The Republic of Latvia, situated in the Baltic region, has a relatively young banking sector with roots tracing back to the early 1990s, after the country regained independence from the Soviet Union. Since then, the Latvian banking sector has undergone significant changes, with multiple financial crises and regulatory responses shaping the industry. The most notable events include the 1998 Russian financial crisis, the 2008 global financial crisis, and the 2018 ABLV Bank crisis. Each of these events has resulted in policy changes aimed at strengthening the Latvian banking system.

Latvian banking principles follow the basic tenets of modern banking: deposit-taking, lending, and offering various financial services to both individuals and businesses. However, the small size of the Latvian market and the country’s historical openness to non-resident clients have led to a high concentration of foreign deposits and loans in the sector. This has exposed Latvian banks to risks such as money laundering, fraud, and financial instability, making it crucial for effective banking regulation to be in place.

Given the risks associated with the Latvian banking sector, the role of banking regulation becomes vital in ensuring the stability, integrity, and transparency of the financial system. Strong regulation not only protects the interests of depositors and creditors but also contributes to the stability of the Latvian economy as a whole.

The Latvian banking sector is marked by several weaknesses that may concern account holders and creditors. The high concentration of foreign deposits makes the sector vulnerable to economic fluctuations and external shocks. Additionally, the sector has faced repeated allegations of money laundering and corruption, which have resulted in the closure or restructuring of several banks, including the infamous Parex Bank and ABLV Bank. These weaknesses may have a detrimental impact on investor confidence and the stability of the financial sector.

Latvian Banking Law

Credit Institution Law: This law governs the establishment, operation, and supervision of banks in Latvia. It outlines the licensing requirements, capital adequacy rules, and regulatory responsibilities of the Financial and Capital Market Commission (FCMC).

Law on the Financial and Capital Market Commission: This law establishes the FCMC as the primary regulator of the Latvian financial sector, giving it the authority to supervise, regulate, and enforce banking laws and regulations.

Law on the Prevention of Money Laundering and Terrorism Financing: This law sets forth the requirements for financial institutions, including banks, to implement anti-money laundering and counter-terrorism financing measures.

Deposit Guarantee Law: This law establishes a deposit guarantee scheme, which provides protection for bank depositors in case of a bank’s failure. The guaranteed amount covers up to €100,000 per depositor.

Law on Recovery and Resolution of Credit Institutions and Investment Brokerage Firms: This law outlines the procedures for the recovery and resolution of distressed banks, aiming to protect financial stability and minimize the impact on taxpayers.

The FCMC is responsible for enforcing banking regulations in Latvia. The FCMC has the authority to impose administrative sanctions on banks, ranging from warnings and fines to revoking banking licenses. Additionally, the FCMC can request information, conduct investigations, and collaborate with other supervisory authorities.

In the international context, Latvia is part of the European Union (EU) and the European Banking Union (EBU). As a member state, Latvia must comply with the EU banking regulations, such as the Capital Requirements Directive (CRD) and the Capital Requirements Regulation (CRR), which set forth prudential standards for banks. The European Central Bank (ECB) and the European Banking Authority (EBA) play significant roles in the supervision and enforcement of these regulations, ensuring consistency and cooperation among EU member states.

Bank Resolution and Insolvency Procedures in Latvia

Bank resolution procedures in Latvia are governed by the Law on Recovery and Resolution of Credit Institutions and Investment Brokerage Firms. The FCMC, as the designated resolution authority, can implement measures such as bail-in, sale of business, bridge institution, and asset separation tools to resolve a failing bank while minimizing the impact on taxpayers and the financial system.

Bank insolvency procedures in Latvia follow the general insolvency framework established by the Insolvency Law. A bank is considered insolvent if it is unable to meet its obligations or its liabilities exceed its assets. The insolvency process is initiated by the FCMC, which appoints an insolvency administrator to manage the bank’s assets and liabilities.

In the creditor hierarchy, depositors covered by the Deposit Guarantee Law hold a preferential claim up to the insured limit. Secured creditors, including covered bondholders, rank above unsecured creditors, while shareholders and subordinated debt holders rank the lowest.

Utilizing the Legal Framework to Recover Funds

Creditors impacted by bank failures in Latvia can rely on the legal framework to recover their funds. Depositors are protected by the Deposit Guarantee Law, ensuring the reimbursement of deposits up to €100,000. Secured creditors can enforce their collateral in accordance with the Insolvency Law, while unsecured creditors can file claims to participate in the distribution of the insolvent bank’s assets. International creditors can seek cooperation from their home country’s regulatory authorities, which can coordinate with the FCMC and other relevant Latvian authorities to facilitate recovery efforts.