Financial stability risk mitigation

The main features characterising the modern financial system architecture are integration, innovations and complexity of the financial system.. This enables allocation of financial resources and manage the arising risks more effectively, at the same time, however, increasing the sensitivity of the financial system to systemic shocks. 

Crises of financial systems disrupt the smooth functioning of payment systems, decrease the possibilities of enterprises to finance investment projects and can fuel mistrust in financial institutions. Due to the said reason, the prevention and management of the crises of financial systems are integral functions of the modern central banks.  

Preventive efforts of the Bank of Lithuania in the field of crisis management included supervision of commercial banks, analysis of the entire banking system operations, identification of potential external and internal shocks for the financial system, and evaluation of their impact onindividual financial institutions and the entire financial system.

The experience of foreign countries proves that problems in the financial sector may arise unexpectedly and can spread very quickly. Speed of the crisis spread depends on the level of interdependence between banks and other financial institutions: the faster it is, the higher is the likelihood of systemic crisis. In order to mitigate the impact of crises, it is important to identify the reasons that originate them, predict their course and possible outcome. The Bank of Lithuania continuously improves the models of the analysis of the financial system and applies the most advanced stress testing models to assess the systemic risk.