Contributed by Averus.
I. LEGAL FRAMEWORK
1.1. Which main legislative and regulatory provisions govern the banking sector in your jurisdiction?
The main legal act regulating the activities of the banks in Lithuania is the Law on Banks of the Republic of Lithuania (Law on Banks). The Law on Banks establishes the banking system which consists of three types of banks: (i) the banks established in Lithuania, (ii) branches of foreign banks, and (iii) specialized banks established in Lithuania. This law regulates the activities of the banks and provides rules for the banking system ensuring stability, reliability, and efficiency of the banking system. The Law on Banks also regulates the establishment, licensing of the bank, and activities of foreign banks in Lithuania, and establishes requirements for the shareholders of the bank and management of the bank.
The Law on the Financial Institutions of the Republic of Lithuania (Law on Financial Institutions) is another important legal act regulating the activities of the banks. This law establishes the services which are considered financial services and can be rendered by the bank, grounds for revocation of the license, distribution of profit of the bank, and peculiarities of supervision of the activities of the banks.
1.2. Which bodies are responsible for enforcing the applicable laws and regulations? What are their main competencies?
The Ministry of Finance is the main body that is responsible for creating, organizing, coordinating, and controlling the implementation of public policy in the field of financial markets and financial services in Lithuania.
The Bank of Lithuania is the central bank of the Republic of Lithuania, established by the Parliament of the Republic of Lithuania (Seimas). The Bank of Lithuania is an integral part of the European System of Central Banks and pursues the objectives and tasks of the European System of Central Banks in accordance with the guidelines and instructions of the European Central Bank. The Bank of Lithuania, among other things, supervises the whole financial market participants, including banks. The three largest banks registered in Lithuania are supervised directly by the European Central Bank together with experts from the Bank of Lithuania (the supervisory authority).
The Bank of Lithuania supervises the financial market to the extent that it is not delegated to the European Central Bank under the provisions of Regulation (EU) No 1024/2013. As a supervisory institution, the Bank of Lithuania inter alia is entitled to issue legal acts and recommendations on the activities of supervised financial market participants and financial market supervision, issue binding instructions to supervised financial market participants and other persons, to impose impact measures on supervised financial market participants and other persons.
It also resolves out-of-court disputes between consumers and banks.
The Bank of Lithuania in certain cases also acts as the resolution authority, responsible for the preparation of detailed resolution plans that will be used to ensure the continuity of operations of the banks facing significant problems. As part of its resolution function, the Bank of Lithuania may sell a bank without the approval of the shareholders of the resolved bank, transfer a bank to a temporary institution to preserve the bank’s core functions and facilitate permanent access to deposits, and segregate assets – creating a ‘good’ and a ‘bad’ bank, with the assets of the resolved bank being segregated accordingly, private bail-in – if the bank’s financial situation deteriorates to the point where the bank’s own funds or other means are insufficient, this measure would ensure that the critical functions of the bank can be rescued and that the costs of the resolution would be borne by the bank’s owners and creditors, not by taxpayers.
Certain actions of the Bank of Lithuania while implementing its functions prescribed by laws might be taken only by obtaining the court’s order. The actions of the Bank of Lithuania might be disputed in courts.
1.3. What are the current priorities of regulators and how does the regulator engage with the banking sector?
The priority objective of the Bank of Lithuania as announced on its website is to develop not only an innovative but also a sustainably developing and reliable payments market in Lithuania. Currently, the Bank of Lithuania is focusing more on compliance with the requirements of the law and the activities of payment market participants, communication with market participants, and education of market participants.
The Bank of Lithuania is quite an active institution, on a regular basis it organizes consultations with financial market participants and issues recommendations and guidelines on various topical questions. The Bank of Lithuania constantly publishes such consultations, guidelines, recommendations, and opinions on its website.
