ESRB European Systemic Risk Board : Notification by Lietuvos bankas (Bank of Lithuania) on four other systematically important institutions (O-SIIs)

Notification template for Article 131 CRD - Other Systemically Important Institutions (O-SII)

Please send this template to

• •[e-mail] when notifying the ESRB;

• •[e-mail] when notifying the ECB;

• •[e-mail] when notifying the EBA.

Emailing this template to the above-mentioned addresses constitutes an official notification, no further official letter is required. In order to facilitate the work of the notified authorities, please send the notification template in a format that allows electronically copying the information.

1. Notifying national authority
1.1 Name of the notifying authority	Lietuvos bankas (Bank of Lithuania, BoL)
2. Description of the measure
2.1 Concerned institution or group of institutions	AB SEB bankas Luminor Bank AB "Swedbank", AB AB Šiaulių bankas 549300SBPFE9JX7N8J82 213800ZY8OD37RGI4E67 549300GH3DFCXVNBHE59 549300TK038P6EV4YU51 The O-SII buffer requirement applied to the identified O-SIIs listed above is to be met with CET1 capital instruments and shall be maintained at the highest consolidation level in Lithuania.
2.2 Level of the buffer applied	O-SII institution		O-SII buffer
	AB SEB bankas		2%
	Luminor Bank AB		2%
	"Swedbank", AB		2%
	AB Šiaulių bankas		1%
2.3 Name of the EU ultimate parent institution	Bank name	Parent company name		Parent company LEI code
	AB SEB bankas	Skandinaviska Enskilda Banken		F3JS33DEI6XQ4ZBPTN86
	"Swedbank", AB	Swedbank AB		M312WZV08Y7LYUC71685
	Luminor Bank AB	Luminor Group AB		Not applicable
2.4 Names of subsidiaries	N/A
3. Timing of the measure
3.1 Timing of the Decision	The Board of the BoL is expected to take its final decision on 27 November 2018.

Date of template version: 2016-03-01

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3.2 Timing of the Publication	The list of designated O-SIIs and applicable buffer rates will be disclosed to the public on the BoL's website after the final decision of the Board of the BoL.
3.3 Disclosure	The decision will be published on the BoL's website.
3.4 Timing of Application	O-SII buffers for AB SEB bankas, Luminor Bank AB, and "Swedbank", AB remain unchanged and are already in force, which is why there is no reason to set a particular timing of application. The O-SII buffer of 1% for AB Šiaulių bankas will be applicable as of 31 December 2020.
3.5 Phasing in	A phase-in period for AB Šiaulių bankas to meet the higher requirement finalises on 31 December 2020.
3.6 Review of the measure	The list of the identified O-SIIs and the O-SII buffer rates are reviewed annually before 1 December.
4. Reason for O-SII identification and activation of the O-SII buffer
4.1 Scores of concerned institution or group of institutions, as per EBA guidelines on the assessment of O-SIIs (Article 131.3)	O-SII institution AB SEB bankas Luminor Bank AB "Swedbank", AB AB Šiaulių bankasO-SII score* 3446 2500 1965 894 *calculated using adjusted methodology that eliminates debt securities outstanding. For rationale, see question a in section 4.2.
4.2 Methodology and indicators used for designation of the O-SII (Article 131.3)	Please provide information on: a. whether you followed the EBA guidelines on the assessment of O-SIIs We followed the EBA guidelines on the assessment of O-SIIs for the most part. The only divergence in our adjusted methodology comes from leaving out the indicator of debt securities outstanding. The rationale for such an adjustment is based on the fact that debt securities outstanding constitute only a negligible share of the banking sector's liabilities (0.06%), thus taking this indicator into account distorts the overall results to a great degree. To illustrate, an automatic adherence to the EBA guidelines in calculating O-SII scores (i.e. incorporating debt securities outstanding in the equation) would result in the following O-SII scores: AB SEB bankas - 3310, Luminor Bank AB - 2239, "Swedbank", AB - 1865, AB Šiaulių bankas - 1458. By eliminating the indicator of debt securities outstanding, we allocate greater weights to the two remaining indicators in the category of interconnectedness, i.e. intra-financial system liabilities and intra-financial system assets each receive weights of 12.5%. b. which threshold score has been set to identify O-SIIs 350 basis points c. which overall score is attributed to the O-SIIs See section 4.1 d. which of the optional indicators have been used to justify supervisory assessment decisions, if any, and what are the scores No optional indicators have been used. e. why these optional indicators are relevant for the Member State Not applicable f. why the bank is systemically important in terms of those particular optional indicators Not applicable g. whether relevant entities with relative total assets not in excess of 0.02%
have been excluded from the identification process No institutions were excluded from the identification process. h. names and scores of all relevant entities not excluded from the identification process (could be sent in a separate excel file, see 4.1) The Excel file is attached to the notification letter. i. whether non-bank institutions have been included in the calculations Yes, institutions such as credit unions and central credit union groups were included in the calculations.
4.3 Supervisory judgement	Has any of the institutions listed in 2.1 been identified through supervisory judgement as laid down in EBA guidelines on the assessment of O-SIIs? If yes, please list the respective institutions. No
4.4 Calibrating the O-SII buffer	Designation of O-SIIs in Lithuania was carried out according to the relevant European Banking Authority guidelines (EBA/GL/2014/10, the Guidelines). In line with the scoring methodology provided in the Guidelines, the systemic importance of institutions was assessed using 9 mandatory indicators (eliminating the indicator of debt securities outstanding, refer to question a in section 4.2) covering 4 different criteria. The criteria are as follows: size, importance (including substitutability/financial system infrastructure), complexity/cross-border activity, interconnectedness. The BoL did not use any optional indicators based on the fact that participants of the Lithuanian financial system are rather homogeneous in terms of financial services and their importance for the financial system is almost fully characterised by the mandatory indicators. The BoL has decided to maintain the 350 basis points threshold (out of a total of 10,000 basis points) as a limit of systemic importance defined by the Guidelines. As the Guidelines do not specify any buffer calibration methods, the calibration was based on 2 approaches: "expected impact" and "expected losses" (detailed below). The quarterly returns on risk-weighted assets (RoRWA) of banks operating in Lithuania were used for both methods. However, the data is available only from 2002, while the sample is contaminated by large negative returns during the 2009-2010 crisis episode. Institution specific O-SII capital buffers were calculated as an average of the results from both approaches. 1. The goal of the "expected impact" approach is to determine specific O-SII capital buffers so that the expected impact of failure of systemically important banks (SIBs) would equal that of a reference non-SIB (a reference non-SIB is defined as an institution with the systemic importance score of 350 basis points). Since SIBs have higher economic costs of failure than non-SIBs, the probability of default (PD) of SIBs must be lower than the PD of the reference non-SIB in order to achieve an equal expected impact of failure. Additional O-SII capital buffers for SIBs lower their PDs and, in turn, limit their economic costs of failure. The defined O-SII score of each SIB was used as the relative measure of the economic costs of failure, while the threshold of 350 basis points was used as the relative measure of the economic costs of failure of the reference non-SIB. The PD of a reference non-SIB was determined using the empirical distribution of the RoRWA of banks operating in Lithuania. 2. The "expected losses" calibration is based on determining the required loss absorbing capacity of SIBs. It was assumed that a larger than 2.5% loss of the capital adequacy ratio would render a SIB insolvent. The 2.5% capital adequacy threshold for losses was chosen to proxy the capital conservation buffer. The amount of the additional capital buffer needed for each SIB is determined by its systemic importance score with the intention to increase its ability to withstand a loss that equals the historical average of Lithuanian bank losses in excess of 2.5% of the capital adequacy ratio.

