Lithuania, a small but vibrant country in the Baltic region, boasts a steadily growing economy and a strong banking sector. As a member of the European Union, Lithuania has seen its GDP increase over the past few years, aided by a solid mix of domestic demand, investment, and export growth. The banking sector in Lithuania, predominantly comprised of foreign-owned institutions, plays a crucial role in facilitating this growth and providing financial services to individuals and businesses alike.
Given the significance of the banking sector in Lithuania, it is essential to have robust measures in place to ensure the stability and confidence of the financial system. One such measure is the Deposit Guarantee Scheme (DGS), designed to protect depositors’ funds in the event of a bank failure. This article delves into the workings of Lithuania’s DGS, explaining how it safeguards depositors’ interests and maintains the resilience of the country’s banking system.
Deposit Protection in Lithuania
Deposits in Lithuanian banks are protected through the Deposit Guarantee Scheme, which is a deposit insurance system aimed at providing financial compensation to depositors in case a bank is unable to meet its obligations. This system offers depositors a safety net, ensuring they do not lose their savings in the event of a bank failure. The primary objectives of deposit insurance are to maintain public confidence in the banking sector, protect depositors, and contribute to the stability of the financial system.
The Deposit Guarantee Scheme in Lithuania is regulated by the Law on Insurance of Deposits and Obligations to Investors, which implements the provisions of the EU Directive 2014/49/EU. The DGS is managed by the State Enterprise Deposit and Investment Insurance (SEDIIS), which is responsible for administering the deposit insurance fund. SEDIIS is located in Vilnius, the capital of Lithuania.
The Deposit Guarantee Scheme in Lithuania is activated when the Bank of Lithuania or a court determines that a bank is unable to meet its obligations to depositors, such as when a bank becomes insolvent or has its license revoked. The trigger event is referred to as a “deposit insurance event,” and it initiates the process of compensating depositors through the DGS.
Under Lithuania’s DGS, deposits are covered up to €100,000 per depositor, per bank. In certain cases, such as when a depositor sells their residential property, temporarily higher coverage of up to €500,000 is available for a period of six months. Eligible deposits include those held in current accounts, savings accounts, term deposits, and certain other types of accounts. However, there are some exclusions, such as deposits from financial institutions, public authorities, or those arising from criminal activities.
Claim procedures are initiated by the SEDIIS once a deposit insurance event has occurred. Depositors are not required to submit an application, as the compensation process starts automatically. The SEDIIS calculates the compensation amount based on the account balance on the day before the insurance event and aims to pay the compensation within seven working days.
Bank Failures in Lithuania
In the last two decades, Lithuania has experienced a few instances of bank failures. In 2008, the Bank of Lithuania revoked the license of Bankas Snoras due to its insolvency and numerous violations of legal acts. Subsequently, in 2013, Ukio Bankas faced a similar fate after the central bank discovered severe deficiencies in its risk management practices and capital adequacy.
In the event of a bank failure, account holders have several options to recover their money. Statutory administration involves the appointment of an administrator by the Bank of Lithuania, who takes control of the bank’s operations and attempts to restore its financial health. If restoration is not feasible, deposit insurance comes into play, with the DGS compensating eligible depositors up to the coverage limit.
If a bank is declared insolvent and goes into liquidation, depositors can file their claims as part of the bank’s liquidation process. During this process, assets are sold, and the proceeds are distributed among creditors, including depositors, according to the priority of their claims.
Additionally, depositors may consider collective civil action, banding together with other affected account holders to pursue legal action against the bank or its management for losses incurred due to negligence, mismanagement, or other wrongful acts.