2.1. What licenses are required to provide banking services in your jurisdiction? What activities do they cover?
Banks differ from other financial market participants as they are considered credit institutions under Regulation (EU) No 575/2013. Only credit institutions have the exclusive right to accept deposits and other repayable funds from non-professional market participants, while the provision of licensed financial services without a license is prohibited. Therefore, a credit institution seeking to accept deposits from retail market participants must first obtain a banking license.
The banking license (depending on its scope) inter alia entitles the bank to accept deposits and other repayable funds, provide payment services, issue electronic money, and provide other licensed services and non-licensed financial services. While the special bank shall have a right to provide only the following services:
- acceptance of deposits and other repayable funds;
- lending (including mortgage lending);
- financial leasing;
- the issuing and administration of travelers’ cheques, bills of exchange, and other means of payment, provided that these activities do not include the service referred to in paragraph 5(4);
- the provision of financial guarantees and financial sureties;
- financial intermediation (agency activities);
- money management;
- credit assessment services;
- rental of safe deposit boxes;
- currency exchange (cash);
- issuance of electronic money.
2.2. What is the procedure for obtaining a banking license? How long does this typically take?
The licensing process in Lithuania consists of three processes. Initially, a pre-assessment is carried out, during which potential bank representatives are familiarized with the legal framework applicable in Lithuania and discuss the key aspects of establishing a bank. Subsequently, an application for a banking license is submitted to the Bank of Lithuania, which in turn assesses whether the bank has submitted all the necessary documents to obtain a license. If the Bank of Lithuania does not find any formal deficiencies in the application, it accepts the application for examination. The Bank of Lithuania, after starting the procedure of assessment of the application and the submitted documents, transmits all data to the European Central Bank. The Bank of Lithuania and the European Central Bank assess the data in parallel. If the authorities examining the application find that the documents are not deficient, the bank should be granted a license to operate within a period of 6 months. However, practice shows that only in exceptional cases the documents submitted are not deficient in one way or another. In this case, the examination period is extended. Once the assessment of the documents submitted by the potential bank has been completed, the Bank of Lithuania submits its conclusions on the bank’s ability to operate in Lithuania to the European Central Bank, which takes the final decision on the granting of the license. The critical elements that may determine the granting of a bank’s license include the adequacy of the documents submitted, the satisfaction of the bank’s minimum capital requirement, the adequacy of the company and its shareholders or holders of voting rights, the suitability of the company’s management, the operational plan of the bank which must be consistent with the ability of the bank’s founders (shareholders or holders of voting rights) to implement it.
2.3. Can a foreign bank operate in your jurisdiction on the basis of its domestic license?
If a bank is licensed in EU countries, it can operate in Lithuania on the basis of its national license. The EU-licensed bank shall have a right to operate whether by establishing a branch or providing financial services without establishing a branch. The right to provide financial services without establishing a branch does not entitle an EU bank to carry on the provision of financial services on a regular basis.
In cases where a bank registered in a non-EU country wishes to start operations in Lithuania, it must obtain a license to operate in Lithuania in accordance with the procedure set out in the Law on Banks.
2.4. What are the restrictions on ownership, including foreign ownership of banks?
It is established under the Law on Banks that the legal entities supported by the state or municipal budgets, persons who did not provide the supervisory authority with the data allowing to establish their identity, participants, activity, financial condition, managers of the legal entity, persons for whose benefit the shares are acquired, or the legality of the acquisition of the funds used to acquire the bank’s shares, or have not proved the legality of the acquisition of the funds used to acquire the bank’s shares; persons who do not consent to the processing by the supervisory authority of their data necessary for the performance of its functions cannot be the shareholder of the bank.
Assessment of the bank’s shareholders is carried on by the Bank of Lithuania.
The shareholder must comply with the requirements of impeccable reputation in order to be approved by the Bank of Lithuania.
2.5. What are the requirements for a proposed acquisition and acquirer of a qualified holding in a bank? Would the same requirements apply in the case of an increase of a qualifying holding?
