Metu Ataskaita Uz 2007 En.indd
ANNUAL REPORT
OF THE BANK OF LITHUANIA
2007
VILNIUS
2008
ISSN 1392-4702
ISSN 1648-9039 (ONLINE)
This Annual Report was prepared on the basis of the data of the Bank of Lithuania, Department
of Statistics under the Government of the Republic of Lithuania, European Central Bank, Eurostat,
International Monetary Fund, Bloomberg information system and other data.
© Lietuvos bankas, 2008
Contents
FOREWORD / 7
I. GLOBAL ECONOMIC DEVELOPMENT / 10
II. REVIEW OF THE ECONOMY OF LITHUANIA / 12
Aggregate Demand and Supply / 12
Labour Market / 14
Prices and Costs / 15
Reasons Behind the Price Development / 15
Food Prices / 16
Administered Prices / 17
Prices of Fuels and Industrial Goods / 18
Prices of Services / 19
Balance of Payments / 19
Current Account Balance / 19
Foreign Trade and Competitiveness / 20
Financing of the Current Account Deficit / 22
Government Finance / 22
III. EXCHANGE RATE AND MONETARY POLICY / 25
Exchange Rate Policy / 25
System of Monetary Policy Instruments / 25
Required Reserves and Banking System Liquidity Development Factors / 26
Currency Exchange Operations / 28
Interest Rates / 29
IV. FOREIGN RESERVE MANAGEMENT / 30
Official Foreign Reserves / 30
Foreign Reserve Functional Parts and Key Management Principles / 30
Liquidity of Foreign Reserves / 31
Safety of Foreign Reserves / 32
Return on Foreign Reserves / 34
V. CASH MANAGEMENT / 35
Currency Issue and Withdrawal / 35
Banknotes and Coins in Circulation / 36
Commemorative Coins / 38
Counterfeit Litas Banknotes and Coins / 40
VI. STATISTICS / 41
VII. MAIN TRENDS IN THE SUPERVISION OF CREDIT INSTITUTIONS / 43
Implementation of the New Capital Adequacy System / 43
Cooperation with Foreign Financial Supervisory Authorities / 44
Coordination of the Implementation of New Capital Adequacy
Requirements in Banks / 44
Technical Assistance to Credit Institutions Supervisory Authorities of the
Countries Outside the European Union / 44
VIII. REVIEW OF THE ACTIVITIES OF CREDIT INSTITUTIONS / 46
Review of the Activities of Banks / 46
Key Indicators of the Banking System / 46
Profitability and Efficiency / 48
Capital Base Developments / 49
Breakdown of Banks by Market Share / 49
Review of Risks Associated with Bank Operations / 50
Credit Risk / 50
Liquidity Risk / 51
Market Risk / 51
Key Trends in the Activities of Credit Unions / 52
Activities of Credit Unions / 52
Key Trends in the Activities of the Central Credit Union of Lithuania / 54
IX. PAYMENT AND SECURITIES SETTLEMENT SYSTEMS / 55
Payment Systems for Settlements in Litas / 55
Payment Systems for Settlements in Euro / 56
Monitoring of Payment and Securities Settlement Systems / 57
Non-Cash Payments / 58
Preparation for Participation in the Single Euro Payments Area and the
TARGET2-Securities Project / 61
X. TRANSPARENCY OF ACTIVITIES OF THE BANK OF LITHUANIA / 62
XI. PARTICIPATION OF THE BANK OF LITHUANIA IN THE ESCB AND
INTERNATIONAL COOPERATION / 64
Participationin the ESCB / 64
International Cooperation / 65
XII. ADMINISTRATION OF THE ACCOUNTS OF THE STATE TREASURY AND
GOVERNMENT INSTITUTIONS / 66
XIII. ORGANISATIONAL STRUCTURE AND STAFF OF THE BANK
OF LITHUANIA / 68
Mission, Values and Ethics / 68
Staff / 68
Organisational Developments / 69
Risk Management / 70
Staff Training / 70
Vladas Jurgutis Scholarship / 72
XIV. THE ANNUAL FINANCIAL STATEMENTS OF THE BANK OF
LITHUANIA 2007 / 73
List of tables and figures
TABLES
Table 1. Real GDP Growth and Inflation in Selected Regions of the World / 10
Table 2. Bank of Lithuania Framework of Monetary Policy Instruments / 26
Table 3. Net Sale of Foreign Exchange to the Bank of Lithuania / 28
Table 4. Composition of Foreign Reserves Unrelated to Liabilities in Foreign Currencies / 33
Table 5. Average Annual Modified Duration of Foreign Reserves and Their Functional Parts / 33
Table 6. Return on Foreign Reserve Portfolios / 34
Table 7. Currency Issue and Withdrawal (–) / 35
Table 8. Banknotes and Coins in Circulation / 38
Table 9. Transactions of the Payment Systems LITAS, LITAS-RLS and LITAS-MMS / 56
Table 10. Composition of Payments of the Payment Systems LITAS, LITAS-RLS and
LITAS-MMS / 56
Table 11. Transactions of the Payment System TARGET2-LIETUVOS BANKAS / 57
Table 12. Transactions of the Payment System LITAS-PHA / 57
Table 13. Non-Cash Payments / 59
Table 14. Payment Cards / 59
Table 15. Payments by Payment Cards / 60
Table 16. ATMs and POS-terminals / 60
Table 17. Participation of the Bank of Lithuania in the ESCB Committees / 64
FIGURES
Fig. 1. Contributions to Real GDP Growth (by Expenditure Approach) / 13
Fig. 2. Contributions of Economic Activities to Real GDP Growth / 13
Fig. 3. Contributions to the Labour Force / 14
Fig. 4. Contributions to the Annual HICP Inflation / 16
Fig. 5. Contributions of Food Prices to the Overall Inflation / 17
Fig. 6. Contribution of Administered Prices to the Overall Annual Inflation / 18
Fig. 7. Contributions of Prices of Industrial Goods to the Overall Annual Inflation / 19
Fig. 8. Components of the Current Account Balance / 20
Fig. 9. Foreign Trade Balance / 21
Fig. 10. CAD Financing Sources / 22
Fig. 11. General Government Deficit, Revenue and Expenditure / 23
Fig. 12. Bank Reserves with the Bank of Lithuania in Litas / 27
Fig. 13. Anchor Currency Trade with Commercial Banks / 28
Fig. 14. Litas and Euro Interest Rate Differential / 29
Fig. 15. Foreign Reserves / 30
Fig. 16. Breakdown of Investment by Financial Asset / 31
Fig. 17. Breakdown of Investment by Rating / 32
Fig. 18. Litas in Circulation / 35
Fig. 19. Value of Banknotes in Circulation / 36
Fig. 20. Number of Banknotes in Circulation / 37
Fig. 21. Number of Coins in Circulation / 37
Fig. 22.10 Litas Gold Coin Issued as an Item of the International Programme “The Smallest Gold
Coins of the World. History of Gold” / 39
Fig. 23. 50 Litas Silver Coin Dedicated to the Panemunė Castle / 39
Fig. 24. 100 Litas Gold Coin From the Series Dedicated to the Millennium Anniversaary of the Mention of
the Name of Lithuania / 40
Fig. 25. 50 Litas Silver Coin Dedicated to XXIX Olympic Games in Beijing / 40
Fig. 26. Development of Assets, Loans and Deposits of the Banking System / 46
Fig. 27. Composition of Bank Assets / 47
Fig. 28. Composition of Bank Liabilities / 47
Fig. 29. Net Profit of Banks / 48
Fig. 30. Market Share of Banks by Managed Assets / 50
Fig. 31. Structure of Capital Required to Cover Market Risk / 52
Fig. 32. Indicators of Credit Union Activities / 53
Fig. 33. Liabilities of the Bank of Lithuania to the State Treasury and Government Institutions for
Their Account Balances / 66
Fig. 34. Average Number of Employees and Number of Employees on Permanent Contracts
(end-of-year) / 69
The sum and percentages of rows in some tables and figures do not correspond to totals due to
rounding (“Total” and “100%”).
Abbreviations and other explanations
AB
public limited liability company
BIS
Bank for International Settlements
CAD
current account deficit
CCUL
Central Credit Union of Lithuania
Department of Statistics Department of Statistics under the Government of the Republic of Lithuania
ECB
European Central Bank
ERM II
Exchange Rate Mechanism II
ESCB
European System of Central Banks
EU European
Union
EURIBOR
euro interbank offered rate
Eurostat
Statistical Office of the European Communities
Eurosystem
the system consisting of the ECB and national central banks of the
EU Member States that adopted the euro
FDI
foreign direct investment
GDP
gross domestic product
GS
securities of the Government of the Republic of Lithuania
HICP
harmonised index of consumer prices
IMF
International Monetary Fund
MFD
modified financial duration
MFI
monetary financial institutions
OPEC
Organization of Petroleum Exporting Countries
USA
United States of America
VAR
value at risk
VILIBOR
average interbank interest rates, for which banks are ready to
lend funds in litas to other banks
FOREWORD
In 2007, the central bank of the Republic of Lithuania maintained stability and integrity of
the monetary, credit and payment systems of Lithuania, ensured the fixed exchanged rate
of the national currency, pushed up significantly its foreign reserves and joined the new pay-
ment system of the ECB and national central banks of the euro area countries. It conducted
strict supervision of credit institutions, conforming to international standards. The Bank also
succeeded in fulfilling its other functions. Over the year, the Bank of Lithuania earned a his-
torically highest profit and paid the largest amount ever to the state budget.
As regards the global economy, the year 2007 was characterised by instability and tension.
The problems that emerged in the US sub-prime mortgage market and the subsequent
turmoil in international financial markets shook the financial system of the whole world and
affected the general economic situation. These developments increased the importance of
assessment and management of risk in Lithuania. However, only a tiny share of assets of the
domestic banking system appeared to be susceptible to the market risk, as the foreign parent
banks of the domestic banks of Lithuania did not actively participate in the mortgage market,
therefore, turbulence in the global economy had little impact on our banks.
The economy of Lithuania grew rapidly in 2007. The increase in the disposable income of
households – driven by the fiscal policy and intensive flow of crediting – supported private
consumption in Lithuania, while absence of the rise in real interest rates and high profitabil-
ity of enterprises prompted investment. Over the year, economic activity of the population
intensified, thus boosting employment.
Strong economic expansion, driven mostly by external capital inflows, is inevitably interlinked
with excess demand in the markets of commodities, services and labour. This has been also
proved by the increased current account deficit, rising foreign debt, a historically high number
of job vacancies, more rapid growth of wages compared to that of labour productivity and
rising inflation. In the coming years, a natural continuation of the prospective economic proc-
esses should be the self-adjustment of markets towards equilibrium, after which economic
developments would become more balanced.
The cyclical economic upswing contributed to the growth of consumer prices, however, the
increase in inflation was determined by factors unrelated to the domestic economic processes
in Lithuania. Growing food prices reflected the global trends, that were determined mostly
by a stronger demand for agricultural and food products. It was driven by rapid economic
developments in less developed countries and an increased production of biofuels. The in-
creased price of fuel also made a sizable impact on the underlying inflation. This is directly
related to a considerable increase in global oil prices.
In 2007, the banks increased interest rates on deposits as well as on loans. This was basi-
cally the result of the growth in interbank interest rates determined by the increased ECB
reference inte rest rates and the shortage of liquidity in global financial markets. Due to the
above reasons, the banks tended to attract more loans in the retail market, at the same time
tightening the rules on granting credits. Interest rates on loans increased also due to credit
risk which, according to bank assessments, increased because of a less optimistic outlook
for the real estate market.
The principal objective of the Bank of Lithuania – seeking price stability – is implemented
using the strategy of a fixed litas exchange rate against the EU singe currency, the euro.
Particular aspects of the economy of Lithuania, such as its openness and relative flexibility of
prices and wages, allow its successful application since April 1994. In the long run, the fixed
exchange rate helps to stabilise import and export prices, the financial system and interest
rates, forms lower inflation expectations and accelerates nominal and real convergence with
the old EU Member States.
Upon entering the EU, Lithuania made a commitment to adopt the single currency euro. One
of the prerequisites for the adoption of the single currency is the obligatory participation in
ERM II. In accordance with the decisions of EU institutions, Lithuania participates in ERM II
from 28 June 2004. When joining it, our state undertook a unilateral commitment to retain
the fixed exchange rate regime and a stable exchange rate of the litas against the euro.
With tensions building up in global financial markets, investors started to assess investment
risk more conservatively. Concerns of some investors about rapid, but insufficiently balanced
economic development of Lithuania and other Baltic states increased the interest rate spread
of the national currencies of these countries and the euro. Under these circumstances, the
fixed exchange rate of the litas applied in Lithuania and its continuity is one of the essential
preconditions for retaining and improving macroeconomic stability of the country.
Notwithstanding major shocks experienced by the global financial markets, the Bank of
Lithuania retained a low risk level and attained the largest return on investment over the
past six years.
Along with the growing amount of litas in circulation, currency issuance from and acceptance
to the Bank of Lithuania increased. Therefore, considerable attention was given to enhanc-
ing the effectiveness of currency circulation and ensuring high quality of litas in circulation.
Implementing its exclusive right to issue the currency of the Republic of Lithuania into circu-
lation and withdraw it from circulation, the Bank of Lithuania supplemented the stocks of
200 litas banknotes and issued into circulation 20 litas banknotes of a new issue. To protect
banknotes of the new issues, advanced technologies have been used.
On 19 November 2007, two new euro real-time gross settlement systems started their opera-
tion: TARGET2-LIETUVOS BANKAS and LITAS-PHA. Basically, the payment infrastructure of
Lithuania has become ready for operation in the euro area after the adoption of the euro by
our state. The volume and value of payment transactions continued to increase rapidly last
year. The systems maintained by the Bank were functioning smoothly.
The Bank prepared and disseminated to internal and external users monetary, financial,
external sector and other financial statistics. For the purpose of a further expansion of the
volume and structure of the information made available to the public, the Bank of Lithuania
prepared and provided to the ECB the data on investment funds according to the require-
ments of the ECB guidelines, as well as additional data on private individual remittances. It
also started to publish the information on quarterly financial accounts of Lithuania, i.e. the
data on financial assets and liabilities of the institutional sectors.
The Bank of Lithuania continued the works related to the implementation of the new EU
Capital Adequacy Directive. It prepared the documents regulating the assessment of the
amount and composition of capital, credit risk mitigation, undated debt securities, stress
testing, etc.
The assessment according to most key indicators shows that both relative and absolute deve-
lopment of the banking sector was more rapid than in 2006. Shareholders’ equity continued
to increase. The increase of the authorised capital and profitable operation of banks had
the most significant impact on the strengthening of the capital base. Large profits of banks
were to a large extent determined by the increased income from banking activities and net
interest income of banks, which was affected by a rapid growth of the bank loan portfolio
and higher real interest margin.
Although indicators of the bank loan portfolio quality remained good, the share of overdue
loans increased slightly over the year. In relative terms, the largest share of overdue loans
was recorded in the consumer loan portfolio of banks, whereas housing loans accounted
for the smallest share.
Notwithstanding the tightening of the rules for the bank capital adequacy calculation and
a rapid development of the banking system, capital adequacy ratio of banks increased, thus
determining larger reserves of banks for minimising potential losses.
For the purpose of optimal implementation of the institutional tasks, a number of structural
changes were introduced in the Bank of Lithuania. Seeking to ensure more effective partici-
pation of the representatives of the Bank of Lithuania in the EU decision-making processes
related to the Economic and Monetary Union, payment systems, stability of the financial sector
and other functions of a central bank, a position of an Attaché for Monetary and Banking
Affairs was established in the Permanent Representation of Lithuania to the European Union
in Brussels.
The Bank of Lithuania effectively uses human resources. Employees of the Bank were improv-
ing their professional skills in order to achieve the tasks and objectives raised. An important
part of the training consisted of the programmes for the enhancement of managerial and
professional skills arranged for the management of different levels and senior experts.
The Report of 2007 gives extensive presentation of the results achieved by the Bank of Lithua-
nia in fulfilling the tasks and performing the functions of the central bank of the Republic of
Lithuania.
By their daily efficient work, the competent board of the central bank of the Republic of
Lithuania and professional and creative staff of the Bank are capable of an effective ac-
complishment of the tasks raised to them and are able to appropriately respond to the new
challenges posed by the financial market and economic developments.
Reinoldijus Šarkinas
Chairman of the Board of the Bank of Lithuania
3rd April 2008
Annual Report of the Bank of Lithuania
2007I. GLOBAL ECONOMIC DEVELOPMENT
The year 2007 was unstable and tense for the global economy. The problems that emerged
in the US sub-prime mortgage market in the middle of the year and the subsequent
turmoil in international financial markets shocked the entire financial system and affected
the overall global economic growth.
The global economic growth decelerated in the second half of the year. At the end of
the year, the rate of growth of the US economy slowed down significantly. Increasingly
more signs of economic growth deceleration also appeared in the euro area. The impact
of the financial market turmoil on emerging economies was less severe. The protracted
strong expansion of the economies of China, India and Russia determined almost a half
of the global economic growth. Strong economic growth also remains in many Central
and Eastern European countries.
Table 1. Real GDP Growth and Inflation in Selected Regions of the World
(annual percentage changes)
2005
2006
2007
2008*
Real GDP growth
World
4.4 5.0 4.9
3.7
Euro area
1.5
2.8
2.6
1.3
USA
3.1 2.9 2.2
0.5
Japan
1.9
2.4
2.1
1.4
Emerging Asia
9.0
8.9
9.0
8.0
Inflation (average annual change in consumer price index)
Euro area
2.2
2.2
2.1
2.6
USA
3.4 3.2 2.9
3.0
Japan
–0.3
0.3
0.0
0.6
Emerging Asia
3.5
3.7
4.8
5.0
Sources: IMF, Eurostat and the Bank of Lithuania.
*Forecasts.
As financial institutions incurred losses in the second half of the year, mistrust between
them increased. Much more prudent credit risk assessment resulted in a sharp rise in
interest rates and disturbed interbank market liquidity. Seeking to reduce the tension,
the US Federal Reserve Bank, the ECB and other central banks maintained the liquidity
of the banking system through open market operations. At the end of the year, another
important step was taken – the US Federal Reserve Bank agreed with the ECB, the central
banks of England, Canada and Switzerland to jointly coordinate their measures for easing
the tensions in the interbank market. In response to the protracted tensions in financial
markets and their negative impact on further economic development, the US Federal
Reserve Bank decreased its reference interest rate three times in the second half of the
year and another two times in early 2008. The central banks of England and Canada
10
I. Global Economic Development
conducted similar policies. The ECB and the central bank of Japan increased their interest
rates in the first half of 2007 and did not change them later.
With strong increases in food, oil and other commodity prices, inflation picked up in many
countries of the world towards the end of the year. Also, the risk of the rise in inflation
over the medium-term increased due to potential further oil and food price increases.
The strongest impact on oil prices recently came from short-term supply factors. At the
end of the year, the OPEC countries did not increase their oil extraction quota, thus the
oil stocks contracted at the start of the heating season. Geopolitical tensions, particularly
in Iran and Nigeria, also hindered the increase of oil supply. Food price increases relate
rather to long-term factors – particularly the growth in the demand for meat and diary
products in emerging markets has been buoyant, and the production of biofuels has
been increased.
Major developments in the foreign exchange market relate to the further weakening of
the US dollar. Its rate fell against the euro and most currencies of the emerging Asia. In
the second half of the year, the US dollar started depreciating also against the Japanese
yen.
11
Annual Report of the Bank of Lithuania
2007 II. REVIEW OF THE ECONOMY OF LITHUANIA
AGGREGATE DEMAND AND SUPPLY
According to preliminary data, the GDP created in Lithuania in 2007 made up LTL 96,772
million (at current prices), and the growth rate of real GDP accelerated, compared to
2006, and amounted to 8.8 per cent. The economic development was pushed up by a
buoyant growth of investment at the start of the year, a better absorption of EU funds,
rapidly soaring income and increasing consumption supported by still intensive borrow-
ing. The growth rate of investment over the second half of the year was more moderate
than within the first half of the year. However, a favourable development of net exports
entailed a stimulating effect on the economy. The main features characteristic to the
year 2007 were the further buoyant rise in the compensation of employees, supported
by a more intensive growth rate of corporate profit.
Domestic demand remains the main driver of the economic growth. In 2007, the composi-
tion of investment changed significantly – the share of investment into vehicles expanded.
A buoyant investment growth in the first half of the year spurred the growth rate of
all investments. However, the effect of investment into vehicles on the total growth of
investment decreased markedly in the second half of the year. A more effective usage
of the EU funds and a good financial stance of enterprises determined the expansion
of investment into engineering and commercial buildings. An expected more intensive
usage of the EU structural support funds in the future – by way of both simplifying
administration and taking advantage of the possibility to additionally finance previously
approved projects – should prove to be one of the key factors encouraging investment
and raising their efficiency. However, a very high profitability of activities related with the
boom of construction leads to a potentially ineffective investment distribution in terms
of an increase of a long-term potential of the economy. The growth rate of investment
into machinery and equipment was particularly sluggish in 2007.
Private consumption was further pushed up by robustly growing income. The growth
rate of consumption expenditure in 2007 continued to approach its average growth
rate over the previous year. According to the data of consumer surveys, it is possible to
conclude that households remain disinclined to saving. In the environment of a robust
growth of prices of the main consumer goods, households expected a further rise of
these prices in the near future and were inclined to spend their growing income on
purchases, rather than save it.
The analysis of the Lithuanian economic development in 2007 in terms of supply dis-
closes that the most important driver of the value added growth was a buoyant increase
in activity of trade enterprises: the value added created by retail and wholesale trade
enterprises accounted for a quarter of the growth of GDP in 2007. The growth rate of
the construction sector was somewhat slower compared to 2006, with the exception
of the first quarter, when the activity was pushed up by seasonal factors. However, a
12
direct effect on the real GDP growth continues to be similar due to an expanding share
II. Review of the Economy of Lithuania
of this sector in the economy. Nevertheless, at the close of the year, the growth rates
of activities related to the construction sector (financial intermediation and real estate)
slackened. These may treated as the signs of deceleration of activity of these sectors,
which will also exercise an impact on the activity of construction enterprises, particularly
those related to the real estate market.
Fig. 1. Contributions to Real GDP Growth (by Expenditure Approach)
(annual change)
Sources: Department of Statistics and calculations of the Bank of Lithuania.
Fig. 2. Contributions of Economic Activities to Real GDP Growth
(annual change)
13
Sources: Department of Statistics and calculations of the Bank of Lithuania.
