In 2002 the International Monetary Fund (IMF) in a report on banking supervision in Lithuania, concluded that the comprehensive framework of prudential regulation and supervision either "fully" or "largely" complied with the Basel Core Principles. The Bank of Lithuania (BoL), which acts as the financial supervisory authority, was also found to have adequate legal powers to conduct its bank licensing and supervision responsibilities. The IMF identified shortcomings in the level of protection of supervisory authorities and in the BoL's powers to respond effectively to bank failures. A 2005 report by the European Bank for Reconstruction and Development (EBRD), notes that Lithuanian law clearly details the accountability of the regulator, its authority with respect to onsite and off-site examinations, and its authority to request information from banks. Lithuanian officials agree that continued active supervision of banks and wide information disclosure are crucial, as stated in a 2007 IMF Article IV Consultation report, and they welcome steps to increase information disclosure by January 1, 2008, as part of the Basel II framework. According to a 2006 EBRD report on Lithuania, harmonization with European Union directives has been the main driver in legislative reforms in the field of banking supervision.

General Overview

In 2002, the International Monetary Fund (IMF) produced a Report on the Observance of Standards and Codes (ROSC) regarding banking supervision in Lithuania. The report concluded that the comprehensive framework of prudential regulation and supervision either "fully" or "largely" complied with the Basel Core Principles, promoting the stability and efficiency of the financial system. According to the same report, the Bank of Lithuania (BoL) has adequate legal powers to conduct its bank licensing and supervision responsibilities. Furthermore, as noted in a 2005 European Bank for Reconstruction and Development (EBRD) report, Lithuanian law clearly details the accountability of the regulator, its authority with respect to onsite and off-site examinations, and its authority to request information from banks. There is however a lack of protection for supervisory authorities, as stated in the 2002 IMF report, and the BoL's powers need to be strengthened in order to respond effectively to bank failure events. According to a 2007 IMF Article IV Consultation report, Lithuanian authorities agree that continued active supervision of banks and wide information disclosure are crucial, and they welcome steps to increase information disclosure by January 1, 2008, as part of the Basel II framework.

Bank licensing and supervision in Lithuania is governed by the Law on the Bank of Lithuania, and the Law on Commercial Banks. According to a 2006 EBRD report on Lithuania, the harmonization with European Union (EU) directives has been the main driver in legislative reforms in the field of banking supervision. Lithuania has three financial supervision authorities, the Bank of Lithuania, the Lithuanian Securities Commission (LSC), and the Insurance Supervisory Commission (ISC). As stated in the 2006 BoL report, the BoL has made substantial progress in implementing cooperation with supervisory authorities of countries whose banks have established subsidiaries in Lithuania, as well as with countries where Lithuanian banks have their own branches. The 2007 IMF Selected Issues report noted that Lithuanian authorities concluded a Memorandum of Understanding (MoU) on December 18, 2006, with the Swedish Riksbank, the Bank of Latvia, and the Bank of Estonia, in order to facilitate supervisory and crisis management cross-border arrangements. According to the 2006 BoL report, Lithuania's participation in the activities of EU institutions includes its membership on the European Banking Committee, Banking Supervision Committee, and Committee of European Banking Supervisors and Finance Conglomerates Committee in 2006.

The 2007 U.S. Department of Commerce (DoC) Country Commercial Guide reported that dozens of banks operate in Lithuania, adding that the banking system is stable, well-regulated, and conforms to EU standards. However, the banking sector is highly concentrated, with the top three banks accounting for 68 percent of the banking assets. Furthermore, following the completion of the bank privatization process in 2002, the share of banking capital held by foreign investors, mostly Nordic countries, increased to 87.5 percent.

The Principles

1. (1) Clear responsibilities and objectives for each supervisory agency.

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There is insufficient publicly available information on Lithuania's compliance with this principle. The BoL is responsible for the licensing and supervision of banks. According to the 2002 IMF ROSC, the objectives of banking supervision are clear, transparent, and internally consistent under the Law. The IMF recommended incorporating the responsibilities and objectives of the supervisory authority into the Law on the Bank of Lithuania.

1.(2) Operational independence and adequate resources.

