Insufficient Information Summary

The International Monetary Fund's (IMF) Financial System Stability Assessment (FSSA), published in 2002, determined that Latvia had achieved "a high degree of compliance" with the Basel Core Principles (BCPs) for Effective Banking Supervision. The legislative framework governing Latvia's financial sector was deemed generally consistent with international best practices and European Union directives. The prudential standards complied with international best practices in all areas. However, the IMF's 2002 FSSA assessed Latvia's regulatory environment under the former banking supervisory agency, the Bank of Latvia (BoL). On July 1, 2001, a unified capital and financial markets regulator - the Financial and Capital Market Commission (FCMC) - was launched, integrating the BoL's Banking Supervision Department, the Securities Market Commission, and the Insurance Supervision Inspectorate. The IMF, in its 2006 Article IV Consultation with Latvia, pointed out that the regulatory and supervisory framework for banks needed to be strengthened. Moreover, the introduction of Basel II demanded closer and more effective cooperation with foreign supervisors. The current international financial market crisis has unveiled a number of weaknesses, both in the Latvian banking system itself and in the way it is supervised, states the IMF's 2009 Staff Report. In this regard, it is recommended that the FCMC launch a focused examination of the banking sector, requiring banks to increase capital where appropriate. Despite the information provided above, none of the sources publicly available addresses Latvia's compliance with the BCPs since the inception of the FCMC as the banking supervisory authority.

General Overview

Until 2001, the Bank of Latvia (BoL) had been responsible for the supervision of the banking system in Latvia. Beginning July 1, 2001, a unified capital and financial markets regulator--the Financial and Capital Market Commission (FCMC)--was launched, integrating the BoL's Banking Supervision Department, the Securities Market Commission, and the Insurance Supervision Inspectorate. The International Monetary Fund (IMF) conducted a Financial Sector Assessment Program in 2001 of Latvia's observance of the Basel Core Principles (BCPs) for Effective Banking Supervision, and reported its findings in its 2002 Financial System Stability Assessment (FSSA). The IMF report, which focused mainly on the supervisory work of the former banking supervisory agency, the BoL, concluded that Latvia had achieved "a high degree of compliance with the Core Principles" (p. 28). Most of the BCPs were given a "compliant" (p. 28) rating. As of 2002, per the same report, the legislative framework governing Latvia's financial sector was generally consistent with international best practices and European Union (EU) directives. The prudential standards complied with international best practices in all areas.

The Law on the Financial and Capital Market Commission of 2001 and the Credit Institution Law of 1995 provide the legal framework for banking supervision in Latvia. According to the U.S. Department of Commerce (DoC) 2008 Country Commercial Guide, Latvian banking legislation includes provisions on accounting and financial statements, minimum capital adequacy requirements, large exposures, restrictions on insider lending, open foreign exchange positions, and loan-loss provisions. A Deposit Insurance Law and an Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT) Law have also been adopted. The U.S. DoC's 2008 report highlights that "the regulatory framework for commercial banking incorporates all principal requirements of European Union directives." Capital adequacy and loan loss provisions even exceed EU requirements. The IMF's 2009 Staff Report indicates that the banking laws will be amended to allow the FCMC, BoL and the Ministry of Finance "to take timely and effective actions to restore financial stability in systemic crises" (p. 65).

The IMF's 2006 Article IV Consultation with Latvia pointed out that the regulatory and supervisory framework for banks needed to be strengthened. Moreover, the introduction of Basel II demanded a closer and more effective cooperation with foreign supervisors. The IMF's 2009 Staff Report states that "the current crisis has unveiled a number of weaknesses, both in the banking system itself and in the way it is supervised" (p. 24). In this regard, it is recommended that the FCMC launch a focused examination of the banking sector, requiring banks to increase capital where appropriate.

Latvia is a stable and growing regional financial center with most commercial banks having a sizeable nonresident deposit base, according to the U. S. Department of State's (DoS) 2008 International Narcotics Control Strategy Report. Nearly 60 percent of the banking system in Latvia is owned by banks from Sweden and other Nordic countries, states the IMF's 2009 Staff Report. The remaining banks are mainly domestically owned. At the end of 2007, per the FCMC's 2007 Annual Report, there were 21 banks and four branches of foreign banks operating in Latvia. Total assets of Latvian banks increased by 45.4 percent in 2006, reaching USD29.76 billion, notes the 2007 KPMG Investment Guide. During the same period, the amount of deposits increased by 25.1 percent, while loans issued to non-banks increased by 56.2 percent.

The Principles

II1. (1) Clear responsibilities and objectives for each supervisory agency.

