This country-specific Q&A provides an overview of the legal framework and key issues surrounding banking and finance law in Lithuania including national authorities, regulation, licenses, organisational requirements, supervision and assets.
This Q&A is part of the global guide to Banking & Finance.
For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/practice-areas/banking-finance/
What are the national authorities for banking regulation, supervision and resolution in the jurisdiction?
The national competent authority in Lithuania is the Bank of Lithuania (the Central Bank) (hereinafter – BoL).
Which type of activities trigger the requirement of a banking licence?
Banks (as well as credit unions) differ from other financial market participants in that, according to Regulation (EU) No. 575/2013, they are considered to be credit institutions. Only credit institutions have the exclusive right to accept deposits and other repayable funds from non-professional market participants, while unauthorised provision of financial services is prohibited.
According to the relevant law there are two types of activities which trigger a banking license:
- receipt of deposits and other repayable funds from non-professional participants of the market
- borrowing from from non-professional participants of the market in excess of the size of the equity capital
Does the regulatory regime know different licenses for different banking services?
Depending on the type of activities different banking services licenses are available in Lithuania and include for licenses:
- Banks, specialised banks, credit unions;
- Lenders, operators of a peer-to-peer lending platform, and credit intermediaries;
- Consumer credit providers, operators of a peer-to-peer lending platforms, consumer credit intermediaries;
- Operators of crowdfunding platforms;
- Payment institutions;
- Electronic money institutions.
Does a banking license automatically permit certain other activities, e.g., broker dealer activities, payment services, issuance of e-money?
A bank shall have the right to provide all financial services which include broker dealer activities, payment services, issuance of e-money etc. In addition to the provision of financial services, a bank may pursue only such other activities as those in the absence of which financial services cannot be provided, which assist in the provision of the financial services or are otherwise directly related to the provision of the financial services.
A conventional banking license cover the following activities:
- receipt of deposits and other repayable funds;
- lending (including mortgage loans);
- financial lease (leasing);
- payment services;
- provision of financial assurances and financial guarantees;
- conclusion of transactions, at one’s own or a client’s expense, on the money market instruments (cheques, bills, deposit certificates, etc.), a foreign currency, financial future and option transactions, the establishment of a currency exchange rate and interest rate, public securities and precious metals;
- investment services;
- financial mediation (activities of an agent);
- currency exchange (in cash);
- settlement of payments between credit institutions (clearing);
- storage and administering of monetary funds;
- provision of services related to issue of securities;
- issue of electronic money;
- management of investment funds, closed-ended investment companies, pension funds or investment companies with variable capital;
- other activities listed in the law.
A specialised bank is eligible to provide all conventional bank activities, except for provision of investment or pension fund management, public offering of securities and other similar services.
What is the general application process for bank licenses and what is the average timing?
The application process consists of the following key stages:
- the pre-application stage: introducing the representatives of a prospective bank to the regulation applied in Lithuania, pre-application meetings and discussions with specialists of the Bank of Lithuania
- submission of an application to the Bank of Lithuania, which within 5 business days reviews whether all necessary documents have been submitted and, where no formal deficiencies are identified, accepts the application for consideration;
- assessment of an application and attached documents: BoL, after starting the assessment procedure for the application and submitted documents, transfers all data to the European Central Bank (ECB). Since that moment, BoL and the ECB together in parallel assess the submitted documents. Where the documents submitted have no deficiencies, the license is issued within 6 month-term. Nevertheless, our experience shows that submitted documents in only exceptional cases do not contain deficiencies of some sort; therefore, the BoL usually submits comments to the applicant, asking to submit additional information or documents. In that case, the timeframe for assessment is extended;
- issuance of a licence or refusal of authorisation: after assessment of submitted documents is completed, the Bank of Lithuania makes its conclusions and submits them to the ECB, which takes the final decision regarding granting of an authorisation.
Legislation provides that a banking application must be assessed within: 1) 6 months of submission of proper and sufficiently informative documents; 2) within 12 months of submission of a banking application, where the submitted documents are not full or are deficient.
Is mere cross-border activity permissible? If yes, what are the requirements?
Cross-border activity permissible in Lithuania, both allowing (i) Lithuanian banks to operate in other countries and (ii) foreign banks to act in Lithuania.
The Lithuanian banking sector comprises six privately held domestically chartered banks and eight branches of EU banks, along with around 70 credit unions. Three of the subsidiaries of foreign-owned banks are owned by Nordic parent groups (SEB, Swedbank, Luminor) and AB “Citadele” bankas is also a foreign subsidiary fully-owned by the parent bank. Šiaulių bankas and Medicinos bankas are controlled by Lithuanian undertakings. All six Lithuanian banks are retail banks that do not engage in cross-border activities. A few branches of EU banks are registered in Lithuania and specialise in corporate loans, leasing, or have a retail business model.
