Estonia – IMF issues report judging country’s banking sector as strong but predicting that EU banking union would strengthen it further; Estonian central bank warns businesses that new 5 euro note must be accepted as legal tender

On 13 May the International Monetary fund issued a 61-page staff report on Estonia that had been completed 23 April 2013.  The section of the report that deals most directly with the banking sector is reproduced below verbatim, with emphasis as per the original.

POLICY CHALLENGES

[...]

B. Advancing Financial Sector Robustness

21. Estonia’s mostly Swedish-owned financial sector has continued to strengthen. Extensive bank write-downs have cut NPLs in half from their peak in mid-2010 to about 3 percent in January 2013 (Figure 9). As the economy continues to improve and with it the quality of loans, NPLs are expected to continue declining albeit at a slower pace. Despite the write-offs, banks have remained well-capitalized, liquid, and profitable. Recovery of assets previously recorded as losses and lower provisioning requirements associated with the improving economy and asset quality have boosted profits and helped replenish banks’ capital in 2012. The capital adequacy ratio has risen to about 19½ percent in January 2013, far exceeding current international norms. Meanwhile, bank funding has also improved with a declining share of foreign funding and rapidly growing domestic deposits, which has resulted in a record low loan-to-deposit ratio.

22. Risks to the financial sector remain but are mitigated by strengthening balance sheets. On the domestic side, the main source of risk stems from (flexible rate) mortgage loans—typically tied to the six-month Euribor—of which about 18 percent currently have negative equity. On the external side, Estonian subsidiaries receive significant funding from Swedish parent-banks which in turn rely on potentially volatile short-term wholesale markets, and are exposed to risks stemming from elevated household debt and house price-to-income ratio. These risks appear manageable nonetheless. At present markets expect stable interest rates, allaying interest rate risks that could diminish households’ ability to service their loans. Also, in Estonia, lower private debt, improving real estate prices, higher employment, and low interest rates have strengthened the ability of the private sector to service its debt. On the external side, parent-banks appear to be sound and the Swedish housing market has been gradually cooling. Moreover, parent funding of Estonian subsidiaries has been stable reflecting a strategic commitment to, and highly profitable investments in Estonia. Finally, Estonia’s financial exposure to EU distressed countries is limited.

23. Recent stress tests suggest that banks are reasonably well positioned to cope with risks. In an adverse scenario seeking to replicate the 2008 events, the Eesti Pank’s (Estonia’s central bank) bottom-up stress tests from Fall 2012 show that NPLs would rise significantly and peak at 6.5 percent at end-2013. However, the required increase in provisioning could be absorbed by bank profits. In addition, banks have substantial prudential buffers (tier 1 capital is about 13½ percent) as well as access to the ECB’s liquidity facilities. Capital adequacy would remain well above statutory minimums. These test results hinge however on unchanged foreign funding (notably, parent banks maintaining their Estonian exposure) as well as on the presumption that profits are not repatriated to parent banks. These assumptions are consistent with the experience following the global financial crisis.

24. Strengthening Estonia’s macro-prudential policies would help reduce risks further. The EU’s CRD IV capital and liquidity requirements have been designed to enhance financial stability in an increasingly challenging EU environment. Although the EU directive allows gradual adjustment, early adoption of these requirements—in tandem with parent banks—would enhance Estonia’s financial sector’s standing without unduly constraining banks’ margins or credit growth. This is because banks already broadly meet these requirements. Similarly, in view of the prevalence of short-term variable interest rate-linked mortgages, adopting formal caps on loan-to-value and loan-to-income ratios—consistent with Estonia’s current banking sector practices—can cement stability and reduce risk exposure. Also, Eesti Pank’s macro-prudential authority and existing tri-lateral (Eesti Pank, MoF, and FSA) forums can be further clarified and strengthened—in line with the European Systemic Risk Board’s recommendations—to enhance the monitoring of systemic risks and limit potential fallout.

