the end of 2009, 1,543 ATMs operated in Lithuania: of which 1,483 ATMs had a cash withdrawal function, 73 ATMs had a cash deposit function and 13 had both functions. Compared to the end of 2008, the number of ATMs increased by 4.9%, the number of ATMs with cash deposit function increased in particular. There were 464 ATMs per 1 mil-lion population in Lithuania at the end of the year (compared to 439 ATMs in Lithuania and 855 ATMs in the Eu in 2008).

In 2009, cash issued by ATMs amounted to LTL 22.8 billion. Compared to 2008, that amount shrank by 14.7%. The average value of a transaction performed at an ATM amounted to LTL 350. Cash delivered by banks through their branches amounted to LTL 12 billion, whereas cash received by customers from merchants through POS terminals made up LTL 140 million. Therefore, ATMs is the most significant infrastructure for cash withdrawal.

sinGle euRo payment aRea pRoject

European banks, supported by the European Commission and the ECB, undertook a SEPA project to standardise payment instruments at the European level. Thus, a single euro payments area will be created: private customers and enterprises will be able to send and receive national and cross-border euro payments under similar conditions, independently from their place of residence. SEPA covers all Eu Member States, as well as Iceland, Lichtenstein, Monaco, Norway and Switzerland. Banks operating in Lithua-nia support the SEPA project, participate in its implementation and offer SEPA payment instruments to the clients.

The Bank of Lithuania coordinates the preparation for the introduction of SEPA standards in our country. In 2009, National Coordination Committee analysed possibility to replace the existing payment instruments by SEPA payment instruments in Lithuania, as well as issues of continuity of direct debit mandates, the standardisation of the exchange of information among banks and their clients, also infrastructure issues. Much attention was focused on the SEPA communication to the population: a seminar about SEPA pos-sibilities and benefits was organised for the public sector, frequently asked questions and answers to them are publicised, also informative publication about SEPA objectives, payment instruments and benefits of the project to different stakeholders was issued.

taRGet2-secuRities pRoject

The Eurosystem’s project TARGET2-Securities (T2S) intends to create a technical platform, where securities transfers and other associated funds transfers related to the settlement of securities transactions will be concentrated. T2S will enable to conduct both local and cross-border settlements in euro and other currencies provided that a relevant central bank agrees to outsource the technical management of the dedicated accounts opened with that bank for securities settlement to the Eurosystem. Technical development of T2S is carried out by national central banks of Germany, Spain, France and Italy. The user Requirements were defined in 2009 and were finally formulated in 2010. According to them, functional and technical specifications of T2S were prepared. 28 central securities depositories in Europe, including CSDL, assured their support to the project in July 200921 when they signed Memorandum of understanding with Eurosystem. This Memorandum inter alia envisages further actions in preparation of T2S legal documents.

In order to properly represent the market participants of Lithuania in the T2S project, the T2S National user Group of Lithuania was created, activity of which is coordinated by the Bank of Lithuania. In 2009, this Group participated in consultations organised by the


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ECB on a number of issues related to T2S, discussed possibilities of opening and manag-ing of accounts both in litas and euro in the T2S platform, how T2S services will change the users’ practice, as well as other legal and technical aspects. Due to relatively great expenses and the expected short lifetime, the plans to develop the interface between LITAS-RLS and T2S platform for settlements in litas were abandoned. CSDL intends to use T2S technical platform for securities transactions in euro.

aDministRation of the accounts of the state tReasuRy anD institutions

In 2009, the Bank of Lithuania, acting as a State Treasury agent as established by the Law on the Bank of Lithuania, administered accounts of the State Treasury of the Republic of Lithuania (hereinafter – State Treasury) denominated in litas and foreign currency. The state monetary resources accumulated on these accounts and used in accordance with the procedure set forth by the State Treasury Law of the Republic of Lithuania and other legal acts are managed by the state institutions of the Republic of Lithuania. The Ministry of Finance manages the bulk of these resources.

The Bank of Lithuania also administered accounts denominated in litas and foreign currency of other state institutions of the Republic of Lithuania, Eu institutions, foreign banks and international financial institutions (hereinafter – institutions). They were opened with the Bank of Lithuania in observance of the legal acts of the Republic of Lithuania and of the Bank of Lithuania. The conditions of the administration of accounts and the services to be provided are established by agreements.

At the end of 2009, the Bank of Lithuania administered 262 accounts of the State Treas-ury and institutions (255 in 2008), of which 88 accounts denominated in litas and 174 accounts denominated in foreign currency (89 accounts denominated in litas and 166 accounts denominated in foreign currency in 2008).

The Bank of Lithuania provides the following services to the State Treasury and institu-tions: the transfer of funds of the State Treasury and institutions according to their pay-ment orders (hereinafter – payment orders), crediting of funds into accounts, currency exchange, acceptance of time deposits in euro and uS dollar, preparation and submission of statements of accounts and of other information. For some state institutions of the Republic of Lithuania, the service of cash collection and issue is provided.

In 2009, 614.4 thousand payment orders of the State Treasury and institutions in vari-ous currencies were processed (705.6 thousand in 2008). The bulk of payment orders in litas were submitted by the Ministry of Finance of the Republic of Lithuania via the State Budget Accounting and Payments System.

paRticipation of the bank of lithuania in the escb anD inteRnational coopeRation

The Bank of Lithuania is part of the ESCB and participates in the preparation and adop-tion of decisions of the ESCB and Eu institutions. It cooperates with international and foreign financial organisations in all major areas of its activity.

paRticipation in the escb

The ECB is the major cooperation partner for the Bank of Lithuania in the Eu. The Bank of Lithuania is a full member of the ESCB.

2009


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Chairman of the Board of the Bank of Lithuania, together with the other governors of the Eu NCBs participates in the activities of the General Council of the ECB, one of the ECB’s three decision-making bodies. usually the Council meets four times per year. In 2009, the General Council addressed and assessed the macroeconomic situation in the Eu, developments in monetary and financial markets, the functioning of ERM II, and the progress achieved by the Member States in meeting the economic policy obligations. Also, the General Council assessed the compliance by the Eu Member States with the requirements in relation to the prohibition to finance Government and to provide privi-leges to financial institutions, debated the issues of the reform of the Eu financial sector supervisory structure and of financial stability. Some of the issues tackled by it were also addressed in the meetings of the Council of the European union.

Representatives of the Bank of Lithuania regularly participate in the work of the ESCB committees, their working and task groups. The ESCB committees address all issues of central banking and assist the ECB’s decision-making bodies in their work. Participation in the committees, their working and task groups provides favourable conditions for the experts from the NCBs of the ESCB to discuss and exchange opinions on various issues of central banking.

Table 19. Participation of the Bank of Lithuania in the ESCB committees and their Working Groups

•AccountingandMonetaryIncomeCommittee Working Group (WG) on Accounting Issues

•MarketOperationsCommittee Monitoring WG WG on Monetary and Exchange Rate Policy Instruments and Procedures WG on Operations Involving Foreign Reserve Assets WG on Collateral Management Network

•BankingSupervisionCommittee WG on Developments in Banking WG on Macro–Prudential Analysis WG on Crises Management

•MonetaryPolicyCommittee WG on Econometric Modelling WG on Public Finance WG on Forecasting

•BanknoteCommittee Counterfeit WG Security WG Issue WG Sub-group of National Analysis Centres

•PaymentandSettlementSystemsCommittee Payment Systems Policy WG Oversight WG WG on TARGET 2 Securities Experts WG ESCB-CESR (Committee of European Securities Regulators) WG

•Eurosystem/ESCBCommunicationsCommittee External Communications WG WG on Euro Cash Communications

•StatisticsCommittee WG on Statistical Information Management WG on External Statistics WG on General Economic Statistics WG on the Euro Area Accounts WG on Government Finance Statistics WG on Monetary and Finance Statistics

•InformationTechnologyCommittee Information Systems Security WG IT Network and Communications WG IT Applications WG

•InternalAuditorsCommittee

•InternationalRelationsCommittee

•LegalCommittee Ad hoc WG of Financial Law Experts •HumanResourcesConference

In 2009, the Economic and Financial Affairs Council (ECOFIN Council) and the European Council approved the reform of the Eu financial supervision framework under which it is intended to establish new Eu financial sector supervisory authorities: the European Systemic Risk Board (ESRB) – for macro-prudential supervision; three new authorities for the supervision of the banking, securities, insurance and occupational pension sectors – for micro-prudential supervision. After the ESRB starts operating, the cooperation of the Bank of Lithuania with the ECB and the NCBs of the ESCB will strengthen further, and


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the Chairman of the Bank of Lithuania, jointly with the other members of the General Council of the ECB will become a member of the General Board of the ESRB, the main decision-making body of the ESRB. Meetings of the General Board are planned to take place at least four times a year. The ECB will ensure secretariat services for the ESRB by providing analytical, statistical, logistical and administrative support to it.

In 2009, the Bank of Lithuania, jointly with the other members of the ESCB signed agreements on the use of the Central Securities Database and financial market statistics data, amendments to the agreement on the participation in TARGET2. The Bank, jointly with the ECB, Nationale Bank van België / Banque Nationale de Belgique and the NCBs outside the euro area (except the NCB of the united kingdom and Sweden) signed a Memorandum of understanding on sharing confidential information for the oversight of card payment systems.

The national authorities of the Eu Member States must consult the ECB regarding the provisions of any draft legal act on the issues within the ECB’s competence. The ECB, in response to the consultation of the authorities, expresses its opinion. The national central banks are entitled to submit their comments on ECB draft opinions. In 2009, the ECB adopted particularly many opinions related to the measures for enhancing financial stability undertaken by the Eu Member States. The Seimas and the Ministry of Finance of the Republic of Lithuania consulted the ECB regarding the Republic of Lithuania Law on Financial Sustainability, measures to strengthen financial stability in Lithuania, as well as on other issues related to the operation of the Bank of Lithuania. Following these con-sultations, the ECB also announced its opinions on the distribution of the profits of the Bank of Lithuania, supervision of payment institutions, procedure to change the official litas exchange rate, and conducting of the public audit at the Bank of Lithuania.

paRticipation in the activities of eu institutions

Chairman of the Board of Lithuania attends the informal meetings of the ECOFIN Council arranged in a country holding Eu presidency semi-annually. The informal meetings of the ECOFIN Council are not regulated by the provisions of the Treaty on the Function-ing of the Eu and do not have the legal power of adopting decisions, yet they are an important forum, as participation in the meetings includes the Finance Ministers and the Governors of the national central banks of the Eu Member States. During the informal meetings of the ECOFIN Council that took place in 2009, the economic situation in the Eu, the implementation of the roadmap on financial supervision and regulation, the new European financial supervision framework, stress testing of the Eu banking sector, as well as other issues were discussed.

In 2009, the Bank of Lithuania provided its opinion and judgements on different issues within its competence, when the position of the Republic of Lithuania was formulated in the monthly meetings of the ECOFIN Council that include the participation of the Economics and Finance Ministers of the Eu Member States.

Representatives of the Bank of Lithuania participate in the activities of one of the most important advisory committees of the ECOFIN Council – the Economic and Financial Committee (EFC). During the meetings of the EFC, the macroeconomic situation in the Eu Member States, how ERM II Member States meet their obligations, how the conver-gence and stability programmes and the SEPA project are implemented, the application of the excessive deficit procedures to the Member States, including Lithuania, as well as other issues were addressed. In 2009, the issues of financial stability addressed most often included: reform of the new structure of the Eu financial sector supervisory author-

2009


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ities, provision of medium-term financial assistance by the Community, the Eu Member States approved measures for maintaining financial sector stability, crisis management. The members of the EFC also discussed the observance of the Eu Memorandum of un-derstanding on Financial Stability signed by the Ministries of Finance, central banks and financial sector supervisory authorities of the states of the Community on 1 June 2008. The Memorandum establishes that more detailed principles and provisions of coopera-tion shall be set forth in separate agreements. A regional Baltic-Nordic Memorandum of understanding on crisis management was prepared in 2009 and signed in early 2010.

