On prolonging decision No. 1 adopted by Cabinet of Ministers and Financial and Capital Market Commission of 01.12.2008. on the setting of restrictions on the fulfilment of obligations by the JSC "Parex Banka"

20.08.2009| Print

Translation from Latvian
Decision No 81
(min. No. 24 paragraph 11. )
of the Board of the Financial and Capital Market Commission

Riga, 19 June 2009

ON PROLONGING DECISION NO. 1 ADOPTED BY CABINET OF MINISTERS AND FINANCIAL AND CAPITAL MARKET COMMISSION OF 01.12.2008 ON THE SETTING OF RESTRICTIONS ON THE FULFILMENT OF OBLIGATIONS BY THE JSC “PAREX BANKA”


1. On 1 December 2008, the Cabinet of Ministers of the Republic of Latvia and the Financial and Capital Market Commission (address: Kungu iela 1, Rīga, LV-1050, LATVIA; reg. no. 90001049028) (hereinafter also – the Commission) adopted a decision No 1 (min. No. 85, §3) on the setting of restrictions on the fulfilment of obligations by the JSC "Parex banka" (hereinafter – the Decision).

2. The following restrictions were set on the fulfilment of obligations by the JSC "Parex banka" (registration No.: 40003074590, registered address at Smilšu iela 3, Riga, LV-1522, Latvia) (hereinafter – the Bank) with the above decision:

2.1. To impose a ban on the Bank to carry out debit transactions in any currency, including through online banking, ATMs and by cash, with clients - natural persons for the amount that exceeds LVL 35 000 per calendar month;
2.2. To impose a ban on the Bank to carry out debit transactions in any currency which are not intended for the purposes of economic activity, including through online banking, ATMs and by cash, with clients - legal persons.
2.3. To impose a ban on the Bank to carry out debit transactions in any currency which are intended for the purposes of economic activity, including through online banking, ATMs and by cash, with clients - legal persons:
2.3.1. with staff fewer than 10 employees as of 31 December 2007 and that exceeds the amount of 35 000 lats per calendar month;
2.3.2. with staff between 11 and 250 employees as of 31 December 2007 and that exceeds the amount of 350 000 lats per calendar month.
2.4. To impose a ban on the Bank to issue new loans and increase loan limits for existing loans as well as a ban to perform any transactions in the financial instruments, except repo deals.
2.5. To impose a ban on the Bank without permission from the authorized representative:
2.5.1. to conduct any transactions (placement of funds in the interbank market, conversion of non-cash foreign currency, disposal of any assets, encumbrance of assets etc.), which are performed in the name of the Bank and relevant payments;
2.5.2. to dispose or encumber the Bank’s property, its investments in the financial instruments and in the capital of other commercial companies, to suspend operation of its branches or structural units;
2.5.3. to waive any right to demand;
2.5.4. to issue warranties, guarantees and provide documentary loan service, as well as modify, renew or terminate existing transactions;
2.5.5. to issue any type of powers, incl. power of attorney, to any person to undertake obligation in the name of the Bank, as well as to extend the validity of existing powers;
2.5.6. to waive the right to possession or holding or the right to use  any property or belonging that has come into the possession of the Bank under its legal rights, except the storage of client valuables in the Bank;
2.5.7. to acquire any fixed assets or intangible assets;
2.5.8. to modify the Bank’s general action rules, price list and transaction commission.
2.6. To determine that restrictions on the settlement of liabilities are not applicable to:
2.6.1. payments into the national budget;
2.6.2. payments to the state and local government authorities (incl. the   Bank of Latvia, the Commission, the Deposit Guarantee Fund);
2.6.3. transactions with the Bank of Latvia;
2.6.4. acquisition of the Republic of Latvia treasury bills;
2.6.5. payments to the commercial companies which spheres of activity encompass commodity production and provision of services to the sectors governed by the state and local government authorities;
2.6.6. deposit interest payments;
2.6.7. client payments to the Bank and its subsidiaries.

3. Period of restriction on the settlement of liabilities is effective until 30 June 2009.

4. In accordance with Section 113 (1) of the Credit Institution Law if the Commission ascertains that a credit institution fails to adhere to the provisions of this Law, directly applicable rules issued by European Union institutions, or decisions or regulations issued by the Financial and Capital Market Commission; or if the activities of a credit institution are threatening its stability or solvency, security or stability of the credit institution sector in Latvia, or if such activities impose threat to cause significant loss to the national economy, or if an excessive outflow of deposits or other assets is occurring from a bank, the Financial and Capital Market Commission by adopting the decision shall have the right to implement one or more of the following actions (hereinafter also - the Law) a bank, from which an excessive outflow of deposits is occurring, may request the Financial and Capital Market Commission to set restrictions on the fulfilment of obligations by the bank, incl.:
• to establish restrictions on the rights and actions of the credit institution, including entirely or partially suspending the provision of financial services, as well as restrictions on fulfilment of obligations, except for the restrictions on fulfilment of obligations referred to in Sub-paragraph 5 of Paragraph hereof (Sub-paragraph 4 of Section 113 (1) of the Credit Institution Law);
• to impose upon the bank restrictions on execution of deposit liabilities (Sub-paragraph 5 of Section 113 (1) of the Credit Institution Law).

