Download Credit Institutions Supervision Department Annual Report 1999

Credit Institutions Supervision Department Annual Report 1999
ISBN 9984-9228-2-0
Introduction
Supervision of Credit Institutions
Activities of Banks
Activities of Credit Unions
Appendices
1. Number of Credit Institutions in Latvia (1991-1999)
2. Number of Licences Issued by the Bank of Latvia (1991-1999)
3. Organisation of the Credit Institutions Supervision Department
4. Credit Institutions Licensed in the Republic of Latvia
Credit Institutions Supervision Department. Annual Report 1999 (in Adobe PDF format)
© Latvijas Banka, 2000
Photographs by J. Krumins, I. Sturmanis and A.F.I.
The source is to be indicated when reproduced.
Introduction
The Credit Institutions Supervision Department of the Bank of Latvia was established in
1992. Since then brief accounts on the Department's activities and the development of Latvian
banks and credit unions have always been included in the Bank of Latvia's Annual Reports.
However, in view of the importance of the banking sector in the financial system and the
public's interest, we decided to publish the Annual Report of the Credit Institutions
Supervision Department. The publication introduces the Credit Institutions Supervision
Department, highlights and comments upon trends in the development of credit institutions,
and reports changes in and amendments to Latvian banking laws and regulations.
1999 was a year of steady and orderly growth for Latvian banks and credit unions. Positive
banking indicators are proof of the recovery from the Russian financial crisis. Banks have
expanded lending and introduced new financial services. The introduction of consolidated
supervision enables us to assess risks arising from capital ties and to take more informed
decisions about banks' financial standing. A qualitatively new stage in banking supervision
has been achieved.
During the challenging years since the Department was established, its staff has gained
experience and skills. Likewise, a regulatory framework for banking activities, based on
international standards, has been developed. The Department's achievements have also been
recognised internationally, and Latvia's system for banking supervision now ranks among the
strongest in the countries of Central and Eastern Europe. Latvia is one of the first countries to
have received a positive evaluation by the IMF's experts regarding compliance of its legal
framework and supervisory practice with the Basle Core Principles for Effective Banking
Supervision. Our main priority, however, is to maintain domestic confidence in the Latvian
banking sector, as public confidence is a prerequisite for a successful operation of banks.
Public confidence can be achieved by ensuring that market participants are well-informed
about the supervisory system and events in the banking sector. To enhance competition in the
banking sector, the public is kept well-informed and market discipline is combined with
traditional supervisory practices.
We hope that this publication will increase the public's understanding of how the Department
has fulfilled its responsibilities, and explain methods of credit institutions supervision, as well
as current developments in the banking sector
Armands Steinbergs
Head of Credit Institutions Supervision Department
Bank of Latvia
Supervision of Credit Institutions
Evolution of Credit Institutions and Supervision in Latvia (1991-1998)
The Bank of Latvia, which is the central bank of the Republic of Latvia, was established on
July 31, 1990. The Laws "On the Bank of Latvia" and "On Banks", which came into effect on
May 19, 1992, set forth the obligations and rights of the Bank of Latvia, among them
supervision of credit institutions. (From the outset, entities subject to supervision were banks,
credit unions, pawn shops and branches of foreign banks, but with the Law "On Credit
Institutions" coming into effect in 1995, pawn shops were excluded from the list of
institutions under supervision.) With this task in mind, the Bank organised the Credit
Institutions Supervision Department.
From 1992 to 1994, the Latvian banking sector expanded at a rapid pace, and during this
period, banks' assets grew more than threefold. In 1993, over 60 banks were licensed in Latvia
(see Appendix 1). In 1994, the Bank of Latvia licensed the first branch of a foreign bank, the
Riga Branch of Societe Generale (France). The first permit to open a representative office was
issued to the German bank Dresdner Bank AG (see Appendix 2); it is the only representative
office of a foreign bank operating in Latvia.
Growth in the banking sector was more rapid than in the other sectors of the national
economy; and this highlighted two short-term goals. A system for supervising credit
institutions had to be set up and appropriate legislative and regulatory frameworks had to be
designed. It was in the period from 1993 to 1994 that the Bank of Latvia adopted a set of
banking requirements, basing them mainly on the recommendations of the Basle Committee
on Banking Supervision, which embrace global experience and in many cases are the source
for the standards of EC directives. Pursuant to Bank of Latvia regulations, credit institutions
started making loan loss provisions. All credit institutions had to meet a number of
requirements, among them capital adequacy and liquidity requirements and restrictions on
exposures.
The 1995 banking crisis was a crucial event for the Latvian banking sector. The banking
sector's rapid expansion, which was accompanied by rash management policies in several
banks and took place in an environment of slower economic growth, led to the crisis. Deposits
of corporate and individual customers grew dramatically; however, domestic facilities for
profitable placement of funds were inadequate. Ownership transfer was not carried out at a
sufficiently rapid pace, and markets for real estate and securities were weak. In 1995, in the
wake of the crisis, the activities of 15 banks were discontinued. Among the fifteen there were
also sizeable banks: the JSC Banka Baltija, the JSC Latvijas depozitu banka and the JSC
Centra banka.
To reinforce the banking sector, the Latvian Government and the Bank of Latvia initiated an
extensive reform program. In 1995, the adoption of the Law "On Credit Institutions", which
replaced the Law "On Banks", was followed by a set of the Bank of Latvia's regulations,
based on the Law. The new Law detailed the obligations and rights of the Bank of Latvia with
respect to the supervision of credit institutions. The Law, along with amendments to the
Administrative Code of Latvia and the Criminal Code of Latvia, increased the responsibilities
of credit institutions, their shareholders, management, employees and customers. In several
cases, the Law "On Credit Institutions" sets even stricter requirements (capital adequacy,
restrictions on exposures to third parties related to a credit institution, etc.) than EC directives,
which are targeted at developed economies and are not sufficiently rigorous to provide for a
stable and smooth operation of the banking sector in a transition economy. Pursuant to the
Law "On Credit Institutions", accounting procedures in credit institutions are to be conducted
in accordance with the Law "On Accounting" and Bank of Latvia regulations. The latter are to
comply with Republic of Latvia laws and International Accounting Standards. Annual
financial statements of banks have to be audited in accordance with International Standards on
Auditing. As of 1995, the Bank of Latvia approves a list of auditing companies, therein
including only international companies. Since 1993, the list is binding on the largest banks,
and since 1995, on all credit institutions.
In 1995, steps were taken to enhance supervision, and, under the PHARE program,
international auditing companies began to conduct audits of banks' interim (among them,
semi-annual) financial statements and internal control systems. Also, to make banking
activities more transparent and clear to the public, the Bank set a requirement to banks to
publish their quarterly balance sheet. As a result, bank customers could follow developments
within banks, and this improved decision-making when choosing a bank for transactions.
From 1996 to 1997, the Bank of Latvia expanded the regulatory requirements, achieving a
number of positive results: banks' capital base strengthened; their profitability increased; the
quality of assets improved; and depositors' confidence grew. Major foreign investors acquired
holdings in a number of banks.
Initially, the focus was on on-site supervision; however, it shifted to off-site supervision and
contact with banks' management because the banking sector grew, management quality in
banks improved and banks' safety increased. To reinforce the achievements of the banking
sector and to provide for further growth, the efficiency of internal control systems at credit
institutions became the priority.
As part of the ongoing harmonisation of the Latvian legislation with EC directives, the
Saeima of the Republic of Latvia adopted the Law "On the Prevention of Laundering of
Proceeds Derived from Criminal Activity" (in 1997) and the Law "On Natural Person Deposit
Guarantees" (in 1998).