There are several business models for Lithuanian banks that allow cross-border activity, subject to requirements set by the countries of operation that include the establishment/acquisition of the bank or branch. Further, the Lithuanian banks willing to provide services in EU may enjoy simplified regime without establishment under freedom of services (FOS) principle.
Likewise, foreign banks may operate in Lithuania by establishing branches or representative offices in Lithuania, as well as by establishing or acquiring the Lithuanian bank. The banks, established in EU, may also provide services under FOS principle after the completion of notification procedure. The Lithuanian laws do not establish significant deviations from the EU law set for provision of services under FOS principle.
What legal entities can operate as banks? What legal forms are generally used to operate as banks?
The legal form taken by a bank as a legal person may only be a public limited liability company or a private limited liability company. The first option is generally used to operate as a bank in Lithuania.
What are the organisational requirements for banks, including with respect to corporate governance?
The organizational requirements for a bank are typical to EU approach and following the EU law.
With respect to corporate governance, a bank must have the following bodies: a general meeting of shareholders, a supervisory board, the board and a head of administration. The management bodies of a bank shall be the bank’s board and the head of the administration.
On the basis of the provisions of legal acts regulating the activities of banks and inter-institutional recommendations, the list of management and structural bodies/officers of the bank includes:
- Board (consisting of not less than 3 members);
- Supervisory Board (consisting of not less than 3 members);
- Head of the administration and Deputy Head (Chair of Board has to be the Head of the administration or the Deputy Head);
- Head of the Internal Audit Service;
- Audit Committee;
- Risk Committee;
- Credit Committee;
- Chief Technical Officer (for the exclusion of business execution, organisation and supervision it is recommended to not appoint a member of the Board or Supervisory Board to CTO position);
- Chief Risk Officer (should be a Member of the Board);
- Chief Legal Officer (for the exclusion of business execution, organisation and supervision it is recommended to not appoint a member of the Board or Supervisory Board to the position of CLO);
- Chief Financial Officer (should be a Member of the Board).
The bank’s articles of association and other corporate bank documents must clearly establish and define the powers and functions of the above listed bodies and officers.
The bank has to ensure effective functioning of internal control system, including the following functions/areas: compliance, risk management, internal audit, conflict of interest management, complaint handling, market abuse prevention, management remuneration, AML, operational risk.
The Lithuanian laws, including Resolution No. 03-181 of 2014 of the Board of the BoL, follows EU approach in setting fitness and propriety requirements for management and owners.
Do any restrictions on remuneration policies apply?
Lithuania applies restrictions on remuneration policies without major deviations from EU Guidelines on sound remuneration policies under Articles 74(3) and 75(2) of Directive 2013/36/EU and disclosures under Article 450 of Regulation (EU) No. 575/2013.
Has the jurisdiction implemented the Basel III framework with respect to regulatory capital? Are there any major deviations, e.g., with respect to certain categories of banks?
Yes, no major deviations from international financial standards and EU CRD IV/CRR package. After the main provisions of CRD IV were transposed into Lithuania’s law in April 2015, new capital buffer requirements for banks have been applied to target structural and cyclical systemic risks to the Lithuanian financial system. Given the general absence of cyclical imbalances in the Lithuanian credit market, the countercyclical capital buffer rate has been set at 0%, but this level can be increased when necessary to increase the resilience of the banking sector and contain excessive credit growth and financial leverage.
Are there any requirements with respect to the leverage ratio?
All banks are subject to capital, liquidity coverage and other requirements that banks must observe. These requirements, including the leverage ratio, serve as safeguards that help ensure safe and sound banking activities. Lithuania applies the requirements set by the EU law with regard to leverage ratio, including EU regulations No. 575/2013, No. 2015/61 and No. 2015/62, without significant deviations.
What liquidity requirements apply? Has the jurisdiction implemented the Basel III liquidity requirements, including regarding LCR and NSFR?
Lithuania applies the liquidity requirements, set Basel III requirements that are briefly summarized below.
Banks must hold sufficient liquid assets to be able to cover net cash outflows under gravely stressed conditions within 30 days. The value of the liquidity coverage ratio (LCR) must not be below 100%, i.e. a bank’s reserves of liquid assets must not be lower than net cash outflows over 30 calendar days under gravely stressed conditions.
The large exposure requirement is applied as well. Exposure to a client or a group of connected clients, i.e. loans granted, also any asset or off-balance-sheet asset share cannot exceed 25% of the bank eligible capital, or EUR 150 million, whichever the higher, provided that the sum of exposure values.
All credit institutions (banks) need to report the LCR templates according to the Delegated Act, while investment firms exempted.