25. Looking forward, deeper cross-border prudential arrangements would help underpin financial stability in Estonia. Over a number of years, Estonia and other Baltic nations have, together with their Nordic counterparts, developed an effective regional supervision framework supported by cooperation agreements and the establishment of the Nordic-Baltic Stability Group and Macroprudential Forum. Their ongoing work has appropriately focused on establishing a burden-sharing mechanism, a common database for financial groups, and preparing for cross-border simulation exercises. In conjunction with EU-level initiatives, these efforts should move ahead by implementing key elements of the framework, notably defining criteria for burden sharing.

The EU banking union can further enhance Estonia’s financial stability (Box 5). The banking union can bolster financial soundness throughout the EU, including by introducing uniform prudential oversight standards and burden sharing mechanisms to respond to financial shocks. In this regard, the single supervisory mechanism (SSM) will place Estonia’s two largest banks under the direct supervision of the ECB. Additional efforts are, however, needed to clarify the role and powers of the Estonian authorities in this context, including in supervisory colleges and with regard to the exchange of confidential information.

26. This will nonetheless entail coordinating Estonia’s long-standing arrangements with the Nordic authorities and the EU banking union. The option to join the banking union, changes proposed in the voting rights at the EBA, and other measures to ensure an EU-wide approach to financial stability in the banking union, have helped assuage non-euro area countries’ misgivings about the SSM. Still, as the SSM and other elements of the banking union go forward, it is essential not to disrupt existing home-host prudential arrangements and safeguard supervisory coordination. This will entail spelling out a common agreement for bank resolution and burden sharing for financial groups—including for those groups spanning the euro and non-euro area jurisdictions—with a view of minimizing the risk of an abrupt contraction in the exposure in host countries.

27. Financial stability can also be supported by further efforts to improve bankruptcy procedures. With the adoption of the reorganization act for household restructuring in April 2011, continued efforts are needed to limit bankruptcy losses and enhance asset recovery by facilitating out-of-court debt restructuring, reducing the cost and ensuring the timely application for, and prompt resolution of bankruptcy procedures.

28. The authorities emphasized their commitment to maintain a strong financial system in the face of an evolving financial architecture. They agreed that enhancing current macro-prudential policies as advised by staff would strengthen Estonia’s financial system. The authorities confirmed that these policies should not pose undue burden on banks or on credit to the economy. But they stressed that under the SSM, their implementation would require coordination with the ECB. In this regard, the authorities explained that once CRD IV was finalized, they would reform the Credit Institution Act to clarify the central bank’s role in setting macro measures and further tri-partite collaboration. Regarding bankruptcy reforms, they stressed that it was early to assess the new household restructuring law but planned to increase resources available to bankruptcy courts

29. In welcoming the EU banking union, the authorities underscored the importance of preserving the Nordic-Baltic working arrangements. In this regard, they highlighted the need to continue clarifying the role of these arrangements within the banking union and avoid disrupting long-standing close collaboration with their Nordic colleagues.

The IMF clearly regards the EU banking union as a positive development for Estonia, due in part to the banking union’s “burden-sharing mechanisms”.  It should be noted, however, that Estonia is in the Eurozone, and that the EU banking union, as presently envisaged, would involve the sharing of burdens felt by Eurozone countries – whether fiscal or financial burdens – with all EU countries, even those that do not use the euro, such as the UK, Sweden, Poland, the Czech Republic, Hungary, Romania, and Bulgaria.

One institution that has consistently spoken out about the dangers of the banking union – as proposed – is the Czech National Bank (Česká národní banka).  The CNB sees a danger that with the EU banking union as presently envisaged the Czech Republic, which has a liquid and well-capitalized banking system, might be forced to bailout much larger EU nations such as Spain, Italy, and Portugal.

CNB board member Lubomír Lízal, in an extemporaneous video interview published on 12 April, mentioned some of his concerns regarding the proposed banking union, but more recently the governor of the CNB himself, Miroslav Singer, wrote an editorial for FT explaining the CNB’s viewpoint on the proposals for a banking union.  Because the editorial by Singer is succinct highly readable, it is reproduced here in its entirety from the website of the CNB:

Opinion: Hurdles remain high for banking union

 

Miroslav Singer (Financial Times (ft.com), 9.5.2013)

The proposed European banking union, which would place eurozone banks under the supervision of the European Central Bank, strives to address some of the institutional deficiencies of the eurozone.

