BETTER FINANCE and its member, the Lithuanian Investors Association (LIA) took note of the Lithuanian Parliament report shedding light on the responsibility of major Scandinavian banks in the 2009-2010 financial crisis in the Baltic States.
In Lithuania, where GDP fell by almost 15% as of 2009, the parliamentary investigation reflects LIA's position on the role of banks in the disruption of the credit market. LIA previously denounced a financial system manipulation in the VILIBOR case, criticizing the concentration of powers at play. Advocating for stricter regulation governing the re-selling of repossessed assets, LIA also argues that banks should not be allowed to use selective control over liquidity for their own profit. The Lithuanian Parliament's report, which refutes the arguments of private credit providers on "exogenous" and unpredictable factors, recalls that practices of the extensive private credit market, in times of economic growth, were directly correlated to major external debt obligations: dependency of Lithuanian parent banks, mainly from Scandinavian banks such as Swedbank and SEB, caused the Baltic state housing bubble crisis in “a boom and bust” of lending activity. This “aggressive business model” of banks financed excessive expansion of their loan portfolios over foreign lenders, whereas market housing demand increased. This caused massive external debt obligations, to the point that the confidence crisis of Scandinavian banks translated into a “sudden stop’’ shock to the Lithuanian economy. Parent banks increased interest rates while puling €3 B — 11% of the 2009 Lithuanian domestic GDP — from interbank funding. Consequently, individuals suffered from the tightening of domestic bank lending standards and bore the consequence of a harsh market drop.
Particularly pointed at by the report is the failure of central bank supervision, allowing banks to distort the Vilnius Interbank Offered Rate (VILIBOR) that regulated inter-banking lending in litas prior to the 2015 Lithuanian eurozone integration. A lack of arbitrage opportunities in the face of dominant Scandinavian-owned banks and their subjective quote projections; absence of regulating measures; non-binding rates; a shallow interbanking market resulted in biased rates as opposed to a competitive equilibrium. Moreover, this system did not translate the ECB’s positive stimulus aimed at the real economy. In fact, the VILIBOR 2008-2010 raise impacted borrowers in the shape of an additional interest (€200 million) according to the Bank of Lithuania. Nearly 90% of these loans were variable rate loans, with many bank customers experiencing very large increases in monthly payments.
The report also further examines the consequences of the insufficient supervision as well as fiscal policy decisions; detrimental government borrowing policies and the untenable state-sponsored mortgage loan insurance.