ANNUAL REPORT OF THE BANK OF LITHUANIA 2010The average annual inflation rate in Lithuania was 1.2 per cent in 2010 – noticeably lower, compared to the inflation in 2009, and lower

VILNIUS

2011

ANNUAL REPORT OF THE BANK OF LITHUANIA

2010

© Lietuvos bankas, 2011

ISSN 1392-4702ISSN 1648-9039 (ONLINE)

The Annual Report was prepared on the basis of the data from the Bank of Lithuania, Statistics Lithuania, the European Central Bank, Eurostat, the International Monetary Fund, Bloomberg and other sources.

ContentsFOREWORD / 7

I. REVIEW OF THE ECONOMY AND FINANCE / 11

Global Economic Developments / 11

Development of the Economy of Lithuania / 13

Real Sector / 13

Aggregate Demand / 13

Aggregate Supply / 14

External Sector / 16

Current Account Balance / 16

Foreign Trade / 17

Balance of Capital and Financial Accounts / 18

Box. Contributions to The European Union Budget and Funds Received from it in the

Balance of Payments of the Republic of Lithuania / 19

Prices and Costs / 21

Reasons Behind the Price Developments / 21

Core Inflation / 21

Food Prices / 22

Administered Prices / 23

Prices of Fuels / 23

Labour Market / 24

Employment and Unemployment, Reasons Behind Unemployment / 24

Wages / 26

General Government Finances / 26

Income, Expenditure and Deficit / 26

Debt / 28

Household Finance / 28

Income and Financial Assets of Households / 28

Expenses and Financial Liabilities of Households / 30

Households Driven Risk to Credit Institutions / 32

Loan and Deposit Developments and Interest Rates / 32

Loans and Interest Rates on Loans / 32

Deposits and Interest Rates on Deposits / 36

II. FUNCTIONS OF THE BANK OF LITHUANIA / 39

Exchange Rate and Monetary Policy / 39

Exchange Rate Policy / 39

Monetary Policy Instruments / 40

Required Reserves and Banking System Liquidity Development Factors / 41

Foreign Exchange Operations / 42

Supervision of Credit Institutions and their Operations / 43

Supervision of Credit Institutions / 43

Supervision of Credit Institutions: Main Trends / 44

Review of Credit Institutions’ Activities / 46

Banking Activities Review / 46

Key Indicators of the Banking System / 46

Increase in Bank Capital / 50

Banks by Market Share / 51

Bank Activity Risk Review / 51

Credit Risk / 51

Liquidity Risk / 53

Market Risk / 54

Operational Risk / 55

Operations of the Central Credit Union of Lithuania / 55

Review of Credit Union Operations / 56

Cash Management / 57

Currency Issue and Withdrawal / 57

Banknotes and Coins in Circulation / 58

Collectors (Commemorative) Coins / 60

Counterfeit Banknotes and Coins / 63

Foreign Reserve Management / 63

Official Foreign Reserves / 63

Foreign Reserve Functional Parts and Key Management Principles / 64

Liquidity of Foreign Reserves / 65

Safety of Foreign Reserves / 65

Return on Foreign Reserves / 67

Statistics / 68

Payment and Securities Settlement Systems / 70

Litas Payment Systems / 70

Euro Payment Systems / 71

Oversight of Payment and Securities Settlement Systems / 73

Non-Cash Payments / 73

Single Euro Payments Area Project / 75

TARGET2-Securities Project / 76

Administration of the Accounts of the State Treasury and Institutions / 76

Participation of the Bank of Lithuania in the ESCB and International Cooperation / 77

Participation in the ESCB / 77

Participation in the Activities of EU Institutions / 78

Cooperation with the International Monetary Fund / 79

Cooperation with Foreign Central Banks and Financial Supervisory Authorities / 80

Cooperation in Other Areas / 82

III. ORGANISATION OF ACTIVITIES OF THE BANK OF LITHUANIA / 83

Staff and Organisational Structure / 83

Mission, Values and Ethics / 83

Staff / 84

Organisational Development and Social Dialogue / 84

Staff Training / 86

Vladas Jurgutis Award and Scholarship / 86

Transparency of Activities and Public Communication / 86

IV. THE ANNUAL FINANCIAL STATEMENTS OF THE BANK OF LITHUANIA 2010 / 91

ANNEXES / 113

Resolutions Adopted by the Board of the Bank of Lithuania Published in

Valstybės žinios (Official Gazette) / 113

Banknotes and Coins in Circulation / 115

Glossary / 119

List of tables and charts

Table 1. Real GDP growth and inflation in selected regions of the world / 11

Table 2. Bank loan portfolio changes / 34

Table 3. Changes of deposits held with banks / 37

Table 4. Monetary policy instruments of the Bank of Lithuania / 41

Table 5. Net purchase of foreign currency from the Bank of Lithuania (–) or net sale to the

Bank of Lithuania / 43

Table 6. Loan portfolio quality indicators / 52

Table 7. Net currency issue or withdrawal (–) / 57

Table 8. Banknotes and coins in circulation / 60

Table 9. Composition of foreign reserves net of liabilities in foreign currencies / 66

Table 10. MD of foreign reserves and individual portfolios / 67

Table 11. Value-at-risk indicator of foreign reserves / 67

Table 12. Return on foreign reserve portfolios / 68

Table 13. Transactions of LITAS-RLS and LITAS-MMS / 71

Table 14. Composition of payments of LITAS-RLS and LITAS-MMS / 71

Table 15. Transactions of TARGET2-LIETUVOS BANKAS / 72

Table 16. Transactions of LITAS-PHA / 73

Table 17. Non-cash payments / 74

Table 18. Payment cards / 74

Table 19. Payments by payment cards / 75

Table 20. Participation of the Bank of Lithuania in the ESCB Committees and their Working Groups / 78

Table 21. Publications of the Bank of Lithuania in 2010 / 87

TABLES

CHARTS

Chart 1. Key interest rates of central banks / 12

Chart 2. Contributions to real GDP growth (by expenditure approach) / 14

Chart 3. Contributions to real GDP growth (by production approach) / 15

Chart 4. Components of the current account balance / 16

Chart 5. Foreign trade balance / 17

Chart 6. Current account deficit financing sources / 18

Chart 7. Contributions to the annual inflation based on the Harmonised Index of Consumer Prices / 21

Chart 8. Contributions of the prices of food, beverages and tobacco to the annual inflation / 22

Chart 9. Contribution of administered prices to the annual inflation / 23

Chart 10. Global oil prices and fuel prices in Lithuania / 24

Chart 11. Main indicators of employment / 25

Chart 12. Wage developments / 26

Chart 13. General government income, expenditure and balance / 27

Chart 14. Contributions to the development of financial assets of households / 29

Chart 15. The ratio of household (net) loans to GDP in Lithuania and selected EU Member States / 30

Chart 16. New loans to households and their interest rates / 31

Chart 17. Interest rates paid by households for loans / 31

Chart 18. Dynamics of the loan portfolio of the EU banking system / 33

Chart 19. Dynamics of the portfolio of loans to non-financial corporations / 35

Chart 20. Dynamics of the portfolio of loans to households / 35

Chart 21. Interest rates on loans to the private sector and the portfolio development by currency / 36

Chart 22. Interest rates on deposits of the private sector and the dynamics of deposits by currency / 37

Chart 23. Litas and euro interest rate spreads / 40

Chart 24. Bank reserves in litas held at the Bank of Lithuania / 42

Abbreviations and other explanations

CCUL Central Credit Union of Lithuania

ECB European Central Bank

ERM II Exchange Rate Mechanism II

ESCB European System of Central Banks

EU European Union (Community)

EUR euro

EURIBOR Euro Interbank Offered Rate

Eurostat Statistical Office of the European Communities

GDP gross domestic product

IMF International Monetary Fund

Lt, LTL Lithuanian litas

MFI monetary financial institution

SEPA Single Euro Payments Area

US, USA United States of America

USD US dollar

VILIBOR Vilnius Inter-Bank Offered Rate, average interbank interest rates at which banks are willing (ready) to lend funds in litas to other banks

Chart 25. Foreign exchange trade of the Bank of Lithuania with commercial banks and other depositors / 43

Chart 26. Dynamics of assets, loans and deposits of the banking system / 47

Chart 27. Composition of bank assets / 48

Chart 28. Composition of bank liabilities / 48

Chart 29. Net profit (loss) of banks / 49

Chart 30. Market share of banks by assets / 51

Chart 31. Structure of capital required to absorb market risk / 54

Chart 32. Performance indicators of credit unions / 56

Chart 33. Litas in circulation / 57

Chart 34. Value of litas banknotes in circulation / 58

Chart 35. Number of litas banknotes in circulation / 58

Chart 36. Number of litas and centas circulation coins in circulation / 59

Chart 37. 10 litas silver coin dedicated to music (from the series “Lithuanian Culture”) / 61

Chart 38. 500 litas gold coin dedicated to the 600th anniversary of the Battle of Grunwald / 61

Chart 39. 50 litas silver coin dedicated to the 600th anniversary of the Battle of Grunwald / 61

Chart 40. 1 litas coin from the alloy of copper and nickel dedicated to the 600th anniversary of

the Battle of Grunwald / 62

Chart 41. 50 litas silver coin dedicated to Biržai Castle (from the series “Historical and Architectural

Monuments of Lithuania”) / 62

Chart 42. 50 litas silver coin dedicated to the Lithuanian nature / 62

Chart 43. Numismatic set of circulation coins of 2010 / 63

Chart 44. Foreign reserves / 64

Chart 45. Breakdown of investment by financial instrument / 65

Chart 46. Composition of foreign reserves by rating / 66

Chart 47. Number of employees employed at the Bank of Lithuania on permanent contracts / 84

Chart 48. Organisational Chart of the Bank of Lithuania / 85

Totals / percentages in some tables and charts may not add up due to rounding (“Total” and 100%).

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FOREWORD

In 2010, the global economy started to recover after the deep recession caused by the global financial crisis. Signs of a marginal growth of consumption and investment and the intensification of the international trade started to emerge. In particular, the global economy strengthened in the first half of the year. As some countries initiated fiscal consolidation and the impact of stimulus measures weakened, the economic development slowed down slightly in the second half of the year, however, it became more sustainable.

Real GDP of Lithuania grew by 1.3 per cent. Our economy was mostly supported by increased foreign demand. Particularly strong growth in exports of goods and services, industrial production and transport services was observed in 2010. Recovery of industrial production and improved expectations of the enterprises helped to restore more intensely the inventories, which shrank somewhat during the economic downturn. Growing in-ventories were the key factor supporting the growth of real GDP.

Domestic demand was particularly weak. It started to grow somewhat only in the second half of the year. Private consumption was restrained by the difficult labour market situa-tion. In 2010, average wages and the number of the employed continued to decline. Wary expectations of households encouraged saving, therefore private consumption remained restrained. Domestic investment grew marginally due to the increase in investment in engineering constructions and production facilities in the public sector.

Owing to sluggish domestic demand and favourable movements in foreign demand, the current account continued to show surplus in 2010. Notwithstanding the deterioration in the balance of goods, the deficit remained noticeably smaller than before the economic downturn. The surplus in the trade in services grew markedly in 2010. Same as earlier, the current account balance was positively affected by current transfers. They consisted basically of the EU structural aid funds and remittances by emigrants to Lithuania.

The average annual inflation rate in Lithuania was 1.2 per cent in 2010 – noticeably lower, compared to the inflation in 2009, and lower than in the EU and the euro area. Inflation was mostly influenced by external factors, whereas the prices of industrial goods and market services – related mainly to domestic demand – were lower, compared to those registered one year ago.

Along with the growing economic activity, the financial situation of the private sector improved; however, notwithstanding historically low interest rates, households and non-financial enterprises assessed future prospects cautiously and tended to avoid additional financial liabilities. The record interest rates on deposits paid in 2009 decreased fivefold in 2010. Nonetheless, depositors remained active and increased their savings in banks by one-tenth.

High unemployment and small wages reduced the capability of households to repay credits. However, notwithstanding the difficult financial situation of households, the quality of the portfolio of loans to individuals was the highest, compared to the quality

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of loans to other debtors of the banks. In 2010, households increased their financial as-sets – mostly by hoarding cash and transferable deposits – and at the same time reduced their liabilities to banks.

The primary objective of the Bank of Lithuania, which is to seek price stability, is im-plemented by employing a strategy of the fixed exchange rate of the litas. Under the conditions of the fixed exchange rate of the litas, the Bank ensures free exchange of litas into euro and vice versa, therefore it does not regulate the litas market interest rates and the amount of litas in circulation, as the latter is determined by the demand for litas. The fixed exchange rate of the litas helps to indirectly attain the primary objective in the long term, i.e. it maintains export and import prices at a more stable level, thereby promoting international trade, forms expectations of low inflation and supports confidence in the economic policy of Lithuania.

Since 28 June 2004, Lithuania has been participating in ERM II and fulfilling its unila-teral obligation to maintain a fixed exchange rate regime and a stable exchange rate of the litas against its anchor currency euro. Monetary policy instruments of the Bank of Lithuania aim at maintaining a stable exchange rate of the litas against the euro and help to ensure adequate liquidity in the banking system. Same as earlier, the Bank of Lithuania exchanged litas into anchor currency without restrictions for the banks oper-ating in our country, applied reserve requirements and provided the overnight lending facility for banks.

Spreads between litas and euro interest rates continued to shrink and achieved the level observed before the crisis at the end of October 2008. That suggested strengthened con-fidence in the litas, financial sustainability of the state and the outlook for the economy of Lithuania. Long-term interest rate spread decreased at a slower rate, compared to the money market interest rate spread, owing to still remaining uncertainty about the future economic development, as well as fiscal and structural policy.

Along with emerging signs of the economic recovery, positive tendencies could also be observed in the activities of the banking sector. The banks became more active in granting credits, a rapid decline in the volumes of bank assets and loans recorded in the previous year slowed down, whereas in individual periods even growth was recorded. The amount of the attracted deposits continued to increase rapidly, which in turn enabled banks to reduce dependence from the financing provided by foreign sources, including parent banks.

Along with the improving macroeconomic situation of the country, loan portfolio quality ratios, which rapidly deteriorated in the previous year, stabilised in 2010. Losses related to loan impairment decreased noticeably, while net interest income, which accounts for the bulk of the total income, was increasing in the course of 2010. The said fact had positive influence on the performance of the banking sector: its activity was profitable in the second half of the year after a nearly two-year period, however previously incurred losses did not allow earning profit over the year as a whole.

While performing the supervision of credit institutions, the Bank of Lithuania continued to apply preventive measures. The focus was placed on the assessment of the quality of risk management by banks and capital enlargement. While managing the risk, banks proceeded with the internal capital adequacy assessment process, during which they assessed the underlying risk, calculated the capital requirement for covering this risk and, taking into consideration the banking activity forecasts, provided for the possibili-ties to increase the capital. The Bank of Lithuania performed the Supervisory Review and Evaluation Process (SREP) of banks and assessed whether banks managed risk in a

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proper way and whether they had sufficient capital to cover it. Also, the Bank identi-fied the existing and potential problems and deficiencies of the internal control and risk management systems.

In 2010, banks increased their capital. Over the year, the capital adequacy ratio grew by 1.4 percentage points, i.e. to 15.6 per cent. This development was influenced not only by the increase in bank capital, but also by the decrease in the risk assumed by banks – the capital requirement for credit risk coverage decreased in 2010.

Much attention was paid to bank liquidity risk management. Banks formed liquidity buffers, allowing them to withstand unfavourable conditions for the term no shorter than one month. The situation in the banking sector in terms of liquidity was stable. The banking system complied with the liquidity ratio and even exceeded it noticeably.

The biggest share of the banking sector is comprised of the subsidiaries and branches of foreign banks. When performing the supervision thereof, the Bank of Lithuania cooper-ates with the supervisory authorities of the financial sector of the EU Member States and participates in the colleges established for the supervision of individual bank groups.

The value of cash in circulation increased in 2010. Return frequency of the banknotes in circulation decreased somewhat over the year, i.e. the same banknote returned to the Bank of Lithuania 2.2 times on average.

When managing foreign reserves, the Bank of Lithuania focused mainly on liquidity and safety of investment. Foreign reserve investment results were determined by low profit margins and tense situation in the euro area government debt securities market owing to significantly higher debts of the countries.

In continuation of its successful implementation of the approved statistical requirements, the Bank of Lithuania compiled and published monetary and financial statistics, external sector statistics as well as other financial statistics. Since the middle of 2010, the Bank has started to collect data according to the revised statistical reporting requirements, classifica-tion principles and statistical reporting schemes for the MFI balance sheet and interest rate statistics. Statistical releases were regularly published in the statistics section of the website of the Bank and provided the latest information on important economic issues. The Loan Risk Database (Central Credit Register) was actively developed and restructured.

The payment and securities settlement systems supervised by the Bank of Lithuania func-tioned in a stable manner. The value of transactions processed in the litas real-time gross settlement system, which is associated with the financial market transactions, decreased, although the volume of transactions increased. The value of transactions processed in the litas retail payment system, which is related to the real economy, increased after a two-year period. The traffic of euro payment systems continued to increase in terms of volume. In addition, since November 2010, the settlement of the cash leg of stock transactions concluded in NASDAQ OMX Vilnius stock exchange is carried out in euro.

In 2010, the Bank of Lithuania, acting as a State Treasury agent, as established by the Republic of Lithuania Law on the Bank of Lithuania, administered accounts of the State Treasury of the Republic of Lithuania (in litas and foreign currencies), where the largest share of monetary resources was held by the Ministry of Finance of the Republic of Lithuania.

The Bank of Lithuania actively participated in different international forums, where many important decisions related to the financial system stability, enhancement of the supervi-sion of the financial sector, economic stimulus provided by the countries and activities of international financial institutions were taken. Many initiatives, which have already been launched, will be developed and implemented in the coming year.

On its website and in publications, the Bank of Lithuania regularly provided the media with information on the domestic banking and financial system as well as on its own activities. Presentations of new collectors (commemorative) litas coins, the Money Museum of the Bank of Lithuania, articles of the experts of the Bank in the press and online, replies to the inquiries of the public and lectures to students were very helpful when informing the public and communicating with it.

The Annual Report presents in detail the work performed by the Bank of Lithuania in implementing the objectives and performing the functions of the central bank of the Republic of Lithuania.

Chairman of the Board of the Bank of Lithuania Reinoldijus Šarkinas

7 April 2011

I. REVIEW OF THE ECONOMY AND FINANCE

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GLOBAL ECONOMIC DEVELOPMENTS

After a severe downturn driven by the global financial crisis, the global economy started growing again in 2010. Consumption and investment gradually recovered, activity in the industrial sector and other sectors of the economy increased and international trade expanded markedly. Governments in a number of countries, seeking to foster the eco-nomic recovery, continued implementing the economic stimulus programmes started during the crisis. Robust capital flows accelerated the growth in some emerging market economies. Rebuilding of inventories that shrank during the crisis had a positive effect on the economic development across the world as well.

The strongest economic growth was observed in the first half of the year; later, as the ef-fects of the economic stimulus faded, the growth rate decelerated. Emerging economies, which were less affected by the crisis, remained the key driver of the global economy. The growth in advanced economies was less pronounced; the economic development was hindered by high unemployment in many of them and in some of them also by the fiscal consolidation undertaken.

Table 1. Real GDP growth and inflation in selected regions of the world(annual percentage changes)

2009 2010 2011* 2012*

Real GDP

World –0.6 5.0 4.4 4.5

Euro area –4.1 1.8 1.5 1.7

Central and Eastern European countries –3.5 4.1 3.6 3.9

USA –2.6 2.9 3.2 2.7

Japan –6.3 3.9 1.4 1.8

Russia –7.9 3.8 4.5 4.4

Inflation (average annual change in consumer prices)

Euro area 0.3 1.6 2.0 1.7

Central and Eastern European countries 4.7 5.3 4.3 4.3

USA –0.3 1.6 1.8 1.5

Japan –1.4 –0.7 –0.1 0.1

Russia 11.7 6.9 8.6 7.3

Sources: IMF and Eurostat.* Forecasts.

Economic recovery caused a strong increase in prices, however, inflation remained low, particularly in advanced economies. In emerging market economies, price increases were stronger. Changes in the prices of energy, food and other commodities exerted the major influence on inflation in 2010. The price of Brent crude oil in global markets fluctuated from 70 to 80 USD per barrel for the largest part of the year, but at the end of the year, due to a decline in the reserves accumulated by advanced economies, oil demand in-

2010

� Annual Report of the Bank of Lithuania

12

creased and its price rose to 90 USD per barrel. After having declined in the first half of the year, food prices increased strongly in the second half of the year however, owing to unfavourable weather conditions and poor harvest in the major grain exporting coun-tries as well as the increasing demand for biofuel. Rising commodity prices determined the price growth across the world, however, owing to high unemployment and uneven recovery of domestic demand, inflation is not projected to rise sharply.

The long-term sustainability of public finances raised concerns in a number of countries. The economic downturn, support to the financial sector and the protracted application of economic stimulus contributed to the growth of general government fiscal imbalances and debt. These problems were particularly significant for the euro area. International financial support measures and tight fiscal consolidation obligations assumed by the governments contributed to easing the tensions.

In 2010, major central banks of the world maintained low interest rate policies and further implemented quantitative monetary policy measures. The interest rates of the Federal Re-serve System, the Bank of Japan and the Bank of England were close to zero for a second year. The ECB did not change its key interest rate (1%) too and maintained excess liquidity in the banking system, which allowed the overnight interest rate to fall below the key rate.

The stimulating effects of low key interest rates on the economy were strengthened by non-conventional monetary policy measures applied by central banks. The ECB provided unlimited liquidity to the banking system, resumed US dollar liquidity operations and purchased euro area government debt securities in the secondary market. The US Federal Open Market Committee announced about its intention to maintain stimulating monetary policy until the full recovery of the economy. The central bank of Japan, seeking to spur economic growth and to curb deflation, increased financing provided to financial institu-tions throughout the year, extended the government securities purchasing programme and reduced the key interest rates even more by fixing their fluctuation band at the range of 0.0 per cent to 0.1 per cent.

Chart 1. Key interest rates of central banks

The quantitative monetary policy implemented by central banks and the successful im-plementation of the financial sector support measures contributed to restoring stability


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in the banking sector and liquidity in the interbank market, easing the tensions in inter-national capital and money markets and the gradual recovery of lending to the private sector. Generally, the situation in the financial sector improved over the year, however, due to the uncertainty surrounding the close connection and the possible negative feedback between public finances and the banking sector, market sensitivity remained high. Yield spreads of debt securities fluctuated markedly and increased not only in the riskier euro area countries, but also in many advanced economies. In addition, inflation pressures started to increase.

The foreign exchange market faced substantial fluctuations in 2010 as well. The esca-lation of problems in the euro area public finances affected the exchange rate of the euro. In the first half of the year, the euro depreciated vis-à-vis the US dollar and other major currencies of the world. Later, when the EU and international institutions started a wider implementation of financial market stabilisation measures and the EU Member States assumed tight fiscal consolidation obligations, the exchange rate of the euro started stabilising. The exchange rate of the US dollar was highest in the middle of the year, however its change over the year was insignificant. The Japanese yen appreciated against other major currencies of the world. The fluctuations of the currencies of Central and Eastern European countries, which apply the floating exchange rate regime, against the euro were most pronounced in the middle of the year.

DEVELOPMENT OF THE ECONOMY OF LITHUANIA

Lithuania’s economy started to recover in 2010 due to a more intensive restoration of inventories and the highest level of real exports, reaching its peak since the beginning of data releases in 1995. However, domestic demand remained sluggish: the volume of investment was broadly the same, whereas final consumption shrank. Investment was subdued by excess production capacity and by a circumspect assessment of the future. Consumption was further suppressed by a poor situation in the labour market and a significant increase in the prices of energy resources and food products.

REAL SECTOR

AGGREGATE DEMAND

In 2010, Lithuania’s real GDP was 1.3 per cent higher than in 2009. Lithuania’s economy was favourably influenced by foreign demand: it contributed to the development of the tradable sector. Increasing industrial production and improved expectations of enterprises intensified the restoration of inventories, which shrank during the downturn. Unfortu-nately, the effect of these factors was insufficient for the recovery of domestic demand. Final consumption remained contracted for almost the whole year, while expenditure on investment went up only in the second half of the year.

Net exports pushed GDP up only in the first half of the year. In the second half of the year, imports grew more rapidly, compared to exports and diminished net exports. That was enough to make the contribution of net exports to the GDP growth negative. Such a de-velopment of net exports was shaped by a vast increase in the imports of energy resources after the closure of the Ignalina Nuclear Power Plant, while in the second half of the year imports were pushed up by higher domestic investment and private consumption.

Growing prices of energy resources and food products limited household expenses for the purchase of other goods and services. This was one of the factors behind a rather poor private consumption in 2010, which shrank by 4.1 per cent over the year. However,

2010


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because of the base effect, the annual contraction of private consumption declined quarter-on-quarter, reaching 3.3 per cent annual growth in the last quarter. Private consumption was also subdued by persisting uncertainty about the economic outlook and still poor situation in the labour market. These factors forced households to save and delay expenditure for durable goods.

Chart 2. Contributions to real GDP growth (by expenditure approach)(annual change)

In the middle of the year, investment started to recover, however, throughout the entire 2010 they remained significantly smaller than before the crisis and corresponded to the level of expenses in 2003–2004. Investment recovered due to more active public sec-tor investment, while investment of the private sector was sluggish. The public sector investment was mostly increased by the construction of a new block of the Lithuania Power Plant, EU funds allocated for the closure of the Ignalina Nuclear Power Plant and the funds allocated by universities for renovation, construction of new buildings and research centres. These factors determined the growth of investment in both non-resi-dential construction and machinery, equipment and vehicles.

AGGREGATE SUPPLY

In 2010, compared to 2009, the largest growth was registered in the value added cre-ated by the tradable sector, particularly manufacturing and transport activities, while the activities associated with domestic demand basically remained the same or contracted.

Economic activity in Lithuania was mostly stimulated by the industry: its value added increased by 5.6 per cent in 2010. The largest impact on this shift was made by manu-facturing, excluding petroleum refining. Other activities attributed to industry, such as mining and quarrying, petroleum refining and electricity, gas and water supply, weakened economics activity or their effect was feeble. Value added in petroleum refining dropped due to repairs in the public company ORLEN Lietuva, the largest company of the industry, which took place in the first quarter; then, in other three quarters it was more intensive than a year ago. Value added in manufacturing, excluding petroleum refining, was mostly


15

pushed up by the activities oriented to foreign demand; sales in the domestic market started to grow only in the last quarter. Only value added in the food industry, one of the main manufacturing industries, which is mostly dependent on domestic demand, was smaller than in 2009. However, a slow reorientation to foreign markets in the second half of the year intensified its activity.

Chart 3. Contributions to real GDP growth (by production approach)(annual change)

In 2010, similar to 2009, the largest contraction of activity was registered in construc-tion – 7.2 per cent. This drop was driven by a smaller volume of the construction of buil-dings – contraction was seen in the construction of both residential and non-residential buildings. Construction of residential buildings decreased due to a weak demand, house-holds avoided to assume additional financial liabilities and expected a further drop of real estate prices, while credit conditions remained tight. The decrease of the construction of non-residential buildings was affected by a low utilisation level of production capa city, discouraging enterprises to invest into new production and administrative premises. The contribution of these factors was softened by the construction of civil engineering structures, which increased over a year by almost 11 per cent. This construction was mostly induced by government decisions to increase expenses for infrastructure projects. In the second half of the year, the construction of civil engineering structures made up about 60 per cent of total construction works, i.e. about 20 percentage points more than in 2007–2008.

Real value added in market services increased by nearly 2.5 per cent over the year. This development was mostly affected by the transport activity, which grew due to recov-ering international trade. The change of value added in activities depending more on domestic demand was insignificant. The activity of trade – the largest activity of market services – grew only in the second half of the year, with the intensification of the whole-sale trade and reduction of the comparative base.

2010


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EXTERNAL SECTOR

CURRENT ACCOUNT BALANCE

Lithuania’s current account balance was positive since the second quarter of 2009 (it made up 4.3% of GDP in 2009). In 2010, the current account surplus amounted to LTL 1.7 billion or 1.8 per cent of GDP. In the second half of the year, the current account balance was somewhat smaller, compared to the first half. It was negatively affected by the deficit of external trade in goods (4.3% of GDP). In 2010, the deficit increased due to higher imports of energy and natural gas after the closure of the Ignalina Nuclear Power Plant and recovering imports of intermediate consumption and capital goods.

Chart 4. Components of the current account balance(compared to GDP)

In 2010, the deficit of income balance was also higher than a year ago, because foreign capital enterprises operating in Lithuania started to receive more profit, compared to incurred losses. This is recorded in the income balance as negative reinvestment. The income balance went up also due to the fact that investors from abroad were paid al-most double interest payments for portfolio investment, compared to a year ago. They increased because of the intensive borrowing of the general government in foreign markets in recent years.

Like earlier, the current account balance was positively affected by current transfers (5.1% of GDP in 2010), which basically consisted of EU structural funds and remittances of emigrants to Lithuania. EU funds were transferred somewhat more sluggish – current transfers of EU funds were about 10 per cent smaller than a year ago. However, remit-tances of individuals transfers from abroad during that time were almost 40 per cent higher than a year ago most likely due to intensifying emigration.

The services balance was also positive and larger in the first three quarters of 2010, compared to the previous year. A larger services surplus was driven by exports of services, transport and travels in particular, that grew more rapidly than imports. In the environ-ment of a buoyant recovery of external trade, foreigners were rendered 32 per cent


17

more services of transportation by road transport than a year ago. More travel services than a year ago were rendered to visitors to Lithuania most likely due to an improved economic situation in other countries. In the first three quarters of 2010, travels of the Lithuanians abroad were less intensive than a year ago.

FOREIGN TRADE

After a significant reduction in 2009, the foreign trade deficit in 2010 boosted by nearly 46 per cent, however, it remained substantially smaller than in 2008.

Chart 5. Foreign trade balance(compared to GDP)

In 2010, the growth of nominal exports was buoyant throughout the year. Its year-on-year increase made up 33.2 per cent. Over the year, exports of all groups of goods increased.