At the time of the IMF's 2002 FSSA, it was stated that the objectives and responsibilities of the supervisor were clearly defined in the laws and regulations. However, it should be noted that the FSSA assessed the performance of the former supervisory agency, the BoL. On July 1, 2001, the FCMC was launched as the unified capital and financial markets regulator in Latvia, integrating the BoL's Banking Supervision Department, the Securities Market Commission, and the Insurance Supervision Inspectorate. Following the change in the regulator, there is insufficient information publicly available addressing Latvia's compliance with this principle.

II1.(2) Operational independence and adequate resources.

The IMF's 2002 FSSA indicated that Latvian laws and regulations outlined the responsibilities and objectives of the regulator. The regulator was also deemed operationally independent with adequate resources for its tasks. However, it should be noted that the FSSA assessed the performance of the former supervisory agency/regulator, the BoL. Beginning July 1, 2001, the FCMC became responsible for the supervision of the banking system in Latvia. The FCMC's 2007 Annual Report indicates that the FCMC has been operating as an entirely autonomous public institution since its inception on July 1, 2001. For the first time in 2007, activities of the FCMC were financed solely by payments from the participants of financial and capital market, as highlighted in the FCMC's 2007 Annual Report. Until the year 2007, financing for the FCMC's activities had also been provided by payments from the national State budget and from the BoL. According to the IMF's 2009 Staff Report, the FCMC will be given adequate additional resources to effectively carry out its tasks. Following the change in the regulator, there is insufficient information publicly available addressing Latvia's compliance with this principle.

II1.(3) A suitable legal framework for authorization and ongoing supervision.

The IMF's 2002 FSSA noted that the legal framework for banking supervision was suitable, including for the authorization of banking establishments and their ongoing supervision. Nevertheless, there is insufficient information publicly available explicitly addressing Latvia's compliance with this principle.

II1.(4) A suitable legal framework to address compliance with laws as well as safety and soundness concerns.

At the time of the IMF's 2002 FSSA, it was stated that Latvia had a suitable legal framework for banking supervision, which addressed compliance with laws as well as soundness and safety concerns. Nevertheless, there is insufficient information publicly available explicitly addressing Latvia's compliance with this principle.

II1.(5) Legal protection for supervisors.

The IMF's 2002 FSSA indicated that Latvia's legal framework for banking supervision ensured the legal protection of supervisors. Nevertheless, there is insufficient information publicly available explicitly addressing Latvia's compliance with this principle.

II1.(6) Arrangement for sharing of information between supervisors and protection of confidentiality of shared information.

The IMF's 2002 FSSA highlighted that the legal framework for banking supervision included arrangements for sharing information between supervisors. In order to promote inter-agency communication, Latvian authorities are committed to a regular exchange of information with the BoL and FCMC, states the IMF's 2009 Staff Report. However, the available sources do not directly address Latvia's compliance with this principle.

FC2. Clearly defined permissible activities for banks and control of the use of the word 'bank'.

The IMF's 2002 FSSA indicated that permissible activities of licensed institutions were clearly defined. The BoL set criteria and rejected applications for establishments that did not meet the standards test. Beginning July 1, 2001, the FCMC became responsible for the supervision of the banking system in Latvia. Following the change in the regulator, there is insufficient information publicly available addressing Latvia's compliance with this principle.

II3. Criteria for structure, directors, operating plan, controls, financial condition and capital base.

There is insufficient publicly available information to address Latvia's compliance with this principle.

II4. Authority to review and reject transfer of ownership.

The IMF's 2002 FSSA indicated that bank supervisors had effective authority to review and reject significant transfers of ownership or controlling interests in banks. However, there is insufficient information publicly available explicitly addressing Latvia's compliance with this principle.

II5. Authority to review major acquisitions and investments.

At the time of the IMF's 2002 FSSA, it was stated that the BoL had the authority to establish criteria for reviewing major acquisitions and investments by banks. Beginning July 1, 2001, the FCMC became responsible for the supervision of the banking system in Latvia. Following the change in the regulator, there is insufficient information publicly available addressing Latvia's compliance with this principle.

II6. Minimum capital adequacy requirements (meet Basle Capital Accord for internationally active banks).