Section 114 of the Credit Institution Law stipulates that a decision to impose deposit restrictions may be adopted by the Financial and Capital Market Commission only with regard to a bank, which at the time of adoption of such decision is capable of satisfying the legal claims submitted by its creditors. The decision to impose deposit restrictions shall set forth the types of restrictions and a period of effectiveness, which shall not exceed 12 months.

Section 99.1 (1) of the Credit Institution Law prescribes that in order to ensure the security, stability and development of Latvia’s credit institution sector, the Financial and Capital Market Commission shall perform supervision of credit institutions.

In accordance with Section 99.1 (2) of the Credit Institution Law, the Commission has a duty to take measures without delay in accordance with the specifications of the Law in order to prevent deficiencies in the operations of credit institutions and the credit institution sector, which threaten or may threaten the stable operation of a credit institution or the credit institution sector on the whole, interfere in the conduct of proper transactions, the provision of financial services or may cause significant loss to the overall State economy.

5. The Commission established the following actual state of affairs: 

5.1. On the basis of information in the Commission’s possession, financial statements submitted by the Bank and operative data, the Commission draws a conclusion that the Bank is solvent. On 22.05.2009 the state joint stock company "Privatizācijas aģentūra" (Latvian Privatization Agency) invested LVL 140,750,000 for raising the Bank’s capital and granted a subordinated loan of LVL 50,270,000. The above capital injection has ensured the Bank’s capital adequacy ratio at 10.81% on 31.05.2009.

5.2. The Commission notes that a number of essential measures have been taken in the Bank (increasing Bank’s capital, stabilizing deposit base) in order to stabilize activities of the Bank and to meet regulatory provisions of the law, and as a result though the Bank’s performance has improved, at the moment the Bank is not yet able to fully meet all the requirements as set by law, namely, ? With the Decision the outflow of deposits from the Bank in greater amounts has been averted.

5.3. The Commission notes that essential steps have been taken in the Bank to stabilize the Bank’s reputation. Audit of the financial reports for 2008 has been accomplished giving a true overview of the Bank’s performance and encouraging the Bank’s existing and potential clients to take decisions on cooperation with the Bank.

6. The financial ratios prove that the Bank has not improved its financial situation to the extent that to ensure compliance with regulatory requirements over the period since adoption of the Decision of 01.12.2008, therefore its operation without imposition of restrictions on the settlement of liabilities is not yet possible, as currently the Bank has no alternative resources to attract.

7. In assessing the Bank’s financial standing, the Commission takes into account the measures taken by the State for improving the Bank’s financial ratios and ensuring stability:

7.1 On 19.03.2009, the Bank reached an agreement on modifying the syndicated loan contract conditions, paying out EUR 232,500,000 to lenders. Next syndicated loan payments are scheduled in February 2010 (EUR 310,000,000) and in May 2011 (EUR 232,500,000). Repayment of the remaining syndicated loan has been guaranteed by the State.

7.2. On 16.04.2009, Prime Minister V. Dombrovskis, the state JSC "Privatizācijas aģentūra" Board Chairman A. Grants and the Bank’s Board Chairman N. Melngailis signed an agreement with the European Bank for Reconstruction and Development on the acquisition of the Bank’s shares (25 percent plus one share). Transaction will take effect upon the prerequisites of the agreement are met/take effect.

7.3. On 11.05.2009, the European Commission adopted the decision allowing Latvia to render the State assistance to the Bank by granting a subordinated loan.

7.4. On 22.05.2009, the state JSC "Privatizācijas aģentūra" made capital injection for raising the Bank’s capital by LVL 140,750,000 and granted a subordinated loan to the Bank in the amount of LVL 50,270,000.

7.5. At the moment, the plan for the restructuring of the Bank has been submitted to the European Commission, presenting the measures for restructuring the Bank to be taken until 2013. To implement the plan and retain State support, the Bank must receive a positive decision from the European Commission by 2013.

8. Taking into consideration above, the Board of the Commission had drawn up a draft decision, which was forwarded by letter No. 05.01.01.015/2408 to the Bank on 17.06.2009, notifying at the same time that the Board of the Commission would discuss the issue on extending duration of the Decision in the meeting of the Commission’s Board on 19.06.2009, and requesting to submit to the Commission in writing the Bank’s opinion in the administrative case until 19.06.2009 or to participate in the 19.06.2009 meeting of the Board of the Commission, if the Bank’s representatives wished to express their opinion  regarding the administrative case attending the meeting in presence.