The growth was mostly supported by robustly increasing exports of minerals products. The increase of nominal exports of mineral products was driven by recovering economies of other countries and by the rise in the prices of these products, which grew by one-third on average over the year. The growth was registered in the exports of food products. Exports to Russia grew particularly robustly. Immensely poor crops in Russia supported the demand of imports of food products to this country, especially in the second half of the year. In 2010, the recovery of exports of chemicals and plastics was also robust due to increasing demand and the renewed growth of prices of some products, e.g. ferti lisers. Also, Lithuania’s exports were pushed up by the growing exports of machinery and me-chanical equipments, however, 70 per cent of them were formed by re-exports. The main commodities supporting the growth of exports of the Lithuanian origin goods were also agricultural products, chemical and mineral products. Exports of the Lithuanian wood were

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also substantially larger. In 2010, market shares of Lithuania’s exports in the main foreign trade regions grew somewhat.

In 2010, the growth of nominal imports was as intensive (34.5% on an annual basis) as that of exports. The growth of industrial production after the recovery of exports pushing the demand for imported intermediate consumption goods up was largely behind the recovery of imports. Also, in the second half of the year, the imports of capital goods, related to the rise of domestic investment, started to grow.

BALANCE OF CAPITAL AND FINANCIAL ACCOUNTS

In 2010 the current account surplus determined a net financial outflow from Lithuania. Similar to the situation a year ago, banks and non-financial corporations further repaid their loans to foreign creditors and increased their foreign assets, probably aiming to use surplus liquidity. As in 2009, the decrease of loans was partly compensated by the borrowing of the Government of the Republic of Lithuania in foreign markets by the placement of a Eurobond issue and the reception of the loan from international institu-tions at the end of the year.

In the second half of the year, foreign direct investment recovered slightly. Compared to 2009, it was pushed up by reinvestments, because the operation of foreign enterprises in Lithuania became profitable again. These investments were also increased by larger borrowing from direct investors. In 2010, the capital account that shows capital transfers of EU structural funds recorded 18 per cent smaller surplus than a year ago, however, the transferred amount continued to be larger, compared to 2005-2008.

Chart 6. Current account deficit financing sources(compared to GDP)

In 2010, the gross external debt grew by LTL 1.5 billion: general government external debt expanded by LTL 9.4 billion, while the external debt of the private sector shrank by about LTL 8 billion. As the annual growth of nominal GDP was about 3.4 per cent, the gross


19

external debt and GDP ratio remained unchanged, compared to 2009, and amounted to approximately 86 per cent. The budget deficit caused an increase of general govern-ment external debt from 20.4 per cent of GDP in 2009 to 29.7 per cent of GDP in 2010, while annual interest payments for this debt doubled. However, the private sector debt declined, therefore, total interest payments of Lithuania for external debt throughout the first three quarters of 2010 were 7 per cent smaller than a year ago.

BOX. CONTRIBUTIONS TO THE EUROPEAN UNION BUDGET AND FUNDS RECEIVED FROM IT IN THE BALANCE OF PAYMENTS OF THE REPUBLIC OF LITHUANIA

Alongside with all economic transactions among Lithuanian and foreign economic enti-ties, Republic of Lithuania balance of payments (hereinafter the balance of payments) accounts for Lithuania’s contributions to the EU budget and inflows of funds received from the EU. They are recorded in respective current account and capital account items of the balance of payments. According to the balance of payments compilation methodology, the mentioned account items cover the inflows of funds received from non-residents or receivable (in this case – the funds received from the EU) on the credit side and the outflows of funds from Lithuania to non-residents or payable funds (in this case – Lithuania’s contributions to the EU budget) on the debit side.

EU own funds forming Lithuania’s contributions to the EU budget are classified into tradi-tion (19%) and other contributions (81%). Collected customs duties and the sugar tax (the interim tax of the sugar industry restructuring) are attributed to customary resources. The major part (approximately 75%) of other resources consists of the value added tax contribu-tions and contributions calculated according to the gross national income. Contributions to the EU budget are recorded in “Government services” of the item “Services” and in “General government” of the item “Current transfers” of the current account. The balance of payments compilation methodology1 envisages that all transactions are to be calculated and recorded in items of the mentioned accounts by their gross value; therefore, the item “Current transfers” covers not paid, but calculated contributions to the EU budget. The Council of the European Union2 established that the EU Member States shall reserve for themselves 25 per cent of the collected traditional own resources taxes for the coverage of tax collection expenses, therefore, this calculated amount is recorded on the credit side of “Government services” of the balance of payments current account item “Services”, added to the actually paid contributions to the EU budget and recorded on the debit side of “General government transfers” of the current account item “Current transfers”.

In 2010, the calculated contributions to the EU budget made up LTL 944.8 million and increased by 21.4 per cent, compared to 2005. Since the beginning of Lithuania’s mem-bership in the EU, the largest contributions were calculated in 2008 and were equal to LTL 1.2 billion.

The largest share of the EU financial support (approximately 90%) consists of the funds from the EU programmes of structural and technical support, financing of direct pay-ments and market regulation measures and the European Agricultural Fund for Rural Development, Ignalina programme administration in Lithuania and the Cohesion Fund programme. Payments for the closure of the Ignalina Nuclear Power Plant administered by the European Bank for Reconstruction and Development (hereinafter – EBRD) may also be attributed to this support.

The amount of the funds received from the EU budget to be recorded in the current ac-count or capital account of the balance of payments depends on the purpose to use the

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received funds. All funds used for financing of investment projects (e.g., road building, construction of wastewater treatment facilities etc.) are recorded on the general govern-ment credit side of the capital account item “Capital transfers”. Almost all funds of the Cohesion Fund programme and a substantial part of the funds of other programmes are recorded in this item. In 2010, the funds of other programmes accounted for 42.5 per cent of the total EU support. Funds for staff training, preparation of various projects and other different payments are recorded on the government credit side of the current account item “Current transfers”. Although a large part of the EU financial support is finally used in the private sector, according to the current methodology, these funds are recorded on the government credit side of the balance of payments item “Current transfers”.

In 2010, EU support funds made up LTL 5.4 billion and grew 2.7 times, compared to 2005. Since the beginning of Lithuania’s membership in the EU, the largest support was received in 2009 and amounted to LTL 5.9 billion.

Payments for the closure of the Ignalina Nuclear Power Plant (administered by the EBRD), depending on the purpose of their usage, are also recorded on the government credit side the current account item “Current transfers” and the capital account item “Credit transfers”. Usually, a larger part of these funds is recorded in the capital account. In 2010, the total amount used made up LTL 314.7 million, out of which 71.4 per cent was recorded in the capital account.

Republic of Lithuania contributions to the EU budget and EU financial support funds received from the EU budget in the balance of paymentsLTL millions

2005 2006 2007 2008 2009 2010

CURRENT ACCOUNT

Services. Government services (credit)

Compensation of the expenses for the administration of taxes to the EU budget 39.39 43.77 52.30 69.07 46.39 44.95

Current transfers.General government (credit)

Payments from the EU budget 1,099.02 1,285.55 1,961.54 1,563.61 3,451.45 3,108.58

Payments for the closure of the Ignalina Nuclear Power Plant – – 17.02 39.13 92.10 89.89

Current transfers.General government (debit)

Contributions to the EU budget 778.20 878.22 981.27 1,220.02 1,129. 3,7 944.80

CAPITAL ACCOUNT

Capital transfers.General government (credit)

Payments from the EU budget 903.54 918.66 1,505.01 1,898.25 2,461.38 2,295.99

Payments for the closure of the Ignalina Nuclear Power Plant – – 210.29 140.47 658.34 224.78

Source: Bank of Lithuania.Note: The information on the contributions to the EU budget and support received from the EU is provided to the Bank of Lithuania by the Ministry of Finance of the Republic of Lithuania, whereas the information on the usage of the funds for the closure of the Ignalina Nuclear Power Plant administered by the EBRD is provided by the Ministry of Economy of the Republic of Lithuania.

1 Balance of payments manual, 5th ed. Washington, 1993.2 Council Decision of 7 June 2007 on the system of the European Communities’ own resources (2007/436/EC, Eura-

tom), OJ L 163, 2003 6 23, p.19.


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PRICES AND COSTS

REASONS BEHIND THE PRICE DEVELOPMENTS

In 2010, the average annual inflation based on the Harmonised Index of Consumer Prices made up 1.2 per cent and was sufficiently lower than in 2009 (4.2%). Year-on-year, the growth of prices of all main groups of goods and services, excluding fuels, subsided, and the main contributor to the lower inflation was sufficiently slower core inflation, particularly due to the decrease of the prices of market services.

Annual inflation, with some exceptions, was rising almost since the beginning of the year and reached 3.6 per cent in December, being the highest since June 2009 (3.9%). The main inflation determinants were associated with the external environment. Throughout the entire 2010, only prices related to the movements in global food and energy markets (i.e. prices of food, fuels and administered prices) surpassed the level a year ago. In the context of persis-ting weak domestic consumption, the prices related to its development (prices of industrial goods, excluding energy, and market services) were constantly lower year-on-year.

Chart 7. Contributions to the annual inflation based on the Harmonised Index of Consumer Prices

CORE INFLATION

Prices of industrial goods and market services, which influence the core inflation1, be-came lower than a year ago in the fourth quarter of 2009. In the first quarter of 2010, the annual drop of these prices was the largest, subsiding gradually afterwards. In the

1 Core inflation is the inflation indicator, the calculation of which does not include certain the most volatile prices (e.g., food, energy). This indicator reflects a long-term trend of the price development, more stable longer-term inflation not affected by short-term economic shocks. The Bank of Lithuania calculates the core inflation indicator as the change of the Harmonised Index of Consumer Prices, excluding prices of food, fuels and lubricants, and administered prices.

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environment of a high unemployment rate and reduced wages, domestic demand re-mained subdued and did not stimulate the growth of prices. This trend is also obvious from the retail trade data, showing that the seasonally adjusted turnover of non-food trade was relatively stable throughout 2010.

The prices of industrial goods, which declined, compared to 2009, were most strongly af-fected by cheaper clothing and footwear, furniture and household equipment, passenger cars, while lower prices of market services were influenced by the prices of telephone and telefax, accommodation and housing rent services.

FOOD PRICES

Development of the prices of food and non-alcoholic beverages contributed to the accelera-tion of the annual inflation. Their annual drop in February was most pronounced (5.2%), while afterwards this decrease was smaller. In July, these prices already surpassed the level a year ago and later they grew even faster (the annual growth was 6.1% at the end of the year). The strongest pressure on annual inflation was exercised by the development of the prices of goods related to the crops of agricultural products in Lithuania and the trends in international markets, i.e. vegetables, dairy products, fruits, bread and cereals. According to the preliminary data of Statistics Lithuania, crops in Lithuania were smaller in 2010 than in 2009: grain – by 27 per cent, vegetables – by 41 per cent, potatoes – by 28 per cent. Such a situation occurred due to both weaker yield and a smaller planting area.

Chart 8. Contributions of the prices of food, beverages and tobacco to the annual inflation

The global food price index announced by the Food and Agriculture Organisation of the United Nations at the end of 2010 almost reached the mid-2008 level – the highest level of food prices. Recently, the prices of sugar, oil and grain became particularly high, whereas the prices of other products, such as dairy products and meat, were also grow-ing. This situation was largely caused by bad weather conditions and the export policy


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of some countries. Increasing prices were also influenced by the stronger demand for food products, mostly linked with a buoyant development of emerging economies and the growing demand for biofuel.

The products grouped as alcoholic beverages and tobacco, contrary to food products and non-alcoholic beverages, had a damping effect on the growth of inflation in 2010. At this juncture, the most important role was played by tobacco, because the rise of its prices in 2009 after increasing excise duties did not affect the annual change of prices. In February 2010, the year-on-year tobacco price growth was the highest (almost 50%), while afterwards its prices grew at a slower pace and in December the growth made up just 5.2 per cent.

ADMINISTERED PRICES

In 2010, administered prices increased, accompanied by a more pronounced annual growth of these prices. In the beginning of the year, after the closure of the Ignalina Nuclear Power Plant, electricity prices rose by one-third. Afterwards, in the middle of the year, these prices went down slightly, but a jump was registered in the natural gas price. The price of heating energy was going up steadily due to the rising prices of fuel used for its production. However, for the major part of the year the heating energy price was smaller than a year ago (it became higher than a year ago only in October and this was the basic contributor to the higher annual inflation that month). Although at the end of the year the price of heating energy Lithuania-wide was more than one-tenth higher than a year ago, its changes in the largest towns, according to the data of the National Control Commission for Prices and Energy, differed.

Chart 9. Contribution of administered prices to the annual inflation

PRICES OF FUELS

For the largest part of 2010, the global oil price in litas was rising and on an annual basis it surpassed the level reached in 2009 by one-third. on average. The global oil demand was largely pushed up by emerging economies, particularly by the increasing demand in China, India, Middle East and Latin America. The oil demand in the countries of the

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Organisation for Economic Co-operation and Development, which decreased for four years in succession, grew mainly due to the rise of the oil demand in the US in 2010.

In the first half of the year, the price of fuels was constantly rising in Lithuania, which was also determined by the appreciation of the US dollar against the litas. During the second half of the year, in the context of the increasing oil price, the fuel price changed insignificantly (with the exception of December, when it jumped by 7%) because of a weaker US dollar. The price jump in December was determined by both an increase in the oil price and the appreciation of the dollar. In 2010, fuel prices grew by 15.2 per cent on average.

Chart 10. Global oil prices and fuel prices in Lithuania(annual change)

LABOUR MARKET

EMPLOYMENT AND UNEMPLOYMENT, REASONS BEHIND UNEMPLOYMENT

As the economy started to recover, domestic investment and consumption, as well as the performance of the activities oriented to domestic demand remained poor, therefore, the situation in the labour market continued deteriorating. Starting to increase in mid-2008, the unemployment rate was rising until the second quarter of 2010, when it reached 18.3 per cent and surpassed the rate in the second half of 2001 after the Russian crisis. In the second half of the year, the unemployment rate decreased already: in the third quarter by 0.5 percentage point and in the fourth quarter by another 0.7 percentage point, notwithstanding the fact that at year-end this indicator usually grew due to lower demand for seasonal or temporary jobs. Administrative reasons were behind a slower decrease of unemployment. The information that the unemployed not registered in the labour exchange were obliged to pay mandatory health insurance contributions on their own was spread at the end of March. Therefore, they started to register at the labour exchange, thus pushing the unemployment rate up in the second quarter. In 2010, the average annual unemployment rate was 17.8 per cent (13.7% in 2009).

When the unemployment rate started to decrease in the second half of the year, the number of long-term unemployed (persons without a job for 1 year and more) persisted to be high. The number of the unemployed without a job for less than 1 month was smaller than a year ago already since the second quarter, while the number of long-


25

term unemployed was substantially higher year-on-year in every quarter of 2010. At year-end, the long-term unemployed accounted for nearly half of the total number of the unemployed. Such a large amount of this type of the unemployed raises concerns, because they lose their skills and motivation to work, while the properly qualified and active labour force is required for a sustainable economic development.

Regardless of the large number of the unemployed, the number of enterprises whose activities were limited because of the shortage of employees in the second half of 2010 was larger, compared to the first half of 2010 or to 2009. This might reflect the labour market inefficiency due to a different structure of labour demand and labour supply. Employers encountered a shortage of employees with required qualifications. Moreover, wage expectations of employees and employers differed, whereas job vacancies were not in the domicile of those looking for a job.

The annual drop of the number of the employed, reaching its peak in the fourth quarter of 2009 (8.2%), was decreasing throughout 2010 (largely because of its slowdown in construction) and made up a mere 1.2 per cent in the fourth quarter. In 2010, the level of job vacancies2, which shows the demand for new employees, was higher than in 2009. In business activities, excluding agriculture, it made up 0.7 per cent (0.3% a year ago) in the fourth quarter. During the economic upturn, the level of job vacancies in construction was substantially larger than in the industry or the market services sector, while during the downturn it approximately matched the level in the services sector.

Chart 11. Main indicators of employment(annual change)

In the first three quarters of 2010, the labour force was smaller than a year ago, while in the fourth quarter it was already somewhat higher. The labour force shrinkage was stimulated by the increasing emigration and hampered by the rising activity of the population. The declared emigration from Lithuania went up in recent years. However, it peaked in the second quarter of 2010 after the announcement at the end of March that the persons that had not declared their departure from Lithuania would have to pay mandatory health insurance contributions on their own. During later quarters, such

2 The level of job vacancies is calculated by dividing the number of job vacancies by the total number of unoccupied and occupied jobs.

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emigrants continued to declare their departure, thus the level of emigration remained elevated. Consequently, the statistics indicate an immense boost of emigration in 2010 (the number of emigrants that declared their departure was nearly four times larger in 2010 than in 2009 and larger than in any other previous year since 2001, which is the year when the collection of international migration data was started). It is likely that many emigrants that declared their departure have departed from Lithuania earlier, therefore, the statistics do not reflect the real emigration scope in 2010. However, the data of migration to the United Kingdom and Ireland – the main countries hosting Lithuania’s citizens – showed an increasing number of new immigrants from Lithuania, particularly in the United Kingdom. Growing emigration is related to the smaller unemployment rate and larger wages in the labour markets of those EU Member States.

WAGES

In the first three quarters of 2010, the annual drop of average gross wages was gradually decelerating, and in the fourth quarter this indicator was somewhat higher (0.2%) than a year ago. For three quarters, wages in the public sector decreased more than in the private sector on an annual basis, while in the fourth quarter it went up already by 1.9 per cent. This shift caused a rise of wages in the national economy, because wages in the private sector in the fourth quarter remained smaller (1.0%) than a year ago. The largest fall in wages per annum was in construction and services sectors. According to the seasonally adjusted data, the level of wages in Lithuania was rather stable throughout 2010; it increased only in the public sector at the end of the year. This may be associated with unregulated pay-ments – bonuses, emoluments, premia, etc.

Chart 12. Wage developments(annual change)

GENERAL GOVERNMENT FINANCES

INCOME, EXPENDITURE AND DEFICIT

In the first three quarters of 2010, the general government deficit made up 6.4 per cent of GDP and was 2.2 percentage points smaller year-on-year. On an annual basis, the deficit went down because in the environment of smaller general government expenditure, the shrinkage of income was substantially less pronounced. The latter grew since the second


27

quarter of 2010, however, its flow in the first three quarters of 2010 remained 0.6 per cent smaller than a year ago. In three quarters, the general government expenditure was 5.5 per cent smaller than a year ago. This was largely influenced by social payments that were lower by approximately one-tenth and somewhat more reduced compensation of employees related to administrative decisions taken in September 2009.

In 2010, the share of the deficit of social security funds expanded, compared to the total general government deficit: in the first quarter it made up about 42 per cent, then it went up and in the third quarter accounted already for more than 55 per cent. Based on the annual data, this share was expanding for the fourth year in turn: it accounted for 5.3 per cent in 2007, 30.3 per cent in 2008, 35.6 per cent in 2009 and 42.7 per cent in the first three quarters of 2010. According to the preliminary data, in 2010 the budget deficit of the State Social Insurance Fund (Sodra) was equal to 2.7 per cent of GDP. Compared to 2009, Sodra received 7.9 per cent less income, while its expenses shrank by 6.8 per cent. The Sodra income fall was affected by the fact that the social contributions base – nominal wages – in the national economy was smaller for the larg-est part of the year, compared to the previous year, and grew insignificantly only in the fourth quarter. Sodra expenses decreased. However, they shrank at a slower pace than planned due to a complicated situation in the labour market and a markedly stronger than planned demand for funds for unemployment benefits.

Chart 13. General government income, expenditure and balance(four-quarter moving sums, compared to GDP)

Year-on-year, the general government income to GDP ratio declined insignificantly in the first three quarters of 2010. The general government income was basically pushed up by non-tax revenue, such as the EU support, and, particularly in the second quarter, a significantly larger than a year ago share of the Bank of Lithuania profit. The latter grew because of both the higher percentage of the Bank of Lithuania profit contribution and a very large profit. The largest negative impact on the general government income was made by almost 5 per cent annual decline of tax revenue. In addition, the collection of social contributions contracted by approximately one-tenth. Social contributions paid by both employers and employees shrank per annum almost by the same amount.

The largest fall among tax income (more than by one-fifth) was observed in the revenue from direct taxes. Profit tax income declined almost by a half, whereas income from the

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personal income tax decreased on an annual basis by around 13 per cent. Income from the profit tax fell due to the fact that in 2010 the majority of enterprises paid the profit tax accor-ding to low profits of 2009; based on the data of State Tax Inspectorate under the Ministry of Finance of the Republic of Lithuania, the number of profitable enterprises dropped by approximately one-fifth in 2009. Income from the personal income tax decreased in 2010 as a result of an annual shrinkage of wages and a smaller number of the employed.

In the first three quarters of 2010, income from indirect taxes grew on an annual basis by almost 4 per cent. It was mostly pushed up by a better collection of the value added tax: its receipts increased by one-tenth. Behind this better collection were both the tax rate increase of 1 percentage point since 1 September 2009 and more intensive wholesale and retail trade than a year ago. Three-quarter income from the excise duties was smaller than a year ago by approximately one-tenth. The smallest shrinkage of this indicator was observed for energy and the largest for processed tobacco.

In the context of lower general government expenditure, its ratio to GDP in the first three quarters of 2010 was smaller than a year ago by almost 3 percentage points. In-termediate consumption expenses increased by almost one-fifth and interest payments went up very noticeably due to a buoyant growth of the general government debt in previous quarters.

In the first three quarters of 2010, general government gross capital formation expenses (investment) were somewhat smaller year-on-year. However, in the third quarter they jumped significantly due to the acquisition of buildings and museum valuables, as well as a substantial increase in reserves.

DEBT

Based on the data of the Ministry of Finance of the Republic of Lithuania, the general government debt made up LTL 36.6 billion (38.7% of GDP) in 2010 and went up by 9.2 percentage points on an annual basis. The largest increment was observed in the debt of central government and social security funds, amounting to LTL 34.1 billion (36.1% of GDP). Year-on-year, the growth rate of the general government debt did not change basically. This reflects that the general government deficit remained high and the Govern-ment of the Republic of Lithuania was intensively borrowing to finance it. Moreover, the general government debt to GDP ratio was still pushed up by the still negative differential between the average interest rate and the growth rate of the economy.

Domestic liabilities went up over the year by one-fifth, while foreign liabilities boosted substantially more (41.4%) and made up the major share of the general government debt. In terms of the maturity of liabilities, short-term liabilities in the domestic market doubled in 2010, whereas longer-term liabilities increased by more than 40 per cent. This shift was impacted by the placement of the bond issue in USD in February and September 2010, which generated approximately LTL 6.8 billion.

HOUSEHOLD FINANCE

INCOME AND FINANCIAL ASSETS OF HOUSEHOLDS

In 2010, average wages were significantly smaller, compared to the level before the economic downturn. Small wages together with a high unemployment rate posed a risk of inability of households to repay loans.

After reaching the peak of their value in the first quarter of 2009, financial assets man-aged by households stabilised and underwent insignificant changes in 2010. In the third


29

quarter of 2010, the composition of financial assets changed insignificantly year-on-year. The increase was registered only in the sum of household holdings of cash and deposits, while the change of the value of other financial asset instruments was without a clear direction in the first three quarters of 2010.

Since the beginning of 2009, investment of households in various financial asset instru-ments were more intensive. The largest increase in households’ financial assets was driven by the accrued cash and transferable deposits with MFIs, while the largest growth was registered in investments in debt securities issued by the general government in the beginning of the period due to a small comparative base. Notwithstanding the shrink-age of the volume of investment in general government long-term securities, excluding shares, in the third quarter of 2010, this indicator was more than 1.5 times larger at the end of that quarter year-on-year, whereas compared to the pre-crisis period it was larger 5 times. However, cash and deposits, as well as shares and other equity securities made up the largest part of financial assets of households.

Chart 14. Contributions to the development of financial assets of households(quarterly data)

Notwithstanding the decline of interest rates for deposits, households increased deposits with the banking system by more than 5 per cent in 2010. This increase was two times larger than in 2009, however, households saved more in litas than euro in 2010. Some-what higher interest rates for deposits in the national currency might be behind such saving. In the nearest future, the situation of households is not expected to improve much. Long-term and structural unemployment will remain as an acute problem, while a slow recovery of the economy will not ensure a buoyant growth of income of the population and thus consumption. However, in 2009–2010 the capacity of households to markedly reduce debts to the banking system and at the same time rather rapid growth of deposits mitigated the risk to the domestic financial system.

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EXPENSES AND FINANCIAL LIABILITIES OF HOUSEHOLDS

Indebtedness of the Lithuanian households to MFIs (30% of GDP), according to the data of the third quarter of 2010, continued to be one the smallest not only in the Baltic States (during that period it made up 47% in Latvia, 51% in Estonia), but also among the small-est in the EU (average – 61%). Regardless of the shrinking loan portfolio of households in the banking system, the share of loans granted to natural persons, compared to the total loan portfolio, continued to be stable (44%). Similar to previous periods, household loans from financial corporations made up the major share of financial liabilities assumed by households (74%).

Interest rates and the share of new loans with the rate fixation period of up to one year jumped immensely due to elevated uncertainty in financial markets and their malfunctioning at the end of 2008 accompanied by a broader bank lending margin. This trend persisted to the mid-2010. New loans with the interest rate fixation period of up to one year accounted for 75 per cent at the end of 2010 and their number was lower than a year ago by 3 percentage points. Reasons behind this situation were a fragile economic recovery, record low interbank interest rates due to the accommoda-tive monetary policy still pursued by the ECB and the expectations of their rise in the future.

Chart 15. The ratio of household (net) loans to GDP in Lithuania and selected EU Member States(data of the third quarter of 2010)

It should be noted that, although the differential of the borrowing price3 in euro and litas declined to the pre-crisis level, the share of loans to households in euro expanded further and made up 72 per cent at the end of 2010. The price has the largest influence on borrowing decisions taken by households. Usually they choose such loan repayment conditions (currency, interest rate fixation period, etc.) that ensure the smallest loan re-payment costs. However, the risk is seldom taken into account. Many households chose

3 Interest rates on new loans to households.


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loans with the interest rate fixation period of up to 1 year. Thus, with a rise of interest rates in the market, household expenses to repay the loan would also increase shortly, which could reduce their solvency.

Chart 16. New loans to households and their interest rates(monthly data)

Interest rates paid by households for their liabilities to MFIs are defined by the level of indebtedness and interest rate developments, which are affected by the situation in the interbank market and risk premia applied by MFIs. As the ECB implemented the accom-modative monetary policy for more than a year and a half, the key interest rates remained particularly low and determined the fall in the interbank interest rates to a level never observed earlier. This compensated the increase in the MFI lending margin4. In addition, lower household indebtedness eased the burden of interest payments.

Chart 17. Interest rates paid by households for loans(quarterly data)

4 Spead between interest rates on new loans and the 6-month interbank interest rate.

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Results of the Bank Lending Survey of October 2010 conducted by the Bank of Lithuania revealed that the majority of banks did not basically change credit standards within the half of the year and lending conditions remained tight. However, stronger competition between banks and non-bank institutions, better expectations regarding the housing market and the economic situation may encourage a gradual easing of lending conditions by banks. The margin applied to borrowers was shrinking already from the mid-2010. However, banks remained conservative in their assessment of the solvency capacity of borrowers and the collateral risk.

The Survey also revealed that, as expected by banks in the beginning of 2010, the demand of households for loans recovered and started rising gradually. According to banks, the households’ borrowing demand increased mainly due to the improvement of the real estate market prospects and an increase in consumer confidence. This, in turn, stimulated more intensive borrowing for house purchase. Banks expect households to borrow more in the near future.

HOUSEHOLDS DRIVEN RISK TO CREDIT INSTITUTIONS

Notwithstanding the difficult financial situation of households in 2010, the quality of the portfolio of loans to individuals was the best, compared to other bank debtors. However, based on the opinion of respondents of the above-mentioned Survey orga nised by the Bank of Lithuania, the domestic financial system and stability of the entire economic are mostly endangered by a slow recovery of the economy, large state risk premia and high unemployment. This may have a very negative impact on household finances.

The economic development and the unemployment rate have a direct impact on house-hold finances and the capacity of households to fulfil assumed liabilities, because income of the population may shrink, the daily cost of living may rise with an increase in inflation, their financial and tangible assets may depreciate, while rising prices of the state bor-rowing may push lending margins applied to households up, thus indirectly increasing the amount of funds required to repay the loan. However, many bank respondents are of the opinion that the majority of losses caused by insolvent households are recognised and they do not expect large surprises in the future.

LOAN AND DEPOSIT DEVELOPMENTS AND INTEREST RATES

LOANS AND INTEREST RATES ON LOANS

In their attempts to ensure as fast as possible economic recovery after the recession, many states worldwide implemented broad accommodative monetary policy and fiscal policy measures. They also contributed to a positive annual nominal GDP change registered by two-thirds of the EU Member States in the third quarter of 2010 (year on year, the economies of 23 Member States were in recession). However, the implemented economic stimulus measures and the state support for the financial sector, which was provided using borrowed funds, generated immense imbalances of the national budgets. This raised uncertainty about the capability of some states to reduce deficit or cover liabilities. Incapable of repaying the growing expenses of debts, the euro area members Ireland and Greece addressed international institutions for help. This partly choked optimism caused by the economic recovery and the increase of risk premia pushed the borrow-ing price up in the second half of 2010. Notwithstanding this, loan interest rates in the EU remained historically low, while stronger optimism about the economic recovery increased borrowing.


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In 2010, the banking system loan portfolio in the EU increased by EUR 711.6 billion5, i.e., five times more than in 2009. The loan portfolio development in the EU Member States was the following: the borrowing in larger states (e.g., Germany, the United Kingdom, France) was more intensive and the loan portfolio was growing, while in the smaller countries (e.g., the Baltic States, Belgium) the banking system loan portfolio shrank further, although the fall rate was slower, compared to previous periods.

Chart 18. Dynamics of the loan portfolio of the EU banking system(year on year)

In the environment of the recovery of the European market and economies of other countries, the foreign demand for the output of the Lithuanian enterprises strengthened. With the rise of exports, the sales and profit of tradable sectors jumped, whereas the number of new bankruptcy proceedings decreased. In the second half of 2010, compared to the first half, a smaller number of enterprises experienced financial difficulties; many of them started to experience the shortage of employees. This reduced the number of the unemployed somewhat and for the second quarter in turn pushed average wages up (this was also affected by an increasing number of seasonal jobs).

Although the financial situation improved, the private sector cautiously assessed the future and further reduced liabilities to the banking system. Development trends of the portfolios of loans to non-financial enterprises and households were different: compared to 2009, the decline of the loan portfolio of non-financial corporations slowed down, while that of households, on the contrary, accelerated. In 2010, the total loan portfolio decreased less due to the rise of lending to financial intermediaries and the increase of general government liabilities, which basically grew because of a stronger demand of social security funds for borrowing in the context of an imbalanced budget. In 2010, the loan portfolio of MFIs in Lithuania shrank by 4.9 per cent or LTL 3.2 billion.