This monetary zone features at least the same – and probably a higher – level of national diversity as the US. Consequently, it needs, in principle, tax collection and redistribution channels to be on a similar scale to those in the US.

Yet it is clear that fiscal transfers of a comparable magnitude to the US federal budget are unacceptable to many eurozone constituencies.

The banking union is, therefore, essentially an attempt to build transfer channels that are capable of breaking the harmful relationship between the financial sector and sovereign debt, and acceptable to warier member states, particularly Germany.

To be successful, the union needs to consist of three elements.

First, there must be common supervision to prevent slippage of quality due to national complacencies and/or interests.

Second, risk must be shared – in the form of quasi-fiscal transfer channels, the European Stability Mechanism and potential sharing of national guarantee funds.

Finally, there has to be a common approach to resolving bank collapses and their related costs.

It is worth noting that while common rules are presented as something that is necessary for a banking union, they are in fact necessary for greater unity – in other words, for a common EU market.

Alongside the acceptance of such a scheme, however, there are two obvious problems with the creation of this union within the current eurozone.

The first is how to ensure banking systems are well capitalised across all the eurozone countries. The straightforward solution would be to pool the resources of the northern nations and the ECB. I suspect that was the initial plan, but the clear reluctance of the countries in the north to play along is making this very difficult to achieve.

The second is how to achieve supervision that is of a high enough standard to guarantee that transfers through these newly created quasi-fiscal channels do not trouble the northern member states, rather than creating a fully fledged federal tax system for the eurozone.

While the first problem is hampering the establishment of the banking union, the second needs to be solved if the union is to be sustainable over the long term. I have my doubts about whether a solution can be found to the second problem, as it may require supervision of a standard that has never before been attained.

Hopefully, however, other measures to reduce banking risks, such as stronger buffers, can remedy this situation.

Ultimately, there are three main points to consider.

First, the banking union will benefit mainly the eurozone. The Bulgarian lev or Swedish krona currency zones, for example, do not need it, as they exist within the borders of single nation states.

Second, the combined resources of all the EU countries outside the eurozone will not be sufficient to restore the euro area financial system to health.

Third, for the Czech National Bank, one special feature of our banking system is that while it is restricted to the country’s borders, it is solvent and liquid, and a provider of credit to the eurozone banking system.

Consequently, the Czech National Bank will do its best to support the creation of the banking union while working to eliminate the risk of being pulled into the transfer channels via non-market price transactions and risk sharing.

Our well-capitalised and liquid banks should not be used to fund their parent or sister institutions at rates below the market rate for such funds or assets in a situation where group interests prevail over the interests of subsidiaries in the decision making.

We are not needed in – and do not intend to become a party to – quasi-fiscal transfers, even in crisis situations. In particular, we do not wish to become a party to any common funds or any loan-sharing scheme between deposit guarantee funds or anything with similar redistributive effects.

We are also keen to retain our own domestic controls and regulations as well as the current balance of power in the European Banking Authority. I cannot help but wonder whether the failure of advocates of the banking union to respect the similar positions of many non-eurozone countries are complicating its creation. These negotiations are difficult enough in the eurozone countries alone.

For us, joining the Single Supervisory Mechanism (SSM) would involve a loss of supervisory powers. We see no reason to cede such powers, not least because the Czech National Bank has a strong track record on supervising the domestic financial market, and has been able to maintain good working relations with the relevant Czech supervisory bodies.

What is more, some key pillars of the SSM have not even been drafted yet. We do not feel able to draw any conclusions about the quality of SSM supervision until the system has been up and running for a while.

Ultimately, it is a case of wait and see. We wish the eurozone every success in creating the banking union, but it would be better for us to see how the creation of the SSM works in practice.

