Page 36 - Central & Southeast Outlook 2020

macrofinancial environment as one of the main systemic risks to Latvia's financial stability.
The overall picture of the Latvian financial sector is one of stability. Going into 2020, domestic lending remains sluggish and the cyclical risks to financial stability are low, the Bank of Latvia notes in its financial stability report.
The major lenders still mostly rely on domestic deposits as the main source of funding and these deposits continue their robust growth. Credit institution liquidity risk remains limited as credit institutions overall maintain a considerable amount of liquid assets which is more than sufficient to ensure compliance with the liquidity coverage ratio (LCR) and the individual increased additional LCR requirements set by the FKTK, Latvia’s financial sector regulator.
The profits earned by the major credit institutions are stable and their profitability indicators are good while the overall capitalisation level of credit institutions is high, the central bank also notes in the stability report.
5.5 ​Finance - Lithuania
The latest asset quality review of the sector published by Lietuvos bankas in August 2019 noted that​banks have been profitable and remained resilient to external shocks;​“Stress testing reveals that banks operating in Lithuania would manage to withstand a significant economic downturn,” the report said.
However, the report also pointed to the “significantly high” concentration within the sector, which raises the systemic importance of individual banks, and may have contributed to the increase in interest rates on new household and corporate loans.
“The key risks to the stability of Lithuania’s financial system are the potential correction of imbalances in the Nordic countries and the formation of a potentially unsustainable financial cycle in Lithuania,” the report said.
Such an event could result, for example, from “the deteriorating external environment, increase in risk premia in global financial markets and concerns over the alleged money-laundering transactions through certain Nordic banks. The second systemic risk relates to Lithuania’s booming credit and [real estate] markets.”
The Baltic banking sectors have been tarnished by a series of scandals
36​ CESE Outlook 2020​ ​ ​www.intellinews.com