5 The development of the loan portfolio and deposits is analysed according to the data of other MFIs (commercial banks, foreign bank branches and credit unions). Due to the peculiarities and the scope of the data collection (e. g. the loan portfolio is evaluated in nominal terms, it is not reduced by specific provisions, foreign bank branches, which do not accept deposits, are not included), the development of the banking system loan portfolio and deposits, as presented here, differs from the development of the loan portfolio and deposits presented in financial statements of banks.

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Table 2. Bank loan portfolio changes

2009 2010

Q3 Q4 Q1 Q2 Q3 Q4

Loans (end-of-period), LTL billions 66.4 64.8 63.3 63.1 62.6 61.7

Loan portfolio, annual percentage changes –4.8 –8.8 –8.0 –6.4 –6.0 –4.9

Loans to non-financial corporations (end-of-period), LTL billions 33.0 32.4 31.7 31.0 30.0 29.1

Loans to non-financial corporations, annual percentage changes –6.7 –9.4 –9.1 –7.9 –9.2 –10.1

Loans to households (end-of-period), LTL billions 29.2 28.9 28.5 28.1 27.7 27.3

Loans to households, annual percentage changes –2.1 –4.3 –4.7 –4.7 –5.2 –5.3

Loans to GDP* ratio, percentages 68.5 70.9 69.8 69.6 67.9 65.7

Loan flow to GDP* ratio, annual percentages –3.5 –6.9 –6.1 –4.7 –4.1 –3.4

Sources: Statistics Lithuania and Bank of Lithuania calculations.* Estimate of Statistics Lithuania of 28 February 2011.

In the context of a smaller share of non-financial enterprises facing a weak demand and financial difficulties, the business situation in 2010 improved somewhat: an increase was registered in sales, profit before taxes, profitability of sales (it accounted for 3.5% in the said period). Also, the share of profitably operating enterprises expanded (55.0% on average in 2010), while the number of new bankruptcy proceedings in 2010 was 14.5 per cent smaller than a year ago. However, enterprises were cautious in assessing the recovering economic activity and did not rush to finance investments by borrowed funds. On the one hand, this could be determined by a stronger financial situation of enterprises and financing of investments by own funds, as well as incomplete produc-tion capacity utilisation; on the other hand, due to tight credit conditions and increased interest rates, businesses avoided assuming additional financial liabilities. Throughout 2010, the banking system loan portfolio to non-financial corporations shrank in many economic activities, whereas the largest decline was registered in the portfolio of loans to the major debtors – manufacturing, trade and real estate enterprises.

In 2011, bank lending to non-financial corporation should grow in the context of weaker uncertainty about the capability of individual euro area countries to manage debts and a larger number of EU Member States registering economic growth. This will push consumption and imports up, therefore, enterprises operating in Lithuania will be able to increase sales and, owing to the optimisation of activity during previous periods, to boost profit as well.

Notwithstanding somewhat higher wages and a smaller number of the unemployed, the financial position of the population was still difficult, whereas consumer confidence remained negative. Households were intensively reducing consumption by borrowed funds, but new loans for house purchase were growing slightly. These developments could be affected by the stabilisation of real estate prices since the second quarter of 2010 and a substantially smaller increase in the supply of new housing than a year ago: in the first three quarters of 2010, the number of new apartments built was three times smaller year-on-year. Therefore, the number of repaid loans for house purchase was much higher than the number of new loans granted. Throughout 2010, the portfolio of loans to households went down by 5.3 per cent, i.e. its decline was stronger by one-fifth, compared to 2009, although weighted average interest rates on new loans dropped by 1.5 percentage points on an annual basis and made up 5.4 per cent in December.


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Chart 19. Dynamics of the portfolio of loans to non-financial corporations(quarterly flow)

Chart 20. Dynamics of the portfolio of loans to households(monthly flow)

In the environment of a more intensive competition among banks, in December 2010 banks started to reduce margins of housing loans6. However, the increase in inter-bank interest rates will not allow the borrowing price to fall very low in the nearest future. In spite of persisting tight lending conditions, the major share of banks expected the household demand for credit to grow gradually.

6 Spread between the weighted average interest rate of new loans to the private sector and the weighted average 6-month inter-bank interest rate.

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Chart 21. Interest rates on loans to the private sector and the portfolio development by currency

In the context of a sluggish recovery of the euro area economy and a continued fall in economic activity in some countries, the ECB has been implementing accommodative monetary policy and maintaining the key interest rate of 1 per cent for more than a year and a half. With the increase of liquidity in financial markets, inter-bank interest rates declined as never before. However, in the second half of 2010 they were pushed up by a stronger concern about national budget deficits of some countries and their capability to reduce it. Because of this and due to a higher bank lending margin, lending to the private sector in Lithuania became more expensive. Regardless of the changes in the euro area, inter-bank interest rates in litas declined somewhat in the second half of 2010. In December 2010, the weighted average interest rate of loans to the private sector made up 4.6 per cent and was 0.8 percentage point lower than a year ago. Throughout 2010, the spread of interest rates on loans in litas and in euro declined by a half, but remained high and amounted to 3.0 percentage points. Taking into account this development and attempting to reduce debt repayment expenses, households were more active in repay-ing loans in national currency. In December, the spread of interest rates on new loans to business in litas and euro went up, therefore, non-financial corporations became more active in borrowing in foreign currency.

DEPOSITS AND INTEREST RATES ON DEPOSITS

The accommodative monetary policy of the ECB and lower key interest rates improved the liquidity stance of financial intermediaries and reduced their need to borrow in the retail market. Therefore, the interest rates on deposits fell markedly. In the third quarter of 2008, average interest rates paid for private sector deposits with agreed maturity in the euro area reached their highest level since 2003 and made up 4.5 per cent. By the end of 2009, these interest rates went down more than twice and, notwithstanding an insignificant growth, in 2010 were the lowest in the last five years. However, depositors of the euro area countries boosted their deposits with the banking system by a twice larger amount, compared to the depositors of the non-euro area countries, despite the fact that a higher interest rate was offered for the latter.


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The need to attract additional deposits and maintain higher interest rates subsided after the tension related to bank liquidity weakened in Lithuania. After increasing in the beginning of 2009 to the level never observed before (7.7%), weighted average interest rates on new private sector deposits7 declined fivefold over a year and a half and made up 1.6–1.8 per cent since mid-2010. Nonetheless, depositors (excluding financial intermediaries) remained active and raised their savings in banks by 10.3 per cent in 2010.

Table 3. Changes of deposits held with banks

2009 2010

Q3 Q4 Q1 Q2 Q3 Q4

Deposits (end-of-period), LTL billions 36.3 39.3 39.6 40.8 41.1 43.4

Deposits, annual percentage changes –5.9 8.2 9.6 11.7 13.0 10.3

Deposits of non-financial corporations (end-of-period), LTL billions 8.4 9.4 9.1 9.0 9.7 11.0

Deposits of non-financial corporations, annual percentage changes –10.5 8.8 6.4 6.6 16.1 16.5

Deposits of households (end-of-period), LTL billions 24.0 25.5 25.6 26.1 25.7 27.1

Deposits of households, annual percentage changes –4.2 3.4 4.7 7.1 6.9 6.3

Deposits to GDP* ratio, percentages 37.5 43.0 43.6 45.0 44.5 46.2

Sources: Statistics Lithuania and Bank of Lithuania calculations.* Estimate of Statistics Lithuania of 28 January 2011.

Chart 22. Interest rates on deposits of the private sector and the dynamics of deposits by currency

In the environment of a gradual improvement of the private sector financial situation, depositors were slow in spending money for consumption and used a part of free funds to increase deposits. However, taking into account low interest rates paid on deposits with agreed maturity, they preferred to increase overnight deposits. In the context of

7 1-month and longer-term deposits.

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subsiding tension with regard to stability of the national currency and the narrowing of the spread of the interest rates on deposits in litas and in euro, the composition of deposits by currency changed: in 2010, the share of depositors holding their sav-ings in litas expanded. The general government boosted its deposits with banks the most, which might have been affected by the funds attracted in foreign markets and temporarily unused.

II. FUNCTIONS OF THE BANK OF LITHUANIA

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EXCHANGE RATE AND MONETARY POLICY

The primary objective of the Bank of Lithuania is to maintain price stability, which is implemented using a fixed exchange rate strategy. The Law of the Republic of Lithuania on the Credibility of Litas which came into effect on 1 April 1994 provides legal grounds for the fixed exchange rate of the litas. It sets an obligation for the Bank of Lithuania to ensure the litas amount in circulation is fully (no less than 100%) backed by gold and foreign reserves and the anchor currency is exchanged into litas at a fixed exchange rate. The above principles help to maintain a fixed exchange rate of the litas. As of 2 February 2002, the euro is the anchor currency for Lithuania.

EXCHANGE RATE POLICY

In the context of the fixed exchange rate regime, the Bank of Lithuania ensures free exchange of litas into euro and vice versa, therefore, it can not directly regulate the litas market rates and the amount of litas in circulation, as the latter depends on the changing litas demand. For these reasons, the Bank is unable to regulate directly the aggregate demand and the price level. However, the fixed exchange rate means that the primary objective is pursued indirectly, i.e. it helps to keep export and import prices stable and encourages international trade, it also helps to anchor inflation expectations and support confidence in the Lithuanian economic policy. The fixed exchange rate of the national cur-rency therefore helps to ensure relative price stability in a long perspective. Such strategy has been applied since 1994. It is successful because of such features of the Lithuanian economy as its openness and relative flexibility of prices and wages.

Short and medium-term price developments may deviate from the level that is perceived as relative price stability. This depends on various reasons related to both external and internal factors, such as significant changes in global commodities market (especially changes in food and energy prices, which account for a relatively large share in Lithuania’s consumer price index and cost structure of the economy); administrative decisions (change of consumption taxes and administered prices); structural processes (huge differences in labour productivity within exporting and non-exporting sectors, which lead to price convergence, and improv-ing trade environment), as well as cyclical downturns and upturns of the economy, which sometimes are deepened by the country’s inadequate economic and fiscal policy.

EU single currency euro is one of the most significant economic policy measures on the way to our country’s prosperity. Lithuania will join the euro area as soon as it complies with the Maastricht convergence criteria. The introduction of the single currency will allow the country to enjoy the full benefits it can offer, such as no exchange rate risk, cheaper borrowing in the domestic market, no currency exchange costs and cheaper cash transfers for settlement with the key trade partners in the euro area. This will give a boost to Lithuania’s trade and financial integration in the euro area, increase its at-tractiveness to investors and add to the growth of the welfare of its residents.

2010


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One of the conditions for the adoption of euro is the country’s participation in the ERM II. Lithuania joined the ERM II on 28 June 2004; since then it maintains the fixed exchange rate regime and a stable exchange rate of the litas against the euro, which is LTL 3.4528 for EUR 1. In its convergence programmes, the Government of the Republic of Lithuania reaffirmed repeatedly Lithuania’s plans to continue participation in the ERM II and stick to the fixed exchange rate of the litas against the euro at the current rate. The Bank of Lithuania continues to maintain institutional capacities for smooth and rapid currency changeover in case the EU Council adopts a decision to introduce the euro in the country.

In 2010, the difference between litas and euro interest rates decreased further. This showed increasing confidence in litas stability, sustainability of public finances and the prospects of Lithuania’s economy. The money market interest rate spread, calculated as a difference between three-month VILIBOR and EURIBOR, continued decreasing. During the year, it narrowed 6.5 times to 50 basis points, the level observed in June 2008. The long-term interest rate spread, as measured by the Lithuanian and German government securities yield spread, went down over the year 1.7 times to 260 basis points, the level observed in mid-October 2008. Due to further economic developments and challenges of fiscal and structural policy, the long-term interest rate spread was decreasing at a slower rate than the money market interest rate spread.

Chart 23. Litas and euro interest rate spreads

MONETARY POLICY INSTRUMENTS

The Bank of Lithuania uses monetary policy instruments to maintain the fixed exchange rate of the litas against the euro and ensure that there is an appropriate amount of liquidity in the banking system. The Bank of Lithuania exchanges litas into euro without restrictions upon request of domestic commercial banks and branches of foreign credit institutions (hereinafter referred to as banks), applies the reserve requirements and pro-vides the overnight lending facility.

To implement the fixed litas exchange rate regime, the Bank of Lithuania has assumed a commitment in respect of the banks subject to reserve requirements to buy and sell anchor currency without restrictions at the official exchange rate. The net result (the


41

amount of euro purchased or sold by the Bank of Lithuania over a certain period of time) directly depends on the change in the autonomous factors of the banking system reserves in litas8, required reserves and excess reserves.

To ensure stability of settlements between banks, the Bank of Lithuania provides a lend-ing facility in the form of overnight repurchase agreements to banks that participate in the real-time gross settlement system. The banks however had no recourse to this facility in 2010. Required reserves, an efficient interbank settlement system and the an-chor currency exchange facilities at the Bank of Lithuania enabled banks to ensure safe management of their liquidity.

Table 4. Monetary policy instruments of the Bank of Lithuania

Liquidity provision Liquidity absorption Maturity Frequency Procedure

Standing facilities for banks

Anchor currency sale to the Bank of Lithuania

Anchor currency purchase from the Bank of Lithuania

– Access at the discretion of counterparties

Bilateral transactions,the Bank of Lithuania purchases euros and settles on trade date or the second day following trade date and sells euros and settles on the second day following trade date

Overnight repurchase agreements

– 24 hours Access at the discretion of counterparties

Bilateral transactions

Reserve requirements

Banking system liquidity stabilisation

The reserve base consists of the liabilities of banks established in Lithuania and foreign bank branches, except liabilities to the Bank of Lithuania (if any) and other banks 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 4 per cent is applied to other liabilities of the base.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. A bank shall have complied with its reserve requirement, if the simple arithmetic average of the bank’s reserve holdings was not lower than required reserves.

REQUIRED RESERVES AND BANKING SYSTEM LIQUIDITY DEVELOPMENT FACTORS

In 2010, the volume of required reserves of the banking system changed only margin-ally; however, there were changes observed in the composition of bank liabilities. As the Bank of Lithuania reduced the reserve requirement ratio to 4 per cent in October 2008, the development of required reserves was driven mainly by the changes in banks’ liabilities. Over the year, the banking system’s required reserves grew by LTL 90 million (4.7%) to largely offset a slight decline in 2009. In 2010, a further decline in liabilities to foreign banks and the growth in resident (households, non-financial corporations and the general government) deposits were observed. The share of resident deposits grew from 78.8 to 82.2 per cent.

Long-term bank liabilities with the initial maturity of over two years, which are subject to zero reserve requirement ratio by the Bank of Lithuania, went down by 21.9 per cent to LTL 22 billion in 2010. Banks cut their liabilities to foreign banks, but the share of

8 Autonomous factors of the banking system reserves in litas are the Bank of Lithuania operations that have an impact on the amount of reserves of the banking system in litas, but are performed to satisfy the needs other than liquidity management of the banking system. The main autonomous factors include the amount of currency in circulation and the transfer of the general government funds from the banking system to the Bank of Lithuania and vice versa.

2010


42

long-term liabilities held by the latter continued to be the largest, making up 89.6 per cent. Other long-term liabilities remained low at the end of 2010. The funds that were attracted through long-term bonds and long-term deposits of non-bank residents (mainly households) made up respectively 4.0 and 3.9 per cent of long-term bank liabilities, while long-term deposits of non-bank non-residents made up 2.5 per cent. Long term liabilities decreased over the year from 37.4 to 30.8 per cent of total bank liabilities, well below the level of respective liabilities of credit institutions within the euro area (37% based on the end-2010 data).

The Bank of Lithuania also applies zero reserve requirement ratio to the banking funds attracted through repurchase agreements. The repurchase agreements made up a low, but increasing, share of bank liabilities subject to zero reserve requirement ratio. In 2009, it fluctuated between 0.3 and 0.7 per cent, before increasing to 0.6–2.3 per cent interval in September 2010, as banks were more inventive in attracting funds in the domestic market.

Chart 24. Bank reserves in litas held at the Bank of Lithuania

Similar to 2009, the autonomous factors of the banking system’s reserves in litas con-tributed to the growth of its excess reserves in litas in 2010, and the amount of euros purchased from the Bank of Lithuania by banks in the context of the fixed exchange rate of litas and the self-regulation of money supply was higher than the amount of euros they sold to the Bank of Lithuania. During the said period, autonomous factors made the banking system reserves grow by LTL 7.6 billion. By exchanging the funds received from the EU structural funds and the funds borrowed in foreign currency into litas and by using them in the domestic market, the Government of the Republic of Lithuania boosted the supply of bank reserves in litas by LTL 8.6 billion. The demand for litas cash increased by LTL 0.9 billion following the economic recovery, and required reserves went up by almost LTL 0.1 billion, reducing the banks’ excess reserves in litas accordingly.

FOREIGN EXCHANGE OPERATIONS

In the context of the economic recovery and increasing demand for money, the amount of foreign currency in net terms purchased by the Bank of Lithuania, in contrast to 2009,


43

was higher than the amount sold. In 2010, the sale of foreign currency (mainly euro) to the Bank of Lithuania by the Ministry of Finance of the Republic of Lithuania and other depositors exceeded the foreign currency purchase by LTL 8.2 billion, while the purchase of euros by banks exceeded the sales by LTL 7.1 billion. The net purchase of the foreign currency by the Bank of Lithuania therefore made up LTL 1.1 billion.

Table 5. Net purchase of foreign currency from the Bank of Lithuania (–) or net sale to the Bank of LithuaniaLTL millions

2009 2010

Q1 Q2 Q3 Q4 Q1–Q4

Domestic banks –14,291.5 –2,478.0 –1,565.5 –1,113.2 –1,906.1 –7,062.8

Other depositors of the Bank of Lithuania 11,730.3 1,735.5 1,971.6 1,244.5 3,213.6 8,165.1

Total –2,561.2 –742.5 406.1 131.3 1,307.5 1,102.3

Source: The Bank of Lithuania.

In 2010, the Bank of Lithuania concluded foreign exchange transactions with domestic banks and its other depositors for the amount of LTL 67.7 billion or almost the same amount as in 2009 (LTL 68.5 billion).

Chart 25. Foreign exchange trade of the Bank of Lithuania with commercial banks and other depositors

SUPERVISION OF CREDIT INSTITUTIONS AND THEIR OPERATIONS

SUPERVISION OF CREDIT INSTITUTIONS

The Bank of Lithuania acts within the limits of the powers conferred on it to perform the supervision of credit institutions, which involves monitoring and control of credit institu-tions’ compliance with the laws and the requirements laid down by the legal acts of the Bank of Lithuania, the International Accounting Standards, and the recommendations of the Basel Committee on Banking Supervision presented in “Core Principles for Effective Banking Supervision”. It also takes preventive measures that ensure effective and reliable functioning of individual credit institutions and the entire system.

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SUPERVISION OF CREDIT INSTITUTIONS: MAIN TRENDS

The Bank of Lithuania’s priority in the supervision of credit institutions remains the prevention of the activities risk in banks. In 2010, the Bank of Lithuania focused on the management of various types of risks encountered by banks and the strengthening of bank capital (capital base), which is the main source for absorbing risk-related losses.

Additional requirements were laid down to further enhance internal control and risk management for the improvement of risk management processes in banks and other credit institutions. Much attention was paid to credit and liquidity risk management; new requirements were set for building up liquidity buffers and liquidity counterbalancing capacity, which reduce potential liquidity risk; new requirements for the management of concentration risk were approved.

In 2010, banks continued implementing the internal capital adequacy assessment process (ICAAP). They assessed the significant risk, calculated the capital requirement to cover it and presented information on the capital increase possibilities with regard to the bank’s activity forecast on a continuous basis. During the ICAAP, banks calculate the internal capital required to cover not only credit, market and operational risk, but also other risks (concentration risk, strategic risk, interest rate risk in the banking book, large exposure risk in trading book, equity risk, reputation risk and other risks) that are not assessed or are insufficiently assessed, when calculating the regulated capital adequacy amount under the General Regulations for the Calculation of Capital Adequacy. The internal capital adequacy requirements set by banks in Lithuania are higher than the internal capital level required by the Bank of Lithuania. When this level is approached, solutions are searched for the increase of the capital or the reduction of the asset risk.

The Bank of Lithuania also continued the supervisory review and evaluation process (SREP) to find out whether banks manage their risks properly and their capital is sufficient to cover this risk, as well as to identify potential and existing problems and shortcomings in the internal control and risk management system.

In conjunction with the SREP, the central bank additionally continued to organise annual general and target on-site inspections of banks. During target on-site inspections, special attention was devoted to the management of individual risks and certain areas of bank activities. In 2010, much attention was paid to the issues related with the management of credit and liquidity risks and the improvement of internal management. During general on-site inspections, the highest risk areas of banking activities were a matter of primary interest, as well as the evaluation of the management not only of credit and liquidity risks, but also market and operational risks, and the internal control. Risk management systems were examined to find out whether they are sound and effective, whether they allow proper and timely risk identification, assessment, monitoring and management, whether banks ensure compliance with the requirements of the legal acts regulating banking activities and their internal regulations and whether financial and supervisory reports submitted to the Bank of Lithuania are drawn up correctly.

There were a number of regular meetings of the Chairman of the Board of the Bank of Lithuania and some members of the Board with heads of banks operating in the country. These meetings were held to find out about activity prospects of banks, to present to their management the Bank of Lithuania’s position on the issues it considers the most urgent, to discuss inspection results and other problems related to bank activities.

The liquidity in the banking sector was constantly monitored. The Bank of Lithuania continued to collect additional daily information on the changes in the composition of


45

assets and liabilities. Upon detecting any major changes in the composition of assets and liabilities, banks were requested to provide explanations and foresee measures to be taken to absorb potential liquidity risk.

To limit possibilities for liquidity risk to emerge, banks were presented with new require-ments for building up liquidity buffers and liquidity counterbalancing capacities. Banks started building up liquidity buffers for at least one-week and for at least one-month survival period. Banks estimated their liquidity counterbalancing capacity based on the cash-flow forecasts to ensure permanent appropriate level of required liquidity.

To ensure more detailed regulation of risk management and greater transparency of the supervisory process, the legal acts of the Bank of Lithuania regulating ICAAP, SREP, requirements for the consolidation of financial group financial reporting and joint (con-solidated) supervision, requirements for the supervision of foreign bank branches and cooperation with supervisory institutions of other EU Member States during the supervi-sion of branches were supplemented. Moreover, the definitions of the new maximum exposure requirement and connected persons were tightened. It is expected to impose more restrictions on bank lending to connected persons and thus reduce the loan port-folio dependence on connected borrowers.

To strengthen risk management processes in banks, special attention was paid to the concentration risk. The new requirements approved by the Bank of Lithuania aim at re-ducing the loan portfolio concentration and dependence of credit risk on certain clients, financial products, sectors of economic activity or geographical regions.

In order to tighten the requirements that credit institutions have to comply with when setting and paying variable remuneration and other payouts awarded on the basis of performance results to employees whose professional activity and decisions taken may have a material impact on the risk assumed by the credit institution, the Board of the Bank of Lithuania approved the new remuneration policy requirements for the staff of credit institutions, which provide for certain restrictions regarding the deferred and non-cash portion of variable remuneration and the deferral period.

Taking into account the impact of the global financial crisis and the recommendations of the EU institutions to revise the requirements for conducting stress testing in banks, the Bank of Lithuania updated and supplemented the General Regulations for Stress Testing. Requirements were set for banks to diversify the sources of liquid funds, to perform liquidity risk testing taking into consideration potential stress scenarios and to prepare business continuity plans revised on the basis of the stress testing results. Banks are required to build detailed macroeconomic scenarios that would cover not only narrow bank operation aspects, but also various factors that occur or may occur independently from bank activities and yet have an impact on the operation and financial situation of banks. Moreover, the requirements for the stress testing of liquidity risk and concentra-tion risk were improved.

To determine real resilience of the financial sector, all banks performed stress testing according to general Bank of Lithuania’s scenarios, which are sufficiently severe. The findings of the stress testing on 1 January and 1 July 2010 showed that the Lithuanian banking system is capable of withstanding potential financial shocks.

To simplify the conditions for the operation of electronic money institutions and encour-age the development of electronic money within the Lithuanian financial system, as well as to implement the provisions of the Directive of the European Parliament and of the Council on the taking up, pursuit and prudential supervision of the business of electronic

2010


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money institutions, experts of the Bank of Lithuania in cooperation with the working group formed by the Ministry of Finance of the Republic of Lithuania worked out a draft law of the Republic of Lithuania on electronic money and electronic money institutions, as well as amendments and supplements to other related laws.

As the Bank of Lithuania started conducting the supervision of payment institutions, the supervisory infrastructure for these institutions was built. It comprises both the legal base (licensing, calculation of requirements, internal control, reporting, etc.) and the technical measures that ensure the submission of supervisory and financial reports and the performance of supervision.

As the credit unions of Lithuania continued to expand their activity and introduced an increasing number of various operations, the necessity emerged for more detailed regula-tion of the requirements for their financial accounting and financial reporting. With regard to the above, the Board of the Bank of Lithuania approved the Policy Requirements for Financial Accounting and Financial Reporting of Credit Unions.

In implementing the provisions of the programme of the Republic of Lithuania for 2008–2012 on merging the financial market supervisory authorities, the Bank of Lithua-nia’s staff took part in the drafting of various legal acts and participated in the commission formed by the Ministry of Finance of the Republic of Lithuania for the implementation of the concept of the merger of financial market supervisory authorities.

The IMF mission that visited Lithuania in May and October 2010 analysed Lithuania’s macroeconomic and financial stability, gave their assessment of the general economic forecasts and the implementation of economic policy measures.

REVIEW OF CREDIT INSTITUTIONS’ ACTIVITIES

BANKING ACTIVITIES REVIEW

The banking system of Lithuania consists of 9 commercial banks, 11 foreign bank branches and 2 representative offices of foreign banks. Two foreign bank branches have not yet started their operation. By 31 December 2010, the Bank of Lithuania had received 239 notifications from the supervisory authorities of the EU Member States regarding inten-tions of the banks licensed by them to provide services in Lithuania without establishing branches.

KEY INDICATORS OF THE BANKING SYSTEM

2010 was a breakthrough year that was much more favourable for the operation of banks than the previous year, which allowed the banking sector to curtail its operational losses significantly. The positive trends in banking activities became evident in the second half of 2010, when the growth of assets and loans was observed during some months. In 2010, the increase in customer deposits exceeded the growth in the previous year, whereas the decline in bank assets and the volume of loans to customers was several times smaller than last year. The recent positive dynamics of the key banking sector indicators suggests the worst is already behind.

Bank assets fell over the year by 3 per cent to LTL 81.7 billion on 31 December 2010, while loans to their customers decreased by 5.2 per cent to LTL 58.3 billion. Although deposit interest rates went down significantly in all of the banks, deposits kept grow-ing fast in 2010. Deposits climbed over the year by 10.6 per cent to LTL 45.4 billion. They grew in all depositor segments, with the exception of financial institutions, while the biggest contribution was reported for the deposits of private enterprises, which


47

grew by LTL 2 billion (17.5%). As in the previous year, a notable increase was observed in household deposits (by LTL 1.3 billion) and deposits of government institutions (by LTL 880.8 million).

Chart 26. Dynamics of assets, loans and deposits of the banking system(end-of-period)

Deterioration in the financial situation of borrowers and huge loan impairment losses affected the crediting policy of banks, which remained conservative throughout 2010; however, changes in the composition of bank assets indicate the stabilisation of the share of loans. It kept decreasing very fast in 2009, while in 2010 it went down by 1.7 percentage points (only by 0.4 percentage point in the second half) to make up 71.4 per cent of bank assets. As the loan portfolio of banks contracted, repaid funds were directed to reduce debts to other banks (mainly parent banks), whereas the share of securities was growing at a slower rate than in the previous year. Bank investments in securities hiked in 2010 by LTL 849 million, with their share in bank assets increasing by 1.3 percentage points to 11.1 per cent. During 2010, a decrease was observed not only in the debt to banks, but also in the funds held with banks (LTL 1.4 billion). The latter declined by 1.5 percentage points to 8.5 per cent mainly due to a decrease in the funds held with parent banks abroad.

On 31 December 2010, the share of the bank assets invested abroad made up 16.9 per cent of total bank assets, a slight decrease over the year, which was largely offset by the growth of investments in debt securities of foreign issuers and loans to non-residents. In contrast to 2009, an ongoing decline in assets invested abroad was followed by a decline in the share of foreign currency denominated (mainly euro denominated) assets. Although this share declined by 1.8 percentage points over the year, it still was the largest share of assets at 71.2 per cent.

Although the changes in the structure of banks’ financing sources followed the previous year trends, they were more significant. Deposits held in banks continued to grow very fast for the second consecutive year, reaching historical highs; thus the significance of deposits as a financing source increased further, whereas dependence of banks on the financing by foreign banks (parent banks among them) continued to decline.

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Chart 27. Composition of bank assets(end-of-period)

In 2010, the debt to banks and other credit institutions declined by LTL 6.9 billion or 21.2 per cent. The entire flow of funds repaid to banks was directed to parent banks abroad. Owing to such changes, the share of the debt to banks decreased over the year by 7.2 percentage points to 33.7 per cent of total balance sheet liabilities. Growth was registered in various deposit segments: deposits to households and private enterprises each grew by 3.2 percentage points, whereas other deposits went up by 1.7 percentage points. On 31 December 2010, household deposits made up 34.4 per cent of liabilities and were the major source of financing for the banking sector.

Chart 28. Composition of bank liabilities(end-of-period)


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Such changes led to the growth of the loan portfolio share that is financed with deposits: a year ago, customer deposits were used to finance 66.7 per cent of the loan portfolio, whereas other bank resources (mainly the funds borrowed from parent banks) made up the smaller share, while in 2010 the loan portfolio share financed with deposits reached 77.9 per cent. Furthermore, owing to the above changes in the structure of banks’ financing sources, the Lithuanian banking system became less reliant on the financing from other countries: on 31 December 2010, the funds received from non-residents accounted for 40.1 per cent of the banking system’s liabilities, a year-on-year drop of 6.1 percentage points.

The amount of deposits in banks grew in 2010 largely due to an increase in the funds attracted from the Lithuanian residents, while the amount of non-resident deposits went up only marginally. Litas deposits increased by LTL 3.1 billion, while deposits in foreign currency grew by LTL 1.3 billion; consequently, the litas deposit share grew to 66.5 per cent of total deposits.