In the second half of 1998, Latvian credit institutions' financial standing was impaired by the
Russian financial crisis. A number of banks had acquired securities of the CIS countries, and
these constituted a large part of their assets. Even those banks that had not made large
investments in this region felt indirectly the impact of the crisis, because deposits of and
transactions with customers related to eastern markets decreased. As a result of the Russian
crisis, the licences of two small banks were revoked.
The deterioration in the overall situation in Zone B countries (non-OECD countries) and the
unprecedented events in Russia were the reasons why the Bank of Latvia resolved to reassess
the degree of risk for claims on central banks and central governments in Zone B countries
denominated in the national currencies of these countries and to raise the degree of risk
assigned to such assets from 0% (as established in accordance with internationally approved
practice and EU requirements) to 50%. Restrictions regarding exposures that arise from
transactions with residents of Zone B countries as well as total exposures to residents of Zone
B countries were established. These requirements enhanced the diversification of banks'
investments in Zone B countries and reduced country risk.
In May 1998, the Saeima of the Republic of Latvia adopted amendments to the Law "On
Credit Institutions" establishing consolidated supervision of credit institutions. The
amendments also laid the legal foundation for the Bank of Latvia's cooperation with other
domestic and foreign supervisory authorities. Substantial changes were made to the procedure
for liquidating a credit institution, the process of insolvency and bankruptcy, the procedure for
applying rehabilitation, and the activities of the administrator and liquidator. The Bank of
Latvia was granted the right to control the activities of the administrator and liquidator.
The skills and professionalism of the Bank of Latvia's supervisors was recognised by the
IMF's invitation to the project "Contingency Planning for the Largest Banks of Ukraine" in
the second half of 1998. The tasks under the project were as follows: to evaluate the seven
largest Ukrainian banks in accordance with the CAMELS rating system; with a view to the
overall situation in that country and banks, to develop recommendations concerning banking
regulations; and work out proposals for restructuring and rehabilitating particular banks.
Organisation and Tasks of the Credit Institutions Supervision Department
The main objective of the Bank of Latvia's Credit Institutions Department is to promote the
stability, soundness and development of the credit institutions system. The mere existence of
a supervisory system, however, cannot fully guarantee the soundness of credit institutions.
Having such strict guarantees in place would be an unacceptable interference in the market.
The purpose of supervision is to detect potential problems and to assist banks in preventing
them or curbing their adverse economic consequences. The Bank of Latvia, therefore, places
the activities of credit institutions under various restrictions whose aim is to minimise risks,
while influencing the management decision making process as little as possible.
The Credit Institutions Supervision Department has three divisions (see Appendix 3): the
Banking Regulations and Analysis Division, the Legal and Licensing Division, and the
Supervision Division.
Banking Regulations and Analysis Division
The objective of the Banking Regulations and Analysis Division is to develop and improve
banking regulations, implement the requirements of EC banking and accounting directives,
and follow the Core Principles for Effective Banking Supervision as set forth by the Basle
Committee on Banking Supervision with the aim of promoting the stability and evolution of
the system of credit institutions.
With a view to the Division's main objectives, its staff has the following tasks:
1) to participate in drafting and amending Latvian banking laws and regulations as well as
accounting regulations, and preparing Bank of Latvia regulations;
2) with trends in the Latvian banking sector in mind, to analyse regulatory requirements of
other countries (especially of those in Central and Eastern Europe), EC banking directives,
recommendations of the Basle Committee on Banking Supervision and the IMF's analytical
papers; and work out proposals for introducing and improving regulatory requirements;
3) to cooperate with the Association of Latvian Commercial Banks and provide consultations
with respect to banking regulations;
4) to produce analytical papers on the development of the Latvian supervisory system and the
banking sector;
5) to inform the public about the development of the Latvian banking sector, supervision and
the requirements of laws and regulations;
6) to collaborate with international organisations and other domestic and foreign supervisory
authorities.
Legal and Licensing Division
The objectives of the Legal and Licensing Division are as follows: to provide for the
compliance of the supervision of credit institutions with the requirements of the Law "On
Credit Institutions", other Republic of Latvia laws and regulations, and Bank of Latvia
regulations; to receive, review, compile and analyse documents and information concerning
the licensing of credit institutions and granting other Bank of Latvia permits to credit
institutions; and subsequently submit this information to the Bank of Latvia's senior
management for further consideration.
With a view to these objectives, the staff of the Legal and Licensing Division has the
following tasks:
1) with respect to the activities of credit institutions and supervision, to provide information
on legal issues, provide consultations on and explanations of Republic of Latvia laws and
regulations; collaborate with the Association of Cooperative Credit Unions of Latvia; where
required, participate in teams conducting on-site supervision of credit institutions;
2) to participate in drafting banking laws and regulations; express opinion on and work out
amendments to draft regulations prepared by other organisational units of the Bank of Latvia;
upon request of other public institutions, assess draft laws and regulations prepared by these
institutions;
3) to represent the Bank of Latvia in court where proceedings have been initiated with respect
to the liquidation or insolvency of a credit institution and other activities of a credit
institution;
4) to collaborate with the liquidator and the administrator in the insolvency process of a credit
institution; compile and analyse information submitted by liquidators and administrators;
participate in reviewing rehabilitation plans submitted by administrators and working out
draft resolutions for submission to the Executive Board of the Bank of Latvia;
5) to receive and review documents submitted by credit institutions seeking to obtain licences
and Bank of Latvia permits; prepare draft resolutions and forward them to the Executive
Board of the Bank of Latvia.
Supervision Division
The main objectives of the Supervision Division are as follows: to detect causes of possible
problems in credit institutions on a timely basis; within the scope of competency, to take
measures to eliminate these causes; and to react adequately so as to mitigate the adverse
effects of problems in individual credit institutions on the banking sector.
To pursue its objectives, the staff of the Supervision Division ensures ongoing and
comprehensive banking supervision. The Division's staff has the following tasks:
1) to analyse and assess banking indicators and risk management policies; review the
founding documents submitted by a credit institution seeking to obtain a licence; monitor the
quantitative and qualitative changes in banks' performance indicators, and compliance with
banking regulations;
2) to analyse risk management policies and procedures with respect to new financial services,
submitted by banks;
3) to conduct on-site inspections in credit institutions at least once a year (the Bank of Latvia
decides on the scope and frequency of inspections in each bank, taking into account the
ongoing analysis of banking activities);
4) where necessary, conducts special-purpose inspections in banks, examining selected
financial services (lending, management of the trading book, trust operations) and compliance
with regulatory requirements;
5) where intensified supervision procedures have been applied, acts as proxy for a credit
institution.
Activities of the Credit Institutions Supervision Department in 1999
1999 was a tough year for Latvian banks as they had to cope with the consequences of the
1998 Russian financial crisis; however, it proved that the Latvian banking sector was stable
and flexible in adapting to the overall market conditions.
In 1999, the Bank of Latvia did not issue licences to banks, but it licensed four credit unions:
Raunas Kooperativa krajaizdevu sabiedriba, Punu Kooperativa krajaizdevu sabiedriba,
Jurnieku forums and Zosenu Kooperativa krajaizdevu sabiedriba. The Bank refused to issue
licences to four credit unions, because the submitted founding documents failed to meet the
requirements of Republic of Latvia laws and Bank of Latvia regulations.
Pursuant to the Law "On Credit Institutions", as of December 31, 1999, the paid-up share
capital of registered banks has to be the lats equivalent of 5.0 million euros, translated into
lats by applying the Bank of Latvia's exchange rate for the euro. In 1999, 14 banks received
the Bank of Latvia's permission to increase their share capital, among them were six banks
that had to raise their share capital to comply with the said requirement of the Law.