The IMF's 2002 FSSA indicated that minimum capital adequacy requirements were more stringent than those established by the Basel Capital Accord. With regards to the implementation of Basel II, amendments to the Credit Institution Law were passed in 2007 in line with EU Capital Requirements Directive No. 2006/48/EC and No. 2006/49/EC. A number of regulations were also adopted, including Regulations on the Calculation of Minimum Capital Requirements, Regulations on the Compliance with Restrictions on Exposures, and Regulations for Establishing an Internal Control System. The U.S. DoC's 2008 report highlights that capital adequacy and loan loss provisions in Latvia exceed EU requirements. It is recommended that the FCMC launch a focused examination of the banking sector, requiring banks to increase capital where appropriate, states the IMF's 2009 Staff Report. However, the available sources do not directly address Latvia's compliance with this principle.

II7. A method exists for the evaluation of procedures related to loans, investments and portfolio management.

According to the IMF's 2002 FSSA, the BoL's evaluation of credit institutions' investment criteria and credit policies was "in line with the Core Principles" (p. 29). Beginning July 1, 2001, the FCMC became responsible for the supervision of the banking system in Latvia. Following the change in the regulator, there is insufficient information publicly available addressing Latvia's compliance with this principle.

II8. Policies, practices and procedures for evaluating the quality of assets and the adequacy of loan loss provisions and reserves.

The IMF's 2002 FSSA indicated that the BoL had implemented effective supervision and regulation mechanisms for evaluating credit institutions' loan evaluation and loan loss provisions. According to the U.S. DoC's 2008 report, loan loss provisions exceed EU requirements. Beginning July 1, 2001, the FCMC became responsible for the supervision of the banking system in Latvia. Following the change in the regulator, there is insufficient information publicly available addressing Latvia's compliance with this principle.

II9. Prudential limits and management information system on concentration of exposure.

According to the IMF's 2002 FSSA, prudential limits were "compliant with the Core Principles" (p. 29). In addition, the BoL had limits on large exposures "in line with the Core Principles" (p. 29). Beginning July 1, 2001, the FCMC became responsible for the supervision of the banking system in Latvia. Following the change in the regulator, there is insufficient information publicly available addressing Latvia's compliance with this principle.

II10. Arm's length rule and monitoring for connected lending.

As stated in the IMF's 2002 FSSA, the BoL had limits on connected lending "in line with the Core Principles" (p. 29). Beginning July 1, 2001, the FCMC became responsible for the supervision of the banking system in Latvia. Following the change in the regulator, there is insufficient information publicly available addressing Latvia's compliance with this principle.

II11. Policies and procedures for country risk and transfer risk.

The IMF's 2002 FSSA stated that the BoL had limits on country risk "in line with the Core Principles" (p. 29). Beginning July 1, 2001, the FCMC became responsible for the supervision of the banking system in Latvia. Following the change in the regulator, there is insufficient information publicly available addressing Latvia's compliance with this principle.

II12. Measuring and monitoring market risk. Limit and/or specific capital charge on market risk exposure.

The IMF's 2002 FSSA stated that the BoL had limits on market risk "in line with the Core Principles" (p. 29). Beginning July 1, 2001, the FCMC became responsible for the supervision of the banking system in Latvia. Following the change in the regulator, there is insufficient information publicly available addressing Latvia's compliance with this principle.

II13. Comprehensive risk management processes.

At the time of the IMF's 2002 FSSA, the IMF recommended introducing "more explicit regulations on interest rate risk in the whole banking portfolio" (p. 30). In 2007, the FCMC, as indicated in its 2007 Annual Report, conducted 23 bank inspections, in particular focusing on risk management, namely operational risk, interest rate risk, foreign exchange risk, and liquidity risk. Nevertheless, there is insufficient information publicly available addressing Latvia's compliance with this principle.

II14. Adequate internal controls.

According to the IMF's 2002 FSSA, the BoL had internal audit and control systems "in line with the Core Principles" (p. 29). The Regulations on Establishing an Internal Control System were adopted in May 2007. Beginning July 1, 2001, the FCMC became responsible for the supervision of the banking system in Latvia. Following the change in the regulator, there is insufficient information publicly available addressing Latvia's compliance with this principle.

II15. Strict "know-your-customer" rules and high ethical and professional standards.

The Latvian government criminalized money laundering for all serious crimes in 1998. At the time of the IMF's 2002 FSSA, it was noted that rules for the prevention of money laundering were in line with international standards. The Law on Prevention of Money Laundering and Terrorist Financing (hereafter referred to as "AML/CFT Law") came into force on August 13, 2008, transposing the relevant EU Directives. The AML/CFT Law requires financial institutions to gather customer identification and keep records, notes the 2008 U. S. DoS's International Narcotics Control Strategy Report. Financial institutions must report both suspicious activities and unusual transactions to Latvia's financial intelligence unit, the Office for the Prevention of the Laundering of Proceeds Derived from Criminal Activity, also known as the Control Service. In 2007, the FCMC, as stated in its 2007 Annual Report, furthered its collaboration with the Selected Committee of Experts on the Evaluation of Anti-Money Laundering Measures (MONEYVAL). The progress report of Latvia on the implementation of the IMF Report on Latvia's observance of Financial Action Task Force AML/CFT recommendations was approved at the MONEYVAL's 25th plenary meeting and published in June 2007. Despite the information provided above, there is insufficient information publicly available addressing Latvia's compliance with this principle.