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There is insufficient publicly available information on Lithuania's compliance with this principle. According to the 2002 IMF ROSC, the BoL has a satisfactory degree of independence to exercise its bank licensing and supervision powers. However, as pointed out in the same report, the appointment to the management boards of members outside the BoL could potentially affect the BoL's operational independence. Therefore, the IMF recommended that the Law on the Bank of Lithuania be amended to include a provision that a majority of the staff members be from the BoL, as well as strengthening the provisions relating to conflicts of interest of board members.

1.(3) A suitable legal framework for authorization and ongoing supervision.

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According to the 2002 IMF ROSC, the BoL has adequate legal powers to conduct its bank licensing and supervision responsibilities. Bank licensing and supervision in Lithuania are governed by the Law on the Bank of Lithuania, and the Law on Commercial Banks. According to a 2006 EBRD report on a strategy for Lithuania, the harmonization with EU directives has been the main driver in legislative reforms in the field of banking supervision. Nevertheless, there is insufficient publicly available information on Lithuania's compliance with this principle.

1.(4) A suitable legal framework to address compliance with laws as well as safety and soundness concerns.

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There is insufficient publicly available information on Lithuania's compliance with this principle. According to the 2002 IMF ROSC, the powers of the BoL must be strengthened in order to respond effectively to bank failure events.

1.(5) Legal protection for supervisors.

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There is insufficient publicly available information on Lithuania's compliance with this principle. As stated in the 2002 IMF ROSC, the law does not protect supervisors from legal actions in their conduct of bank licensing and supervision. The IMF recommended enacting provisions to the Law to provide supervisors with an appropriate degree of legal protection, while preserving effective accountability and transparency.

1.(6) Arrangement for sharing of information between supervisors and protection of confidentiality of shared information.

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As stated in the 2006 BoL report, the BoL has made substantial progress in its cooperation with supervisory authorities of countries whose banks have established subsidiaries in Lithuania, as well as in countries where Lithuanian banks have their own branches. Lithuanian authorities notably concluded an MoU on December 18, 2006, with the Swedish Riksbank, the Bank of Latvia, and the Bank of Estonia, in order to facilitate supervisory and crisis management cross-border arrangements, as noted in the 2007 IMF Selected Issues report. Nevertheless, there is insufficient publicly available information on Lithuania's compliance with this principle.

2. Clearly defined permissible activities for banks and control of the use of the word 'bank'.

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According to the 2005 EBRD report, Lithuania shows a high level of compliance in its definition of banks and banking activities. Nevertheless, there is insufficient publicly available information on Lithuania's compliance with this principle.

3. Criteria for structure, directors, operating plan, controls, financial condition and capital base.

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There is insufficient publicly available information on Lithuania's compliance with this principle. As stated in the 2005 EBRD report, the licensing authority and requirements show a high level of compliance. However, the disclosure of beneficial ownership is still problematic.

4. Authority to review and reject transfer of ownership.

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In its 2002 ROSC, the IMF recommended strengthening the BoL's power to review and reject transfer of ownership. Nevertheless, there is insufficient publicly available information on Lithuania's compliance with this principle.

5. Authority to review major acquisitions and investments.

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There is insufficient publicly available information on Lithuania's compliance with this principle. According to a 2005 EBRD report, Lithuanian Law does not request prior supervisory approval for major acquisitions.

6. Minimum capital adequacy requirements (meet Basle Capital Accord for internationally active banks).

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According to the 2002 IMF ROSC, the legal framework and prudential rules enable the BoL to ensure that banks are required to hold a minimum level of capital relative to their risk-weighted exposures on both a solo and consolidated group basis, in line with the Basel Capital Accord. Consequently, the 10 percent capital ratio for licensed banks was deemed appropriate. The IMF, however, recommended keeping the minimum capital requirement under periodic review. As stated in the 2006 EBRD report, Lithuania shows a high level of compliance with prudential regulations. Nevertheless, there is insufficient publicly available information on Lithuania's compliance with this principle.

7. A method exists for the evaluation of procedures related to loans, investments and portfolio management.

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According to the 2002 IMF ROSC, the BoL has effective systems in place to evaluate banks' credit granting and loan portfolio management procedures. Furthermore, as stated in the 2006 EBRD report, Lithuania shows a high level of compliance with prudential regulations. Nevertheless, there is insufficient publicly available information on Lithuania's compliance with this principle.