For the first time, in accordance with the 1998 amendments to the Law "On Credit
Institutions", the rehabilitation process was initiated in two banks recognised as insolvent, and
ended successfully with the restoration of these banks' solvency. During the rehabilitation of
the JSC Rigas Komercbanka, the bank which had suffered from the Russian crisis most
severely, most of creditors' claims were capitalised, additional funds were attracted from
shareholders and the number of shareholders was increased thereby restoring the bank's
solvency. The bank's name was changed for the JSC Pirma Latvijas Komercbanka. When
rehabilitating the JSC Latvijas Industriala banka, the bank was reorganised by merging it
with the JSC Baltijas Starptautiska banka, to which all liabilities and rights were transferred.
In 1999, the Bank of Latvia revoked the licences of four banks. The licence of the JSC Bank
Land was revoked for the failure to meet the capital requirements stipulated in the Law "On
Credit Institutions" and regular non-compliance with the requirements governing the activity
of credit institutions set out in the same law. The JSC Latvijas Kreditbanka was reorganised
into an undertaking other than a credit institution. Two banks - the JSC Rigas Naftas un
kimijas banka and the insolvent JSC Latvijas Industriala banka - were reorganised by
merging them with other banks. As they ceased to exist, their licences were revoked.
In 1999, the liquidation of 32 banks and two credit unions was continued (the liquidation of
five banks was completed).
In 1999, the Bank of Latvia's staff conducted 56 inspections, of which 49 were in banks. As in
previous years, attention was mainly directed at the assessment of risk assets, analysis of
internal control systems and evaluation of internal audit.
The growing lending activity of banks throughout 1999 led to an increase in loans granted and
the introduction of new types of credit. Hence, in bank examinations attention was
increasingly paid to the assessment of borrowers' financial standing and solvency so as to
timely detect difficulties that might arise in repaying loans.
As banks expanded their activity and introduced new financial services, the focus was on the
improvement and development of internal control systems at banks to provide for a prudent
management of traditional and new risks. During on-site inspections, a comprehensive
assessment was conducted with respect to the ability of a bank's management to identify and
manage operational risks. Attention was directed at the quality of a bank's internal audit
function: the qualifications of internal auditors, suitability for the position and independence
from the management were evaluated. Likewise, the Bank's examiners assessed the adequacy
of audits conducted, i.e. whether these audits had been sufficient to ensure adequate
monitoring of the internal control system and assessment of its effectiveness.
To get a timely, comprehensive and safe assurance that the Bank's information and other
systems will be capable of smooth operation throughout the Year 2000 rollover period, a
working group for coordinating solutions to the Y2K problem was formed in October 1998.
The Credit Institutions Supervision Department participated in the Bank of Latvia's
programme for addressing the Y2K problem where the compliance of the banking sector was
involved.
On May 13, 1999, the Board of Governors of the Bank of Latvia adopted the "Regulation for
Year 2000 Compliance". The regulation was binding on all banks and branches of foreign
banks registered in Latvia, which had to report to the Bank of Latvia on the course of their
activities to achieve Year 2000 compliance. The information received was analysed and
submitted to the Board of Governors of the Bank of Latvia and the working group for
coordinating solutions to the Y2K problem. The staff of the Credit Institutions Supervision
Department regularly checked on banks to determine whether they complied with the said
regulation and followed their own plans when addressing the Y2K problem, and discussed the
course of measures taken with banks' management.
Cognisant of the possible effect of the Y2K problem on financial institutions, the Credit
Institutions Supervision Department, in collaboration with the Information Systems Audit
Division of the Internal Audit Department at the Bank of Latvia, conducted the relevant audits
in 18 Latvian banks. Upon the Bank of Latvia's request, Arthur Andersen, Deloitte & Touche
and PricewaterhouseCoopers assessed the Year 2000 compliance of five banks.
During the rollover period, none of the banks had liquidity problems and none of the credit
institutions reported any operational disturbances in Latvia.
Under the agreement concluded between the Bank of Latvia and the European Commission,
the On-Call Audit Assistance Programme continued to be implemented. This programme
enabled the Bank of Latvia to assess banks' internal control systems, their Year 2000
compliance, and the correctness of consolidated financial statements and reports on
compliance with the regulatory requirements.
The credit institutions information system, an in-house information system aimed at
enhancing the effectiveness of credit institutions supervision, went live in 1997. Information
is used for analytical reports, and it can be classified and grouped by topic for supervision
purposes. In the course of time, the system has been expanded and improved. In 1999, the
system was updated to reflect amendments in banking laws and regulations.
Where the Bank of Latvia has decided on applying the intensified supervision procedures to a
credit institution, an employee of the Supervision Division may be appointed as a proxy. The
responsibility of a proxy is to monitor whether restrictions imposed as a result of the
intensified supervision procedures are complied with, to assess the financial standing of the
bank and to undertake a set of measures to stabilise the activity of the bank. In 1999, the Bank
of Latvia appointed its proxies in three banks.
Cognisant of the significance of cooperation in the field of supervision, the Bank of Latvia
concluded its first agreement on cross-border supervision with the Financial Supervision
Authority of Finland (Rahoitustarkastus) in September 1999. Likewise, the Bank reached
accord with the supervisory authorities in Estonia, Lithuania, Russia, Sweden and Germany
with respect to draft agreements on cross-border supervision.[1]
The staff of the Credit Institutions Supervision Department continuously improve their
professional skills by participating in seminars and conferences both in Latvia and abroad, by
paying visits to supervisory authorities outside Latvia and by inviting advisors to the Bank of
Latvia. Most training programmes for the staff of the Credit Institutions Supervision
Department have been organised in collaboration with the Banque de France, the Deutsche
Bundesbank, the Federal Reserve System and the Joint Vienna Institute. Also, staff members
participate in training programmes organised by the Group of Banking Supervisors from
Central and Eastern Europe.
In 1999, upon request of the National Bank of Ukraine, employees of the Credit Institutions
Supervision Department participated in a seminar organised for members of the Ukrainian
Parliament to discuss draft banking laws, reporting on Latvian banking laws and regulations
that establish and govern the status and activities of the central bank and credit institutions,
and set forth banking requirements and procedures for a credit institution's liquidation and
insolvency.
The Credit Institutions Supervision Department successfully collaborates with the Association
of Cooperative Credit Unions of Latvia, which was established in 1999 with the aim of
promoting, developing and supporting a movement of credit unions in Latvia, training
individuals connected with credit unions, and collaborating with similar organisations in other
countries. Active cooperation was continued with the Association of Latvian Commercial
Banks with respect to the harmonisation of draft banking regulations and organisation of
training programmes for employees of credit institutions to ensure a better understanding of
and compliance with new banking regulations.
Developments in the Regulatory Framework for Banking Activities
In 1999, the Credit Institutions Supervision Department continued to harmonise banking
regulations with the requirements of EC directives and the Basle Core Principles for Effective
Banking Supervision.
The "Regulation for Receiving Bank of Latvia Permits Governing Credit Institution
Operations" came into effect on May 1, 1999, replacing the "Regulation for Amending the
Charter, Changing the Shareholders, the Initial Capital, the Management, the Chief
Accountant, the Legal Address, the Name of Credit Institutions, and Undertaking Merger or
Split-Up of Credit Institutions", which was approved by the Board of Governors of the Bank
of Latvia on March 15, 1996. In the new regulation, the requirements concerning the
identification of a credit institution's shareholders, their financial standing and qualifying
holdings in other undertakings (business ventures) are set out more explicitly and expanded,
with particular care expended to establish whether said undertakings (business ventures)
include credit institutions, financial institutions or financial holding companies. The
regulation lists the relevant documents to be submitted. The "Regulation for Receiving Bank
of Latvia Permits Governing Credit Institution Operations" establishes that a credit institution
that intends to render new financial services must inform the Bank of Latvia in writing 30
days in advance and concurrently submit to the Bank a description of policies and procedures
for managing the inherent risks.