Annual Report of the Bank of Lithuania
2007 A quicker GDP growth rate in the second quarter (9.4%), compared to the first one (8.1%),
was also partly driven by supply developments in individual economic sectors, such as agri-
culture and oil processing activity. A more intensive agricultural activity exercised a positive
one-off effect on the Lithuanian economy in the third and fourth quarters. Favourable
weather conditions, compared to 2006, determined better crops. Therefore, the change of
the value added in agriculture turned to positive. In the second half of the year, a negative
effect of the oil processing activity on the economic activity subsided due to AB Mažeikių
Nafta still operating for some time and the statistical comparative base effect.
In 2007, the growth rate of sales of the manufacturing (excluding oil products) produc-
tion remained intensive. In contrast to previous years, increased exports were one of
the main reasons of the industrial development. This is suggested by a rapid increase of
orders for the production of exported products. However, the growth rate of orders to
the domestic market was slower than in the previous year. The strongest contributors to
the development of manufacturing, excluding the oil processing activity, were the activity
of food and chemical industries: at the end of the year, their activity slackened somewhat
(largely due to the statistical comparative base effect). In the second half of the year, the
sales of products of textiles and associated industries started to shrink, particularly, in
export markets. Evidently, this was entailed by increasing labour costs in Lithuania.
LABOUR MARKET
A buoyant economic development in 2007 called for a more intensive usage of domes-
tic labour resources. In contract to several previous years, the activity of the Lithuanian
population during the period under review increased, thus pushing the labour force up.
Over a year, the labour force grew by 0.9 per cent or 14.8 thousand of people. A higher
number of older persons than earlier were registered in the labour force, and at the same
time a smaller number of the most productive population (25–54 years of age) withdrew
from it. This partly suggests a reduced international emigration of the most productive
population. The labour force was supplemented by a higher number of young people
(15–24 years of age) than earlier.
Fig. 3. Contributions to the Labour Force
(annual change)
14
Sources: Department of Statistics and calculations of the Bank of Lithuania.
II. Review of the Economy of Lithuania
Over the year, the highest increase of employees was registered in construction and
transport activities. In the first three quarters, the number of employees in the whole
economy expanded by 38.0 thousand or 2.5 per cent year-on-year, of which, by 20.1
thousand in the construction sector and by 17.6 thousand in the transport sector. The
number of employees also soared in trade, public administration and education activities,
while in agriculture this number declined. With a higher increase in the number of the
employed than in the labour force, the rate of unemployment continued to fall (4.2%
in the fourth quarter).
An unceasing tension in the labour market was reflected by a further increase in the level of
job vacancies1. In the fourth quarter of 2007, the rate of job vacancies in business activities,
excluding agriculture, made up 2.4 per cent. Particular shortage of employees was observed
in such activities as construction, industry, financial intermediation and transport.
Because of the tension in the labour market and due to administrative decisions, the
average wage continued to grow. However, its growth did not accelerate in 2007.
During the period under review, wages in the public sector grew substantially slower
than in the private sector. This gap became very evident in the third quarter, when the
growth of wages in the public administration activity turned to negative because of the
base effect2.
The growth of the average wage was mainly driven by increasing wages in industry, trade,
construction and transport activities, as well as in education3 and health care activities4.
The average wage was also pushed up by a LTL 100 increase of the minimum monthly
wage in July 2007.
PRICES AND COSTS
REASONS BEHIND THE PRICE DEVELOPMENT
In 2007, the average annual inflation soared significantly. Over the year, it grew by 2
percentage points and accounted for 5.8 per cent in December. The strongest contributor
to the inflation increase was a buoyant growth of prices of processed food products. The
increase in these prices reflects the global trends of food becoming more expensive. These
trends are largely driven by robustly expanding economies in less developed countries,
thus pushing up the demand for agricultural products and processed food.
The effect of the prices of industrial goods on the overall inflation remained insignificant
in 2007. The wage growth outpacing the growth of productivity and rising prices of
commodities (wood and gas) continued exerting upward pressure on the producer prices
of industrial goods. However, the increase of prices of these goods to consumers was
limited by the prices of imported products, which grew less then those of the goods of
domestic production. In the period under review, the effect of the prices of services on
overall inflation continued to strengthen. The rise in the prices of services was caused
by growing demand and rapidly increasing wage and other costs.
1 The level of job vacancies is calculated by dividing the number of job vacancies by the total number of unoccupied and
occupied jobs.
2 In the third quarter of 2006, a part of wages not paid earlier to police officials and some other public servants was
remunerated, thus particularly increasing wages in the public administration activity.
3 Wages for scientists and lecturers were raised in July 2007 and wages for young scientists in September 2007.
4 LTL 226 million were allocated to the Mandatory Health Insurance Fund to increase wages for healthcare specialists
in May.
15
Annual Report of the Bank of Lithuania
2007
Fig. 4. Contributions to the Annual HICP Inflation
(annual change)
Sources: Department of Statistics and calculations of the Bank of Lithuania.
*HICP, excluding food, fuels and lubricants and administered prices.
FOOD PRICES
In 2007, the prices of food rose very rapidly. The growth of the prices of milk and dairy
products, as well as meat and meat products was particularly strong. The prices of bread
and cereals increased more than earlier. With an increase in the excise duty on cigarettes,
their prices were growing gradually. In the last months of the year, the prices of food
and beverages exceeded the prices a year ago by more than 13 per cent.
The increase in food prices in both Lithuania and abroad was driven by a larger gap
between the global demand and supply of agricultural products and food. This gap
was mostly influenced by a robust economic growth in less developed countries and its
stimulating effect on the demand for agricultural products and food. An intensive eco-
nomic growth was registered in many countries that face the largest shortage of food,
according to the United Nations. Higher income determines the increasing consumption
of food in these countries. The global demand for cereals was also pushed up by the
expanding production of biofuels.
According to the data of the International Food Policy Research Institute, the consumption
of cereals over recent years exceeds the amount grown. In 2006, cereal stocks, wheat in
particular, were the smallest since the 1980’s. The global production of agricultural pro-
ducts with a higher value added (meat, milk, vegetables) has been expanding. However,
the rising prices of this production reflect that the supply lags behind the demand.
The profit margin of the Lithuanian food producers is not narrowing, and the share of
food commodity costs in product prices is broadly at the same level. Therefore, the in-
creasing prices of agricultural products push up the food producer and consumer prices
very much. Food prices also include the growing wage costs. Wage growth in the trade
16
II. Review of the Economy of Lithuania
sector has been exceeding productivity growth already since 2006, and in 2007 this gap
was also observed in the food production sector.
In the second half of the year, there was a large boost of milk prices in the Baltic States.
The increase in milk prices in both Lithuania and the Baltic States was one of the main
factors behind the inflation acceleration in the last months of 2007. The price increase
was supported by robustly growing dairy product prices abroad. In the second half of the
year, over 10 per cent annual growth of prices of dairy products was recorded in Ireland,
Austria, Belgium, Denmark, Spain, the United Kingdom, the Netherlands, Germany and
many new EU Member States. A favourable economic condition of the Baltic States might
also have exercised an effect on a more intensive rise in milk prices in these countries,
compared to those in the Western Europe.
Fig. 5. Contributions of Food Prices to the Overall Inflation
(annual change)
Sources: Department of Statistics and calculations of the Bank of Lithuania.
ADMINISTERED PRICES
The contribution of administered prices to the overall inflation in 2007 was larger than
in 2006. This was mainly driven by a large increase in the prices of heating energy, as
well as by higher prices of electricity, passenger transport and education services.
Because of the rise of the prices of imported natural gas, the price of heating energy
for the population in 2007 exceeded the 2006 level by 12.3 per cent. This pushed the
annual inflation up by 0.4 percentage points (0.15 percentage points in 2006).
Over the year, the price of one electricity kilowatt-hour rose by 2 cents or 7 per cent. This
pushed up the annual inflation by 0.17 percentage points due to a direct effect.
Increasing wage costs and the rising prices of fuel are behind a substantial increase in the
prices of passenger transport services. Public transport services became more expensive
17
Annual Report of the Bank of Lithuania
2007 in Kaunas and Panevėžys. With an increase in the maximum tariffs of travel, the prices
of intercity bus travels rose as well. In autumn, the prices of education services increased:
the tuition fees in some universities and colleges went up, and the services provided by
language and music schools became more expensive.
Fig. 6. Contribution of Administered Prices to the Overall Annual
Inflation
Sources: Department of Statistics and calculations of the Bank of Lithuania.
PRICES OF FUELS AND INDUSTRIAL GOODS
In the first months of 2007, the price of liquid fuel was lower than a year ago, thus reduc-
ing the overall inflation. Due to higher geopolitical uncertainty, particularly in Iran and
Nigeria, as well as unplanned interruption of the operation of some oil enterprises, the
oil price started to rise and in September exceeded its level in the same period of 2006.
This directly pushed up the price of fuels and its contribution to the overall inflation.
The impact of the prices of industrial goods on the overall inflation remained insignificant.
The price increase of these goods was limited by the prices of imported goods rising at a
slower pace than those of domestic products. The rising prices of imported gas and other
commodities (e.g., wood) and a more rapid growth of wages compared to productivity
growth pushed up the prices of industrial goods of the Lithuanian producers. However,
in general, the production of the Lithuanian producers, excluding food and liquid fuels,
accounts for a smaller share of the consumer basket, compared to imported products,
thus decreasing the contribution of producer prices to the overall inflation.
In the group of industrial goods, the prices of clothing, footwear, audio and video equip-
ment were declining in the period under review. A drop in the prices of some of these
goods was partially attributed to cheaper imports. However, there was a simultaneous
rise of furniture prices, while in the middle of the year car prices started to advance. The
imports of more expensive furniture and cars were stimulated by accelerating demand.
Actually, the prices of the Lithuanian furniture producers were also pushed up by the
rising prices of wood.
18
II. Review of the Economy of Lithuania
Fig. 7. Contributions of Prices of Industrial Goods to the Overall
Annual Inflation
Sources: Department of Statistics and calculations of the Bank of Lithuania.
PRICES OF SERVICES
The growing domestic demand stimulated market service providers to increase prices
further, thus pushing up the overall inflation. The highest rise of prices was observed
in housing related services, such as the rent of housing and its maintenance, as well as
housing renovation, car repairs and the repair of audio and video equipment.
More expensive restaurant, cafe and dining room services were the largest contribu-
tors to the annual inflation in the group of market services. Their prices were pushed
up not only by the large demand and growing labour costs, but also by the increasing
food prices. In general, wages in the activities of market services advanced much more
buoyantly than the value added per employee.
BALANCE OF PAYMENTS
CURRENT ACCOUNT BALANCE
After a robust growth in 2006 and in the first half of 2007 due to a buoyant growth
of import supported by large domestic demand, the current account deficit declined in
the second half of the year and made up 13.7 per cent of GDP in 2007 (10.8% of GDP
in 2006) or LTL 3.2 billion. The trade balance deficit that did not increase substantially
in the second half of the year and was affected by temporary factors in agricultural and
oil processing sectors, as well as rapidly soaring prices of the main export goods, such
as food, chemical products, wood and articles of wood, are the main reason behind the
stabilisation of the CAD.
19
Annual Report of the Bank of Lithuania
2007
Fig. 8. Components of the Current Account Balance
(compared to GDP)
Sources: Department of Statistics, Bank of Lithuania and calculations of the Bank of
Lithuania.
Although the balance of services remains positive, its impact on the current account
subsided by 1.5 percentage points in 2007 and made up 2.1 per cent of GDP. This de-
velopment was mainly driven by the expansion of the import of transport services. In
addition, in the environment of more intensive travelling of the Lithuanian population, the
amount of expenses on tourism services in foreign countries was increasing, thus entailing
a negative effect on the balance of services as well. In the environment of an intensive
growth of profit of foreign capital enterprises and the rising interest rates, the income of
foreign investors started to advance more quickly. This caused a significant aggravation
of the balance of income in 2007. However, such a situation did not worsen Lithuania’s
external imbalance, as the increase of the income balance deficit was mainly entailed by
the growing profit of foreign investors, which was reinvested inside the country.
FOREIGN TRADE AND COMPETITIVENESS
Due to the consequences of the fire in AB Mažeikių Nafta and longer than planned repairs
at the enterprise, the scope of foreign trade grew at a somewhat slower rate in 2007,
compared to 2006. Over the year, the nominal export advanced by 11.2 per cent and
the import increased by 14.5 per cent. Because of a stronger influence of oil processing
disruptions on the export, the general negative effect of the trade in oil products on
the foreign trade balance grew by 1 per cent of GDP. Excluding the trade in oil and its
products, the growth rate of the nominal export, same as that of the nominal import,
almost doubled. The changes in the trade balance of food products had the largest impact
on the reduction of foreign trade deficit in 2007. Bigger crops and a robust increase in
global prices led to a better trade balance of agricultural products and food.
Foreign trade deficit was mostly affected by the reduction in the trade in machinery and
equipment and vehicles. In the second half of the year, the growth rates of the trade
in ground vehicles (about 10% of Lithuania’s export) slackened significantly due to
foreign demand developments. Since re-exported vehicles from the Western European
20
II. Review of the Economy of Lithuania
countries made the largest share of this trade, the growth rate of the import subsided in
the context of declining foreign demand. The increase of the scope of foreign trade was
supported most of all by the growth of production produced by chemical and plastics
sectors. Stronger production capacities, the growing demand for fertilisers supported
by the global production of food and biofuels and the rising prices of fertilisers formed
favourable conditions for the Lithuanian producers of fertilisers to increase the export of
their production. This caused a respective increase of demand for imported commodities.
In the second half of 2007, exports of wood and wood articles soared in particular. An
over 10 per cent annual rise of the price of wood and wood articles accompanied by a
shortage of wood in the Scandinavian countries, when the government of Russia, the
main wood exporter, started to increase tariffs on the export of roundwood timber, were
the main reason behind an intensive growth of wood exports.
Fig. 9. Foreign Trade Balance
(compared to GDP)
Sources: Department of Statistics and calculations of the Bank of Lithuania.
The market share development – the main indicator of export competitiveness – dis-
closed no signals of decline in competitiveness of the Lithuanian exporters in 2007. The
demand for exported products and favourable prices in foreign markets, higher industrial
capacity of major exporting enterprises formed suitable conditions for export expansion.
Competitive positions of the Lithuanian exporters were also supported by the fact that
wages and prices in other countries exporting to the same markets as Lithuania (e.g.,
many new EU Member States) were also advancing at rather intensive rates. At the same
time, currencies of these countries became more expensive in nominal terms.
21
Annual Report of the Bank of Lithuania
2007 FINANCING OF THE CURRENT ACCOUNT DEFICIT
In 2007, the CAD share financed by flows that do not expand debt broadened. Approxi-
mately a half of the CAD was covered by the funds of these flows. In the context of a
more rapid use of EU structural funds, non-repayable capital transfers were increasing.
Their further increase is expected due to the establishment of easier conditions to obtain
the support of EU structural funds and provision of a possibility for additional financing
of earlier approved projects in the event of a shortage of funds required for their imple-
mentation, determined by a higher price level in Lithuania. The share of foreign direct
investment in financing the CAD also expanded. It is partly associated with a buoyant
rise of investment in the first quarter, out of which investment in the oil processing sec-
tor was prevailing. Later, the growth rate of this investment slackened somewhat. This
rate was mostly supported by reinvested corporate profit.
Fig. 10. CAD Financing Sources
(ratio to GDP)
Source: Bank of Lithuania.
The growth of flows that do not expand debt was also accompanied by a rapid growth
of net borrowing of banks abroad, which remains the main CAD financing source. Ac-
tive private sector borrowing entailed a 12.4 percentage point increase of gross external
debt in 2007 and accounted for 73.3 per cent of GDP. The growth of debt was largely
driven by growing net liabilities of banks and other financial corporations and corporate
liabilities to direct investors. In the environment of rising interest rates and gross national
debt, the direct costs of economic development financing by external capital flows. i.e.,
interest expenses, increased as well and made up approximately 2 per cent of GDP.
GOVERNMENT FINANCE
According to preliminary data, the general government deficit in 2007 amounted to 1.3
per cent of GDP, i.e. it was higher by 0.4 percentage point than envisaged in Lithuania’s
22
Convergence Programme 2007, updated in December 2007.
II. Review of the Economy of Lithuania
Similar to the previous year, general government finances were pro-cyclical – the bud-
getary revenue exceeding the plan due to a favourable effect of the business cycle was
redistributed by various ways to finance additional expenditure. Thus, the advantage of
achieving a more balanced fiscal position was not taken, although the economic develop-
ment was more favourable than expected in the beginning of 2007.
The 2007 Lithuania’s Convergence Programme envisaged a gradual reduction of the
general government deficit in the medium term. The Republic of Lithuania Law on Fiscal
Discipline adopted at the end of the year also shows attempts of the public institutions
at attaining balanced government finances in the long run. However, the general go-
vernment budget is still envisaged to be in deficit in 2008 at 0.5 per cent of GDP, and
the budget surplus is planned only from 2009. An envisaged gradual improvement of
the budget balance indicator is based on a faster growth of the public sector income,
compared to expenses, rather than on the reduction of expenditure.
Fig. 11. General Government Deficit, Revenue and Expenditure
Four-quarter moving sums, compared to GDP
Sources: Department of Statistics and calculations of the Bank of Lithuania.
The general government income soared by 21 per cent over the year and made up 34.3
per cent of GDP, i.e., 0.9 percentage point more than in 2006. Compared to the national
budget plan of 20075, the amount of tax revenue collected was larger than planned by
0.8 per cent of GDP. A better than expected macroeconomic environment – the growth
of private consumption and wages – determined a robust expansion of both tax revenue
and social contributions. The increase in the revenue of the personal income tax was
slightly limited by the reduction of the tax tariff in mid-2006.
The year 2007, compared to 2006, was considerably more successful to the budget of
social insurance funds: the growth rate of social contributions comprised 21 per cent.
This was caused not only by raising wages, but also by structural developments in the
labour market – the number of insured by social insurance was increasing.
5 Republic of Lithuania Law No. X-963 of 7 December 2006 on the Approval of Financial Indicators of the 2007 State
Budget and Budgets of Local Governments.
23
Annual Report of the Bank of Lithuania
2007 The growth rate of the general government expenditure in 2007 suggests that a larger
fiscal consolidation was not achieved. Over the year, these expenses soared by 24 per cent
and accounted for 35.6 per cent of GDP, i.e., 1.7 percentage points more than in 2006.
The rise of expenses on wages and social payments was particularly high. In 2007, the
base pension and insured income for the indexation of social insurance benefits was
increased, other social transfers were also rising.
The general government gross fixed capital formation expenditure (investment) went
up by 50 per cent. A more intensive growth of the general government investment was
determined by a more active usage of the support of EU structural funds, which also
strengthened the demand for co-financing funds.
The general government debt in 2007 represented 17.3 per cent of GDP. Over the year,
it increased by LTL 1.8 billion, of which, the general government external debt rose by
LTL 1.0 billion, as a result of the placement of the Eurobond issue with the nominal value
of EUR 600 million (LTL 2.072 billion) in international financial markets in October. The
largest part of the borrowing demand of the Government of the Republic of Lithuania
was related to the repayment of liabilities assumed earlier and the coverage of the budget
deficit. However, the debt to GDP ratio contracted somewhat over the year due to a
robust growth rate of the economic activity.
24
III. Exchange Rate and Monetary Policy
III. EXCHANGE RATE AND MONETARY POLICY
EXCHANGE RATE POLICY
The principal objective of the Bank of Lithuania – seeking price stability – is implemented
using the strategy of a fixed litas exchange rate against the euro. Features of the
economy of Lithuania, such as its openness and relative flexibility of prices and wages,
allow its successful application since April 1994. In the long term the fixed exchange
rate helps to stabilise import and export prices, the financial system and interest rates,
forms lower inflation expectations and accelerates nominal and real convergence with
the EU countries.
Upon entering the EU, Lithuania made a commitment to adopt the single currency euro.
Its adoption will promote foreign trade and financial relations of Lithuania and increase
attractiveness of our country to investors. One of the conditions for the adoption of the
single currency is the obligatory participation in ERM II. In accordance with the decision of
EU institutions, Lithuania participates in ERM II from 28 June 2004. When joining ERM II,
our country undertook a unilateral commitment to retain the fixed exchange rate regime
and a stable exchange rate of the litas against the euro of LTL 3.45280 for EUR 1. The
objective of joining the euro area as soon as Lithuania complies with the convergence
criteria is one of the main goals of the state macroeconomic policy.
2007 was the year marked by rising tensions both in domestic and in international
markets. With the rise of tension in global financial markets, investors started to assess
investment risks more conservatively. The concern of some investors about a rapid, but
insufficiently balanced economic development of Lithuania and other Baltic states in-
creased the interest rate spreads of the national currencies of these countries over the
euro interest rates. Under these circumstances, the currency board arrangement applied
in Lithuania and its continuity is one of the essential conditions for retaining and improving
macroeconomic stability of our country.
SYSTEM OF MONETARY POLICY INSTRUMENTS
The monetary policy instruments of the Bank of Lithuania aim at maintaining a stable
litas exchange rate against the euro and help ensuring appropriate liquidity in the banking
system. Same as earlier, in 2007 the Bank of Lithuania exchanged litas to the anchor
currency without restrictions, applied reserve requirements and provided the overnight
lending facility for commercial banks established in the country and branches of foreign
credit institutions (hereinafter referred to as banks).
In implementing the stable litas exchange rate regime, the Bank of Lithuania has as-
sumed a commitment in respect of the banks, to which it applies reserve requirements,
to buy and sell anchor currency without restrictions at the official exchange rate. The net
25
Annual Report of the Bank of Lithuania
2007 result of the euro purchase or sale by the Bank of Lithuania over a certain period directly
depends on the change of the autonomous factors of the banking system reserves in
litas6, required reserves and excess reserves.
The Bank of Lithuania applies the reserve requirement ratio of 6 per cent since May 2002.
The Bank of Lithuania made available the facility of overnight lending for the collateral
of eligible securities to banks participating in the settlement system LITAS-RLS, so that
it is possible to ensure stability of settlements between banks, if necessary. However, in
2007, as in 2006, banks did not apply to the Bank of Lithuania for overnight borrow-
ing. Required reserves, an effective interbank settlement system, the interbank market,
and the forex window at the Bank of Lithuania enabled banks to manage their liquidity
reliably by themselves.
