Bank Account Holders in Lithuania: Protect Your Account Balance and Qualify for Deposit Insurance Repayment When Banks Fail or Stop
The Republic of Lithuania is an independent, sovereign state located geographically in North-East Europe and a member of the European Union and participant in the Eurozone. It is bordered by Latvia, Belarus, Poland, and Russia. Lithuania is the largest of the three Baltic states, with a population of nearly 3 million. Lithuania is a developed country with an open and mixed economy driven by services, industry, and agriculture. The rapid growth of the economy resulted in inflation and an imbalance of payments, as well as wage growth that exceeds productivity.
In the wake of its declaration of independence from the Soviet Union, a transition was made from a planned economy to a free market economy. The overall changes in society required time, effort and flexibility from both the government and the Lithuanian people. The privatization of state-owned enterprises attracted foreign direct investment and external knowledge. Consumer demand rose due to macroeconomic stabilization policies and a strong commitment to a currency board arrangement.
In recent years, challenges such as the Global Financial Crisis and the Covid pandemic have affected Lithuania. Recovery efforts aimed to strengthen the business environment and limit public intervention in times of crisis. A particular focus was given to liberalizing labor laws and improving the competitiveness of the country internationally. Yet, a steady outflow of young, highly educated people is causing a shortage of skilled labor. Coupled with an aging population, this could strain public finances and limit long-term growth.
Banking and Finance in Lithuania
In Lithuania, banks dominate the financial system, offering basic retail banking, leasing, and insurance services. Banks and leasing companies in the domestic market mostly cater to the needs of small, medium, and large businesses using domestic deposits. Large enterprises, on the other hand, are more dependent on foreign sources of funding. Electronic money institutions utilize financial technology (Fintech) to enable electronic payment activity for its users. Credit unions provide loans and transaction banking to their members. A reform of the sector was needed to align credit unions with their cooperative principles, business model and related issues. As a side effect, these reforms also allowed local and foreign non-banking financial companies to incorporate a ‘specialized bank’.
Fintech is a growing industry in the Baltic states. The industry gained momentum during the Covid pandemic by the provision of efficient international payment services and cards, and access to digital currency. As of the end of the year 2020, there were over 230 Fintech companies registered in Lithuania covering a wide range of businesses including digital banking, crypto currency and payment systems. The impressive growth of the sector led to cyber risks and challenges with money laundering and supervision of non-resident users and owners.
The Lithuanian banking sector experienced strong growth over the years and is well capitalized. Bank sector liquidity is one of the highest of the Eurozone, while the loan to deposit ratio remains low. The largest banks that operate in the country are funded by domestic deposits. However, bank profitability and net interest income is under pressure due to a rise in competition from challenger banks, low margins, and a decline in asset quality. To avoid over-indebtedness and protect retail borrowers from interest rate volatility responsible lending practices are introduced.
Financial Regulation in a Broad Spectrum
Banking law is the overall framework that defines how banks and other financial institutions conduct business and protect the public interest. Financial regulation relates to the licensing and supervision of financial institutions subject to certain requirements, restrictions and guidelines. Since 2012, the (Central) Bank of Lithuania has been responsible for supervising all financial markets and institutions in Lithuania. This includes credit institutions, insurers and securities firms, payment and electronic money companies, and most other financial institutions.
Different laws and regulations govern the complex and interconnected financial system, which is under the control of specialized regulators. Collaboration, information sharing and coordination between the Lithuanian agencies is mission critical but not always easy. In Lithuania, the central bank regulates and supervises banks and credit unions and manages their exit from the system when necessary. This mandate is laid down in national legislation and the framework of the European System of Central Banks.
The Basel III capital requirements, transposed into national law via the European Capital Requirements Directive, apply to the Lithuanian banking sector. Capital Adequacy Ratios (CAR) reveal the capital of Lithuanian banks in relation to its risk weighted assets and current liabilities, and is measured on a quarterly basis. It fluctuates sector wide between 19,4% in 2016 and 23,1% at the end of 2021.
An important distinction is made between traditional banks and electronic money institutions. In its basic form, retail banks accept deposits, control the funds entrusted to them and grant loans. Electronic money institutions have a different business model. They are financed via shareholders or capital markets. EMU’s have limited control to customer funds and are prohibited from granting loans with these deposits. Yet, the relationship between both types of financial institutions and their customers is one of debtor and creditor. Depositors therefore hold a claim against the institution.
