Sergei Kuznetsov in Minsk -

On November 24, the central bank of Lithuania ended the nervous wait to find out what it intended to do with the ailing Bankas Snoras by announcing it would liquidate the fifth-biggest bank by assets to avoid a costly bailout for taxpayers.

The central bank described the financial situation at the bank it was forced to take over on November 16 as "worse than previously identified," with some LTL3.4bn (about €1bn) in assets missing, three times the €300m initially estimated. As such, saving the bank "would cost significantly more and would take longer than the available liquidity" at Snoras, the central bank said in a statement.

"There's no sense in putting money into a plane that's not going to fly," Governor Vitas Vasiliauskas told a news conference. "We don't see any other healthy way on how to resolve the problem other than by liquidating the bank. We have stumbled into potentially illegal activity."

The liquidation of Snoras, the first major crisis in the Baltic banking system since Latvia rescued its Parex Banka in 2008, will mean Lithuania avoids a repeat of the Latvian's government massive borrowing to save Parex. The Latvian government was forced to seek €7.5bn in bailout loans from the International Monetary Fund and EU after the takeover.

Nerijus Maciulis, chief economist with Swedbank in Lithuania, says it's likely that Snoras' assets and insurance facility will be sufficient to cover all insured liabilities - deposits of up to €100,000 - but the government may decide to cover deposits in excess of the insured amount. "Current estimates show that some 260 companies have deposits in excess of €100,000. This does not pose a significant threat to the overall economy, but undoubtedly may have a severe influence on those companies' liquidity and solvency," Maciulis notes.

Lithuanian Finance Minister Ingrida Simonyte said on November 24 that the government would not cover all Snoras' losses because the problems were caused by the bank's management and not by economic difficulties. She said with reference to preliminary reports that Snoras' liabilities exceeded its total assets.

Isolated

Ahead of the central bank verdict, Lithuanian officials were confident that the banking crisis would not cause much damage to the economy, as the problems centred on only one particular bank. "The consequences for the banking system and the entire Lithuanian economy are minimal. This bank accounts for just 10% of the Lithuanian banking sector, and it is not too much. It seems that the government can cope with the situation without major consequences," Virginijus Valentinavicius, advisor to the Lithuanian PM, told bne on November 24.

Many experts agree that there are no systemic risks to the banking system of the region. Nerijus Maciulis, chief economist with Swedbank in Lithuania, says that neither Snoras nor its Latvian subsidiary Latvijas Krajbanka was a systemic bank. "There was no noticeable bank run in the market following the nationalisation of Snoras - the Bank of Lithuania reports that almost a week after the event the total amount of deposits in Lithuanian banks is up by 0.1%," he notes.

In a statement on November 23, Vaidievutis Geralavicus, member of the board of the central bank, explained: "Deposits increased marginally, but the trend is gratifying - none of the banks registered a decline in deposits exceeding usual cyclical fluctuations. All operating banks of the country comply with reserve, capital adequacy and liquidity requirements safely. Balances in the correspondent accounts of some Lithuanian banks increased significantly. Therefore, wise are those bank customers who remain calm and do not lose their accumulated interest."

The reaction in the government bond and credit default swap market was also muted. "Lithuanian government bond yields are up, but so are German yields. Current risk aversion and increasing government borrowing costs represent uncertainty regarding resolution of euro area debt crisis. Interbank interest rates also increased only by few basis points, indicating that the trust amongst the other banks operating in Lithuania has not suffered," Maciulis said.

Even so, there remain questions about whether the Lithuanian central bank and other government institutions could have prevented such a crisis at Snoras. Swedbank's Maciulis claims that the central bank had warned about problems at Snoras, but took no action besides "half-hearted oral reprimands". "Current developments suggest that the Bank of Lithuania takes a firmer stance and will not tolerate similar misbehaviour. I don't think there is a need to change legislation, but perhaps a higher accountability of certain institutions could be called for," he says.

Commenting on the prospects of another Snoras' subsidiary - Lithuania's Finasta Bank - Maciulis says that "it is by and large isolated entity and seems to be able to avoid major disturbance to its day-to-day activities". "Of course, lack of confidence will spill over from Snoras to it and will impact its main activity - fund management," he says.