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Bank of Lithuania sets countercyclical capital buffer rate at 0.5%

Lithuanian banks and central credit unions must build up a countercyclical capital buffer rate of 0.5% within a year, the Bank of Lithuania said Dec. 21.

"There has been an upswing in the financial cycle for some time: lending for households and enterprises has increased, trading in real estate has been active and its prices have been on the rise," Lietuvos bankas Chairman Vitas Vasiliauskas said.

The central bank noted that the buffer rate could be quickly reduced if economic growth decelerated or in case of a shock. At the same time, it may also decide to raise the buffer rate further to 1% if current market trends remain the same.

The countercyclical capital buffer requires banks to build up an additional buffer of common equity Tier 1 capital that can be released at times of stress to help reduce the risk of the supply of credit being constrained by regulatory capital requirements. The Czech central bank recently increased its buffer rate to 1.25%, effective from 2019, while the Danish Systemic Risk Council called for the imposition of a 0.5% buffer rate.