With this decision the FCMC has closed the banks’ individual hearing period and completed a supervisory dialogue on new requirements with 12 Latvian banks. The assessment of banks’ business models was carried out in line with the methods realised by the European Central Bank (ECB) and FCMC, or the so-called Supervisory Review and Evaluation Process (SREP). The requirements for bank individual performance indicators are set out in this process, as well as future tasks based on supervisory findings, including provision of more frequent information and negotiations on the implementation of the new business models.
FKTK Chairman Pēters Putniņš: “In a few years, the most extensive reform has been taking place in Latvia’s financial sector, initiated and closely controlled by the FCMC, which was launched in 2016, upon becoming a member of the OECD. As a whole, a thorough work has been done in the Latvian banking sector to reduce risks; we have radically transformed what was built in the previous 25 years, achieving a real change of understanding in the banking business approach. All banks have demonstrated their good will, setting free the state from undue reputational risk. Over a limited period, nearly ten billion euro of foreign customer money have left the Latvian financial sector. The process was handled very delicately and without unnecessary shocks, which in turn is considered a high sector achievement, as the reform process that was planned in five years was implemented in two years. This demonstrates the high professional level and strength of the management of our financial sector. Each of the 12 banks for which a different business development path has now been selected, has had their own dialogue with the FCMC experts regarding change management, therefore the solutions have been individual. This has been a very scrupulous task of evaluating all facets in the chosen new business models. I believe that we will now have a banking sector in line with the size of economy and performance in the future. Now it is very important to regain a good international reputation and confidence in our ability to change and self-regulate into a new growth cycle. This is a good starting point for restoring the international reputation of the financial sector.”
New environment for business development
The change management in the banking sector led by the FCMC (since 2016) has entered into a final stage. The bank’s future performance results will show the new business models’ appropriateness for the new conditions and the ability to absorb the effects of the period of change. Over the next one to three years the banks’ performance will be evaluated step by step in the light of the new business situation, identifying the most effective business niches to ensure the profitability and sustainability of new business models with the risk levels acceptable to our state and economy.
FKTK Chairman Pēters Putniņš: “This is an entirely different risk model that has been embedded into the banks’ new business models. There is no reason anymore to talk about a free flow of high-risk foreign money in Latvia. The percentage of potentially risky foreign deposits and transactions will now be so small that there will be no basis for concern about our national authorities’ ability to control them properly.”
With the new risk mitigation approach, the Latvian banking sector is now focusing on attracting the European Union (EU) and the European Economic Area (EEA) customers, giving up most of their clients outside this economic area. As part of the Latvian banks have radically changed the previous business approach that was basically focused on the foreign customer business management, a new phase has now started, therefore considering the new deposit and customer structure in the banking sector overall, a new term will be used in the future: “Latvian banks” (instead the two previously used, i.e. Latvian foreign customer banks and domestic banks).
Indicators of Latvian banking sector performance in the period of change:
More information about the Supervisory Review and Evaluation Process (SREP) on the ECB website:
INFOGRAPHICS: “Assessment of new business models in Latvian banking sector”:
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