Sources:

Republic of Estonia: 2013 Article IV Consultation (2013-05-13)

Video: CNB board member issues warning on common bank resolution (2013-04-12)

Editorial in FT: Opinion: Hurdles remain high for banking union (2013-05-09 01:04)

Editorial on website of CNB: Opinion: Hurdles remain high for banking union (2013-05-09)

 

In earlier news, on 11 May the Bank of Estonia (Eesti Pank) published on its website an announcement reminding businesses in Estonia that they are required to accept the new five-euro banknote as legal tender.

The central bank noted that since the introduction of the new €5 note into circulation at the beginning of May there had been cases of stores refusing to accept it, and of banknote verification machines rejecting it.  The announcement went on to explain in detail the security features of the new banknote, and how the banknote can be easily verified by hand.

The central bank suggested that readers view on itse website various videos produced by the ECB that introduce and explain the new €5 banknote, and noted that the Bank of Estonia had been carrying out a series of training sessions for cash handlers throughout Estonia to familiarize them with the features of the new banknote.

ECB video on the new €5 banknote, in English: “The Euro: Our Money”

ECB video on the new €5 banknote, in Estonian: “Euro, meie raha”

It has been widely noted that the new €5 banknote is the first euro banknote to carry Cyrillic writing.  On the obverse it carries the word “ЕВРО” (i.e., euro), and the abbreviation “ЕЦБ” (i.e., ECB).  What has been less noticed is the fact that the Cyrillic word “ЕВРО” is the upper-case form of the word “евро” (pronounced “evro”) rather than of the word “еуро” (pronounced “euro”).

At present there is no member country of the Eurozone in which Cyrillic is used as an official alphabet except by an ethnic minority.  In 2007 Bulgaria joined the European Union but not the Eurozone (EMU), as it continues to use its own currency, the Bulgarian lev (BGN).  It is planned, however, that Bulgaria will eventually enter the EMU and replace the lev with the euro.  It is with Bulgaria in mind, then, that the ECB has for the first time printed banknotes containing Cyrillic letters.

But why do the Cyrillic letters on the new banknote spell out something that is pronounced “evro” instead of “euro”?

In fact as a rule the name of the EMU’s currency is written and pronounced as “evro” (or in Cyrillic “евро”) in those Slavic countries that, perhaps under Byzantine Greek influence, pronounce the name of Europe as “Evropa”.  Hence the form “evro” (евро) is used officially by the central banks of Slovenia, Bosnia and Herzegovina (when writing in Serbian), Serbia, Macedonia, Bulgaria, Moldova (Russian-speaking part), Transnistria, Ukraine, and Russia, while the form “euro” is used by the central banks of Montenegro, Bosnia and Herzegovina (when writing in Croatian and Bosnian), Croatia, the Czech Republic, Slovakia, Poland, and Belarus.

At the time that Bulgaria was preparing to enter the EU, one bone of contention was the ECB’s insistence that Bulgaria needed to conform to the EU-wide custom of referring to the EMU currency in a form that is pronounced “euro”, not “evro”.  In October 2008, however, the EU gave in, granting to the government of Bulgaria permission to use the form that is pronounced “evro”.

Sources:

Bank of Estonia press release: Kaupmehed peavad uut 5-eurost vastu võtma (2013-05-11)

News article: Bulgaria wins victory in “evro” battle (2007-10-18 17:50 EDT)

Wikipedia: Bulgaria and the euro (retrieved 2013-05-18)

ECB video on new €5 banknote – English version: The Euro: Our Money (2013-04-30)

ECB video on new €5 banknote – Estonian version: Euro, meie raha

Bosnia – Banking ombudsman of Republika Srpska criticized for protecting banks rather than customers; IMF issues report stating that Bosnian banking system is stable but that the level of NPLs is gradually increasing

On 17 May the online Bosnian news service Capital published an article by journalist Jelena Despotović examining the work of the Ombudsman for the Banking System that was instituted in April 2011 in Republika Srpska, one of the two main constituent entities of Bosnia and Herzegovina since the signing of the Dayton Agreement in 1995.

