ECB flags 'potential negative consequences' of Latvia's mortgage relief law

The European Central Bank has published its view on measures already announced by Latvia which are supposed to help homeowers meet their increased mortgage obligations.

As previously reported by LSM, the Ministry of Finance came up with proposals to provide mortgage relief to borrowers, which were opposed by banks, who argued that the measures risked distorting the market. That in turn led to accusations that the banks were acting like a cartel by a former Finance Minister.  

The ECB's opinion, signed by Christine Lagaarde, begins with a clear rap over the knuckles of the Latvian authorities for not consulting them much earlier in the legislative process.

"The ECB notes that the draft law was already passed by the Latvian Parliament on 6 December 2023, but that the legislative procedure is not yet complete pending promulgation by the President or referral back to the Parliament. The ECB must be consulted at an appropriate stage in the legislative process. The ECB has emphasised on several occasions in its opinions that even in cases of particular urgency, or where the legislation has reached an advanced stage, the national authorities are not relieved of their duty under Articles 127(4) and 282(5) of the Treaty to consult the ECB at an appropriate stage in the national legislative process that allows sufficient time for (1) the ECB to examine the draft legislative provisions and (2) the relevant national authorities to take the ECB’s opinion into consideration before the provisions are adopted," said the ECB.

It continues in a critical vein noting that "The implementation of the draft law is expected to entail financial costs for the Latvian banking sector. The consulting authority has not submitted an explanatory memorandum containing an impact assessment regarding the profitability, capitalisation and future lending capacity of the banking sector."

Furthermore "the eligibility criteria laid down in the draft law do not sufficiently limit the scope of borrowers entitled to a reduction in mortgage loan interest payments as the draft law will impact the majority of outstanding mortgages," according to the ECB.

It then issues a string of warnings.

"The widespread and untargeted reduction in effective loan interest payments that adoption of the draft law is envisaged to achieve could give rise to financial stability concerns," it advises, adding "Reduced bank profitability implies a lower capacity for banks to retain earnings and thus may reduce capital available to credit institutions. Beyond reducing bank resilience, this could have adverse effects on bank credit supply. The lower profitability resulting from the application of the draft law could push banks to offer less favourable credit terms and increase lending rates, and may lead to lower credit supply, which can then adversely affect real economic growth."

"Furthermore, the draft law could distort market competition and impair the level playing field across the banking union," warns the ECB. It also "may generate additional unintended consequences with negative implications for financial stability. Domestic and foreign investors could have less appetite to invest in Latvian credit institutions, as adoption of the draft law would lower the profitability outlook of credit institutions." 

"In the light of the above, the ECB recommends that the draft law is complemented by a thorough analysis of the potential negative consequences for the banking sector," it concludes.

The full opinion can be read here.


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