Table 2. Bank of Lithuania Framework of Monetary Policy Instruments
Provision of
Absorption of
Maturity
Frequency
Procedure; settlement day
liquidity
liquidity
Standing facilities
Anchor currency
Anchor currency sale
–
Access at the discretion of
Bilateral transactions, the Bank of
purchase
counterparties
Lithuania purchases euros by settling
on trade date or the second day
following trade date and sells them by
settling on the second day following
trade date
Overnight repurchase
–
Overnight
Access at the discretion of
Bilateral transactions
agreements
counterparties
Required reserves
Stabilised liquidity of The reserve base consists of the liabilities of banks established in Lithuania, except liabilities to the Bank of
the banking system
Lithuania and other credit institutions that are subject to reserve requirements applied by the Bank of Lithuania.
Zero reserve requirement ratio is applied to the following: 1) deposits with an initial maturity of over two years
or with the redemption notice term specified in a relevant agreement of over two years; 2) debt securities issued
with an initial maturity of over two years; 3) repurchase agreements.
The reserve requirement ratio of 6% is applied to other liabilities of the base.
Required reserves are calculated on the basis of bank statistical balance sheets of the last month preceding the
month, in which the reserve maintenance period starts.
Required reserves are held in litas on settlement accounts of banks with the Bank of Lithuania. Maintenance
period: from the 24th calendar day of a month to the 23rd calendar day of the consecutive month, inclusive.
Compliance with the reserve requirement is assessed on the basis of the averaging provision.
REQUIRED RESERVES AND BANKING SYSTEM LIQUIDITY DEVELOPMENT FACTORS
The volume of required reserves7 in 2007 grew due to deposits attracted by banks and
debt securities issued, to which the Bank of Lithuania applies reserve requirements. Re-
quired reserves increased to LTL 2.6 billion during the period under review. The growth
rate of these reserves slowed down markedly from 27 per cent (in 2006) to 18 per cent
(in 2007). One of the main reasons for this slowdown is the increase of the share of long-
term liabilities of banks with an initial maturity of over two years, to which the Bank of
Lithuania applies a zero reserve requirement ratio, in the composition of bank liabilities.
This share increased from 25 per cent at the end of 2006 to 35 per cent at the end of
2007 and made up LTL 24 billion.
6 Autonomous factors of the banking system reserves in litas are Bank of Lithuania operations that have an impact
on the amount of reserves of the banking system in litas, but are not performed due to the needs of the bank
liquidity management.. The main autonomous factors are the amount of currency in circulation and the transfer of
the general government funds from the banking system to the Bank of Lithuania or from the Bank of Lithuania to
the banking system.
26
7 The comparison of the required reserves of 24 December 2006 and 24 December 2007.
III. Exchange Rate and Monetary Policy
Same as earlier, the largest and still growing share of long-term liabilities of banks con-
sisted of the funds in foreign currencies lent by non-residents, mostly foreign parent
banks. Their share rose from 82 per cent at the end of 2006 to 87 per cent at the end
of 2007. The funds attracted by banks using bonds with the maturity of over two years,
after calculating the required reserves, are the second largest share of long-term liabilities.
It declined slightly in 2007, from 9.6 per cent to 9.3 per cent.
The remaining share of long-term liabilities of banks consisted of resident (mostly
household) deposits. The total amount of long-term deposits of residents changed only
marginally, since residents became interested in bank bonds and other possibilities of
investment. The share of these deposits in long-term liabilities of banks went down from
8 per cent to 4 per cent.
The Bank of Lithuania also applies a zero reserve requirement ratio to bank funds at-
tracted by repurchase agreements. Traditionally, these agreements made up a small
share of bank liabilities, to which a zero reserve requirement ratio is applied, although
this share increased from 0.01 per cent to 1.3 per cent during the period under review,
while from March to May 2007, when the interbank market was especially active, the
share of the said repurchase agreements was 2–3 per cent.
Fig. 12. Bank Reserves with the Bank of Lithuania in Litas
Source: Bank of Lithuania.
The share of liabilities of the euro area credit institutions, to which a zero reserve require-
ment ratio is applied, made up approximately 42 per cent of the reserve base during the
period under review. It continues to be higher than in Lithuania (35%), although the gap
contracted significantly. Debt securities with the maturity of over two years issued by
the euro area credit institutions make up approximately 50 per cent, long-term deposits
around 30 per cent and repurchase agreements 20 per cent of these liabilities.
Same as a year ago, the rate at which autonomous factors increased banking system
liquidity was significantly higher than the rate of growth of required reserves in 2007,
therefore banks purchased euros from the Bank of Lithuania to manage the impact of
these factors on liquidity. Autonomous factors increased the supply of bank reserves in
litas by LTL 2.9 billion during the period under review: the higher amount of currency in
circulation reduced bank reserves by almost LTL 1 billion, however, the transfer of the
general government funds pushed up bank reserves by LTL 3.8 billion.
27
Annual Report of the Bank of Lithuania
2007 Due to the rise of tension in domestic and international interbank markets in 2007, the
banking system of Lithuania accumulated a larger excess reserve average. It made up 4
per cent of required reserves, compared to 2.1 per cent in 2006.
CURRENCY EXCHANGE OPERATIONS
In 2007, the Bank of Lithuania concluded foreign exchange transactions with domestic
banks and its other depositors (mainly the Ministry of Finance of the Republic of Lithuania)
for the amount of LTL 68.9 billion, or 53.7 per cent more than in 2006. They resulted in
a net purchase of foreign exchange by the Bank of Lithuania.
Table 3. Net Sale of Foreign Exchange to the Bank of Lithuania
LTL million
2006
2007
Q1
Q2
Q3
Q4
Q1–Q4
Banks
–2,251.2
–740.6 –233.4 –269.7 –501.7
–1,745.4
Other Bank of Lithuania depositors
3,841.0
697.8
822.3
265.2
2,004.2
3,789.5
Total 1,589.8
–42.8
588.9
–4.5
1,502.5
2,044.1
Source: Bank of Lithuania.
The exchange of the funds obtained by the general government institutions abroad
into litas and their transfer from the Bank of Lithuania to the domestic banking system
increased its liquidity. Due to the management of the fluctuations of reserves in litas
and taking into account the growth of currency in circulation and required reserves that
reduced excess liquidity, the net purchase of euro by banks from the Bank of Lithuania
was LTL 1,745 million in the calendar year 2007, while during the reserve maintenance
periods that started in the year under review the net purchase was LTL 2,477 million. The
average amount of a transaction with commercial banks was LTL 75.5 million in 2007,
i.e. similar as in 2006 (LTL 74.6 million).
Fig. 13. Anchor Currency Trade with Commercial Banks
Source: Bank of Lithuania.
Increased tension in financial markets induced some investors to insure their investment
28
by the currencies of the Baltic states against the currency exchange risk. It resulted in an
III. Exchange Rate and Monetary Policy
increased demand for litas in the interbank market, higher activity of this market and
the larger turnover of the anchor currency trade of the Bank of Lithuania with banks. In
the second half of the year, this turnover declined to the usual level of previous years,
following the formation of a new supply and demand equilibrium in the interbank market
by the higher litas and euro interest rate differential.
INTEREST RATES
In the spring of 2007, with the rise of tension in the financial markets of the Baltic states,
the litas and euro interest rate differential started to grow. The concern of foreign inves-
tors and rating agencies about a rapid, but insufficiently balanced economic development
of Lithuania and other Baltic states, global risk reassessment and decreased liquidity of
the markets increased litas interest rates. At the end of 2007, three-month and twelve-
month VILIBOR was 6.65 and 7.31 per cent respectively, or 2 and 2.6 percentage points
higher than EURIBOR of a corresponding maturity. At the end of 2006, litas interest rates
were higher than respective euro interest rates by 6 and 3 basis points. In the second
half of December 2007, following the formation of a new litas supply and demand
ratio, the interest rates in the interbank market and the differential from euro interest
rates started to decline rapidly. In the capital market, the spread between the yield on
GS in litas of various maturities and the yield on the German Government securities also
increased markedly. In 2007, the spread between the yield on two-year GS and the yield
on two-year German Government securities widened by 1.2 percentage points to 1.2
percentage points, while the spread between the yields on ten-year GS increased by 0.8
percentage point to 1.1 percentage points. Long-term GS interest rates of Lithuania,
which are used for the assessment of convergence, were 0.1 percentage point higher
than the average long-term interest rate of three EU Member States with the lowest
rate of inflation (the Maastricht Treaty stipulates that the deviation may not be larger
than 2 percentage points).
Fig. 14. Litas and Euro Interest Rate Differential
Sources: Bank of Lithuania calculations* and Bloomberg information system.
*The yield of GS of 2016 was calculated on the basis of the purchasing yield pub-
lished by the primary market participants.
29
Annual Report of the Bank of Lithuania
2007 IV. FOREIGN RESERVE MANAGEMENT
OFFICIAL FOREIGN RESERVES
In 2007, official foreign reserve assets (hereinafter referred to as “foreign reserves”)
increased by EUR 873 million (19.9 per cent). At the end of the year they made up EUR
5,271 million.
Fig. 15. Foreign Reserves
Source: Bank of Lithuania.
Foreign reserve developments were mostly influenced by the increase in currency in
circulation and MFI deposits held at the Bank of Lithuania of EUR 322 million and EUR
328 million respectively. Due to the increment in other external liabilities, foreign reserves
grew by EUR 242 million. The market value of foreign reserves net of liabilities in foreign
currencies grew by EUR 783 million.
FOREIGN RESERVE FUNCTIONAL PARTS AND KEY MANAGEMENT PRINCIPLES
The main objective of the Bank of Lithuania in managing foreign reserves is to ensure
sufficient amount of liquid foreign resources to maintain the fixed exchange rate of the
litas against the anchor currency at any time. In pursuing this objective, foreign reserve
management is primarily guided by liquidity and safety principles. Subject to meeting
these requirements, foreign reserves are managed to achieve maximum return.
In determining the foreign reserve investment strategy, the Bank of Lithuania takes into
consideration the fact that under the fixed exchange rate regime frequent interventions
in the domestic currency market evoke fluctuations in the amount of foreign reserves.
However, even in cases of turbulent domestic financial markets, a part of the foreign
30
IV. Foreign Reserve Management
reserves remains untouched. Taking that into account, foreign reserves have been split
into the functional parts: liquidity, investment and gold portfolios.
Functional parts of foreign reserves are subject to different requirements. Foreign reserves
in the liquidity portfolio are primarily meant to ensure the urgent need of liquidity emerging
from performing operations in the domestic foreign exchange market and managing ac-
counts of depositors. Holdings in the liquidity portfolio may be needed at any time, therefore
a one-month investment horizon is applied, when determining an investment strategy of
the portfolio. The Bank of Lithuania seeks to manage the liquidity portfolio in a way that
portfolio return over the period of one month never turns negative and systematically
exceeds the return on risk-free investment (overnight interbank deposit rate).
If necessary, holdings of the investment portfolio may be used for interventions in domestic
foreign exchange markets and other purposes, but, as they are unlikely to be needed
within the established period, the priority is given to the profitability requirement. An
investment horizon of one year is applied when defining an investment strategy for the
investment portfolio. The investment portfolio is managed so as to ensure that, within
this period, portfolio return has low probability to turn negative and that over the
reasonably long term the average annual return on the portfolio exceeds the average
annual return on an investment into a highly secure financial asset with the maturity of
one calendar year.
Gold is invested into time deposits or gold swaps.
LIQUIDITY OF FOREIGN RESERVES
Following the liquidity principle, the Bank of Lithuania manages foreign reserves so that,
if needed, investments can be liquidated promptly and without significant costs, and
the proceeds received can be used for interventions in the foreign exchange market (or
for other purposes).
The Bank of Lithuania invests the major part of foreign reserves into highly liquid financial
assets. This ensures that almost all foreign reserves can be liquidated in a very short time
and at relatively low cost even during the period of financial market turbulence. In 2007,
the share of investment in highly liquid financial instruments accounted for 65 per cent
of foreign reserves on average, of which, investment into sovereign bonds, which are
treated as the most liquid and safe financial instruments in the global financial markets,
accounted for 59 per cent of foreign reserves.
Fig. 16. Breakdown of Investment by Financial Asset
Source: Bank of Lithuania.
31
Annual Report of the Bank of Lithuania
2007 Liquidity requirements applied by the Bank of Lithuania ensure that a regular-size inter-
ventions in the domestic foreign exchange market are made and liabilities of the Bank
of Lithuania vis-à-vis its depositors are met without liquidating any investments.
SAFETY OF FOREIGN RESERVES
When investing foreign reserves, the Bank of Lithuania faces credit, exchange rate and
interest rate risks. Adhering to the safety principle applied to foreign reserves, it sets
requirements and limits to manage these risks.
Credit risk is limited by compiling the list of eligible counterparties and issuers and es-
tablishing investment concentration and individual limits. The list of counterparties and
issuers includes only those counterparties and issuers, which have been assigned high
credit ratings by international rating agencies. In 2007, investment in the most secure
financial instruments, i.e. those rated Aaa, accounted for 56 per cent of foreign reserves
on average, while the average credit rating of the Bank of Lithuania foreign reserve
investment was Aa18.
Fig. 17. Breakdown of Investment by Rating
Source: Bank of Lithuania.
Credit risk is reduced through a wide application of the diversification principle. According
to this principle, investment limits are assigned to financial instruments, issuers and groups
of counterparties as well as to issuers and counterparties of the same country. In 2007,
investment was made in 17 countries using various financial instruments. Individual limits
established for every counterparty prevent excessively high concentration of investment
and operations.
Like other central banks, the Bank of Lithuania faces foreign exchange rate risk. Due to
unfavourable developments in exchange rates, the value of foreign reserves measured
in the national currency may decline. As Lithuania has a fixed exchange rate of the litas
against the euro, the Bank of Lithuania reduces the currency risk to the minimum by
investing almost all foreign reserves – unrelated to liabilities in foreign currencies – in
euro denominated assets. However, the Bank of Lithuania cannot fully avoid the cur-
rency risk due to holdings of gold. Gold price in euro terms grew by 31 per cent over
the year, and the value of gold held by the Bank of Lithuania increased over the year by
LTL 55.47 million.
8 The calculation is based on Moody’s ten-year insolvency probabilities and average investment structure for companies
32
and governments with different ratings.
IV. Foreign Reserve Management
Table 4. Composition of Foreign Reserves Unrelated to Liabilities in Foreign Currencies
(average per year; percentages)
Currency
2006
2007
Change, percentage points
Euro 96.9
97.3
0.4
Gold 3.1
2.7
–0.4*
Total 100.0
100.0
–
Source: Bank of Lithuania
*Change in the average proportion of gold is related to the change in gold price and foreign reserves The amount of gold
almost did not change over the year.
The Bank of Lithuania as an agent of the State Treasury manages accounts of the State
Treasury, public funds and some government institutions. In order to avoid the exchange
rate risk, assets corresponding to liabilities in foreign currencies are invested in the cur-
rency of liabilities. The largest share of liabilities in foreign currencies (on average, 99%
per year) is denominated in euro.
To ensure the safety principle, the Bank of Lithuania, apart from credit and exchange
rate risks, also controls the interest rate risk. The latter is managed by establishing a
benchmark for each functional part of the foreign reserves, its modified duration, the
allowed deviations from the modified duration of the benchmarks and maximum maturity
of individual investment.
Table 5. Average Annual Modified Duration of Foreign Reserves and Their Functional Parts
(years)
Functional parts
2006
2007
Liquidity portfolio
0.19
0.27
Investment portfolio
1.07
0.99
Gold portfolio
0.00
0.13
Total 0.63
0.66
Source: Bank of Lithuania.
The choice of the modified duration of investment determines the characteristics of the
return on investment and the interest rate risk. Historical data suggest that the invest-
ment in German government bonds with 0.66 modified duration has never experienced
negative return over the period of one year, and the minimal annual return on such
investment was 2 per cent.
RETURN ON FOREIGN RESERVES
Upon reaching compliance with the key requirements of safety and liquidity applied
to the foreign reserve management, the foreign reserves are managed adhering to the
principle of profitability, i.e. they are invested so that the return on investment is max-
imised over the long term.
In 2007, return on the foreign reserve investment was 3.81% (2.38% in 2006). The
growth of interest rates in the euro area that started at the end of 2005 had a dampening
impact on long-term bond prices in 2007 and was more favourable for the short-term
investment, therefore the return on liquidity portfolio was higher than that on invest-
ment portfolio.
33
Annual Report of the Bank of Lithuania
2007 Table 6. Return on Foreign Reserve Portfolios
(percentages)
2003
2004
2005
2006
2007
Liquidity portfolio
2.27 2.02 2.05 2.91 4.05
Investment portfolio
3.09
3.28
2.15
2.01
3.76
Gold portfolio
0.34
0.09
0.00
0.00
0.04
Total 2.61
2.60
2.11
2.38
3.81
Source: Bank of Lithuania.
The return on foreign reserve portfolios achieved main objectives: return on liquidity
portfolio did not turn negative for a single month and was consistently higher than the
return on risk-free investment (overnight interbank deposit rate), and the annual return
on investment portfolio was positive over the year. The result of the active portfolio
management was positive: the total return on all portfolios exceeded the strategic
benchmarks by 8 basis points (EUR 2,150 thousand).
34
V. Cash Management
V. CASH MANAGEMENT
CURRENCY ISSUE AND WITHDRAWAL
Implementing its exclusive right to issue banknotes and coins, the Bank of Lithuania puts
into and withdraws from circulation banknotes and coins of the Republic of Lithuania,
establishes the denominations of banknotes and coins, organises production of banknotes
and coins, their transportation and storage and makes up reserve funds of banknotes
and coins according to the procedure established by law.
In 2007, the value of banknotes and coins in circulation increased by LTL 1,112.3 million.
The Bank of Lithuania issued into and withdrew from circulation LTL 3,122.15 million and
LTL 2,009.83 million respectively. As at 31 December, the value of currency in circulation
including commemorative coins and numismatic sets was LTL 9,168.34 million, compared
to LTL 8,056.0 million one year ago.
Table 7. Currency Issue and Withdrawal (–)
LTL million
Year
Quarter
I
II
III
IV
I–IV
2006
–153.5 386.2 443.5 664.2
1,340.4
2007
93.5
426.7
341.1
251.0
1,112.3
Source: Bank of Lithuania.
Fig. 18. Litas in Circulation
Source: Bank of Lithuania.
Currency issue is traditionally affected by seasonal factors. In Lithuania, as in a number
of other countries, the amount of currency in circulation decreases in the first quarter
35
Annual Report of the Bank of Lithuania
2007 of each year and increases in summertime. The largest amount of currency is issued in
December, i.e. before Christmas and New Year holidays. In December 2007, the amount
of currency in circulation increased by LTL 320.5 million.
In the beginning of 2007, the Bank of Lithuania supplemented the stocks of 200 litas
banknotes of 1997 issue; it also issued into circulation 20 litas banknotes of 2007 issue
on 11 June.
On 1 March 2007, 2, 5, 10, 20, 50 litas banknotes of 1993 issue and 1 litas banknotes
of 1994 issue were withdrawn from circulation and are no longer legal tender. These
banknotes are exchanged free of charge for an unlimited period at the cash offices of
the Bank of Lithuania.
BANKNOTES AND COINS IN CIRCULATION
As at 31 December 2007, the number of banknotes totalled to 82.4 million, with the
value of LTL 8,990.42 million. From the beginning of the year, the number of banknotes
grew by 1.4 million (1.7%) and their value by LTL 1,087.4 million (13.8%). This was
determined by strong demand for high-denomination banknotes. Over the year, the
average value of a banknote in circulation increased from LTL 97.6 to LTL 109.1.
Fig. 19. Value of Banknotes in Circulation
Source: Bank of Lithuania.
Along with the growing value of litas in circulation, currency issuance from and acceptance
to the Bank of Lithuania are growing too. In 2007, the Bank issued 170 million pieces of
banknotes (146 million pcs. in 2006) and accepted 168 million pieces of banknotes (135
million pcs. in 2006). The average return frequency of banknotes in circulation accelerated
slightly in 2007: over the year, the same banknote returned to the Bank of Lithuania 2.2
times on average (2 times in 2006). This process should be encouraged, since authenticity
of banknotes and their fitness for further circulation can be verified more often: banknotes
are calculated using fully automated banknote processing systems. Over the reporting year,
50 litas, 100 litas and 500 litas banknotes returned to the Bank of Lithuania more frequently
than in 2006, while 20 litas banknotes returned more rarely, compared to 2006.
Unfit rate of banknotes in circulation indicates the share of banknotes returning to the
Bank of Lithuania unfit for further circulation. In 2007, the average unfit rate of ban-
36
knotes in circulation fell from 29 to 26 per cent. Over the year, 39.2 million of the total
V. Cash Management
168 million banknotes accepted by the Bank were acknowledged as unfit for further
circulation and destroyed (38.7 million pcs. in 2006).
Fig. 20. Number of Banknotes in Circulation
Source: Bank of Lithuania.
As at 31 December 2007, 200 litas banknotes accounted for the largest share of the total
value of banknotes in circulation. Over the year, their share increased (12.8%). Over the
year, the share of 100 litas in circulation decreased (12.2 percentage points).
As at 31 December, the number of coins in circulation totalled to 810.5 million and
their value was LTL 177.92 million. From the beginning of the year, the number of coins
increased by 105.2 million (14.9%) and their value grew by LTL 24.8 million (16.2%). A
relatively rapid growth rate of the number of coins in circulation was prompted by the
growing demand of low-denomination coins.
Fig. 21. Number of Coins in Circulation
Source: Bank of Lithuania.
1 and 2 centas coins accounted for the largest share of the total number of coins (38.0%
and 19.4% respectively). In 2007, the demand for those coins made up over 61 per
cent of the total demand for coins: 43 million pieces of 1 centas coin alone were issued,
37
Annual Report of the Bank of Lithuania
2007 compared to 37 million pieces in 2006. The average demand for litas and centas coins
per capita in Lithuania increased by 14 per cent, i.e. to 238 coins, of which, 91 coins
were 1 centas coins.
Euro area countries face huge demand for low-denomination coins too. In 2007, the
average demand for euro coins per capita in the euro area countries increased by 9 per
cent, i.e. up to 242 coins.
At the end of the year, 1, 2 and 5 litas coins accounted for just over two thirds (70.5%)
of the total value of coins in circulation. The share of litas coins changed only slightly
over the year.