The amount of additional capital needed was calculated proportionally to the SIB score in excess of 350 basis points using the average of historical losses exceeding 2.5% of the capital adequacy ratio and the probability of such event.
4.5 Effectiveness and proportionality of measure	The Lithuanian banking system is highly concentrated. In terms of assets, in Q2 2018 the market share of the 4 largest banks comprised around 91% of the total assets of the Lithuanian banking system. The failure of a systemically important institution could have a severe negative impact on the stability of the Lithuanian financial sector and on the real economy. A higher capital requirement for systemically important institutions will improve the overall banking sector resilience against negative shocks and will also help to limit possibly misaligned incentives of systemically important financial institutions. Lending of AB SEB bankas, Luminor Bank AB, and "Swedbank", AB will not be affected by this intended O-SII decision because the buffers remain unchanged compared to the previous notification period. Conversely, since the O-SII buffer requirement for AB Šiaulių bankas is intended to increase, a phase-in period (see section 3.5) is set so as to allow AB Šiaulių bankas to accumulate the required buffer gradually (e.g. via retained earnings). This, in turn, should limit the impact of the increased O-SII buffer requirement on the day-to-day business of AB Šiaulių bankas, and should allow for a more orderly capital adjustment, given forthcoming effective increases in the CCyB (from 0% to 0.5% on 31 December 2018 and further from 0.5% to 1% on 30 June 2019), as well as future MREL requirements.
5. Cross-border and cross-sector impact of the measure
5.1 Assessment of cross-border effects and the likely impact on the internal market (Recommendation ESRB/2015/2)	The cross-border effects and impact on the internal market are expected to be non-material as the cross-border activities of identified O-SIIs within the EU are limited. No spill-over effects are expected because all Member States have introduced O-SII capital buffers in accordance with CRD IV (2013/36/EU).
5.2 Assessment of leakages and regulatory arbitrage within the notifying Member State	As the measure is institution-specific, the possibility of leakages is minimal.
6. Combinations and interactions with other measures
6.1 Combinations between G-SII and O-SII buffers (Article 131.14)	N/A
6.2 Combinations with SRB buffers (Article 131.14 + Article 133.5)	The SRB has not been set.
6.3 O-SII requirement for a subsidiary (Article 131.8)	Bank name	Parent company name	O-SII buffer rate of parent company
	AB SEB bankas	Skandinaviska Enskilda Banken	2%
	"Swedbank", AB	Swedbank AB	2%

6.4 Interaction with other measures

N/A

7. Miscellaneous
7.1 Contact person(s) at notifying authority	Nijolė Valinskytė, Head of the Macroprudential Policy Division, [phone]([e-mail]) Algirdas Prapiestis, Principal Economist, Macroprudential Policy Division, [phone]([e-mail])
7.2 Any other relevant information	N/A