8. Policies, practices and procedures for evaluating the quality of assets and the adequacy of loan loss provisions and reserves.

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As stated in the 2002 IMF ROSC, the BoL has effective systems in place to evaluate banks' quality of assets and adequacy of loan loss provisions and to require banks to maintain appropriate risk management practices. Issues remain however in relation to asset valuation and the market valuation of collateral. The IMF recommended keeping the loan classification and provisioning rules under review. Furthermore, subject to BoL approval, banks might be able to develop their own loan classification and provisioning rules. According to the 2006 EBRD report, Lithuania shows a high level of compliance with prudential regulations. Nevertheless, there is insufficient publicly available information on Lithuania's compliance with this principle.

9. Prudential limits and management information system on concentration of exposure.

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According to the 2002 IMF ROSC, the BoL has an effective system to evaluate and monitor banks' exposure concentration. However, the IMF advised a reduction in the maturity for inter-bank loans that are exempted from the large exposure limit. As stated in the 2006 EBRD report, Lithuania shows a high level of compliance with prudential regulations. Nevertheless, there is insufficient publicly available information on Lithuania's compliance with this principle.

10. Arm's length rule and monitoring for connected lending.

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As stated in the 2002 IMF ROSC, lending to parent banks and other corporate shareholders is not subject to the connected exposure limit. The IMF recommended tightening the connected lending limit, so as to reduce the risk of intra-group contagion. It also advised giving greater responsibility to the board of directors in overseeing their banks' connected exposures. According to the 2006 EBRD report, Lithuania shows a high level of compliance with prudential regulations. Nevertheless, there is insufficient publicly available information on Lithuania's compliance with this principle.

11. Policies and procedures for country risk and transfer risk.

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In its 2002 ROSC, the IMF advised guiding banks on a wider range of banking risks, including payment system risks, business continuity risk, cyber risks, and reputation risks. According to the 2006 EBRD report, Lithuania shows a high compliance with prudential regulations. Nevertheless, there is insufficient publicly available information on Lithuania's compliance with this principle.

12. Measuring and monitoring market risk. Limit and/or specific capital charge on market risk exposure.

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As stated in the 2002 IMF ROSC, the IMF recommended keeping the large exposure limit - 25 percent of bank capital - under review. According to the 2006 EBRD report, Lithuania shows a high level of compliance with prudential regulations. Nevertheless, there is insufficient publicly available information on Lithuania's compliance with this principle.

13. Comprehensive risk management processes.

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According to the 2002 IMF ROSC, the accountability of the board of directors and senior management should be strengthened to ensure high-quality risk management systems. The IMF recommended increasing the duties of the board of directors to include responsibility for ensuring effective risk management systems. This issue has since been addressed, and Lithuania shows a high level of compliance in risk management, as stated in the 2006 EBRD report. Nevertheless, there is insufficient publicly available information on Lithuania's compliance with this principle.

14. Adequate internal controls.

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According to the 2002 IMF ROSC, the accountability of the board of directors and senior management should be strengthened to ensure adequate internal controls. The IMF therefore recommended increasing the duties of the board of directors to include responsibility for ensuring effective internal controls. According to the 2006 EBRD report, Lithuania shows a high level of compliance with prudential regulations. Nevertheless, there is insufficient publicly available information on Lithuania's compliance with this principle.

15. Strict "know-your-customer" rules and high ethical and professional standards.

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As reported in the 2002 IMF ROSC, Lithuania has relatively comprehensive laws for dealing with money laundering and other financial crimes. The IMF, however, recommended providing examination staff with regular training to detect and prevent money laundering and other financial crimes. It also advised strengthening the coordination and cooperation between the agencies involved in the fight against money laundering and financial crimes. According to the 2006 EBRD report, Lithuania shows a high level of compliance with prudential regulations. In a 2006 Third Round Detailed Assessment on Lithuania, the European Committee on Crime Problems and Select Committee of Experts on the Evaluation of Anti-Money Laundering Measures concluded that, in theory, Lithuania is characterized by a sound legal and institutional AML/CFT framework. The same report also noted that Lithuanian laws generally cover requirements for customer identification, record keeping, and suspicious transactions reports (STRs), although shortcomings remain in relation to customer due diligence and STRs. However, there is insufficient publicly available information on Lithuania's compliance with this principle.