On 22 March 2011 the National Assembly of Republika Srpska adopted a statute that made changes to the Law on the Banking Agency of Republika Srpska (Закон о Агенцији за банкарство Републике Српскe), and these changes entered into effect when the statute was published on 13 April 2011.  The main change contained in the statute was the creation of an independent Ombudsman for the Banking System (Oмбудсман за банкарски систем) within the already-existing Banking Agency of Republika Srpska (Агенција за банкарство Републике Српске).  The statute assigned to the Ombudsman the duty of promoting and protecting the rights and interests of individual consumers who use financial services.  In late April 2011 the office of Ombudsman was duly created within the Banking Agency, on 28 June 2011 the Banking Agency appointed Vladimir Rudić (Владимир Рудић) as the first Ombudsman for a term of five years beginning upon the publication of the appointment notice in the official gazette, and in September 2011 the Ombudsman began hearing his first cases.

Vladimir Rudić, Ombudsman for the Banking System

in Republika Srpska (Bosnia and Herzegovina)

The article in Capital quotes at length Mika Nikić, a board member of the Association for the Protection of Guarantors (Удружење за заштиту жираната), who characterizes the Ombudsman as being “a hidden player of the banking lobby” (prikriveni igrač bankarskog lobija) in that although many of the complaints submitted by consumers against banks and microfinance organizations regard legal violations, the Ombudsman does not investigate whether fraud may have been committed but instead always seeks to reach a negotiated agreement between the financial institution and the customer.  The article goes on to characterize the Ombudsman, Vladimir Rudić, as evasive for having refused to respond to questions from the journalist’s except in written form.  The article closes by reiterating that an earlier article by Capital, published on 15 July 2011 shortly after the appointment of Vladimir Rudić to the post of Ombudsman had become official, revealed that Rudić is the brother of Snježana Rudić, who at that time was Deputy Minister of Finance for Republika Srpska as well as a member of the Managing Board of the banking agency that selected Vladimir Rudić for the job.

Although the journalist herself strongly implies that the present Ombudsman is not doing the job that he was hired to do, the primary source for her information, the board member of the Association for the Protection of Guarantors, merely states that the final result is that the office of Ombudsman protects financial institutions more than customers.  It is worth noting, therefore, that the actual text of the statute passed by the National Assembly on 22 March 2011 clearly states that in the case of disputes between consumers and financial institutions the Ombudsman must attempt to resolve such disputes peacefully through negotiation and mediation so that the disputes do not end up in court, and the statute gives the Ombudsman no investigatory, prosecutorial, or disciplinary powers.  So if in fact the Ombudsman for the Banking System in Republika Srpska is effectively serving as a tool of the “banking lobby”, the influence of the “banking lobby” over the Ombudsman’s office would seem to date back all the way to the drafting of the statute that the assembly adopted on 22 March 2011.

Principal sources:

Article: Koga štiti Ombudsmen za bankarstvo RS – banke ili klijente? (2013-05-17 12:54)

Law passed on 22 March 2011 that mandates the creation of ombudsman's office: Закон о измјенама и допунама Закона о Агенцији за банкарство Републике Српске

In other news, on 17 May the International Monetary fund issued a 45-page staff report on Bosnia and Herzegovina dated 23 April 2013.  The section of the report dealing most directly with the banking sector is reproduced below verbatim, with emphasis as per the original.

POLICY DISCUSSIONS

[...]

C. Ensuring Financial Sector Stability

18. The banking system is relatively stable, but lending remains muted and nonperforming loans are creeping up. Financial sector indicators through end-2012 suggest that the banking system—which is predominantly owned by Austrian and Italian banks—remains profitable and adequately capitalized at the aggregate level. However, the headwinds from weak domestic activity are being more pronouncedly felt. Non-performing loans (NPLs) have edged up further, to over 13 percent by end-2012 and could rise even more in the near future, although provisioning stands at 67 percent of non-performing assets. While the latest stress tests did not reveal major weaknesses in the system, the banking agencies have been quick to engage some smaller banks that presented tighter capital positions under severe shock scenarios. Parent banks’ exposure to their subsidiaries declined only moderately over the last several quarters. The loan-to-deposit ratio remains relatively high at around 125 percent. Credit growth remains subdued, however, at 3 percent in 2012, reflecting banks applying tighter credit standards and the weak economy.