An acquirer who has decided to acquire, directly or indirectly, a qualified share in the authorized capital and/or voting rights of the bank, or if the share in the authorized capital and/or voting rights of the bank is acquired or increased so that the proportion of the bank’s authorized capital and/or voting rights held reaches or exceeds 20%, 30% or 50%, or to the extent that the bank becomes controlled, shall be obliged to submit a notification of the proposed acquisition to the Bank of Lithuania. The notification of the proposed acquisition shall be submitted by completing the special form Notification of Proposed Acquisition and attaching the specified documents. A person transferring a qualified share in the authorized capital and/or voting rights of a financial market participant who decides to transfer a share in the authorized capital and/or voting rights of the bank or to reduce it so that the bank’s share of the authorized capital and/or voting rights is less than 20%, 30% or 50%, or to the extent that the bank ceases to be controlled by it shall immediately submit a notification to the Bank of Lithuania.
III. REGULATORY CAPITAL AND LIQUIDITY
3.1. How are banks typically funded in your jurisdiction?
Banks in Lithuania are funded by contributions from their shareholders (an increase of share capital or loans) and deposits from non-professional market participants.
3.2. What capital and own funds requirements apply to banks in your jurisdiction?
Banks must hold sufficient capital to cover unexpected losses and to have sufficient funds to mitigate the risk of insolvency in times of crisis. The sum of the bank’s capital ratios set out in Article 26(1)(a) to (e) of Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions must be at least EUR 5 million. Meanwhile, the amount of the bank’s own funds ratios laid down in Article 26(1)(a) to (e) of Regulation (EU) No 575/2013 for a specialized bank shall not be less than EUR 1 million. Banks operating in Lithuania are also subject to liquidity requirements. Banks are required to hold sufficient liquid assets to cover their net cash outflows within 30 days in the event of extremely adverse conditions. The liquidity coverage ratio must not be less than 100%, i.e., a credit institution’s stock of liquid assets must be at least equal to the net cash outflow during the 30 calendar days of the stressed period. Banks must have sufficient stable funding to cover their funding needs for a period of one year, under both normal and stressed conditions.
3.3. Has your jurisdiction implemented the Basel III framework? Are there any major deviations?
The principles of effective banking supervision are enshrined in the Basel III framework, to which Lithuania has joined. Lithuania is supportive of the Basel III framework.
IV. REPORTING, ORGANISATIONAL REQUIREMENTS, INTERNAL GOVERNANCE, AND RISK MANAGEMENT
4.1. What key reporting and disclosure requirements apply to banks in your jurisdiction?
The banks are required to publish regularly consolidated and, where appropriate, individual information that is easily accessible and accurately reflects their financial position, financial performance, risk exposures, risk management strategies, and the bank’s governance policies and processes.
The reports can be divided into several groups:
- Financial and operational reports necessary for the supervisory authority to carry out supervisory functions, such as the report on changes in equity, the report on issued loans, the report on employees’ numbers, the report on calculation of initial capital and equity, etc.
- Reports to supervise the implementation of measures to prevent money laundering and/or terrorist financing.
- Operational and security risk event reports, e.g., notification of a major operational or security risk event.
4.2. What are the organizational requirements for banks, including with respect to corporate governance? Please briefly describe the requirements and the procedure of assessment of the suitability of the members of the management body and key function holders.
Under the Law on Banks, the bank must establish a governance structure consisting of a Supervisory Board, the Management Board, and the Chief Executive Officer. The roles and responsibilities of the bank’s organs shall be clearly regulated and enshrined in the bank’s internal documents, specifying which functions are assigned to which organs of the bank.
The Resolution of the Board of the Bank of Lithuania on the approval of the general requirements for the internal governance of banks defines the basic principles and requirements to ensure that the organizational structure and internal governance of banks are effective, based on a long-term business strategy, and in line with the nature of the bank’s activities, the business risks assumed and their management, and the ability of the bank’s governing bodies to adequately manage the bank’s activities.
