The risk in the Lithuanian banking sector in the context of the overheating of the economy

Abstract

In 2007, more and more signals on the overheating of the Lithuanian economy appeared. High inflation rates and stagnation in the housing market resulting in the increasing number of default loans, force Lithuanian banks to review their risk management policies. In this article the analyses of the changes in the Lithuanian economy is presented, reflecting on the signals of the overheating and the changes of the main indicators in the Lithuanian banking sector as well. The behaviour of the banking sector and the risks related with their activities during this specific period in the economy is investigated and liquidity, credit and capital adequacy risks as the most important risks in the Lithuanian banking sector are analyzed. A short review of policy taken by national authorities in order to keep financial stability and help banks run the risks they face is presented.