19. Further progress is being made to strengthen bank supervision and the crisis resolution framework. Specifically:

·       The Federation authorities have amended the legal framework related to the treatment of confidential information to align it with EU requirements, while in the Republika Srpska this is awaiting parliamentary approval (an end-December 2012 structural benchmark that is now expected to be completed before end-June 2013, and which is the proposed new deadline for this benchmark). These changes would help to pave the way to sign MOUs with homecountry banking supervisors, aimed at enhancing cooperation. The authorities are also planning to host a cross-border forum in the near future, inviting home country supervisors and parent banks.

·         Amendments to the entities’ banking laws to limit the provisional administration of banks to one year, with a possible 6-month extension are also awaiting approval by the respective parliaments (structural benchmarks for end-December 2012 which are now expected to be completed before end-June 2013, which is also proposed as the new deadline for these benchmarks). A more comprehensive overhaul of both entities’ banking laws is planned in order to fully harmonize them with EU legislation. This process is expected to be completed in the first half of 2014.

·     A joint MOU between the Central Bank of Bosnia and Herzegovina (CBBH), and the banking agencies, which formalizes the procedures for top-down stress-testing has been prepared and was signed in mid March 2013.

·        The authorities have established the criteria for identifying—and prepared a preliminary list of—those financial institutions that are considered systemically important and which will be subject to increased monitoring, including bottom-up stress tests.

·       The authorities have requested Fund technical assistance to assess the NPL resolution framework and to identify steps to strengthen this framework by removing legal, tax, and institutional obstacles.

·    The amendments to the law governing the DIA have been submitted to the BiH parliament. These amendments aim to ensure that: (i) coverage will be extended to small- and medium-sized enterprises; (ii) all banks will be members of the deposit insurance scheme, including those that may fall under provisional administration; and (iii) it is consistent with international standards (an end-March 2013 structural benchmark).

Source:

Bosnia and Herzegovina: Second Review Under the Stand-By Arrangement and Requests for Waivers of Applicability and Modification of Performance Criteria —Staff Report; Press Release; and Statement by the Executive Director (2013-05-17)

Lithuania – Šiaulių Bankas reports profit of € 990,000 for 1Q 2013 and provides details regarding disposition of former Ūkio Bankas assets; Central bank begins publishing financial data on individual banks

On 17 May the commercial bank Šiaulių Bankas (AB Šiaulių bankas), the fourth largest of Lithuania’s domestically-licensed banks by assets, published financial statements for the first quarter of 2013.  The bank reported a non-consolidated net profit for the quarter of LTL 3,415,000 (€ 989,052).  (N.B.: The exchange rate between the euro and the Lithuanian litas (LTL) has been pegged since 2002 at EUR 1 = LTL 3.4528.)

Šiaulių Bankas’s non-consolidated total assets and net profit/loss for the most recent 6 quarters

Quarter	Total assets at end of quarter (LTL)	Net profit for quarter (LTL)
1Q 2013	5,422,443,000	3,415,000
4Q 2012	2,931,466,000	3,863,000
3Q 2012	2,853,258,000	3,986,000
2Q 2012	2,792,161,000	3,718,000
1Q 2012	2,756,654,000	3,305,000
4Q 2011	2,731,566,000	2,083,000

The earnings result was in line with profits obtained in previous quarters, but a glance at the bank’s level of total assets shows that something significant happened in 1Q 2013.  As noted previously in this column, on 12 February the country’s central bank, the Bank of Lithuania (Lietuvos bankas), revoked the license of the commercial bank Ūkio Bankas (AB Ūkio bankas), and before the end of the month Šiaulių Bankas had signed an agreement with the deposit insurance fund (Valstybės įmonė “Indėlių ir investicijų draudimas”) and the temporary administrator for Ūkio Bankas according to which certain assets and liabilities of Ūkio Bankas would be transferred to Šiaulių Bankas.