Table 8. Banknotes and Coins in Circulation
Denomination
31 12 2006
31 12 2007
31 12 2006
31 12 2007
LTL million
Percentage
LTL Percentage
Million Percentage
Million Percentage
share
million
share
pcs.
share
pcs.
share
Banknotes
LTL
1
2.6 0.0 2.6 0.0 2.6
3.3 2.6
3.2
LTL
2
2.6 0.0 2.6 0.0 1.3
1.6 1.3
1.6
LTL
5
2.3 0.0 2.2 0.0 0.5
0.6 0.4
0.6
LTL 10
100.4
1.3
100.0
1.1
10.0
12.4
10.0
12.1
LTL 20
209.7
2.7
202.3
2.3
10.5
12.9
10.1
12.3
LTL 50
498.1
6.3
532.4
5.9
10.0
12.3
10.6
12.9
LTL
100
3,106.2 39.3
2,434.8 27.1 31.0
38.4 24.3
29.6
LTL
200
2,352.8 29.8
3,832.2 42.6 11.8
14.5 19.2
23.3
LTL 500
1,628.3
20.6
1,881.3
20.9
3.3
4.0
3.8
4.6
Total banknotes
7,903.0
100.0
8,990.4
100.0
81.0
100.0
82.4
100.0
Coins
LTL 0.01
2.7
1.7
3.1
1.7
265.2
37.6
307.8
38.0
LTL 0.02
2.7
1.8
3.1
1.8
135.0
19.1
157.2
19.4
LTL 0.05
2.7
1.8
3.2
1.8
53.8
7.6
63.6
7.8
LTL 0.1
12.2
7.9
13.4
7.5
121.8
17.3
133.6
16.5
LTL 0.2
10.9
7.1
12.2
6.9
54.6
7.7
61.1
7.5
LTL 0.5
8.5
5.6
9.9
5.6
17.1
2.4
19.8
2.4
LTL
1
31.1 20.3 36.0 20.2 31.1 4.4 36.0
4.4
LTL
2
38.2 24.9 44.5 25.0 19.1 2.7 22.3
2.8
LTL 5
37.6
24.6
45.0
25.3
7.5
1.1
9.0
1.1
Commemorative coins
and numismatic sets
6.5
4.3
7.5
4.2
0.2
0.0
0.2
0.0
Total
coins
153.1 100.0 177.9 100.0 705.3
100.0 810.5
100.0
Source: Bank of Lithuania
COMMEMORATIVE COINS
Four commemorative coins were issued into circulation in 2007: two silver and two
gold coins.
Continuing the participation in the international programme “The Smallest Gold Coins
of the World. History of Gold”, a 10 litas gold coin was issued on 27 March (mintage
7,000 coins).
The reverse of the coin features the formula of the principle – the golden section (Sectio
Aurea) – used in architecture from antiquity, which is expressed in a geometrical figure – the
38
V. Cash Management
rectangle. In Renaissance, the formula of the golden section was applied to the propor-
tions of the portrayal of a human figure, the composition of art works, etc. The obverse
of the coin features one the most significant historical and architectural monuments
of the history of Lithuania – Aušros (Medininkų) Vartai in Vilnius. The architecture of
Aušros Vartai is distinguished by particularly precise and harmonious proportions. The
attic of Aušros Vartai features Vytis, the symbol of the national emblem. The coin has
a reeded edge.
The graphic design of the coin was made by Liudas Parulskis, and the plastic model by
Rytas Jonas Belevičius.
Fig. 22.10 Litas Gold Coin Issued as an Item of the International Programme “The Smallest Gold Coins
of the World. History of Gold”
Continuing the series “Historical and Architectural Monuments of Lithuania”, 50 litas
silver coin dedicated to Panemunė Castle – the sixth in the series – was issued on 26
June (mintage 5,000 pcs.).
The reverse of the coin displays a stylised image of Panemunė Castle. The centre of the
obverse features the national emblem on the shield upon the background of a fragment of
the Castle tower. The edge of the coin bears the inscription ISTORIJOS IR ARCHITEKTŪROS
PAMINKLAI (Historical and architectural monuments).
The coin was designed by Saulius Juozas Jarašius.
Fig. 23. 50 Litas Silver Coin Dedicated to the Panemunė Castle
On 26 September, the Bank of Lithuania issued the first 100 litas gold coin from the series
dedicated to mark the millennium anniversary of the mention of the name of Lithuania
(mintage 5,000 pcs.).
The reverse of the coin contains the composition of a fragment of the transcription of
the Quedlinburg Annals (16th c.). The composition is surrounded by the inscription AN-
NALES QUEDLINBURGENSES in Latin and the year of the mention of the name of Lithua-
nia – 1009. The obverse of the coin features a stylised mounted knight – an allusion to
the national emblem of Lithuania. The edge of the coin bears the inscription LIETUVOS
VARDO TŪKSTANTMETIS (Millennium anniversary of the name of Lithuania).
The coin was designed by Liudas Parulskis and Giedrius Paulauskis.
39
Annual Report of the Bank of Lithuania
2007 Fig. 24. 100 Litas Gold Coin From the Series Dedicated to the Millennium Anniversaary of the Men-
tion of the Name of Lithuania
Towards the end of the year (13 December), the Bank of Lithuania issued 50 litas silver
coin to mark the XXIX Olympic Games in Beijing (mintage 5,000 pcs.).
The reverse of the coin features a stylised runner, while in the centre of the obverse the
national emblem is displayed. The edge of the coin bears the inscription XXIX OLIMPIA-
DOS ŽAIDYNĖS (XXIX Olympic Games).
The coin was designed by artists Laura Grainytė, Evaldas Prižginas and Giedrius
Paulauskis.
Fig. 25. 50 Litas Silver Coin Dedicated to XXIX Olympic Games in Beijing
COUNTERFEIT LITAS BANKNOTES AND COINS
In 2007, 1,372 pieces of counterfeit banknotes and 5 pieces of counterfeit coins were
identified in Lithuania, i.e. the figure is a little bit higher for the banknotes and slightly
lower for the coins, compared to 2006, when 1,305 pieces of counterfeit banknotes
and 17 pieces of counterfeit coins were identified.
The largest share of counterfeits consisted of 100 litas banknotes of 2000 issue: they
accounted for 58 per cent of all counterfeit banknotes. As in the previous year, counter-
feit banknotes were printed most often using inkjet printers and sometimes contained
imitations of banknote security features: watermark, security thread, fluorescent security
features, visible when exposed to UV light and microperforation. Counterfeit 1 litas
coins were made by way of casting an easily melting lead and tin alloy. The quality of
counterfeit banknotes and coins is very low, therefore they can be easily distinguished
from the genuine ones.
In 2007, identified counterfeits accounted for as little as 0.0017 per cent of the total
number of banknotes in circulation: 1 counterfeit banknote per 60,000 pieces of ban-
knotes in circulation.
In order to prevent money counterfeiting, the Bank of Lithuania puts into circulation
the banknotes of new issues and uses effective security features for their protection,
which can not be imitated by colour copiers. 100 litas banknotes of the new issue have
an integrated holographic strip, and 10 and 20 litas banknotes of 2007 issue have an
40
iridescent stripe and embossed numerals of the denomination.
VI. Statistics
VI. STATISTICS
The Bank of Lithuania collects, compiles, publishes and disseminates to internal and
external users the statistical information on the MFI balance sheet and interest rates,
securities, payment instruments, money and foreign exchange markets, international
reserve assets, balance of payments, international investment position, external debt and
quarterly financial accounts of institutional sectors. It also prepares and issues statistical
publications and publishes statistical information on its website.
One of the most important statistical tasks of the Bank of Lithuania in 2007 was to meet
the constantly growing demand of users for statistical information compliant with the
international statistical standards and comparable with other EU Member States. The
Bank of Lithuania started publishing additional data on foreign direct investment broken
down by country and economic activity on its website and additional data on the private
individual remittances in the bulletin “Balance of Payments of the Republic of Lithuania”.
In November 2007, the Bank of Lithuania started to publish on its website the quarterly
financial accounts data on financial assets and liabilities of the institutional sectors of
Lithuania and the methodological notes on their compilation.
In order to expand the MFI balance sheet and interest rate statistics, the works related
to the amendment of relevant ECB regulations were continued. The Bank of Lithuania
participated in the analysis of the methodology of the new statistical requirements and
evaluation of its implementation costs. The Bank of Lithuania actively participated in the
preparation of the third edition of the ECB’s Monetary Financial Institutions and Markets
Statistics Sector Manual by preparing and submitting the chapter “Lithuania”. The ECB
published this publication at the end of March 2007.
The Bank of Lithuania participated in the preparation of the Triennial Central Bank Sur-
vey of Foreign Exchange and Derivatives Market Activity in 2007 by the BIS, which was
published in December 2007, and provided statistical data for the ECB’s Euro Money
Market Survey and the publication Bond Markets and Long-Term Interest Rates in Non-
Euro Area Member States of the European Union.
The sector of other financial intermediaries (OFI), which includes investment funds, fi-
nancial leasing, factoring and other financial corporations, continues to rapidly expand
its activities. Therefore, the Bank of Lithuania pays particular attention to the OFI balance
sheet statistics. Following the requirements of the ECB’s guidelines, from June 2007 the
Bank of Lithuania started a regular preparation of the quarterly investment fund data
under the short-term approach and provision of them to the ECB. When introducing
these statistics, the maintenance of the statistical list of investment funds of Lithuania
was continued and their balance sheet and portfolio investment data were collected and
managed. The ECB conducted the quality assessment of the statistical data on investment
funds of Lithuania and intends to start their publication in 2008.
The Bank actively participates in the projects of international institutions for the improve-
ment and implementation of statistical reporting standards and methods. One of such
41
Annual Report of the Bank of Lithuania
2007 projects is the new edition of the Balance of Payments Manual prepared by the IMF. The
Bank of Lithuania, same as the central banks of other states, analysed the first version of
this draft publication and prepared and submitted its remarks and proposals to the IMF.
Another important project is the ECB’s Centralised Securities Database, which is under
development. During its participation in this project, the Bank of Lithuania developed
the software tools and started using them for the provision of the data to this database.
The database helps to improve external sector statistics. In the future, the information
of the Centralised Securities Database will be used in the compilation of the harmonised
statistics of investment fund assets and liabilities. To ensure efficiency of this work and
satisfaction of internal demands, the Bank of Lithuania developed statistical securities
information systems, which store the data on securities issues and their holders. This
information will also be used for the compilation of statistics of investment fund assets
and liabilities, securities issues, national quarterly financial accounts and external sector
statistics.
In continuation of the important works for the improvement of the external debt statistics,
the Bank of Lithuania implemented the recommendations of the first IMF technical as-
sistance mission in 2007: it started to publish the net external debt and to calculate and
publish the gross external debt service data according to updated structure, drew up a
preliminary debt-service payment schedule and calculated the short-term external debt
by its residual maturity. In active cooperation with the IMF experts, the implementation of
the second stage of the project was started and the 2008 action plan was prepared.
The annual assessment of the quality of the country’s balance of payments and inter-
national investment position following the methodology prepared by Eurostat is very
important for the improvement of external sector statistics. The Bank of Lithuania partici-
pated twice in the assessment of the said balances. The assessments of the balances of
payments of the EU Member States are submitted to the EU Parliament. After examining
the first quality assessment report, Eurostat evaluated the data quality of the balance of
payments of the Republic of Lithuania positively.
To avoid increasing the burden of statistical reporting, the Bank of Lithuania cooperates
with other institutions producing the official statistics of Lithuania, expands the usage
of information collected by other national institutions and relies on the experience of
other countries in relevant areas of statistics. The cooperation with Statistics Lithuania is
particularly useful due to the exchange of experience, data and information. The coopera-
tion of the Bank of Lithuania with the Securities Commission, which shared the available
information on the investment portfolio of pension funds and investment funds, was
valuable for the improvement of the balance of payments statistics and implementation
of the OFI balance sheet statistics. For the purpose of a further development of the Bank’s
statistical information system, the experience of the central banks of other EU Member
States in the implementation and administration of similar systems was studied.
An annual meeting with statistical information compilers and providers was organised
at the end of 2007 for the third time. The main new developments in financial statistics
and the tasks and prospects of 2008 were discussed. Special attention was paid to the
dissemination of statistical information by using modern technologies and tools to ensure
its timeliness, accessibility and reliability.
42
VII. Main Trends in the Supervision of Credit Institutions
VII. MAIN TRENDS IN THE SUPERVISION OF CREDIT
INSTITUTIONS
In performing supervision of credit institutions, the Bank of Lithuania contributes to the
development of a safe, transparent, competitive and reliable system of domestic credit
institutions by creating conditions for a stable development of the country’s financial
market.
IMPLEMENTATION OF THE NEW CAPITAL ADEQUACY SYSTEM
In 2007, continuing the implementation of the new capital directives, the Bank of
Lithuania prepared several new legal acts and made supplements and amendments to
legal acts.
The new recommendations of the Committee of European Banking Supervisors (CEBS)
and clarifications of the working group on the implementation of the new capital
adequacy directives formed by the European Commission were taken into account in
making adjustments to the General Regulations for the Calculation of Capital Adequacy.
The said adjustments deal with the establishment of risk coefficients by applying the
standardised credit risk assessment method, the establishment of credit risk parameters
by applying the internal ratings-based method, the classification of activities as business
lines to determine capital requirements for covering operational risks, etc. Furthermore,
some capital structure elements have been changed for calculating capital adequacy.
Banks were allowed to include retained profit for the current year into its Tier I capital
only after making assessment of operational results, the nature of risk management and
asset concentration level in the bank.
The General Provisions on Undated Debt Securities and Their Inclusion into Bank Capital
were prepared to create conditions for banks to issue undated debt securities and include
them into capital. This document sets requirements to be met for undated debt securities
to be included into bank’s Tier II capital.
Since subordinated loans are an important component in a bank‘s capital, the General
Provisions of Subordinated Loans and Their Inclusion into Bank Capital were revised.
A series of individual meetings with bank managers and experts were held to assess
preparedness of banks to apply the requirements provided for in the legal acts on the
calculation of capital adequacy from 1 January 2008 and in particular the introduction
of the internal capital adequacy assessment process.
In implementing the new capital adequacy requirements, the Bank of Lithuania made an
assessment of the preparation of one of the banks to apply the internal ratings-based
credit risk assessment method and the advanced operational risk measurement approach
for the calculation of capital requirements. The Board of the Bank of Lithuania allowed
this bank to start the application of both methods from 1 January 2008.
43
Annual Report of the Bank of Lithuania
2007 The General Provisions on Stress Testing were updated and revised. In conducting the
credit institutions supervision, a supervisory review and assessment process was started by
the Bank of Lithuania with regard to each of them, therefore every credit institution shall
have to create and implement an effective and functional mechanism for deter mining
internal capital requirements, depending on the scope and nature of its activities, the
risks assumed and the operations performed. An obligatory stress testing of the bank’s
activities is one of the conditions for the capital distribution and adequate assessment
of the risks related to the bank’s activities. The document sets out key aspects of the
organisation and performance of stress testing in credit institutions.
Taking into account the fact that the Basle Committee on Banking Supervision updated
the Core Principles for Effective Banking Supervision and considering a rapid development
of the banking supervision and the international practice gained, the Core Principles for
Effective Banking Supervision were supplemented with new requirements and approved
by the Board of the Bank of Lithuania. The key innovations paid particular attention to
risk management processes in banks. Supervisory institutions must make sure that both
individual risks and the overall risk faced by the bank are properly identified, assessed
and managed. At the same time, the Bank of Lithuania made an assessment of how
the Core Principles for Effective Banking Supervision have been implemented in the
Lithuanian banking system.
COOPERATION WITH FOREIGN FINANCIAL SUPERVISORY AUTHORITIES
COORDINATION OF THE IMPLEMENTATION OF NEW CAPITAL ADEQUACY
REQUIREMENTS IN BANKS
It is very important to maintain close relations with financial sector supervisory authorities
of foreign countries, where banks within their jurisdiction have subsidiary (controlled)
banks or branches in Lithuania. The harmonisation of actions by supervisory authorities
of individual countries and national requirements has become especially important after
starting the assessment and recognition of more complex credit and operational risk as-
sessment methods based on internal models. To this end, particularly close cooperation
has been maintained with supervisory authorities of Estonia, Latvia and Sweden.
On the basis of memoranda of understanding between the Financial Supervision Authority
of Finland and the Bank of Lithuania regarding cooperation, the bank took part in the
meetings with representatives of the Financial Supervision Authority of Finland. These
meetings were held to exchange information about the macroeconomic situation and
developments in the banking sector of the two countries, supervisory activity plans for
2007 and the implementation of capital adequacy directives.
TECHNICAL ASSISTANCE TO CREDIT INSTITUTIONS SUPERVISORY
AUTHORITIES OF THE COUNTRIES OUTSIDE THE EUROPEAN UNION
The Bank of Lithuania takes part in a project that aims to render technical assistance to
central banks of other countries, with priority given to Belarus and Ukraine. Experts of
the Bank of Lithuania consult representatives of those banks and organise their visits to
the Bank of Lithuania.
During the meetings held in the Bank of Lithuania in 2007, staff members of central
banks of the above countries were informed about the ongoing implementation of Ba-
44
VII. Main Trends in the Supervision of Credit Institutions
sel II requirements, banking supervision system in Lithuania, consolidation of financial
statements of a financial group and consolidated supervision, stress testing, loan risk
database, some aspects of the Capital Adequacy Directives, major principles of evaluation
of financial activities, practical aspects of bank inspection and other issues. As a part of
the training program, experts of the National Bank of the Republic of Belarus were given
presentations on bank establishment, registration and licensing procedures. During the
training sessions, qualification and other requirements to the bank management were
discussed, experience was exchanged, and questions answered.
Similar training was organised for the staff members of the National Bank of the Republic
of Belarus in Minsk and the experts of the National Bank of Ukraine in Kiev. There, the
representatives of the Bank of Lithuania read presentations about credit risk management
in banks, the loan risk database as one of the instruments of credit risk management,
and other topical subjects related to the supervision of credit institutions.
45
Annual Report of the Bank of Lithuania
2007 VIII. REVIEW OF THE ACTIVITIES OF CREDIT
INSTITUTIONS
REVIEW OF THE ACTIVITIES OF BANKS
There are 9 commercial banks and 5 foreign bank branches that hold banking licences
operating in Lithuania. As of 1 January 2008, the Bank of Lithuania had received 176
notifications from the supervisory authorities of the EU Member States on intentions of
the banks licensed by supervisory institutions of the said countries to provide services in
Lithuania without establishing a branch.
KEY INDICATORS OF THE BANKING SYSTEM
The year 2007 was profitable for banks and marked by a rapid development. The
growth of GDP was accompanied by the growth of the domestic banking sector, both
in relative and in absolute terms, which was faster than in 2006 according to many key
indicators.
Fig. 26. Development of Assets, Loans and Deposits of the
Banking System
(End-of-period)
Source: Bank of Lithuania.
According to the data of non-audited financial statements as of 1 January 2008, the as-
sets of banks grew by LTL 22.1 billion (37.5%) to LTL 81 billion. The loans to customers
made up LTL 56.7 billion, an increase of 18.1 billion or 46.8 per cent, compared to 2006.
Over the year, the amount of deposits with domestic banks soared by LTL 6.5 billion or
21.5 per cent to LTL 36.8 billion on 1 January 2008. Of these, the deposits of residents
46
went up by LTL 4.8 billion or 26.8 per cent to LTL 22.7 billion.
VIII. Review of the Activities of Credit Institutions
On 1 January 2008, the share of loans to customers in bank assets was 70.1 per cent, a
year-on-year increase of 4.5 percentage points. Along with the loans to financial institu-
tions, they accounted for 74.1% of the banking sector assets. This big share of loans
has a positive impact on the profitability of banks; however, it also shows the growth
of assumed credit risk.
Investing in the domestic market has remained among the priorities of banks. Over the
year, bank assets in Lithuania increased by LTL 19.8 billion and foreign assets of banks
by LTL 2.3 billion.
Fig. 27. Composition of Bank Assets
(End-of-period)
Source: Bank of Lithuania.
Fig. 28. Composition of Bank Liabilities
(End-of-period)
47
Source: Bank of Lithuania.
Annual Report of the Bank of Lithuania
2007 Recently, a slower increase in bank deposits, compared to loans, forced banks to finance
the growth of their assets by borrowing within the interbank market and by distri buting
new borrowing products. In recent years, the major source for bank asset funding was
the funds raised within the interbank market, mainly from parent banks. This can be
seen from the liability composition: over the year, deposits of private enterprises and
individuals decreased respectively by 3.2 and 2.5 percentage points, while debt to banks
and other financial institutions went up from 34.3 per cent to 39.7 per cent. Debt securi-
ties issued by banks continue to be another popular source of financing. Their issuance
grew year-on-year by 73 per cent.
PROFITABILITY AND EFFICIENCY
According to the data of non-audited financial statements presented by banks, all banks
earned a profit , with the exception of a branch of the Estonian bank Balti Investeeringute
Grupi Pank AS, which reported a loss of LTL 4.2 million, and a Baltic branch of the Icelandic
bank MP Investment Bank hf., which reported a loss of LTL 0.6 million. In 2007, the total
non-audited profit of the domestic banking system was LTL 1,154 million (LTL 667 million
in 2006).
Fig. 29. Net Profit of Banks
(End-of-period)
Source: Bank of Lithuania.
Bank profit grew mostly because fast growing loan portfolio and the real interest margin
pushed up interest income. In 2007, the net interest income of banks went up by 51.6
per cent year on year. A wider range of services rendered by banks and growing fees
for some of them determined an increase in the net income from services and commis-
sions, which grew by 29.7 per cent, compared to 2006. The operating results of banks
also improved by foreign exchange operations and operations in financial derivatives,
which grew by 19.8 per cent, and income from sales of some premises owned by banks,
which grew 3.8 times.
Over the year, the income of banks from equity securities grew by LTL 66 million or 2.1
times. This type of income grew mainly because of dividends received by banks from
their subsidiary (controlled) companies and income from sales of some of subsidiary
(controlled) companies.
The major factor that pushed the banking profits down was operational expenses, which
grew by 31.5 per cent over the year. Among operational expenses, the biggest increase
was registered in expenses related to wages (34.4%) and the rent of premises and main-
48
tenance (28.7%). Because of an increase in the number of bank operations and their
VIII. Review of the Activities of Credit Institutions
scope, as well as profitability of banks, the amount of taxes paid by banks went up to
LTL 287 million, an increase of LTL124 million or 75.8 per cent. The increase of deposits
with banks led to a growth of deposit insurance contribution expenses of LTL 31 million.
Moreover, with the interest rate growth trend becoming increasingly prominent, banks
suffered losses from operations with debt securities.
The year 2007 saw an increase in return on assets of the banking system. Over the year,
it went up from 1.3 per cent to 1.7 per cent, while return on equity grew from 20.3 per
cent to 25.9 per cent.
In the beginning of 2007, the real interest margin of the banking system was going
down, but started to increase in July and made up 2.82 per cent at the end of the year.
It was the composition of bank assets and liabilities that determined the growth of the
real interest margin. With reference interest rates going up, interest rates on loans by
banks with the largest share of the loan portfolio consisting of loans with floating inte-
rest rates grew much more rapidly than interest rates on deposits.