In 2009, the Bank of Lithuania, seeking to participate properly in the preparation and adoption of Eu decisions, regularly cooperated with the Eu institutions, and its repre-sentatives participated in the activities of the committees and working groups of the ECOFIN Council, the European Banking Committee, the Committee of European Banking Supervisors, the Balance of Payments Committee, the Monetary, Finance and Balance of Payments Statistics Committee of the European Commission, the Eu Member States Public Administration Network, and different working groups.

coopeRation with the inteRnational monetaRy funD

In the supreme decision-making body of the IMF, the Board of Governors our country is represented by the Chairman of the Board of the Bank of Lithuania, who is the Governor of the IMF for Lithuania. The central issues of the global economy and IMF policies are discussed during the Spring and Annual meetings of the IMF and the World Bank Group. In 2009, the ways to stabilize the global economy by coordinated actions of international financial institutions and governments of member countries, the issues of reforms of IMF governance, surveillance and lending resources were considered.

Increasing the foreign currency reserves of its member countries, twice in 2009 the IMF allocated, in proportion to the size of their IMF quota, SDR of over 182.6 billion. On 28 August 2009, a general allocation of SDR 161.2 billion, and on 9 September – a special allocation of SDR of almost 21.5 billion entered into force. In accordance with these al-locations, SDR of over 137.2 million were transferred to the account of the Republic of Lithuania with the IMF which is managed by the Bank of Lithuania.

To enhance the efficiency and role of the IMF, its governance reform was implemented further. One of its aims was completion of the quota revision commenced in 2008 and agreement on the principles for the future quota revision in 2011. The aim of these revi-sions is to achieve that the size of the IMF quota of member countries is as much in line with their influence on the global economy as possible. On 23 April 2009, the Seimas of the Republic of Lithuania adopted the Law on the Increase of the IMF Quota of the Republic of Lithuania and approved the increase of our country’s IMF quota from SDR 144.2 million to SDR 183.9 million. Lithuania’s quota will be increased upon approval by all 54 countries whose quotas are to be increased and coming into effect of the re-spective amendments to the Articles of Agreement of the International Monetary Fund (hereafter – Articles of Agreement).

Within the framework of the IMF governance reform, discussions have been commenced on the reform of representation of the IMF member countries in its Executive Board. The present composition and size of the Nordic-Baltic Constituency ensure adequate representation of Lithuania in the IMF.

In 2009, the IMF reformed substantially its lending system by introducing a new instru-ment – Flexible Credit Line, doubling the member countries’ access to IMF resources and simplifying its lending conditions and procedures. Seeking to enhance its influence in


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the international monetary and financial system after the crisis, the IMF began to review its mandate: it intends to enhance and expand its surveillance and ensure the flexibility of its lending instruments so that they are acceptable and available to as many member countries as possible.

The Bank of Lithuania cooperated with the IMF on an ongoing basis participating in the activities of the Nordic-Baltic Constituency (NBC): the NBC’s joint position on IMF policy issues discussed by the IMF‘s Executive Board was coordinated. The NBC’s cooperation policy guidelines and working programmes were addressed in the meetings of members and alternate members of the NBC’s Monetary and Financial Committee. The joint posi-tion of the Eu on IMF policy issues was coordinated in the meetings of the Economic and Financial Committee (ECF) and its IMF subcommittee.

Lithuania’s cooperation with the IMF is based on annual economic consultations under Article IV of the Articles of Agreement. A mission of the IMF worked in Lithuania in June 2009 and analysed the macroeconomic and financial stability, assessed economic develop-ment forecasts and the implementation of economic policy measures in our country.

During our country’s economic consultations in the IMF Executive Board’s meeting in August, the efforts of the Government of the Republic of Lithuania to implement fiscal consolidation, strengthen the financial sector and increase the flexibility of the labour market were supported. The Executive Board recommended proceeding with fiscal consolidation in order to maintain the sustainability of public finances and fur-ther implementing the projected structural reforms aimed at increasing the country’s competitiveness. These measures are important in ensuring the smooth functioning of the currency board arrangement and seeking to adopt the euro in Lithuania. It should also be noted that the Bank of Lithuania has taken appropriate actions for maintaining stability in the banking system.

Relations with foReiGn financial supeRvisoRy authoRities

In Lithuania, over 80% of the banking market is controlled by foreign banks via their branches and subsidiaries operating in our country. Therefore the Bank of Lithuania, implementing the supervision of banks operating in different countries within differ-ent bank groups closely cooperates with the financial sector supervisory authorities of the Eu Member States. Special attention is paid to the implementation of preventive measures. Cooperation is intensified through establishing colleges with the participation of representatives of the financial supervisory authorities of all parties concerned. The colleges discuss urgent supervisory issues and formulate a general supervisory strategy.

In 2009, representatives of the Bank of Lithuania took part in the activities of the colleges established by the Danish and Swedish Financial Supervisory Authorities. During the meet-ings, information on the activities of bank groups in different countries, the economic situation in the countries was exchanged; the prospects of financial supervision were discussed. Teleconferences of the colleges took place: information on the state of the banking system in the countries participating in the activities of colleges was shared; the near-term and strategic action plans and their coordination were discussed, including the possibility of cooperation in performing the supervisory review and evaluation process.

One of the banks operating in our state has a parent bank in a foreign state, therefore the Bank of Lithuania, as the authority which conducts the supervision of the former, has initiated the establishment of a college. A multilateral cooperation agreement with the Estonian and Latvian financial supervisory authorities on the establishment of a college was signed, the purpose of which is to conduct the supervision of a bank’s group. The

2009


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college established in 2009 analysed the operation of the bank’s group, and during a teleconference discussed the trends in the banking system of the countries which have established the college, the state of the authorities of the group of the bank under review and the prospects for the operation of the college.

The Bank of Lithuania exchanged information on a regular basis with the supervisory authorities of other countries, organised joint inspections. Meetings took place with the representatives of the Danish, Latvian, Norwegian, Finnish and Swedish financial supervisory authorities, with whom the results of the supervisory review and evaluation process and the situation in the banking sector of Lithuania and of the said countries, as well as the economic situation in those countries were discussed.

coopeRation in otheR aReas

The Bank of Lithuania closely cooperates with international institutions preparing and publishing statistical information, particularly the ECB, Eurostat, BIS and IMF, and par-ticipates in the activities of their committees and working groups.

A meeting of the Statistics Committee of the ESCB was held in Vilnius in September 2009. The Committee coordinates management of statistical information necessary for performing the tasks of the ESCB and contributes to the euro area development works in the area of statistics. Since it is aimed that European financial statistics is not only comprehensive but also harmonised among countries, the Committee performs many works preparing international statistical reporting standards. During the meeting, exclusive attention was given to financial stability statistics and the objective of harmo-nising the statistics necessary for the supervision of the entire banking system and of individual banks. MFI statistical reporting and credit institution financial reporting are already quite remote from each other; therefore at the Committee’s meeting the trends of their harmonisation were discussed: harmonising methodologies, improving manage-ment of statistics, and preparing to provide additional financial stability statistics to the ESRB being established.

In 2009, the Bank of Lithuania, in observance of the regulations for the provision of technical support and of the provisions of the development co-operation policy of the Republic of Lithuania for 2006–2010, provided technical support to the national central banks of Armenia, Belarus and Georgia, as well as to the Financial Supervisory Authority of Kazakhstan.

Employees of the Bank of Lithuania introduced the representatives of the said banks to the supervision of the Lithuanian banking system, stress testing, implementation of the new requirements for the calculation of capital adequacy requirement, crisis preven-tion and preparation for the management of financial crises, credit risk management, problem credits, calculation of financial stability ratios, monetary and financial statistics and external sector statistics, risk management, internal audit, the accounting policy of the Bank of Lithuania.

III. ORGANISATION OF ACTIVITIES OF THE BANK OF LITHUANIA

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III. ORGANISATION OF ACTIVITIES OF THE BANk OF LITHuANIA

The Board of the Bank of Lithuania (from the left): Member of the Board Audrius Misevičius, Deputy Chairman of the Board Ramunė Vilija Zabulienė, Chairman of the Board Reinoldijus Šarkinas, Member of the Board Vaidievutis Ipolitas Geralavičius andDeputyChairmanoftheBoardDariusPetrauskas.

staff anD oRGanisational chaRt

The implementation of the objectives and tasks of the Bank of Lithuania also depends on qualified, responsible, initiative, creative staff and its effective team-work. The hu-man resources management policy pursued by the Bank comprises the areas of staff administration, development and maintenance of competence.

At the end of the year, the Bank of Lithuania comprised 11 departments, 6 autonomous divisions, and 2 branches in Kaunas and Klaipėda.

mission, values anD ethics

The Bank of Lithuania, in pursuit of its objective defined by the Law on the Bank of Lithuania and performing the entrusted functions, carries out its mission to foster the sustainability and integrity of the state’s monetary, credit and payment systems and their stable, reliable and efficient functioning, thus creating favourable conditions for the optimal development of the national economy.

The main principles of the activity of the Bank of Lithuania are based on the following values:

2009


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Adherence to the public good: responsibility towards the public is considered an integral part and a principle of the activity of the Bank.

Competence and quality: decisions taken by the Bank of Lithuania are based on profes-sional expertise and efficient professional activity of it staff.

Non-partisan attitudes and professional analysis: the Bank of Lithuania highly esteems non-partisan attitudes of its experts, progressive ideas, professional judgement, and comprehensive and careful analysis of information and phenomena.

Integrity: the Bank of Lithuania strives to ensure that staff members, when cooperating with the staff members of other institutions and communicating with the general public, observe the highest ethical standards: integrity, objectivity, discreetness and tolerance.

Transparency of activity: the Bank of Lithuania seeks transparency of its activity as a principle of accountability to the public.

Ethics is regulated by the code of ethics for the staff and by that for the Board of the Bank of Lithuania. They establish the principles of conduct and the standards of professional ethics. The codes ensure adequate separation between public and private interests as well as observance of high standards of professional ethics.

staff

On 31 December 2009, the Bank of Lithuania employed 802 staff members on permanent contracts (excluding 17 staff members on maternal/paternal leave and 7 staff members who left to work with the ECB and other foreign and international financial institutions for the period of unpaid leave) and 6 on fixed-term contracts, who replaced those on maternal/paternal leave. Over a year, 3.5% of the staff members left their job and 2.3% were employed, i.e. the staff turnover intensity made up 5.8%.

The number of specialists is rather large owing to those functions of the Bank of Lithua-nia, of which not all are performed by part of other national central banks of the Eu. The Bank, among other things, handles cash, completely manages its foreign reserves, supervises credit institutions, ensures the functioning of payment and securities settle-ment systems, designs, implements and maintains necessary information systems.

At the end of the year, the average age of employees was 45.6 years. Employees of 40 to 50 years of age made up the largest by age proportion of employees (31%). Employ-ees of 50 to 60 years of age made up 26%, those of 30 to 40 – 25%, and those under 30 – 10%. Employees of over 60 years of age accounted for the smallest proportion (8%) of the staff.

The average length of service of the employees at the Bank of Lithuania was 12.5 years. Almost three-fourths of the employees (70.6%) have been working at the Bank for over 10 years. Females accounted for 53%, males – for 47% of total employees.

The Bank employed one professor doctor habilitatus, sixteen employees held doctorate degrees.

Social dialogue at the Bank of Lithuania has been developed since 2007, when the Staff Association was elected at the Bank. Agreements on the human resources management policy and social guarantees have been arrived at. The first collective agreement of the Bank of Lithuania was signed in October 2009.

Representatives of the Staff Association twice a year attend social dialogue meetings at the ECB.