The Bank of Lithuania conducts regular top-down solvency and liquidity stress tests in order to assess the domestic banking system’s resilience to adverse shocks, using an in-house methodology. Solvency stress testing is focused on the assessment of the banks’ credit loss and profitability under an adverse macroeconomic scenario over a two-year horizon and on a quarterly basis. Liquidity stress testing involves sensitivity analysis. Aggregate results of the solvency and liquidity stress tests are made public once a year in the Bank of Lithuania’s Financial Stability Review.
Do banks have to publish their financial statements?
Yes, the Lithuanian banks, including branches of foreign banks, have to publish their financial statements.
Does consolidated supervision of a bank exist in the jurisdiction? If so, what are the consequences?
Yes, consolidated supervision of a bank apply in Lithuania.
As a general rule, a bank which is the parent of a group must prepare and submit to the Bank of Lithuania consolidated financial statements and the reports. These reports must be submitted on a quarterly basis.
A parent bank shall publish the annual consolidated accounts in observance of requirements established by laws and legal acts of the Bank of Lithuania: balance sheet; profit (loss) account; cash flow statement; statement of changes in equity; explanatory notes; auditor’s opinion.
The Bank of Lithuania performing joint consolidating supervision of the whole financial group shall chair the meetings of the college of supervisors and shall decide which competent authorities participate in a meeting or in an activity of the college.
- All members of the college shall be kept fully informed, in advance, of the organisation of such meetings, the main issues to be discussed and the activities to be considered.
- The Bank of Lithuania shall plan and coordinate the activities of the colleges taking into account the relevance of their decisions to the participating supervisors, in particular the potential impact on the stability of the financial system in other EU Member States concerned.
- The Bank of Lithuania shall notify EBA about the activities of the colleges, including in emergency situations and shall provide all information which is of particular relevance for achieving convergence of supervision.
- Before applying sanctions and measures, the Bank of Lithuania shall consult with supervisors of the EU Member States responsible for exercising joint (consolidated) supervision. However, the Bank of Lithuania may decide not to consult in cases of urgency or where such consultation may jeopardise the effectiveness of the decisions. In this case, the Bank of Lithuania shall, without delay, inform the supervisors of the EU Member States.
What reporting and/or approval requirements apply to the acquisition of shareholdings in, or control of, banks?
The undertaking intending to acquire or increase a qualifying shareholding of 20%, 30% or 50% shareholding in a bank, or other shareholding granting the control over the bank, must obtain the prior consent of the Bank of Lithuania.
The consent may be refused by the Bank of Lithuania if the applicant does not meet the requirements for eligible owners, as briefly described in section 15 of this questionnaire.
Does the regulatory regime impose conditions for eligible owners of banks (e.g., with respect to major participations)?
The minimum number of founders of a bank is seven, except when a bank is established by a foreign or Lithuanian bank or by the Lithuanian Government. Each founder must also acquire at least 2% of the bank's share capital. Any person needs the permission of the Bank of Lithuania in order to acquire directly or indirectly 10% and more of shares or votes in a commercial bank.
As general rule, eligibility for the qualified bank’s owner is based on (1) the good repute of the owner, (2) good repute and experience of the person who will be the head of the bank, (3) the financial soundness and 4) absence of criminal record with regard to criminal offences, as listed in the law, (5) absence of negative impact on due operations of the bank following the completion of shareholding acquisition, as well as, other conditions.
The law also provides for the list of following entities that may not own shares in banks, which includes:
- state institutions, except for the Lithuanian Government and municipalities;
- institutions financed from the Lithuanian state budget;
- banking subsidiaries or other subsidiaries of the bank;
- an entity in which the bank's investment equals or exceeds 10% of its capital.
Are there specific restrictions on foreign shareholdings in banks?
In general, no specific significant restrictions apply for foreign shareholdings in Lithuanian banks.
Is there a special regime for domestic and/or globally systemically important banks?
There are no globally systemically important banks in Lithuania.
In December 2015, the BoL identified and declared systemically important institutions in Lithuania, which were made subject to additional capital buffer requirements. From end-2016 onwards, an additional capital buffer of 2% has been applied to AB SEB bankas, Swedbank AB and AB DNB bankas (current name – Luminor), and a 0.5% buffer to AB Šiaulių bankas.
What are the sanctions the regulator(s) can order in the case of a violation of banking regulations?
As a general rule, the Bank of Lithuania can apply enforcement measures against financial market participants under supervision as well as other persons. The nature and type of sanctions depend on violation type and field.
The Bank of Lithuania is granted with an authority to take the following actions:
- to warn banks when their activities may lead to, or are in violation of, banking standards and prescribe the time period during which deficiencies or violations must be corrected;
- to impose administrative fines;
- to suspend or revoke a bank's license, or restrict one or more of its operations;
- to suspend or revoke the license of a bank's branch operation;
- to request the removal or remove from office a member(s) of the bank's board or its head of administration;
- to request the suspension or suspend the powers of a member(s) of the bank's council;
- to suspend the powers of the bank's council, remove from office the entire board of the bank and its head of administration and appoint a bank administrator (and, if necessary, his/her deputies);
- to establish restrictions on disposal of the bank's account(s) opened with the Bank of Lithuania; and to revoke the license of the bank;
- other actions specifically listed in the law.