The ratio of fixed expenses and the profit from the principal activity, which serves as the
banking system efficiency indicator, declined (improved) over the year by 4.9 percentage
points to 40 per cent on 1 January 2008, showing the share of net income earned by banks
from the principal activity, that was used to cover operating and amortisation expenses.
CAPITAL BASE DEVELOPMENTS
Over the year, the shareholders’ equity increased by 42.8 per cent to LTL 5.9 billion on 1
January 2008. Profitable operations and authorised capital growth were the major fac-
tors that determined this increase. On 1 January 2008, the authorised capital amounted
to LTL 3.1 billion.
The authorised capital of the banking system grew by LTL 408 million to LTL 3.1 billion.
Six out of nine operating banks issued new shares and registered increased authorised
capital. In addition, in 2007 the bank capital base improved because of subordinated
loans received by five banks.
The share of the capital controlled by non-residents remained basically unchanged at
87.6 per cent. The capital from the Scandinavian countries continued to dominate in
the banking system of Lithuania.
On 1 January 2008, the capital adequacy ratio of the banking system was 10.9 per
cent (the required minimum set by the Bank of Lithuania is 8%), up by 0.16 percentage
point, compared to the previous year. This was mostly influenced by the capital base,
which grew faster than the risk-weighted assets. All commercial banks complied with
the established capital adequacy requirement.
Tier I capital, which is relatively more stable, prevails in the capital structure of the Lithua-
nian banking system, accounting for 70.2 per cent of its capital base.
The capital allocated to mitigate the credit risk and the market risk amounted to LTL
4.6 billion and LTL 115 million, respectively. Domestic banks could additionally reduce
the value of loans 4 times without violating the capital adequacy ratio, i.e. they could
assume additional asset risk amounting to LTL 18.6 billion.
BREAKDOWN OF BANKS BY MARKET SHARE
With the competition in the banking system getting stronger, the concentration in the
banking sector continued to decline in 2007. Over the year, the market share of the
49
Annual Report of the Bank of Lithuania
2007 three largest banks (AB SEB bankas, AB bankas Hansabankas and AB DnB NORD bankas)
contracted from 69 to 67.6 per cent. Over the year, the market share of other banks
increased from 23.8 to 24.2 per cent, compared to 2006, while the share of foreign
bank branches went up from 7.2 to 8.2 per cent. The share of three largest banks in
the loan market decreased from 73.5 to 70.3 per cent. The concentration of deposits of
individuals and total deposits in the market declined less notably.
Fig. 30. Market Share of Banks by Managed Assets
(End-of-period)
Source: Bank of Lithuania.
REVIEW OF RISKS ASSOCIATED WITH BANK OPERATIONS
CREDIT RISK
According to the preliminary data of 1 January 2008, the bank loan portfolio, including
loans to financial institutions, accounted for 62.1 per cent of Lithuania’s GDP in 2007,
while in other Baltic countries this ratio was more than twice higher.
Compared to other EU Member States, some possibilities for the loan market to expand
further (still low ratio of loan portfolio to GDP, the continued growth of the Lithuanian
economy, further development of the EU assistance and the EU funds already allocated
to Lithuania, but not yet utilised) have not changed, although an increasing number of
signs emerge, implying that its further development may slow down slightly.
New loans to businesses and households issued during several consecutive years are
similar in size, although the amount of loans to individuals was somewhat higher (LTL
8.8 billion), compared to loans to private companies (LTL 8.5 billion). Loans to the lat-
ter made up 54.3 percent of the portfolio of loans issued to customers, while loans to
natural entities accounted for 41.5 per cent (of which, loans for house purchase made
up 29.4 per cent of the portfolio of bank loans).
Over the period under review, loans for house purchase accounted for the biggest share
of the loans to residents with their annual growth rate reaching 61.6 per cent, slightly
higher than twelve months ago. The growth of the loans for house purchase was not
only determined by the demand for this type of loans, but also by higher housing prices
and higher loan amounts.
Regardless of the fact that loans for house purchase grew quite fast during the period
under review, both their volume and their ratio to GDP were still obviously lower than in
other Baltic states. At the end of 2007, according to the preliminary data, the average loan
amount per capita in Lithuania was LTL 7,000, while in other Baltic states this indicator
was 2 to 3 times higher.
The ratio of overdue loans to total loans as well as the ratio of loan impairment (specific
50
provisions) to loan portfolio indicate the quality of the loan portfolio of a bank.
VIII. Review of the Activities of Credit Institutions
The ratio of loans with regular payments overdue for 60 days and more and the total
loan portfolio went up from 0.97 to 1.03 per cent over the year. Overdue loans continued
to make up a relatively small share of the total loan portfolio; despite the rise in interest
rates, the indicators that characterise the loan portfolio remained good. The smallest
share of overdue loans was among the loans for house purchase (0.59 per cent), while
the largest share of them was among consumer loans (1.49 per cent).
Over the year, the ratio of loan impairment (special provisions) to loan portfolio went
down (i.e. improved) from 0.97 to 0.79 per cent.
LIQUIDITY RISK
According to the data of 1 January 2008, the liquidity ratio of the banking system was
43.5 per cent, exceeding the Bank of Lithuania’s established minimum by 13.5 percentage
points. The liquid assets accounted for 21.9 per cent of the total assets of the banking
system. All banks complied with the liquidity ratio set by the Bank of Lithuania. Parent
institutions of many banks are strong, and the latter may expect support in managing
liquidity risk.
Liquidity risk management in banks remained important, since the banking system assets
and the terms of liabilities were not fully balanced. Long term assets (over 1 year), which
comprised more than a half (59.7%) of bank assets, were financed mainly by short-term
liabilities (long-term liabilities made up only 36.7% of bank funds). Some positive changes
were observed too: over the year, long term liabilities grew more rapidly (by 79%) than
the assets of analogous maturity (by 36.8%). However, the management of long-term
liquidity of banks remains important.
Towards the end of 2007, the largest share of liquid assets (32%) held by banks in other
banks (mainly foreign) was in the form of short-term funds. The portfolio of government
securities and other securities accounted for 38 per cent and funds held with the Bank of
Lithuania made up 21 per cent of liquid bank assets. Demand deposits (49%) and time
deposits of individuals (24%) accounted for the biggest share of current liabilities.
MARKET RISK
According to the data of the Capital Adequacy Report, on 1 January 2008, 2.4 per
cent of risk-weighted bank assets and off-balance sheet items were sensitive to risk, i.e.
the share of items sensitive to market risk declined slightly (by 0.5 percentage point),
compared to 2006. Over the year, the capital needed to cover market risk increased by
LTL 12.7 million.
The analysis of individual market risk elements suggests a reduced interest rate risk in
2007 and a more even distribution of capital requirements by individual risk types. A
notable decrease was observed in the capital requirements for reducing interest rate and
equity risks, while the capital requirements for covering exchange rate and counterparty
risks rose by 5.4 and 9.3 percentage points to 13.4 and 14.5 per cent, respectively. Across
the banking system, the interest rate risk remains the most relevant type of risks. The
biggest share of the trading book capital requirement, 51.3 per cent, was allocated to
cover this risk.
The analysis of the impact of the interest rate development on the banking sector profita-
bility showed that in case interest rates in all currencies (litas and foreign currencies) went
down by 1 percentage point, the annual net interest income of the banking system would
decrease by 10.3 per cent (against the net interest income earned in 2007).
51
Annual Report of the Bank of Lithuania
2007
Fig. 31. Structure of Capital Required to Cover Market Risk
(End-of-period)
Source: Bank of Lithuania.
On 1 January 2008, the overall open position in foreign currencies made up 2.4 per
cent of the banking system capital9. Over the year, the ratio of overall open position
to the banking system capital increased by over 1 percentage point, while the position
remained short.
During the year, the share of equity risk in the trading book decreased notably (from
29.5 to 20.8 per cent); accordingly, the capital requirement to cover this risk went down
by nearly 21 per cent. The sale of the trading book securities portfolio by one of the
banks determined the above changes. According to the data of 1 January 2008, the
equity portfolio of domestic banks, excluding investments into subsidiary companies,
made up LTL 176.6 million, of which, about 88.5 per cent of equities were attributed
to the trading book.
KEY TRENDS IN THE ACTIVITIES OF CREDIT UNIONS
ACTIVITIES OF CREDIT UNIONS
On 1 January 2008, there were 67 credit unions operating in Lithuania, which incorporated
83,000 members. Only one credit union was founded in the year under review. Credit
unions make up a small part of the financial system: their assets account for about 0.81
per cent of the banking system assets.
The most active participants of the credit unions were farmers, since the engagement
in agricultural activities is one of the requirements for the membership in many credit
unions. Over the year, the number of credit union members increased by 14,000 legal
and natural persons.
The growing number of credit union members had an impact on the expansion of credit
union operations. Over the year, their share capital went up by 45.8 per cent to LTL 67.9
million on 1 January 2008.The assets managed by credit unions increased by 41.9 per
cent to LTL 655.1 million. Credit unions kept increasing the portfolio of loans to their
members (an increase of 49.2 per cent to LTL 455.3 million); the amount of deposits held
in credit unions went up too (an increase of 39.7 per cent to LTL 518.2 million).
9 In accordance with the requirements set by the Bank of Lithuania, the overall open position should not exceed 25
52
per cent of the bank’s capital.
VIII. Review of the Activities of Credit Institutions
Fig. 32. Indicators of Credit Union Activities
(End-of-period)
Source: Bank of Lithuania.
The asset composition of credit unions changed insignificantly over the period under
review: as in previous years, credit unions focused mainly on loans to its members. On
1January 2008, the net value of loans accounted for 69 per cent of assets. Over the
year, loans granted by credit unions grew by 49.2 per cent. On 1 January 2008, specific
provisions for loans and accrued income had been formed by 50 credit unions. Regard-
less of the growth of loan portfolios of credit unions, the specific provisions for loans,
which were growing faster (by 1.7 times), were the major reason for deterioration of
the loan portfolio quality indicators – both the ratio of specific provisions for loans to
total loans and the share of non-performing loans (loans under groups III, IV and V) in
total loans increased and made up 0.4 per cent and 1.4 per cent, respectively, in the
beginning of 2008.
According to the non-audited data, credit unions earned a profit of LTL 2.8 million in
2007 (59 credit unions reported profit, while 8 credit unions reported loss). Since income
kept growing faster than operational expenses, an improvement was registered in the
efficiency of credit union activities – the ratio of operational expenses and amortisation
to income decreased over the year by 1.9 percentage points to 41 per cent.
Credit unions are currently subject to a higher capital adequacy ratio than banks (no
lower than 13 per cent). According to the data of statements presented as on 1 January
2008, the capital adequacy of the credit union system exceeded the established minimum
requirement by 3.3 percentage points.
Two liquidity ratios have been set to credit unions. The first liquidity ratio, i.e. the ratio
of liquid assets of credit unions to current liabilities, made up 51.8 per cent at the end
of 2007 (30 per cent is the established minimum ratio). The second liquidity ratio, i.e.
the ratio of recalculated liquid assets and credit union capital amount to recalculated
current liabilities, made up 1.2 at the level of the whole credit union system on 1 January
2008, i.e. it was higher that the minimum required ratio, which may not be lower than
1. All credit unions, with the exception of three, to which enforcement measures were
applied, operated in compliance with prudential requirements.
53
Annual Report of the Bank of Lithuania
2007 KEY TRENDS IN THE ACTIVITIES OF THE CENTRAL CREDIT UNION OF LITHUANIA
Over the year, the assets of the Central Credit Union of Lithuania (CCUL) grew by 29
per cent to LTL 141.6 million on 1 January 2008, the highest level since the start of its
operations. Deposits held with the CCUL increased by 27.1 per cent to LTL 124.6 mil-
lion. The largest share of its assets (35.5 per cent) consisted of the funds in banks, while
government securities made up 26.7 per cent.
The loan portfolio of the CCUL increased by 59.1 per cent over the year to LTL 49.3 mil-
lion. In 2007, the growth rate of the loan portfolio was slower than in previous years.
Its quality remained good. According to the data submitted by the CCUL, no asset im-
pairment (specific provisions) has been registered as of 1 January 2008. Over the period
under review, the CCUL helped to deal with liquidity problems in three credit unions,
which were granted loans from the Liquidity Support Reserve.
During the year, the number of the CCUL members remained unchanged at 59. After
credit unions paid up all additional shares from the Government of the Republic of
Lithuania, the additional share capital (LTL 5.3 million) belonged to 59 credit unions,
members of the CCUL. On 1 January 2008, the Government of the Republic of Lithuania
had one main share of LTL 1,000. On 1 January 2008, the Liquidity Support Reserve and
the Stabilisation Fund of the CCUL amounted respectively to LTL 5.3 million and LTL 3.1
million, respectively.
The CCUL earned a profit of LTL 714 thousand. Interest income accounted for the largest
share of income (82.3% of total income), while operational and interest expenses accounted
for the largest share of expenses (47.0 and 28.7 per cent, respectively). Such a large share
of operational expenses was a result of an increase in expenses on advertising the credit
union movement, the introduction of payment cards and wage-related expenses.
In 2007, the CCUL operated in compliance with all prudential requirements set by the
Bank of Lithuania.
54
IX. Payment and Securities Settlement Systems
IX. PAYMENT AND SECURITIES SETTLEMENT SYSTEMS
One of the functions of the Bank of Lithuania is to encourage stable and efficient opera-
tion of payment and securities settlement systems. In performing this function, the Bank
of Lithuania provides settlement services and conducts the oversight of payment and
securities settlement systems.
PAYMENT SYSTEMS FOR SETTLEMENTS IN LITAS
The Bank of Lithuania manages the real-time gross settlement system LITAS-RLS and
the designated time retail payment system LITAS-MMS that started their operation on
29 January 2007 and replaced the payment system LITAS and performs the function
of the operator of these systems. It ensures reliable operation of the systems, consults
their participants, maintains management information, ensures business continuity of
the systems and performs other administrative tasks. To be better prepared for potential
contingencies, the Bank of Lithuania improved business continuity procedures of these
systems by preparing the business continuity plan and performing its testing.
At the end of 2007, the systems LITAS-RLS and LITAS-MMS included 24 participants
each: the Bank of Lithuania, 9 commercial banks, 2 foreign bank branches, the Central
Securities Depository of Lithuania, the Central Credit Union of Lithuania and 10 financial
brokerage companies.
The payment traffic processed by the payment systems managed by the Bank of Lithuania
continued to increase rapidly. In the course of 2007, the system LITAS-RLS processed
0.3 million payment orders with the value of LTL 231.1 billion. The daily average volume
processed by the system was 1.2 thousand payments with the value of LTL 1,009 million.
The average value per payment was LTL 868.8 thousand. Compared to the former system
LITAS, the daily average volume of urgent payment orders increased over the year by
21 per cent10. The highest payment traffic in this system was recorded on 28 December,
when a total of 6.8 thousand payments were processed. The highest value of payments
(LTL 2.4 billion) was recorded on 11 April.
The system LITAS-MMS processed 23.2 million payment orders with the total value of
LTL 215.4 billion. The daily average volume processed by the system was 101.4 thousand
payments with the value of LTL 940.8 million. The average value per payment was LTL
9.3 thousand. Compared to the results of the former system LITAS, the daily average
volume of ordinary payment orders increased by 18.9 per cent , while the daily average
value of payments went up by 28.6 per cent over the year. The highest payment traffic
was recorded on 21 December, when a total of 213 thousand payments were processed.
The highest value of payments (LTL 1.9 billion) was recorded on 28 December.
55
10 The value of operations of the system LITAS-RLS is not comparable with the value of real-time payments of the
former system LITAS.
Annual Report of the Bank of Lithuania
2007 Table 9. Transactions of the Payment Systems LITAS, LITAS-RLS and LITAS-MMS
Year
Volume of transactions, thousand
Value of transactions, LTL million
Total
Daily average
Concentration
Total
Daily average
Concentration
ratio*, %
ratio*, %
2006 21,317
(LITAS) 86.3 73.4
280,762
1,136.7 60.3
2007**
24,954 – –
469,502 – –
of which
of which
1,459
76.8
73.7
23,007
1,210.9
61.3
(LITAS)
266
1.2
68.7
231,063
1,009.0
49.2
(LITAS-RLS)
23,229 101.4 72.2
215,432 940.8 61.1
(LITAS-MMS)
Source: Bank of Lithuania.
*Concentration ratio is the share of transactions of three banks with the largest volume of payments in total payment transactions.
**The system LITAS operated until 28 January 2007.
The composition of payments of the systems LITAS-RLS and LITAS-MMS is different.
Usually larger value payments are made in real time, i.e. via the system LITAS-RLS. The
share of medium value payments (LTL 5,001 to LTL 1,000,000) and large value payments
(over LTL 1 million) in this system made up 41.4 per cent of total payments of the system
LITAS-RLS in 2007. The share of such payments in the system LITAS-MMS comprised only
12.5 per cent of total payments of the system.
Table 10. Composition of Payments of the Payment Systems LITAS, LITAS-RLS and LITAS-MMS
(Compared to the total volume and the total value of payments; percentages)
System
Payment
Up to LTL 5,000
LTL 5,001–1,000,000
LTL 100,001–1,000,000
Over LTL 1,000,000
transactions
LITAS-RLS Volume
58.6
27.0
8.9
5.5
Value
0.1
0.9
3.4
95.6
LITAS-MMS Volume
87.5
11.5
0.9
0.1
Value
7.6
24.9
25.6
42.0
Source: Bank of Lithuania.
PAYMENT SYSTEMS FOR SETTLEMENTS IN EURO
On 19 November 2007, two new euro real-time gross settlement systems started their
operation: TARGET2-LIETUVOS BANKAS and LITAS-PHA. Settlements via these systems
are an attractive alternative to the correspondent banking relationships. These systems
enable domestic financial institutions to provide better services to their customers mak-
ing settlements in euro. After the launch of new systems, the payment infrastructure of
Lithuania has become essentially ready for operation in the euro area after the adoption
of the euro by our state.
The system TARGET2-LIETUVOS BANKAS is a component system of the Eurosystem’s
payment system TARGET2. The Bank of Lithuania is an operator of this system, however,
it performs only a part of the operator’s functions, i.e. participant administration and
support (including contingencies). The Single Shared Platform of the system is maintained
by 3 national central banks of the Eurosystem: Deutsche Bundesbank, Banque de France
and Banca d’Italia.
Many preparatory works were performed before the launch if the system. The Bank of
56
Lithuania coordinated the preparation of prospective participants and provided consul-
IX. Payment and Securities Settlement Systems
tations to them, monitored their testing, performed central bank actions necessary for
the performance of tests. Also, the Bank of Lithuania prepared and coordinated with
the ECB the system’s legal documentation, concluded necessary agreements with the
central banks of the Eurosystem, participated in the verification of compliance of the
Single Shared Platform of TARGET2 with the functional specifications and took part in
comprehensive tests itself.
At the end of the year, TARGET2-LIETUVOS BANKAS included 5 participants: the Bank
of Lithuania, 2 commercial banks, 1 foreign bank branch and the Central Securities
Depository of Lithuania.
Table 11. Transactions of the Payment System TARGET2-LIETUVOS BANKAS
Year
Volume of transactions
Value of transactions, EUR million
Payment orders submitted
Cross-border
Payment orders submitted
Cross-border
payments
payments
Domestic
Cross-border
Total
Domestic
Cross-border
Total
received
received
2007*
59 1,031
1,090 7,056 24 1,847
1,871 1,854
Source: Bank of Lithuania.
*The system started its operation on 19 November 2007.
The system LITAS-PHA was developed by the Bank of Lithuania. The system LITAS-PHA
establishes conditions for financial institutions to make settlements in euro via the Bank
of Lithuania as a direct participant of the system TARGET2-LIETUVOS BANKAS. Credit
institutions may also receive intraday credits in euro in settlement accounts opened in
the system LITAS-PHA. Differently from the system LITAS-RLS, where intraday credits in
litas are granted in the form of repurchase agreements, a new form of granting credits
in euro has been introduced in the system LITAS-PHA: a credit line secured by eligible
assets, whose procedures of provision comply with the Eurosystem’s monetary policy
guidelines.
At the end of the year, the system LITAS-PHA had 13 participants: the Bank of Lithuania,
8 commercial banks, 2 foreign bank branches, the Central Credit Union of Lithuania and
1 financial brokerage company.
Table 12. Transactions of the Payment System LITAS-PHA
Year
Volume of transactions
Value of transactions, EUR million
Payment orders submitted
Payments
Payment orders submitted
Payments
received from
received from
Domestic
To TARGET2
Total
Domestic
To TARGET2
Total
TARGET2
TARGET2
2007*
55 109
164
1,229 0.6
134.6
135.2 139.5
Source: Bank of Lithuania.
*The system started its operation on 19 November 2007.
MONITORING OF PAYMENT AND SECURITIES SETTLEMENT SYSTEMS
The Bank of Lithuania conducts the oversight of 5 payment systems (LITAS-RLS, LI-
TAS-MMS, TARGET2-LIETUVOS BANKAS, LITAS-PHA and KUBAS)11 and the securities
settlement system12. In 2007, it performed regular monitoring of these systems. It was
determined that the systems operated in a stable manner (without critical incidents),
coped with the increased payment traffic and their operators complied with the require-
11 The Central Credit Union of Lithuania is the owner and operator of the system KUBAS.
12 The Central Securities Depository of Lithuania is the owner and operator of the securities settlement system.
57
Annual Report of the Bank of Lithuania
2007 ments established by the Republic of Lithuania Law on Settlement Finality in Payment
and Securities Settlement Systems.
Before the launch of the system LITAS-PHA, the Bank of Lithuania made an assessment
of its compliance with the Core Principles for Systemically Important Payment Systems
established by the BIS. The assessment was made in accordance with the methodology
approved by the Eurosystem. The results demonstrated that the system LITAS-PHA was
fully compliant with all the said principles applicable to it.
The Bank of Lithuania also participated during the Eurosystem’s assessment of the system
TARGET2, the component of which is the system TARGET2-LIETUVOS BANKAS. The ECB
will publish the results of the TARGET2 assessment in 2008.
The European Commission was informed about the new payment systems (TARGET2-
LIETUVOS BANKAS and LITAS-PHA), and the Official List of Systems and Their Participants
was updated accordingly.