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staff tRaininG

Training and continuous development are organised to improve the staff’s knowledge and skills in order to ensure efficient operation of the national central bank and its adequate functioning within the ESCB. The employees improved their knowledge of economics and management during internal and external training events and have been issued international certificates testifying to their professional qualifications.

In line with The Rules of Procedure of the Bank of Lithuania, staff training is allotted 3 to 5% of the payroll budget. In 2009, pursuing the policy of saving staff costs, only 2.2% of the payroll budget were used (3.6% in 2008).

In 2009, the ECB provided a possibility for 6 employees of the Bank of Lithuania and Nationale Banque van België / Banque Nationale de Belgique – for one employee to gain professional experience and the experience of working within an international team. They were invited to work on short-term contracts as experts on the issues of econom-ics, market operations, accounting, payment systems and law during unpaid leave from the Bank of Lithuania. One employee has been working in Washington as advisor to the Executive Director of the Nordic–Baltic Office of the IMF.

vlaDas juRGutis awaRD anD scholaRship

Commemorating the 75th anniversary of the establishment of the Bank of Lithuania and the issue of the litas, the Bank of Lithuania established Vladas Jurgutis (the first Governor of the Bank of Lithuania) award in 1997. It is granted for significant works in the areas of banking, finance, monetary and macroeconomic research. The award (since 2009 – in the amount of 50 thousand litas) is granted by the Bank of Lithuania and the Lithuanian Academy of Sciences.

Since its establishment the award has been granted and handed out four times: to Profes-sor Alfonsas Žilėnas for significant works in the fields of banking and finance (in 1997); Domininkas kaubrys and Stasys Sajauskas for the book “The Numismatics of the Grand Duchy of Lithuania” (in 1998); Vladas Terleckas for the books issued in 1995–1999 and published articles on the Lithuanian banking history (in 1999); Arūnas Dulkys, Juozas Galkus and Stanislovas Sajauskas for the book “Lithuanian coins” (in 2008). The Award Commission, having assessed the works presented, decided not to grant it to anyone of the nominees in 2009. In 2009, Vladas Jurgutis scholarship was awarded to two stu-dents from Vilnius university and Vytautas Magnus university for excellent performance in studies and active participation in scientific activity.

Vladas Jurgutis Scholarship was established in 1990. It is awarded for one academic year to two best-performing full-time students of banking and finance at universities of Lithuania. Candidates for the scholarship are nominated by university faculties in which banking and finance departments are in place. Decisions on awarding the scholarship are taken by the Board of the Bank of Lithuania. The scholarship equals the minimum monthly wage.

tRanspaRency of activities anD public communication

Transparency in the activities of the Bank of Lithuania – as a principle of its accountability to the public – is ensured through the implementation of various public information and communication measures.

The Bank of Lithuania publishes and issues annual reports as separate publications. They present information on the national central bank’s key monetary policy tasks and their


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fulfilment, monetary policy operations, supervision of credit institutions, financial state and operating performance, how other functions prescribed by laws are performed, as well as information on the macroeconomic situation in the country – analysis of develop-ments in the economy and financial markets of the country.

Twice a year, Chairman of the Board delivers reports to the Seimas of the Republic of Lithuania on the implementation of the Bank of Lithuania’s primary objective, perform-ance of its functions, and the state of the banking system.

The Bank‘s website (www.lb.lt) is an important source of information for finance analysts, media, and the public. In 2009, 362 thousand users visited the website about 3.6 million times. Over 144 thousand users visited it more than once. It is visited about 10 thousand times per day on average. The Bank’s website urgently informs about resolutions of the Board in Lithuanian and English, provides financial statistics, payments information, financial stability reviews, macroeconomic projections, reviews of the activities of credit institutions operating in Lithuania and their balance sheet statements, as well as informa-tion about the Bank’s participation in the ESCB and its international relations.

Publications of the Bank present information on its activities and monetary, banking, balance of payments and financial statistics, and introduce litas banknotes and coins as well as their security features to the reader.

Table 20. Publications of the Bank of Lithuania in 2009

Report on the Implementation of the Primary Objective of the Bank of Lithuania, Performance of its Functions and the Situation in the Banking System (to be presented to the Seimas of the Republic of Lithuania twice a year);

Annual Report of the Bank of Lithuania 2008 (separately in Lithuanian and English);

Monthly Bulletin of the Bank of Lithuania (in Lithuanian and English);

External Statistics (quarterly and annual; in Lithuanian and English);

Annual Financial Statements of the Bank of Lithuania, 2008 (separately in Lithuanian and English);

Banking Statistics Yearbook 2008 (separately in Lithuanian and English);

Financial Stability Review 2009 (separately in Lithuanian and English);

Academic Journal Monetary Studies (biannual);

Working Paper Series publications (in English);

Currency market (in Lithuanian and English);

Amendments and supplements to the set of legal acts (in Lithuanian – monthly, in English – three time a year);

Booklets of collectors (commemorative) coins to present four collectors (commemorative) coins issued in 2009 (separately in Lithuanian and English);

Catalogue Lithuanian Collectors Coins 1993-2009 (in Lithuanian and English);

Security features of the circulation banknotes of the Republic of Lithuania (sets; separately in Lithuanian and English);

Informative publication About the Bank of Lithuania (separately in Lithuanian and English);

Informative publication “SEPA: Single Euro Payments Area. A Closer Look”.

As part of the ESCB, the Bank of Lithuania closely cooperates with ECB specialists, pre-pares and distributes ECB publications.

All publications are distributed free of charge inside the country and abroad, their elec-tronic versions are easily available on the Bank’s website.

The Bank of Lithuania encourages the economic education of the population and raises its economic literacy in different ways and by various means, helps to better understand and to properly assess financial and economic information received from different sources. At the request of representatives of the media, seminars on the subjects of interest to them were arranged in 2009. The journalists were told about cash issuance

2009


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and handling; lectures on the Bank of Lithuania’s monetary policy, statistics, bank loan quality assessment principles and loan quality development in Lithuania were delivered. In January, a large group of Belarusian journalists visited the Bank of Lithuania. They were delivered a lecture “Macroeconomic policy: the role of modern central banks”. It was one of the events within the international project aimed at teaching journalists to write on the subjects of economy and business, which was financed by the Ministry of Foreign Affairs of the united kingdom.

The public was further informed about the euro, Lithuania’s future currency. On 1 April 2009, an international seminar “The Euro Day in Vilnius” took place in the Constitution Hall of the Seimas of the Republic of Lithuania. It was arranged by the Bank of Lithuania and the Ministry of Finance of the Republic of Lithuania jointly with the European Commission. The heads of these institutions delivered reports. The event, which was widely covered by the media, included the participation of members of the Seimas and Government of the Republic of Lithuania, officials of state authorities, the Bank of Lithuania and banks in op-eration in our country, as well as representatives of the academic circles. An exhibition “The Euro, Our Currency“, initiated by the European Commission, was opened at the kaunas branch of the Bank of Lithuania on October 29. It ran until the beginning of February 2010. The Bank of Lithuania assisted in arranging the exhibition. Its visitors found out about the development of the Economic and Monetary union and the persistent way to the euro; the benefits of the euro were explained, the unity of euro banknotes was presented and the differences in the euro coins issued by individual states were demonstrated. The Bank participates in running a special website (www.euro.lt), which informs about Lithuania‘s Eu membership and preparation for the adoption of the euro in our country.

Information on the SEPA project undertaken by the European banks is disseminated on a permanent basis. The banks of our country participate actively in the project as well. A seminar “SEPA: Challenges and New Possibilities” was held at the Bank of Lithuania on 21 May. The brochure “SEPA: The Single Euro Payments Area. A Closer Look” issued by the Bank of Lithuania for the general public tells how the project has originated in Europe and what has already been done in implementing it, explains SEPA’s benefits for the providers of payment services and their customers – the public, companies, public authorities. The publication presents the payment instruments offered by the SEPA and advises on what is done in developing the SEPA in Lithuania.

Presentation of new collectors (commemorative) litas coins contributes to public infor-mation and communication. In 2009, four such events took place. On 17 March, two coins – 50 litas silver collectors (commemorative) coin and 1 litas coin circulation coin from alloy of copper and nickel dedicated to Vilnius, European Capital of Culture 2009 were presented in the Town Hall of Vilnius. On 26 June, the 100 litas gold coin from the series dedicated to the millennium anniversary of the mention of the name of Lithuania was presented at the Bank of Lithuania. Presentation of the 50 litas silver collectors (com-memorative) coin from the series “Historical and Architectural Monuments of Lithuania” dedicated to the Tytuvėnai Architectural Ensemble took place in the Tytuvėnai gymnasium (region of Kelmė) on 15 September. On 8 December, the 50 litas silver collectors (com-memorative) coin dedicated to Lithuanian nature was presented in the Botanical garden of Vilnius University in Kairėnai.

The Bank of Lithuania contributed to arranging the exhibition “Lithuanian and Polish money – the Past, the Present, the Future”, which was held in the Lublin branch of the National Bank of Poland in 22 June–17 July 2009. It was dedicated to the 440th anni-versary of the union of Lublin.


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The Bank constantly follows the public opinion on various banking-related issues and acceptance of information by the public, thereby ensuring bilateral relationship. There-fore it performs regular monitoring of the media, carries out public opinion polls (e.g., a survey of households having loans for house purchase has been conducted), analyses their results and takes them into account while formulating and implementing the public information and communication policy and preparing financial stability reviews.

A quarterly magazine “Apie mus” (“About Us”), aimed at informing the staff of the Bank of Lithuania, is published.

IV. THE ANNuAL FINANCIAL STATEMENTS OF THE BANk OF LITHuANIA 2009

IV. THE ANNUAL FINANCIAL STATEMENTS OF THE BANK OF LITHUANIA 2009

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balance sheet of the bank of lithuania

LTL million

Notes 31 December 2009 31 December 2008

ASSETS

1. Gold 1 496.51 395.732. Claimsonforeigninstitutionsdenominated

inforeigncurrency 15,332.37 15,204.11

2.1. Receivables from the International Monetary Fund 2 518.41 0.41 2.2. Deposits, securities and other investments denominated

in foreign currency 3 14,813.96 15,203.70

3. Otherassets 383.66 388.36

3.1. Tangible and intangible fixed assets 4 150.79 152.86

3.2. Investments into equity instruments 5 21.07 20.96

3.3. Off-balance sheet instruments revaluation differences 6 (3.50) (6.27)

3.4. Accruals and deferred expenses 7 191.87 196.76

3.5. Sundry 8 23.43 24.05

Total 16,212.54 15,988.20

LIABILITIES

4. Banknotesandcoinsincirculation 9 7,932.19 9,629.475. Liabilitiestodomesticcreditinstitutionsrelatedto

monetarypolicyoperationsdenominatedinlitas 10 2,520.36 3,084.586. Liabilitiestootherdomesticinstitutions

denominatedinlitas 11 64.59 179.93

7. Liabilitiestoforeigninstitutionsdenominatedinlitas 12 137.69 56.028. Liabilitiestodomesticinstitutionsdenominated

inforeigncurrency 13 2,639.92 1,123.489. Liabilitiestoforeigninstitutionsdenominated

inforeigncurrency 13 275.86 75.6010.Counterpartofspecialdrawingrightsallocatedby

theInternationalMonetaryFund 2 518.01 –

11.Itemsinthecourseofsettlement 22.59 5.70

12.Otherliabilities 6,14 2.00 81.33

12.1. Off-balance-sheet instruments revaluation differences (5.57) 67.83

12.2. Accruals and deferred income 3.41 4.43

12.3. Sundry 4.17 9.08

13.Revaluationaccounts 15 403.73 393.88

14.Capital 16 1,176.17 994.13

14.1. Authorised capital 200.00 200.00

14.2. Reserve capital 976.17 794.13

15.Profitfortheyear 26 519.44 364.08

Total 16,212.54 15,988.20

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pRofit anD loss account of the bank of lithuania

LTL million

Notes 2009 2008

Interest income 18 307.40 636.33

Interest expense 19 (22.72) (128.27)

1. Netinterestincome 284.68 508.07 Realised gains (losses) arising from financial operations 20 345.95 (26.13)

Unrealised losses from revaluation 21 (16.47) (4.51)2. Netresultoffinancialoperationsand

revaluationlosses 329.49 (30.64)

Fees and commissions income 10.83 15.05

Fees and commissions expense (2.67) (3.13)

3. Netincomefromfeesandcommissions 22 8.17 11.92

4. Dividendincome 5 2.35 2.26

5. Otherincome 1.87 2.18

TOTALNETINCOME 626.56 493.78

6. Staffcosts 23 (53.69) (53.45)

7. Administrativeexpenses 24 (16.19) (18.93)8. Depreciationandamortisationoftangibleand

intangiblefixedassets 4 (11.49) (11.14)9. Banknoteandcoinproductionservicesand

circulationexpenses 25 (25.75) (46.18)

PROFITFORTHEYEAR 26 519.44 364.08

The accompanying explanatory notes are an integral part of these Financial Statements.

