Cabinet of Ministers of the Republic of Latvia
Financial and Capital Market Commission
Riga, 01.12.2008 Decision No.1
(Min. no.85, paragraph 3)
On the setting of restrictions on the fulfilment of obligations by the JSC Parex banka
1. In accordance with Section 113 of the Credit Institution Law (hereinafter also – the Law) a bank, from which an excessive outflow of deposits is occurring, may request the Financial and Capital Market Commission (hereinafter – the Commission) to set restrictions on the fulfilment of obligations by the bank.
2. The joint stock Parex banka (registration No.: 40003074590, registered address at Smilšu iela 3, Riga, LV-1522, Latvia) (hereinafter – the Bank) on 7 November 2008 approached the Commission requesting to set the following debit payment limits at the Bank for a two-week period:
2.1. LVL 25 000 on transfers to other bank accounts or cash withdrawals for natural persons;
2.2. LVL 50 000 on all transfers, except payments for the purposes of economic activity, state duty and tax payment, for legal persons, except local governments, central and local government enterprises and institutions.
3. Section 114 of the Credit Institution Law prescribes that the Commission and the Cabinet of Ministers (hereinafter also – the Cabinet) shall take a decision on the setting of restrictions jointly for a period not exceeding 12 months.
4. 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 decision on setting restrictions on the fulfilment of obligations by the Bank shall be adopted urgently as any delay in decision-taking imposes direct threat on the Bank’s stability and its depositors’ property.
6. The Cabinet and the Commission are of the opinion that application of measures mentioned in Section 114 (1) of the Credit Institution Law, taking into account the actual circumstances, is desirable in the situation when an excessive outflow of deposits and other assets from the Bank is occurring. The Cabinet and the Commission are of the opinion that restrictions on the fulfilment of obligations set for a two-week period as requested by the Bank are insufficient to effectively stabilize the situation, in particular in light of the actual circumstances when not less than LVL 492 million flew away from the Bank over the period from 30 September 2008, and such a tendency jeopardises the ability of the Bank to meet requirements provided for in the Credit Institution Law regarding the Bank’s capital adequacy and liquidity. Furthermore, the Cabinet and the Commission are of the opinion that legitimate objective of the decision made by the Cabinet and the Commission, in compliance with Section 114 (2) of the Law, is to meet the provisions of Section 99.1 (1) of the Law.
7. With adoption of the decision, compliance with the duty to take measures without delay in accordance with Section 99.1 (2) of the Credit Institution 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 losses to the overall State economy will be met. Besides, persons who use the Bank’s services will be protected and other measures taken in order to ensure legal protection of interests of other persons related to the activities of the Bank.
8. Such a decision is commensurable with the probable loss, and restrictions on the Bank’s legal interests are justified by considerable benefit given to the state and public, namely, legal interests of persons will be violated if the Cabinet and the Commission do not adopt such a decision as well as if by disregarding regulatory requirements set for the purposes to maintain sound activities of credit institutions the Cabinet and the Commission do 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 Cabinet and 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 contrary to the regulatory requirements of the European Union.
9. Therefore the Cabinet and the Commission hold an opinion that a decision regarding restrictions on execution of liabilities must be imposed on the Bank, under which the Cabinet and the Commission will take measures to avert threats on the integrity of the overall financial system, its adequate functioning, reputation and stability, as well as potential casting doubts on the repute of credit institution supervisory system both on local and international scale.
10. Considering the above and urgency to take the measures to successfully prevent the excessive outflow of deposits and other assets from the Bank and maintain the Bank’s capital adequacy and liquidity, the Cabinet of Ministers and the Commission decide:
10.1. 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;
10.2. 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.
10.3. 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:
10.3.1. with staff fewer than 10 employees as of 31 December 2007 and that exceeds the amount of 35 000 lats per calendar month;
10.3.2. with staff between 11 and 250 employees as of 31 December 2007 and that exceeds the amount of 350 000 lats per calendar month.
10.4. 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.
10.5. To impose a ban on the Bank without permission from the authorized representative:
10.5.1. 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;
10.5.2. 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;
10.5.3. to waive any right to demand;
10.5.4. to issue warranties, guarantees and provide documentary loan service, as well as modify, renew or terminate existing transactions;
10.5.5. 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;
10.5.6. 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;
10.5.7. to acquire any fixed assets or intangible assets;
10.5.8. to modify the Bank’s general action rules, price list and transaction commission.
10.6. To determine that restrictions on the settlement of liabilities are not applicable to:
10.6.1. payments into the national budget;
10.6.2. payments to the state and local government authorities (incl. the Bank of Latvia, the Commission, the Deposit Guarantee Fund);
10.6.3. transactions with the Bank of Latvia;
10.6.4. acquisition of the Republic of Latvia treasury bills;
10.6.5. 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;
10.6.6. deposit interest payments;
10.6.7. client payments to the Bank and its subsidiaries.
10.7. To impose legally binding obligation on the Bank, within 24 hours of the announcement of this decision, to submit to the Financial and Capital Market Commission a report on measures taken to ensure fulfilment of the restrictions on the settlement of liabilities as determined by the decision.
10.8. Transactions in foreign currencies referred to above shall be converted into lats according to the currency exchange rate established by the Bank of Latvia at the day of transaction.
The decision becomes effective upon its adoption and is applicable to the Bank starting from 1 December 2008 after notifying the decision to the Board of the Bank. Period of restriction on the settlement of liabilities is effective until 30 June 2009.
Minister of Finance
Financial Capital Market Commission