NON-CASH PAYMENTS
In 2007, the volume of non-cash payments in Lithuania was 197 million, of which 193
million (98% of the total volume of payments) were domestic payments and 4 million
(2%) were cross-border payments. The value of these payments amounted to LTL 1,605
billion, of which LTL 1,371 billion (85% of the total value of payments) were domestic
payments and LTL 234 billion (15%) were cross-border payments. Over the year, com-
pared to 2006, the total volume of non-cash payments increased by 25.4 per cent, the
volume of domestic payments went up by 25.4 per cent, and the volume of cross-border
payments grew by 25.9 per cent. The total value of non-cash payments increased by
38.3 per cent, the value of domestic payments went up by 42.7 per cent, and the value
of cross-border payments grew by 16.9 per cent.
Credit transfers accounted for 47.5 per cent of the total volume of non-cash payments
and made up 99 per cent of the total value of these payments. In 2007, the non-paper
based way (by internet, telephone, etc.) of initiating credit transfers was prevalent. It
was used to submit two out of three credit transfers (65.6%). Compared to 2006, the
volume of credit transfers submitted in non-paper based way increased by 24.2 per cent
in 2007, while the volume of credit transfers submitted in paper based form decreased by
0.5 per cent. The overall decline in the volume of credit transfers initiated in paper based
way was determined by a decrease in domestic credit transfers of 0.6 per cent, however,
the volume of cross-border payments increased by 24.4 per cent. Also, a trend has been
observed that this way is usually used to initiate larger value credit transfers (with the
average value of a transaction being LTL 26.5 thousand) than using the non-paper based
way ((with the average value of a transaction being LTL 11.9 thousand).
Compared to 2006, the volume of direct debits increased by 18.6 per cent, while their
value increased by 34.3 per cent in 2007. Direct debits accounted for 3.6 per cent of
the total volume of non-cash payments and made up 0.1 per cent of the total value of
these payments.
Compared to 2006, the volume of payments by payment cards (debit, credit, electronic
money and virtual cards) increased the most over the year (by 39.1 per cent). Payment
cards became the most frequently used payment instrument when making non-cash set-
tlements. The volume of payment card payments constituted 48.7 per cent of the total
58
volume of non-cash payments and 0.7 per cent of the total value of such payments.
IX. Payment and Securities Settlement Systems
Payments by cheque comprised 0.1 per cent of the total volume of non-cash payments
and 0.2 per cent of the total value of these payments. Compared to 2006, the volume
of payments by cheque declined by 7.8 per cent, while their value increased slightly by
2.9 per cent in 2007.
Table 13. Non-Cash Payments
Volume of transactions
Value of transactions
Average value
per transaction,
Million
Compared to 2006;
LTL million
Compared to 2006; LTL thousand
more, less (–), %
more, less (–), %
Total non-cash payments
197.38
25.4
1,605,223
38.3
8.1
Credit transfers
93.77
14.4
1,589,083
38.3
16.9
Non-paper
based
61.49
24.2
733,707
20.2
11.9
Paper
based
32.27
–0.5
855,376
58.6
26.5
Direct debits
7.20
18.6
1,371
34.3
0.2
Payment cards (debit, credit,
electronic money, virtual)
96.13
39.1
11,665
58.9
0.1
Cheques 0.28
–7.8
3,104
2.9
11.0
Source: Bank of Lithuania.
The number of payment cards was 3.9 million at the end of 2007, up by 9.1 per cent,
compared to the end of 2006.
Debit cards accounted for 89.9 per cent of all payment cards. Over the year, the market
share of Visa debit cards decreased by 0.5 percentage point to 70.4 per cent. The market
share of MasterCard debit cards increased by 0.5 percentage point to 29.4 per cent.
Domestic debit cards accounted for only 0.2 per cent of all debit cards.
The number of credit cards has been growing rapidly for several consecutive years. Com-
pared to 2006, the number of credit cards grew by 37.9 per cent in 2007 and accounted
for 8.7 per cent of all payment cards at the end of the year. MasterCard credit cards
prevail in the market, although their share has been decreasing for several consecutive
years and made up 59.9 per cent at the end of the year. The market share of Visa credit
cards increased from 34.1 per cent to 39.5 per cent. In 2007, American Express credit
cards were introduced in the credit card market of Lithuania. At the end of the year, they
accounted for 0.6 per cent of all credit cards.
Table 14. Payment Cards
(End-of-period)
2006
2007
Total payment cards
3,558,245
3,881,362
Bank (debit/credit) cards
3,462,772
3,825,324
Debit
cards
3,218,266
3,488,246
Domestic
cards
7,263
6,867
International
cards
3,211,003
3,481,379
Credit
cards
244,506
337,078
Domestic
cards
0
0
International
cards
244,506
337,078
Electronic money cards
80,625
31,780
Virtual cards
15,177
24,267
Source: Bank of Lithuania.
Footnote: Some payment cards had several functions (e.g. debit and electronic money cards). These cards are included in several
59
respective card categories. Therefore, the sum of individual card categories and the total number of cards does not match.
Annual Report of the Bank of Lithuania
2007 Compared to 2006, the number of electronic money cards declined by 61 per cent in
2007 and accounted for 0.8 per cent of all payment cards at the end of the year. Cards
of this type are no longer distributed and are gradually withdrawn from the market.
There were 1,153 payment cards per 1,000 population in Lithuania at the end of the
year (compared to 1,051 cards in Lithuania and 1,508 cards in the EU in 2006).
Compared to 2006, the volume of payments by debit cards increased by 38.5 per cent,
while the value of such payments went up by 57.8 per cent in 2007. The average value
of a debit card payment was LTL 112.
The average value of a credit card payment was LTL 251. Compared to 2006, the volume
of payments by credit cards increased by 62.6 per cent, while the value of such payments
went up by 67.6 per cent.
Compared to 2006, the volume of virtual card payments increased by 120 per cent, while
their value went up by 109.6 per cent in 2007. These cards are only used for payment
for goods and services purchased online. The number of virtual cards has been increasing
rapidly for several consecutive years.
Table 15. Payments by Payment Cards
Volume of transactions
Value of transactions
Average value per
transaction, LTL
Thousand
Compared to 2006;
LTL million
Compared to 2006;
more, less (–), %
more, less (–), %
Debit cards
89,506
38.5
10,017.4
57.8
112
Credit cards
6,377
62.6
1,600.2
67.6
251
Electronic money cards
31
–93.1
1.9
–89.2
62
Virtual cards
220
120.0
45.0
109.6
204
Source: Bank of Lithuania.
At the end of the year, there were 1,334 ATMs and 29,360 POS-terminals in Lithuania.
Compared to the end of 2006, the number of ATMs and POS-terminals increased by 16.4
per cent and 28.3 per cent, respectively. Although these elements of the payment card
infrastructure increased rapidly, Lithuania still falls behind the EU average. At the end
of 2007, there were 396 ATMs (760 ATM’s in the EU in 2006) and 8,722 POS-terminals
(17,354 in the EU in 2006) per 1,000,000 population in Lithuania.
Table 16. ATMs and POS-terminals
(End-of-period)
2006
2007
Number of
Number of machines per
Number of
Number of machines per
machines
1,000,000 population
machines
1,000,000 population
ATMs
1,146
339
1,334
396
Payment card POS-terminals
22,891
6,763
29,360
8,722
Debit and credit card
POS-terminals
20,787
6,141
27,568
8,190
Electronic money card
POS-terminals
2,104
622
1,792
532
Source: Bank of Lithuania.
60
IX. Payment and Securities Settlement Systems
PREPARATION FOR PARTICIPATION IN THE SINGLE EURO PAYMENTS AREA AND THE
TARGET2-SECURITIES PROJECT
The following projects currently carried out in Europe are important to the financial in-
stitutions of Lithuania: the Single Euro Payments Area (SEPA) and TARGET2-Securities.
SEPA is the area where private customers and enterprises may send and receive domestic
and cross-border euro payments under the same basic conditions, independently from
their area of residence within the EU. Several commercial banks of Lithuania are among the
first European banks offering SEPA payment instruments (credit transfers, bank cards).
The Bank of Lithuania has a dual role in the SEPA project. First, the Bank of Lithuania co-
ordinates the preparation for the introduction of SEPA standards in our country. Second, it
manages national payment systems, which could be used to process transactions using
SEPA payment instruments after SEPA standards are introduced.
At the end of 2007, the Bank of Lithuania, the Association of Lithuanian Banks, com-
mercial banks and foreign bank branches formed the coordination committee for the
SEPA project implementation in our country. The goal of this committee is to work out
a plan and use it while adapting national payment instruments to SEPA standards and
ensure, within its competence, compliance with this plan during the changeover from
existing payment instruments to SEPA payment instruments.
The Eurosystem’s project TARGET2-Securities is the centralised technical platform that will
enable an efficient processing of both domestic and cross-border securities settlements. It
is planned to implement the project by 2013. The ECB Governing Council approved the
TARGET2-Securities feasibility study in 2007. In cooperation with market participants, the
Eurosystem prepared and submitted user requirements for public consultation. Together
with the Central Securities Depository of Lithuania and market participants, the Bank
of Lithuania monitors the implementation of the project and analyses the documents
prepared and the decisions made.
61
Annual Report of the Bank of Lithuania
2007 X. TRANSPARENCY OF ACTIVITIES OF THE BANK OF
LITHUANIA
Transparency in the activities of the Bank of Lithuania – as a principle of its accountability
to the public – is ensured through the implementation of various information and com-
munication measures.
Twice a year, the Bank of Lithuania delivers reports to the Seimas of the Republic of
Lithuania on the implementation of its primary objective, the performance of its func-
tions, and the state of the banking system. In 2007, the Chairman of the Board of the
Bank of Lithuania delivered such reports on 20 March and 16 October.
The Bank of Lithuania continuously provides Information about domestic banking and
the financial system to the press, radio, television, Lithuanian and world news agencies,
and websites. On the Bank of Lithuania’s website (www.lb.lt), resolutions of the Board
are urgently published in Lithuanian and English, financial statistics, payments informa-
tion, financial stability reviews, macroeconomic forecasts, reviews of the activities of
credit institutions operating in Lithuania and their balance sheets and profit and loss
accounts are provided, and information about the Bank’s participation in the ESCB and
its international relations is given.
In the publications of the Bank, information relating to the activities of the Bank of
Lithuania, monetary and banking, balance of payments and financial statistics are pub-
lished, the reader is introduced to litas banknotes and coins and their security features.
The following periodic publications are issued in Lithuanian and English: Annual Report,
Balance of Payments of the Republic of Lithuania (yearbook), Annual Financial Statements,
Banking Statistics Yearbook, Financial Stability Review (annually); in Lithuanian: Main
Bank Activity Indicators (monthly), Balance of Payments of the Republic of Lithuanian
(quarterly), Currency Market (monthly), Monthly Bulletin and the scientific publication
“Monetary Studies”. The publications are distributed free of charge inside and outside
the country, their electronic versions are easily available on the Bank’s website.
The Bank of Lithuania is a part of the ESCB and fulfils this system’s business transparency
requirements in close cooperation with the ECB: it publishes the ECB’s press releases in
Lithuanian, prepares and distributes ECB publications together with the ECB experts. In
2007, the Bank of Lithuania, jointly with the ECB, prepared and published in Lithuanian
the quarterly electronic versions of the ECB’s Monthly Bulletin and issued the following
periodic publications: the ECB’s Annual Report 2006 and Convergence Report May 2007.
The electronic versions of all the above publications are available on the websites of the
Bank of Lithuania and the ECB.
The population of Lithuania was further informed about the euro, Lithuania’s future
currency. On the Bank of Lithuania’s initiative, the trips of media representatives from
the country’s largest cities and regions to Slovenia were arranged in February and May
2007 with the aim of introducing this country’s experience in the adoption of the EU
62
single currency in early 2007. The Bank took part in updating the website (www.euro.lt),
X. Transparency of Activities of the Bank of Lithuania
which informs about Lithuania’s EU membership and preparation for the adoption of the
euro in our country. Under the Partnership Agreement with the European Commission,
an informative publication about the EU single currency was prepared in Lithuanian,
Russian and Polish in the fourth quarter. The publication answers in a popular way the
frequently asked questions about the euro and its adoption in Lithuania. It had a print
run of 1.5 million copies and was distributed in the first quarter of 2008 across Lithua-
nia. Using the funds allocated by the European Commission, 80 stands “The euro in
the European Union” were produced in Belgium. The stand visually describes the way
of the EU Member States towards the single currency, presents the euro banknotes and
the Lithuanian euro banknotes that will appear in circulation after our state becomes
a member of the euro area. These stands are placed in state institutions, they are also
offered to higher schools, municipalities and libraries.
The public is continuously informed about the Bank’s activities by answering the inquiries
received by letters, e-mail and telephone from Lithuanian and foreign citizens.
The Bank of Lithuania encourages in different ways and by various means the economic
education of the population and increases its economic literacy, which enables it to bet-
ter understand and to properly assess financial and economic information received from
different sources. In 2007, employees of the Bank of Lithuania participated in public
discussions, published articles in the press and on the web, delivered lectures to university
students on our state’s macroeconomic situation, finance and banking.
Presentation of new commemorative litas coins is helpful for public information and com-
munication. In 2007, four such events took place. At the Museum of the Bank of Lithuania
in Vilnius, the 10 litas gold commemorative coin issued by the Bank for participation in the
international programme “The Smallest Gold Coins of the World. History of Gold” was
presented to numismatists, artists and journalists; the presentation of the 50 litas silver coin
dedicated to Panemunė Castle was arranged in this castle in Jurbarkas region; the 100 litas
gold commemorative coin from the series dedicated to the millennium of the mention of
the name of Lithuania was presented in the Gediminas Castle tower in Vilnius. Also, the
50 litas silver commemorative coin dedicated to the XXIX Olympic Games in Beijing was
presented in the capital at the Lithuanian National Olympic Committee.
At the end of June 2007, the Museum of the Bank of Lithuania was closed for recon-
struction.
The preparation of the virtual exposition “Money in Lithuania in 1914–1945” in Lithuanian
and English dedicated to everyone interested in banking and the development of money
in Lithuania was completed. It is distributed on DVD and will also be demonstrated at
the renovated Museum of the Bank of Lithuania in the future.
On 18 December, the exposition of the Bank’s Museum was opened in the Bank of
Lithuania buildings in Kaunas. It focuses mainly on the history of the Bank and the na-
tional currency. The exposition is open to the public.
The publication of a quarterly magazine “Apie mus” (“About Us”) aimed at providing
information to the staff of the Bank of Lithuania was started in 2007. It replaced the
previous monthly publication of the same title.
The Bank of Lithuania constantly follows the public opinion on various banking-related
issues and acceptance of information by the public, thereby ensuring bilateral relationship.
Therefore it performs regular monitoring of the media, carries out public opinion polls,
analyses their results and takes them into account while formulating and implementing
the public information and communication policy.
63
Annual Report of the Bank of Lithuania
2007 XI. PARTICIPATION OF THE BANK OF LITHUANIA IN
THE ESCB AND INTERNATIONAL COOPERATION
PARTICIPATION IN THE ESCB
The Bank of Lithuania participates in the work of the General Council of the ECB and
the ESCB committees and their working groups and task forces in the preparation and
adoption of ECB decisions. The General Council approves convergence reports, addresses
the issues relating to the functioning of ERM II and participation of the EU Member States
in this mechanism, and discusses macroeconomic issues, harmonisation of statistics and
other matters. It also submits proposals to the Governing Council on ECB legal acts. The
ESCB committees address various issues within their areas of activity and assist the ECB’s
decision-making bodies in carrying out their tasks.
Table 17. Participation of the Bank of Lithuania in the ESCB Committees
• Accounting and Monetary Income Committee
• Legal Committee
Working Group (WG) on the Allocation of Monetary Income
WG of Financial Law Experts
WG on Accounting Issues and Financial Reporting
• Banking Supervision Committee
• Market Operations Committee
WG on Developments in Banking
Monitoring WG
WG on Macroprudential Analysis
WG on Monetary and Exchange Rate Policy Instruments and
Procedures
WG on Operations Involving Foreign Reserve Assets
WG on Collateral Management
• Banknote Committee
• Monetary Policy Committee
Counterfeit WG
WG on Econometric Modelling
Security WG
WG on Public Finance
Issue WG
WG on Forecasting
• Eurosystem / ESCB Communications Committee
• Payment and Settlement Systems Committee
External Communications WG
Payment Systems Policy WG
WG on the Information Campaign on the Introduction of the
Payment Systems Monitoring WG
Euro
Securities Settlement Systems WG
WG on TARGET2
TARGET Management WG
• Information Technology Committee
• Statistics Committee
Information Systems Security WG
WG on Statistical Information Management
IT Network and Communications WG
WG on External Statistics
IT Applications WG
WG on General Economic Statistics
WG on Monetary Union Financial Accounts
• Internal Auditors Committee
WG on Government Finance Statistics
WG on Monetary, Financial Institutions and Markets Statistics
• International Relations Committee
• Human Resources Conference
64
XI. Participation of te Bank of Lithuania in the ESCB and International Cooperation
Six meetings of the General Council of the ECB were held in 2007. The Bank of Lithuania,
jointly with other members of the ESCB, signed agreements related to joining the pay-
ment system TARGET2, Amendments to the Central Bank Agreement on ERM II and a
new ESCB Agreement on the Co-operation Regarding Transportation of Euro Banknotes
between the Member States.
INTERNATIONAL COOPERATION
Cooperation with the IMF is based on annual consultations under Article IV of the Articles
of Agreement of the International Monetary Fund (IMF). A mission of the IMF’s European
Department which worked in Lithuania in early 2007 performed an assessment of our
country’s economic situation and prospects; at a meeting of the IMF’s Executive Board
in March, Lithuania’s economic consultations took place, and at the end of the year, a
joint mission of the IMF and World Bank paid a visit to Lithuania with the aim of updating
Lithuania’s financial sector assessment programme. The latter mission’s report will be
discussed by the IMF’s Executive Board in 2008.
In 2007, a representative of the IMF’s Monetary and Capital Markets Department assisted
the experts of the Bank of Lithuania in developing and introducing a stress testing model,
and a representative of the Statistics Department worked out methodical recommenda-
tions for the improvement of external debt statistics and an action plan for 2008.
In 2007, representatives of the Bank of Lithuania attended the IMF’s spring and annual
meetings. At the meetings, discussions were held on the IMF’s strategic issues of a quota
and voice reform, a mechanism of income and expenses, the progress in enhancing IMF
surveillance; the results of the first multilateral consultations were discussed.
The Bank of Lithuania actively cooperated with the Nordic-Baltic Constituency (NBC)
in coordinating the NBC’s joint position for the discussion of key issues at the IMF’s
Executive Board and assessing the documentation prepared by the Constituency for the
meetings of full and alternate members of the NBC’s Monetary and Financial Committee
that take place before spring and annual meetings of the IMF’s International Monetary
and Financial Committee.
During the meetings of the Economic and Financial Committee of the EU Council and
its IMF subcommittee, the General Council of the ECB and the International Relations
Committee of the ESCB, representatives of the Bank of Lithuania and their colleagues
from the EU Member States coordinated the joint position on key issues of international
financial environment.
The Chairman of the Board of the Bank of Lithuania attended the annual meeting and
regular bimonthly meetings of the BIS, where the chairpersons of the central banks –
members of the BIS – discuss relevant macroeconomic and financial issues.
Cooperation with foreign central banks, especially with those of the neighbouring coun-
tries, was expanded further. A seminar of the Baltic States’ central banks which was held
in Latvia reviewed recent economic developments and the expansion of the banking and
financial sector of this region.
In 2007, the Bank of Lithuania was an active provider of technical assistance to the central
banks of the countries on the list of beneficiaries of official development aid drawn up
by the Organisation for Economic Cooperation and Development. Consultations were
provided to the experts of the central banks of Armenia, Belarus, Kyrgyzstan and Ukraine
on the issues of commercial bank supervisory system, organisation of inspections and
65
off-site monitoring, internal audit quality assessment, IT audit, and other issues.
Annual Report of the Bank of Lithuania
2007 XII. ADMINISTRATION OF THE ACCOUNTS OF
THE STATE TREASURY AND GOVERNMENT
INSTITUTIONS
In 2007, the Bank of Lithuania, acting as a State Treasury agent as established by the Law
on the Bank of Lithuania, administered accounts of the State Treasury of the Republic of
Lithuania (hereinafter – State Treasury) denominated in litas and foreign currency. The
state monetary resources accumulated on these accounts and used in accordance with
the procedure set forth by the State Treasury Law of the Republic of Lithuania and other
legal acts are managed by the government institutions of the Republic of Lithuania. The
Ministry of Finance manages the bulk of these resources.
During the reporting year, the Bank of Lithuania also administered litas and foreign cur-
rency accounts of other government institutions of the Republic of Lithuania, EU institu-
tions, foreign banks and international financial institutions (hereinafter – institutions). They
were opened with the Bank of Lithuania in observance of the legal acts of the Republic
of Lithuania and the Bank of Lithuania. The conditions of account administration and
the services provided are established by agreements.
At the end of 2007, the Bank of Lithuania administered 270 accounts of the State Treasury
and government institutions (272 in 2006), of which, 83 accounts in litas and 187 accounts
in foreign currency (84 accounts in litas and 188 accounts in foreign currency in 2006).
Fig. 33. Liabilities of the Bank of Lithuania to the State Treasury and
Government Institutions for Their Account Balances
(End-of-period)
66
Source: Bank of Lithuania.
XII. Administration of the Accounts of the State Treasury and Government Institutions
The Bank of Lithuania provides the following services to the State Treasury and govern-
ment institutions: transfer of funds of the State Treasury and government institutions
according to their payment orders (hereinafter – payment orders), crediting of funds
into accounts, currency exchange, acceptance of time deposits in euro and US dollar,
preparation and submission of statements of accounts and of other information. For
some government institutions of the Republic of Lithuania, the service of cash collection
and issue is provided.
In 2007, 716.7 thousand payment orders of the State Treasury and government institu-
tions in various currencies were processed (672.5 thousand in 2006). The bulk of payment
orders in litas were submitted by the Ministry of Finance of the Republic of Lithuania via
the State Budget Accounting and Payment System.
67
Annual Report of the Bank of Lithuania
2007 XIII. ORGANISATIONAL STRUCTURE AND STAFF OF
THE BANK OF LITHUANIA
MISSION, VALUES AND ETHICS
The Bank of Lithuania, in pursuit of its objective defined by the law and performing
the entrusted functions, carries out its mission: ensures sustainability and integrity of
the state’s monetary, credit and payment systems and their stable, reliable and efficient
functioning, thus creating favourable conditions for the optimal development of the
national economy.
The main principles of the activity of the Bank of Lithuania include the following values:
Adherence to the public good: responsibility towards the public is considered an integral
part and a principle of the activity of the Bank.
Competence and quality: when taking decisions, the Bank of Lithuania relies upon pro-
fessional expertise and efficient professional activity of its staff13.