The Annual Financial Statements 2009 of the Bank of Lithuania were approved on 25 March

2010 by Resolution No. 03-25 of the Board of the Bank of Lithuania.

Chairman of the Board Reinoldijus Šarkinas


91

explanatoRy notes to the annual financial statements of the bank of lithuania

functions of the bank of lithuania

The Bank of Lithuania shall perform the following functions:

- issue the currency of the Republic of Lithuania;

- formulate and implement monetary policy;

- determine the litas exchange rate regulation system and announce the official exchange

rate of the litas;

- manage, use and dispose of the foreign reserves of the Bank of Lithuania;

- act as a State Treasury agent;

- in the manner and cases established by laws and other legal acts, issue and revoke licenses of

credit institutions and payment institutions of the Republic of Lithuania as well as branches

of credit institutions of foreign states, and supervise the activities thereof; it shall also per-

form other functions related to the activities of credit institutions and payment institutions

established by laws;

- establish principles and procedures for financial accounting and reporting of credit institu-

tions and payment institutions of the Republic of Lithuania and branches of credit institu-

tions of foreign states operating in the Republic of Lithuania;

- encourage sound and efficient operation of payment and securities settlement systems;

- collect monetary, banking and balance of payments statistics, as well as the data of financial

and related statistics of the Republic of Lithuania, implement standards on the collection,

reporting and dissemination of the said statistics and compile the Balance of Payments of

the Republic of Lithuania.

After Lithuania’s accession to the European union (Eu) on 1 May 2004, the Bank of Lithuania

became a part of the European System of Central Banks (ESCB). Lithuania has been partici-

pating in the Exchange Rate Mechanism II from 28 June 2004.

basis foR pRepaRation anD pResentation of the annual financial statements

The financial accounting of the Bank of Lithuania is managed and the Annual Financial State-

ments are prepared in accordance with the Law on the Bank of Lithuania, other legislation

of the Republic of Lithuania applicable to the Bank of Lithuania and the Accounting Policy

approved by the Board of the Bank of Lithuania, which is in line with the accounting and

financial reporting guidelines established by the European Central Bank (ECB) to the extent

that such requirements are applicable to a national central bank of the Member State which

has not yet adopted the euro. If a specific accounting treatment is not laid down in the Ac-

counting Policy of the Bank of Lithuania and in the absence of the decisions and instructions

to the contrary by the ECB, the Bank of Lithuania shall follow the principles of the international

accounting and financial reporting standards as adopted by the European union relevant to

the activities and accounts of the Bank of Lithuania.

Following the principles of consistency and comparability, the respective comparable financial

data for 2008 have been presented.

Due to rounding, the totals included in the Balance Sheet, Profit and Loss Account and Notes

of the Bank of Lithuania may not equal the sum of the individual figures.

2009


92

accountinG policy

gENERAL PRINCIPLES

In managing financial accounting and drawing up the financial statements, the Bank of Lithua-

nia follows the following general accounting principles: economic reality and transparency,

prudence, materiality, going concern, accrual, consistency and comparability.

Gold, debt securities and other on-balance-sheet and off-balance-sheet foreign reserves assets

and liabilities (hereinafter – financial items) denominated in foreign currency are recorded in

financial accounting at acquisition cost (transaction) price, and in the Annual Financial State-

ments are presented at market price and official exchange rate1 of the balance sheet date.

Results arising from revaluation of financial items – gold holding, foreign currency (on a

currency-by-currency basis), securities (on a code-by-code basis, i.e. same ISIN number) and

interest rate futures and forward transactions in securities (on an item-by-item basis) – are

accounted for separately.

unrealised revaluation loss arising at the end of the financial year from revaluation of a

separate financial item at market price and official exchange rate and exceeding previous

unrealised revaluation gain registered in corresponding revaluation account, is recognised as

expense of the current financial year. unrealised loss taken to Profit and Loss Account can-

not be reversed in subsequent years against new revaluation gain of the same financial item

resulting from changes in market price and official exchange rate or offset by the revaluation

gain of another type of the financial item.

unrealised revaluation gain arising at the end of the financial year from the revaluation of a

separate financial item at market price and official exchange rate is presented at revaluation

accounts.

The average rate and (or) average price method is used in order to compute the acquisition

costs for gold, securities and foreign currency. Such acquisition costs are used for the purpose

of calculating the realised and unrealised results.

Income and expense are recognised in the accounting period in which they are earned or

incurred and not in the period in which they are received or paid.

gOLd

Gold holdings are revalued on the last business day of each month on the basis of the gold

market price in uS dollars per one Troy ounce. This price is converted into litas at the official

exchange rate of the litas against the uS dollar on the revaluation day.

No distinction is made between the gold market price and uS dollar revaluation differences for

gold, but a single gold revaluation gain or loss is recorded in the gold revaluation account.

In the event of recognition of unrealised revaluation loss on gold at year-end, the average

cost of gold is correspondingly adjusted to the gold market price and uS dollar exchange

rate prevailing on the last business day of the financial year.

Transactions related to gold swaps are accounted for in the same way as repurchase agree-

ments.

1OfficialexchangerateistheofficialexchangerateofthelitasagainsttheeuroorexchangerateofthelitasagainstforeigncurrencydeterminedbytheBankofLithuania.


93

FOREIgN CURRENCy

Financial items denominated in foreign currency are revalued on each business day at the

official exchange rate prevailing on that day.

Official exchange rates of the litas against major foreign currencies determined by the Bank of LithuaniaLitas (LTL) per unit

Currency Code 31 December 2009 31 December 2008

Euro EUR 3.4528 3.4528

US dollar USD 2.4052 2.4507

100 Japanese yen JPY 2.6108 2.7144

Special Drawing Rights XDR 3.7745 3.8148

The average rate of foreign currency is recalculated on a daily basis in case of an increase of

a respective foreign currency position (if the position is long – in case of the net inflows of

the day, if the position is short – in case of net outflows of the day).

In the event of recognition of unrealised revaluation loss on a separate foreign currency at

year-end, the average rate of that currency is correspondingly adjusted to the official exchange

rate on the last business day of the financial year.

FOREIgN EXCHANgE TRANSACTIONS

Foreign currency to be received or paid according to foreign exchange spot, forward and swap

transactions influences a respective foreign currency position on a trade date and is recorded

in off-balance-sheet accounts from the trade date to the settlement date.

The difference in the value at the spot and forward rates of the transaction is recognised as

interest income or expense and is accrued on a daily basis over the remaining duration of

the transaction.

SECURITIES

Securities are recorded in the on-balance-sheet accounts at cost on the transaction settlement

date. Coupon purchased together with security is presented in a separate balance sheet item

as other assets and is not included in the acquisition cost of the security.

The revaluation of securities recorded in the on-balance-sheet accounts is performed on the

last business day of each month at market price prevailing at the revaluation date. Revalua-

tion results of securities related with changes of the market price of securities and the official

exchange rate of the foreign currency are accounted for in separate revaluation accounts.

The average price of each type of securities is recalculated at the end of the business day in

consideration of all purchases of the same type of securities made during the day and their

average acquisition costs. Realised gain (loss) for the same day sales of these securities is

calculated according to this new average cost.

The difference between the security acquisition cost and its nominal value – discount or pre-

mium – is recognised as income or expense according to the straight-line method on a daily

basis from the settlement date of purchase transaction to the maturity date or settlement

date of sale transaction.

2009


94

Discount on non-coupon bearing securities is amortized according to the Internal Rate of

Return (IRR) method and discount or premium on coupon bearing securities – according to

the straight-line method.

If at the end of the financial year unrealised revaluation loss on valuation of a separate type

of securities is recognised as expense, the average cost of such type of securities is adjusted

according to its market price prevailing on the last business day of the financial year.

FORWARd TRANSACTIONS IN SECURITIES

Forward purchases or sales of securities are recognised in off-balance-sheet accounts from

the trade date to the settlement date at the forward price of the transaction. Securities to

be purchased or sold under these transactions are revalued on the last business day of each

month at forward market price. The revaluation result on these securities is recorded for

separately on item-by-item basis in on-balance-sheet assets or liabilities accounts.

On the settlement date of forward transactions in securities, purchases or sales of the securi-

ties are recorded on the on-balance-sheet accounts at the actual market price, and the dif-

ference between this price and the forward price of the transaction is recognised as realised

income or expense.

EqUITy INSTRUmENTS

Long-term investments into equity instruments held for the Bank’s specific purposes are in-

vestments into equities in order to participate in the activities of a specific enterprise whose

equity instruments are non-marketable and their price is not quoted in the market. They are

recorded at cost.

REvERSE TRANSACTIONS

A repurchase agreement is recorded as collateralised inward deposit: the commitment to

repay funds is recorded on the liabilities side of the balance sheet, while the financial asset

that has been given as collateral (sold and repurchased under this agreement) remains on

the asset side of the balance sheet for the period of the transaction.

A reverse repurchase agreement is recorded as a collateralised outward loan on the asset side

of the balance sheet. The collateral acquired during the transaction period is not reported in

the balance sheet and is not revalued.

The difference between the purchase and repurchase price of the collateral acquired under

repurchase and reverse repurchase agreements is recognised on a daily basis as interest income

or expense over remaining duration of the transaction.

INTEREST RATE FUTURES

Interest rate futures are recorded in off-balance-sheet accounts at nominal value of contracts

from the trade date to the closing or maturity date. Daily changes in the variation margins

of interest rate futures are recognised as realised income or expense.


95

TANgIBLE ANd INTANgIBLE FIXEd ASSETS

Tangible and intangible fixed assets include such assets whose acquisition cost (including VAT)

is not less than LTL 500 and whose useful life is longer than one year. The Museum stocks,

pieces of art and tangible assets included into the list of cultural valuables are also treated as

tangible assets with no regard to their acquisition cost. Tangible and intangible fixed assets are

recorded in the balance sheet at cost less accumulated depreciation (amortisation). Depreciation

(amortisation) is calculated on a straight-line basis over the expected useful life of assets.

Depreciation (amortisation) rates of tangible and intangible fixed assets

Assets Annual rate, %

Buildings and structures 2.5–10

Cash calculation and computer equipment 10–50

Vehicles 20

Furniture, office equipment and other inventory 5–50

Intangible assets 25–100

If there are signs of significant decline in the market value of real estate, then at the end of

the financial year the acquisition cost of such assets is reduced by the amount of impairment

loss.

BANKNOTES ANd COINS IN CIRCULATION

Banknotes and coins in circulation are presented at nominal value as liabilities in the balance

sheet. The cost of printing of banknotes and minting coins, as well as other expenses associ-

ated with the issue of the national currency into circulation, are recorded as expenses when

incurred, irrespective of when the coins and banknotes were put into circulation.

RECOgNITION OF INCOmE ANd EXPENSES

Interest income and expense related to financial items denominated in foreign currency (in-

cluding premiums and discounts of securities) are calculated and booked daily.

