Financial and capital markets preparing for the introduction of the euro. By joining the euro zone, Latvia’s banking supervisory model will change

11.10.2013
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Press Release
September, 2013

Financial and capital markets preparing for the introduction of the euro
By joining the euro zone, Latvia’s banking supervisory model will change

All the market participants subject to supervision of the Financial and Capital Market Commission (FCMC) have developed their action plans for the introduction of the euro and final preparations are now ongoing, according to the data available to the FCMC.  This enables us to have confidence that the financial and capital markets will be completely ready for the adoption of the euro. By entering the euro area, the banking supervisory model will be also changed in Latvia as from October 2014. The single supervisory mechanism (SSM) provides for a broader mandate for the European Central Bank (ECB), which will exercise supervision of largest credit institutions of the euro area in close collaboration with national regulators.

Preparedness for the euro
Monitoring of the process of preparation for the introduction of the euro by the operators under our supervision is within the scope of FCMC responsibilities, and so far we are satisfied with their accomplishment
, the FCMC Board member, Director of Supervision Department Jeļena Ļebedeva emphasized. Results of market participant surveys show that all the market participants have their action plans in place, potential risks are identified and measures for their reduction are set as well as testing of information systems is already underway. The procedure for switching from the lats to the euro have been developed for the banks that provide ATMs services, as well as additional security measures are scheduled.

Following the preparedness of market operators for the introduction of the euro, the FCMC will be responsible for monitoring compliance of cash and non-cash currency changeover with the provisions of the Law on Introduction of the Euro by market participants, as well as adherence of the market players to the principle of legal continuity. At the time of switchover to the euro the FCMC will assume one more function – to follow the changes in the banking charges and fees for services and reasons behind any changes, and where the necessity arises to require explanations from the banks.

Latvia within the single supervisory mechanism
With entering the euro area Latvia will automatically join the single supervisory mechanism for banks that should commence functioning already in October 2014 according to current estimates . This means that the single supervisory mechanism will have an impact also on the existing supervisory model for the Latvian banks by sharing functions between the ECB and the national regulators. The single supervisory mechanism provides for a broader ECB mandate, which will exercise supervision of largest eurozone credit institutions closely cooperating with national regulators.

The single supervisory mechanism, which principles of operation were agreed among the EU ministers of finance in December 2012, is part of the plan of the European banking union. The purpose of the banking union to establish a single supervisory mechanism in the European Union has been implemented to strengthen financial stability and extend supervision of the banking sector. Three keystones for successful implementation of intention are: 1) a single supervisory mechanism; 2) a single resolution mechanism for the troubled banks, to avoid as much as possible costly banking bail-outs for tax-payers in the future; 3) a harmonised deposit guarantee scheme.

Admittedly, the foundation of the banking union and its first move, the single supervisory mechanism, is a quite ambitious plan to restore confidence in the banking se?tor and implement further banking integration in the European Union. For Latvia, we expect no decrease in the FCMC workload following the change of supervisory model, on the contrary – it could increase. The transitional period will be challenging, when the first steps are to be made not only by the ECB, but we have to learn how to cooperate and adapt to the market under the new supervisory model, the FCMC Chairman Kristaps Zakulis pointed out.

On 12 September 2013, the European Parliament voted in favour of granting banking supervision powers to the ECB. In coming weeks the EU Council will have to confirm its support for the single supervisory mechanism by adopting the Regulation according to which the powers of coordinating supervisory authority in the banking sector of the euro area will be conferred on the ECB. Whereas a public consultation of the Regulation of the ECB framework is planned approximately until April 2014, to specify procedures and principles for submission and evaluation of documentation for receipt of a licence or changes in acquiring a qualifying holding, for performing supervision, functions of the ECB and national regulators, the process of cooperation and information exchange between the ECB and national regulators, methodologies for the assessment of significance of banks in respect of subjecting them to the direct supervision of ECB. At present the ECB is drafting cooperation principles with the FCMC experts participating in working groups designated for the purpose.

Though the ECB is planning to approve the list of banks by the end of this year, overall the ECB will perform direct supervision of about 130 credit institution groups. According to provisional data, in Latvia the three largest banks in terms of assets could enter the list, namely, Swedbank, SEB banka and ABLV Bank.

As regards above banks, the issues within the ECB’s competence will be such as compliance with the EU regulatory provisions for own funds of credit institutions, large exposure limits, liquidity ratio, structure of financing. Adequacy of credit institution strategy, procedures and measures implemented for sufficient risk management will be evaluated, as well as adequacy of credit institution own funds for covering risks associated with its operation and potential risks. As regards other credit institutions the above issues will remain under the authority of FCMC. The FCMC will cooperate with the ECB reporting to it significant supervisory resolutions as well as providing information about other credit institutions.

Supervision of commercial banking internal control systems in place will remain within the scope of the FCMC responsibilities, as well as anti-money laundering issues, compliance with rules governing the financial instruments market and other aspects. National supervisory authorities will also continue supervision of the market participants other than credit institutions, i.e. credit unions, insurance sector, operators of financial instruments market, pension funds, payment institutions, electronic money institutions etc.

Further information:

Laima Auza
Head of Communications Department
Financial and Capital Market Commission
Phone: +371 67774860, +371 26148001
laima.auza@fktk.lv

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