Pursuant to the amendments to the Law "On Credit Institutions", the consolidated supervision
of banks was introduced in Latvia on January 1, 1999. In view of this, the Board of Governors
of the Bank of Latvia adopted the "Regulation for Consolidated Supervision of Banks" (in
effect as of May 1, 1999). This development is vital for the harmonisation process of Latvian
banking regulations with the requirements of EC directives and enhancing the effectiveness of
supervision. Pursuant to the Law "On Credit Institutions", banks must comply with the capital
adequacy requirement, limits on exposures, restrictions on investment in the movable
property and real estate and the share capital of undertakings (business ventures) on a
consolidated basis. The regulation is binding on banks whose subsidiaries and joint ventures
are credit institutions or financial institutions and on banks whose parent undertakings are
financial holding companies registered in Latvia. The new regulatory requirements were
introduced to restrict the transfer of banking activities to unregulated or underregulated
related undertakings, to evaluate additional risks inherent in the activities conducted by banks
through related undertakings and to make more informed decisions about the financial
standing of these banks. At present, Latvian banks mainly control small leasing companies
and have also acquired qualifying holdings in the share capital of insurance, brokerage and
investment companies.
When preparing annual financial statements for 1999 and the subsequent years, credit
institutions have to comply with the "Regulation for Consolidated Annual Financial
Statements of Banks". The regulation is based on the relevant EC directives and, pursuant to
the Law "On Credit Institutions", has been designed so as to include the requirements of
International Accounting Standards. Consolidated annual financial statements must disclose
information about the financial standing and activity results of the group consisting of a bank
(a parent undertaking) and its subsidiaries to any person or investor wishing to obtain such
information.
The "Regulation for Compiling 'Report on Country Risk' " (adopted on July 15, 1999 by the
Board of Governors of the Bank of Latvia; in effect as of October 1, 1999) will regularly
provide the Bank of Latvia, the supervisory authority, with information that will enable it to
evaluate country risk inherent in credit institutions' operations. Country risk is associated with
assets and off-balance-sheet liabilities arising from transactions with non-residents (including
governments), and is related to losses that can occur if the foreign borrower (including
governments) defaults on its liabilities due to political, social or economic conditions in the
borrower's country. Pursuant to the regulation, the Bank of Latvia regularly receives
information on the concentration of banks' assets and off-balance-sheet liabilities in individual
countries, the maturity profile of assets, and factors influencing country risk.
The "Regulation for Assessing Assets and Off-Balance-Sheet Liabilities" (adopted on July 15,
1999 by the Board of Governors of the Bank of Latvia; in effect as of January 1, 2000) was
worked out in view of considerable qualitative changes in lending and credit risk management
practices of Latvian banks. The regulation replaced the "Provisions for Evaluating Credits and
Off-Balance-Sheet Items" approved by the Board of Governors of the Bank of Latvia on
January 17, 1996. The "Regulation for Assessing Assets and Off-Balance-Sheet Liabilities"
applies to evaluation of all types of loan, and other assets and off-balance-sheet liabilities
involving credit risk. The regulation provides guidelines for evaluating the quality of banks'
assets and off-balance-sheet liabilities, classifying assets and off-balance-sheet liabilities in
accordance with the assigned credit risk, establishing provisions for losses, and reporting
changes in the quality of assets and off-balance-sheet liabilities in financial statements. The
regulation was worked out in accordance with the consultative paper of the Basle Committee
on Banking Supervision "Sound Practices for Loan Accounting and Disclosure", which was
published in October 1998 and details the requirements of the Basle Core Principles for
Effective Banking Supervision.
The "Regulation for Calculating Capital Adequacy"[2] has been developed in view of the need
to introduce EC banking directive 93/6/EEC "On Capital Adequacy of Investment Firms and
Credit Institutions". The directive establishes capital requirements with respect to market
risks. The new regulation will replace the procedure for calculating the capital adequacy ratio
set out in the "Regulation for Calculating Credit Institution Performance Indicators".
Previously the procedure was based on credit risk evaluation. Pursuant to the new regulation,
the capital requirement is also imposed to cover market risks, including foreign exchange risk,
which is inherent in all activities of a credit institution, and position, commodities, settlement
and counter-party risks, which are inherent in a credit institution's trading book.
The regulation will come into effect in stages. As of July 1, 2000, credit institutions will be
required to calculate the capital adequacy requirement for assets and off-balance-sheet
liabilities with respect to credit and foreign exchange risks. As of January 1, 2001, the capital
adequacy requirement will be imposed on a credit institution's trading book positions to cover
inherent market risks. Where the total of a credit institution's trading book positions exceeds
the minimum criteria, the credit institution has to comply with the capital requirements with
respect to position, commodities, settlement and counter-party risks.
In 1999, work on a number of draft laws and regulations was begun to continue the
harmonisation of the Latvian banking legislation with EC directives and introduction of the
Basle Core Principles for Effective Banking Supervision, and to reflect the acquired
experience in supervision of credit institutions.
The Bank of Latvia staff participates in drafting the new amendments to the Law "On Credit
Institutions". The definitions for the following terms are to be changed slightly: "credit
institution", "bank", "credit union", "branch of a foreign bank" and "means of payment". A
number of proposed amendments refer to requirements with respect to close links between a
credit institution and natural or legal persons, as set forth in Directive 95/26/EC "On
Reinforcing Prudential Supervision". If these requirements are introduced, the Bank of Latvia
will be able to monitor more successfully holdings of credit institutions in undertakings
(business ventures), financial institutions and foreign banks. Likewise, where necessary, the
Bank will be authorised to prohibit the acquisition of such holding or to ask for its
termination. The amendments might also expand the range of officials subject to the
requirements concerning education and professional experience, as set forth in the Law "On
Credit Institutions"; at present, only persons applying for the office of chairperson of the
executive board, member of the executive board, executive director, chief accountant,
chairperson of the audit commission, member of the audit commission of a bank or a credit
union, or manager of a branch of a foreign bank are subject to such requirements. The
proposed amendments set forth that the Bank of Latvia has the power to require the dismissal
of officials not complying with the above requirements. Likewise, it is stipulated that credit
institutions, for supervisory purposes, may be asked to submit auditors' long-form report
covering a number of specified issues.
Work on the draft "Regulation for the Register of Credit Institutions' Debtors" has been
begun, because the Law "On Credit Institutions" requires that for the purposes of
establishment and functioning of the register of credit institutions' debtors, a credit institution,
pursuant to Bank of Latvia regulations, provides the Bank of Latvia with information on its
debtors and the course of settling their liabilities.
To follow best world models in minimising money laundering, the "Guidelines for
Developing Procedures for Identifying Suspicious Financial Transactions"[3] were drafted.
The Law "On the Prevention of Laundering of Proceeds Derived from Criminal Activity" sets
forth that the management and employees of a credit institution must report to the Office for
Preventing Laundering of Proceeds Derived from Criminal Activity (Disclosures Office) any
facts that due to any circumstances are suspected to involve money laundering or attempted
money laundering, and refrain from transactions involving money laundering or attempted
money laundering. It is difficult to recognise operations that may be related to money
laundering, and this process directly involves decisions made by individuals. The Bank of
Latvia recommendations lay down core principles to be observed by credit institutions when
describing control procedures for identifying and avoiding suspicious financial transactions.
[1] The agreement with the Bank of Estonia was signed in March 2000 and with the Bank of
Lithuania in June 2000.