Realised gain and loss arising from financial items denominated in foreign currency are taken

to the Profit and Loss Account on the trade date, except for the realised gain and loss on

securities which are recognised on the settlement date.

unrealised revaluation gain is not recognised as income and is presented in revaluation ac-

counts. unrealised revaluation loss is taken to the Profit and Loss Account at year-end, if it

exceeds previous revaluation gain related to the corresponding financial item.

Interest income and expense related to financial items denominated in litas are booked

monthly, other income and expenses of the year – till year-end.

POST-BALANCE SHEET EvENTS

Annual Financial Statements are adjusted for post-balance sheet events that occur between

the balance sheet date and the date on which the Annual Financial Statements are approved

by the Board of the Bank of Lithuania, if those events provide evidence of conditions that

existed on balance sheet date and therefore that amounts reported in the Annual Financial

Statements have to be adjusted.

2009


96

No adjustment is made for the data of the Annual Financial Statements of post-balance sheet

events that are indicative of conditions that arose after the balance sheet date. Events which

are of such importance that their non-disclosure could influence the economic decisions of

users taken on the basis of the Annual Financial Statements are disclosed in Explanatory Notes

to the Annual Financial Statements.

financial Risk anD its manaGement

The main object of the financial risk of the Bank of Lithuania is foreign reserves that as

at 31 December 2009 accounted for about 98 per cent of the total assets of the Bank of

Lithuania.

In managing foreign reserves the Bank of Lithuania is exposed to different types of financial

risk such as market, credit, liquidity and settlement risk. These risks are managed by an es-

tablished system of limits for risk exposures and other means aimed at reducing risks.

The main risk faced by the Bank of Lithuania in foreign reserve management that has the

strongest influence on financial results is market risk. Market risk comprises exchange rate,

gold price and interest rate risk.

Exchange rate risk has been eliminated – practically all foreign reserves not related to liabilities

in foreign currencies are invested in the anchor currency – the euro. The part of foreign reserves

corresponding to liabilities is invested in the currency of the liabilities (see Note 27).

The Bank of Lithuania uses the indicator of the modified duration (MD)2 as the main tool

for managing interest rate risk. Interest rate risk is managed by setting benchmarks to each

portfolio of foreign reserves, its MD and largest allowed deviations of portfolio real invest-

ment MD from the MD of the benchmarks. The average MD of foreign reserves was 1.33 in

2009 (1.18 in 2008).

Market risk is valued applying “value-at-risk” (VaR) indicator. At the end of 2009 VaR indicator

for market risk was EuR 3.9 million3 (EuR 5.5 million in 2008), for gold price and exchange

rate risk – EuR 2.5 million (EuR 3.8 million in 2008), for interest rate risk – also EuR 2.5 mil-

lion (EuR 4.5 million in 2008).

For the purpose of managing exchange rate risk and interest rate risk, the Bank of Lithua-

nia also uses financial derivatives (see Note 17). All financial derivatives are included in the

measurement of the investment market and credit risk.

Credit risk is managed by establishing strict financial reliability requirements to issuers and

counterparties. In order to reduce credit risk, limits of the liabilities to the Bank of Lithuania

are established for issuers, counterparties and their groups.

Liquidity risk is managed by setting liquidity ratios and a minimum amount of highly liquid

financial instruments in foreign reserves.

Various correspondent account management instruments are applied for managing settlement

risks: delivery-versus-payment principle, matching of debt and credit turnovers. These measures

facilitate reduction of the risk of loss due to settlement defaults by counterparties.

2 MDshowsapproximatelyhowmuchwillthepercentagevalueofaninvestmentchange,iftheprofitabilityratesincreaseby100basispoints.

3 TheindicatoriscalculatedusingparametricapproachbasedonRiskMetricsmethodology.Itshowsaprobabilityof95%thatadversedevelopmentsofgoldprice,exchangeratesorinterestratewillnotreducetheinvestmentvalueduringthenextbusinessdaybytheamountexceedingthevalueoftheindicator.DataandestimatesusedbytheMarketOperationsDepartmentoftheBankofLithuaniaandthoseofRiskMetricsaregiveninthesection“FinancialRiskandItsManagement”.


9�

notes

note 1. Gold

31 December 2009 31 December 2008

Gold holdings in:

Troy ounces 186,984.41 186,675.87

Kilograms 5,815.87 5,806.27

Price of one Troy ounce, USD 1,104.00 865.00

Valueofgold,LTLmillion 496.51 395.73

Gold holdings in 2009, compared to 2008, increased due to differences in the weight of gold

bars arising on settlements of gold investment transactions.

Gold InvestmentTroy ounces


Non-invested reserves 179,277.89 74,737.56

Swaps 7,706.52 –

Fixed-term deposits – 111,938.31

Total 186,984.41 186,675.87

note 2. Receivables from the international monetary fund

LTL million


Net reserve position in the International Monetary Fund 0.13 0.13Balance in Special Drawing Rights account with the International Monetary Fund 518.28 0.27

Total 518.41 0.41

The net reserve position in the International Monetary Fund (IMF) holdings belongs to the

Republic of Lithuania, which is a member of the IMF since 1992. The Bank of Lithuania per-

forms the function of depository of the IMF funds.

Quota of the Republic of Lithuania in IMF totals SDR 144.20 million. Part of this Quota (25%)

was paid in SDRs and the other part was paid in non-marketable and non-interest bearing

Republic of Lithuania Government Promissory Notes denominated in national currency. The

value of these Government securities issued for the benefit of the IMF as at 31 December

2009 amounted to SDR 143.65 million.

Net Reserve Position in the IMFSDR million


Quota of the Republic of Lithuania in the International Monetary Fund (total value) 144.20 144.20Claims of the International Monetary Fund corresponding to Government promissory notes in litas (143.65) (143.61)Funds of the International Monetary Fund in accounts with the Bank of Lithuania in litas (0.51) (0.56)

NetreservepositionintheInternationalMonetaryFund 0.03 0.03

2009


9�

In order to provide liquidity to the global economic system by supplementing the foreign

exchange reserves of the IMF member countries, in 2009 IMF allocated SDR 182.64 billion

to the IMF member countries in proportion to their quotas:

1. by the decision of IMF Board of Governors the general allocation of SDR 161.18 billion

was distributed on 28 August 2009,

2. after the enforcement of the Fourth Amendment of the IMF Articles of Agreement the

special one-time allocation of SDR 21.45 billion was distributed on 9 September 2009.

As a result of these SDR allocations the amount of SDR 137.24 million was transferred to the

account of the Bank of Lithuania held with IMF (SDR 106.9 million on 28 August 2009, SDR

30.34 million on 9 September 2009).

SDR 137.24 million (LTL 518.01 million) provided by IMF are disclosed under balance sheet

of the Bank of Lithuania assets item “Receivables from the International Monetary Fund”

and under liability item “Counterpart of special drawing rights allocated by the International

Monetary Fund”. Whereas the amounts of interest payable and receivable on SDR funds

recorded under the abovementioned items were equal, therefore SDR allocations distributed

by the IMF did not influence the financial result of the Bank of Lithuania in 2009.

During the first half of 2011 the IMF envisages revising the expedience of withdrawing a part

of SDR allocations to IMF member countries in view of the situation in the global economy

and overall liquidity condition.

note 3. Deposits, securities and other investments Denominated in foreign currency

LTL million


Debt securities 14,396.08 13,465.50

Accounts with foreign banks 247.34 764.88

Reverse repurchase agreements 90.20 –

Claims on the ECB (TARGET24 account) 80.34 23.80

Fixed-term deposits with foreign banks – 949.52

Total 14,813.96 15,203.70

Balances of accounts of the Bank of Lithuania held with central banks of other states comprise

LTL 201.71 million (LTL 574.99 million on 31 December 2008).

Liabilities of the Bank of Lithuania to participants of TARGET2 – domestic commercial

banks – related to the claims of the Bank of Lithuania on the ECB arising due to operations

performed via TARGET2 are presented in Note 13.

The breakdown of deposits, securities and other investments by currency is presented in

Note 27.

� TARGET2isaTransEuropeanAutomatedRealtimeGrosssettlementExpressTransfersystemoperatingonthebasisofasinglesharedplatformandprovidingharmonisedservicesaccordingtoaunifiedpricesystem.


99

Breakdown of Deposits, Securities and Other Investments Denominated in Foreign Currency by Country of Residence of Issuer and CounterpartyLTL million


EU Member States 14,072.24 14,395.34

Japan 365.60 407.05

USA 105.35 104.45

Australia 17.88 17.19

International financial institutions 252.90 279.68

Total 14,813.96 15,203.70

Breakdown of Deposits, Securities and Other Investments Denominated in Foreign Currency by MaturityLTL million


Demand 327.69 788.68

Up to 1 year 5,559.30 6,940.21

1–5 years 8,788.30 7,267.82

Over 5 years 138.67 206.99

Total 14,813.96 15,203.70

note 4. tangible and intangible fixed assets

LTL million

Intangible assets

Tangible assets Total

Buildings and construc-tion in progress

Cash calculation and computer equipment (including non-assem-bled items)

Vehicles Other property, plant and equipment (including non-assem-bled items)

Acquisition cost as at 31 December 2008 14.71 161.76 64.95 7.78 33.83 283.03

Additions in 2009 0.45 0.89 4.83 0.02 3.25 9.45

Disposals in 2009 – – (2.25) (0.87) (0.21) (3.33)

Redistribution in 2009 0.16 (1.34) 0.77 – 0.41 0.00Acquisition cost as at 31 December 2009 15.32 161.30 68.30 6.92 37.29 289.15Accrued depreciation as at 31 December 2008 (13.69) (31.55) (52.45) (4.79) (27.68) (130.17)

Depreciation in 2009 (1.13) (3.71) (4.82) (0.77) (1.06) (11.49)

Written-off depreciation in 2009 – – 2.22 0.87 0.21 3.29Accrued depreciation as at 31 December 2009 (14.82) (35.26) (55.05) (4.69) (28.54) (138.36)

Netbookvalueasat31December2009 0.50 126.04 13.26 2.24 8.75 150.79

Netbookvalueasat31December2008 1.02 130.20 12.50 2.99 6.15 152.86

The Bank of Lithuania has not concluded any transactions with the mortgage of tangible

assets of the Bank of Lithuania.

2009


100

note 5. investments into equity instruments

Since 1 May 2004 the Bank of Lithuania is a member of the ESCB. In accordance with Article

28 of the Statute of the ESCB and the ECB, the Bank of Lithuania is the subscriber of the capital

of the ECB. Shares of the national central banks in the subscribed capital of the ECB depend

on the established key for the ECB capital subscription, which is adjusted every five years in ac-

cordance with Article 29.3 of the Statute of the ESCB and the ECB or adjusted in the case of a

change in the number of the European union Members States in accordance with Article 49.3

of the Statute of the ESCB and the ECB. The shares of the NCBs in the ECB’s capital key are

weighted according to the shares of the respective Member States in the Eu’s total population

and GDP in equal measure, as notified to the ECB by the European Commission.

In implementing the requirements of Article 29.3 of the ESCB and ECB Statute, shares of na-

tional central banks in the key for the ECB capital subscription were adjusted with effect from 1

January 2009. After the increase of the share of the Bank of Lithuania in the subscribed capital

of the ECB to 0.4256 per cent from 1 January 2009 (0,4178 per cent on 31 December 2008),

the Bank of Lithuania additionally paid EuR 31,45 thousand to the capital of the ECB.

