Bank failures have become a concern for international bank creditors, especially in the wake of several high-profile cases in Europe. One country that has experienced such incidents is Latvia. Banking law in Latvia is governed by various legislations, including the Credit Institution Law, the Law on the Financial and Capital Market Commission (FCMC), and the Law on Deposit Guarantee. These laws define the regulatory framework for banks, establish the supervisory authority, and set forth procedures for bank failures.
Over the years, several Latvian banks and credit institutions have faced substantial fines for wrongdoing, primarily related to anti-money laundering (AML) and counter-terrorism financing (CTF) breaches. Some examples include:
ABLV Bank: ABLV Bank, once the third-largest bank in Latvia, faced allegations of money laundering and breaching international sanctions in 2018. The U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) proposed sanctions against ABLV Bank, accusing it of facilitating transactions for sanctioned entities and individuals. Although specific penalties were not levied, the allegations led to the bank’s rapid collapse as it faced liquidity issues and deposit outflows. ABLV Bank subsequently entered voluntary liquidation, whilst shareholders pursue claims for damages against the local bank supervisor and the European Central bank for wrongful closure of the bank.
Rietumu Banka: In 2017, Rietumu Banka was fined €80 million by French authorities for its involvement in a large-scale tax evasion scheme. The bank allegedly helped clients launder money through offshore companies and evade taxes. Rietumu Banka was not shut down, as it continued to meet its capital and liquidity requirements, and implemented measures to strengthen its AML and CTF controls.
Trasta Komercbanka: In 2016, Trasta Komercbanka faced a €1 million fine from the Financial and Capital Market Commission (FCMC) for AML and CTF breaches. The European Central Bank (ECB) subsequently withdrew the bank’s license due to its failure to address identified deficiencies and maintain adequate capital levels.
The reasons why some banks were not shut down despite severe wrongdoing vary on a case-by-case basis. Factors that regulators consider include the bank’s financial condition, the severity of the breaches, and the bank’s willingness to address deficiencies and implement necessary remedial measures. Authorities may also consider the potential impact of the bank’s failure on the broader financial system and opt for alternative measures, such as fines, restrictions, or management changes, to address the wrongdoing while maintaining the bank’s operations.
Bank Failure in Latvia
A bank failure in Latvia is defined as the inability of a credit institution to meet its obligations or the likelihood that it will be unable to do so in the near future. The determination of bank failure involves a comprehensive assessment of a bank’s financial condition, including capital adequacy, liquidity, asset quality, and governance.
The FCMC is the bank supervisor in Latvia, responsible for overseeing the country’s banking sector. It has the legal mandate to determine whether a bank is failing or likely to fail based on the established criteria. If the FCMC concludes that a bank is failing, it will initiate resolution procedures in collaboration with the Single Resolution Board (SRB), a European Union (EU) agency responsible for the resolution of failing banks.
The most common reasons for bank failure in Latvia include poor risk management, inadequate capitalization, and failure to comply with anti-money laundering (AML) and counter-terrorism financing (CTF) regulations. For example, ABLV Bank, one of the largest Latvian banks, collapsed in 2018 due to allegations of money laundering and breaching international sanctions.
To preserve critical functions and ensure the continuation of the organization during financial distress, Latvia’s banking supervision and resolution planning focus on early intervention, strict regulatory compliance, and cooperation with EU authorities. The FCMC and SRB regularly assess the resolvability of Latvian banks and require them to develop recovery plans in case of financial difficulties.
When a bank fails in Latvia, the FCMC, in coordination with the SRB, implements the resolution strategy, which may involve reorganizing, recapitalizing, restructuring, or dissolving the bank. The specific resolution tools used depend on the circumstances of the failure and the bank’s financial condition.
The resolution authority in Latvia has various tools at its disposal, including the sale of the business, bridge bank, and asset separation. The sale of the business involves transferring the failed bank’s assets and liabilities to a solvent third party. The bridge bank tool establishes a temporary bank to maintain critical functions and facilitate the transfer of assets and liabilities. Asset separation involves transferring non-performing assets to a separate entity, allowing the failed bank to continue its operations with a healthier balance sheet.
Latvia’s Law on Deposit Guarantee protects account holders in case of bank failure by providing deposit insurance up to EUR 100,000 per depositor. This protection extends to both resident and non-resident account holders. Other creditor interests are protected according to the creditor hierarchy established by the Bank Recovery and Resolution Directive (BRRD), an EU regulation that governs the resolution of failing banks.
Orderly Dissolution and Bank Liquidation in Latvia
Latvia ensures that non-viable firms exit the market in an orderly manner by adhering to the legal framework and resolution mechanisms established by the FCMC, SRB, and the BRRD. This approach aims to minimize the impact on financial stability, protect depositors, and maintain the continuity of critical banking functions. The orderly market exit process involves close coordination among regulators, resolution authorities, and relevant stakeholders.
Bank liquidation in Latvia occurs when a failed bank cannot be resolved through other means or when liquidation is deemed more appropriate. The liquidation process is carried out according to the Credit Institution Law and the Civil Procedure Law. In the event of liquidation, a liquidator is appointed to manage the bank’s assets and ensure that they are distributed fairly among creditors in accordance with the established creditor hierarchy.
Account holders of a failed bank in Latvia must be proactive in safeguarding their position during the stages of statutory administration, deposit insurance, and bank liquidation. This involves staying informed about the bank’s financial condition, the resolution process, and any communications from the FCMC, SRB, and the liquidator. Additionally, account holders should ensure their deposits do not exceed the insured amount (EUR 100,000) and consider diversifying their holdings among multiple banks to minimize risk.