Bank Resolution for Financial Institutions in Distress
Financial institutions, no matter their size, can fail. Despite their size and position in society, financial institutions can fail. Resolution strategies for banks that pose a risk to financial stability differ from those that are experiencing individual difficulties. In the event of liquidation or insolvency of a financial institution that does not affect financial stability, depositors are reimbursed for their insured account balance by the Lithuanian Deposit Insurance Fund.
As defined in the Law on Financial Sustainability, financial institutions operating in Lithuania must proactively compose their own recovery and resolution plans. Such plans are then used as a blueprint to resolve the issues that threaten the viability of the financial institution in distress. The low level of interconnectedness between domestic banks limits the risk of contagion and most bank resolution efforts therefore take place in a vacuum.
When banks fail or are likely to fail, the objective of the Lithuanian resolution procedure is to orderly resolve the troubled financial institution, protect financial stability and avoid public support at the expense of the tax payer. The Bank of Lithuania acts as the resolution authority. During resolution, the resolution authority has access to the following tools: the sale of the business, a bridge institution, asset separation and the bail-in procedure.
A specialized asset management company, Turto Bankas, manages state-owned property and the recovery of debts and loans to the state, including state guarantees and other liabilities. The involvement of Turto in large scale resolution procedures has shown to be slow and difficult. This is the result of a combination of capacity constraints, legal obstacles, poor asset quality and limited market liquidity.
Bank Deposit Protection in Lithuania
The Lithuanian Law on Insurance of Deposits and Liabilities to Investors defines bank deposit protection in Lithuania. The Deposit and Investment Insurance Fund ensures the protection of deposits to account holders and liabilities to investors when financial institutions fail. The transparent and efficient fund therewith contributes to the stability of financial market and strengthens public confidence in financial institutions. The organization manages a fund for deposit insurance, a fund for liabilities to investors and the resolution fund.
Insured events trigger the reimbursed of insured deposits to eligible account holders. The insured event is determined by the supervisory authority when a member institution becomes insolvent, or when it becomes subject to bankruptcy procedures. The Deposit and Investment Insurance Fund informs the public and in particular the creditors of a failed financial institutions that an insured event is forthcoming. Reimbursement to eligible account holders, in line with provisions of the law, is maximized at 100.000 euro per depositor. The insured limit can be raised with an additional protection of 300.000 euro in exceptional circumstances. Upon the notification of an insured event, the right to claim expires after five years. A claim is then subordinated in the insolvency and liquidation procedures.
Large Claims, Civil Action and Bank Liquidation
Disqualified DGS creditors or those creditors with claims exceeding the insured limits, should examine the resolution framework and take precautions to minimize their risk and maximize their recovery potential. A fundamental issue starts with the legal relationship between the bank and its account holders. Contrary to the general belief, bank deposits legally belong to the general assets of the bank. The account holder is merely a debtor for the amount entrusted to the bank. This makes bank deposit protection in Lithuania via the domestic deposit guarantee scheme into a critical part of the recovery strategy.
The position of bank account holders and other creditors in bank liquidation is identical to claimants in regular insolvency procedures. Prioritized and secured creditors are paid in full. A general fund is then formed to collect and realize in the assets of the failed bank. Distribution from the general fund to unsecured creditors and account holders takes place on a pro-rata basis. Due to the lack of available assets, most unsecured creditors receive a smaller portion of their money back and are forced to accept a loss.
Whether it is a matter of financial need or righteousness, every single creditor finds his account balance important and wants as much of it returned after the failure of their bank. Standard resolution planning does not discriminate bank account holders. As a result, all creditors are treated equally. Individual bank customers may however wish to take further action to secure better recovery prospects. Although the resolution framework is all-embracing, the law may award or indemnify individual claimants. This is not an easy task and therefore should be closely examined and possible legal action must be well prepared.
Contact us for More Information…
Legal Floris LLC helps international creditors recover their account balances and investment funds when their banks fail or their investments disappear. Due to our vast experience in dozens of bank failures in different countries, we are often able to maximize repayments and minimize risks for our clients. Contact us right now to find out how we can help you to reclaim your account balance when your bank in Lithuania is forced to stop:
- Visit: www.depositguaranteeclaim.com/free-case-evaluation
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