Distribution of the Subscribed Capital of the European Central Bank as at 31 December 2009

Central bank Percentages

Nationale Bank van België / Banque Nationale de Belgique 2.4256

Deutsche Bundesbank 18.9373

Central Bank and Financial Services Authority of Ireland 1.1107

Bank of Greece 1.9649

Banco de España 8.3040

Banque de France 14.2212

Banca d’Italia 12.4966

Central Bank of Cyprus 0.1369

Banque centrale du Luxembourg 0.1747

Bank Centrali ta’Malta / Central Bank of Malta 0.0632

De Nederlandsche Bank 3.9882

Oesterreichische Nationalbank 1.9417

Banco de Portugal 1.7504

Banka Slovenije 0.3288

Národná banka Slovenska 0.6934

Suomen Pankki - Finlands Bank 1.2539

Total(euroareacentralbanks) 69.7915

Áúëãàðcêà íàðîäíà áàíêà (Bulgarian National Bank) 0.8686

Česká národní banka 1.4472

Danmarks Nationalbank 1.4835

Eesti Pank 0.1790

Latvijas Banka 0.2837

Lietuvos bankas 0.4256

Magyar Nemzeti Bank 1.3856

Narodowy Bank Polski 4.8954

Banca Naţională a României 2.4645

Sveriges Riksbank 2.2582

Bank of England 14.5172

Total(non-euroareacentralbanks) 30.2085


101

As Lithuania does not participate in the euro area, the transitional provisions of Article 48

of the Statute of the ESCB apply. According to these provisions, up to 31 December 2009

the Bank of Lithuania has paid the minimum contribution of 7 per cent of the ECB capital

subscribed by the Bank of Lithuania, i.e. EuR 1.72 million (LTL 5.93 million).

The Bank of Lithuania is a member of the Bank for International Settlements (BIS) with repre-

sentation and voting rights equal to 1,070 shares with the acquisition cost of LTL 11.51 million

and the nominal value of SDR 5,000 per share. The Bank of Lithuania has paid up 25 per cent

of the value of these shares. In 2009 the Bank of Lithuania received dividends of LTL 1.08 mil-

lion for these BIS shares (LTL 1.01 million in 2008).

The Bank of Lithuania owns 60 per cent of the shares of the Central Securities Depository

of Lithuania the acquisition cost of which is LTL 3.63 million. In 2009 the Bank of Lithuania

received dividends of LTL 1.28 million for them (LTL 1.24 million in 2008).

The Bank of Lithuania holds one SWIFT share with the acquisition cost of LTL 3,249. Dividends

are not paid for this share.

note 6. off-balance-sheet instruments Revaluation Differences

Off-balance-sheet instruments revaluation differences represent the results of revaluation

due to the changes of the official exchange rate of foreign exchange transactions which

are recorded in off-balance-sheet accounts (see Note 17). The revaluation difference related

to foreign currency receivables is reported under the asset item of the balance sheet, while

revaluation difference related to foreign currency payable is reported under the balance sheet

liabilities item (see Note 14).

note 7. accruals and Deferred expenses

LTL million


Accrued interest income 115.98 111.99

Accrued coupon on securities 115.65 107.56

Interest on financial derivatives 0.31 4.04

Interest on fixed-term gold deposits – 0.30

Other accrued interest 0.02 0.09

Coupon purchased with a security 73.81 82.33

Other accrued income 0.11 0.86

Deferred expenses 1.97 1.58

Total 191.87 196.76

note 8. sundry

LTL million


Loans to the staff of the Bank of Lithuania 19.86 16.63

Loans for house purchase or repairs 19.48 16.15

Consumer loans 0.38 0.48

Other receivables 1.51 5.32

Current tangible assets 2.06 2.09

Total 23.43 24.05

2009


102

note 9. banknotes and coins in circulation

This balance sheet item presents the nominal value of litas banknotes and coins in circulation.

In 2009, the value of banknotes and coins put into circulation by the Bank of Lithuania was

LTL 1,145.60 million (LTL 2,085.31 million in 2008) and the value of those withdrawn from

circulation was LTL 2,842.89 million (LTL 1,624.18 million in 2008).

Banknotes and Coins in CirculationLTL million


Banknotes 7,735.26 9,433.12Coins (including collector (commemorative) coins and numismatic sets of coins) 196.93 196.35

Total 7,932.19 9,629.47

note 10. liabilities to Domestic credit institutions Related to monetary policy operations Denominated in litas

This item consists of the holdings of required minimum reserves held by commercial banks

in their current accounts with the Bank of Lithuania. From November 2008 credit institutions

are subject to 4 per cent reserve requirement.

The Bank of Lithuania pays interest for the part of commercial bank required reserves that does

not exceed the required reserve ratio used by the ECB for that period by applying marginal

interest rates of the main refinancing operations of the Eurosystem set by the ECB (see Note

19). In 2009, the interest rate used for calculations of interest paid by the Bank of Lithuania

for the part of required reserves of commercial banks decreased from 2.45 to 1 per cent (in

2008 fluctuated from 4.42 to 2.45 per cent).

note 11. liabilities to other Domestic institutions Denominated in litas

LTL million


Liabilities to Government institutions 52.95 164.76

Liabilities to other domestic institutions 11.65 15.16

Total 64.59 179.93

note 12. liabilities to foreign institutions Denominated in litas

LTL million


Balances in current accounts of international organisations 137.53 55.86

Balances in current accounts of foreign banks 0.15 0.16

Total 137.69 56.02


103

note 13. liabilities Denominated in foreign currency

Liabilities to Domestic Institutions Denominated in Foreign CurrencyLTL million


Fixed-term deposits of Government institutions 2,026.93 627.70

Balances in current accounts of Government institutions 532.65 493.24

Balances in current accounts of TARGET2 participants 80.34 2.53

Total 2,639.92 1,123.48

Liabilities to Foreign Institutions Denominated in Foreign CurrencyLTL million


Balances in current accounts 257.63 75.60

Gold swaps 18.23 –

Total 275.86 75.60

Breakdown of Liabilities to Foreign Institutions in Foreign Currency by Country of Residence of CounterpartyLTL million


International organisations 257.63 75.60

EU Member States 18.23 –

Total 275.86 75.60

Breakdown of Liabilities Denominated in Foreign Currency by MaturityLTL million


Demand 870.49 571.25

Up to 1 year 2,045.16 627.70

Without term 0.13 0.13

Total 2,915.78 1,199.08

note 14. other liabilities

LTL million


Off-balance sheet instruments revaluation differences (see Note 17) (5.57) 67.83

Accruals and deferred income 3.41 4.43

Accrued interest expenses 0.50 1.54

Other accruals 2.72 2.69

Deferred income 0.18 0.19

Sundry 4.17 9.08

Total 2.00 81.33

2009


104

note 15. Revaluation accounts

LTL million


Revaluation accounts

Gold 305.92 205.83

Securities 97.78 188.04

Foreign currency 0.03 0.02

Total 403.73 393.88

Revaluation accounts represent revaluation balances arising from unrealised gains on gold,

securities and foreign currency.

unrealised revaluation loss of each type of securities and each foreign currency holding,

when exceeding previous corresponding revaluation gains, were recognised as expenses at

the end of 2009 (see Note 21).

note 16. capital

LTL million

31 December 2008 Increase 31 December 2009

Capital

Authorised capital 200.00 – 200.00

Reserve capital 794.13 182.04 976.17

Total 994.13 182.04 1,176.17

note 17. off-balance-sheet instruments

Foreign Exchange TransactionsLTL million

Value on a trade date Value on 31 December 2009

Value adjustment differences

SwapsReceivables 371.08 367.58 (3.50)

Payables 371.08 365.51 (5.57)

Forward agreementsReceivables 0.12 0.12 –

Payables 0.12 0.12 (0.00)

Spot transactionsReceivables 1,008.22 1,008.22 –

Payables 1,008.22 1,008.22 –

Totalbyforeignexchangetransactions

Receivables 1,379.43 1,375.93 (3.50)

Payables 1,379.43 1,373.86 (5.57)

For the purposes of foreign reserve management, the Bank of Lithuania used interest rate

futures and forward transactions in securities in 2009.

As at 31 December 2009, outstanding interest rate futures at their nominal value accounted

for: LTL 1,428.08 million (LTL 724.40 million in 2008) of notional sales and LTL 69.06 million

(LTL 234.79 million in 2008) of notional purchases.


105

As at 31 December 2009, the Bank of Lithuania did not have any outstanding forward

transactions in securities.

The impact of interest rate futures and forward transactions in securities on the Bank of

Lithuania financial results is disclosed in Note 20.

note 18. interest income

LTL million

2009 2008

Interest income on:

Investments in securities 297.18 576.18

Financial derivatives 2.98 26.32

Balances of accounts 2.85 5.44

Reverse repurchase agreements 2.67 12.14

Fixed-term deposits 0.78 15.24

Other interest income 0.94 1.02

Total 307.40 636.33

note 19. interest expense

LTL million

2009 2008

Interest expense on:

Fixed-term deposits of Government institutions 7.34 60.27

Balances in current accounts of Government institutions 2.48 12.50

Required minimum reserves of credit institutions 12.80 39.27

Liabilities related to repurchase agreements 0.07 14.43

Other interest expense 0.03 1.79

Total 22.72 128.27

note 20. Realised Gains (losses) arising from financial operations

LTL million

2009 2008

Realised gains (losses) arising from:

Sale of securities 355.79 26.39

Sale of gold and foreign currency (0.02) (0.00)

Forward transactions in securities (1.31) 4.00

Interest rate futures (8.52) (56.52)

Total 345.95 (26.13)

note 21. unrealised losses from Revaluation

LTL million

2009 2008

Unrealised revaluation losses on:

Securities 16.45 4.40

Foreign currency 0.02 0.11

Total 16.47 4.51

2009


106

note 22. net income from fees and commissions

LTL million

2009 2008

Income from:

Settlement services 6.93 8.03

Sales of numismatic valuables 3.61 6.41

Usage of the Loan Risk Database 0.13 0.25

Auctions of securities 0.04 0.23

Other services 0.12 0.13

Total 10.83 15.05

Expenses relating to fees and commissions (2.67) (3.13)

Netincomefromfeesandcommissions 8.17 11.92

note 23. staff costs

LTL million

2009 2008

Expenses on wages and salaries 41.05 40.86

to the members of the Board 1.27 1.28

to the heads of structural divisions 2.19 2.30

to other staff of the Bank of Lithuania 37.59 37.28

Contributions to State Social Insurance Fund 12.64 12.59

Total 53.69 53.45

The Board of the Bank of Lithuania consists of the Chairman of the Board of the Bank of

Lithuania, two Deputy Chairmen and two Board Members. At the end of 2009 the Bank of

Lithuania had eleven departments, six independent divisions and two branches. The total

number of employees was 832 (in 2008 – 843 employees) of which 6 were on fixed-term

labour contract (in 2008 – 7 employees) and 24 were on parental leave or unpaid leave for

short-term contracts with the ECB, IMF or central banks of other countries (in 2008 – 17

employees).

note 24. administrative expenses

LTL million

2009 2008

Expenses

Maintenance expenses 7.39 8.52

Information subscription expenses 1.94 1.71

Mail and communication 1.67 1.64

Business trips 1.55 2.05

Training of the staff 0.90 1.49

Public relations 0.81 1.11

Library acquisitions and press subscriptions 0.17 0.18

Other 1.76 2.22

Total 16.19 18.93


10�

note 25. banknote and coin production services and circulation expenses

LTL million

2009 2008

Banknote production expenses – 16.08

Coin minting expenses 25.34 29.56

Cash circulation expenses 0.41 0.55

Total 25.75 46.18

note 26. Distribution of the profit of the bank of lithuania

By virtue of amendment to Article 23 of the Law on Amendment to the Law on the Bank of

Lithuania (No. XI-510, 2 December 2009; (Valstybės žinios (Official Gazette) No. 147-6553,

2009) enforced from 2 December 2009, the contribution amount of the profit of the Bank of

Lithuania to the State budget was changed. Pursuant to the Law, when allocating the profit

of the Bank of Lithuania from 2009 and thereafter the contribution to the State budget shall

be 70 per cent (instead of former 50 per cent) of the amount of the profit of the Bank of

Lithuania for the financial year or a part thereof remaining after the allocation of the profit

to cover the uncovered loss incurred during the previous financial year. The part of the profit

remaining after the allocation shall be transferred to the reserve capital, as authorised capital

of the Bank of Lithuania has been completely formed.