[2] Adopted on March 16, 2000 by the Board of Governors of the Bank of Latvia.
[3] Adopted on July 13, 2000 by the Board of Governors of the Bank of Latvia.
Activities of Banks
Development of Banks
At the end of 1999, in Latvia, there were 23 banks (see Appendix 4), the Riga Branch of
Societe Generale (France)[1], and the representative office of Dresdner Bank AG (Germany).
Foreign investment was made in 20 banks; in 12 of these, foreign shareholders owned over
50% of the share capital. Six banks were subsidiaries of foreign banks: the JSC
MeritaNordbanken Latvia[1], the JSC Hansabanka, the JSC Latvijas Unibanka, the JSC
Saules banka, the JSC Vereinsbank Riga and the JSC Latvijas Biznesa banka. The Latvian
Government was the sole owner of the JSC Latvijas Hipoteku un zemes banka.
Capital concentration in the banking sector continued. As at December 31, 1999, the assets of
five largest banks, in each of which assets totalled over 100 million lats, accounted for 61.7%
of banks' assets.
Assets
The three years following the restoration of Latvia's independence were marked by rapid
expansion in the banking sector. From December 1992 to December 1994, banks' assets
increased more than threefold. Having coped with the aftershocks of the 1995 crisis, banks
started gaining stability. The 1996 results confirmed growth in the banking sector. From
December 1995 to December 1997, banks' assets increased more than two times (see Chart 1).
Positive development trends characteristic of Latvian banks in 1996 and 1997 continued in
the first months of 1998. An increase in banks' assets could be observed every month, as both
residents and non-residents placed their funds with Latvian banks, predominantly as deposits.
In the second half of 1998, when the Russian crisis broke out, banks' assets decreased.
In 1999, the ongoing positive development of Latvian banks was reflected in strong
performance indicators: assets rose by 16.4%, reaching 1 962.2 million lats, the largest
amount since the restoration of Latvia's independence.
Structure of Assets
Different growth patterns of assets items resulted in changes in the structure of banks' assets
(see Chart 2).
Securities
Investment in securities, which accounted for 10.0% of banks' assets in 1994, has shown
considerable changes. After the 1995 banking crisis, banks looked for profitable investment
opportunities, and at the end of 1997, their investment in securities increased 3.9 times over
the end-1994 level. At the end of 1997, securities accounted for 25.2% of banks' assets. Until
early 1996, banks mainly acquired Latvian government securities. The share of these
securities in banks' portfolio of government securities was 93.1% in 1994, 84.8% in 1995, and
67.2% in 1996. In 1997, due to higher yields, banks' started investing in foreign,
predominantly CIS, government securities.
In 1999, the situation was different and the share of securities in banks' assets decreased to
17.0%; however, banks increased their security portfolio by 8.1%. The share of securities of
OECD countries increased in the portfolio.
Loans
In 1994, lending was one of the major activities of Latvian banks: gross loans accounted for
44.4% of assets (see Chart 2). After the 1995 banking crisis, banks' assets decreased, as did
the loan portfolio and the share of loans in banks' assets. In 1996, as banks started to expand
lending, the loan portfolio increased by 38.9%; however, the share of loans in banks' assets
continued to decrease. The 74.4% increase in loans granted during 1997 was a result of
improving economic environment and falling discount rates of Latvian Treasury bills. Of
loans, 75.1% was issued to domestic borrowers. In 1998, gross loans continued to increase
(by 46.0%), yet at a less rapid pace than in 1997. The share of loans reached 43.4% of banks'
assets. Loans to residents accounted for 78.3% of loans.
In 1999, banks' loan portfolio increased by 16.1%, totalling 850.6 million lats. The share of
loans in banks' assets remained at the 1998 level, 43.4%.
The share of loans to residents continued to increase in 1999, reaching 79.0% of the total. The
expanding shares of loans granted to and deposits received from residents are indicative of the
banking sector's growing interest in the domestic market. The Russian financial crisis
eliminated profitable, yet risky, investment possibilities provided by that country, and this
made Latvian banks focus on financing the Latvian economy.
At the end of 1999, loans to manufacturing, trade, and transport, storage and communication,
the three major sectors of the Latvian economy, accounted for 26.4%, 24.8% and 13.0% of
loans to domestic enterprises, respectively.
The most widely used type of credit was commercial credit, which accounted for 41.4% of
loans to enterprises and private persons. The share of industrial credit in loans to enterprises
and private persons also continued to expand, reaching 25.1% at the end of the year.
With the Latvian economy growing, the share of loans to the public sector decreased (see
Chart 3). As the market for real estate developed, loans to private persons increased.
The maturity profile of loans showed positive development trends. Loans with a maturity of
over one year increased, and their share in banks' loans was 34.0% in 1996, 43.4% in 1997,
45.0% in 1998, 64.8% in 1999 (for the maturity profile of banks' loan portfolio, see Chart 4).
These changes are indicative of a gradual transition from short-term lending to trade to
lending to the goods-producing sector and the service sector.
Liabilities
Structure of Liabilities
Different growth patterns of liabilities items caused changes in the structure of banks'
liabilities (see Chart 5). Banks received funds mainly in the form of deposits.
The share of deposits in banks' liabilities increased from 61.8% at the end of 1998 to 65.8% at
the end of 1999.
Although Latvian banks' liabilities to credit institutions increased by 6.2% during 1999, their
share in total liabilities decreased by 1.2 percentage points.
Deposits
The banking crisis, which was concurrent with a decrease in depositors' (mainly private)
confidence in the first half of 1995, and the blocking of depositors' funds in banks, whose
licences were revoked due to insolvency, led to a decrease in deposits held with Latvian banks
(for deposits in breakdown by depositor, see Chart 6).
In 1996, the increase in deposits, especially those of private enterprises, pointed to gradual
improvements in the country's economic position. At the end of 1996, deposits amounted to
686.0 million lats (a year-on-year increase of 29.5%), exceeding the pre-crisis level (623.8
million lats at the end of 1994). At the end of 1997, deposits totalled 1 080.4 million lats,
exceeding by 57.5% the end-1996 level. The increase was mainly achieved by attracting funds
from private enterprises. At the end of 1998, deposits received by banks declined by 37.8
million lats or 3.5%. Influenced by the Russian financial crisis, non-residents' deposits
declined by 15.7%. At the same time, residents' deposits grew.
At the end of 1999, deposits reached 1 290.8 million lats, increasing by 23.8% compared with
the level at end-1998. The 1999 level is the all-time high recorded for deposits with Latvian
banks. This confirms public confidence in Latvian banks.
The maturity profile of deposits showed positive changes: growth was recorded for the shares
of short-, medium- and long-term deposits. The share of demand deposits declined from
74.9% at the end of 1998 to 68.3% at the end of 1999. At the same time, short-term deposits
increased by 65.2%, reaching 28.1% of total deposits (for the maturity profile of deposits, see
Chart 7).
Liabilities to Credit Institutions
In 1995, the domestic interbank market was inactive. In 1996, the situation was much
different, and at the end of the year, liabilities to domestic credit institutions reached 21.2
million lats (see Chart 8). Liabilities to credit institutions in non-OECD countries accounted
for 54.4% of liabilities to credit institutions. At the end of 1999, the market situation again
changed significantly: liabilities to credit institutions in OECD countries constituted 63.2% of
liabilities to credit institutions. The maturity profile of liabilities to credit institutions in
OECD countries changed significantly during 1998. At the end of 1999, the largest part of
liabilities to credit institutions in OECD countries were long-term. At the end of 1997,
liabilities having a maturity of one year or over one year constituted 57.2% of liabilities to
credit institutions in OECD countries, whereas at the end of 1999, 73.1%.