The members of the management bodies are only selected on the basis of an assessment of their experience, qualification, and reputation. The process for the appointment/election of members of the organs of the bank shall be transparent and non-discriminatory and shall provide equal conditions for the participation of all candidates who meet the conditions set out in the competition/selection process. The appointment/election of members of the Bank’s organs shall be based on an assessment of their ability to devote sufficient time and effort to their functions, in particular in relation to risk assessment issues. Each member should undertake, in accordance with the procedures laid down by the organs of the bank, to limit his/her other professional commitments to such an extent that they do not interfere with the proper performance of the functions assigned to them.
The members of the management bodies should be of impeccable reputation.
4.3. What are the local rules for loans to the management body and their related parties?
Lending to the bank’s managers, persons related to them, and legal entities in which the bank’s managers, persons related to them, or persons related to them, or in which such persons are the managers, hold a qualifying share of the share capital and/or voting rights, may not exceed the amounts set by the bank’s Supervisory Board. The conditions and procedures for such lending shall be determined by the bank’s Supervisory Board.
The lending conditions for the related parties may not be more favorable than the lending conditions for other customers of the bank.
The conditions and procedures for lending to persons related to the Bank must be approved by the Bank’s Supervisory Board. The documents confirming such transactions should inter alia provide the name of the person and his/her status (i.e. member of a banking body or related party); the type and amount of the transaction the name and composition of the person or body of the bank deciding on the approval of the transaction and the applicable conditions; whether the transaction is at arm’s length (yes/no); whether the transaction is on terms and conditions available to all employees (yes/no); the sum of Tier 1 capital and Tier 2 capital; the bank’s total Tier 1 capital; whether the transaction/loan is part of a large exposure; the relative weighting of the aggregate amount of all outstanding balances of all transactions with the same person, calculated as a percentage dividing the total outstanding amount by the total outstanding amount of transactions with members of the banking body and their related parties.
The bank must also have a procedure for the management of interest, which inter alia should include the approved principles for transactions with related parties that define the conduct of such transactions on an arm’s length basis.
4.4. What are the main legal provisions governing risk management in the banking sector in your jurisdiction?
The Resolution of the Board of the Bank of Lithuania approving the Provisions on the organization of internal control and risk assessment/management of all banks establishes the guiding principles to be followed by the bank to ensure that the bank’s system of internal control and risk assessment/management is well organized, effective and ensures the safe and sound operation of the bank.
The Resolution has been developed in line with the documents published by the Basel Committee on Banking Supervision: the framework for internal control systems in banking organizations, sound credit risk assessment and valuation for loans, the principles of credit risk management, principles for the management and supervision of interest rate risk, sound practices for managing liquidity in banking organizations, sound practices for the management and supervision of operational risk.
As announced by the Bank of Lithuania on its website, the Bank of Lithuania’s financial market supervision is based on a risk-based supervision model. The underlying assumption of this model is that not all financial market participants or the services they provide pose the same threat to the stability of the financial system, consumers, and the economy. Financial market participants supervised by the Bank of Lithuania are assigned to one of four categories, in descending order of supervisory priority, i.e., the first category is assigned to financial market participants with the highest priority, and the fourth category to financial market participants with the lowest priority. A financial market participant shall be assigned to one of the categories on the basis of its size, systemic importance, uniqueness, and other quantitative and qualitative indicators. An econometric model based on these indicators is developed to rank the importance of financial market participants and assign them to a category. Based on this, the Supervisory Service of the Bank of Lithuania develops a priority and risk map, which is regularly updated.
4.5. What are the legal requirements applicable to banks in combating money laundering and terrorist financing area?
The main legal requirements applicable to banks in the area of anti-money laundering and counter-terrorist financing are primarily established in the Law on Prevention of Money Laundering and Terrorist Financing.