In 2010, performance results of the banking sector revealed positive changes; after almost two years of operating with loss, the banking sector began to earn profit since the middle of the year. Nevertheless, because of the negative performance result in the first half of 2010, the banking sector suffered the loss of LTL 276.2 million over the year. The performance result for 2010 improved significantly however, compared with 2009, when the loss made up LTL 3.7 billion. In 2010, two banks and five foreign bank branches reported profit, while seven banks and four foreign bank branches incurred losses.

Chart 29. Net profit (loss) of banks(end-of-period)

More than a fourfold decrease of asset impairment expenses, compared with 2009, was the major driving force behind the improvement of bank performance results. These expenses made up LTL 1.2 billion in 2010. A decrease in provisions for off-balance items was another factor that had a positive effect on the improvement of performance results. Despite a significant reduction, asset impairment expenses remained sizeable, compared with those recorded during the economic growth period, and had a negative effect on bank performance results. The above expenses are likely to decrease further in the context of the domestic economy recovery. Expenses on the impairment of loans and receivables (LTL 694.8 million) accounted for the biggest share of asset impairment expenses, while the expenses on the impairment of investments in subsidiaries (mainly in subsidiary leas-

2010


50

ing companies) (LTL 457 million) recognised by banks made up a significant portion of the latter. Despite a significant improvement driven by a decrease in asset impairment expenses, the bank performance result before taxes and assets impairment and provision expenses in 2010 (LTL 854.2 million) was lower than in 2009 (LTL 1,042.6 million).

The operational results of the banking sector suffered in 2010 because of a decline in net interest income, trading book profit and operations in other financial instruments. Net interest income, which constitutes the biggest share of bank earnings, decreased by LTL 117.3 million or 9.2 per cent, trading book profit went down by LTL 40.4 million, whereas the profit from other financial assets and liabilities declined by LTL 160.2 million. Net interest income went down as a result of a shrinking loan portfolio, while the real interest margin, which shows a difference between banks’ interest income and interest expenses, stabilised in the second half of 2010 and started growing. Since 1 April 2010, the date when the real interest margin went down to historical lows, it kept growing slowly for three consecutive quarters, but still remained very low. On 31 December 2010, it made up 1.3 per cent only. The growth of the real interest margin in the future is likely to have a positive effect on the growth of net interest income and bank profitability.

To improve their operational result, banks raised service fees and continued increasing operational efficiency by curtailing their expenses. In 2010, banks earned LTL 673 million of net income from services and commissions, a year-on-year increase of LTL 22 million or 3.4 per cent. As net interest income of banks declined, the impact of net income from services and commissions on bank income grew significantly, since this type of income changed insignificantly during the economic downturn and remained in the second place in terms of amount among all types of bank income. Despite the fact that major steps to boost efficiency were already taken in 2009 and the economic recovery and the intensification of bank activity prompted an increase in the volume of operations, banks were still able to improve operational efficiency by reducing their expenses: other opera-tional expenses decreased by 6.5 per cent, whereas amortisation expenses went down by 6.8 per cent. Staff expenses, which accounted for the major portion of operational expenses, decreased in 2010 by 4.7 per cent, compared with 2009, while the number of employees went down over the year by 457 or 5.3 per cent.

The staff reduction prompted an increase in the amount of bank assets per one bank employee in the banking sector, which is one of the indicators showing staff efficiency in the banking sector. The indicator of assets per employee of the banking system (exclu-ding employees in foreign bank branches) grew over the year by 1.7 per cent on average to LTL 8,140 thousand.

INCREASE IN BANK CAPITAL

On 31 December 2010, the foreign investors’ share in the banks’ authorised capital made up 87 per cent. The capital of the Scandinavian investors continued to prevail in the banking system of Lithuania.

To curtail the operational risk of banks, the Bank of Lithuania applies the capital adequacy ratio. In 2010, all banks complied with the established capital adequacy ratio, and the banking system complied with this ratio with quite a large reserve. Over the year, the capital adequacy ratio grew by 1.4 percentage points to 15.6 per cent on 31 December 2010. It grew despite the tightening of requirements for financial instruments included in bank capital in late 2010. The capital structure of the domestic banking system was sound, since as much as 78 per cent of the capital consisted of Tier I capital. It should be noted that both the European Commission and the Basel Committee on Banking Supervi-


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sion plan to further tighten the capital definition and to introduce new capital adequacy ratios for Tier I capital and financial leverage. Although the approval of the envisaged changes has not been finalised yet, the preliminary calculations show that the Lithuanian banks would have sufficient capital to comply with the future requirements.

With the improvement of operational results, banks continued to boost their capital. Many of them used various measures to do this in 2010: their authorised capital was increased by LTL 157 million, reserve capital by LTL 173 million, whereas the shareholder of one of the banks paid LTL 345.3 million to cover the loss of the subsidiary. Consequently, in spite of the operational loss, the banking system capital grew by LTL 450 million to LTL 7.3 billion.

The growth of the capital adequacy ratio during the previous year was driven not only by the increase in bank capital, but also by the reduction of the risk assumed by banks: in 2010, bank assets (mainly loans) declined, leading to a decrease in credit risk capital requirements.

When performing the ICAAP, banks calculated additional capital requirement for various types of risks, which were not assessed or insufficiently assessed under the General Regula-tions for the Calculation of Capital Adequacy.

BANKS BY MARKET SHARE

As in the wake of the economic downturn the largest banks abandoned their active expansion plans, the concentration of three banks that occupied the largest market share in 2010 continued to decrease across all major market segments. Over the year, the asset market share of three largest banks shrank by 3.5 percentage points to 60.8 per cent, the deposit market share decreased by 2.2 percentage points to 63.5 per cent, whereas the loan market share went down by 1.9 percentage points to 64.1 per cent. A considerable market share lost by foreign bank subsidiaries was overtaken by smaller banks without parent banks; foreign bank branches slightly strengthened their market position as well. The assets share of banks that do not have foreign parent institutions continued to grow to reach 19.5 per cent, the highest level over the past few years.

Chart 30. Market share of banks by assets(end-of-period)

BANK ACTIVITY RISK REVIEW

Credit Risk

A marked growth in lending operations by banks was observed in 2010, compared with the previous year, however, due to more conservative risk assessment the growth was slower than in the pre-crisis period, whereas the flow of new loans still remained below that of repaid loans. The amount of new loans extended by banks over the year totalled LTL 9.6 billion, a year-on-year increase of LTL 2.8 billion. Less significant changes in loan

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portfolios were registered not only because of more intensive bank lending, but also because of lower loan impairment: the latter made up LTL 3.9 billion of specific provisions in 2009 and LTL 0.3 billion in 2010. The annual rate of the loan portfolio decline deceler-ated each quarter in 2010. The ongoing economic recovery will most likely contribute to a further increase in lending activities by banks.

In 2010, banks were more active in lending to the public sector and subsidiary financial institutions, while lending to the private sector, the major segment in the loan portfolio, continued to decrease, albeit at a lower rate than in 2009. Loans granted to general government institutions and to state and local government enterprises increased by LTL 1 billion, while loans to the public sector as a share of the loan portfolio of banks almost doubled over the year to account for 4.4 per cent at the end of the year. Loans to financial institutions grew over the year by LTL 948.2 million, whereas their share in the loan portfolio of the banking system increased to 5 per cent. Lending to subsidiaries was the major driving force behind the growth of lending to financial institutions. The loan portfolio declined largely due to the decrease in loans to private enterprises by LTL 3.2 billion. Their share in the loan portfolio fell by 2.8 percentage points over the year to 47.7 per cent on 31 December 2010. A significant decline was also observed in loans to households (LTL 1.9 billion), which accounted for 42.9 per cent of the total loan port-folio. Housing loans made up the biggest share of loans to households. They declined at a slower rate (by 2.4% only) than other loans to households in 2010; therefore their share grew by 3.8 percentage points to 79.3 per cent of total loans to households. There were several reasons for a relatively subdued decrease in the housing loan portfolio: these are long-term loans, thus their regular repayments are relatively small, leading to a slow decrease in the remaining repayable amount. The quality of this type of the loan portfolio deteriorated insignificantly over 2010, i.e. the impact of the growth of specific provisions on the value of these loans was lower.

In 2010, there were fewer incentives for borrowing in euro, as VILIBOR, which is used to calculate interest rates on loans to customers, came noticeably close to EURIBOR. Consequently, the share of loans in litas in the loan portfolio in 2010 decreased by 0.4 percentage point, considerably less than in 2009, when it dipped by 9 percentage points. On 31 December 2010, litas loans accounted for 26 per cent of the loan portfolio.

Table 6. Loan portfolio quality indicators(31 December 2010; share of the loan portfolio, percentages)

Loan impairment (specific provisions)

Loans overdue for more than 60 days

Impairedloans

Non-performingloans

Loans to customers: 7.9 3.0 16.6 19.5

of which, housing loans 3.0 2.4 5.7 8.1

of which, consumer loans 11.7 9.0 10.7 19.7

Source: Bank of Lithuania calculations.

The recovery of the economy of Lithuania could also be seen recently from the loan portfolio indicators: their trends in 2010 indicated the loan quality stabilisation. Individual indicators for the loan portfolio quality deteriorated further, but at a lower rate than in 2009. In 2010, specific provisions of banks grew by LTL 267.5 million (LTL 3.9 billion in 2009). It should be noted that specific provisions grew in the first half of 2010, but decreased slightly in the second half of the year. The ratio of loan impairment (specific provisions) to loan portfolio grew by 0.8 percentage point to 7.9 per cent, whereas the ratio of impaired loans to loan portfolio went up by 0.8 percentage point to 16.6 per


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cent. The ratio of loans with initial regular payments overdue for more than 60 days9 to total loan portfolio decreased by 0.6 percentage point to 3.0 per cent.

The quality of the loan portfolio of banks and the amount of specific provisions are largely affected by loans to businesses. Although the number of enterprises under the bankruptcy procedure or under restructuring began to decrease in 2010, their liabilities to banks remained significant. Liabilities of all enterprises under the bankruptcy proce-dure or under restructuring to banks made up around LTL 3.5 billion or 12.7 per cent of bank loans to resident private enterprises on 31 December 2010. Specific provisions by banks for loans to the above-mentioned enterprises amounted to LTL 1.7 billion, with loans to enterprises in real estate and construction sectors accounting for the biggest share of these loans (around 70%).

On 31 December 2010, the coverage ratio of impaired and overdue loans was 70.3 per cent, i.e. this is the share of loans that banks expect to recover from collateral provided by borrowers. Slight variations of this indicator in 2010 showed that the value of the pledged assets held by banks remained broadly unchanged.

On 31 December 2010, banks were capable of absorbing credit risk losses in the amount of LTL 2.9 billion without violating the capital adequacy ratio, i.e. they were able to in-crease specific provisions by almost 60.0 per cent or to increase the risk-weighted assets by LTL 32.7 billion.

Liquidity Risk

With the improvement in the economic situation of the country and the intensification of bank operations, the banking sector liquidity ratio started to decrease. It declined by 7.1 percentage points in 2010 and made up 42.8 per cent on 31 December 2010, i.e. it was almost 13 percentage points higher than the minimum set by the Bank of Lithuania (30%). In 2010, all banks complied with the set liquidity ratio. The liquidity ratio decrease was driven mainly by demand deposits, which contributed to the growth of current liabilities, while bank holdings of liquid assets went down insignificantly (by LTL 0.2 billion), despite more active lending. This means that lending was financed by attracting deposits rather than by reducing liquid assets. As the banking system assets were declining faster than liquid assets, the share of the latter increased over the year and made up 24.1 per cent of bank assets.

The threat of liquidity risk subsided, as the situation in Lithuanian and global financial markets continued to improve, reducing the need for banks to keep liquidity ratio on the same high level as in the context of adverse market developments. It should be noted that to ensure the capability of meeting their liabilities in adverse environment, when necessary, foreign bank subsidiaries, which hold the biggest share of the Lithuanian banking system, could get financing from their parent banks. As their debt to foreign parent banks decreases, subsidiary banks have large unused borrowing facilities with their parent banks. Banks without parent institutions abroad are particularly sensitive to the fluctuations in deposit volume and have limited access to support from other financial institutions, which makes them more vulnerable in this sense. To avoid problems that may arise in the case of a sudden decrease in deposits, these banks hold larger reserves of liquid funds. Their liquidity ratio contracted in 2010 at a lower rate and was higher by 8 percentage points on average, compared with that of foreign bank subsidiaries.

Acknowledging the importance of liquidity risk management, the Bank of Lithuania sup-plemented the Rules for Calculating the Liquidity Ratio in May 2010. Banks were instructed 9 Loans overdue for more than 60 days become subject to analysis only in the case when no specific provisions have

been made against them on an individual basis.

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to disclose projected inflows and outflows, the net financing gap and liquidity buffers for the period of up to 1 month, as estimated during stress-testing. On 31 December 2010, banks reported having sufficient liquidity buffers to cover the net financing gap. Liquidity buffers formed by banks made up LTL 17.6 billion, while the net financing gap totalled LTL 7.3 billion, which means that banks had liquidity buffers, which exceeded the minimum requirement 2.5 times.

Market Risk

The capital adequacy report data showed that on 31 December 2010 the capital required to absorb market risks amounted to LTL 376.7 million or 8.5 per cent of the overall capital requirement for the absorption of all types of risks estimated by banks.

The biggest share of the market risk capital requirement (75.2%) went for the coverage of foreign exchange risk. The share of the capital requirement to absorb interest rate risk decreased over the year to 20.4 per cent, while the share of the capital requirement for absorbing other market risks, such as equity risk and commodity risk, was very low. When assessing potential losses, interest rate risk was more important for banks operating in Lithuania, since almost the entire capital requirement to absorb foreign exchange risk (99.6%) was formed by open positions in euro, while banks did not have large positions in other currencies. In many banks, same as in the entire banking system, the euro posi-tion remained long, i.e. assets in euro exceeded liabilities in euro, whereas the overall open position in foreign currency (excluding euro) of the banking system was long and made up only 0.44 per cent of bank capital (the maximum allowed position is 25%). The overall open position in foreign currency was shaped largely by positions in US dollar and Latvian lats. In 2010, bank assets and liabilities in euro were slowly decreasing, whereas assets and liabilities in litas were increasing. Nevertheless, assets in euro remained almost twice larger than bank assets in litas.

Chart 31. Structure of capital required to absorb market risk(end-of-period)

The interest rate gap analysis that shows the impact of interest rate changes on net interest income of banks suggests that banks could be sensitive to euro interest rate changes, while the composition of bank assets and liabilities in litas and other currencies is balanced, therefore the change of interest rates in these currencies would not have any noticeable impact on bank profitability.

The equity risk assumed by banks operating in Lithuania is insignificant (only LTL 3.4 mil-lion or 0.9 per cent of the market risk capital requirement), as the largest share (91.3%)


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of equity securities represent investments in subsidiary enterprises that are recorded in the banking book.

Operational Risk

After the migration to Basel II capital adequacy regime two years ago, banks started measuring operational risk as a distinct risk type and calculating the capital requirement for covering potential losses resulting from people, systems, inadequate or failed inter-nal processes or from external events, including legal risk. The capital adequacy report showed that 6.5 per cent of the banking system’s capital requirement was allocated to absorb operational risk on 31 December 2010.

To ensure adequate management of operational risk, the Bank of Lithuania requests banks, including those that use less sophisticated quantitative methods to compute capital requirements for operational risk, to ensure a continuous improvement of their operational risk management systems: to store internal data on real losses incurred as a result of operational risk; to review information systems to adapt them better to specific needs of information management, storage and analysis; to work out plans for stress-testing and business continuity; to devote proper attention to the management of a risk associated with the outsourcing of ancillary services, etc.

OPERATIONS OF THE CENTRAL CREDIT UNION OF LITHUANIA

Over the year, the assets of the CCUL grew by 51.4 per cent to LTL 310.4 million and reached the highest level since the start of its operations in 2002. Any changes in the CCUL’s assets directly depend on the developments in their main source of financing: deposits of credit unions (members of the CCUL) held with the CCUL, which were used to finance 86.3 per cent of the CCUL’s assets. Deposits of the CCUL members went up by 56.7 per cent to LTL 267.8 million. Meanwhile, their loan portfolio contracted by 34.1 per cent to LTL 30.3 million on 31 December 2010. With the growth of deposits and shrinking of the loan portfolio, free funds were invested in debt securities of the governments of Lithuania and foreign countries, which grew 2.7 times over the year and accounted for the largest share of the assets (48.7%).

Over the year, the number of the CCUL members remained unchanged at 61. On 31 December 2010, the total share capital (LTL 10.3 million) was held by credit unions, members of the CCUL.

The quality of the CCUL’s loan portfolio remained good. On 31 December 2010, there were no specific provisions made against loans. The CCUL had no loans with periodic repayments overdue for more than 60 days.

With the growth in the volume of operations of credit unions, members of the CCUL, the Liquidity Support Reserve and the Stabilisation Fund of the CCUL, which are formed of member contributions, increased. On 31 December 2010, they totalled respectively LTL 8.7 million and LTL 6.4 million. Three credit unions received subordinated loans from the Stabilisation Fund for the amount of LTL 570 thousand. The CCUL helped three credit unions in solving their temporary liquidity problems by granting loans for liquidity support.

In 2010, the CCUL earned the profit of LTL 1.5 million, i.e. 1.5 times more than in 2009. The profit growth was mainly driven by the fact that, with the increase in the volume of operations of the CCUL, net interest income grew, whereas expenses for specific provisions declined.

The CCUL complied with all prudential requirements set by the Bank of Lithuania: liquidity and capital adequacy requirements were again met with a considerable reserve.

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REVIEW OF CREDIT UNION OPERATIONS

One more credit union was founded in 2010, so there were 68 credit unions operating in Lithuania on 31 December 2010. They had over 114,000 members. The number of the latter grew by 10,700. As the number of credit union members kept growing and some credit unions increased minimum share contributions and contributions required to receive loans, the share capital of credit unions went up by 25.7 per cent in 2010 to LTL 135.8 million.

Owing to the ongoing economic recovery and the increase in the number of credit union members, the volume of operations of credit unions grew much more rapidly than in 2009. Over the year, credit union assets went up almost by 37 per cent to LTL 1.3 billion, loans granted increased by 25.5 per cent to LTL 752.1 million, while deposits held with credit unions rose by as much as 40 per cent to LTL 1.1 billion. On 31 December 2010, the assets managed by credit unions made up 1.6 per cent of the assets of the domestic banking sector, i.e. 0.5 percentage point more than in 2009.

Chart 32. Performance indicators of credit unions(end-of-period)

Despite of the ongoing economic recovery, quality indicators of the credit union loan portfolio, by contrast to the banking sector, kept deteriorating at the same rate as in the previous year. It should be noted however that these indicators remained well above the loan portfolio quality indicators of banks. Over 2010, specific provisions of credit unions for loans went up by 64.4 per cent to LTL 14.3 million, while the specific provisions to loan portfolio ratio rose from 1.4 to 1.9 per cent.

In 2010, credit unions incurred the loss of LTL 5.4 million (in 2009, the loss was LTL 5.3 million). In 2010, 37 credit unions reported profit and 31 credit unions reported loss. Although their income kept growing, the loss of credit union operations, similar to the banking sector, was largely determined by loan impairment expenses.

According to the data of statements as of 31 December 2010, all credit unions com-plied with prudential requirements established by the Bank of Lithuania. Liquidity ratio was 42.2 per cent and exceeded the minimum required level (30%) by more than 12 percentage points. The capital adequacy ratio applied to credit unions is higher than for


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banks: it should be at least 13 per cent. According to the credit union statements for 31 December 2010, the capital adequacy ratio of the credit union system was 20.2 per cent and exceeded the established minimum with a relatively large reserve.

CASH MANAGEMENT

Implementing its exclusive right to issue currency, the Bank of Lithuania issues into circu-lation and withdraws from circulation banknotes and coins of the Republic of Lithuania, establishes their denominations, organises production, transportation and storage of banknotes and coins and makes up reserve funds of banknotes and coins according to the procedure established by laws.

CURRENCY ISSUE AND WITHDRAWAL

In 2010, the value of currency in circulation including collectors (commemorative) coins and numismatic sets increased by LTL 891.8 million: the Bank of Lithuania issued into circulation LTL 3,334.2 million and withdrew from circulation LTL 2,442.4 million of unfit banknotes and coins. Over the year, the value of currency increased by 11.2 per cent (it decreased by 17.6% in 2009). As at 31 December, the value of currency in circulation was LTL 8,824.0 million (LTL 7,932.2 million one year ago).

Table 7. Net currency issue or withdrawal (–)LTL millions

Year Quarter

I II III IV I–IV

2008 –468.3 224.0 120.1 585.3 461.1

2009 –1,306.4 –316.0 –271.6 196.8 –1,697.3

2010 –105.6 393.2 211.1 393.2 891.8

Source: Bank of Lithuania.

The value of currency in circulation decreased most notably in January 2010 and increased in December, before the Christmas and New Year holidays.

Chart 33. Litas in circulation

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BANKNOTES AND COINS IN CIRCULATION

As at 31 December 2010, the number of banknotes totalled to 78.3 million, whereas their value made up LTL 8,613.1 million. Since the beginning of the year, the number of banknotes grew by 5.0 million (6.8%) and their value increased by LTL 877.8 million (11.4%). With the growing demand for higher denomination banknotes, the average value of a banknote in circulation during the year rose from LTL 105.4 to LTL 109.9.

Along with the growing amount of currency in circulation, the Bank of Lithuania issued more banknotes compared to the previous year, i.e. 170 million pieces (compared to 166 million pieces in 2009), and accepted a lesser amount, i.e. 165 million (compared to 175 million pieces in 2009).

Chart 34. Value of litas banknotes in circulation

Chart 35. Number of litas banknotes in circulation

The average return frequency of banknotes in circulation shows how many times on average banknotes in circulation return to the Bank of Lithuania during the year. This process should be encouraged, because it enables to verify the authenticity of banknotes


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and their fitness for further circulation more often. The same banknote returned to the Bank of Lithuania 2.2 times on average in 2010 (compared to 2.4 times in 2009).

Unfit rate of banknotes in circulation indicates the share of banknotes returning to the Bank of Lithuania that are unfit for further circulation. In 2010, the average unfit rate of banknotes in circulation fell from 23 per cent to 20 per cent. Over the year, 34.1 million of the total 165 million pieces of banknotes accepted by the Bank of Lithuania were acknowledged as unfit for further circulation and destroyed (compared to 46.2 million pcs. in 2009).

As at 31 December 2010, 200 litas banknotes accounted for the largest share of the total value of banknotes in circulation. Over the year, their share increased from 49.1 per cent to 51.8 per cent. The share of 100 litas banknotes decreased by 1.1 percentage points and accounted for 23.7 per cent, while the share of 500 litas banknotes in circulation decreased by 0.8 percentage point, which accounted for 16.0 per cent of the total value of banknotes in circulation.

As at 31 December, the number of circulation coins in circulation totalled to 975.1 mil-lion and their value was LTL 198.0 million. Since the beginning of the year, the number of coins in circulation increased by 48.0 million pieces (5.2%) and their value grew by LTL 11.7 million (6.3%).

Chart 36. Number of litas and centas circulation coins in circulation

1 and 2 centas coins accounted for the largest share of the total number of circulation coins in circulation (38.9% and 20.6%, respectively). In 2010, the demand for those coins made up nearly 67.3 per cent of the increased demand for all circulation coins. 1 centas coins made up the largest amount of the issued coins, i.e. 22 million pieces (compared to 16 million pieces in 2009). The average number of litas and centas circulation coins per capita in Lithuania increased by 8 per cent, i.e. to 295 coins, of which nearly 115 coins were 1 centas coins.

At the end of the year, 1, 2 and 5 litas coins accounted for nearly three fourths (73.9%) of the total value of circulation coins in circulation. Over the year, the share of the value of 5 litas coins increased by 1.0 percentage point and the shares of 1 and 2 litas coins decreased marginally.

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Table 8. Banknotes and coins in circulation

Denomination 31 12 2009 31 12 2010 31 12 2009 31 12 2010

LTL millions

Percentage share

LTL millions

Percentage share

Million pcs.

Percentage share

Million pcs.

Percentage share

Banknotes

LTL 1 2.6 0.0 2.6 0.0 2.6 3.6 2.6 3.4

LTL 2 2.6 0.0 2.6 0.0 1.3 1.8 1.3 1.6

LTL 5 2.2 0.0 2.2 0.0 0.4 0.6 0.4 0.6

LTL 10 98.7 1.3 94.9 1.1 9.9 13.4 9.5 12.1

LTL 20 202.1 2.6 212.5 2.5 10.1 13.8 10.6 13.6

LTL 50 413.6 5.4 420.4 4.9 8.3 11.3 8.4 10.7

LTL 100 1,921.3 24.8 2,038.9 23.7 19.2 26.2 20.4 26.0

LTL 200 3,794.6 49.1 4,464.1 51.8 19.0 25.9 22.3 28.5

LTL 500 1,297.6 16.8 1,374.9 16.0 2.6 3.5 2.7 3.5

Total banknotes 7,735.3 100.0 8,613.1 100.0 73.4 100.0 78.3 100.0

Circulation coins

LTL 0.01 3.6 1.9 3.8 1.9 358.1 38.6 379.4 38.9

LTL 0.02 3.8 2.0 4.0 2.0 189.6 20.5 200.6 20.6

LTL 0.05 3.7 2.0 3.9 2.0 74.6 8.1 77.9 8.0

LTL 0.1 14.3 7.7 14.8 7.5 143.1 15.4 147.5 15.1

LTL 0.2 13.5 7.3 14.1 7.1 67.5 7.3 70.4 7.2

LTL 0.5 10.8 5.8 11.1 5.6 21.6 2.3 22.2 2.3

LTL 1 38.5 20.6 40.9 20.6 38.5 4.2 40.9 4.2

LTL 2 48.1 25.8 50.3 25.4 24.0 2.6 25.1 2.6

LTL 5 50.1 26.9 55.3 27.9 10.0 1.1 11.1 1.1

Total circulation coins 186.3 100.0 198.0 100.0 927.1 100.0 975.1 100.0

Collectors (commemorative) coins and numismatic sets 10.6 12.8 0.3 0.3


COLLECTORS (COMMEMORATIVE) COINS

The Bank of Lithuania issued five collectors (commemorative) coins in 2010: one coin was made from gold (Au 999) and four coins were made from silver (Ag 925). The quality standard of the coins was proof (a mirror surface with mat relief). The Bank of Lithuania also issued 1 litas circulation collectors (commemorative) coin made from alloy of copper and nickel. All coins were minted at the Lithuanian Mint.

On 26 March, the Bank of Lithuania issued 10 litas silver coin dedicated to music. It started a new series “Lithuanian culture” (diameter 28.70 mm, weight 12.44 g, mint-age 10,000 pcs.).

The obverse of the coin features the coat of arms of the Republic of Lithuania and the reverse features a composition delineated in stylised contours of musical instruments depicted by staffs and other musical symbols. The edge of the coin bears the inscription LIETUVOS KULTŪRA * MUZIKA * (Lithuanian culture *Music*).

The graphic design of the coin was created by Rūta Ona Čigriejūtė, and the plaster model was made by Rytas Jonas Belevičius.


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Chart 37. 10 litas silver coin dedicated to music (from the series “Lithuanian Culture”)

On 29 June, the Bank of Lithuania issued 500 litas gold coin, 50 litas silver coin and 1 litas coin from the alloy of copper and nickel dedicated to the 600th anniversary of the Battle of Grunwald.

Obverses of the coins feature the stylised Vytis or stamps of the ruler of the state of the time. Reverses feature the scenes from the Battle of Grunwald, which are depicted employing the details characteristic to the outfit, armour and arms of the riders and infantry of the time. Stylised spearheads of the 15th century are engraved on the edges of the gold and silver coins.

Designer of the coins is Rytas Jonas Belevičius.

Diameter of the gold coin is 33.00 mm and its weight is 31.10 g. The mintage of the coin is 5,000 pcs.

Chart 38. 500 litas gold coin dedicated to the 600th anniversary of the Battle of Grunwald

Diameter of 50 litas silver coin is 38.61 mm and its weight is 28.28 g. The mintage of the coin is 10,000 pcs.

Chart 39. 50 litas silver coin dedicated to the 600th anniversary of the Battle of Grunwald

Diameter of 1 litas circulation collectors (commemorative) coin is 22.30 mm and its weight is 6.25 g. The mintage of the coin is 1 million pcs.

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Chart 40. 1 litas coin from the alloy of copper and nickel dedicated to the 600th anniversary of the Battle of Grunwald

Continuing the series “Historical and Architectural Monuments of Lithuania”, 50 litas silver coin dedicated to Biržai Castle was issued on 14 September and was the ninth coin in that series (diameter 38.61 mm, weight 28.28 g, mintage 10,000 pcs.). The obverse of the coin features the stylised coat of arms of the state from that period on the shield. The reverse features a stylised Biržai Castle and a rider. The edge of the coin bears the inscription ISTORIJOS IR ARCHITEKTŪROS PAMINKLAI (Historical and architectural monuments).

Designer of the coin is Vytautas Narutis.

Chart 41. 50 litas silver coin dedicated to Biržai Castle (from the series “Historical and Architectural Monuments of Lithuania”)

On 30 November, the Bank of Lithuania issued 50 litas silver coin dedicated to the Lithuanian nature. This is the fifth coin dedicated to nature (diameter 38.61 mm, weight 28.28 g, mintage 10,000 pcs.).

The obverse of the coin features the coat of arms of the state Vytis. The reverse of the coin features a loach fish, which is included in the Red Data Book of Lithuania. The edge of the coin bears the inscription LIETUVOS GAMTA* (Lithuanian nature).

The graphic design of the coin was created by Vytautas Narutis, and the plaster model was made by Giedrius Paulauskis.

Chart 42. 50 litas silver coin dedicated to the Lithuanian nature

On 8 March, a new numismatic set of circulation coins of 2010 with a brass commemo-rative sign was issued into circulation. It was dedicated to the 20th anniversary of the restoration of the Independence of Lithuania (BU quality). Mintage of the numismatic set of circulation coins is 3.5 thousand pcs.


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Chart 43. Numismatic set of circulation coins of 2010

COUNTERFEIT BANKNOTES AND COINS

In 2010, 578 counterfeit banknotes and 3 counterfeit 1 litas coins were identified in Lithuania. The number of counterfeits is 3.4 times smaller, compared to 2009 (when 1,958 counterfeits were identified). As in the previous year, the largest share of counterfeits consisted of 100 litas banknotes. They accounted for 47 per cent of all counterfeit bank-notes. 20 litas counterfeit banknotes accounted for 24 per cent of all counterfeits.