Non-partisan attitudes and professional analysis: the Bank of Lithuania highly esteems
non-partisan attitudes of its staff members, different positive ideas, professional judge-
ment, and comprehensive and careful analysis of information and phenomena.
Integrity: the Bank of Lithuania strives to ensure that staff members, when cooperating
with other institutions and the general public, observe the highest ethical standards:
integrity, objectivity, discreetness and tolerance.
Transparency of activity: the Bank of Lithuania aspires to transparency of activity as a
principle of accountability to the public.
Ethics is regulated by the codes of ethics for the staff and for members of the Board.
They establish the principles of conduct and the standards of professional ethics. The
codes of ethics ensure adequate separation between private and public interests as well
as observance of high standards of professional ethics.
STAFF
On the last working day of 2007, the Bank of Lithuania (including its Kaunas and Klaipėda
branches) employed 842 staff members: 830 on permanent contracts (of which, 12
were on maternal/paternal leave) and 12 on fixed-term contracts. Compared to 2006,
the number of staff members employed on permanent contracts dropped by 0.4 per
cent. Over a year, 4.5 per cent of the staff members left their job and 4.9 per cent were
employed. The highest rate of change was among economists and highest qualification
experts, as they were in demand due to increasing tension in the labour market.
68
13 Bank of Lithuania staff is divided into experts and services personnel.
XIII. Organisational Structure and Staff of the Bank of Lithuania
Fig. 34. Average Number of Employees and Number of Employees on
Permanent Contracts (end-of-year)
Source: Bank of Lithuania.
The average age of employees was 44.4 years. At the end of the year, employees from
41 to 50 years made up the largest proportion of employees by age (31%). Employees
from 31 to 40 years of age made up 29 per cent, those from 51 to 60 – 24 per cent,
and those under 30 – 10 per cent. Employees over 61 years of age formed the smallest
proportion (6%) of the staff.
The average length of service of the employees at the Bank of Lithuania was 11.1 years.
More than a half of employees (64.1%) have been employed at the Bank of Lithuania
for over 10 years.
The proportion of males and females was 46 per cent and 54 per cent respectively.
The Bank employed one professor doctor habilitatus, 18 employees held doctorate de-
grees and 539 employees (64%) had higher education.
ORGANISATIONAL DEVELOPMENTS
At the end of the year, the Bank of Lithuania had 11 departments, 6 autonomous divi-
sions and 2 branches in Kaunas and Klaipėda.
For the implementation of institutional objectives and to ensure efficient use of the human
resources, a number of structural changes were introduced at the Bank of Lithuania in
2007. The Bank devotes much attention to economic research; therefore the Economic
Research Division was established within the Economics Department. With the change
of volumes of loans administered by the Loans Division of the International Relations
Department, the said Division was liquidated and a part of its functions has been trans-
ferred to a division established within the Accounting Department. In an effort to better
present the activities of the Bank of Lithuania and to introduce the Bank’s functions and
role in the domestic economy as well as banking and monetary developments to the
public, the Bank’s Museum has been moved from the Cash Department to the Public
Relations Division.
With a view to ensuring a more efficient participation of representatives of the Bank of
Lithuania in the EU decision-making processes in the areas of economic and monetary
69
Annual Report of the Bank of Lithuania
2007 union, payment systems, financial sector stability, as well as other areas related to central
bank functions the position of an Attaché for Monetary and Banking Affairs was estab-
lished in the Permanent Representation of Lithuania to the European Union.
RISK MANAGEMENT
The main tasks of risk management of the Bank of Lithuania include ensuring uninter-
rupted monitoring and assessment of risk, urgent submission of risk assessment infor-
mation to the Bank’s respective units and the management, and continuous assessment
of the acceptance of the level of the assumed risk for implementing the objectives of
the Bank of Lithuania. Risk management includes the identification, analysis and assess-
ment of risks and controls, continuous monitoring and assessment of Bank of Lithuania
indicators and incident management.
At the Bank of Lithuania, the risk management is formalised and performed in accordance
with the established risk management system. The latter combines three integrated links:
decentralised risk management of each business process, centralised risk management,
and adoption of strategic decisions and identification of risk tolerance level by the Board
of the Bank of Lithuania.
The integrated process of risk management ensures ongoing analysis and improvement
of the Bank of Lithuania risk process and allows structured management of risks. Each
business area of the Bank is analysed on a periodic basis and assessed by carrying out
risk and control self-assessment sessions. For quantitative risk and control assessment,
the Bank of Lithuania uses the information system for monitoring incidents and key
indicators.
Operational risk is the risk of incurring losses due to inappropriate or wrongly executed
business processes, not implemented internal control measures, staff errors, illegal ac-
tions, failures in the operation of information systems or the influence of external events.
Strategic risk may arise from inadequate assessment or the absence of assessment of the
external and internal factors of the Bank of Lithuania environment, where these factors
may affect the implementation of the Bank’s objectives and consistency and continuity of
operations. Financial risk is the risk of incurring losses or receiving smaller-than-expected
profit due to inappropriate activities while managing credit, interest rate and other risks,
or due to financial market shocks. Efficient management of operational, strategic and
financial risks is aimed at avoiding financial losses and negative influence to the reputation
of the Bank of Lithuania, thus ensuring public confidence in the Bank of Lithuania.
STAFF TRAINING
In line with the Rules of Procedure of the Bank of Lithuania, staff training is allotted 3–5
per cent of the payroll budget.
During the implementation of the staff training plan for 2007, employees of the
Bank – experts and the management – improved their professional skills required for the
fulfilment of objectives and tasks raised. An important part of the training consisted of
a programme for the improvement of managerial skills for the management of different
levels and chief experts. It covered a cycle of seminars on the issues of staff performance
assessment, management and motivation, report writing and presentation. The seminars
at the Bank of Lithuania were conducted by domestic and foreign lecturers. Employees
70
of the Bank improved their skills at different training events organised in Lithuania in the
XIII. Organisational Structure and Staff of the Bank of Lithuania
71
Annual Report of the Bank of Lithuania
2007 fields of cost accounting, internal audit, operational risk management, asset valuation,
law, information technologies and development of general competencies.
Employees attended ad hoc seminars organised abroad by ESCB banks on the issues of
banking supervision, payment systems, accounting, statistics, information technologies,
managerial skills improvement, risk and public relations. Five employees of the Bank of
Lithuania developed their professional competencies at the ECB employed on short-term
contracts. They worked as experts in the fields of economics, statistics, accounting and
law.
VLADAS JURGUTIS SCHOLARSHIP
In 2007, Vladas Jurgutis scholarship was awarded to two students from Vilnius University
and Vytautas Magnus University for excellent performance in studies and active partici-
pation in scientific activity.
Vladas Jurgutis scholarship was established in 1990. It is awarded for one academic
year to two full-time students of economics and finance at universities of the Republic
of Lithuania. Candidates for the scholarship are nominated by university faculties with
banking and finance departments. Decisions on awarding the scholarship are taken by
the Board of the Bank of Lithuania. The scholarship is equal to the minimum monthly
wage.
72
XIV. THE ANNUAL FINANCIAL STATEMENTS
OF THE BANK OF LITHUANIA 2007
XIV. The Annual Financial Statements of the Bank of Lithuania 2007
BALANCE SHEET OF THE BANK OF LITHUANIA
LTL million
Notes
31 December 2007
31 December 2006
ASSETS
1. Gold
1
366.22
310.75
2. Claims on foreign institutions denominated
in foreign currency
17,639.89
14,613.86
2.1 Receivables from IMF
2 0.39 0.40
2.2. Deposits, security and other investments
denominated in foreign currency
3 17,639.50 14,613.46
3. Other assets
382.27
445.68
3.1. Tangible and intangible fixed assets
4 145.99 147.31
3.2. Investments into equity instruments
5 20.96 21.10
3.3. Off-balance sheet instruments revaluation differences
6 1.21 –
3.4. Accruals and deferred expenses
7 198.68 261.98
3.5.
Sundry
8 15.43 15.29
Total
18,388.38
15,370.29
LIABILITIES
4. Banknotes and coins in circulation
9
9,168.34
8,056.02
5. Liabilities to domestic credit institutions related to
monetary policy operations denominated in litas
10
3,702.03
2,591.15
6. Liabilities to other domestic institutions
denominated in litas
11
91.84
130.40
7. Liabilities to foreign institutions denominated in litas
12
38.78
8.89
8. Liabilities to domestic institutions denominated in
foreign
currency
13
2,986.96
3,311.75
9. Liabilities to foreign institutions denominated in
foreign
currency
13
1,033.20
227.49
10. Items in the course of settlement
5.96
0.74
11. Other liabilities
14, 6
23.32
17.84
11.1. Off-balance sheet instruments revaluation differences
(6.24)
–
11.2. Accruals and deferred income
24.21
13.04
11.3.
Sundry
5.35
4.80
12. Revaluation accounts
15
181.91
122.90
13. Capital
16
832.21
761.32
13.1. Authorised capital
200.00
164.83
13.2. Reserve capital
632.21
596.49
14. Profit for the year
26
323.83
141.79
Total
18,388.38
15,370.29
75
Annual Report of the Bank of Lithuania
2007 PROFIT AND LOSS ACCOUNT OF THE BANK OF LITHUANIA
LTL million
Notes
2007
2006
Interest
income
18 631.40
350.12
Interest
expense
19 (175.58)
(66.79)
1. Net interest income
455.82
283.33
Realised gains (losses) arising from
financial
operations
20 (19.18)
(40.11)
Unrealised losses from revaluation
21 (13.46)
(26.65)
2. Net result of financial operations and
revaluation
losses
(32.64)
(66.76)
Fees and commissions income
11.20
7.01
Fees and commissions expense
(2.82)
(1.70)
3. Net income from fees and commissions
22
8.38
5.31
4. Dividend income
5
2.43
2.45
5. Other income
2.29
2.01
TOTAL NET INCOME
436.28
226.34
6. Staff costs
23
(51.75)
(50.30)
7. Administrative expenses
24
(16.34)
(18.05)
8. Depreciation and amortisation of tangible
and intangible fixed assets
4
(11.40)
(12.44)
9. Banknote and coin production services
and circulation expenses
25
(32.96)
(3.76)
PROFIT FOR THE YEAR
26
323.83
141.79
The accompanying explanatory notes are an integral part of these Financial Statements.
The 2007 Annual Financial Statements of the Bank of Lithuania were approved on
20 March 2008 by Resolution No. 29 of the Board of the Bank of Lithuania.
Chairman of the Board
Reinoldijus Šarkinas
76
XIV. The Annual Financial Statements of the Bank of Lithuania 2007
EXPLANATORY NOTES TO THE ANNUAL FINANCIAL STATEMENTS OF THE
BANK OF LITHUANIA
PRIMARY OBJECTIVE AND FUNCTIONS OF THE BANK OF LITHUANIA
The primary objective of the Bank of Lithuania is to maintain price stability.
The functions of the Bank of Lithuania are the following:
- to issue the currency of the Republic of Lithuania; formulate and implement monetary policy;
determine the litas exchange rate regulation system and announce the official exchange
rate of the litas;
- to manage, use and dispose of the foreign reserves of the Bank of Lithuania;
- to act as a State Treasury agent;
- in the manner and cases established by laws and other legal acts, to issue and revoke licenses
of credit institutions of the Republic of Lithuania as well as branches of credit institutions
of foreign states, and supervise the activities thereof; it shall also perform other functions
related to the activities of credit institutions established by laws;
- to establish principles and procedures for financial accounting and reporting of credit in-
stitutions of the Republic of Lithuania and branches of credit institutions of foreign states
operating in the Republic of Lithuania;
- to encourage stable and efficient operation of payment and securities settlement systems;
- to collect monetary, banking and balance of payments, statistics, as well as data on Lithuanian
financial and related statistics, implement standards on the collection, reporting and dissemina-
tion of the said statistics and compile the Balance of Payments of the Republic of Lithuania.
After Lithuania’s joining the European Union (EU) on 1 May 2004, the Bank of Lithuania
became a part of the European System of Central Banks (ESCB). Lithuania has been partici-
pating in the Exchange Rate Mechanism II from 28 June 2004.
BASIS FOR PREPARATION AND PRESENTATION OF ANNUAL FINANCIAL STATEMENTS
The Bank of Lithuania prepares its Annual Financial Statements pursuant to the requirements
of Article 49 of the Law on the Bank of Lithuania.
The financial accounting of the Bank of Lithuania is managed and the Annual Financial State-
ments are prepared in accordance with the Law on the Bank of Lithuania, other legislation
of the Republic of Lithuania applicable to the Bank of Lithuania and the Accounting Policy
approved by the Board of the Bank of Lithuania being in line with the accounting and finan-
cial reporting guidelines established by the European Central Bank (ECB)1 to the extent that
such requirements are applicable to a national central bank of the Member State which has
not yet adopted the euro. If a specific accounting treatment is not laid down in the Bank
of Lithuania Accounting Policy and in the absence of the decisions and instructions to the
contrary by the ECB, the Bank of Lithuania shall follow valuation principles in accordance
with international accounting standards as adopted by the European Union relevant to the
activities and accounts of the Bank of Lithuania.
Following the principles of consistency and comparability, the respective comparative financial
data for 2006 have been presented.
1 Guideline of the ECB of 10 November 2006 on the legal framework for accounting and financial reporting in the
European System of Central Banks (ECB/2006/16) (”Guideline of the ECB on accounting and financial reporting”).
77
Annual Report of the Bank of Lithuania
2007 ACCOUNTING POLICY
GENERAL PRINCIPLES
In managing financial accounting and drawing up the financial statements, the Bank of Lithua-
nia follows the following general accounting principles: economic reality and transparency,
prudence, materiality, going concern, accrual, consistency and comparability.
Gold, debt securities and other on-balance sheet and off-balance sheet foreign reserves assets
and liabilities denominated in foreign currency (“financial items”) are recorded in financial
accounting at transaction cost, and in the Annual Financial Statements are presented at the
balance sheet compilation date market price and official exchange rate.
Revaluation takes place on a currency-by-currency basis for foreign exchange and on a code-
by-code basis (i.e. same ISIN number) for securities. Results arising from revaluation of gold
holding, foreign currency and securities are accounted for separately. Unrealised revaluation
losses arising at the end of the financial year from the revaluation of financial items at market
price and official exchange rate, exceeding previous unrealised revaluation gains registered in
corresponding revaluation account, are recognised as expense of the current financial year.
Unrealised losses taken to profit and loss account cannot be reversed in subsequent years
against new revaluation gains of the same financial item due to market price and official
exchange rate changes or covered by the revaluation gains of another type of the financial
item.
With effect from 1 January 2007, the amendments to the Accounting Policy approved by
the Board of the Bank of Lithuania, ensuring the implementation of the requirements of the
Guideline of the ECB on accounting and financial reporting that have become valid from the
same date, were introduced:
- foreign currency purchases and sales affect a respective foreign currency position on the
trade date;
- accrued income and expense denominated in foreign currency are recorded in financial ac-
counts and simultaneously affect the respective foreign currency position on a daily basis;
- realised foreign exchange results (gains or loses) are calculated and booked on a trade
date.
These changes in the Accounting Policy have not been applied retrospectively.
GOLD
Gold holdings are revalued on the last business day of each month on the basis of the gold
market price in US dollars per Troy ounce of gold. This price is translated into litas at the of-
ficial exchange rate of the litas against the US dollar on the revaluation day.
No distinction is made between the gold market price and US dollar revaluation differences for
gold, but a single gold revaluation gain or loss is recorded in the gold revaluation account.
In the event of recognition of unrealised revaluation loss on gold at year-end, the average
cost of gold is correspondingly adjusted to the gold market price prevailing on the last busi-
ness day of the financial year.
Transactions related to gold swaps are accounted for in the same way as repurchase agree-
ments.
78
XIV. The Annual Financial Statements of the Bank of Lithuania 2007
FOREIGN CURRENCY
On-balance sheet and off-balance sheet foreign currency financial items are revalued on each
business day at the official exchange rate prevailing on that day.
Official exchange rates of the litas and main foreign currencies quoted by the Bank of
Lithuania
Litas (LTL) per unit
Currency
Code
31 December 2007
31 December 2006
Euro EUR
3.4528
3.4528
US dollar
USD
2.3572
2.6304
100 Japanese yen
JPY
2.0842
2.2153
Special Drawing Rights
XDR
3.6943
3.9557
The average rate of foreign currency is recalculated on a daily basis in case of an increase of
a respective foreign currency position (if the position is long – in case of the net inflows of
the day, if the position is negative – in case of net outflows of the day).
In the event of recognition of unrealised revaluation losses on any foreign currency at year-
end, the average rate of that currency is correspondingly adjusted to the official exchange
rate on the last business day of the financial year.
SECURITIES
Securities are recorded at cost on the settlement date. Security’s coupon income purchased
is treated as a separate item and is not included in the acquisition cost of the security.
Securities are valued on a monthly basis at market price prevailing at the time of the revalua-
tion date.
The average cost of security holding is recalculated at the end of a business day taking into con-
sideration all purchases made during the day and their costs. Realised gains (losses) for the same
day sales of these securities are calculated on the basis of a new weighted average cost.
The difference between the security acquisition cost and its par value – discount or premium – is
recognised on a straight-line basis as income or expense daily from the purchase settlement
date to the maturity date or sale settlement date.
Discount or premium on coupon securities are amortised according to the straight-line method.
The Internal Rate of Return method however, is used for discount securities.
If at the end of financial year unrealised revaluation losses on valuation of any one security
are recognised as expenses, the average cost of such security is adjusted according to its
market price prevailing on the last business day of the financial year.
Investments into equity instruments held for the Bank’s specific purposes (investments into
equities in order to participate in the activities of a specific enterprise whose equity instruments
are non-marketable and their price is not quoted in the market) are recorded at cost.
79
Annual Report of the Bank of Lithuania
2007 REVERSE TRANSACTIONS
A repurchase agreement is recorded as collateralised inward deposit: the commitment to
repay funds is recorded on the liabilities side of the balance sheet, while the financial asset
that has been given as collateral (sold and repurchased under this agreement) remains on
the asset side of the balance sheet for the period of the transaction.
A reverse repurchase agreement is recorded as a collateralised outward loan on the asset
side of the balance sheet. The collateral acquired during the transaction period is not shown
in the balance sheet and is not revalued.
The difference between the purchase and repurchase price of the collateral acquired under
repurchase and reverse repurchase agreements is recognised on a daily basis as interest income
or expense on a straight – line basis over the transaction period.
TANGIBLE AND INTANGIBLE FIXED ASSETS
Tangible and intangible fixed assets include such assets whose acquisition cost (including VAT)
is not less than LTL 500 and whose useful life is longer than one year. The Museum stocks,
pieces of art and tangible assets included into the list of cultural valuables are also treated
as tangible assets with no regard to their acquisition cost. Tangible and intangible fixed as-
sets are recorded in the balance sheet at cost less accumulated depreciation (amortisation).
Depreciation (amortisation) is calculated on a straight-line basis over the expected useful life
of assets.
Depreciation (amortisation) rates of tangible and intangible fixed assets
Assets
Annual rate, %
Buildings and structures
2.5–10
Cash calculation and computer equipment
10–50
Intangible assets
33–100
Vehicles
20
Furniture, office equipment and other inventory
5–50
If there are signs that the market value of real estate is declining more rapidly than expected
when estimating the useful life of the asset, then at the end of the financial year the value of
such assets is adjusted for recognised losses arising because of their significant impairment.
BANKNOTES AND COINS IN CIRCULATION
Banknotes and coins in circulation are presented at nominal value as liabilities in the balance
sheet. The cost of printing banknotes and minting coins, as well as other expenses associa-
ted with the issue of the national currency into circulation, are recorded as expenses when
incurred, irrespective of when the coins and banknotes were put into circulation.
FOREIGN EXCHANGE TRANSACTIONS
Foreign currency to be received or paid under the foreign exchange spot, forward and swap
transactions affects a respective foreign currency position on a trade day and is recorded in
off-balance sheet accounts from the trade date to the settlement date. The difference in the
value at the spot and forward rates of the transaction is recognised as interest income or
expense and are accrued daily on a straight – line basis over the transaction period.
80
XIV. The Annual Financial Statements of the Bank of Lithuania 2007
FORWARD TRANSACTIONS IN SECURITIES
Forward purchases or sales of securities are recognised in off-balance sheet accounts from
the trade date to the settlement date. The revaluation results on purchased and sold securi-
ties under such type of transactions are recorded in respective on-balance sheet assets or
liabilities accounts.
On the settlement date of forward transactions in securities the difference between the actual
market price and the transaction price is recognised as realised income or expense.
INTEREST RATE FUTURES
Interest rate futures are recorded in off-balance sheet accounts at the nominal value of
contracts from the trade date to the closing or maturity date. Daily changes in the variation
margins of interest rate futures are recognised as realised income or expense.
RECOGNITION OF INCOME AND EXPENSES
Interest income and expense related to financial items denominated in foreign currency (in-
cluding premiums and discounts of securities) are calculated and booked daily in profit and
loss account, regardless of the date when it was received or incurred.
Realised gains and losses arising from financial operations denominated in foreign currency
are taken to the profit and loss account on the trade date, except for the gains and losses
on securities which are recognised on the settlement date.
Unrealised revaluation gains are not recognised as income. Unrealised revaluation losses are
taken to the profit and loss account at the year-end if they exceed previous revaluation gains
related to the corresponding financial item.
The average cost and (or) average rate method is used in order to compute the acquisition
costs for gold, securities and foreign currency. Such acquisition costs are used for the purpose
of calculating of realised and unrealised results.
POST-BALANCE-SHEET EVENTS
Annual Financial Statements are adjusted for post-balance sheet events that occur between
the balance sheet date and the date on which the Annual Financial Statements are approved
by the Board of the Bank of Lithuania, if those events provide evidence of conditions that
existed on balance sheet date and therefore that amounts reported in the Annual Financial
Statements have to be adjusted.
No adjustment is made for the data amounts of the Annual Financial Statements of post-ba-
lance sheet events that are indicative of conditions that arose after the balance sheet date.
Events which are such material that their non-disclosure could influence the economic decisions
of users taken on the basis of the Annual Financial Statements are disclosed in Explanatory
Notes to the Annual Financial Statements.
81
Annual Report of the Bank of Lithuania
2007 FINANCIAL RISK AND ITS MANAGEMENT
The main object of the Bank of Lithuania financial risk is foreign reserves that as at 31 De-
cember 2007 accounted for about 98 per cent of the total assets of the Bank of Lithuania.
