Banks are liquidated when they become financially insolvent and unable to meet their obligations. This situation arises due to poor management, excessive risk-taking, or unfavorable economic conditions. Liquidation is a process to protect depositors, maintain financial stability, and recover funds to repay creditors.

Bank regulation seeks to minimize the negative impact of a failing bank on the financial system and the economy. It ensures the orderly wind-down of a distressed bank, protects depositors, and helps maintain confidence in the banking system. Liquidation can have short-term adverse effects on employees and investors, but the long-term benefits often outweigh the immediate costs.

The decision to liquidate or penalize a bank depends on the severity of the problem and the potential risk to the financial system. Minor issues may warrant a penalty, while severe cases require liquidation. The Bank of Lithuania, the country’s central bank, and other supervisory authorities make these decisions based on the bank’s financial health and the potential systemic risk.

The Legal Framework in Lithuania

Bank liquidation in Lithuania is governed by the Law on Banks, the Law on the Bank of Lithuania, and the Bankruptcy Law. Additionally, European Union regulations such as the Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism (SRM) also impact the liquidation process.

The Bank Recovery and Resolution Directive (BRRD) is an EU regulation that provides a common framework for managing bank failures. It aims to ensure the orderly resolution of failing banks, minimize taxpayer bailouts, and protect depositors. The BRRD impacts bank liquidation in Lithuania by providing a harmonized approach, including early intervention measures, bail-in provisions, and the establishment of resolution authorities.

Local insolvency regulations, such as the Bankruptcy Law, provide specific rules and procedures for the liquidation process. These regulations determine how the liquidator is appointed, the valuation of assets, and the distribution of proceeds to creditors. They also establish the priority of claims and the treatment of secured and unsecured creditors.

Bank Liquidation Procedures in Lithuania

Before liquidation becomes is announced, the Bank of Lithuania and other supervisory authorities assess the bank’s financial health and potential risks. Early intervention measures, such as requiring capital injections or restructuring plans, may be implemented. If these measures fail, the authorities may consider the liquidation process.

The assets of the distressed bank are valued by an independent valuator, who considers factors like market conditions, cash flow, and asset quality. Potential write-downs depend on the assets’ actual market value compared to their book value. A lower market value results in higher write-downs, affecting the amount available for distribution to creditors. Collecting assets can be challenging due to differences in legal systems, currency fluctuations, and political risks. These factors can prolong the liquidation process, increase costs, and reduce repayment percentages for creditors.

The appointment of a liquidator in Lithuania is made by the court upon the initiation of the bankruptcy proceedings. The liquidator must be an impartial and qualified professional, often a licensed insolvency practitioner, who is responsible for overseeing the orderly wind-down of the bank’s operations, realizing its assets, and distributing the proceeds to creditors.

The assets of the bank will be distributed to creditors according to the priority of claims established by Lithuanian insolvency law. This typically involves the following order: administrative expenses, secured creditors, preferential creditors, unsecured creditors, and shareholders. Each category of creditors receives payment only after the previous category’s claims have been satisfied.

Secured creditors have a legal claim on specific assets of the bank, which serve as collateral for their loans. They are paid before unsecured creditors from the proceeds of the sale of those assets. Unsecured creditors, on the other hand, do not have collateral and are paid from the remaining funds after secured and preferential creditors have been satisfied. Unsecured creditors usually receive a proportionate share of the available funds based on the size of their claim.