INFOGRAPHICS: On implementation of new business models in Latvian banking sector

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• While carrying out the task of revising the previous approach to the banking business, assigned by the FCMC at the beginning of the year, Latvian banks (in particular the banks operating in the foreign customer segment) have experienced a dramatic decrease in foreign customer deposits, with domestic (80%) and the European Union member states (10%) deposits dominating, and their total share now amounting to 90% of all bank deposits in Latvia. 

• Along with applying the new risk reduction approach the Latvian banking sector is now focusing on attracting the EU and EEA customers and surrendering most of customers outside this economic area. Business lines chosen are basically traditional   banking services, developing new channels to reach customers (including FinTech options), both domestic (small and medium-sized business crediting) and the Baltic States and other EU countries. Provision of individual asset management services is also a promising activity.

FCMC Chairman Pēters Putniņš draws conclusions about the change management process: “We are now going through a historic period of time when the very foundations of the banking system, built over the past 25 years, are being overhauled.  This is a radically different situation for the business development with the current share of domestic/EU and foreign clients (90% to 10%). Our dialogue with the sector shows that the banks have been taking active measures and seeking new businesses approaches; the new models are being integrated in their business strategies. This has been a very scrupulous work with each bank, assessing all aspects in the new business model chosen by the bank. At present we are reviewing some latest information, and it can be said that a kind of progress control is taken, which will be followed by a future risk impact assessment and definition of key performance indicators. In this new situation, the requirements for banks will be also calculated anew and set on an individual basis by the end of the year. Therefore it can be regarded that the change management in the banking sector is being finalized. In 1-3 years we have to become aware of the new situation, most efficient business niches to ensure cost-effectiveness of new models. We are witnessing changes in the environmental aspects of the financial sector operations that apply to all Latvia-registered banks because of the tougher competition for the domestic and EU clientele. I believe that already this year we will say good-bye to the terms as foreign customer banks and domestic banks. In view of the new deposit and customer structures in the future we will talk about a single banking sector – Latvia-based banks serving both domestic customers and foreign customers. The future performance of the banks will demonstrate appropriateness of the chosen business approaches to the new circumstances and the capacity to absorb the consequences of transitional period of changes.”

Provision of foreign customer services has been a high risk niche; therefore the FCMC requested respective banks to maintain an increased level of major ratios (capital, liquidity) on an individual basis. This approach now allows to dramatically change their business approach, significantly reducing the risk component relating to the customer choice included in the previously selected business models. Transformation of sectoral business approach will be completed with the integration of new business models in the future business strategies and the approval of the strategies.


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