Counterfeit banknotes were most often printed using inkjet printers and sometimes contained imitations of banknote security features (watermark, security thread, fluores-cent security features visible when exposed to UV light, etc.). The quality of counterfeits was low, therefore, they could be easily distinguished from the genuine ones by doing “feel-look-tilt” test and comparing them to genuine banknotes and coins.

In 2010, identified counterfeits accounted for around 0.0006 per cent of the total number of banknotes in circulation, i.e. one counterfeit banknote per 135,000 banknotes in circulation (compared to 18,000 banknotes in the euro area). The overall level of coun-terfeiting in Lithuania is considerably lower, compared to euro area countries.

FOREIGN RESERVE MANAGEMENT

One of the functions of the Bank of Lithuania is the management, use and disposal of the foreign reserves of the Bank of Lithuania. The Bank aims to invest foreign reserves in safe, liquid and return generating assets and thus ensures a smooth functioning of the fixed exchange rate regime.

OFFICIAL FOREIGN RESERVES

In 2010, official foreign reserve assets (hereinafter referred to as “foreign reserves”) increased by EUR 528.2 million (LTL 1,823.8 million) i.e. by 11.4 per cent. As at 31 De-cember, they accounted for EUR 5,167.4 million (LTL 17,842.1 million).

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Chart 44. Foreign reserves

Foreign reserves increased due to the increase in MFI deposits of EUR 335.0 million (LTL 1,156.8 million) and the increase in the amount of cash in circulation of EUR 257.6 mil-lion (LTL 889.6 million), meanwhile, a negative effect was brought about by the central government deposits, which decreased by EUR 47.7 million (LTL 164.7 million), and other factors, accounting for the decrease of EUR 72.8 million (LTL 251.4 million).

FOREIGN RESERVE FUNCTIONAL PARTS AND KEY MANAGEMENT PRINCIPLES

The main objective of the Bank of Lithuania in managing foreign reserves is to ensure such an amount of liquid financial resources which would be sufficient at any time to maintain the fixed national currency exchange rate against the anchor currency. In pursu-ing this objective, foreign reserves are managed in accordance with liquidity and safety principles. When managing foreign reserves, the Bank of Lithuania aims to maximise the return over a one-year horizon by adhering to rigid liquidity and safety principles.

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 stressed domestic financial markets, part of the foreign reserves remains untouched. Taking this into account, foreign reserves are divided into four parts: liquidity, investment, held-to-maturity and gold portfolios.

When investing, the Bank of Lithuania pursues different aims and applies different in-vestment strategies for individual portfolios. Liquidity portfolio is primarily dedicated to ensure operational liquidity needs of the Bank of Lithuania, stemming mostly from the operations of the Bank of Lithuania in the domestic currency market as well as from the operations in Bank of Lithuania client accounts. The size of liquidity portfolio is defined, taking into consideration operational liquidity needs in the domestic currency market and Bank of Lithuania’s client account balances in foreign currency. When managing the liquidity portfolio, the Bank of Lithuania seeks that the portfolio return exceeds the inter-est rate of the liabilities of the Bank of Lithuania and at the same time exceeds the return on risk free investment (overnight interbank investment) over a one-year horizon.

Part of the foreign reserves is allocated to the investment portfolio under the assumption that, although this portion of foreign reserves may need to be utilised for interventions


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in the domestic currency market or for other purposes whenever needed, it is highly un-likely that such necessity will arise over the predetermined period of time, therefore, the investment portfolio return requirement is considered much more significant. A one-year investment horizon is applied when setting an investment strategy for the investment portfolio. The Bank of Lithuania aims to manage the investment portfolio so as to maxi-mize its return over a one-year horizon with a constraint of minimum investment return exceeding one half of the return of the safe three-month investment (investment in the euro area government securities of respective maturity) with a 99 per cent probability.

Part of the long-term securities, which are not subject to strict liquidity requirements and could be held until maturity, might be allocated to the held-to-maturity portfolio.

Taking into consideration the purpose of gold and the specific nature of managing these assets, gold investment is managed in a separate portfolio. Gold investment market is rather limited and relatively illiquid and its interest rates are typically low, therefore, the Bank of Lithuania invests gold only when it is economically useful.

LIQUIDITY OF FOREIGN RESERVES

In accordance with the liquidity principle, the Bank of Lithuania manages foreign reserves so as to ensure that its investment might be liquidated immediately and without signifi-cant costs. When implementing this principle, the Bank of Lithuania invests the greater part of foreign reserves in financial instruments of the highest liquidity. In comparison to other financial instruments of lower liquidity, this ensures the ability to mobilise a sufficient part of foreign reserves in a very short time at a relatively low cost during the period of stressed financial markets.

On 31 December 2010, the share of the investment in very liquid government bonds accounted for 44 per cent of the total investment.

Chart 45. Breakdown of investment by financial instrument(31 December 2010)

The operational liquidity requirements applied by the Bank of Lithuania ensure that regular-size interventions in the domestic currency market are made and its liabilities vis-à-vis its depositors can be met without liquidating any investments.

SAFETY OF FOREIGN RESERVES

Adhering to the safety principle, the Bank of Lithuania manages foreign reserves so that the assets could not be lost, frozen or otherwise constrained. In implementing the

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safety principle, the Bank invests foreign reserves in financial instruments with a very low probability of default.

Credit risk is managed by compiling lists of eligible counterparties and issuers of securi-ties and setting 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. As at 31 December 2010, investment in the most secure financial instruments (Aaa-rated) accounted for 22 per cent of foreign reserves. The average credit rating of the Bank of Lithuania foreign reserve investment was A1.

Chart 46. Composition of foreign reserves by rating(31 December 2010)

Credit risk is mitigated through a wide application of the diversification principle. Ac-cording to this principle, investment limits are assigned to financial instruments, issuers, counterparties and their groups as well as to issuers and counterparties of the same domicile country. As at 31 December 2010, investments were made in securities issued by 32 issuers.

Like most other central banks, the Bank of Lithuania encounters foreign exchange rate and gold price risks. Due to unfavourable developments in exchange rates, the value of foreign reserves measured in the national currency may decline. As our country has a fixed exchange rate of the litas against the euro, the Bank of Lithuania eliminates the currency risk by investing almost all foreign reserves (excluding gold) – net of liabilities in foreign currencies – in euro denominated assets.

Gold price in euro terms grew by 39 per cent and the value of gold held by the Bank of Lithuania increased by LTL 191.7 million over the year.

Table 9. Composition of foreign reserves net of liabilities in foreign currencies(31 December; percentages)

Currency 2009 2010 Change, percentage points

Euro 96.3 95.1 –1.2

Gold 3.7 4.9 1.2

Total 100.0 100.0 –

Source: Bank of Lithuania.Note: Change in the share of gold is related to the change in the price of gold and in the size of foreign reserves. The amount of gold held by the Bank of Lithuania remained unchanged, i.e. 5.8 t.

The Bank of Lithuania, as an agent of the State Treasury, manages accounts of the State Treasury, other official institutions of the Republic of Lithuania and those of the EU, for-


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eign banks and international financial institutions. It also acts as a depository for funds received from the IMF on behalf of the Republic of Lithuania.

In order to avoid the exchange rate risk, assets corresponding to liabilities in foreign currencies are invested in the currency of liabilities. As at 31 December 2010, liabilities in euro accounted for 79.2 per cent, special drawing rights for 18.5 per cent and US dollars for 2.3 per cent of the total liabilities in foreign currencies.

To ensure compliance with the safety principle, the Bank of Lithuania takes into account both credit and interest rate risks. Along with the changes in the interest rates, the market value of the assets of the Bank changes too. Longer-term and riskier investment generates higher return in the long run, however, its return over a one-year horizon may turn negative. Interest rate risk is managed by setting benchmarks for each portfolio, its modified duration (MD), largest permissible deviations in terms of MD from benchmarks and permissible maturity of an individual investment.

Table 10. MD of foreign reserves and individual portfolios(31 December)

Functional parts 2009 2010

Liquidity portfolio 0.29 0.09

Investment portfolio 1.31 1.05

Gold portfolio 0.02 0.14

Total 0.97 0.68


In addition, the-value-at-risk indicator is used for assessing the market risk.

Table 11. Value-at-risk indicator of foreign reserves(31 December, EUR millions)

2009 2010

Liquidity portfolio 1.0 1.3

Investment portfolio 2.5 2.5

Gold portfolio 2.5 3.2

Diversification effect –2.1 –3.1

Total 3.9 3.9

Source: Bank of Lithuania.Note: Value-at-risk is calculated using the parametric method applying RiskMetrics methodology and data. Value-at-risk indicates that the value of foreign reserves will not change due to the changes of interest rates, gold price and exchange rates by more than the respective amount in euro during the next business day with a 95 per cent probability.

As at 31 December 2010, value-at-risk of investments was the same as at the end of 2009, however, the risks of individual portfolios changed.

As fluctuations in gold price increased, the gold portfolio risk increased too.

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 is maximised over the long term.

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In 2010, the return on foreign reserve investment, excluding the impact of the change in exchange rates and gold price, accounted for 0.53 per cent. Because of a rising price of gold, the return was 1.86 per cent, including the contribution of exchange rates and gold price. Lower return, compared to the long-term average, was caused by particu-larly low interest rates in the euro area and the fact that the price of some euro area government bonds decreased due to investors’ unfavourable sentiment regarding the fiscal situation of those countries.

The Bank of Lithuania conducts a conservative investment policy, i.e. it invests the bulk of foreign reserves in government debt securities of economically developed countries. In 2010, nearly 80 per cent of foreign reserves were invested in government debt securities of euro area countries. From the introduction of the euro to 2010, the euro area govern-ment bond market was quite homogeneous, spreads between the yields of different government bonds were low, and the credit ratings of the countries were high. The situa-tion changed in 2010, the spreads between government bond yields increased – more than tenfold in some cases – and rating agencies reduced the ratings of a number of euro area countries. Owing to these reasons, the changes of government bond yields and prices varied across countries. Yields of securities of more secure countries with higher credit ratings decreased, at the same time their price increased, while the yields of securities of the countries with lower credit ratings went up and their prices dropped. Nevertheless, euro area government bond yields remained particularly low, because the ECB maintained the interest rates at the historically lowest level in 2010.

Table 12. Return on foreign reserve portfolios(percentages)

2006 2007 2008 2009 2010

Liquidity portfolio 2.91 4.05 4.09 1.19 0.55

Investment portfolio 2.01 3.76 5.57 4.47 0.19

Gold portfolio 0.00 0.04 0.09 0.04 0.00

Held-to-maturity portfolio 2.24

Return excluding contribution of exchange rates and gold prices 2.38 3.81 5.00 3.85 0.53

Return including contribution of exchange rates and gold prices 2.66 4.15 5.22 4.45 1.86

Source: Bank of Lithuania.Note: Held-to-maturity portfolio is accounted at cost, while its return is equal to the accumulated yield.

STATISTICS

The Bank of Lithuania, one of the institutions in charge of compiling official statistics, has continued to successfully implement the European methodological requirements in the field of monetary and financial statistics, government finance statistics, quarterly financial ac-counts, and external statistics. Its success has also been recognised by the ECB in its reports on statistical preparedness of the EU Member States and in convergence reports. In 2010, the ECB report on statistical preparedness of non-euro area EU Member States stated that Lithuania has been providing the required data in the above-mentioned areas of statistics.

To implement the ECB regulations and guidelines in the field of monetary and financial statistics, the Bank of Lithuania started in mid-2010 to collect data in line with the re-vised MFI balance sheet and interest rate statistical reporting requirements, classification principles and statistical reporting schemes. Changes in the MFI balance sheet statistical


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reporting are mostly related to additional grouping of loans into real estate backed loans, syndicated loans, revolving loans and overdrafts, convenience and extended credit card credit. Statistical reporting for interest rates on MFI loans and deposits was updated by introducing a more detailed grouping of interest rates on loans by purpose, amount of the loan and interest rate fixation period. The data were supplemented with interest rates on loans secured with collateral and guarantees. Publishing of the new MFI balance sheet and interest rate statistics is expected to start in 2011.

With regard to external statistics, the Bank of Lithuania remained focused on the imple-mentation of the new international statistics standards, such as the 6th edition of the IMF Balance of Payments and the International Investment Position Manual (BPM6), the 4th edition of the Benchmark Definition of Foreign Direct Investment by the OECD and related requirements by the ECB and Eurostat in the field of external statistics.

To ensure more detailed information on the securities holdings, the Board of the Bank of Lithuania issued in April 2010 the resolution that changed the system for the collection of external statistics. After the said resolution is fully implemented, the information will be collected directly from custodians.

In 2010, the Bank of Lithuania provided data for the IMF’s Coordinated Direct Invest-ment Survey and joined the IMF’s Coordinated Portfolio Investment Survey. As a result of the uniform methods used, Lithuania’s data are now comparable with the statistics of other participant countries.

The Bank of Lithuania continued to enhance the management of both securities and foreign loan databases and improve data quality by revising historical data and harmonizing the terms used. Information from these databases is used to compile statistics on investment funds, securities issues statistics, external statistics and quarterly financial accounts.

In 2010, in order to increase the number of data providers and extend the scope of information, but reduce the burden for data providers and avoid excessive information, the Bank of Lithuania continued the development of the Loan Risk Database (Central Credit Register). The purpose of the database is to ensure effective functioning of the credit system and the Bank of Lithuania’s right of access to information necessary for the supervisory function and statistics compilation and for the implementation of poli-cies related to the financial system stability and the monetary policy, as well as to create conditions for the Bank of Lithuania and credit institutions to assess the borrowers’ credibility. In December 2010, the Board of the Bank of Lithuania amended the Rules for Managing the Loan Risk Database. Under the said rules, all credit institutions (not only commercial banks and foreign bank branches as previously, but also credit unions and the CCUL) will have to provide data on borrowers and loans granted to them. The amended rules also establish the obligation to provide data on every loan that is in excess of or equals LTL 1,000 (previously the database contained data only on loans in excess of LTL 50,000 and all loans to defaulted borrowers). This will ensure a comprehensive view of Lithuania’s loan market.

The work continued to further develop and improve the published statistical releases and statistical data provided to the ECB: data on foreign direct investment by the type of economic activity is now published on the Bank’s website and in the quarterly bulletin “External Statistics”; the annual publication “External Statistics” now contains detailed information on services that are grouped by type; far more comprehensive quarterly financial accounts data by institutional sector and subsector now can be found on the website of the Bank, as well as the data on backing of the total amount of the litas in

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circulation by gold and foreign exchange reserves and a joint press release by the Bank of Lithuania and Statistics Lithuania on foreign direct investment.

In 2010, statistical releases of a new form were regularly published on the special web-page of the Bank of Lithuania (http://www.lb.lt/statistical_releases) to provide its users with the latest information on relevant economic issues. For the user’s convenience, the deadline for the publication of the Lithuanian financial accounts was moved back ten days; moreover, the latter are now presented with the financial accounts wizard that helps to better understand information and quickly find required data in the huge flow of statistics.

The Bank of Lithuania took active part in the first-ever celebration of the World Statis-tics Day on 20 October 2010. The importance of statistics for the economic and social development of various countries was underlined at the conference organised in the Parliament of the Republic of Lithuania. The Bank officials met with university professors, students and other representatives of the public to present to them the statistical data and statistical publications issued in the past and today.

PAYMENT AND SECURITIES SETTLEMENT SYSTEMS

One of the functions of the Bank of Lithuania is to encourage stable and efficient op-eration of payment and securities settlement systems. The Bank of Lithuania provides settlement services, conducts the oversight of payment and securities settlement systems and coordinates the activity of market entities of Lithuania in international projects.

LITAS PAYMENT SYSTEMS

The Bank of Lithuania manages the real-time gross settlement system (LITAS-RLS) and the designated time retail payment system (LITAS-MMS) and performs the function of their operator. It ensures reliable operation of the systems, consults their participants, maintains management information, ensures business continuity of the systems and performs other administrative tasks.

On 31 December 2010, the systems LITAS-RLS and LITAS-MMS each had 24 participants: the Bank of Lithuania, nine commercial banks, five foreign bank branches, the Central Securities Depository of Lithuania (CSDL), CCUL and seven financial brokerage companies. Compared to the end of 2009, the number of participants remained unchanged; one financial brokerage company discontinued its participation, whereas another financial brokerage company became a new participant.

The volume of payments processed by the system LITAS-RLS increased, however, the value of payments declined. Compared to 2009, the average daily payment traffic increased by 2.4 per cent in terms of volume and decreased by 13.1 per cent in terms of value in 2010. The highest payment traffic in this system was recorded on 1 July, when a total of 3.9 thousand payments were processed. The highest value of payments (LTL 2.6 billion) was recorded on 11 February.

In 2010, LITAS-RLS participants more actively used the litas intraday credit facility. Over the year, 110 repurchase transactions were concluded for the amount of LTL 651 mil-lion. Intraday credits as a liquidity management instrument contribute to the smooth payment processing in the system.

The volume and the value of payments processed by LITAS-MMS increased (the value of payments increased after the period of two years). Compared to 2009, the average


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daily payment traffic increased by 4.0 per cent in terms of volume and 4.5 per cent in terms of value. The highest volume (189.5 thousand payments) and the highest value (LTL 1.5 billion) of payments were recorded on 30 December.

Table 13. Transactions of LITAS-RLS and LITAS-MMS

Year Volume of transactions, thousands Value of transactions, LTL millions

Total Daily average Concentration ratio*, %

Total Daily average Concentration ratio, %

2009 302 1.2 65.1 330,161 1,305.0 53.3 (LITAS-RLS)

27 169 107.4 72.6 197,950 782.4 61.0 (LITAS-MMS)

2010 310 1.2 59.8 286,850 1,133.8 49.0 (LITAS-RLS)

28 262 111.7 71.0 206,883 817.7 57.0 (LITAS-MMS)

Source: Bank of Lithuania calculations.*Concentration ratio is the share of transactions of three banks with the largest volume of payments in total payment transactions.

Composition of LITAS-RLS and LITAS-MMS payments is different. Usually, larger value payments (interbank transactions, the litas leg of euro exchange transactions) are made in real time, i.e. via LITAS-RLS. The average value of one payment made up LTL 926 thousand in LITAS-RLS and LTL 7.3 thousand in LITAS-MMS.

Table 14. Composition of payments of LITAS-RLS and LITAS-MMS(compared to the total volume and the total value of payments; percentages)

System Payment transactions

Up to LTL 5,000 LTL 5,001–100,000

LTL 100,001–1,000,000

OverLTL 1,000,000

LITAS-RLS Volume 66.1 22.5 6.1 5.3

Value 0.1 0.7 2.3 97.0

LITAS-MMS Volume 90.8 8.5 0.6 0.1

Value 9.0 22.1 22.5 46.4


EURO PAYMENT SYSTEMS

Two euro real-time gross settlement systems operate in Lithuania: TARGET2-LIETUVOS BANKAS and LITAS-PHA. They enable domestic financial institutions to provide better services to their customers that make settlements in euro.

The system TARGET2-LIETUVOS BANKAS is a component system of TARGET2. The Bank of Lithuania registers, administers and consults its participants and provides assistance in case of problems. It also coordinates the activity of the TARGET2 national user group. The system TARGET2 is operated by three national central banks of the Eurosystem: Banca d’Italia, Banque de France and Deutsche Bundesbank.

The new – fourth – release of TARGET2 went live on 22 November 2010. The Bank of Lithuania coordinated the preparation of participants from our country for the changes, monitored their testing, performed central bank actions necessary for the performance of tests.

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At the end of the year, as in the previous year, TARGET2-LIETUVOS BANKAS had five participants: the Bank of Lithuania, two commercial banks, one foreign bank branch and the CSDL.

The payment traffic processed by this system recorded a large increase in terms of volume, whereas the value of payments changed insignificantly. The increase in the volume of payments was also affected by the fact that from 22 November 2010 TARGET2-LIETUVOS BANKAS became the main place for the settlement of stock transactions concluded in the stock exchange NASDAQ OMX Vilnius. The daily average volume of submitted pay-ments processed by the system was 164 payments with the value of EUR 376 million. Compared to 2009, this represents an increase of 81.8 per cent in terms of volume and 1.3 per cent in terms of value. The average value per payment was EUR 2.3 million. The daily average volume of cross-border payments received by the system was 431 payments with the value of EUR 362 million. Compared to 2009, this represents an increase of 19.9 per cent in terms of volume and a decrease of 0.6 per cent in terms of value. The average value per payment was EUR 0.8 million.

Table 15. Transactions of TARGET2-LIETUVOS BANKAS

Year Volume of transactions Value of transactions, EUR millions

Payment orders submitted Cross-border payments received

Payment orders submitted Cross-border payments receivedDomestic Cross-border Total Domestic Cross-border Total

2009 4,620 18,406 23,026 92,039 1,657 93,330 94,987 93,346

2010 17,368 24,829 42,197 111,210 3,577 93,353 96,930 93,510


Taking into consideration the Eurosystem’s requirements, it is planned to reorganise the system LITAS-PHA, which was created by the Bank of Lithuania. Settlement services will be transferred from this system to the system TARGET2-LIETUVOS BANKAS by 18 November 2011. In preparation for the changes, in 2010 the Bank of Lithuania initiated the communication and consultation programme for related credit institutions, which will be continued in 2011.

Currently, during the transition period until 18 November 2011, LITAS-PHA provides the infrastructure for financial institutions to make settlements in euro via the Bank of Lithuania as a direct participant of TARGET2-LIETUVOS BANKAS. Credit institutions may also receive euro intraday credits via settlement accounts opened in this system. This possibility will remain after 18 November 2011. On 31 December 2010, LITAS-PHA had fourteen participants: the Bank of Lithuania, eight commercial banks, three foreign bank branches, the CCUL and one financial brokerage company. Compared to the end of 2009, the number of participants remained unchanged.

Participants of this system used its services more actively. The daily average volume of submitted payments processed by the system was 22 payments with the value of EUR 34.9 million. Compared to 2009, this represents an increase of 29.8 per cent in terms of volume and 60.4 per cent in terms of value. The average value per payment was EUR 1.6 million. The daily average volume of received payments was 103 payments with the value of EUR 34.2 million. Compared to 2009, this represents an increase of 38.6 per cent in terms of volume and 74.7 per cent in terms of value. The average value per payment was EUR 334 thousand.


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Table 16. Transactions of LITAS-PHA

Year Volume of transactions Value of transactions, EUR millions

Payment orders submitted Payments received from TARGET2

Payment orders submitted Payments received from TARGET2Domestic To TARGET2 Total Domestic To TARGET2 Total

2009 463 3,930 4,393 18,951 567.5 4,999.6 5,567.1 5,015.6

2010 805 4,942 5,747 26,472 306.6 8,691.3 8,997.9 8,831.1


OVERSIGHT OF PAYMENT AND SECURITIES SETTLEMENT SYSTEMS

The Bank of Lithuania conducts the oversight of four payment systems (LITAS-RLS, LITAS-MMS, LITAS-PHA and KUBAS10) and the securities settlement system (SSS)11. Together with the Eurosystem, the Bank of Lithuania participates in the oversight of TARGET2. From 2010, it participates with other regulatory authorities in the joint oversight of the TARGET2-Securities platform, which is under development.

In 2010, the Bank of Lithuania performed regular monitoring of these systems. It was determined that the systems operated in a stable manner (without critical incidents) and their operators complied with the requirements established by the Republic of Lithuania Law on Settlement Finality in Payment and Securities Settlement Systems.

Using modern modelling technologies, stress testing of LITAS-RLS was performed. The obtained results confirmed that the system has liquidity reserves and, in case of a technical malfunction of information systems of the largest participants, other participants would not be affected substantially, i.e. the system would not encounter systemic risk.

When conducting the oversight of the SSS, the Bank of Lithuania cooperates with the Securities Commission of the Republic of Lithuania (hereinafter “Securities Commission”) according to the memorandum of understanding. In 2010, relevant issues related to the CSDL and the SSS were discussed during the meetings of representatives of the Bank of Lithuania and the Securities Commission. It was agreed that in 2011 the Securities Commission will participate in the SSS assessment performed by the Bank of Lithuania in accordance with the Recommendations of the European System of Central Banks and the Committee of European Securities Regulators for securities settlement systems in the European Union.

NON-CASH PAYMENTS

In 2010, the volume of non-cash payments in Lithuania was 227.9 million, of which 220.0 million (97%) were domestic payments and 7.8 million (3%) were cross-border payments. The value of these payments amounted to LTL 863.2 billion, of which LTL 706.9 billion (82%) were domestic payments and LTL 156.3 billion (18%) were cross-border payments. Over the year, the total volume of non-cash payments increased by 6.7 per cent, the volume of domestic payments went up by 6.1 per cent, and the volume of cross-border payments grew by 24.4 per cent. Compared to 2009, the total value of non-cash pay-ments decreased by 8.7 per cent, the value of domestic payments dropped by 12.7 per cent, whereas the value of cross-border payments increased by 15.0 per cent.

The use of direct debit was increasing most rapidly among all non-cash payment methods. Structure of payment instruments changed insignificantly. The largest share of payments

10 The CCUL is the owner and operator of the system KUBAS.11 The owner and operator of the SSS is the CSDL.

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was made using credit transfers (50.3 per cent of the total volume of non-cash pay-ments) and card payments (43.5 per cent of the total volume of non-cash payments). Direct debit made up 6.1 per cent of the total volume of non-cash payments, whereas cheques accounted for less than 1 per cent.

Table 17. Non-cash payments

Volume of transactions Value of transactions Average value per transaction, LTL thousandsMillions Compared to 2009;

more, less (–), %LTL millions Compared to 2009;

more, less (–), %

Total non-cash payments 227.9 6.7 863,210 –8.7 3.8

Credit transfers 114.5 6.1 853,210 –8.8 7.4

Non-paper based 80.4 6.0 528,320 6.6 6.6

Paper based 34.2 6.5 324,890 –26.3 9.5

Direct debit 13,.9 15.7 2,187 1.4 0.2

Payment cards (debit, credit and virtual) 99.1 6.1 6,012 4.5 0.1

Cheques 0,3 5.6 1,801 0.9 5.9


The number of payment cards was 4.3 million on 31 December 2010, down by 0.2 per cent, compared to the end of 2009.

For the second consecutive year, the number of debit cards decreased slightly (by 0.4%) and accounted for 85.5 per cent of the total number of payment cards at the end of the year. Over the year, the market share of Visa debit cards declined slightly and that of MasterCard debit cards increased and made up 68.9 per cent and 31.1 per cent respectively at the end of 2010.

For the first time since the beginning of the collection of such data in 2001, the number of credit cards declined. Compared to 2009, their number went down by 1.8 per cent and made up 13.1 per cent of all payment cards on 31 December 2010. The market share of MasterCard, Visa and American Express credit cards, which are used in the country, changed for the benefit of VISA cards, although MasterCard still remains the market leader. At the end of 2010, the said three systems had 54.4 per cent, 41.1 per cent and 4.5 per cent of the market, respectively.

The only cards that increased in number were virtual cards. However, although valued for security when making settlements in the electronic domain, they have a small share of the market (1.4%).

There were 1,335 payment cards per 1,000 residents in Lithuania on 31 December 2010 (compared to 1,305 cards in Lithuania and 1,450 cards in the EU in 2009).

Table 18. Payment cards(end-of-period)

2009 2010

Total payment cards 4,343,587 4,332,800

Debit cards 3,719,135 3,705,376

Credit cards 576,827 566,458

Virtual cards 47,625 60,966



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Over the year, compared to 2009, the volume and the value of payments by all types of payment cards increased, especially those of credit cards and virtual cards.

Table 19. Payments by payment cards

Volume of transactions Value of transactions Average value per transaction, LTLThousands Compared to 2009;

more, less (–), %LTL millions Compared to 2009;

more, less (–), %

Debit cards 88,517 4.6 4,586.8 0.7 52

Credit cards 10,132 20.4 1,366.1 18.9 135

Virtual cards 416 29.2 58.8 21.7 141Source: Bank of Lithuania calculations.

At the end of 2010, 1,571 automatic teller machines (ATMs) operated in Lithuania, of which 1,510 ATMs had a cash withdrawal function, 90 ATMs had a cash deposit func-tion and 29 had both functions. Compared to the end of 2009, the number of ATMs increased by 1.8 per cent. There were 484 ATMs per 1,000,000 residents in Lithuania on 31 December (compared to 463 ATMs in Lithuania and 867 ATMs in the EU in 2009).

In 2010, cash issued by ATMs amounted to LTL 22.5 billion. Compared to 2009, this amount declined by 1.3 per cent. The average value of a cash withdrawal transaction performed at an ATM remained unchanged and amounted to LTL 350. Cash issued by banks through their branches amounted to LTL 8.9 billion, whereas cash received by customers from merchants through point-of-sale terminals made up LTL 81 million. Thus, ATMs are the most significant infrastructure for cash distribution.

SINGLE EURO PAYMENTS AREA PROJECT

Banks operating in Europe implement the SEPA project, which is aimed at standardising payment instruments at the European level. In 2010, this project accelerated further: at the end of the year, each seventh credit transfer in the euro area was performed in accordance with SEPA requirements, whereas the European Commission submitted the proposal to the European Parliament and the Council of the European Union to establish the end dates for the migration to SEPA payment instruments. This legal act will facilitate the planning of preparatory works by market participants. Banks operating in Lithuania support the SEPA project, participate in its implementation and offer SEPA payment instruments to the customers.

The Bank of Lithuania takes action in two directions. First, the Bank itself prepares to create a possibility for its customers (the Treasury of the Republic of Lithuania and various institutions) to send and receive SEPA credit transfers. The measures planned for that will be implemented in the beginning of 2012. Second, the Bank of Lithuania coordinates the preparation of credit institutions for the implementation of SEPA standards in our country through its representative, who is chairing the national coordination committee of this project. In 2010, the Lithuanian SEPA migration plan was updated, the collection of statistics on SEPA credit transfers was started, the public was informed in various forms about the SEPA project, whereas credit institutions agreed on the formation of the creditor identifier used in SEPA direct debit transactions. It is planned to store all creditor identifiers allocated by credit institutions in a centralised database administered by the Bank of Lithuania from 2013. The possibility will also be created for any person to check the creditor identifier.

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TARGET2-SECURITIES PROJECT

The Eurosystem’s project TARGET2-Securities (T2S) intends to create a technical platform that will allow concentrating the transfers of securities and associated funds related to the settlement of securities transactions. T2S will allow performing both domestic and cross-border settlements in euro. It will be open to other currencies as well.