Equity
Pursuant to Republic of Latvia laws and regulations, the own funds of banks had to be at least
100.0 thousand lats before March 31, 1996, 1.0 million lats as of April 1, 1996, 2.0 million
lats as of April 1, 1998, and as of January 1, 2000, the lats equivalent of 5.0 million euros
according to the Bank of Latvia's exchange rate. This requirement promoted a gradual
increase in banks' equity.
The paid-up share capital of banks grew by 34.2% in 1997 and by 29.6% in 1998 (for banks'
paid-up share capital, see Chart 9). In 1999, the paid-up share capital of banks increased by
4.3%. As banks incurred losses in 1998, their equity fell below the paid-up share capital in
1998 and 1999.
At the end of 1998, foreign investment in the share capital of Latvian banks was 67.7% (a
year-on-year increase of 2.7 percentage points; for banks' share capital in breakdown by
investor, see Chart 10). Foreign investment was made in the capital of 24 banks (out of 27
banks operating in Latvia). In 15 banks, foreign shareholders owned over 50% of the share
capital. In 1999, the share of foreign shareholders' holding in Latvian banks declined slightly
(by 1.5 percentage points), to 66.2% at the end of the year. In 1999, shareholders from Estonia
and Sweden significantly increased their share in Latvian banks' share capital (by 3.3
percentage points and 5.0 percentage points, respectively). This can be explained with the fact
that two large Scandinavian banks - Skandinaviska Enskilda Banken AB and
FoereningsSparbanken AB (Swedbank) - expanded their activity in the Baltic financial
market. The holding of the European Bank for Reconstruction and Development in the share
capital of Latvian banks increased; however, its share in the total decreased. Russian
investment in banks' capital decreased by 1.4%, as did its share in the total (by 1.4 percentage
points). Shareholders from the United States increased their investment; however, its share in
the total decreased by 3.5 percentage points. The breakdown of Latvian banks' share capital
by shareholder revealed positive trends: the number of shareholders related to off-shores
decreased, as did their share in the total.
Profitability
In 1996, banks had successfully recovered from the 1995 banking crisis, and their profit was
30.3 million lats. The main sources for profit were investment in securities and foreign
exchange transactions (for banks' income and expense, see Chart 11).
In 1997, the profit of banks reached 46.0 million lats. Income on trading securities almost
doubled. With the quality of banks' assets improving, net impairment charges decreased
considerably.
Latvian banks held mainly Russian government securities with a view to high income from
risky CIS markets; therefore, banks' losses for 1998 were considerable. Banks that had lent to
domestic enterprises exporting their services or goods to eastern markets also incurred
considerable losses. The losses of the latter, however, were much lower than those incurred
due to holdings of Russian government securities. At the end of 1998, in the monthly
financial position reports, banks reported a loss of 28.4 million lats. At the beginning of 1999,
when many Russian banks were insolvent and defaulted on their liabilities, assets placed in
Russia were reassessed. As a result, according to banks' annual reports for 1998 (submitted by
March 31, 1999) losses totalled 102.6 million lats.
In 1999, banks' profit for the year amounted to 17.9 million lats. The main sources for profit
were interest income on loans, commission and fee income and income on foreign exchange
transactions (55.5%, 23.5% and 9.7% of total income).
With banks' assets growing, administrative expenses rose, particularly expenses for
acquisition of modern banking technologies. From 1995 to 1997, the ratio of administrative
expenses to assets decreased, stabilising at approximately 4% in 1998 and 1999 (see Chart
12).
The return on banks' assets was 1% in 1995 and 1999, and approximately 3% in 1996 and
1997.
Quality of Loans
Banks gradually improved credit risk management, lending practices and procedures for
assessing borrowers. Much attention was directed at assessing the borrower's financial
standing and the quality of collateral. Likewise, banks started to follow more conservative
lending policies. Banks wrote off previously granted loans that were classified as lost. In
1997, the share of non-performing loans in banks' loan portfolio decreased to 10.1% (see
Chart 13).
Until the second half of 1998, there were no indications that expansive lending could lead to a
deterioration in the loan portfolio. Enterprises were creditworthy and their development
outlook was positive. However, with the Russian financial crisis breaking out, the situation
changed. Many enterprises lost export markets in Russia. At the beginning of 1999, exports to
Russia decreased by about 70% compared with the beginning of 1998. The process of finding
new markets is difficult and time consuming. As a result, the quality of loans changed at the
outset of 1999. At the end of 1998, non-performing loans accounted for 6.3% of the total,
while at the end of the first half of 1999, for 7.6%. Exports, particularly to the EU, rose
gradually in the second half of the year. This allows to expect further improvement in the
quality of loans. At the end of 1999, the quality of the loan portfolio was as follows: 89.4%
was standard loans, 4.4% close-watch loans, and 6.2% non-performing loans.
Significant expansion in lending was concurrent with decreases in the amount of nonperforming loans and their share in the loan portfolio. Although the stock of non-performing
loans was somewhat large according to western standards, it did not threaten the stability of
banks, because non-performing loans were sufficiently provided for, as required by stringent
Bank of Latvia regulations (see Chart 14). At the end of 1999, banks' specific provisions
constituted 4.1% of loans granted.
Large Exposures
Pursuant to the Law "On Credit Institutions", the total of a credit institution's large exposures
(exposure is classified as large if it exceeds 10% of a credit institution's own funds) may not
exceed the credit institution's own funds more than eightfold. The ratio of total large
exposures to banks' own funds was 169.6% at the end of 1998 and 175.2% at the end of 1999.
Capital Adequacy
The ratio of banks' own funds to the sum of risk-weighted assets and off-balance-sheet
liabilities (capital adequacy) reflects the part of assets and off-balance-sheet liabilities that has
to be provided against risks with own funds. Pursuant to banking regulations, the capital
adequacy ratio may not fall below 10%.
Latvian banks' capital adequacy is above the minimum requirement (see Chart 15).
The fall in banks' capital adequacy ratio in the years following 1996 can be explained with an
increase in risk assets. The loan portfolio of banks increased considerably (about threefold in
the period from end-1997 to end-1999). In 1998, the risk weighting applied to assets
associated with central banks and central governments in Zone B countries and denominated
in the national currencies of these countries was raised for the purpose of calculating the
capital adequacy ratio.
The breakdown of banks by the capital adequacy ratio reveals that for almost half of banks the
ratio exceeds 20% (see Chart 16). The share of these banks' assets in the total was only 17.2%
at the end of 1999. The capital adequacy ratio for five largest banks, whose assets in total
reached 61.7% of all banks' assets, was within a range of 10%-15%.
Liquidity Risk
The Bank of Latvia requires credit institutions to maintain liquid assets in an amount that is
sufficient to meet their liabilities and is not below 30% of total current liabilities (liquidity
requirement). The following unencumbered assets are treated as liquid assets: vault cash;
demand claims on the Bank of Latvia and solvent credit institutions; claims on the Bank of
Latvia and solvent credit institutions, whose residual maturity does not exceed 30 days; and
deposits with other maturity, where their withdrawal ahead of maturity is established by a
contract (deducting penalty for meeting liabilities ahead of maturity where the contract
contains such provision); and investment in marketable securities, i.e., securities that can be
sold quickly, without significant loss or used as collateral to receive a loan. Current liabilities
are demand liabilities and liabilities whose residual maturity does not exceed 30 days.
Banks monitor their liquidity every day; likewise, they evaluate and plan the maturity profile
of their assets and liabilities. Latvian banks maintain liquid assets at a sufficient level, and
such policies can be regarded as prudent (see Chart 17). In 1996 and 1997, when a significant
part of banks' assets was comprised of liquid Russian government securities, liquidity was
higher, whereas in the wake of events in the Russian financial market in August 1998, it fell
substantially. In 1999, banks' liquidity increased.