What is the resolution regime for banks?
The Lithuanian resolution regime is based on EU regime, including SRM and BRRD.
Resolution tools available to the resolution authority include (i) sale of business, (ii) bridge institution, (iii) asset separation, and (iv) bail-in.
Bank resolution may be financed by the European Single Resolution Fund. In certain circumstances, the Deposit Insurance Fund may be required to contribute to the financing of bank resolution by an amount equal to the losses that covered depositors would have suffered had they not been protected and excluded from resolution. The national resolution fund and the Deposit Insurance Fund are administered separately by the same designated authority, the State Company “Deposit and Investment Insurance”, but decisions regarding their usage during resolution are made by the national resolution authority i.e. Bank of Lithuania.
In December 2015, the Bank of Lithuania was designated to become the resolution authority of the country (Bank Recovery and Resolution Directive No. 2014/59/EU). From 2016, when the Single Resolution Mechanism fully entered into force, the Bank of Lithuania shares its resolution responsibilities with the Single Resolution Board, as prescribed in the Single Resolution Mechanism Regulation (No. 806/2014). For financial institutions the failure of which would not pose risks to financial stability, the regular liquidation/insolvency procedure is available and depositors receive payouts from the Lithuanian Deposit Insurance Fund as required.
How are client’s assets and cash deposits protected?
In respect of protection of clients’ assets and cash deposits, Lithuania follows EU approach and has implemented Directive No. 2014/49/EU on Deposit Guarantee Schemes. Lithuania has an explicit deposit insurance scheme regulated by the Law on Insurance of Deposits and Liabilities to Investors of Lithuania. The deposit insurance scheme is managed by a separate state company “Deposit and Investment Insurance” established by the Lithuanian Government. The state company “Deposit and Investment Insurance” administers the insurance of deposits held by residents in banks, non-EU bank branches and credit unions. It is responsible for the collection of contributions paid by insured institutions and the distribution of funds via a paying agent in case of an insured event.
The deposit insurance scheme is mandatory for all credit institutions (banks and credit unions) established in Lithuania as well as to the branches of banks from non-EU countries if the level of their respective depositor protection is lower in their home country.
Does your jurisdiction know a bail-in tool in bank resolution and which liabilities are covered?
Bail-in tool, as defined in BRRD, is transposed in the national law of Lithuania.
Is there a requirement for banks to hold gone concern capital (TLAC)?
Lithuania has implemented requirements set in CRR directive No. 36/2013. Tier 2 capital is considered to be gone concern capital. The gone concern capital allows an institution to repay depositors and senior creditors if a bank became insolvent.
In your view, what are the recent trends in bank regulation?
We see the following trends in the Lithuanian market:
- Credit union reform was finalised by the end of 2017 which results to more stable and secure environment;
- A growing number of application for specialised banks and other FinTech licences (e.money institutions, e.payment institutions);
- Challenges to meet deadlines in implementing new EU requirements: GDPR, PSD2, AML IV etc.
- New requirement to have additional countercyclical capital buffer of 0.5% by the end of 2018. This measure, to be applied for the first time in the history of Lithuania, will help strengthen the resilience of the financial system against potential shocks.
- Real estate is still named by residents as the most attractive investment and bank loan portfolio value is mainly boosted by housing loans.
- Success FinTech Hub initiatives. A huge work done within a year by regulatory bodies and the market itself.
- RegTech solutions and implementation as one the strategic goals of the Bank of Lithuania.
- LoB initiative to launch blockchain-based solutions to help FinTech players to operate in the regulatory and technological sandbox platform-service.
- Launch of CENTROlink – an instant payment system operated by the Bank of Lithuania.
- Issue of BoL position on virtual currencies and ICO. According to BoL, financial services must be clearly dissociated from activities related with virtual currencies. Banks, payment institutions and other financial market participants should not provide services associated with virtual currencies or participate in their issue.
What do you believe to be the biggest threat to the success of the financial sector ?
We see the following challenges and threats of the Lithuanian financial sector:
- Lack of resources to supervise of FinTech players and regulatory sandbox regime.
- A large (excessive) number of potential specialised banks to be established in Lithuania may result to systemic risk and/or affect country reputation.
- Stability and reputational risks associated with a growing number of ICO and (extremely) high optimism level in virtual currencies.
- A tough competition from other FinTech Hubs in Nordics and Baltic region;
- Overestimated expectations as to Fintech start-ups.