T2S is currently under development by the national central banks of Germany, Spain, Italy and France and later it will be operated by these banks. In 2010, T2S User Requirements were finalised, the draft Framework Agreement between the Eurosystem and the deposi-tories that will use T2S was under preparation, service fees were set, the preparation of the User Detailed Functional Specifications was continued, and the launch date of the project was corrected. It is planned that T2S will be launched in September 2014.

T2S National User Group is operating in Lithuania; its activity is coordinated by the Bank of Lithuania. This group monitored the project implementation, participated in the consultations on T2S fees organised by the ECB, considered the options and terms of the connection to the platform, and discussed how to use various T2S possibilities: auto-collateralisation, partial settlement, operation schedule. The decisions of the group will later have an influence on individual institutions when preparing for the connection to the T2S technical platform.

ADMINISTRATION OF THE ACCOUNTS OF THE STATE TREASURY AND INSTITUTIONS

The Bank of Lithuania, acting as a State Treasury agent as established by the Republic of Lithuania Law on the Bank of Lithuania, administered litas and foreign currency accounts of the State Treasury of the Republic of Lithuania (hereinafter – State Treasury) in 2010. 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 state institutions of the Republic of Lithuania. The Ministry of Finance of the Republic of Lithuania manages the bulk of these resources.

The Bank of Lithuania also administered accounts denominated in litas and foreign cur-rency of other state institutions of the Republic of Lithuania, EU institutions, 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 of the Bank of Lithuania. The conditions of the administration of accounts and the services to be provided are established by agreements.

On 31 December 2010, the Bank of Lithuania administered 267 accounts of the State Treasury and institutions (262 in 2009), of which 87 accounts denominated in litas and 180 accounts denominated in foreign currency (88 and 174 respectively in 2009).

The Bank of Lithuania provides the following services to the State Treasury and institutions: the transfer of funds of the State Treasury and institutions according to their 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 other information. For some state institutions of the Republic of Lithuania, the service of litas cash collection and issue is provided.

In 2010, 574.4 thousand payment orders of the State Treasury and institutions in various currencies were processed (614.4 thousand in 2009). The bulk of payment orders in litas


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were submitted by the Ministry of Finance of the Republic of Lithuania via the State Budget Accounting and Payments System.

PARTICIPATION OF THE BANK OF LITHUANIA IN THE ESCB AND INTERNATIONAL COOPERATION

As part of the ESCB, the Bank of Lithuania participates in the preparation and adop-tion of decisions related to EU institutions and the ESCB. In addition, it cooperates with international financial institutions and takes part in their activities. The Bank of Lithuania’s cooperation with foreign central banks is based on different bilateral and multilateral initiatives with the aim of sharing experience on the issues of relevance to central banking.

PARTICIPATION IN THE ESCB

The ECB is the major cooperation partner for the Bank of Lithuania in the EU. The Bank of Lithuania is a full member of the ESCB, which consists of the ECB and the national central banks of the EU Member States.

ECB decisions are taken by the Governing Council, the Executive Board and the General Council. The Chairman of the Board of the Bank of Lithuania, together with other go-vernors of euro area national central banks (NCBs) and governors of the NCBs outside the euro area, participates in the work of the General Council. The Council usually meets four times a year. In 2010, members of the General Council addressed issues related to: the macroeconomic situation in the EU, monetary and financial market developments, the functioning of ERM II, the progress by the Member States in meeting the economic policy obligations as well as compliance with the requirements in relation to the prohibi-tion to finance Government and to grant privileges to financial institutions. Furthermore, members of the General Council discussed the issues pertaining to the European Systemic Risk Board. The latter was established at the end of 2010 with the main focus on both macro-prudential supervision of the EU financial system and the application of macro-prudential measures. In an additional meeting, the General Council approved the ECB’s Convergence Report, which assesses the economic and legal convergence of nine EU Member States outside the euro area.

Representatives of the Bank of Lithuania regularly participate in the work of the ESCB committees and their working groups. The committees address various issues related to central banking and assist the ECB’s decision-making bodies in fulfilling their tasks. Employees of the Bank of Lithuania participate in the work of 12 ESCB committees and their 30 different working groups. After the establishment of the European Systemic Risk Board, the Banking Supervision Committee was eliminated in December 2010. In order to help the ECB to carry out its tasks related to financial stability, the Financial Stability Committee of the ESCB was established on 13 January 2011. Participation in the ESCB committees and their working groups provides favourable conditions for the experts of the NCBs to discuss and exchange opinions on various central banking issues.

The Bank of Lithuania is a holder of the subscribed capital of the ECB. The right to subscribe and hold capital of the ECB is limited to the central banks of the EU Member States. In December 2010, the Governing Council of the ECB decided to increase the ECB’s capital by EUR 5 billion (from EUR 5,760,652,402.58 to EUR 10,760,652,402.58). Thus, the share of the Bank of Lithuania in the subscribed capital of the ECB increased as well to amount to EUR 45,797,336.63. To ensure that the increase of the ECB’s capital does not entail a high increase in the shares of the Member States outside the euro area

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in the ECB’s paid-up capital, the Governing Council decided to reduce the share of the ECB’s subscribed capital. This means that the NCBs of the Member States outside the euro area must pay the ECB 3.75 per cent instead of 7 per cent. Thus, the share of the Bank of Lithuania in the paid-up capital of the ECB accounts for EUR 1,717,400.12.

Table 20. Participation of the Bank of Lithuania in the ESCB Committees and their Working Groups

• Accounting and Monetary Income Committee Working Group (WG) on Accounting Issues

• Monetary Policy Committee WG on Econometric Modelling WG on Forecasting WG on Public Finance

• Banknote Committee Counterfeit WG Issue WG Security WG

• Market Operations Committee Monitoring WG WG on Monetary and Exchange Rate Policy Instruments

and Procedures WG on Operations Involving Foreign Reserve Assets WG on Collateral Management

• Eurosystem/ESCB Communications Committee External Communications WG Euro Cash Communication WG

• Financial Stability Committee

• Information Technology Committee Information Systems Security and Risk Management WG IT infrastructure portfolio, operations and service

management WG

• Statistics Committee WG on External Statistics WG on General Economic Statistics WG on Government Finance Statistics WG on Monetary and Finance Statistics WG on the Euro Area Accounts WG on Statistical Information Management

• Payment and Settlement Systems Committee Payment Systems Policy WG Oversight WG WG on TARGET 2 Securities Experts WG T2S National Users Group Experts Network WG ESCB-CESR (Committee of European Securities

Regulators) WG

• International Relations Committee

• Legal Committee Ad hoc WG of Financial Law Experts

• Internal Auditors Committee

• Human Resources Conference

The Bank of Lithuania signed agreements jointly with the other members of the ESCB in 2010 on TARGET2, ERM II, transportation of euro banknotes between the Member States and communication of confidential data for statistical purposes.

The national authorities of the EU Member States must consult the ECB regarding the provisions of any draft legal act on the issues within the ECB’s competence. In response to the respective authorities, the ECB expresses its opinion. In return, the national central banks are entitled to submit their comments on the ECB’s draft opinions. To this end, the Ministry of Finance of the Republic of Lithuania consulted the ECB regarding the legal status of the assets of the Bank of Lithuania, the term of office and wages of members of the Board, protection of the foreign reserve assets of foreign central banks, annual financial statements of the Bank of Lithuania, and amendments of the Law on Settle-ment Finality and of the Law on Financial Collateral Arrangements. The Bank of Lithuania consulted the ECB regarding the national rules on monetary policy operations.

PARTICIPATION IN THE ACTIVITIES OF EU INSTITUTIONS

The Bank of Lithuania maintains relations with the Economic and Financial Affairs Coun-cil of the EU (ECOFIN Council) and the European Commission. Representatives of the Bank participate in central bank related activities of almost 50 committees and working groups of the Council of the European Union and of the European Commission. The Bank of Lithuania, within its competence, provides its opinion and judgements in the


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formulation of the Republic of Lithuania’s position regarding the issues addressed at the ECOFIN Council.

The Chairman of the Board of Lithuania attends the informal meetings of the ECOFIN Council, which are arranged in a country that holds the EU presidency semi-annually. The informal meetings of the ECOFIN Council are not regulated by the provisions of the Treaty on the Functioning of the EU and do not have the legal power of adopting decisions. However, they provide an important forum for the Finance Ministers and governors of the national central banks of the EU Member States to discuss relevant economic and financial issues. During the informal meetings of the ECOFIN Council that were held in 2010, a major focus was on the issues related to the economic and financial crisis. These included issues such as: crisis management, taxation of the banking sector, establishment of a resolution fund, tightening of the requirements of the Basel III rules for calculating capital adequacy, regulation of the activities of credit rating agencies.

Representatives of the Bank of Lithuania participate in the activities of one of the most important advisory committees of the ECOFIN Council – the Economic and Financial Com-mittee (EFC). During the EFC meetings, mainly the following issues were addressed: the macroeconomic situation in the EU Member States, how the EU Member States participat-ing in ERM II meet their obligations, how the convergence and stability programmes and the SEPA project are implemented, the application of the excessive deficit procedures to the Member States, including Lithuania. Similar to the previous year, in 2010 important issues of financial stability were discussed: provision of preventive financial support by the Community, crisis management and related sharing of financial burden, extension of state guarantees provided to banks, stress testing of the banking sector and taxation of financial institutions.

After the adoption of the regulations of the European Parliament and of the Council on the reform of the EU financial supervisory authorities in November 2010, the Bank of Lithuania became a part of the European System of Financial Supervisors. This system, which consists of the European Systemic Risk Board established for macro-prudential supervision and three new authorities established for micro-prudential supervision in the areas of banking, insurance and occupational pensions, became operational in 2011. Representatives of the Bank of Lithuania, jointly with representatives of the national central banks of all other EU Member States, the Insurance Supervisory Commission of the Republic of Lithuania and the Securities Commission of the Republic of Lithuania, participate in the activities of the European Systemic Risk Board and the European Bank-ing Authority. Accordingly, representatives of the Insurance Supervisory Commission of the Republic of Lithuania participate in the activities of the European Insurance and Oc-cupational Pensions Authority and representatives of the Securities Commission of the Republic of Lithuania in the activities of the European Securities and Markets Authority. Thus, the European System of Financial Supervisors brought together the financial super-visory authorities on a national and EU levels so that they can operate as one network.

COOPERATION WITH THE INTERNATIONAL MONETARY FUND

In the supreme decision-making body of the IMF, the Board of Governors, our country is represented by the Chairman of the Board of the Bank of Lithuania. The Board of Governors usually meets twice a year – during the Spring and Annual meetings of the IMF and of the World Bank Group. During the meetings, the key issues related to the global economy, IMF policies ad reforms, as well as international economic and financial fora cooperation are discussed. In 2010, the meetings mainly focussed on the issues of

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sustainable recovery of the global economy and IMF governance, lending instruments and mandate reforms.

In December 2010, the IMF’s Board of Governors approved the IMF quota and gover-nance reforms, aimed at enhancing representation of dynamic emerging and developing countries and under-represented countries in the IMF, including Lithuania. It is intended to increase the relative quotas and voting power of these countries as well as the possibilities for their direct representation in the IMF’s Executive Board. It was also decided to increase the IMF’s overall quota by 100 per cent during the upcoming 14th quota revision – from approximately Special Drawing Rights (SDR) 238.4 billion to SDR 476.8 billion.

After the decisions of the 13th quota revision of 2008 enter into effect, Lithuania’s IMF quota will increase from SDR 144.2 million to SDR 183.9 million, and the IMF proposes to additionally increase it during the 14th quota revision to SDR 441.6 million.

In 2010, the IMF further reformed its lending system by introducing a new instru-ment – Precautionary Credit Line, devised for countries with a sufficiently sound economy, but not complying with the particularly tight requirements applicable to the Flexible Credit Line. In continuation of the revision of its mandate, the IMF aimed at increasing the efficiency of systemic surveillance, as the key instrument of crisis prevention. The surveillance of the financial sector was enhanced: the assessment of the financial sec-tor of systemically important countries has become a mandatory part of their economic consultations with the IMF.

The Bank of Lithuania cooperated with the IMF on a regular basis, participating in the activities of the Nordic-Baltic Constituency (NBC): the Constituency’s joint positions on IMF policy issues discussed by the IMF’s Executive Board were coordinated. The key issues of cooperation were addressed in the meetings of members and alternate members of the Nordic-Baltic Monetary and Financial Committee. The joint positions of the EU on IMF policy issues were coordinated in the meetings of the EFC and its IMF subcommittee.

Lithuania’s cooperation with the IMF remains based on annual economic consultations under Article IV of the Articles of Agreement of the IMF. In May and October 2010, the representatives of the IMF worked in Lithuania, they analysed macroeconomic and finan-cial stability, assessed general economic development forecasts and the implementation of economic policies.

During Lithuania’s economic consultations in the IMF Executive Board’s meeting in July, the efforts of Lithuania to implement fiscal consolidation and strengthen its financial sector were favourably assessed. It was also noted that confidence in the banking sector was retained and the capital adequacy and liquidity ratios of banks are higher than required. The Executive Board of the IMF recommended proceeding with fiscal consolidation and implementing measures to ensure stability of the financial system.

COOPERATION WITH FOREIGN CENTRAL BANKS AND FINANCIALSUPERVISORY AUTHORITIES

In Lithuania, the major share of the banking market is controlled by foreign banks via their branches and subsidiaries. Therefore, the Bank of Lithuania, implementing the supervision of banks within different bank groups, closely cooperates with the financial supervisory authorities of other countries.

The Bank of Lithuania actively cooperates in supervisory colleges. They are established by and consist of representatives of the financial supervisory authorities of all countries in which a certain bank group is operating. The Bank of Lithuania has signed seven


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multilateral agreements on the supervision of international groups with operational branches in Lithuania.

The significance of these colleges in performing the function of banking supervision has been particularly increasing recently: in them, relevant information about banking activities is exchanged, both requests from banks to allow applying advanced methods of risk assessment for the calculation of the capital requirement and the results of model credibility assessment regularly reported by banks that are already applying such methods are considered. In 2010, representatives of the Bank of Lithuania took part in the activities of the colleges established by the Danish, Norwegian and Swedish Financial Supervisory Authorities. During the meetings, information on the economic situation in the countries, activities of bank groups and their operating performance was exchanged, the prospects for financial supervision were discussed and its general strategy was formulated. Another form of communication for college members is teleconferences, during which important supervision issues are discussed and positions of college members while conducting a supervisory review and assessment of individual banks and of the entire bank group are agreed. In order to jointly discuss the operating performance of a bank group and other relevant issues, representatives of the group subject to supervision usually attend such college meetings.

One of the banks operating in Lithuania has a subsidiary in a foreign country, therefore the college conducting its supervision is led by the Bank of Lithuania based on a multilat-eral agreement with the financial supervisory authorities of Estonia and Latvia. In 2010, regular meetings of the college members were held to discuss the problems of concern to the countries, exchange important information and coordinate further cooperation and information exchange.

During inspections12 of units of foreign banks – subsidiaries and branches – the Bank of Lithuania cooperates with foreign financial supervisory authorities by informing them about upcoming inspections (reviews) and about the results after conducting them and exchanging relevant information. Foreign financial supervisory authorities inform about the results of inspections of parent banks conducted by them. Such cooperation is very important, because the units of foreign banks operating in Lithuania belong to groups of large banks, which recently have been increasingly centralising the management of different types of risk (especially liquidity) and application of advanced methods of risk assessment for the calculation of the capital requirement. In 2010, representatives of the Danish, Latvian, Norwegian and Swedish financial supervisory authorities came to Lithuania to inspect banks or their branches within the bank groups subject to their su-pervision and operating here. At the same time, the results of the inspections (reviews) of these units conducted by the Bank of Lithuania were discussed.

In 2010, the respective ministries, central banks and financial market supervisory au-thorities of Denmark, Estonia, Iceland, Latvia, Lithuania, Norway, Finland and Sweden signed an agreement on cooperation in the area of cross-border financial stability, crisis management and resolution. According to this agreement, representatives of the Bank of Lithuania take part in joint supervisory actions and programmes and prepare informa-tion on the situation at the banks in Lithuania.

Technical assistance was further provided to specialists of the National Bank of the Re-public of Belarus. In 2010, training was organised at the Bank of Lithuania. The guests were introduced to the Lithuanian banking system and banking supervision, issuance

12 Banks operating in Lithuania are inspected, branches of banks holding licenses from other EU Member States are reviewed.

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of licences, conditions and procedures for licence revocation for credit and payment institutions, changes in the methodology for calculating capital adequacy, oversight of risk management in banks, basic principles of the organisation of off-site inspection, the use of the loan risk database, the process of organisation and conducting of bank inspections. In addition, employees of the Bank of Lithuania organised training at the National Bank of the Republic of Belarus. They delivered presentations about banking inspection practices and the implementation of the supervisory review and evaluation process in Lithuania, and shared experience.

COOPERATION IN OTHER AREAS

The Bank of Lithuania closely cooperates with international institutions preparing and publishing statistical information, particularly the ECB, Eurostat, the IMF and the Bank for International Settlements (BIS), and participates in the activities of their respective committees and working groups. Experts of the Bank actively participated in the dis-cussions on measures for the implementation of new standards and requirements for monetary and financial, quarterly financial accounts and external statistics, provided their comments and suggestions regarding draft documents prepared by the ECB, the IMF and Eurostat.

In 2010, the Bank of Lithuania, jointly with the central banks of other states, conducted already a third survey of traditional foreign exchange market transactions and over-the-counter derivative transactions and submitted its results to the BIS for a Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity.

In 2010, the Bank of Lithuania, in observance of its rules for the provision of technical support and of the provisions of the development cooperation policy of the Republic of Lithuania for 2006–2010, provided technical support to the national central banks of Armenia, Georgia, Kyrgyzstan and Ukraine. Employees of the Bank of Lithuania presented the collection, processing and dissemination of statistical data by the Bank of Lithuania, resolution of the issues of risk management and internal audit, accounting policy of the Bank of Lithuania and other issues to representatives of the said banks.

III. ORGANISATION OF ACTIVITIES OF THE BANK OF LITHUANIA

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The Board of the Bank of Lithuania in 2010 (left to right): Member of the Board Audrius Misevičius, Deputy Chairman of the Board Ramunė Vilija Zabulienė, Chairman of the Board Reinoldijus Šarkinas, Member of the Board Vaidievutis Ipolitas Geralavičius and Deputy Chairman of the Board Darius Petrauskas

STAFF AND ORGANISATIONAL STRUCTURE

The Bank of Lithuania employs qualified, responsible, active and creative staff to imple-ment the objectives and tasks of the Bank of Lithuania. The human resources management policy covers the major areas of staff administration, development and maintenance of competence.

MISSION, VALUES AND ETHICS

The mission of the Bank of Lithuania is to ensure sustainability and integrity of the state’s monetary, credit and payment systems and their stable, reliable and efficient functioning, thus creating favourable conditions for optimal development of the national economy.

The activities of the Bank of Lithuania are based on the following values: adherence to the public interests, competence and quality, non-partisan attitudes and professional analysis, transparency and integrity of activity.

Ethics is regulated by the code of ethics for the staff and the code of ethics for the Board of the Bank of Lithuania. They establish the principles of conduct and the standards of professional ethics. The codes are to ensure adequate separation between public and private interests as well as observance of high standards of professional ethics.

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STAFF

On 31 December 2010, 796 staff members were employed at the Bank of Lithuania. Of these, 774 staff members were employed on permanent contracts, 5 staff members, who replaced those on maternal/paternal leave, were employed on fixed-term contracts, 13 staff members were on maternal/paternal leave and 4 staff members worked at the ECB, IMF or studied for the period of unpaid leave. Over a year, the number of staff members employed on permanent contracts decreased by 3.5 per cent.

Chart 47. Number of employees employed at the Bank of Lithuania on permanent contracts(31 December)

At the end of the year, the average age of employees was 46 years. Employees aged 40 to 50 made up the largest age proportion of employees (34%). Employees aged 50 to 60 made up 27 per cent, those aged 30 to 40 – 22 per cent, and those under 30 – 9 per cent. Employees aged over 60 accounted for the smallest proportion of the staff (8%).

The average length of service of the employees at the Bank of Lithuania was 13.4 years. Almost three-fourths of the employees (74.6%) have been working at the Bank for over 10 years. Females accounted for 53 per cent and males for 47 per cent of total employees.

The Bank employed one professor doctor habilitatus, eighteen employees held a docto-rate degree.

ORGANISATIONAL DEVELOPMENT AND SOCIAL DIALOGUE

At the end of the year, the Bank of Lithuania comprised 11 departments, 6 autonomous divisions and 2 branches in Kaunas and Klaipėda.

For the purpose of implementing institutional objectives and in an effort to efficiently use the human resources, in 2010 the Bank of Lithuanian was subject to structural changes. Aiming at optimal organisation of work and higher labour productivity, structural changes were implemented at the General Services Department: three divisions were reorganised into two and the number of staff was reduced by 20.

Social dialogue is developed at the Bank of Lithuania. Agreements on the human re-sources management policy and social guarantees have been arrived at. A new Staff Association was elected at the end of 2010. Its representatives attend social dialogue meetings at the ECB twice a year.


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STAFF TRAINING

Training and continuous development of competences is a major element of the human resources management policy. It is employed to constantly improve the staff knowledge and skills in order to ensure efficient operation of the national central bank and its ap-propriate functioning within the ESCB. The share of funds for the improvement of the staff skills is determined by the Rules of Procedure of the Bank of Lithuania. The Rules were changed in 2010: it was established that staff training was allotted 1 to 4 per cent of the payroll budget (previously 3 to 5 per cent). In 2010, 1.8 per cent of the payroll budget was used (2.2% in 2009).

Introductory training was provided to students on practice at the Bank of Lithuania and new staff members to present the Bank’s structure and activities to them.

The ESCB regulates and encourages gaining work experience at other central banks. In this regard, 7 staff members of the Bank of Lithuania worked at the ECB and one at Nationale Banque van Belgiė/ Banque Nationale de Belgique on short-term contracts during the period of unpaid leave from the Bank of Lithuania. They had an opportunity to obtain expert knowledge on the issues of economics, accounting, payment systems and translation. One employee worked for a second year in Washington as Advisor to the Executive Director of the Nordic–Baltic Office of the IMF.

VLADAS JURGUTIS AWARD AND SCHOLARSHIP

When commemorating the 75th anniversary of the establishment of the Bank of Lithua-nia and the issue of the litas, the Bank of Lithuania established Vladas Jurgutis (the first Governor of the Bank of Lithuania) award in 1997. It is granted for significant works in the areas of banking, finance, monetary and macroeconomic research of our country. In 2008, the regulations for granting the award were changed: it is now granted by the Bank of Lithuania together with the Lithuanian Academy of Sciences.

By Resolution of the Board of the Bank of Lithuania, the 2010 award was granted to Antanas Tyla for the monograph “The Treasury of the Grand Duchy of Lithuania during the two-decade war (1648–1667)” and to Dr Vytautas Valvonis for his works in the area of banking, particularly the credit risk management.

Vladas Jurgutis Scholarship was established in 1990. It is awarded for one academic year to two best-performing full-time students of banking and finance at universities of Lithuania. Candidates for the Scholarship are nominated by university faculties, which have banking and finance departments. Decisions on awarding the Scholarship are taken by the Board of the Bank of Lithuania. The scholarship equals the minimum monthly wage.

In 2010, Vladas Jurgutis Scholarship was awarded to the students from Vilnius University and Vytautas Magnus University for excellent academic performance and active partici-pation in scientific activity.

TRANSPARENCY OF ACTIVITIES AND PUBLIC COMMUNICATION

Transparency in the activities of the Bank of Lithuania – as a principle of a national central bank’s accountability to the public – is ensured through the implementation of various public information and communication measures.

The Bank publishes and issues annual reports in the form of separate publications in Lithuanian and English. They present information on the Bank’s key objectives and their


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fulfilment, monetary policy operations, supervision of credit institutions, the Bank’s finan-cial situation and operating performance, performance of its other functions prescribed by laws, as well as information on the macroeconomic situation of the country – deve-lopments of the country’s economy and financial markets are analysed.

Twice a year, the Bank of Lithuania submits reports to the Seimas of the Republic of Lithuania on the implementation of the central bank’s primary objective, performance of its functions and the situation in the banking system. The reports are published on the internet. The Bank of Lithuania regularly provides information about domestic banking and the country’s financial system to the press, radio, television, Lithuanian and world news agencies and websites. Employees of the Bank comment on relevant financial is-sues by giving interviews to the media or at press conferences.

The Bank of Lithuania’s website (www.lb.lt) is an important source of information for finance analysts, media and the public. It urgently informs in Lithuanian and English about resolutions of the Board, presents financial statistics, payments information, financial stability reviews, macroeconomic forecasts, reviews of the activities of credit institutions operating in Lithuania and their balance sheets, and provides information about the Bank’s participation in the ESCB and its international relations. The Bank’s new website was created in 2010 and presented to the public in early 2011. It has a new design, is more convenient for the users in terms of search for information and is more comprehensive in terms of content. It provides more possibilities for virtual com-munication than previously.

By order of the Bank of Lithuania, a half-hour video film was made in 2010, which presents in a popular way the Bank’s main functions and activity in Lithuanian and English. It tells about the Bank’s monetary policy, cash issuance, supervision of credit institutions and payment systems, economic education, reminds of the history of the Bank of Lithuania. The film can be watched on the Bank’s website; it is used for educational purposes at the Money Museum of the Bank of Lithuania.

Publications of the Bank present information on its activities and monetary, banking, balance of payments and financial statistics, and introduce the litas banknotes and coins as well as their security features.

Table 21. Publications of the Bank of Lithuania in 2010

Report on the Implementation of the Primary Objective of the Bank of Lithuania, Performance of its Functions and the Situation in the Banking System (to be presented to the Seimas of the Republic of Lithuania twice a year, in Lithuanian)

Annual Report of the Bank of Lithuania 2009 (separately in Lithuanian and English)

Monthly Bulletin of the Bank of Lithuania (in Lithuanian and English)

External Statistics (quarterly and annual; in Lithuanian and English)

Annual Financial Statements of the Bank of Lithuania, 2009 (separately in Lithuanian and English)

Banking Statistics Yearbook 2009 (separately in Lithuanian and English)

Financial Stability Review 2010 (separately in Lithuanian and English)

Academic Journal Monetary Studies (biannual)

Working Paper Series publications (in English)

Booklets of collectors (commemorative) coins to present the collectors (commemorative) coins issued in 2010 (separately in Lithuanian and English)

Catalogue Lithuanian Collectors Coins 1993–2010 (in Lithuanian and English)

Brochure The Return of Lost Valuables (in Lithuanian, English and German)

Booklet Architectural Exposure (in Lithuanian and English)

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As part of the ESCB, the Bank of Lithuania closely cooperates with ECB experts, prepares and distributes ECB publications.

All publications are distributed free of charge inside the country and abroad, their elec-tronic versions are available on the Bank’s website.

In October 2010, the Bank of Lithuania opened an important page in the history of national statistics, which until then had only been familiar to a small number of specia-lists. Digital copies of the 1928–1938 quarterly bulletins of the Bank of Lithuania, which operated in the pre-war period, issued in Kaunas were made available on the internet. Inter-war and modern statistical publications were presented in the exhibition dedicated to the World Statistics Day, which was organised in the Library of the Bank of Lithuania. This day was first commemorated on 20 October.

The public was further informed about the euro. A short film “The Euro Ahead”, which was created and made available on the internet, presents the activities of the Bank of Lithuania in this area. European Commission and ECB publications on the adoption of the euro issued in Lithuanian and English, souvenirs with the symbols of the euro were distributed. A mobile international exhibition “The Euro, Our Currency” arranged by the European Commission provided the Lithuanian public with new information about the single currency of the EU. It ran in the historical buildings of the Bank of Lithuania in Kaunas from October 2009 to February 2010. The Exhibition was actively visited by organised groups, particularly those of schoolchildren, from across Lithuania, as well as individual residents and guests of Kaunas.

Information on the SEPA project undertaken by the European banks is disseminated. Our country’s commercial banks actively participate in the project. On the initiative of the Bank of Lithuania, an ECB video film presenting the SEPA project has been dubbed in Lithuanian and can be watched on the Bank’s website.

Presentation of new collectors (commemorative) litas coins contributes to the provision of information and communication with the public. Four such events took place in 2010. On 26 March, the public listened to jazz tunes in the Conference Hall of the Bank of Lithuania. They announced the issue of a 10 litas silver coin dedicated to music. Three coins dedicated to the 600th anniversary of the Battle of Grunwald – 500 litas gold, 50 litas silver and 1 litas copper/nickel-alloy coins – were presented to the general public on 29 June at the Museum of Applied Arts in Vilnius. The presentation of the 50 litas silver coin dedicated to Biržai Castle was arranged on 14 September at the “Sėla” Museum of Biržai region. On 30 November, an event was arranged at the Lithuanian Maritime Museum in Klaipėda to mark the issue of the 50 litas silver coin depicting, for the first time on the collectors coins issued by the Bank of Lithuania, a fish – the loach, which is included into the Red Data Book of Lithuania.

A new exposition of the Money Museum of the Bank of Lithuania was presented to the public at the end of 2010. It occupies an area of over 300 square metres of the Museum’s five halls, introducing the visitors to the history of world money and banking, Lithuanian money, and banking development in our country. The exhibits of the Museum are also presented on the Bank’s website.

A quarterly magazine “Apie mus” (“About Us”), providing information to the staff of the Bank of Lithuania, is published.

An exhibition of the Lithuanian modern art was run at the ECB in Frankfurt am Main on 23 June–17 September 2010. About 70 works of art – paintings, photographs, artistic


89

installations and video films created by over 20 artists of different generations – were exhibited. The exhibition was arranged and supported by the ECB and the Bank of Lithuania. It was also a perfect occasion to make known the Bank of Lithuania’s art col-lection, which already comprises over 130 works of art – paintings, graphical works and sculptures. The organisers of the exhibition in Frankfurt am Main selected and exhibited 6 paintings from the Bank of Lithuania’s collection.