LTL

2009 2008 2007

Profit allocation

Transfer to the state budget 363,606,065 182,041,717 161,914,094 Allocation to the reserve capital of the Bank of Lithuania 155,831,171 182,041,717 161,914,094

Total 519,437,236 364,083,435 323,828,188

2009


10�

note 27. assets and liabilities of the bank of lithuania by currency

LTL million

LTL EUR USD JPY XDR XAU Other Total

31December2009 ASSETS Gold – – – – – 496.51 – 496.51Claimsonforeigninstitutionsdenominatedinforeigncurrency – 14,355.08 92.80 365.65 518.41 – 0.43 15,332.37Receivables from the IMF – – – – 518.41 – – 518.41Debt securities – 14,030.58 – 365.49 – – – 14,396.08Deposits and other investments – 324.50 92.80 0.15 – – 0.43 417.88Otherassets 190.61 192.48 0.25 0.00 – – 0.32 383.66Totalon-balance-sheetassets 190.61 14,547.56 93.05 365.65 518.41 496.51 0.75 16,212.54LIABILITIES Banknotesandcoinsincirculation 7,932.19 – – – – – – 7,932.19Liabilitiestodomesticcreditinstitutionsrelatedtomonetarypolicyoperationsdenominatedinlitas 2,520.36 – – – – – – 2,520.36Liabilitiestootherdomesticinstitutionsdenominatedinlitas 64.59 – – – – – – 64.59Liabilitiestoforeigninstitutionsdenominatedinlitas 137.69 – – – – – – 137.69Liabilitiestodomesticinstitutionsdenominatedinforeigncurrency – 2,547.12 92.66 – 0.13 – 0.00 2,639.92Liabilitiestoforeigninstitutionsdenominatedinforeigncurrency – 275.86 – – – – – 275.86CounterpartofspecialdrawingrightsallocatedbyIMF – – – – 518.01 – – 518.01Itemsinthecourseofsettlement 22.59 – – – – – – 22.59Otherliabilities 7.26 0.31 – (5.57) – – – 2.00Revaluationaccounts 305.95 97.77 – 0.01 – – – 403.73Capital 1,176.17 – – – – – – 1,176.17Profit 519.44 – – – – – – 519.44Totalon-balance-sheetliabilities 12,686.24 2,921.07 92.66 (5.56) 518.14 – 0.00 16,212.54NETON-BALANCE-SHEETASSETS(LIABILITIES) (12,495.63) 11,626.50 0.39 371.21 0.27 496.51 0.75 0.00Off-balance-sheetassetsincludedintocurrencyposition Receivables under foreign exchange transactions 131.21 1,248.22 – – – – – 1,379.43Off-balance-sheetliabilitiesincludedinto currencyposition Payables under foreign exchange transactions 877.01 131.21 – 371.21 – – – 1,379.43Netoff-balance-sheetassets(liabilities)includedintocurrencyposition (745.80) 1,117.01 – (371.21) – – – 0.00NETASSETS(LIABILITIES) (13,241.43) 12,743.51 0.39 0.00 0.27 496.51 0.75 0.0031December2008 Totalon-balance-sheetassets 194.17 14,983.43 6.45 407.70 0.41 395.73 0.31 15,988.20Totalon-balance-sheetliabilities 14,528.27 1,384.91 6.11 68.77 0.13 – 0.00 15,988.20NETON-BALANCE-SHEETASSETS(LIABILITIES) (14,334.10) 13,598.52 0.34 338.93 0.27 395.73 0.31 0.00Off-balance-sheetassetsincludedintocurrencyposition 460.95 446.60 5.66 – – – – 913.22Off-balance-sheetliabilitiesincludedintocurrencyposition 101.86 466.61 5.42 339.33 – – – 913.22Netoff-balance-sheetassets(liabilities)includedintocurrencyposition 359.09 (20.01) 0.25 (339.33) – – – 0.00

NETASSETS(LIABILITIES) (13,975.01) 13,578.51 0.59 (0.40) 0.27 395.73 0.31 0.00

ANNEXES

109

ANNEXES

Resolutions of the boaRD of the bank of lithuania in 2009, that weRe published in Valstybės žinios (official Gazette)

On approval of regulations on the non-banking sector enterprise certificate system; approved on 12 February 2009 (Valstybės žinios (Official Gazette) No. 19-792, 2009).

Declaring of 50-litas commemorative and 1-litas circulation commemorative coins, issued to celebrate the event “Vilnius – European Capital of Culture 2009”, a legal tender and their issue into circulation; approved on 19 February 2009 (Valstybės žinios (Official Gazette) No. 22-896, 2009).

On amending Resolution No. 49 of 22 April 1999 of the Board of the Bank of Lithuania “On approval of the rules for establishing compliance of the currency of the Republic of Lithuania with acceptability features and replacing worn and damaged currency; adopted on 19 February (Valstybės žinios (Official Gazette) No. 22-897, 2009).

On approval of forms of financial statements; approved on 26 March 2009 (Valstybės žinios (Official Gazette) No. 42-1649, 2009).

On amending Resolution No. 105 of 3 November 1995 of the Bank of Lithuania “On prudential requirements to credit unions”; approved on 26 March 2009 (Valstybės žinios (Official Gazette) No 42-1650, 2009).

On calculation of prudential requirements for credit unions; approved on 26 March 2009 (Valstybės žinios (Official Gazette) No 42-1651, 2009).

On approval of minimum loan evaluation requirements of credit unions; approved on 26 March 2009 (Valstybės žinios (Official Gazette) No 42-1652, 2009).

On notification rules regarding the acquisition and assignment of a qualified share of the authori-sed capital and/or of voting rights in a bank; approved on 21 April 2009 (Valstybės žinios (Official Gazette) No 45-1794, 2009).

On declaring the third 100-litas commemorative coin of the series dedicated to the millennium of the mention of the name of Lithuania a legal tender and its issue into circulation; approved on 2 June 2009 (Valstybės žinios (Official Gazette) No 75-3087, 2009). On amending Resolution No. 125 of 21 December 1995 of the Board of the Bank of Lithuania “On amending rules for the administration of the Loan Risk Database”; approved on 11 June 2009 (Valstybės žinios (Official Gazette) No. 72-2958, 2009).

On declaring null and void Resolution No. 112 of 1 July 2004 of the Board of the Bank of Lithu-ania “On approval of regulations of the Republic of Lithuania Government securities auction and requirements for participants of the Republic of Lithuania Government securities auction”; adopted on 17 June (Valstybės žinios (Official Gazette) No. 75-3086, 2009).

On amending Resolution No. 136 of 18 October 2007 of the Board of the Bank of Lithuania “On amending regulations on operation of TARGET2-LIETuVOS BANkAS payment system”; approved on 23 July 2009 (Valstybės žinios (Official Gazette) No. 89-3836, 2009).

On amendment to Resolution No. 148 of 8 November 2007 of the Board of the Bank of Lithuania “On rules for granting intraday credit in euro; approved on 23 July 2009 (Valstybės žinios (Official Gazette) No. 89-3837, 2009).

On declaring 50-litas commemorative coin dedicated to Tytuvėnai Architectural Ensemble (of the series “Historical and Architectural Monuments of Lithuania”) a legal tender and its issue into cir-culation; adopted on 27 August 2009 (Valstybės žinios (Official Gazette) No. 105-4413, 2009).

2009


110

On amending Resolution No. 99 of 10 June 2004 of the Board of the Bank of Lithuania “On ap-proval of rules for outsourcing ancillary services”; approved on 15 October 2009 (Valstybės žinios (Official Gazette) No. 126-5479, 2009).

On amending Resolution No. 136 of 18 October 2007 of the Board of the Bank of Lithuania “On approval of operation rules for TARGET2-LIETuVOS BANkAS payment system”; approved on 20 October 2009 (Valstybės žinios (Official Gazette) No. 126-5480, 2009).

On amending Resolution No. 148 of 8 November 2007 of the Board of the Bank of Lithuania “On approval of rules for granting intraday credits in euro”; approved on 20 October 2009 (Valstybės žinios (Official Gazette) No. 126-5481, 2009).

On methods for the assessment of systemically important payment systems; approved on 20 Oc-tober 2009 (Valstybės žinios (Official Gazette) No. 126-5482, 2009).

On amending Resolution No. 127 of 22 July 2004 of the Board of the Bank of Lithuania “On approval of rules for implementation of the right to provide financial services in the Republic of Lithuania and other European union Member States”; approved on 26 November 2009 (Valstybės žinios (Official Gazette) No. 142-6293, 2009).

On declaring 50-litas commemorative silver coin dedicated to the Lithuanian nature a legal tender and its issue into circulation; approved on 26 November 2009 (Valstybės žinios (Official Gazette) No. 142-6294, 2009).

On amending Resolution No. 21 of 1 March 2007 of the Board of the Bank of Lithuania “On ap-proval of provisions for granting Valdas Jurgutis award”; approved on 3 December 2009 (Valstybės žinios (Official Gazette) No. 145-6483, 2009).

On amending Resolution No. 139 of 24 December 2003 of the Board of the Bank of Lithuania “On statistical reporting of interest rates on loans and deposits by monetary financial institutions”; approved on 3 December 2009 (Valstybės žinios (Official Gazette) No. 155-7015, 2009).

On amending Resolution No. 46 of 8 May 2003 of the Board of the Bank of Lithuania “On the balance sheet statistical reporting by monetary financial institutions”; approved on 3 December 2009 (Valstybės žinios (Official Gazette) No 155-7014, 2009, amended by Valstybės žinios (Official Gazette) No. 7, 2010).

On minimum remuneration policy requirements for employees of credit institutions; approved on 10 December 2009 (Valstybės žinios (Official Gazette) No. 149-6708, 2009).

On approval of the procedure for reporting to the Bank of Lithuania statistical information and data necessary for the compilation of the balance of payments and international investment position of the Republic of Lithuania; adopted on 24 December 2009 (Valstybės žinios (Official Gazette) No. 155-7016, 2009)

On amending Resolution No.58 of 6 May 2004 of the Board of the Bank of Lithuania “On ge-neral rules for presentation and consideration of permission applications of credit institutions, and issuance of permissions”; adopted on 24 December 2009 (Valstybės žinios (Official Gazette) No. 2-118, 2009).

On rules for calculation of payment institutions’ own funds; approved on 24 December 2009 (Valstybės žinios (Official Gazette) No. 2-119, 2010).

On permissions to payment institutions, issued by the Bank of Lithuania; approved on 24 December 2009 (Valstybės žinios (Official Gazette) No. 4-181, 2010).

On instructions to credit institutions, designed to prevent money laundering and/or terrorist finan-cing; approved on 30 December 2009 (Valstybės žinios (Official Gazette) No. 2-120, 2010).

On rules for implementation of the right to provide payment services in the Republic of Lithuania and other European union Member States; approved on 30 December 2009 (Valstybės žinios (Official Gazette) No. 4-182, 2010).

On rules for administration of the public list of payment institutions; approved on 30 December 2009 (Valstybės žinios (Official Gazette) No. 4-183, 2010).

On internal control, risk management, and received funds protection requirements to payment ins-titutions; approved on 30 December 2009 (Valstybės žinios (Official Gazette) No. 4-184, 2010).

On financial statements of payment institutions; approved on 30 December 2009 (Valstybės žinios (Official Gazette) No. 4-185, 2010).

