MD’s Keynote Speech—National Development Bank in Lithuania: Aims and Effective Governance

IMF News, July 2, 2020

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IMF World Economic Outlook update: "The recession will be deeper in 2020 and the recovery slower in 2021 than we projected in April."
Global growth projections cited:
- "We expect GDP to shrink by 4.9 percent this year and grow by 5.4 percent in 2021."
- "Nearly 95 percent of countries projected to face negative per capita income growth this year."
Global policy response:
- "Globally, fiscal actions now amount to about $10.7 trillion."
- Major central banks used interest rate cuts, "massive and swift asset purchases, and other extraordinary measures."
Lithuania-specific context:
- Lithuania has "not been hit as hard as other countries in Europe" but experienced "tragic loss of life and decline in economic activities."
- Lithuania’s advantages relative to 2009: "euro area membership, fiscal space, and no significant macroeconomic imbalances" enabling a swifter response.

System strengths:
- Banking system described as "profitable, well capitalized, and subject to a strong regulatory and supervisory framework at both the European and national levels."
- "Lithuania’s central bank appropriately and proactively using all macroprudential and supervisory powers at its disposal."
Three central challenges identified:
- Concentration:
- "Lithuania’s three largest banks represent three-fourths of total assets."
- Current analysis: concentration "has not resulted in a lack of competition" and "banks’ strong profitability seems to reflect high efficiency."
- Risk noted: "high concentration cannot turn into a problem of inefficiency."
- Policy implication: "your efforts to develop a vibrant fintech sector will continue to add welcome competitive pressure."
- SME access to finance:
- "Small and medium enterprises’ inadequate access to finance" due to higher risk and tightened regulation.
- Common remedy: public development institutions (example given: "INVEGA in Lithuania" providing direct lending or loan guarantees).
- Countercyclicality:
- "Inability of banks to provide enough credit during downturns."
- Mitigating action: central banks, including the Bank of Lithuania, use "countercyclical buffers and macroprudential policy."

Potential benefits of state-owned banks:
- Fulfill functions not performed by private banks.
- Provide financing for projects that "benefit the wider economy."
- Provide "countercyclical lending—increasing their loan book when the economy is weak."
- Historical role: active during recent crises (COVID-19 and global financial crisis) in advanced economies ("France, Germany, and Japan") and emerging markets ("Brazil, Turkey, and Saudi Arabia").
Key risks and necessary precautions:
- Fiscal risk from guarantees:
- "Public banks have implicit or explicit government guarantees, which is what leads to their low funding costs but could represent significant fiscal risks."
- Recommendation: decisions should be "preceded by rigorous, comprehensive, and transparent analysis on the implications for public finances."
- Funding and fiscal backstops:
- To "preserve financial stability, support programs through public banks should be appropriately funded in a transparent manner," and governments should be ready for "timely recapitalizations when needed."
- Governance and efficiency:
- "Incentives for efficient management are sometimes lacking," risking "inefficient banks with weak governance."
- Mitigation: "strong governance independent of political influence and robust regulation and supervision are key."

International experience highlights design principles:
- Create safeguards to "avoid undue political interference."
- Keep "mandates explicit and narrow."
- Ensure "effective monitoring and transparency to avoid losses."
- Deliver "a level playing field between state-owned banks and private banks."
Practical example: KfW (German development bank) design features:
- "Limited and clearly established mandate."
- "It is prohibited by law to distribute profits to its shareholders."
- Channels funds "predominantly through the German banking system," reducing risks.
- "Access of KfW to international and domestic capital markets also helps ensure high standards of transparency."

Overarching guidance:
- "Careful attention should be given to the pros and cons" of establishing a state-owned bank.
- A "well-designed state-owned bank in Lithuania could help support sustained growth and deliver higher living standards," but "risks must be transparently assessed and dealt with."
Complementary reforms and priorities:
- Continue to "build on your recent achievements and complement your efforts to create a vibrant fintech sector."
- Ensure financial sector reforms "reinforce the macroeconomic and financial stability that has allowed Lithuania to prosper in recent years."
- Target structural challenges to speed convergence with Western Europe, including addressing "social disparities, poverty, and the implementation of education and healthcare reforms."
Timing and decision-making:
- "You have important decisions ahead of you—and you must act fast in the current crisis context while also weighing the pros and cons of your policy choices."
- Final advice encapsulated in the proverb: "Measure three times… but cut only once."

Kristalina Georgieva, "MD’s Keynote Speech—National Development Bank in Lithuania: Aims and Effective Governance", July 2, 2020.