IV. THE ANNUAL FINANCIAL STATEMENTS OF THE BANK OF LITHUANIA 2010


93

BALANCE SHEET OF THE BANK OF LITHUANIA

LTL million

Notes 31 December 2010 31 December 2009

ASSETS

1. Gold 1 688.25 496.51

2. Claims on foreign institutions denominated in foreign currency 17,112.43 15,332.37

2.1. Receivables from the International Monetary Fund 2 549.58 518.41

2.2. Deposits, securities and other investments denominated in foreign currency 3 16,562.84 14,813.96

3. Other assets 387.95 383.66

3.1. Tangible and intangible fixed assets 4 144.60 150.79

3.2. Investments into equity instruments 5 18.94 21.07

3.3. Off-balance sheet instruments revaluation differences 6 – (3.50)

3.4. Accruals and deferred expenses 7 205.36 191.87

3.5. Sundry 8 19.05 23.43

Total 18,188.63 16,212.54

LIABILITIES

4. Banknotes and coins in circulation 9 8,823.95 7,932.19

5. Liabilities to domestic credit institutions related to monetary policy operations denominated in litas 10 3,044.42 2,520.36

6. Liabilities to other domestic institutions denominated in litas 11 219.82 64.59

7. Liabilities to foreign institutions denominated in litas 12 101.30 137.69

8. Liabilities to domestic institutions denominated in foreign currency 13 3,026.17 2,639.92

9. Liabilities to foreign institutions denominated in foreign currency 13 474.32 275.86

10. Counterpart of special drawing rights allocated by the International Monetary Fund 2 549.16 518.01

11. Items in the course of settlement 12.38 22.59

12. Other liabilities 6, 14 11.56 2.00

12.1. Off-balance-sheet instruments revaluation differences 0.38 (5.57)

12.2. Accruals and deferred income 5.13 3.41

12.3. Sundry 6.05 4.17

13. Revaluation accounts 15 503.04 403.73

14. Capital 16 1,332.00 1,176.17

14.1. Authorised capital 200.00 200.00

14.2. Reserve capital 1,132.00 976.17

15. Profit for the year 27 90.49 519.44

Total 18,188.63 16,212.54

2010


94

PROFIT AND LOSS ACCOUNT OF THE BANK OF LITHUANIA

LTL million

Notes 2010 2009

Interest income 18 226.61 307.40

Interest expense 19 (20.45) (22.72)

1. Net interest income 206.16 284.68

Realised gains (losses) arising from financial operations 20 110.30 345.95

Unrealised losses from revaluation 21 (158.57) (16.47)

2. Net result of financial operations and revaluation losses (48.27) 329.49

Fees and commissions income 19.19 10.83

Fees and commissions expense (2.58) (2.67)

3. Net income from fees and commissions 22 16.61 8.17

4. Dividend income 5 4.38 2.35

5. Other income 23 4.65 1.87

TOTAL NET INCOME 183.52 626.56

6. Staff costs 24 (52.35) (53.69)

7. Administrative expenses 25 (16.67) (16.19)

8. Depreciation and amortisation of tangible and intangible fixed assets 4 (11.30) (11.49)

9. Banknote and coin production services and circulation expenses 26 (12.71) (25.75)

PROFIT FOR THE YEAR 27 90.49 519.44

The accompanying explanatory notes are an integral part of these Financial Statements.

The Annual Financial Statements 2010 of the Bank of Lithuania were approved on 15 March

2011 by Resolution No. 03-36 of the Board of the Bank of Lithuania.

Chairman of the Board Reinoldijus Šarkinas


95

EXPLANATORY NOTES TO THE ANNUAL FINANCIAL STATEMENTS OF THE BANK OF LITHUANIA

FUNCTIONS OF THE BANK OF LITHUANIA

The Bank of Lithuania shall perform the following functions:

- 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;

- manage, use and dispose of the foreign reserves of the Bank of Lithuania;

- act as a State Treasury agent;

- in the manner and cases established by laws and other legal acts, issue and revoke licenses of

credit institutions and payment institutions of the Republic of Lithuania as well as branches

of credit institutions of foreign states, and supervise the activities thereof; it shall also per-

form other functions related to the activities of credit institutions and payment institutions

established by laws;

- establish principles and procedures for financial accounting and reporting of credit institu-

tions and payment institutions of the Republic of Lithuania and branches of credit institu-

tions of foreign states operating in the Republic of Lithuania;

- encourage sound and efficient operation of payment and securities settlement systems;

- c ollect monetary, banking and balance of payments statistics, as well as the data of financial

and related statistics of the Republic of Lithuania, implement standards on the collection,

reporting and dissemination of the said statistics and compile the Balance of Payments of

the Republic of Lithuania.

After Lithuania’s accession to 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 THE ANNUAL FINANCIAL STATEMENTS

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, which is in line with the accounting and

financial reporting guidelines established by the European Central Bank (ECB) 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 Ac-

counting Policy of the Bank of Lithuania and in the absence of the decisions and instructions

to the contrary by the ECB, the Bank of Lithuania shall follow the principles of the international

accounting and financial reporting 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 comparable financial

data for 2009 have been presented.

Due to rounding, the totals included in the Balance Sheet, Profit and Loss Account and Notes

of the Bank of Lithuania may not equal the sum of the individual figures.

2010


96

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 (other than those classified as held-to-maturity) and other on-balance-

sheet and off-balance-sheet foreign reserves assets and liabilities (hereinafter – financial

items) denominated in foreign currency are recorded in financial accounting at acquisition

cost (transaction) price, and in the Annual Financial Statements are presented at market price

and official exchange rate1 of the balance sheet date.

Results arising from revaluation of gold holding, foreign currency (on a currency-by-currency

basis), securities (on a code-by-code basis, i.e. same ISIN number) and interest rate futures and

forward transactions in securities (on an item-by-item basis) are accounted for separately.

Unrealised revaluation loss arising at the end of the financial year from revaluation of a

separate financial item at market price and official exchange rate and exceeding previous

unrealised revaluation gain registered in corresponding revaluation account, is recognised as

expense of the current financial year. Unrealised loss taken to Profit and Loss Account can-

not be reversed in subsequent years against new revaluation gain of the same financial item

resulting from changes in market price and official exchange rate or offset by the revaluation

gain of another type of the financial item.

Unrealised revaluation gain arising at the end of the financial year from the revaluation of a

separate financial item at market price and official exchange rate is presented at revaluation

accounts.

The average rate and average price 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 the realised and unrealised results.

Income and expense are recognised in the accounting period in which they are earned or

incurred and not in the period in which they are received or paid.

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 one Troy ounce. This price is converted into litas at the official

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 and US dollar exchange

rate prevailing on the last business day of the financial year.

Transactions related to gold swaps are accounted for in the same way as repurchase agree-

ments.

1 Official exchange rate is the official exchange rate of the litas against the euro or exchange rate of the litas against foreign currency determined by the Bank of Lithuania.


97

FOREIGN CURRENCY

Financial items denominated in foreign currency are revalued on each business day at the

official exchange rate prevailing on that day.

Official exchange rates of the litas against major foreign currencies determined by the Bank of LithuaniaLitas (LTL) per unit

Currency Code 31 December 2010 31 December 2009

Euro EUR 3.4528 3.4528

US dollar USD 2.6099 2.4052

100 Japanese yen JPY 3.2024 2.6108

Special Drawing Rights XDR 4.0015 3.7745

The average rate of foreign currency is recalculated on a daily basis in case of an increase of

a respective foreign currency position.

In the event of recognition of unrealised revaluation loss on a separate 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.

FOREIGN EXCHANGE TRANSACTIONS

Foreign currency to be received or paid according to foreign exchange spot, forward and swap

transactions influences a respective foreign currency position on a trade date 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 is accrued on a daily basis over the remaining duration of

the transaction.

SECURITIES

Securities are recorded in the on-balance-sheet accounts at cost on the transaction settle-

ment date.

The revaluation of securities (other than those classified as held-to-maturity) is performed on

the last business day of each month at mid-market prices prevailing at the revaluation date.

Revaluation results of securities related with changes of the market price of securities and

the official exchange rate of the foreign currency are accounted for in separate revaluation

accounts.

Securities classified as held-to-maturity are accounted at cost subject to impairment and any

premiums or discounts are amortised.

The average price of each issue of securities is recalculated at the end of the business day in

consideration of all purchases of the same issue of securities made during the day and their

average acquisition costs. Realised gain (loss) for the same day sales of these securities is

calculated according to this new average cost.

Coupon purchased together with security is presented in a separate balance sheet item as

other assets and is not included in the acquisition cost of the security.

The difference between the security acquisition cost and its nominal value – discount or pre-

mium – is recognised as income or expense according to the straight-line method on a daily

2010


98

basis from the settlement date of purchase transaction to the maturity date or settlement

date of sale transaction.

Discount on non-coupon bearing securities is amortized according to the Internal Rate of

Return (IRR) method and discount or premium on coupon bearing securities is amortized

according to the straight-line method.

If at the end of the financial year unrealised revaluation loss on valuation of a separate type

of securities is recognised as expense, the average cost of such type of securities is adjusted

according to its market price prevailing on the last business day of the financial year.

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 at the forward price of the transaction. Securities to

be purchased or sold under these transactions are revalued on the last business day of each

month at forward market price. The revaluation result on these securities is recorded for

separately on item-by-item basis in on-balance-sheet assets or liabilities accounts.

On the settlement date of forward transactions in securities, purchases or sales of the securi-

ties are recorded on the on-balance-sheet accounts at the actual market price, and the dif-

ference between this price and the forward price of the transaction is recognised as realised

income or expense.

EQUITY INSTRUMENTS

Long-term investments into equity instruments held for the Bank’s specific purposes are in-

vestments 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. They are

recorded at cost.

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 reported 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 over remaining duration of the transaction.

INTEREST RATE FUTURES

Interest rate futures are recorded in off-balance-sheet accounts at 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.


99

TANGIBLE AND INTANGIBLE FIXED ASSETS

Tangible fixed assets include such tangible items 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 historical and art valuables are also

treated as tangible assets with no regard to their acquisition cost. Intangible assets include

items without physical substance whose useful life is not less than one year. Tangible and

intangible fixed assets are recorded in the balance sheet at cost less accumulated deprecia-

tion (amortisation). Depreciation (amortisation) is calculated on a straight-line basis over the

estimated useful life of the asset.

Depreciation (amortisation) rates of tangible and intangible fixed assets

Assets Annual rate, %

Tangible fixed assets

Buildings and structures 2.5–10

Cash count and computer equipment 10–50

Vehicles 20

Furniture, office equipment and other fixed assets 5–50

Intangible assets 25–100

If there are signs of significant decline in the market value of real estate, then at the end of

the financial year the acquisition cost of such assets is reduced by the amount of impairment

loss.

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 of banknotes and minting coins, as well as other expenses associ-

ated 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.

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.

Realised gain and loss arising from financial items denominated in foreign currency are taken

to the Profit and Loss Account on the trade date, except for the realised gain and loss on

securities which are recognised on the settlement date.

Unrealised revaluation gain is not recognised as income and is presented in revaluation ac-

counts. Unrealised revaluation loss is taken to the Profit and Loss Account at year-end, if it

exceeds previous revaluation gain related to the corresponding financial item.

Interest income and expense related to financial assets and liabilities denominated in litas are

booked monthly, other income and expenses of the year denominated in litas – till year-end.

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.

2010


100

No adjustment is made for the data of the Annual Financial Statements of post-balance sheet

events that are indicative of conditions that arose after the balance sheet date. Events which

are of such importance 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.

FINANCIAL RISK AND ITS MANAGEMENT

The main object of the financial risk of the Bank of Lithuania is foreign reserves that as at 31

December 2010 accounted for 98 per cent of the total assets of the Bank of Lithuania.

In managing foreign reserves the Bank of Lithuania is exposed to different types of financial

risk such as market, credit, liquidity and settlement risk. These risks are managed by an es-

tablished system of limits for risk exposures and other means aimed at reducing 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 comprises exchange rate,

gold price and interest rate risk.

Exchange rate risk has been mainly eliminated – practically all foreign reserves not related to

liabilities in foreign currencies are invested in the anchor currency – the euro. The part of foreign

reserves corresponding to liabilities is invested in the currency of the liabilities (see Note 28).

The Bank of Lithuania uses the indicator of the modified duration (MD)2 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 largest allowed deviations of portfolio real invest-

ment MD from the MD of the benchmarks. In 2010 the part of foreign reserves not exceeding

the amount of the capital of the Bank of Lithuania was invested into foreign governments’

securities classified as held-to-maturity. The average MD of foreign reserve investments (other

than those classified as held-to-maturity) was 0.85 in 2010 (1.33 in 2009).

Market risk is valued applying “value-at-risk” (VaR) indicator. At the end of 2010 VaR indicator

for market risk was EUR 3.9 million3 (EUR 3.9 million in 2009), for gold price and exchange

rate risk VaR indicator was EUR 3.2 million (EUR 2.5 million in 2009), for interest rate risk VaR

indicator was EUR 2.5 million, same as in the previous year.

For the purpose of managing exchange rate risk and interest rate risk, the Bank of Lithua-

nia also uses financial derivatives (see Note 17). All financial derivatives are included in the

measurement of the foreign reserves investment market and credit risk.

Credit risk is managed by establishing strict financial reliability requirements to issuers and

counterparties. In order to reduce credit risk, limits of the liabilities to the Bank of Lithuania

are established for issuers, counterparties and their groups.

Liquidity risk is managed by setting liquidity ratios and a minimum amount of highly liquid

financial instruments in foreign reserves.

Various correspondent account management instruments are applied for managing settle-

ment risks: the delivery-versus-payment principle, matching of debt and credit turnovers,

ISDA Master Agreement. These measures facilitate the reduction of the risk of loss due to

settlement defaults by counterparties.2 MD shows approximately how much will the percentage value of an investment change, if the profitability rates

increase by 100 basis points.3 The indicator is calculated using parametric approach based on RiskMetrics methodology. It shows a probability of

95% that adverse developments of gold price, exchange rates or interest rate will not reduce the investment value during the next business day by the amount exceeding the value of the indicator. Data and calculations provided in the section “Financial Risk and Its Management” are prepared by the Market Operations Department of the Bank of Lithuania and RiskMetrics.


101

NOTES

Note 1. Gold

31 December 2010 31 December 2009

Gold holdings in:

Troy ounces 186,994.08 186,984.41

Kilograms 5,816.17 5,815.87

Price of one Troy ounce, USD 1,410.25 1,104.00

Value of gold, LTL million 688.25 496.51

Gold InvestmentTroy ounces


Non-invested reserves 86,716.20 179,277.89

Swaps 100,277.88 7,706.52

Total 186,994.08 186,984.41

Note 2. Receivables from the International Monetary FundLTL million


Reserve tranche position with the International Monetary Fund 0.14 0.13

Balance in special drawing rights account with the International Monetary Fund 549.45 518.28

Total 549.58 518.41

The reserve tranche position with the International Monetary Fund (IMF) holdings belongs to

the Republic of Lithuania, which is a member of the IMF since 1992. The Bank of Lithuania

performs the function of depository of the IMF funds.

Quota of the Republic of Lithuania in the IMF totals SDR 144.20 million. Part of this Quota

(25%) was paid in SDRs and the other part was paid in non-marketable and non-interest

bearing Republic of Lithuania Government promissory notes denominated in national cur-

rency. The value of these Government securities issued for the benefit of the IMF as at 31

December 2010 amounted to SDR 143.66 million.

Reserve Tranche Position with the IMFSDR million


Quota of the Republic of Lithuania in the International Monetary Fund (total value) 144.20 144.20

Claims of the International Monetary Fund corresponding to Government promissory notes in litas (143.66) (143.65)

Funds of the International Monetary Fund in accounts with the Bank of Lithuania in litas (0.51) (0.51)

Reserve tranche position with the International Monetary Fund 0.03 0.03

SDR 137.24 million (LTL 549.16 million) allocated by the IMF in 2009 are disclosed under

balance sheet of the Bank of Lithuania assets item “Receivables from the International Mone-

tary Fund” and under liability item “Counterpart of special drawing rights allocated by the

International Monetary Fund”. The amounts of interest payable and receivable on SDR funds

recorded under the abovementioned items were the same.

2010


102

Note 3. Deposits, Securities and Other Investments Denominated in Foreign Currency

LTL million


Debt securities (other than those classified as held-to-maturity) 12,735.90 14,396.08

Debt securities classified as held-to-maturity 1,281.74 –

Reverse repurchase agreements 1,415.34 90.20

Claims on the ECB (TARGET24 account) 621.24 80.34

Accounts with foreign banks 508.62 247.34

Total 16,562.84 14,813.96

In 2010 the portfolio of securities classified as held-to-maturity was formed. Securities from

this portfolio are presented in the Annual Financial Statements at cost subject to impairment

and any premiums or discounts are amortised. The market value of these securities at market

rates prevailing on the balance sheet date was LTL 1,119.80 million.

The increase in the reverse repurchase agreements was caused by the tactical foreign reserve

management investment decisions.

The majority of the Bank of Lithuania accounts with foreign banks are balances held with

central banks of other states. Balances of the Bank of Lithuania in these accounts comprise

LTL 500.60 million (LTL 201.71 million on 31 December 2009).

Liabilities of the Bank of Lithuania to participants of TARGET2 related to the claims of the

Bank of Lithuania on the ECB arising due to operations performed via TARGET2 are presented

in Note 13.

The breakdown of deposits, securities and other investments by currency is presented in

Note 28.

Breakdown of Deposits, Securities and Other Investments Denominated in Foreign Currency by Country of Residence of Issuer and CounterpartyLTL million


EU Member States 16,293.21 14,072.24

USA 112.88 105.35

Australia 10.35 17.88

Japan 0.03 365.60

International financial institutions 146.37 252.90

Total 16,562.84 14,813.96

Breakdown of Deposits, Securities and Other Investments Denominated in Foreign Currency by MaturityLTL million


Demand 1,129.86 327.69

Up to 1 year 7,775.95 5,559.30

1–5 years 6,987.63 8,788.30

Over 5 years 669.41 138.67

Total 16,562.84 14,813.96

4 TARGET2 is a Trans-European Automated Real-time Gross settlement Express Transfer system operating on the basis of a single shared platform and providing harmonised services according to a unified price system.


103

Note 4. Tangible and Intangible Fixed Assets

LTL million

Tangible fixed assets Intangible fixed assets

Total

Buildings and construction in progress

Cash count and computer equipment (including asset under construction)

Vehicles Other tangible assets (including asset under construction)

Acquisition cost as at 31 December 2009 161.30 68.30 6.92 37.29 15.32 289.15

Additions in 2010 – 3.42 – 0.88 0.81 5.11

Disposals in 2010 – (1.82) (1.13) (0.42) (0.11) (3.48)

Acquisition cost as at 31 December 2010 161.30 69.90 5.79 37.76 16.03 290.78

Accrued depreciation as at 31 December 2009 (35.26) (55.05) (4.69) (28.54) (14.82) (138.36)

Depreciation in 2010 (3.84) (4.71) (0.66) (1.30) (0.80) (11.30)

Written-off depreciation in 2010 – 1.82 1.13 0.42 0.11 3.48

Accrued depreciation as at 31 December 2010 (39.10) (57.93) (4.21) (29.42) (15.51) (146.18)

Net book value as at 31 December 2010 122.20 11.97 1.58 8.34 0.51 144.60

Net book value as at 31 December 2009 126.04 13.26 2.24 8.75 0.50 150.79

The Bank of Lithuania has not concluded any transactions with the mortgage of tangible

assets of the Bank of Lithuania.

Note 5. Investments into Equity Instruments

Since 1 May 2004 the Bank of Lithuania is a member of the ESCB. In accordance with Article

28 of the Statute of the ESCB and of the ECB, the Bank of Lithuania is the subscriber of the

capital of the ECB. Shares of the national central banks in the subscribed capital of the ECB

depend on the established key for the ECB capital subscription, which is adjusted every five

years in accordance with Article 29.3 of the Statute of the ESCB and of the ECB or adjusted

in the case of a change in the number of the European Union Members States in accordance

with Article 48.3 of the Statute of the ESCB and of the ECB. The shares of the NCBs in the

ECB’s capital key are weighted according to the shares of the respective Member States in

the EU’s total population and GDP in equal measure, as notified to the ECB by the European

Commission. The share of the Bank of Lithuania in the capital of the ECB as of 1 January

2009 comprises 0.4256 per cent.

The ECB increased its subscribed capital from EUR 5,760,652,402.58 to EUR 10,760,652,402.58

from 29 December 2010. In addition, according to the ECB decision the part of the subscribed

capital which is required to be paid up was reduced from 7% to 3.75% for non-euro zone

countries of the EU, subject to transitional provisions set in Article 47 of the Statute of the

ESCB and of the ECB. Due to these changes, on 29 December 2010, the Bank of Lithuania

made an additional payment of EUR 1.19 thousand to the capital of the ECB and the paid-

up capital of the Bank of Lithuania as at 31 December 2010 amounted to EUR 1.72 million

(LTL 5.93 million).

2010


104

Distribution of the Subscribed and Paid-up Capital of the European Central BankEuro

Central Bank Subscribed capital until 28 December 2010

Paid-up capital until 28 December 2010

Subscribed capital from 29 December 2010

Paid-up capital from 29 December 2010

Nationale Bank van België/

Banque Nationale de Belgique 139,730,384.68 139,730,384.68 261,010,384.68 180,157,051.35

Deutsche Bundesbank 1,090,912,027.43 1,090,912,027.43 2,037,777,027.43 1,406,533,694.10

Central Bank of Ireland 63,983,566.24 63,983,566.24 119,518,566.24 82,495,232.91

Bank of Greece 113,191,059.06 113,191,059.06 211,436,059.06 145,939,392.39

Banco de España 478,364,575.51 478,364,575.51 893,564,575.51 616,764,575.51

Banque de France 819,233,899.48 819,233,899.48 1,530,293,899.48 1,056,253,899.48

Banca d’Italia 719,885,688.14 719,885,688.14 1,344,715,688.14 928,162,354.81

Central Bank of Cyprus 7,886,333.14 7,886,333.14 14,731,333.14 10,167,999.81

Banque centrale du Luxembourg 10,063,859.75 10,063,859.75 18,798,859.75 12,975,526.42

Central Bank of Malta 3,640,732.32 3,640,732.32 6,800,732.32 4,694,065.65

De Nederlandsche Bank 229,746,339.12 229,746,339.12 429,156,339.12 296,216,339.12

Oesterreichische Nationalbank 111,854,587.70 111,854,587.70 208,939,587.70 144,216,254.37

Banco de Portugal 100,834,459.65 100,834,459.65 188,354,459.65 130,007,792.98

Banka Slovenije 18,941,025.10 18,941,025.10 35,381,025.10 24,421,025.10

Národná banka Slovenska 39,944,363.76 39,944,363.76 74,614,363.76 51,501,030.43

Suomen Pankki – Finlands Bank 72,232,820.48 72,232,820.48 134,927,820.48 93,131,153.81

Subtotal for euro area NCBs 4,020,445,721.55 4,020,445,721.55 7,510,020,721.55 5,183,637,388.22

Българска народна банкаБългарска народна банка

(Bulgarian National Bank) 50,037,026.77 3,502,591.87 93,467,026.77 3,505,013.50

Česká národní banka 83,368,161.57 5,835,771.31 155,728,161.57 5,839,806.06

Danmarks Nationalbank 85,459,278.39 5,982,149.49 159,634,278.39 5,986,285.44

Eesti Pank 10,311,567.80 721,809.75 19,261,567.80 722,308.79

Latvijas Banka 16,342,970.87 1,144,007.96 30,527,970.87 1,144,798.91

Lietuvos bankas 24,517,336.63 1,716,213.56 45,797,336.63 1,717,400.12

Magyar Nemzeti Bank 79,819,599.69 5,587,371.98 149,099,599.69 5,591,234.99

Narodowy Bank Polski 282,006,977.72 19,740,488.44 526,776,977.72 19,754,136.66

Banca Naţională a României 141,971,278.46 9,937,989.49 265,196,278.46 9,944,860.44

Sveriges Riksbank 130,087,052.56 9,106,093.68 242,997,052.56 9,112,389.47

Bank of England 836,285,430.59 58,539,980.14 1,562,145,430.59 58,580,453.65

Subtotal for non-euro area NCBs 1,740,206,681.03 121,814,467.67 3,250,631,681.03 121,898,688.04

Total 5,760,652,402.58 4,142,260,189.22 10,760,652,402.58 5,305,536,076.26

The Bank of Lithuania is a member of the Bank for International Settlements (BIS) with

1,070 shares, which acquisition cost is 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 2010 the

Bank of Lithuania received dividends of LTL 3.01 million for these BIS shares (LTL 1.08 million

in 2009).

The Bank of Lithuania owns 60 per cent of the shares of the Central Securities Depository of

Lithuania AB (CSD). In 2010, by the decision of the annual general meeting of shareholders the

authorised capital of the entity was reduced from LTL 6.05 million to LTL 2.50 million, proportio-

nally reducing the number of the shares owned by the CSD shareholders. Following this decision,

the acquisition cost of shares owned by the Bank of Lithuania decreased from LTL 3.63 million

to LTL 1.50 million. In 2010 the Bank of Lithuania received dividends of LTL 1.38 million for the

owned CSD shares (LTL 1.28 million in 2009).


105

The Bank of Lithuania holds one SWIFT share with the acquisition cost of LTL 3,249. Dividends

are not paid for this share.

Note 6. Off-Balance-Sheet Instruments Revaluation Differences

Off-balance-sheet instruments revaluation differences represent the results of revaluation due

to the changes of the official exchange rate of foreign exchange transactions and due to

changes of the forward price of forward transactions in securities, which both are recorded

in off-balance-sheet accounts (see Note 17).

Note 7. Accruals and Deferred Expenses

LTL million


Accrued interest income 154.78 115.98

Accrued coupon on securities 154.69 115.65

Interest on reverse repurchase agreements 0.07 –

Other accrued interest 0.02 0.33

Coupon purchased with a security 48.62 73.81

Other accrued income 0.11 0.11

Deferred expenses 1.85 1.97

Total 205.36 191.87

Note 8. Sundry

LTL million


Loans to the staff of the Bank of Lithuania 17.09 19.86

Mortgage loans and loans for reconstruction 17.04 19.48

Consumer loans 0.05 0.38

Other receivables 0.20 1.51

Current tangible assets 1.76 2.06

Total 19.05 23.43

Note 9. Banknotes and Coins in Circulation

This balance sheet item presents the nominal value of litas banknotes and coins in circulation.

In 2010, the value of banknotes and coins (including collector (commemorative) coins and

numismatic sets of coins) put into circulation by the Bank of Lithuania was LTL 3,334.16 mil-

lion (LTL 1,145.60 million in 2009) and the value of those withdrawn from circulation was

LTL 2,442.40 million (LTL 2,842.89 million in 2009).

Banknotes and Coins in CirculationLTL million


Banknotes 8,613.07 7,735.26

Coins (including collector (commemorative) coins and numismatic sets of coins) 210.88 196.93

Total 8,823.95 7,932.19

2010


106

Note 10. Liabilities to Domestic Credit Institutions Related to Monetary Policy Operations 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. From November 2008 credit institutions

are subject to 4 per cent reserve requirement.

The Bank of Lithuania pays interest for the part of commercial bank required reserves that

does not exceed the required reserve ratio used by the ECB for that period by applying

marginal interest rates of the main refinancing operations of the Eurosystem set by the ECB

(see Note 19). In 2010, the interest rate used for calculations of interest paid by the Bank

of Lithuania for the part of required reserves of commercial banks was 1 per cent (in 2009

decreased from 2.45 to 1.00%).

Note 11. Liabilities to Other Domestic Institutions Denominated in Litas

LTL million


Liabilities to Government institutions 123.12 52.95

Liabilities to other domestic institutions 96.70 11.65

Total 219.82 64.59

Note 12. Liabilities to Foreign Institutions Denominated in Litas

LTL million


Balances in current accounts of international organisations 101.20 137.53

Balances in current accounts of foreign banks 0.10 0.15

Total 101.30 137.69

Note 13. Liabilities Denominated in Foreign Currency

Liabilities to Domestic Institutions Denominated in Foreign CurrencyLTL million


Fixed-term deposits of Government institutions 1,967.27 2,026.93

Balances in current accounts of TARGET2 participants 621.22 80.34

Balances in current accounts of Government institutions 357.52 532.65

Fixed-term deposits of other domestic institutions 80.16 –

Total 3,026.17 2,639.92

Liabilities to Foreign Institutions Denominated in Foreign CurrencyLTL million


Gold swaps 317.52 18.23

Repurchase agreements 142.48 –

Balances in current accounts 14.33 257.63

Total 474.32 275.86


107

Breakdown of Liabilities to Foreign Institutions in Foreign Currency by Country of Residence of CounterpartyLTL million


EU Member States 335.18 18.23

Swiss Confederation 124.81 –

International organisations 14.33 257.63

Total 474.32 275.86

Breakdown of Liabilities Denominated in Foreign Currency by MaturityLTL million


Demand 992.94 870.49

Up to 1 year 2,507.42 2,045.16

Without term 0.14 0.13

Total 3,500.50 2,915.78

Note 14. Other Liabilities

LTL million


Accruals and deferred income 5.13 3.41

Accrued interest expenses 2.02 0.50

Other accruals 2.92 2.72

Deferred income 0.19 0.18

Sundry 6.05 4.17

Off-balance sheet instruments revaluation differences (see Note 17) 0.38 (5.57)

Total 11.56 2.00

Note 15. Revaluation Accounts

LTL million


Revaluation accounts

Gold 497.63 305.92

Securities 5.32 97.78

Foreign currency 0.09 0.03

Total 503.04 403.73

Revaluation accounts represent revaluation balances arising from unrealised gains on gold,

securities and foreign currency.

Unrealised revaluation loss of securities, derivatives and foreign currency holding, when ex-

ceeding previous corresponding revaluation gains, were recognised as expenses at the last

working day of 2010 (see Note 21).

2010


108

Note 16. Capital

LTL million

31 December 2009 Increase 31 December 2010

Capital

Authorised capital 200.00 – 200.00

Reserve capital 976.17 155.83 1,132.00

Total 1,176.17 155.83 1,332.00

The reserve capital of the Bank of Lithuania rose following the distribution of the profit of

the Bank of Lithuania in accordance with provisions laid down in the Law on the Bank of

Lithuania.

Note 17. Off-Balance-Sheet Instruments

Foreign Exchange TransactionsLTL million

Value on a trade date Value on 31 December 2010

Value adjustment differences

Forward transactions

Receivables 0.42 0.42 –

Payables 0.42 0.40 (0.02)

Spot transactionsReceivables 358.96 358.96 –

Payables 358.96 359.34 0.38

Total by foreign exchange transactions


Payables 359.38 359.74 0.36

For the purposes of foreign reserve management, the Bank of Lithuania in 2010 also used

interest rate futures and forward transactions in securities.

As at 31 December 2010, outstanding interest rate futures at their nominal value accounted

for: LTL 794.49 million (LTL 1,428.08 million in 2009) of notional sales and LTL 19.34 million

(LTL 69.06 million in 2009) of notional purchases.

As at 31 December 2010, the outstanding forward transaction in securities at value

LTL 5.41 million was in force (as at 31 December 2009, the Bank of Lithuania did not have

any outstanding forward transactions in securities).

