Prudential requirements to banks

Prudential Requirements to Banks

The Law of the Republic of Lithuania on Banks establishes the prudential requirements to banks that are compulsory to all commercial banks in Lithuania. The size of ratios and their calculation methodologies are set by the Bank of Lithuania. The following prudential requirements have been set: capital adequacy, liquidity, maximum open position in foreign currency and precious metals, maximum exposure and large exposure. The Bank of Lithuania may adopt legal acts establishing other requirements that do not contradict the recommendations of the Basel Committee on Banking Supervision and European Union directives.

- Capital adequacy ratio specifies that the ratio of eligible bank capital and risk-weighted assets and off-balance sheet liabilities may not be lower than 8 per cent.

- Liquidity ratio specifies that the ratio of a bank’s liquid assets and current liabilities may not be lower than 30 per cent.

- Maximum open position in foreign currency and precious metals: the overall open position in foreign currency (excluding euro) may not exceed 25 per cent of bank capital, whereas the ratio of the open position in one currency (excluding euro) or precious metals may not exceed 15 per cent of bank capital.

- Maximum exposure ratio means that the amount of loans granted to a single borrower may not exceed 25 per cent of bank capital. The amount of loans granted by the bank to its parent company, other subsidiary companies of this parent company or its own subsidiary companies may not exceed 75 per cent of bank capital for each borrower, if the Bank of Lithuania conducts the supervision of the whole financial group on a consolidated basis. If the Bank of Lithuania does not conduct the supervision of the whole financial group on a consolidated basis, the amount of loans granted by the bank to its parent company, other subsidiary companies of this parent company or its own subsidiary companies may not exceed 20 per cent of bank capital for each borrower.