The Resolution of the Board of the Bank of Lithuania on the approval of the instructions to financial market participants aimed at preventing money laundering and/or terrorist financing establishes instructions to Financial Market Participants, including the banks on the Prevention of Money Laundering and/or Terrorist Financing provides that the bank must ensure that the internal control system includes the identification, assessment, and management of money laundering and terrorist financing risks on a continuous and effective basis. The system of internal control for the prevention of money laundering and terrorist financing shall inter alia include an AML/CFT policy and the internal rules and procedures implementing it, and a system of communication to the management bodies to enable timely decisions to be taken on the management of money laundering and terrorist financing risks. The bank is responsible for establishing an organizational structure that clearly defines the rights, duties, and responsibilities of its staff in relation to the management of money laundering and terrorist financing risks and for ensuring that those duties are fulfilled.
4.6. Are there any legal provisions regulating banking secrecy in your jurisdiction?
Banking secrecy in the Republic of Lithuania is regulated by Article 55 of the Law on Banks. Banking secrecy containing information may only be disclosed to the customer of the bank to whom the banking secrecy information relates or to other persons at the customer’s written request or with the customer’s written consent, specifying to whom and to what the information may be provided. The bank shall have the right to provide information that constitutes a bank secret to a court, arbitration, or other persons if and only to the extent necessary for the protection of the bank’s legitimate interests, as well as to public authorities for the purpose of preventing crime. The bank shall provide information constituting the banking secrecy to the authorities performing pre-trial investigation, criminal intelligence, intelligence, tax administration, supervision of the financial market functions, and also to authorities responsible for money laundering and/or prevention of financing of terrorism, etc. In other cases not established by applicable laws, banking secrecy containing information shall be provided only on the basis of a reasoned court order, if the court determines that such information is necessary for a legitimate interest pursued by the court or by the person requesting the banking secrecy information.
5.1. What are the main trends in the banking sector in your jurisdiction?
As announced by the Bank of Lithuania in its review of activities of the banking sector in III quarter of the year 2022 published on their website the banks operating in Lithuania continue to successfully withstand the war in Ukraine and other economic challenges, as well as continue to take a very responsible approach to the uncertainties of the current situation and to be adequately prepared for possible surprises. Banks were quite active in lending to businesses and individuals. Residential mortgages dominated, as usual. Deposits of the population with banks grew, although the annual growth rate slowed down. The Bank of Lithuania continues to promote competition in the banking sector.
The recent entrants in the banking sector (specialized banks) or bank start-up market have almost doubled in terms of assets over the year and are increasingly competing with longer-established banks. However, it is noteworthy that in the Lithuanian banking sector, the divergence between the larger, longer-established banks and the more recently launched specialized banks remains significant, despite the rapid growth in the latter’s business volume.
The Bank of Lithuania established the specialized Centre for Financial Market Development in the year 2022. As announced by the Bank of Lithuania on its website the Centre for Financial Market Development will look for ways to strengthen the existing financial market participants and attract new ones, promote sustainable FinTech development, and implement capital market development measures.
5.2. What are the biggest challenges in the banking sector at the moment?
The biggest challenges in the banking sector are related to international sanctions against Russia and Belarus and their implementation of anti-money laundering measures. The Bank of Lithuania notices that commercial banks may face indirect challenges from Russia’s war against Ukraine: credit risk for Lithuanian companies that have or have had business relations with the affected countries and cyber security threats.
5.3. What’s new in fintech?
While Lithuania is still considered a fintech hub, the Bank of Lithuania emphasizes its goals to increase the operational maturity and improve the quality of services of fintech its licenses. It should also be noted that electronic money/ payment institutions wish to move into the banking sector obtaining a specialized bank license, however, the requirements for acquiring the specialized bank license are considerably higher. This is why the number of specialized banks is still low in comparison with the number of issued electronic money/payment institutions licenses. Based on the statistic of the Bank of Lithuania announced on their website the total amount of payment transactions made by electronic money and payment institutions in 2022 are almost two times higher than during the year 2021.