Forward transactions in securitiesLTL million

Value on a trade date Value on 31 December 2010

Value adjustment differences

Forward transaction in securities


Securities transferrable 5.39 5.41 0.02

The impact of interest rate futures and forward transactions in securities on the Bank of

Lithuania financial results is disclosed in Note 20.


109

Note 18. Interest Income

LTL million

2010 2009

Interest income on:

Investments in securities 222.35 297.18

Reverse repurchase agreements 1.69 2.67

Balances of accounts 1.69 2.85

Loans to the staff of the Bank of Lithuania 0.78 0.84

Financial derivatives 0.07 2.98

Fixed-term deposits 0.03 0.78

Other interest income 0.00 0.10

Total 226.61 307.40

Note 19. Interest Expense

LTL million

2010 2009

Interest expense on:

Required minimum reserves of credit institutions 9.84 12.80

Fixed-term deposits of Government institutions 5.40 7.34

Balances in current accounts of Government institutions 2.89 2.48

Gold swaps 1.29 0.03

Fixed-term deposits of other domestic institutions 0.98 –

Liabilities related to repurchase agreements 0.03 0.07

Other interest expense 0.02 0.00

Total 20.45 22.72

Note 20. Realised Gains (Losses) Arising from Financial Operations

LTL million

2010 2009

Realised gains (losses) arising from:

Sale of securities 161.33 355.79

Sale of gold and foreign currency 0.06 (0.02)

Forward transactions in securities (1.90) (1.31)

Interest rate futures (49.19) (8.52)

Total 110.30 345.95

Note 21. Unrealised Losses from Revaluation

LTL million

2010 2009

Unrealised revaluation losses on:

Securities 158.55 16.45

Derivatives 0.02 –

Foreign currency 0.00 0.02

Total 158.57 16.47

2010


110

Note 22. Net Income from Fees and Commissions

LTL million

2010 2009

Income from:

Sales of numismatic valuables 12.22 3.61

Settlement services 6.72 6.93

Usage of the Loan Risk Database 0.13 0.13

Other services 0.12 0.16

Total 19.19 10.83

Expenses relating to fees and commissions (2.58) (2.67)

Net income from fees and commissions 16.61 8.17

Note 23. Other income

The majority of the other income is comprised of LTL 3.02 million Value Added Tax which

had been paid on minted gold collector (commemorative) coins until 2010 and which was

received back by the Bank of Lithuania from the Lietuvos monetų kalykla UAB.

Note 24. Staff Costs

LTL million

2010 2009

Expenses on wages and salaries: 39.38 40.41

To the members of the Board 1.07 1.26

To the heads of structural divisions 2.10 2.16

To other staff of the Bank of Lithuania 36.21 36.99

Other emoluments 0.63 0.64

Contributions to State Social Insurance Fund 12.34 12.64

Total 52.35 53.69

The Board of the Bank of Lithuania consists of the Chairman of the Board of the Bank of Lithuania,

two Deputy Chairmen and two Board Members. On 31 December 2010 the Bank of Lithuania

had eleven departments, six independent divisions and branches in Kaunas and Klaipėda.

The total number of employees was 796 (2009: 832 employees) of which 5 were on fixed-term

labour contract (2009: 6 employees) and 17 were on parental leave or unpaid leave for short-

term contracts with the ECB and IMF or for the studies in abroad (2009: 24 employees).

Note 25. Administrative Expenses

LTL million

2010 2009

Expenses

Maintenance expenses 8.61 7.39

Information subscription expenses 2.19 1.94

Mail and communication 1.50 1.67

Business trips 1.13 1.55

Training of the staff 0.68 0.90

Public relations 0.56 0.81

Honorarium 0.24 0.16

Library acquisitions and press subscriptions 0.16 0.17

Other 1.59 1.60

Total 16.67 16.19


111

Note 26. Banknote and Coin Production Services and Circulation Expenses

LTL million

2010 2009

Coin minting expenses 12.51 25.34

Cash circulation expenses 0.20 0.41

Total 12.71 25.75

Note 27. Distribution of the Profit of the Bank of Lithuania

Pursuant to Article 23 on the profit allocation of the Law on the Bank of Lithuania, the profit

of the Bank of Lithuania of the financial year 2010 is allocated by the contribution to the

State budget of 70 per cent of the amount of the profit of the Bank of Lithuania and the

remaining part of the profit is transferred to the reserve capital. The authorised capital of the

Bank of Lithuania has been completely formed.

LTL

2010 2009 2008

Profit allocation

Transfer to the state budget 63,341,216 363,606,065 182,041,717

Allocation to the reserve capital of the Bank of Lithuania 27,146,235 155,831,171 182,041,717

Total 90,487,452 519,437,236 364,083,435

2010


112

Note 28. Assets and Liabilities of the Bank of Lithuania by Currency

LTL million

LTL EUR USD JPY XDR XAU Other Total

31 December 2010 ASSETS Gold – – – – – 688.25 – 688.25Claims on foreign institutions denominated in foreign currency – 16,395.38 166.98 0.03 549.58 – 0.45 17,112.43Receivables from the IMF – – – – 549.58 – – 549.58Debt securities – 13,951.20 66.43 – – – – 14,017.64Deposits and other investments – 2,444.17 100.55 0.03 – – 0.45 2,545.20Other assets 177.98 208.03 1.87 – – – 0.08 387.95Total on-balance-sheet assets 177.98 16,603.41 168.85 0.03 549.58 688.25 0.53 18,188.63LIABILITIES Banknotes and coins in circulation 8,823.95 – – – – – – 8,823.95Liabilities to domestic credit institutions related to monetary policy operations denominated in litas 3,044.42 – – – – – – 3,044.42Liabilities to other domestic institutions denominated in litas 219.82 – – – – – – 219.82Liabilities to foreign institutionsdenominated in litas 101.30 – – – – – – 101.30Liabilities to domestic institutions denominated in foreign currency – 2,957.06 68.96 – 0.14 – 0.02 3,026.17Liabilities to foreign institutions denominated in foreign currency – 406.63 67.69 – – – – 474.32Counterpart of special drawing rights allocated by IMF – – – – 549.16 – – 549.16Items in the course of settlement 12.38 – – – – – – 12.38Other liabilities 9.34 1.72 0.50 – – – – 11.56Revaluation accounts 497.72 5.32 – – – – – 503.04Capital 1,332.00 – – – – – – 1,332.00Profit 90.49 – – – – – – 90.49Total on-balance-sheet liabilities 14,131.43 3,370.74 137.15 – 549.30 – 0.02 18,188.63NET ON-BALANCE-SHEET ASSETS (LIABILITIES) (13,953.45) 13,232.67 31.69 0.03 0.29 688.25 0.52 0.00Off-balance-sheet assets included into currency position Receivables under foreign exchange transactions – 359.38 – – – – – 359.38Off-balance-sheet liabilities included into currency position Payables under foreign exchange transactions 328.02 – 31.36 – – – – 359.38Net off-balance-sheet assets (liabilities) included into currency position (328.02) 359.38 (31.36) – – – – 0.00NET ASSETS (LIABILITIES) (14,281.47) 13,592.05 0.33 0.03 0.29 688.25 0.52 0.0031 December 2009 Total on-balance-sheet assets 190.61 14,547.56 93.05 365.65 518.41 496.51 0.75 16,212.54Total on-balance-sheet liabilities 12,686.24 2,921.07 92.66 (5.56) 518.14 – 0.00 16,212.54NET ON-BALANCE-SHEET ASSETS (LIABILITIES) (12,495.63) 11,626.50 0.39 371.21 0.27 496.51 0.75 0.00Off-balance-sheet assets included into currency position 131.21 1,248.22 – – – – – 1,379.43Off-balance-sheet liabilities included into currency position 877.01 131.21 – 371.21 – – – 1,379.43Net off-balance-sheet assets (liabilities) included into currency position (745.80) 1,117.01 – (371.21) – – – 0.00NET ASSETS (LIABILITIES) (13,241.43) 12,743.51 0.39 0.00 0.27 496.51 0.75 0.00

ANNEXES

113

ANNEXES

RESOLUTIONS ADOPTED BY THE BOARD OF THE BANK OF LITHUANIA PUBLISHED IN VALSTYBĖS ŽINIOS (OFFICIAL GAZETTE)

Resolution Amending and Supplementing Resolution No 146 of the Board of the Bank of Lithuania of 23 November 2006 on the General Regulations for the Disclosure of Information Relating to the Pru-dential Supervision of Credit Institutions adopted on 10 March 2010 (Valstybės žinios (Official Gazette) No 37, 31 03 2010; Publication No 1774).

Resolution on Declaring Legal Tender and Issue into Circulation of 10 Litas Silver Collectors (Com-memorative) Coin Dedicated to Music (from the series “Lithuanian Culture”) adopted on 16 March 2010 (Valstybės žinios (Official Gazette) No 31, 18 03 2010; Publication No 1488).

Resolution on Approval of Principal Regulations for the Management of Foreign Reserves of the Bank of Lithuania adopted on 16 March 2010 (Valstybės žinios (Official Gazette) No 35, 27 03 2010, Publication No 1710).

Resolution on Statistical Reporting on Payment Instruments adopted on 15 April 2010 (Valstybės žinios (Official Gazette) No 46, 22 04 2010; Publication No 2244).

Resolution on Statistical Reporting of Account Managers adopted on 15 April 2010 (Valstybės žinios (Official Gazette) No 46, 22 04 2010 Publication No 2245).

Resolution Amending Resolution No 125 of the Board of the Bank of Lithuania of 21 December 1995 on Approval of the Rules for Managing the Loan Risk Database adopted on 6 May 2010 (Valstybės žinios (Official Gazette) No 55, 13 05 2010; Publication No 2742).

Resolution Amending Resolution No 1 of the Board of the Bank of Lithuania of 29 January 2004 on Liquidity Requirement Calculation Rules adopted on 25 May 2010 (Valstybės žinios (Official Gazette) No 63, 31 05 2010; Publication No 3141).

Resolution Amending Resolution No 195 of the Board of the Bank of Lithuania of 16 December 2008 on Authorisations Granted by the Bank of Lithuania to Credit Unions adopted on 10 June 2010 (Valstybės žinios (Official Gazette) No 70, 17 06 2010, Publication No 3539).

Resolution on Declaring Legal Tender and Issue into Circulation of 500 Litas Gold Collectors (Com-memorative) Coin, 50 Litas Silver Collectors (Commemorative) Coin and 1 Litas Copper and Nickel Alloy Collectors (Commemorative) Circulation Coin Dedicated to the 600th Anniversary of the Battle of Grunwald adopted on 10 June 2010 (Valstybės žinios (Official Gazette) No 70, 17 06 2010, Pub-lication No 3540).

Resolution Amending Resolution No 125 of the Board of the Bank of Lithuania of 21 December 1995 on Approval of the Rules for Managing the Loan Risk Database adopted on 23 July 2010 (Valstybės žinios (Official Gazette) No 106, 27 07 2010; Publication No 4749).

Resolution on Declaring Legal Tender and Issue into Circulation of 50 Litas Silver Collectors (Comme-morative) Coin Dedicated to Biržai Castle (from the series “Historical and Architectural Monuments of Lithuania”) adopted on 2 September 2010 (Valstybės žinios (Official Gazette) No 106, 09 09 2010; Publication No 5508).

Resolution Amending Resolution No 149 of the Board of the Bank of Lithuania of 25 September 2008 on Regulations for the Organisation of Internal Control and Risk Assessment (Management) adopted on 23 September 2010 (Valstybės žinios (Official Gazette) No 114, 27 09 2010; Publication No 5871).

Resolution Amending Resolution No 138 of the Board of the Bank of Lithuania of 9 November 2006 on General Regulations for the Calculation of Capital Adequacy adopted on 21 October 2010 (Valstybės žinios (Official Gazette) No 130, 06 11 2010; Publication No 6689).

Resolution Amending Resolution No 131 of the Board of the Bank of Lithuania of 11 October 2007 on Approval of the General Regulations on Hybrid Instruments to be Eligible for Including in Own

2010


114

Funds of the Bank adopted on 21 October 2010 (Valstybės žinios (Official Gazette) No 130, 06 11 2010; Publication No 6690).

Resolution Amending Resolution No 145 of the Board of the Bank of Lithuania of 23 November 2006 on Approval of the General Regulations for the Internal Capital Adequacy Assessment Process and for the Supervisory Review and Evaluation Process adopted on 21 October 2010 (Valstybės žinios (Official Gazette) No 130, 06 11 2010; Publication No 6691).

Resolution Amending Resolution No 153 of the Board of the Bank of Lithuania of 7 December 2006 on Approval of the Rules on Consolidation of Accounts of the Financial Group and on Joint (Consolidated) Supervision adopted on 21 October 2010 (Valstybės žinios (Official Gazette) No 130, 06 11 2010; Publication No 6692).

Resolution Amending Resolution No 85 of the Board of the Bank of Lithuania of 20 May 2004 on Approval of the Rules for Supervision of Foreign Bank Branches Operating in the Republic of Lithuania adopted on 21 October 2010 (Valstybės žinios (Official Gazette) No 130, 06 11 2010; Publication No 6693).

Resolution Amending and Supplementing Resolution No 151 of the Board of the Bank of Lithuania of 7 December 2006 on Approval of the Requirements for the Publicly Disclosed Information adopted on 21 October 2010 (Valstybės žinios (Official Gazette) No 130, 06 11 2010; Publication No 6694).

Resolution Amending Resolution No 139 of the Board of the Bank of Lithuania of 9 November 2006 on the Procedure for Recognition of the External Credit Assessment Institutions adopted on 21 Oc-tober 2010 (Valstybės žinios (Official Gazette) No 130, 06 11 2010; Publication No 6695).

Resolution Amending Resolution No 240 of the Board of the Bank of Lithuania of 24 December 2009 on the Regulations for the Calculation of Own Funds of Payment Institutions adopted on 21 October 2010 (Valstybės žinios (Official Gazette) No 130, 06 11 2010; Publication No 6696).

Resolution Amending Resolution No 136 of the Board of the Bank of Lithuania of 18 October 2007 on Approval of the Operating Rules of TARGET2-LIETUVOS BANKAS Payment System adopted on 16 November 2010 (Valstybės žinios (Official Gazette) No 136, 20 11 2010; Publication No 6981).

Resolution Amending Resolution No 137 of the Board of the Bank of Lithuania of 18 October 2007 on Approval of the Operating Rules of LITAS-PHA System adopted on 16 November 2010 (Valstybės žinios (Official Gazette) No 136, 20 11 2010; Publication No 6982).

Resolution Amending Resolution No 148 of the Board of the Bank of Lithuania of 8 November 2007 on Approval of the Rules on Granting Euro-denominated Intraday Credits adopted on 16 November 2010 (Valstybės žinios (Official Gazette) No 136, 20 11 2010; Publication No 6983).

Resolution on Declaring Legal Tender and Issue into Circulation of 50 Litas Silver Collectors (Com-memorative) Coin Dedicated to the Lithuanian Nature adopted on 16 November 2010 (Valstybės žinios (Official Gazette) No 136, 20 11 2010; Publication No 6984).

Resolution on Approval of Key Principles of Financial Accounting and Accountability Policy of Cre-dit Unions adopted on 2 December 2010 (Valstybės žinios (Official Gazette) No 144, 09 12 2010; Publication No 7409).

Resolution Amending Resolution No 138 of the Board of the Bank of Lithuania of 9 November 2006 on General Regulations for the Calculation of Capital Adequacy adopted on 23 December 2010 (Valstybės žinios (Official Gazette) No 156, 30 12 2010, No 156; Publication No 7962).

Resolution Amending Resolution No 149 of the Board of the Bank of Lithuania of 25 September 2008 on Regulations for the Organisation of Internal Control and Risk Assessment (Management) adopted on 23 December 2010 (Valstybės žinios (Official Gazette) No 156, 30 12 2010, No 156; Publication No 7963).

Resolution Amending Resolution No 139 of the Board of the Bank of Lithuania of 9 November 2006 on the Procedure for Recognition of the External Credit Assessment Institutions adopted on 23 December 2010 (Valstybės žinios (Official Gazette) No 156, 30 12 2010, No 156; Publication No 7964).

Resolution Amending Resolution No 133 of the Board of the Bank of Lithuania of 11 October 2007 on Approval of the General Regulations for Stress Testing adopted on 23 December 2010 (Valstybės žinios (Official Gazette) No 156, 30 12 2010, No 156; Publication No 7965).

Resolution Amending Resolution No 228 of the Board of the Bank of Lithuania of 10 December 2009 on Minimum Requirements of the Policy of Remuneration of Credit Institution Employees adopted on 23 De-cember 2010 (Valstybės žinios (Official Gazette) No 156, 30 12 2010, No 156; Publication No 7966).

Resolution Amending Resolution No 125 of the Board of the Bank of Lithuania of 21 December 2009 on Approval of the Rules for Managing the Loan Risk Database adopted on 23 December 2010 (Valstybės žinios (Official Gazette) No 158, 31 12 2010; Publication No 8087).

ANNEXES

115

BANKNOTES AND COINS IN CIRCULATION*

10 litas

1997 issue

2001 issue

2007 issue

20 litas

1997 issue

2001 issue

2007 issue

* Excluding collectors (commemorative) coins.

2010


116

50 litas

1998 issue

2003 issue

100 litas

2000 issue

2007 issue

200 litas

1997 issue

500 litas

2000 issue

ANNEXES

117

1 centas – 1991 issue 2 centas – 1991 issue 5 centas – 1991 issue

10 centas – 1991 issue 20 centas – 1991 issue 50 centas – 1991 issue

10 centas – issues since 1997 20 centas – issues since 1997 50 centas – issues since 1997

1 litas – issues since 1998 2 litas – issues since 1998 5 litas – issues since 1998

For more information on the currency of the Republic of Lithuania and its security features, see the website of the Bank of Lithuania (http://www.lb.lt/lt/banknotai/index/htm).

2010


118

Circulation collectors (commemorative) coins

1997

1 litas coin issued to mark the 75th anniversary of the Bank of Lithuania and the litas

Designed by Rimantas EidėjusVytis adapted by Arvydas KaždailisAlloy of copper and nickel. Cu 75%, Ni 25%The edge of the coin rimmed at intervalsDiameter 22.30 mm. Weight 6.25 gMintage 200,000 pcs.

1999

1 litas coin issued to mark the 10th anniversary of the Baltic Way

Designed by Antanas ŽukauskasAlloy of copper and nickel. Cu 75%, Ni 25% The edge of the coin rimmed at intervalsDiameter 22.30 mm. Weight 6.25 gMintage 1,000,000 pcs.

2004

1 litas coin issued to mark the 425th anniversary of Vilnius University

Designed by Rytas Jonas BelevičiusAlloy of copper and nickel. Cu 75 %, Ni 25 %The edge of the coin rimmed at intervalsDiameter 22.30 mm. Weight 6.25 gMintage 200,000 pcs.

2005

1 litas coin dedicated to the Palace of the Grand Dukes of Lithuania

Designed by Giedrius PaulauskisAlloy of copper and nickel. Cu 75 %, Ni 25 %Regular dodecagon coinThe edge of the coin rimmed at intervalsDiameter 22.30 mm. Weight 6.25 gMintage 1,000,000 pcs.

20091 litas coin dedicated to Vilnius – European Capital of Culture 2009

Designed by Vytautas NarutisAlloy of copper and nickel. Cu 75 %, Ni 25 %The edge of the coin rimmed at intervalsDiameter 22.30 mm. Weight 6.25 gMintage 1,000,000 pcs.

2010

1 litas coin dedicated to the 600th anniversary of the Battle of Grunwald

Designed by Rytas Jonas BelevičiusAlloy of copper and nickel. Cu 75 %, Ni 25 %The edge of the coin rimmed at intervalsDiameter 22.30 mm. Weight 6.25 gMintage 1,000,000 pcs.

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GLOSSARY

This glossary contains selected terms that are used in the Annual Report.

Balance of payments: a statistical statement that summarises, for a specific time period, the economic transactions of an economy with the rest of the world. The transactions considered are those involving goods, services and income; those involving financial claims on, and liabilities to, the rest of the world; and those (such as debt forgiveness) that are classified as transfers.

Central counterparty: an entity that interposes itself between counterparties to the contracts traded in one or more financial markets, becoming the buyer to every seller and the seller to every buyer.

Central government: the government as defined in the European System of Accounts 1995, but excluding regional and local governments and social security funds.

Central securities depository (CSD): an entity that: enables securities transactions to be pro-cessed and settled by the book entry; plays an active role in ensuring the integrity of securities issue. Securities can be held in physical (but immobilised) or dematerialised form (i.e. so that they exist only as electronic records).

Collateral: assets pledged or otherwise transferred (e.g. by credit institutions to central banks) as a guarantee for the repayment of loans, as well as assets sold (e.g. by credit institutions to central banks) under repurchase agreements.

Credit institution: a licensed undertaking whose business is to receive deposits or other repa-yable funds from non-professional market participants and lend them, or issue and administer electronic money.

Credit risk: a probability that a counterparty will not settle the full value of an obligation under the procedure established in the contract.

Debt security: a promise on the part of the issuer (i.e. the borrower) to make one or more payment(s) to the holder (the lender) on specified future dates. Such securities usually carry a specific rate of interest (the coupon) and/or are sold at a discount to the amount that will be repaid at maturity. Debt securities issued with an original maturity of more than one year are classified as long-term.

Direct investment: cross-border investment for the purpose of obtaining a lasting interest in an enterprise resident in another economy (assumed, in practice, for ownership of at least 10% of the ordinary shares or voting power). Included are equity capital, reinvested earnings and other capital associated with inter-company operations.

Economic and Financial Affairs Council (ECOFIN Council): the EU Council meeting in the composition of the ministers of economy and finance.

Economic and Financial Committee (EFC): a consultative Community body which contributes to the preparation of the work of the European Commission and the ECOFIN Council. Its tasks include reviewing the economic and financial situation of the EU Member States and of the Community, as well as budgetary surveillance.

ERM II (Exchange Rate Mechanism II): the exchange rate mechanism which provides the frame-work for exchange rate policy cooperation between the euro area countries and the non-euro area EU Member States. ERM II is a multilateral arrangement with fixed, but adjustable, central rates and a standard fluctuation band of ±15%. Decisions concerning central rates and, possibly, narrower fluctuation bands are taken by mutual agreement between the EU Member State concerned, the euro area countries, the ECB and the other EU Member States participating in the mechanism.

EURIBOR: euro interbank lending rate at which a prime bank is willing to lend funds in euro to another prime bank, as reported by a panel of contributing banks.

Euro area: the area encompassing those EU Member States, in which the euro has been adopted as the single currency in accordance with the Treaty and in which a single monetary policy is conducted. The euro area currently comprises Ireland, Austria, Belgium, Estonia, Greece, Spain, Italy, Cyprus, Luxembourg, Malta, the Netherlands, Portugal, France, Slovakia, Slovenia, Finland and Germany.

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European Central Bank (ECB): the ECB lies at the centre of the Eurosystem and the European System of Central Banks. It has its own legal personality. The ECB ensures that the tasks conferred upon the Eurosystem and the ESCB are implemented either through its own activities or through those of the NCBs, pursuant to the Statute of the ESCB. The ECB is governed by the Governing Council, the Executive Board, and, as a third decision-making body, by the General Council.

European System of Central Banks (ESCB): composed of the ECB and the NCBs of all 27 EU Member States, i.e. it includes, in addition to the members of the Eurosystem, the NCBs of those Member States that have not yet adopted the euro. The ESCB is governed by the decision-making bodies of the ECB: the Governing Council, the Executive Board and the General Council.

Eurosystem: the central banking system of the euro area. It comprises the ECB and the NCBs of the Member States that have adopted the euro.

Excessive deficit procedure: the provision set out in Article 126 of the Treaty and specified in Protocol No 12 on the excessive deficit procedure requires EU Member States to maintain budgetary discipline, defines the criteria for a budgetary position to be considered an excessive deficit and regulates steps to be taken following the observation that the requirements for the budgetary balance or government debt have not been fulfilled. Article 126 is supplemented by Council Regulation (EC) No 1467/97 of 7 July 1997 on speeding up and clarifying the implementation of the excessive deficit procedure (as amended by Council Regulation (EC) No 1056/2005 of 27 June 2005), which is one element of the Stability and Growth Pact.

Financial stability: a condition in which the financial system, comprising financial intermediaries, markets and market infrastructures, is capable of withstanding shocks and the consequences of financial imbalances and in which the likelihood of disruptions in the financial intermediation process, which are severe enough to significantly impair the allocation of savings to profitable investment opportunities, is low.

Foreign exchange swap: simultaneous spot and forward transactions exchanging one currency against another.

General Council: one of the decision-making bodies of the ECB. It comprises the President and the Vice-President of the ECB and the governors of all of the NCBs of the European System of Central Banks.

General government: a sector defined in the European System of Accounts 1995 as comprising resident entities that are engaged primarily in the production of non-market goods and services intended for individual and collective consumption and/or in the redistribution of national inco-me and wealth. Included are central, regional and local government authorities, as well as social security funds. Excluded are government-owned entities that conduct commercial operations, such as public enterprises.

Gold portfolio: gold as a part of foreign reserves and associated investments.

Governing Council: the supreme decision-making body of the ECB. It comprises all the members of the Executive Board of the ECB and the governors of the NCBs of the Member States whose currency is the euro.

Harmonised Index of Consumer Prices (HICP): a measure of the development of consumer prices that is compiled by Eurostat and harmonised for all EU Member States.

Interest expenses: interest paid by a credit institution on borrowed and other funds.

Interest income: interest received for the invested funds of service users and other service pro-viders, as well as other available funds.

International investment position: the value and composition of an economy’s outstanding net financial claims on (or financial liabilities to) the rest of the world.

Investment portfolio: a part of foreign reserves aimed at earning larger revenues. A longer one-year investment period is applied to the investment strategy for this part of foreign reserves.

ISIN: an International Securities Identification Number or code assigned to securities issued in financial markets. It is assigned by a competent issuing authority.

Key ECB interest rates: the interest rates, set by the Governing Council, which reflect the mone-tary policy stance of the ECB. They are the rates on the main refinancing operations, the marginal lending facility and the deposit facility.

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Liquidity portfolio: a part of foreign reserves, the primary purpose of which is to ensure the urgent need of liquidity by the Bank of Lithuania. A short one-month investment period is applied to the investment strategy for this part of foreign reserves.

Liquidity risk: a probability of disruptions in a credit institution’s settlements due to imbalances of cash flows.

Main refinancing operation: a regular open market operation executed by the Eurosystem in the form of reverse transactions. Such operations are carried out through a weekly standard tender and normally have a maturity of one week.

Maintenance period: the period over which credit institutions’ compliance with reserve requi-rements is calculated.

Market risk: the probability that a credit institution may suffer losses due to a price change of mar-ket variables, such as interest rates, foreign exchange rates, equity securities or commodities.

MFIs (monetary financial institutions): financial institutions which together form the money-issuing sector of Lithuania. These include the Bank of Lithuania, resident credit institutions (as defined in Community law) and all other resident financial institutions whose business is to receive deposits and/or close substitutes for deposits from entities other than MFIs and, for their own account (at least in economic terms), to grant credit and/or invest in securities. The latter group consists of money market funds.

Operational risk: the risk of losses resulting from people, systems, inadequate or failed internal processes or from external events, including legal risk.

Payment institution: a legal entity that holds a license of a payment institution or a license of limited operations of a payment institution.

Price stability: the primary objective of the Eurosystem is to maintain stable prices. The Governing Council of the ECB defines price stability as a year-on-year increase in the Harmonised Index of Consumer Prices for the euro area of below 2%.

Repurchase agreement and reverse repurchase agreement: a contract to sell and sub-sequently repurchase securities, commodities or a guaranteed title to securities or commodities when such a guarantee is issued by a licensed stock exchange holding the title to the said se-curities and commodities, whereby the institution cannot assign or pledge certain securities or commodities to more than one counterparty at a time and makes a commitment to repurchase them (or the same type securities or substitutes of commodities) at a specified price and on a specified date, that had been indicated or will be indicated by the seller. In the case of the securities or commodities seller, it is a repurchase agreement, while for the buyer it is a reverse repurchase agreement.

Reserve base: the sum of the eligible balance sheet items (in particular liabilities) that constitute the basis for calculating the reserve requirement of a credit institution.

Reserve ratio: the ratio defined by the central bank for each category of eligible balance sheet items included in the reserve base. The ratio is used to calculate reserve requirements.

Reserve requirement: the minimum amount of reserves a credit institution is required to hold with the Bank of Lithuania over a predefined maintenance period. Compliance with the require-ment is determined on the basis of the average of the daily balances in the reserve accounts over the maintenance period.

Risk: the risk of losses (in both on and off-balance-sheet positions) arising from movements in market prices.

Securities settlement system (SSS): a transfer system for settling securities transactions. It com-prises all of the institutional arrangements required for the clearing and settlement of securities trades and the provision of custody services for securities.

SEPA: the single euro payments area; the aim of this project is the standardisation of payment instruments in Europe.

Settlement risk: the risk that settlement in a transfer system will not take place as expected, usually owing to a party defaulting on one or more settlement obligations. This risk may comprise operational risk, credit risk and liquidity risk.

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Shares and other equity: equity securities representing ownership of a stake in a corporation. They comprise shares traded on stock exchanges (quoted shares), unquoted shares and other equity. Shares usually produce income in the form of dividends.

Standing facility: a central bank facility available to counterparties at their initiative. The Eurosys-tem offers two overnight standing facilities: the marginal lending facility and the deposit facility.

Systemic risk: the risk that the inability of one participant to meet its obligations in a system will cause other participants to be unable to meet their obligations when they become due. Such a failure to meet liabilities may cause significant liquidity or credit problems that could threaten the stability of the financial system. Such inability may be caused by operational or financial problems.

TARGET 2: the new generation Trans-European Automated Real-Time Gross Settlement Express Transfer system. It functions on the basis of a single shared platform and provides harmonised services with a uniform pricing scheme.

Bank of LithuaniaGedimino pr. 6, LT-01103 Vilnius, LithuaniaTel. +370 5 268 0235Fax +370 5 212 6005E-mail: [email protected]://www.lb.lt

Annual Report of the Bank of Lithuania 2010

Order No. 13459Published by the Bank of LithuaniaPrinted by UAB “Baltijos kopija” Kareiviø g. 13B, LT-09109 Vilnius, Lithuania

Documents

ANNUAL REPORT OF THE BANK OF LITHUANIA 2010The average annual inflation rate in Lithuania was 1.2 per cent in 2010 – noticeably lower, compared to the inflation in 2009, and lower