On 19.06.2009 the Commission received the Bank’s letter No. 2.-01/46 dated 18.06.2009 "On the FCMC Draft Decision "On prolonging Decision No. 1 (Min. No. 85, §3) adopted by the Cabinet of Ministers and Financial and Capital Market Commission on 01.12.2008 regarding the setting of restrictions on the fulfilment of obligations by the JSC "Parex banka"", where the Bank had provided their explanations regarding the administrative case.

At the 19.06.2009 meeting of the Board, the Commission heard oral explanations provided by the Bank’s representatives G. Beļavskis, R. Idelsons, V. Ābele, M. Celmiņa and A. Spridzāns.

When taking this decision, the Commission examined the written and oral explanations provided by the Bank’s representatives.

9. Considering the above Bank’s financial ratios, the actual state of affairs and the State activities aimed at the improvement of the Bank’s financial ratios and ensuring stability, conclusions might be drawn that the Bank’s financial stability is not sufficient to lift the restrictions on the settlement of liabilities. Considering that the Bank has a significant role in the Latvia’s financial system overall, the Commission is of the opinion that the prolonging of the Decision regarding restrictions on the settlement of liabilities would be desirable. Legal (legitimate) goal of the Commission in prolonging the Commission’s Decision regarding the restrictions on the settlement of liabilities, pursuant to Section 113 (1), and Section 114 (1) and (2) of the Credit Institution Law, is to ensure protection of depositors and stability of the financial and capital market in accordance with the Commission’s goals as stipulated in Article 5 of the Law on the Financial and Capital Market Commission.

10. Such a decision is commensurable with the probable loss, and restrictions on the Bank’s legal interests are justified by significant benefit given to the state and public, namely, legal interests of persons will be violated if the Commission does not adopt such a decision as well as if the Bank fails to meet regulatory requirements set for the purposes to maintain sound activities of credit institutions and the Commission does not take any measures to prevent threats on the Bank’s activities, thus continuing exposure of the Bank to the risk that it would be incapable to duly meet its debt liabilities to the existing Bank’s clients. Once the Bank’s inability to meet requirements essential for their operation is identified, idleness of the Commission would lead to a conclusion that the supervisory system in Latvia is inadequately strict and professional because it allows the Latvia-registered banks to ignore regulatory requirements for ensuring the financial stability pursuant to the regulatory requirements of the European Community.

11. Notwithstanding the Bank’s financial performance mentioned in point 5 of the Decision hereof, the decision to extend the restriction on the settlement of liabilities is the most efficient measure out of all referred to in Section 113 (1) of the Credit Institution Law. Other measures (e.g., a warning) will not be sufficiently effective to prevent an excessive outflow of funding from the Bank. Besides, the Decision is justifiable and commensurable with the measures taken by the State for improving the Bank’s financial ratios and ensuring stability referred to in point 7 of the Decision hereof. Furthermore, annulment of the Bank’s licence (permit) would not be commensurable with the above measures taken for ensuring the Bank’s financial stability. The Decision is also legitimate due to significant benefit to the public – maintenance of the stability of financial system in contrast to short-term interests of the Bank’s clients. In adopting this Decision, the Commission has taken into account the interests of any individual who uses services of the financial system. The Commission’s Decision will protect the interests of the Bank’s clients and partners, in particular the interests of the settlement system participants in case of a financial shock to the Bank, which could result in serious impediments to the overall financial system and incommensurable damage to persons concerned.

12. Taking into account that the State has invested significant financial resources in the Bank and public unavailability of the Decision could have a negative impact on the public confidence in the Bank’s solvency and its ability to provide qualitative financial services in the future, the Commission holds an opinion that the Decision should be made public.

On the basis of provisions of Section 99. 1 (1) and (2), Section 110.1 (1), Sub-paragraphs 4 and 5 of Section 113 (1), Section 114 (1) and (2) of the Credit Institution Law, Article 5 and Article 17 clause 6.1 of the Law on the Financial and Capital Market Commission, Sub-paragraph 2 of Section 63 (1), Section 65 (4) and Section 66(1) of the Administrative Procedure Law,

The Board of the Financial and Capital Market Commission d e c i d e s:

1. To extend the period of restrictions on the settlement of liabilities as set by the Decision No. 1 of Cabinet of Ministers and the Financial and Capital Market Commission of 01.12.2008 (min. No. 85, §3) on the setting of restrictions on the fulfilment of obligations by the JSC "Parex banka" until 30 November 2009;

2. To publish the Decision of the Board of the Financial and Capital Market Commission in the official gazette Latvijas Vēstnesis.

The Decision becomes effective on 1 July 2009.

In accordance with Section 188 (2) of the Administrative Procedure Law and Section 99.1 (3) of the Credit Institution Law, appeal against the Decision of the Financial and Capital Market Commission may be lodged with the Regional Administrative Court (Jēzusbaznīcas iela 6, Rīga) within one month of notifying the addressee of this administrative act.

In accordance with Section 123 of the Credit Institution Law, appeal of the administrative act issued by the Financial and Capital Market Commission shall not suspend the execution thereof.

Chairwoman
Financial and Capital Market Commission

I. Krūmane
(signature)