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

_IMF News, July 2, 2020_

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## Bibliographic details
- Published: July 2, 2020

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### Context—a crisis like no other
- 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.

### Lithuania’s financial system: Progress and Challenges
- 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."

### Public banks—benefits and risks
- 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."

### Careful design is needed
- 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."

### Build on your achievements — policy guidance and priorities
- 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.*

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## References

- [https://www.imf.org/en/about/senior-officials/bios/kristalina-georgieva](https://www.imf.org/en/about/senior-officials/bios/kristalina-georgieva)
- [Republic of Lithuania and the IMF](http://www.imf.org/external/country/LTU/index.htm)
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_Source: https://www.imf.org/en/news/articles/2020/07/02/sp070220-md-remarks-lithuania_