FCMC sets a countercyclical capital buffer rate of 0% within the macroprudential supervision framework
The global financial crisis demonstrated that the micro-prudential supervision, mainly focused on ensuring stability at the level of individual financial institutions, was not sufficient to guarantee the overall financial system stability. Therefore, in addition to the previous supervisory approach, the macroprudential supervision is being implemented that provides for applying appropriate measures in case of growing cyclical (e.g. excessive lending growth) or structural (e.g. related to systemically important (too big to fail) credit institutions) systemic risks. In such cases, appropriate measures may be applied, such as capital buffer rates, increased minimum capital and liquidity requirements, more stringent risk exposure limits etc.
In Latvia, the Bank of Latvia is a macroprudential supervision authority. Whereas, according to the Credit Institution Law, the Financial and Capital Market Commission (FCMC) is the authority responsible for applying the macroprudential instruments. Therefore, from this year, the FCMC will set and publish, on a quarterly basis, a countercyclical capital buffer (CCB) rate applicable to exposures to the residents of the Republic of Latvia, which the Latvian banks and foreign banks will start using in 12 months after setting the rate, and in certain cases, also investment firms in carrying out the calculation of the credit institution-specific CCB rate. The purpose of CCB is to ensure that credit institutions accumulate, during periods of economic growth, a sufficient capital base in order to absorb losses in stressed periods; it will serve as a safety cushion thus enabling credit institutions to continue lending under unfavourable economic conditions as well. In the calculation of credit institution-specific CCB rate the geographical structure of the credit institution transactions is to be taken into account as well as the CCB rates set in respective countries.
In view that the overall macroeconomic and financial sector situation is described as stable, and the total loan portfolio is decreasing, currently the FCMC has set the CCB rate applicable to exposures to the residents of the Republic of Latvia at 0%. Credit institutions will have to start applying this rate in the calculation of the credit institution-specific CCB rate from 1 February 2016, but as the rate is set at 0%, no additional capital buffer requirement will be imposed on banks applicable to exposures to the residents of the Republic of Latvia. Current lending and GDP growth rate forecasts indicate that no increase in the CCB rate would be required the next two years as well.
The CCB has been established based on several ratios: the CCB guide calculated for a respective quarter, other variables that are considered relevant for addressing cyclical systemic risk, as well as recommendations issued by the European Systemic Risk Board.
Macroprudential supervision in Latvia
In Latvia, the Bank of Latvia is the macroprudential supervision authority. The Bank of Latvia, the Ministry of Finance and the Financial and Capital Market Commission have entered into a cooperation agreement on promoting financial stability, and the Macroprudential Council was established in 2013. The Governor of the Bank of Latvia presides over the meetings of the Macroprudential Council with participation of the finance minister and FCMC chairman.
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