16. Effective supervisory system consisting of on-site and off-site supervision.

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As reported in the 2002 IMF ROSC, the BoL conducts regular, comprehensive on- and off-site examinations of banks that cover a wide range of banking areas as well as early warning indicators. However, the IMF recommended ensuring that on-site examiners effectively assess both the nature of risks in bank subsidiaries and their management systems to oversee subsidiaries. As noted in the 2005 EBRD report, Lithuanian Law clearly details the regulators' authority with respect to on- and off-site examinations. Nevertheless, there is insufficient publicly available information on Lithuania's compliance with this principle.

17. Regular contact with bank management and understanding of bank's operations.

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According to the 2005 EBRD report, Lithuanian Law clearly details the regulators' authority to request information from banks. Nevertheless, there is insufficient publicly available information on Lithuania's compliance with this principle.

18. Analytical reports and statistical returns on solo and consolidated basis.

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There is insufficient publicly available information on Lithuania's compliance with this principle.

19. Independent validation of supervisory information through on-site examination or external auditors.

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There is insufficient publicly available information on Lithuania's compliance with this principle.

20. Ability to supervise on a consolidated basis.

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There is insufficient publicly available information on Lithuania's compliance with this principle. As stated in the 2002 IMF ROSC, the BoL, in its conduct of consolidated supervision, needs to ensure that it carefully assesses the nature of risks and adequacy of risk management in banks' subsidiaries.

21. Consistent accounting policies and practices that provide a true and fair view of the financial condition of the bank.

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According to the 2002 IMF ROSC, information requirements and disclosures are generally well-developed. Banks and their subsidiaries are required to comply with International Accounting Standards (IAS) and are subject to annual external audit. However, the IMF recommended reducing the extent to which banks are required to depart from IAS and strengthening the public disclosure requirements. As stated in the 2007 KPMG Investment Guide, beginning in 2004, companies in Lithuania performed accounting and prepared financial statements and consolidated accounts in accordance with Lithuanian Business Accounting Standards (LBAS), which require less disclosure than the corresponding IAS and International Financial Reporting Standards (IFRS). As of January 1, 2005, however, Lithuania has complied with European Commission Regulation No 1606/2002, which requires all EU-listed companies to prepare consolidated accounts following IFRSs. Nevertheless, there is insufficient publicly available information on Lithuania's compliance with this principle.

22. Adequate supervisory measures to ensure timely corrective action.

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There is insufficient publicly available information on Lithuania's compliance with this principle. As reported in the 2002 IMF ROSC, the BoL has adequate supervisory measures to ensure timely corrective actions at financial institutions. The IMF recommended, however, giving more powers to the BoL with regards to existing penalty provisions applicable to banks for non-compliance with supervisory requirements.

23. Banking supervisors must practice global consolidated supervision over their internationally-active banking organizations.

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As stated in the 2006 BoL report, the BoL has made substantial progress in implementing cooperation with supervisory authorities of countries where Lithuanian banks have their own branches. Nevertheless, there is insufficient publicly available information on Lithuania's compliance with this principle.

24. International exchange of information with other supervisors.

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According to the 2002 IMF ROSC, the BoL has made substantial progress in implementing cooperation agreements with other supervisory and regulatory authorities. Lithuanian authorities concluded a MoU on December 18, 2006, with the Swedish Riksbank, the Bank of Latvia, and the Bank of Estonia in order to facilitate supervisory and crisis management cross-border arrangements, as noted in the 2007 IMF Selected Issues report. Nevertheless, there is insufficient publicly available information on Lithuania's compliance with this principle.

25. Supervision of local operation of foreign banks and information sharing with home country supervisors.

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In its 2002 ROSC, the IMF recommended developing systems for assessing the financial condition of parent banks which have banks operating in Lithuania, and completing MoUs with all parent supervisory authorities. As stated in the 2006 BoL report, the BoL has made substantial progress in implementing cooperation with supervisory authorities of countries whose banks have established subsidiaries in Lithuania. Nevertheless, there is insufficient publicly available information on Lithuania's compliance with this principle.