Lithuania, a Baltic country in northeastern Europe, has a unique banking and financial history. Since regaining independence in 1991, Lithuania has experienced rapid economic growth, joined the European Union in 2004, and adopted the Euro in 2015. The country’s banking sector has undergone several reforms to stabilize and regulate financial institutions while adhering to EU directives. These policy responses, including the establishment of the Bank of Lithuania and the introduction of deposit insurance, aim to prevent banking crises and protect creditors.
Lithuanian banking is based on a few fundamental principles, such as transparency, risk management, customer protection, and adherence to international standards. Despite these principles, the banking sector remains vulnerable to economic shocks, external risks from foreign banks, and cyber threats. Creditors must be vigilant and stay informed about the Lithuanian banking environment to mitigate potential risks.
Banking regulation plays a crucial role in ensuring the stability and security of Lithuania’s financial system. The regulatory framework helps maintain a level playing field for banks, prevents systemic risks, and protects customers and creditors. The main regulatory body in Lithuania is the Bank of Lithuania, responsible for supervising and implementing regulations to safeguard the financial system.
Despite regulatory improvements, the Lithuanian banking sector still faces weaknesses, such as high levels of non-performing loans, a concentration of foreign-owned banks, and susceptibility to external shocks. These vulnerabilities pose risks to account holders and creditors, who may face financial losses in the event of bank failures or economic downturns.
Lithuanian Banking Law
Law on Banks: The Law on Banks establishes the regulatory framework for the operation and supervision of banks in Lithuania. It outlines licensing requirements, capital adequacy rules, and corporate governance standards for banks.
Law on Financial Institutions: This law regulates non-bank financial institutions, such as insurance companies and investment firms, ensuring their stability and compliance with international standards.
Law on the Bank of Lithuania: This legislation establishes the central bank’s mandate and responsibilities, including monetary policy, financial stability, and banking supervision.
Law on Deposit Insurance: The law mandates the establishment of a deposit insurance fund to protect depositors and minimize the impact of bank failures on account holders.
Domestic enforcement of banking regulations in Lithuania is primarily the responsibility of the Bank of Lithuania. It can impose administrative sanctions, such as fines, restrictions on business activities, and even license revocation, on banks that violate regulations. In cases of severe misconduct, the Bank of Lithuania can refer cases to the public prosecutor for criminal proceedings. International enforcement involves cooperation with foreign regulators and the European Central Bank (ECB), particularly in cases involving cross-border activities of Lithuanian banks. Information sharing, joint investigations, and enforcement actions can occur under EU regulations and bilateral agreements.
Bank Resolution and Insolvency Procedures in Lithuania
Bank resolution procedures in Lithuania aim to ensure the orderly resolution of failing banks while minimizing the impact on financial stability and taxpayer burden. The Bank of Lithuania, in coordination with the European Single Resolution Board, has the authority to implement resolution measures, such as bail-in, bridge institution, or asset separation. The resolution process follows the EU Bank Recovery and Resolution Directive (BRRD), which seeks to protect creditors and depositors during bank failures.
Lithuanian bank insolvency procedures are governed by the Law on Enterprise Bankruptcy and the Law on Restructuring of Enterprises. In the event of insolvency, a bankruptcy administrator is appointed to manage the process, which includes realizing assets and distributing proceeds among creditors. The applicable creditor hierarchy in Lithuania is as follows:
Secured creditors: Creditors with collateral have the highest priority and are paid first.
Unsecured creditors: This group includes employees, tax authorities, and other unsecured creditors.
Subordinated creditors: These creditors rank lower in priority and are paid after unsecured creditors.
Shareholders: Shareholders have the lowest priority and are paid only if there are remaining funds after other creditors are satisfied.
Several financial institutions licensed and supervised by the Bank of Lithuania failed over the years. One example of is Bankas Snoras, which was declared bankrupt in 2011. The Bank of Lithuania and the European Central Bank took immediate measures to prevent a financial crisis, including securing the funds of depositors through the deposit insurance system. The bank’s assets were sold, and the proceeds were used to pay creditors in accordance with the established creditor hierarchy.
Another case is Ūkio Bankas, which faced insolvency in 2013. The Bank of Lithuania implemented a resolution procedure, transferring the bank’s healthy assets and liabilities to another bank, while the remaining assets were liquidated. This process protected depositors and allowed for an orderly resolution of the bank’s insolvency.
Legal Framework for Creditors Impacted by Bank Failure in Lithuania
Creditors affected by bank failures in Lithuania can rely on the legal framework to recover their money. They can participate in insolvency or resolution procedures, submit their claims to the bankruptcy administrator, and expect to receive payments based on their priority in the creditor hierarchy. Additionally, creditors can seek legal advice and representation to ensure their rights are protected throughout the process.