In view of possible disturbances during the Year 2000 rollover period, Latvian banks
increased their liquid assets, which constituted 64% of current liabilities at the end of 1999.
At the same time, the share of claims on credit institutions in OECD countries accounted for
45% of liquid assets.
The maturity profile of banks' assets and liabilities reveals an excess of funds on demand and
a shortage of funds with a maturity of three months or over three months, as measured against
the placement of assets (see Chart 18). 1999 saw a positive trend: short-term funds (with a
maturity of three months to one year) increased.
In 1998, a number of Latvian banks successfully raised long-term funds from non-residents
(see Chart 19). The increasing share of liabilities with a maturity of over one year allowed
banks to issue more long-term loans.
Foreign Exchange Risk
The Law "On Credit Institutions" establishes restrictions on the open foreign exchange
position: it may not exceed 10% of own funds for any single foreign currency and 20% of
own funds for the total of all foreign currencies.
The currency profiles of banks' assets and liabilities (see Charts 20 and 21) reflect banks'
prudent management of foreign exchange risk and compliance with restrictions on open
foreign exchange positions as set forth in the Law "On Credit Institutions".
In 1998, the share of Russian government securities in several banks' assets reached 10%.
This resulted in a significant spot position in Russian rubles, which was hedged by foreign
exchange and interest rate futures and forwards (see Chart 22). In early 1999, transactions
with Russian securities decreased considerably; hence, the net spot position also decreased.
As of the second quarter of 1999, the net spot position was insignificant.
The ratio of the total of off-balance-sheet liabilities and futures and forwards denominated in
foreign currencies to banks' assets was 1.5% at the end of 1998 and 0.2% at the end of 1999.
[1]
The licence of the JSC MeritaNordbanken Latvia was revoked as of May 26, 2000. The
bank's assets were taken over by the newly established Riga Branch of Merita Bank Plc.
Likewise, the Riga Branch of Merita Bank Plc. took over the assets of the Riga Branch of
Societe Generale, whose licence was revoked as of May 2, 2000.
Activities of Credit Unions
On December 31, 1999, 11 credit unions were licensed in the Republic of Latvia. Two of
them had not been registered at the State Enterprise Register and had not started operating by
the end of the year.
Credit unions have two main functions. They are undertakings established to conduct the
activities of a credit institution and render financial services to their members. Credit unions
promote the economic activity of the population, particularly in rural areas. The aim of a
credit union is not earning profit but satisfying the economic and social needs of its members.
The activity of credit unions peaked in 1998 and 1999, when a number of new credit unions
were established. In 1998 and 1999, credit unions' assets accounted for only 0.03% of credit
institutions' assets (a smaller part in previous years).
Credit unions' assets have showed steady growth every year, almost doubling in the period
from 1997 to 1999. At the end of 1999, they reached 677.2 thousand lats (see Chart 23). This
was possible due to the increase in members' deposits.
The main activity of credit unions is lending. The share of loans to members accounts for the
largest part of assets: 88.0% at the end of 1997, 89.7% at the end of 1998 and 84.1% at the
end of 1999.
At the end of 1997, credit unions' loan portfolio was 298.3 thousand lats. In 1998, it increased
by 62.8%, reaching 485.6 thousand lats. In 1999, the loan portfolio increased by 17.3%, to
569.5 thousand lats.
The largest part of loans granted by credit unions are short-term. In 1999, loans with a
maturity of three to six months rose rapidly, reaching 304.9 thousand lats.
The share of non-performing assets in credit unions' assets is rather small. With loans
increasing, the share of such assets increased, constituting 2.1% of total assets (see Chart 24).
Close-watch loans accounted for a large part of credit unions' loan portfolio (83.7% at the end
of 1999). This can be explained with the Bank of Latvia's stringent requirements for the
assessment of loan quality and the prudent lending policies followed by credit unions.
Pursuant to Bank of Latvia regulatory requirements, specific provisions in the amount of 10%
have to be made for close-watch loans. This explains why the share of non-performing loans
was small compared with that of provisions (see Chart 25). The increasing loan portfolio and
decreasing net impairment charges point to the high quality of loans.
The structure of credit unions' liabilities did not show substantial changes. Members' deposits
accounted for the bulk of liabilities (see Chart 26). With liabilities increasing, deposits
doubled: from 186.9 thousand lats at the end of 1997 to 376.8 thousand lats at the end of
1999. The large share and increasing amount of deposits were indicative of an increase in the
number of credit unions' members and growing confidence in credit unions.
In accordance with the Law "On Credit Institutions", the minimum founding share capital of a
credit union had to be at least 5 000 lats before December 31, 1996, at least 10 000 as of
January 1, 1997; and it has to be at least 20 000 as of January 1, 1998. At the end of 1996,
with financial support from the EC, three credit unions, whose founding capital was 5 000
lats, were established. In 1997, the newly founded credit unions could not meet the
requirements to share capital, as set forth in the Law "On Credit Institutions". After assessing
the activity of credit unions and their opportunities, the Law "On Credit Institutions" was
amended (amendments were adopted by the Saeima of the Republic of Latvia on October 30,
1997) by stipulating that the minimum founding share capital of a credit union has to be at
least 2 000 lats. This requirement is in force to date.
Although the minimum capital requirement for credit unions was decreased, the number of
credit unions did not increase substantially in 1999. Where share capital is below 10 000 lats,
a credit union is not able to ensure its operations as it cannot satisfy members' demand for
loans, and has to quote high lending rates to cover expenses. Hence, a normal course of
business is hindered.
The paid-up share capital and equity of credit unions increased in line with growth in the
number of credit unions (see Chart 27). Credit unions' equity accounted for 33.0% (111.8
thousand lats) of total liabilities at the end of 1997, for 29.4% (159.0 thousand lats) at the end
of 1998, and for 30.5% (206.8 thousand lats) at the end of 1999. Growth was achieved on
account of the increase in share capital and profit earned.
Interest income on loans constituted the largest part of Latvian credit unions' profit: 13.9
thousand lats in 1997, 11.0 thousand lats in 1998 and 21.0 thousand lats in 1999. With credit
unions' assets increasing, net interest income on loans rose significantly, to 53.2 thousand lats
in 1997, 67.9 thousand lats in 1998 and 86.4 thousand lats in 1999 (see Chart 28).
Administrative expenses were the largest. Their ratio to total assets also rose slightly. The
ratio was 4.8% in 1997, 5.3% in 1998 and 6.3% in 1999. The increase in administrative
expenses occurred due to an increase in credit unions' assets and a subsequent growth in
personnel remuneration and other administrative expenses.
At the end of 1999, the capital adequacy of credit unions was 34.8% (pursuant to the Law "On
Credit Institutions", it may not fall below 10%).
Appendix 1
Number of Credit Institutions in Latvia (1991-1999)
1991
14
Credit institutions
Banks
Branches of foreign banks Credit unions
Representative
offices of foreign banks
1992
51
50
1
-
1993
63
62
1
-
1994
58
55
1
2
1
1995 1996
43 39
41 34
1
1
1
4
1
1
1997
37
31
1
5
1
1998
35
27
1
7
1
1999
35
23
1
11
1
Appendix 2
Number of Licences Issued by the Bank of Latvia (1991-1999)
1991
14
Licences
14
Banks
Branches of foreign banks Credit unions
Permit for opening a representative office of
a foreign bank
Licences revoked
Banks
Credit unions
1992
37
36
1
-
1993
16
16
-
1994
5
1
1
2
1
1995 1996
1
5
2
1
3
-
1997
1
1
-
1998
2
2
-
1999
4
4
-
-
4
4
-
9
8
1
16
14
2
3
3
-
4
4
-
4
4
-
9
9
-
Appendix 3
Organisation of the Credit Institutions Supervision Department of the Bank of
Latvia
Appendix 4
Credit Institutions Licensed in the Republic of Latvia[1]
Banks
1.