The management of Šiaulių Bankas gives details on the transfer of assets and liabilities in its interim financial report for 1Q 2013 published on 17 May:

On 23 February 2013, an agreement was signed between Ūkio Bankas AB registered in Lithuania (legal entity‘s code 112020136, hereinafter Ūkio Bankas), Šiaulių Bankas AB (legal entity‘s code 112025254) and a state-owned enterprise Indėlių ir Investicijų Draudimas (legal entity‘s code 110069451, hereinafter Deposit Insurance Fund) on the transfer of assets, rights, transactions and liabilities of Ūkio Bankas, based on which a part of assets, rights, transactions and liabilities of Ūkio Bankas was transferred to Šiaulių Bankas. Under the agreement, Šiaulių Bankas takes over LTL 1.9bn assets (rights) and LTL 2.7bn liabilities from Ūkio Bankas. The difference of LTL 800m between the liabilities and the assets taken over will be covered by the Deposit Insurance Fund. The assets of Ūkio Bankas transferred to Šiaulių Bankas are based on a preliminary valuation carried out by an audit company, the results of which have been approved by the Board of the Bank of Lithuania. To have an accurate estimation of assets and liabilities transferred, a more detailed final valuation of assets and liabilities transferred will be carried out within 3 months after the date of signing the agreement. If the results of the final valuation show that the value of the assets transferred is higher than that established during the preliminary valuation, Šiaulių Bankas will refund to Ūkio Bankas the difference between the values of the assets established during the preliminary and the final valuations. If the results of the final valuation show that the value of the assets transferred is lower than that established during the preliminary valuation, IDF will pay to Šiaulių Bankas the difference between the values of the assets established during the preliminary and the final valuations (the total amount payable by IDF cannot exceed LTL 800m). In addition, the agreement provides for the possibility for the creditors of Ūkio Bankas to sell four different portfolios of assets within 9 months after the date of signing the agreement: (a) portfolio of real estate transferred into the ownership of Šiaulių Bankas, (b) portfolio of higher risk (potentially lower-quality performance) loan groups, (c) portfolio of subsidiaries of Ūkio Bankas engaged in real estate development activities and (d) portfolio of shares of subsidiaries of Ūkio Bankas engaged in other activities – Ūkio Banko Lizingas UAB and life insurance company Bonum Publicum UAB. Another very important clause in the agreement says that in the event the value of the assets transferred to Šiauliai Bankas increases after 2 years, Šiaulių Bankas will have to refund a part of such increase in the value of the assets to the creditors of Ūkio Bankas. This is applicable to lower risk (potentially higher-quality performance) loan groups and collateral real estate repossessed and sold. In this case the Bank bears no risk, because portfolio of the assets would be fully exchanged in another form of asset – cash, also covering all related administration, financing and other expenses which are foreseen in the agreement. 

The transactions had not been fully completed as of 31 March 2013 as according to the agreement dated 20 April 2013 the remaining part of assets and liabilities were transferred at their preliminary values. Sigining the supplement of the agreement resulted in one more assets‘ option consisting of the loans exposed to increased risk and assets foreclosed under recovery loans into the bank‘s balance sheet.

In related news, on 16 May the country’s Department of Enterprise Bankruptcy Management (Įmonių bankroto valdymo departamentas) published an announcement that a firm closely associated with Ūkio Bankas and its owner Vladimir Romanov – the firm ŪBIG (UAB “Ūkio banko investicinė grupė”) – had formally declared itself unable to pay its creditors.  Ūkio Bankas had granted considerable loans to ŪBIG, and ŪBIG had in turn granted considerable loans to one of its better-known subsidiaries, Heart of Midlothian Plc, owner of the soccer team “Heart of Midlothian Football Club” (“Hearts”) of Edinburgh, Scotland, but also owner of the alumina plant “Birač” («Бирач» а.д.) in Zvornik, Bosnia, and the commercial bank Balkan Investment Bank («Балкан Инвестмент Банк» а.д.) in Banja Luka, Bosnia.  The declaration of inability to pay by ŪBIG opens the way to bankruptcy proceedings against ŪBIG by the firm’s creditors, among which are the bankruptcy administrators of Ūkio Bankas.