In managing foreign reserves the Bank of Lithuania is exposed to market, credit, liquidity,
settlement and operational risks. These risks are managed by an established broad system of
limits for risk exposures and other means aimed to reduce risks.
The main risk faced by the Bank of Lithuania in foreign reserve management that has the
strongest influence on financial results is market risk. Market risk consists of exchange rate
risk and interest rate risk.
Exchange rate risk is eliminated – practically all foreign reserves not related to liabilities in
foreign currencies are invested in the anchor currency. The part of foreign reserves correspon-
ding to liabilities is invested in the currency of the liabilities (see Note 27).
The Bank of Lithuania uses the indicator of the modified duration (MD) as the main tool
for managing interest rate risk. Interest rate risk is managed by setting benchmarks to each
portfolio of foreign reserves, its MD and allowed deviations of portfolio real investment MD
from the MD of the benchmarks. The “value-at-risk” method is also used as an instrument
for interest rate risk management.
Credit risk is managed by establishing strict financial reliability requirements to issuers and
counterparties. In order to reduce credit risk, investment limits are established for issuers,
counterparties and their groups.
Foreign reserve liquidity risk is managed by setting liquidity ratios and a minimal amount of
highly liquid financial instruments in foreign reserves.
Various correspondent account management techniques are applied for managing settle-
ment risk, such as payment queuing, matching of debt and credit turnovers. These measures
facilitate reduction of the risk of loss due to settlement defaults by counterparties.
NOTES
Note 1. Gold
31 December 2007
31 December 2006
Gold holdings in:
Troy ounces
186,339.052
185,840.531
Kilograms
5,795.79
5,780.29
Price of one Troy ounce, USD
833.75
635.70
Value of gold, LTL million
366.22
310.75
Gold holdings in 2007, compared to 2006, changed due to differences in the weight of gold
bars arising on settlements of gold transactions.
The gold held at 31 December 2007 is invested into gold deposits (154.449 ounces) and
gold swaps (31.890 ounces, see Note 13). All gold as at 31 December 2006 was held as
non-invested gold reserve.
82
XIV. The Annual Financial Statements of the Bank of Lithuania 2007
Note 2. Receivables from the International Monetary Fund
The net reserve position in the International Monetary Fund (IMF) holdings belongs to the
Republic of Lithuania, which has been a member of the IMF since 1992.
The Bank of Lithuania performs the function of depository of the IMF funds.
The Republic of Lithuania’s Quota (SDR 144.20 million) has not changed since 1999. A part
of this Quota (25%) was paid in SDR and the residual part was paid in non-marketable and
non-interest bearing Government promissory notes denominated in national currency. The
value of these Government securities issued in favour of the IMF as at 31 December 2007
amounted to SDR 143.65 million.
Net Reserve Position in the IMF
SDR million
31 December 2007
31 December 2006
State Quota of the IMF membership (total value)
144.20
144.20
IMF claims corresponding to Government promissory notes in litas
(143.65)
(143.67)
IMF funds in accounts with the Bank of Lithuania in litas
(0.52)
(0.50)
Net reserve position in the IMF
0.03
0.03
Funds Receivable from the IMF
LTL million
31 December 2007
31 December 2006
Net reserve position in the IMF
0.13
0.14
Balance in SDR account with the IMF
0.26
0.26
Total 0.39
0.40
Note 3. Deposits, Securities and Other Foreign Currency Investments
LTL million
31 December 2007
31 December 2006
Correspondent accounts with foreign banks
26.91
45.90
Claims to ECB in respect of TARGET22
22.09 –
Fixed-term deposits with foreign banks
1,677.02
2,038.55
Debt securities
15,450.72
11,743.78
Reverse repurchase agreements
462.76
785.23
Total 17,639.50
14,613.46
The breakdown of deposits, securities and other investments by currency is shown in Note 27.
On 19 November 2007, the Bank of Lithuania joined TARGET2. The Bank of Lithuania claims
to ECB arose due to operations performed via the system TARGET2 and correspond with
the Bank of Lithuania liabilities to participants of this system – domestic commercial banks
(see Note 13).
2 System TARGET2 is a new generation real-time gross settlements in euro system TARGET (Trans-European Automated
Real-time Gross Settlements Express Transfer system) created by the Eurosystem, operating on the basis of single
platform and providing harmonised services under a unified price system.
83
Annual Report of the Bank of Lithuania
2007 Breakdown of Deposits, Securities and Other Investments Denominated in Foreign
Currency by Issuers and Counterparties
LTL million
31 December 2007
31 December 2006
EU Member States
16,411.78
13,439.34
Japan 631.83
1.57
International financial institutions
445.65
752.35
USA 124.85
254.15
Canada
25.39 –
Swiss Confederation –
166.05
Total 17,639.50
14,613.46
Breakdown of Deposits, Securities and Other Investments Denominated in Foreign
Currency by Maturity3
LTL million
31 December 2007
31 December 2006
Demand
49.00
66.65
Up to 1 year
13,338.81
11,795.55
1–5 years
4,025.05
2,710.19
Over 5 years
226.64
41.07
Total 17,639.50
14,613.46
Note 4. Tangible and Intangible Fixed Assets
LTL million
Intangible
Property, plant and equipment
Total
assets
Buildings
Cash
Vehicles
Other
and
calculation
property,
construc-
and computer
plant and
tion in
equipment
equipment
progress
(including
non-assem-
bled items)
Acquisition cost as at
31 December 2006
13.25
152.28
61.52
5.84
33.55
266.44
Additions in 2007
0.74
1.04
6.45
0.78
1.08
10.09
Disposals in 2007
(0.19) –
(0.06)
(0.33)
(1.52)
(2.10)
Acquisition cost as at
31 December 2007
13.80
153.32
67.91
6.29
33.11
274.43
Accrued depreciation as at
31 December 2006
(12.83)
(24.37)
(49.90)
(4.77)
(27.26)
(119.13)
Depreciation in 2007
(0.66)
(3.57)
(5.21)
(0.51)
(1.45)
(11.40)
Written-off depreciation in 2007
0.19 –
0.06
0.33
1.51
2.09
Accrued depreciation as at
31 December 2007
(13.30)
(27.94)
(55.05)
(4.95)
(27.20)
(128.44)
Net book value as at
31 December 2007
0.50
125.38
12.86
1.34
5.91
145.99
Net book value as at
31 December 2006
0.42
127.91
11.62
1.07
6.29
147.31
84
3 Residual maturity is presented.
XIV. The Annual Financial Statements of the Bank of Lithuania 2007
Note 5. Investments into Equity Instruments
On 1 May 2004 Lithuania joined the EU and consequently the Bank of Lithuania became a
member of the ESCB. In accordance with Article 28 of the Statute of the ESCB and the ECB,
the Bank of Lithuania became the subscriber of the capital of the ECB. The Bank of Lithuania
balance sheet sub-item ”Investments into equity instruments” represents the Bank of Lithuania
participating interest in the ECB.
Subscriptions depend on shares which are fixed in accordance with Article 29.3 of the Statute
of the ESCB and the ECB must be adjusted every five years.
After Bulgaria and Romania’s becoming the EU Member States, the ECB key for capital sub-
scription was recalculated. The share of the Bank of Lithuania in the ECB’s capital is 0.4178
per cent (0.4425% until the recalculation). This share is calculated in accordance with Article
29 of the Statute of the ESCB and the ECB, on the basis of population and GDP data of
EU Member States provided by the European Commission. As Lithuania does not participate
in the euro area, the transitional provisions of Article 48 of the Statute of the ESCB and the
ECB are applied. Consequently, the Bank of Lithuania was required to pay-up a minimal 1.72
million euro contribution of 7 per cent of its subscribed capital to the ECB upon entry to the
ESCB on 1 May 2004. After the recalculation of the ECB capital key as from 1 January 2007,
the Bank of Lithuania minimal contribution was specified and a contribution part of 0.04
million euros was returned to the Bank of Lithuania.
The Bank of Lithuania is a member of the Bank for International Settlements (BIS) with re-
presentation and voting rights equal to 1.070 shares with the acquisition cost of LTL 11.51
million and the nominal value of SDR 5.000 per share. The Bank of Lithuania has paid up 25
per cent of the value of these shares. In 2007 the Bank of Lithuania received dividends of
LTL 1.06 million for these BIS shares (LTL 1.05 million in 2006).
The Bank of Lithuania owns 60 per cent of the shares of the Central Securities Depository of
Lithuania (CSDL) with the acquisition cost of LTL 3.63 million. In 2007 the Bank of Lithuania
received dividends of LTL 1.37 million for them (LTL 1.40 million in 2006).
The Bank of Lithuania holds one SWIFT share with an acquisition cost of LTL 3,249.
Investments into Equity Instruments
LTL million
31 December 2007
31 December 2006
ECB 5.82
5.96
BIS
11.51
11.51
CSDL 3.63
3.63
SWIFT 0.00
0.00
Total 20.96
21.10
Note 6. Off-balance Sheet Instruments Revaluation Differences
Off-balance sheet instruments revaluation differences represent the revaluation by the of-
ficial exchange rate results from foreign exchange transactions shown in the off-balance
sheet accounts (see Note 17). The revaluation difference from foreign currency receivables is
recognised in the asset item of the balance sheet, while revaluation difference from foreign
currency payable is shown in the balance sheet liabilities item (see Note 14).
85
Annual Report of the Bank of Lithuania
2007 Note 7. Accruals and Deferred Expenses
LTL million
31 December 2007
31 December 2006
Coupon purchased with a security
73.23
123.21
Accrued interest income
123.35
136.45
Accrued coupon on securities
116.01
135.07
Interest on fixed-term deposits
4.76
0.90
Interest on reverse repurchase transactions
0.17
0.48
Interest on financial derivatives
2.30 –
Other accrued interest
0.11
0.00
Other accruals
0.69
0.94
Deferred expenses
1.41
1.38
Total 198.68
261.98
Note 8. Sundry
The largest share of this item – LTL 9.95 million (LTL 8.45 million in 2006) – represents loans
issued to the staff of the Bank of Lithuania, out of which loans to the staff for house pur-
chase or repairs amounted to LTL 9.50 million (LTL 7.94 million in 2006), and the balance of
consumer loans was LTL 0.45 million (LTL 0.51 million in 2006).
Note 9. Banknotes and Coins in Circulation
This balance sheet item shows the nominal value of litas banknotes and coins in circulation.
In 2007 the Bank of Lithuania put into circulation LTL 3,122.15 million (LTL 3,005.33 million
in 2006) and withdrew from circulation LTL 2,009.83 million (LTL 1,664.90 million in 2006)
banknotes and coins.
Banknotes and Coins in Circulation
LTL million
31 December 2007
31 December 2006
Banknotes 8,990.42
7,902.95
Coins (including commemorative coins)
177.92
153.07
Total 9,168.34
8,056.02
Note 10. Liabilities to Domestic Credit Institutions Related to Monetary Policy Opera-
tions Denominated in Litas
This item consists of the holdings of required minimum reserves held by commercial banks
in their current accounts with the Bank of Lithuania. The Bank of Lithuania pays interest for
a part of minimum reserves held by commercial banks not exceeding the minimum reserves
ratio required by the ECB for that period (see Note 19), by applying marginal interest rates
of the main Eurosystem refinancing operations set by the ECB.
86
XIV. The Annual Financial Statements of the Bank of Lithuania 2007
Note 11. Liabilities to Other Domestic Institutions Denominated in Litas
LTL million
31 December 2007
31 December 2006
Liabilities to Government institutions
82.08
121.15
Liabilities to other domestic institutions
9.76
9.25
Total 91.84
130.40
Note 12. Liabilities to Foreign Institutions Denominated in Litas
LTL million
31 December 2007
31 December 2006
Balances in current accounts of international organisations
38.67
8.75
Balances in current accounts of foreign banks
0.11
0.14
Total 38.78
8.89
Note 13. Liabilities Denominated in Foreign Currency
Liabilities to Domestic Institutions Denominated in Foreign Currency
LTL million
31 December 2007
31 December 2006
Fixed-term deposits of Government institutions
2,661.50
2,799.48
Balances in current accounts of Government institutions
303.88
512.27
Balances in current accounts of TARGET2 participants
21.58 –
Total 2,986.96
3,311.75
Liabilities to Foreign Institutions Denominated in Foreign Currency
LTL million
31 December 2007
31 December 2006
Balances in current accounts
112.76
227.49
Repurchase agreements
868.35 –
Gold swaps
52.09 –
Total 1,033.20
227.49
Breakdown of Liabilities to Foreign Institutions Denominated in Foreign Currency by
Counterparties
LTL million
31 December 2007
31 December 2006
EU Member States
920.44 –
International organisations
112.76
227.49
Total 1,033.20
227.49
87
Annual Report of the Bank of Lithuania
2007 Breakdown of Liabilities Denominated in Foreign Currency by Maturity
LTL million
31 December 2007
31 December 2006
Demand 438.09
739.62
Up to 1 year
3,581.94
2,799.48
Without term
0.13
0.14
Total 4,020.16
3,539.24
Note 14. Other Liabilities
LTL million
31 December 2007
31 December 2006
Off-balance sheet Instruments
Revaluation Differences (see Note 17)
(6.24) –
Accruals and deferred income
24.21
13.04
Accrued interest expenses
20.64
9.69
Other accruals
3.37
3.15
Deferred
income
0.20
0.20
Sundry 5.35
4.80
Balances in current accounts
3.95
3.91
Subsidies
0.73
0.73
Other amounts payable
0.67
0.16
Total 23.32
17.84
Note 15. Revaluation Accounts
LTL million
31 December 2007
31 December 2006
Revaluation accounts
Gold
177.39
122.82
Securities
4.51
0.05
Foreign
currency
0.01
0.03
Total 181.91
122.90
Revaluation accounts represent unrealised gains arising from revaluation of gold, securities
and foreign currency.
Unrealised revaluation losses of separate securities and foreign currencies, when exceeding
previous corresponding revaluation gains, at the end of 2007 were recognised as expenses
(see Note 21).
Note 16. Capital
LTL million
31 December 2006
Increase
31 December 2007
Capital
Authorised
capital
164.83
35.17
200.00
Reserve
capital
596.49
35.72
632.21
Total 761.32
70.89
832.21
88
XIV. The Annual Financial Statements of the Bank of Lithuania 2007
Note 17. Off-balance sheet Instruments
Foreign Exchange Transactions
LTL million
Value on a
Value on
Value adjustment
trade date
31 December 2007
differences
Swaps
Receivables
644.62
645.83
1.21
Payables
644.62
638.39
(6.23)
Forward agreements
Receivables
1.25
1.25
–
Payables
1.25
1.24
(0.01)
Spot transactions
Receivables
880.46
880.46
–
Payables
880.46
880.46
–
Total by foreign ex-
Receivables
1,526.33
1,527.54
1.21
change transactions
Payables
1,526.33
1,520.09
(6.24)
For the purposes of foreign reserve management, the Bank of Lithuania used interest rate
futures and forward transactions in securities in 2007.
As at 31 December 2007, interest rate futures at their nominal value accounted for:
LTL 8,852.98 million of notional sales and LTL 241.70 million of notional purchases.
As at 31 December 2007, the Bank of Lithuania did not have any forward transactions in
securities.
The impact of interest rate futures and forward transactions in securities on the Bank of
Lithuania financial results is disclosed in Note 20.
Note 18. Interest Income
LTL million
2007
2006
Interest income on:
Investments in securities
567.85
299.83
Fixed-term deposits with foreign banks
50.17
28.59
Reverse repurchase agreements
8.19
9.83
Financial
derivatives
2.40
9.46
Balances of accounts with foreign banks
2.31
2.08
Other interest income
0.48
0.33
Total 631.40
350.12
Note 19. Interest Expense
LTL million
2007
2006
Interest expense on:
Fixed-term deposits of Government institutions
107.53
39.94
Balances in current accounts of Government institutions
9.23
5.62
Interest on required minimum reserves of credit institutions
33.08
19.72
Liabilities related to repurchase agreements
24.25
1.51
Other interest expense
1.49
–
T
89
otal 175.58
66.79
Annual Report of the Bank of Lithuania
2007 Note 20. Realised Gains (Losses) Arising from Financial Operations
LTL million
2007
2006
Realised gains (losses) arising from:
Sale of securities
(6.47)
(46.24)
Sale of foreign currency
0.08
0.21
Interest rate futures
(14.36)
5.92
Forward transactions in securities
1.57 –
Total (19.18)
(40.11)
Note 21. Unrealised Losses from Revaluation
LTL million
2007
2006
Unrealised revaluation losses on:
Securities
13.43
26.65
Foreign
currency
0.03
0.00
Total 13.46
26.65
Note 22. Net Income from Fees and Commissions
LTL million
2007
2006
Income from:
Settlement
services
6.95
5.90
Sales of numismatic valuables
3.51
0.39
Usage of the Loan Risk Database
0.35
0.30
Auctions of securities
0.13
0.16
Other
services
0.26
0.26
Total 11.20
7.01
Expenses relating to fees and commissions
(2.82)
(1.70)
Net income from fees and commissions
8.38
5.31
Note 23. Staff Costs
LTL million
2007
2006
Expenses on wages and salaries
39.55
38.45
to the members of the Board
1.14
1.02
to the heads of structural divisions
2.31
2.20
to other staff of the Bank of Lithuania
36.10
35.23
Contributions to State Social Insurance Fund
12.20
11.85
Total 51.75
50.30
The Board of the Bank of Lithuania consists of Chairman of the Board of the Bank of Lithuania,
two Deputy Chairmen and two Board Members. At the end of 2007, eleven departments, six
independent divisions and two branches carried out activities at the Bank. The total number
of employees was 842 (837 employees in 2006).
90
XIV. The Annual Financial Statements of the Bank of Lithuania 2007
Note 24. Administrative Expenses
LTL million
2007
2006
Expenses
Maintenance
expenses
6.56
6.11
Information subscription expenses
1.66
1.67
Business
trips
2.14
1.76
Mail and communication
1.72
1.63
Training of the staff
1.42
1.35
Public relations
0.96
0.85
Library acquisitions and press subscriptions
0.18
0.18
Other
1.70
4.50
Total 16.34
18.05
Note 25. Banknote and Coin Production Services and Circulation Expenses
LTL million
2007
2006
Banknote production expenses
18.36 –
Coin minting expenses
14.14
3.45
Cash circulation expenses
0.46
0.31
Total 32.96
3.76
Note 26. Distribution of the Profit of the Bank of Lithuania
In accordance with the requirements of Article 23 of the Law on the Bank of Lithuania on
the allocation of the profit of the Bank of Lithuania, the profit for the financial year of 2007
is allocated by paying 50 per cent contribution of the profit for the financial year to the state
budget, the remaining part of the profit for the financial year is allocated to the reserve capital.
In 2007 the authorised capital formation was completed.
LTL
2007
2006
2005
Transfer to the state budget
161,914,094
70,895,684
63,596,173
Allocation to the authorised capital
of the Bank of Lithuania
–
35,171,028
31,798,087
Allocation to the reserve capital
of the Bank of Lithuania
161,914,094
35,724,656
31,798,087
91
Annual Report of the Bank of Lithuania
2007 Note 27. Assets and Liabilities of the Bank of Lithuania by Currencies
LTL million
LTL
EUR
USD
JPY
XDR
XAU
Other
Total
31
December
2007
ASSETS
Gold
– – – – –
366.22 –
366.22
Claims to foreign institutions
denominated in foreign currency
– 16,941.41
64.63
632.60
0.39
–
0.86 17,639.89
Receivables from the IMF
–
–
–
–
0.39
–
–
0.39
Debt
securities
–
14,765.70 53.23 631.79
–
–
–
15,450.72
Deposits and other investments
–
2,175.71
11.40
0.81
–
–
0.86
2,188.78
Other assets
175.11
206.76
0.35
0.00
–
–
0.05
382.27
Total
assets
175.11
17,148.17
64.98
632.60 0.39
366.22 0.91
18,388.38
LIABILITIES
Banknotes and coins in circulation
9,168.34
–
–
–
–
–
–
9,168.34
Liabilities to domestic credit institutions
related to monetary policy
operations denominated in litas
3,702.03
–
–
–
–
–
–
3,702.03
Liabilities to other domestic
institutions denominated in litas
91.84
–
–
–
–
–
–
91.84
Liabilities to foreign institutions
denominated in litas
38.78
–
–
–
–
– – 38.78
Liabilities to domestic institutions
denominated in foreign currency
–
2,981.04
4.38
0.87
0.15
–
0.52
2,986.96
Liabilities to foreign institutions
denominated in foreign currency
–
981.11
52.09
–
–
–
–
1,033.20
Items in the course of settlement
5.96
–
–
–
–
–
–
5.96
Other
liabilities
7.85
20.90
0.86
(6.29) – – –
23.32
Revaluation
accounts
177.40 4.22 0.24 0.05
–
–
–
181.91
Capital
832.21 – – – – – –
832.21
Profit
323.83 – – – – – –
323.83
Total liabilities
14,348.24
3,987.27
57.57
(5.37)
0.15
–
0.52 18,388.38
NET ON-BALANCE SHEET
ASSETS (LIABILITIES)
(14,173.13) 13,160.90
7.41
637.97
0.24
366.22
0.39
0.00
OFF-BALANCE SHEET
ASSETS INCLUDED
INTO CURRENCY POSITION
Receivables under foreign
exchange transactions
353.91
1,
172.42 – – – – –
1,526.33
OFF-BALANCE SHEET
LIABILITIES INCLUDED
INTO CURRENCY POSITION
Payables under foreign exchange
transactions
526.55 353.91 7.03 638.84
–
–
–
1,526.33
OFF-BALANCE SHEET ASSETS
(LIABILITIES) INCLUDED
INTO CURRENCY POSITION
(172.64) 818.51 (7.03) (638.84)
–
–
–
0.00
NET ASSETS (LIABILITIES)
(14,345.77) 13,979.41
0.38
(0.87)
0.24
366.22
0.39
0.00
31
December
2006
Total
assets
176.81
12,619.55
2,260.88 1.63 0.40
310.75 0.27
15,370.29
Total
liabilities
11,820.53 1,286.58 2,261.38
1.63
0.16
–
0.01 15,370.29
92
NET ASSETS (LIABILITIES)
(11,643.72) 11,332.97
(0.50)
0.00
0.24
310.75
0.26
0.00
Bank of Lithuania
Gedimino pr. 6, LT-01103 Vilnius, Lithuania
Tel. +370 5 268 0235
Fax +370 5 212 6005
E-mail: info@lb.lt
http://www.lb.lt
Annual Report of the Bank of Lithuania 2007
Order No. 6408
Published by the Bank of Lithuania
Printed by UAB “Baltijos kopija”
Kareiviø g. 13B, LT-09109 Vilnius, Lithuania