JSC Aizkraukles banka[2]
Skolas iela 8, Aizkraukle, LV-5100, Latvia
Phone[3]: 701 5600, 768 6444
Fax[3]: 701 5601
2.
JSC Baltijas Starptautiska banka
Kaleju iela 43, Riga, LV-1050, Latvia
Phone: 721 0172, 722 2789, 721 1426
Fax: 721 6870
3.
JSC Commercial Bank Baltijas
Tranzitu banka
13. janvara iela 3, Riga, LV-1050, Latvia
Phone: 702 4701, 702 4725
Fax: 721 1423, 721 1985
4.
JSC Hansabanka
Kalku iela 26, Riga, LV-1050, Latvia
Phone: 702 4444
Fax: 702 4400
5.
JSC Latvijas Biznesa banka
M. Pils iela 3, Riga, LV-1050, Latvia
Phone: 721 1151, 732 5796, 722 6486
Fax: 722 0249
6.
JSC Latvijas Ekonomiska
komercbanka
E. Birznieka-Upisa iela 21, Riga, LV-1011, Latvia
Phone: 722 1376, 704 1101
Fax: 721 0654, 704 1111
7.
State JSC Latvijas Hipoteku un zemes
banka
Doma laukuma 4, Riga, LV-1977, Latvia
Phone: 722 8866, 777 4022
Fax: 782 0143
8.
JSC Latvijas Krajbanka
Palasta iela 1, Riga, LV-1954, Latvia
Phone: 709 2020, 709 2001
Fax: 721 2083
9.
JSC Latvijas tirdzniecibas banka
Trijadibas iela 4, Riga, LV-1048, Latvia
Phone: 761 3608, 761 1032
Fax: 786 0077, 761 3663
10.
JSC Latvijas Unibanka
Pils iela 23, Riga, LV-1050, Latvia
Phone: 721 5535, 721 5795
Fax: 721 5335
11.
JSC Maras banka
Lacplesa iela 75, Riga, LV-1011, Latvia
Phone: 728 4505, 728 6661
Fax: 728 2788
12.
JSC MeritaNordbanken Latvia[4]
Kalku iela 15, Riga, LV-1050, Latvia
Phone: 709 6200
Fax: 782 0325
13.
JSC Multibanka
Elizabetes iela 57, Riga, LV-1772, Latvia
Phone: 728 9546, 728 2487, 728 4374
Fax: 507 1300
14.
JSC Ogres komercbanka
Brivibas iela 36, Ogre, LV-5001, Latvia
Phone: 50 22278, 50 45554
Fax: 507 1300
15.
JSC Parekss-banka
Smilsu iela 3, Riga, LV-1522, Latvia
Phone: 701 0000
Fax: 701 0001
16.
JSC Bank Paritate
Terbatas iela 4, Riga, LV-1134, Latvia
Phone: 728 8433, 704 1300
Fax: 728 2981
17.
JSC Pirma Latvijas Komercbanka
Smilsu iela 6, Riga, LV-1803, Latvia
Phone: 701 5237, 701 5214
Fax: 782 0080, 732 3449, 732 2521
18.
JSC Rietumu Banka
Brivibas iela 54, Riga, LV-1011, Latvia
Phone: 702 5555, 702 5284
Fax: 702 5588
19.
JSC Saules banka
Smilsu iela 16, Riga, LV-1873, Latvia
Phone: 722 4541, 702 0500
Fax: 702 0505
20.
JSC Trasta komercbanka
Miesnieku iela 9, Riga, LV-1050, Latvia
Phone: 702 7777
Fax: 702 7700, 702 7729
21.
JSC VEF banka
Brivibas gatve 197, Riga, LV-1039, Latvia
Fax: 782 1331, 755 1124
22.
JSC Commercial Bank Ventspils
Apvienota Baltijas Banka[5]
Kuldigas iela 25a, Ventspili, LV-3600, Latvia
Phone: 36 02100
Fax: 36 02148
23.
JSC Vereinsbank Riga
Elizabetes iela 63, Riga, LV-1050, Latvia
Phone: 708 5500
Fax: 708 5507
Foreign Bank Branch
1.
Riga Branch of Société Générale (France)[6]
Brivibas iela 55, Riga, LV-1010
Phone 731 0051
Fax: 731 0060
Credit Unions
1.
Dzelzcelnieks KS
Turgeneva iela 14, Riga, LV-1050, Latvia
Phone: 583 2211, 583 3458
Fax: 583 3458
2.
Jurnieku forums[7]
Elizabetes iela 1, Riga, LV-1010, Latvia
Phone: 702 0163
3.
Ligatnes Druva
"Birzes", Ligatnes pagasta, Cesu rajona, LV-4108,
Latvia
Phone: 41 55901
Fax: 41 55636
4.
Rucavas krajaizdevu sabiedriba
Rucavas pagasta padomes telpas,
Rucavas pagasta, Liepajas rajona, LV-3477,
Latvia
Phone: 34 94506, 34 94683, 34 94507
Fax: 34 86388
5.
Skolu krajaizdevu sabiedriba
Mednieku iela 7, Riga, LV-1010, Latvia
Phone: 733 2549, 245 0621
6.
Punu Kooperativa krajaizdevu
sabiedriba
Valdgales pagasta padomes telpas,
Valdgales pagasta, Talsu rajona, LV-3253, Latvia
Phone: 32 95732
Fax: 32 95772
7.
Raunas Kooperativa krajaizdevu
sabiedriba
Parka iela 4, Raunas pagasta, Cesu rajona, LV4131, Latvia
Phone: 41 20777, 41 77489
Fax: 41 77260
8.
Rujienas Kooperativa krajaizdevu
sabiedriba
Raina iela 3, Rujiena, Valmieras rajona, LV-4240,
Latvia
Phone: 42 63696, 42 25804
Fax: 42 63149
9.
Taurenes Kooperativa krajaizdevu
sabiedriba
Gaujas iela 5-2, Taurenes pagasta, Cesu rajona,
LV-4119, Latvia
Phone: 41 66793
10.
Veselavas Kooperativa krajaizdevu
sabiedriba
"Viesturos", Veselavas pagasta, Cesu rajona, LV4116, Latvia
Phone: 41 92232, 41 92270
Fax: 41 92232
11.
Zosenu Kooperativa krajaizdevu
sabiedriba[8]
Zosenu pagasta padomes telpas,
"Jurniekos ", Zosenu pagasta, Cesu rajona, LV4133, Latvia
Phone: 41 69235, 41 69285
Fax: 41 69235
[1] As at the end of 1999.
[2] The new address of the bank as of May 12, 2000: Elizabetes iela 23, Riga, LV-1010,
Latvia.
[3] The country code is "371".
[4] Reorganised on May 26, 2000. On March 22, 2000, the Riga Branch of Merita Bank Plc.
was opened (address: Kalku iela 15, Riga, LV-1050, Latvia).
[5] Reorganised by merger with the JSC Hansabanka on June 8, 2000.
[6] The licence was revoked on May 2, 2000 due to the bank's voluntary liquidation.
[7] Licensed on November 11, 1999; registered with the Enterprise Register of the Republic
of Latvia on January 6, 2000.
[8] Licensed on December 23, 1999; registered with the Enterprise Register of the Republic of
Latvia on February 14, 2000.