In earlier news, on 28 March a general meeting of Šiaulių Bankas’s shareholders approved a proposal to use the bank’s own funds to increase the bank’s authorized capital by LTL 15,142,467 (€ 4,385,562) through the issuing of 15,142,467 new shares of common stock, to be distributed free of charge to existing shareholders on a proportional basis.

Principal sources:

Šiaulių Bankas – Financial statements in Lithuanian: AB Šiaulių banko ir banko grupės finansinės ataskaitos

Šiaulių Bankas – 1Q 2013 financial statements in English: Interim financial report Šiaulių bankas AB and the bank’s Group for 1 quarter 2013 (2013-05-17 08:37:25)

Insolvency declaration by ŪBIG: Įmonių, negalinčių arba neketinančių vykdyti įsipareigojimus, sąrašas

Šiaulių Bankas – General meeting of shareholders approves capital increase: Šiaulių bankas iš banko lėšų didina įstatinį kapitalą 15 mln. litų (2013-03-28)

In earlier news, on 2 May the Bank of Lithuania (Lietuvos bankas) announced that it would for the first time begin publishing financial data for individual banks.  Until now information for each of the country’s 7 commercial banks has only been brought together in one place on the website of the Association of Lithuanian Banks (Lietuvos bankų asociacija - LBA).  The central bank will be publishing data on individual banks on a quarterly basis, based on mandatory supervisory filings with the central bank.  The central bank will publish quarterly data within 35 days after the end of a quarter, and annual data by 15 May of the year following.  Individual data will be given for each bank that is licensed by the Bank of Lithuania, but data for foreign-based branch banks operating in Lithuania will be given only on an aggregated basis.

The central bank created its first such data files – for yearend-2012 and for 1Q 2013 – on 6 May, and published them on its website exclusively in Lithuanian.  On the basis of these first examples it is possible to compare the quarterly files published by the Association of Lithuanian Banks with those published by the central bank:

	Association of Lithuanian Banks	Bank of Lithuania
Banks for which individual data are provided:	„Citadele“ bankas Danske Bank – Lithuanian branch DNB bankas Medicinos bankas Nordea Bank Finland – Lithuanian branch SEB  bankas Šiaulių bankas Swedbank UniCredit Bank – Lithuanian branch	„Citadele“ bankas DNB bankas bankas „FINASTA“ Medicinos bankas SEB bankas Šiaulių bankas Swedbank
Data provided:	Assets – broken down into 27 categories Liabilities – broken down into 24 categories Total equity and minority interest Issued capital Off-balance sheet items – 2 categories Revenues – broken down into 14 categories Expenses – broken down into 12 categories Profit – broken down into 5 categories Additional information on number of branches, employees, payment cards, ATMs, POS terminals, active retail clients, active commercial clients, registered internet banking users, registered SMS banking users, value of investment funds managed, number of fund owners, as well as detailed data on factoring	Assets – broken down into 11 categories Liabilities – broken down into 9 categories Total equity Current year profit (loss) ROA, ROE, capital adequacy ratio, liquidity ratio, maximum loan amount to a single borrower, maximum loan amount to parent company, maximum open position in currency and precious metals, maximum open position in a single currency (with currency identified, e.g., USD, GBP, LVL)

Principal sources:

Bank of Lithuania press release: Vartotojams – daugiau informacijos apie kiekvieną banką ir kiekvieną kredito uniją (2013-05-02)

Bank of Lithuania data files: Pagrindiniai bankų veiklos rodikliai

Association of Lithuanian Banks data files: Statistika

Mark Pleas

Eastern Europe Banking & Deposits Consultant

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