Situation In The Financial Markets

The situation in the financial markets.

Financial system has gone through major changes over the last decade. Even though the structure remains almost the same as the decade ago, the size and importance of some financial system members has grown notably. In 2001, total financial system assets equaled to 36% GDP. In ten year this ratio has grown to 82% of GDP. All this time banking sector kept its dominance by controlling over 80% of the assets in the hands of less than 10% of the total number of financial market players.

The greatest leap in the financial sector size occured with the significant changes in the credit market which started in 2004-2006. The expansion was fed mailny due to the presence of the foreign capital in the banking system. The credit growth came hand in hand with the economic expansion, thus when economic crisis occurred the growth reversed into the recession as parent banks stopped financing of their subsidiaries in Lithuania. Even though, the total financial system assets has fallen, the respective decline in GDP was even greater causing the rise of the relative financial system size from 98% in 2008 of GDP to 111% of GDP in 2009. Currently, the finance sector is on its way to rebound. Today, the major writedowns has been made in the banking system and improvement of economic outlook implies greater supply in the credit market.

However, the global crisis that occured in the end of 2008 hit both, the country’s economy and the banking sector. Total assets of the banking sector went down mostly due to lower lending activities and the allowances for impairment losses. Even though the economic decline was very severe – the GDP fell 14.8% in 2009 – the banking system maintained its stability. Despite the huge losses there was no panic in the market. In the late 2008 parent banks started withdrawing their assets form their subsidiaries, which is evident in the reduction of Lithuanian banking sector foreign liabilities. The share of foreign liabilities today is at the level of 2006. The drop of banking activities in 2010 has been slowing and in 2011 we should see stronger signs of stabilization. In the end of H1 2011 the assets were lower by 1.7%, but q/q change finally turned positive. In present, the crediting of legal entities and individuals starts to recover gradually in Lithuania and the y/y changes of loan portfolios of banks should be near zero in 2011.

Credit unions are one of the smallest players in the Lithuanian financial system. The total number of credit unions in Lithuania has grown from 41 to 73, which embrace over 100 tousand members, their total assets rose almost 400% over last ten years. Credit union assets account only to 2% of GDP. Credit unions focus on local small businesses and individual interests in separate Lithuanian regions by providing lending and deposit services. Unlike banking sector, credit unions all are mailny of local capital.

The growth of credit union assets is mainly driven by the growth in the top ten largest credit unions. There were concentrated ca. 50% of total credit union assets.