II16. Effective supervisory system consisting of on-site and off-site supervision.

According to the IMF's 2002 FSSA, the banking supervision function consists of on-site and off-site supervision. Beginning July 1, 2001, the FCMC became responsible for the supervision of the banking system in Latvia. Following the change in the regulator, there is insufficient information publicly available addressing Latvia's compliance with this principle.

II17. Regular contact with bank management and understanding of bank's operations.

The IMF's 2002 FSSA indicated that BoL supervisors maintained regular contact with bank management. Beginning July 1, 2001, the FCMC became responsible for the supervision of the banking system in Latvia. Following the change in the regulator, there is insufficient information publicly available addressing Latvia's compliance with this principle.

II18. Analytical reports and statistical returns on solo and consolidated basis.

At the time of the IMF's 2002 FSSA, it was noted that BoL supervisors collected, reviewed, and analyzed banks' prudential reports and statistical returns on a solo and consolidated basis. Beginning July 1, 2001, the FCMC became responsible for the supervision of the banking system in Latvia. Following the change in the regulator, there is insufficient information publicly available addressing Latvia's compliance with this principle.

II19. Independent validation of supervisory information through on-site examination or external auditors.

The IMF's 2002 FSSA indicated that the BoL used on-site examinations and auditor reports for an independent validation of supervisory information. Beginning July 1, 2001, the FCMC became responsible for the supervision of the banking system in Latvia. Following the change in the regulator, there is insufficient information publicly available addressing Latvia's compliance with this principle.

II20. Ability to supervise on a consolidated basis.

According to the IMF's 2002 FSSA, the BoL supervised banks on a consolidated basis. The FCMC's 2007 Annual Report indicates that Regulations on the Consolidated Supervision have been introduced to bring reporting requirements in line with the Committee of European Banking Supervisors' consolidated financial reporting framework (FINREP). Beginning July 1, 2001, the FCMC became responsible for the supervision of the banking system in Latvia. Following the change in the regulator, there is insufficient information publicly available addressing Latvia's compliance with this principle.

II21. Consistent accounting policies and practices that provide a true and fair view of the financial condition of the bank.

At the time of the IMF's 2002 FSSA, the laws and regulations governing accounting standards and practices enabled supervisors to obtain a true and fair view of the financial conditions of banks. The accounting standards were deemed satisfactory. Starting in 2002, per the March 2006 update available from the Deloitte & Touche IAS Plus website, financial institutions in Latvia have been legally required to prepare and publish their financial statements in line with the International Financial Reporting Standards (IFRS), in addition to the EU requirement that listed companies prepare their consolidated financial statements using IFRSs. However, the available sources do not directly address Latvia's compliance with this principle.

II22. Adequate supervisory measures to ensure timely corrective action.

At the time of the IMF's 2002 FSSA, while supervisory measures were generally adequate, the IMF recommended amending the Credit Institution Law to ensure compliance with Core Principles related to corrective action. Nevertheless, there is insufficient information publicly available addressing Latvia's compliance with this principle.

II23. Banking supervisors must practice global consolidated supervision over their internationally-active banking organizations.

The IMF's 2002 FSSA indicated that rules and regulation on cross-border banking were generally satisfactory. The IMF recommended amending the Credit Institution Law to ensure compliance with Core Principles related to overseas supervision. Nevertheless, there is insufficient information publicly available addressing Latvia's compliance with this principle.

II24. International exchange of information with other supervisors.

The FCMC's 2007 Annual Report indicates that the FCMC has efficiently cooperated with foreign supervisory authorities, and signed 24 bilateral cooperation agreements, of which 13 agreements are with foreign supervisors. Nevertheless, there is insufficient information publicly available addressing Latvia's compliance with this principle.

II25. Supervision of local operation of foreign banks and information sharing with home country supervisors.

According to the IMF's 2002 FSSA, "host-country supervision, and supervision over foreign banks, is compliant with the relevant Core Principles" (p. 29). However, it should be noted that the FSSA assessed the performance of the former supervisory agency, the BoL. Following the change in the regulator, there is insufficient information publicly available addressing Latvia's compliance with this principle.