As an international bank creditor with interests in Lithuania, understanding the nation’s banking laws and the consequences of bank failure is crucial to protect your investments. The primary legislation governing Lithuania’s banking sector is the Law on Banks, enacted in 2000 and amended several times since. This law regulates the establishment, licensing, and supervision of banks, as well as the resolution and liquidation of failed banks. The Bank of Lithuania, the country’s central bank, is the primary regulatory authority responsible for implementing these laws and overseeing the banking sector.

Lithuanian banks and credit institutions have also faced significant fines for various wrongdoings in recent years. The fines have been imposed by both Lithuanian authorities and international regulators. Some notable cases include:

Ukio Bankas: In 2013, Ukio Bankas, once the fourth-largest bank in Lithuania, had its license revoked by the Bank of Lithuania due to inadequate risk management, breaches of legal acts, and failure to comply with the regulator’s instructions. As a result, the bank was declared insolvent and entered into bankruptcy proceedings. The bank’s collapse was primarily due to mismanagement rather than severe wrongdoing, but its failure significantly impacted the Lithuanian banking sector.

Bank Snoras: In 2011, Snoras Bank, then the fifth-largest bank in Lithuania, was nationalized after the Bank of Lithuania discovered significant asset misappropriation and fraudulent accounting practices. The bank’s license was subsequently revoked, and it entered into bankruptcy. The bank’s owners were arrested and faced criminal charges, including embezzlement and fraud.

SEB Bank and Swedbank: In 2019, two major banks operating in Lithuania, SEB Bank and Swedbank, faced fines imposed by the Swedish Financial Supervisory Authority (SFSA) for deficiencies in their anti-money laundering and counter-terrorism financing systems. SEB Bank was fined SEK 1 billion (approximately €97 million), while Swedbank received a fine of SEK 4 billion (approximately €388 million). Despite these substantial fines, the banks continue to operate due to their systemic importance in the Lithuanian and regional financial systems.

Even though some Lithuanian banks have faced substantial fines for wrongdoings, they have not been shut down primarily due to their importance to the Lithuanian financial system, the regulators’ preference for remediation, and the potential impact on customers and employees. Instead, these banks have been subjected to increased regulatory oversight and have implemented measures to improve compliance with relevant laws and regulations.

Bank Failure in Lithuania

Bank failure in Lithuania is defined as the inability of a bank to meet its obligations to depositors, creditors, and other stakeholders due to insolvency, poor management, or other reasons. The Bank of Lithuania, as the regulatory authority, is responsible for determining whether a bank has failed or is likely to fail.

The legal mandate of the Bank of Lithuania includes the power to assess a bank’s financial health, management practices, and compliance with regulations. If the Bank of Lithuania concludes that a bank is failing or likely to fail, it may implement various supervisory measures, ranging from increased reporting requirements to initiating resolution or liquidation procedures.

After the Bank of Lithuania concludes that a bank has failed or is likely to fail, it may take one of several actions, including appointing a temporary administrator, revoking the bank’s license, or initiating resolution or liquidation procedures. Common reasons for bank failure in Lithuania include insolvency, inadequate capitalization, poor management, and non-compliance with regulatory requirements.

Bank Supervision and Resolution Planning

The Bank of Lithuania supervises banks to ensure they maintain adequate capital and liquidity levels and comply with prudential regulations. It also requires banks to develop and maintain resolution plans that outline strategies for preserving critical functions and ensuring the organization’s continuation during financial distress.

When a bank fails, the Bank of Lithuania, as the resolution authority, can employ several tools to reorganize, recapitalize, restructure, or dissolve the failed bank. These include the sale of the business, the establishment of a bridge bank, and the separation of assets. Each of these tools aims to minimize losses to creditors, maintain financial stability, and promote an efficient resolution process.

Lithuania’s banking laws protect account deposits and other creditor interests. The Deposit Insurance Scheme ensures that depositors’ funds up to €100,000 are protected, even in the event of a bank’s failure. Non-viable firms are typically required to exit the market in an orderly manner, either through resolution or liquidation, to minimize disruptions to the financial system.

Bank Liquidation Rules in Lithuania

In cases where the Bank of Lithuania determines that a bank’s failure cannot be resolved using the aforementioned tools, it may initiate the liquidation process. The liquidation procedure involves the appointment of a liquidator responsible for selling the bank’s assets, paying off its liabilities, and ultimately dissolving the bank. The liquidator is required to follow a specific order of priority when distributing the proceeds from asset sales to the bank’s creditors.