ANNEXES

111

leGal tenDeR

10 litas

1997 issue

2001 issue

2007 issue

20 litas

1997 issue

2001 issue

2007 issue

2009


112

50 litas

1998 issue

2003 issue

100 litas

2000 issue

2007 issue

200 litas

1997 issue

500 litas

2000 issue

ANNEXES

113

1 centas – 1991 issue 2 centas – 1991 issue 5 centas – 1991 issue

10 centas – 1991 issue 20 centas – 1991 issue 50 centas – 1991 issue

10 centas; since from 1997 20 centas; since from 1997 50 centas; since from 1997

1 litas; since from 1998 2 litas; since from 1998 5 litas; since from 1998

circulation commemorative coins

1 litas of 1997, 1999, 2004, 2005 and 2009 issues

For more information about the currency of the Republic of Lithuania and its protection see on the website of the Bank of Lithuania (http://www.lb.lt/lt/banknotai/index/htm).

2009


114

GlossaRy

This glossary contains selected terms that are used in the Annual Report.

balance of payments: a statistical statement that summarises, for a specific time period, the economic transactions of an economy with the rest of the world. The transactions considered are those involving goods, services and income; those involving financial claims on, and liabilities to, the rest of the world; and those (such as debt forgiveness) that are classified as transfers.

central counterparty: an entity that interposes itself between counterparties to the contracts traded in one or more financial markets, becoming the buyer to every seller and the seller to every buyer.

central government: the government as defined in the European System of Accounts 1995 but excluding regional and local governments, and social security funds.

central securities depository (csD): an entity that: enables securities transactions to be pro-cessed and settled by the book entry; plays an active role in ensuring the integrity of securities issue. Securities can be held in physical (but immobilised) or dematerialised form (i.e. so that they exist only as electronic records).

collateral: assets pledged or otherwise transferred (e.g. by credit institutions to central banks) as a guarantee for the repayment of loans, as well as assets sold (e.g. by credit institutions to central banks) under repurchase agreements.

commissions and other fees: gross amount of commissions and other fees paid and received while providing payment services and closely related auxiliary services.

credit institution: an undertaking whose business is to receive deposits or other repayable funds from non-professional market participants and to grant credit or issue and administer means of payments in the form of electronic money.

credit risk: a probability that counterparty will not settle the full value of obligation under the procedure established in the contract.

Debt security: a promise on the part of the issuer (i.e. the borrower) to make one or more payment(s) to the holder (the lender) at a specified future dates. Such securities usually carry a specific rate of interest (the coupon) and/or are sold at a discount to the amount that will be repaid at maturity. Debt securities issued with an original maturity of more than one year are classified as long-term.

Direct investment: cross-border investment for the purpose of obtaining a lasting interest in an enterprise resident in another economy (assumed, in practice, for ownership of at least 10% of the ordinary shares or voting power). Included are equity capital, reinvested earnings and other capital associated with inter-company operations.

economic and financial affairs council (ecofin council): the Eu Council meeting in the composition of the ministers of economy and finance.

economic and financial committee (efc): a consultative Community body which contributes to the preparation of the work of the European Commission and the ECOFIN Council. Its tasks include reviewing the economic and financial situation of the Member States and of the Commu-nity, and budgetary surveillance.

eRm ii (exchange rate mechanism ii): the exchange rate mechanism which provides the fra-mework for exchange rate policy cooperation between the euro area countries and the non-euro area Eu Member States. ERM II is a multilateral arrangement with fixed, but adjustable, central rates and a standard fluctuation band of ±15%. Decisions concerning central rates and, possi-bly, narrower fluctuation bands are taken by mutual agreement between the Eu Member State concerned, the euro area countries, the European Central Bank (ECB) and the other Eu Member States participating in the mechanism. All participants in ERM II, including the ECB, have the right to initiate a confidential procedure aimed at changing the central rates.

euRiboR: euro interbank lending rate at which a prime bank is willing to lend funds in euro to another prime bank, as reported by a panel of contributing banks.

ANNEXES

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euro area: the area encompassing those Eu Member States in which the euro has been adopted as the single currency in accordance with the Treaty, and in which a single monetary policy is conducted. The euro area currently comprises: Ireland, Austria, Belgium, Greece, Spain, Italy, Cyprus, Luxembourg, Malta, the Netherlands, Portugal, France, Slovakia, Slovenia, Finland, and Germany.

european central bank (ecb): the ECB lies at the centre of the Eurosystem and the European System of Central Banks; it has its own legal personality. The ECB ensures that the tasks conferred upon the Eurosystem and the ESCB are implemented either through its own activities or through those of the NCBs, pursuant to the Statute of the ESCB. The ECB is governed by the Governing Council, Executive Board, and, as a third decision-making body, by the General Council.

european system of central banks (escb): composed of the European Central Bank (ECB) and the NCBs of all 27 Eu Member States, i.e. it includes, in addition to the members of the Eurosystem, the NCBs of those Member States that have not yet adopted the euro. The ESCB is governed by the decision-making bodies of the ECB: the Governing Council, the Executive Board, and the General Council.

excessive deficit procedure: the provision set out in Article 104 of the Treaty and specified in Protocol No 20 on the excessive deficit procedure requires Eu Member States to maintain budgetary discipline, defines the criteria for a budgetary position to be considered an excessive deficit and regulates steps to be taken following the observation that the requirements for the budgetary balance or government debt have not been fulfilled. Article 104 is supplemented by Council Regulation (EC) No 1467/97 of 7 July 1997 on speeding up and clarifying the implementation of the excessive deficit procedure (as amended by Council Regulation (EC) No 1056/2005 of 27 June 2005), which is one element of the Stability and Growth Pact.

financial stability: condition in which the financial system – comprising financial intermediaries, markets and market infrastructures – is capable of withstanding shocks and the unravelling of financial imbalances, thereby mitigating the likelihood of disruptions in the financial intermediati-on process which are severe enough to significantly impair the allocation of savings to profitable investment opportunities.

foreign exchange swap: simultaneous spot and forward transactions exchanging one currency against another.

General council: one of the decision-making bodies of the ECB. It comprises the President and the Vice-President of the ECB and the governors of all of the NCBs of the European System of Central Banks.

General government: a sector defined in the European System of Accounts 1995 as comprising resident entities that are engaged primarily in the production of non-market goods and services intended for individual and collective consumption and/or in the redistribution of national inco-me and wealth. Included are central, regional and local government authorities, as well as social security funds. Excluded are government-owned entities that conduct commercial operations, such as public enterprises.

Gold portfolio: gold as a part of foreign exchange reserves and associated investments.

Governing council: is the supreme decision-making body of the ECB. It comprises all the members of the Executive Board of the ECB and the governors of the NCBs of the Member States whose currency is the euro.

harmonised index of consumer prices (hicp): is a measure of the development of consumer prices, which is compiled by Eurostat and harmonised for all Eu Member States.

interest expenses: interest paid by a credit institution on borrowed and other funds.

interest income: interest received from the funds invested by service users and other service providers, as well as other available funds.

international investment position: the value and composition of an economy’s outstanding net financial claims on (or financial liabilities to) the rest of the world.

investment portfolio: a part of foreign reserves aimed at earning larger revenues. A longer, one-year, investment period is applied to the investment strategy for this part of foreign reserves.

isin: an International Securities Identification Number or code assigned to securities issued in financial markets. It is assigned by a competent issuing authority.

2009


116

key ecb interest rates: the interest rates, set by the Governing Council, which reflect the mone-tary policy stance of the ECB. They are the rates on the main refinancing operations, the marginal lending facility and the deposit facility.

liquidity portfolio: a part of foreign reserves, the primary purpose of which is to ensure the urgent need of liquidity by the Bank of Lithuania. A short, one-month, investment period is applied to the investment strategy for this part of foreign reserves.

liquidity risk: is a probability of disruptions in a credit institution’s settlements due to imbalances of cash flows.

main refinancing operation: a regular open market operation executed by the Eurosystem in the form of reverse transactions. Such operations are carried out through a weekly standard tender and normally have a maturity of one week.

maintenance period: the period over which credit institutions’ compliance with reserve requi-rements is calculated.

market risk: the risk that a credit institution may suffer losses due to a price change of market variables, such as interest rates, foreign exchange rates, equity securities, and commodities.

mfis (monetary financial institutions): financial institutions which together form the money-issuing sector of the euro area. These include the Bank of Lithuania, resident credit institutions (as defined in Community law) and all other resident financial institutions whose business is to receive deposits and/or close substitutes for deposits from entities other than MFIs and, for their own account (at least in economic terms), to grant credit and/or invest in securities. The latter group consists of money market funds.

operational risk: risk associated with losses resulting from inadequate or failed people, systems, internal processes, and from external events, legal risk included.

payment institution: is a legal entity that holds a license of a payment institution or a license of limited operations of a payment institution.

price stability: the primary objective of the Eurosystem. The Governing Council of the ECB defi-nes price stability as a year-on-year increase in the Harmonised Index of Consumer Prices for the euro area of below 2%. The Governing Council has also made it clear that, in the pursuit of price stability, it aims to maintain inflation rates below, but close to, 2% over the medium term.

Repurchase agreement and reverse repurchase agreement: a contract to sell and subsequ-ently repurchase securities, commodities or a guaranteed title to securities or commodities when such a guarantee is issued by a licensed Stock Exchange holding the title to the said securities and commodities, whereby the institution cannot assign or pledge certain securities or commodities to more than one counterparty at a time and makes a commitment to repurchase them (or the same type securities or substitutes of commodities) at a specified price and on a specified date, that had been indicated or will be indicated by the seller. In case of the securities or commodities seller it is a repurchase agreement, while for the buyer it is a reverse repurchase agreement.

Reserve base: the sum of the eligible balance sheet items (in particular liabilities) that constitute the basis for calculating the reserve requirement of a credit institution.

Reserve ratio: the ratio defined by the central bank for each category of eligible balance sheet items included in the reserve base. The ratio is used to calculate reserve requirements.

Reserve requirement: the minimum amount of reserves a credit institution is required to hold with the Bank of Lithuania over a predefined maintenance period. Compliance with the require-ment is determined on the basis of the average of the daily balances in the reserve accounts over the maintenance period.

Risk: the risk of losses (in both on and off-balance-sheet positions) arising from movements in market prices.

securities settlement system (sss): a transfer system for settling securities transactions. It com-prises all of the institutional arrangements required for the clearing and settlement of securities trades and the provision of custody services for securities.

sepa (single euro payments area): a single euro payment area; the aim of the project is stan-dardisation of payment instruments in Europe.

ANNEXES

11�

settlement risk: the risk that settlement in a transfer system will not take place as expected, usually owing to a party defaulting on one or more settlement obligations. This risk may comprise operational risk, credit risk and liquidity risk.

shares and other equity: equity securities representing ownership of a stake in a corporation. They comprise shares traded on stock exchanges (quoted shares), unquoted shares and other equity. Shares usually produce income in the form of dividends

standing facility: a central bank facility available to counterparties at their initiative. The Eurosys-tem offers two overnight standing facilities: the marginal lending facility and the deposit facility.

systemic risk: the risk that the inability of one participant to meet its obligations to the system when due will cause other participants to be unable to meet their obligations when due. Such a failure may cause significant liquidity or credit problems and, as a result, could threaten the stability of the financial system. Such inability may be caused by operational or financial problems.

taRGet: Trans-European Automated Real-Time Gross Settlement Express Transfer system

taRGet2: the second generation Trans-European Automated Real-Time Gross Settlement Express Transfer system. It functions on a single shared platform and offering harmonised services with a uniform pricing scheme.

Bank of LithuaniaGedimino pr. 6, LT-01103 Vilnius, LithuaniaTel. +370 5 268 0235Fax +370 5 212 6005E-mail: [email protected]://www.lb.lt

annual Report of the bank of lithuania 2009

Order No. 11379Published by the Bank of LithuaniaPrinted by uAB “Baltijos kopija” kareiviø g. 13B, LT-09109 Vilnius, Lithuania

annual report of the bank of lithuania 2009payment cards / 71 table 18. payments by payment cards /...

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