Latvian financial regulator: "Foundations of the banking system" being changed

Latvia's banking sector is being transformed in a fundamental way so that it is no longer reliant upon foreign deposits of dubious origin, the country's financial regulator insisted October 31.

Financial and Capital Markets Commission (FKTK) head Pēters Putniņš said in statement that the sector is going through an "historic period of time when the very foundations of the banking system, built over the past 25 years, are being overhauled."

The situation is "radically different" to the long-time image of Latvia as a global money-laundering hub, he said, after changes enacted in the wake of a regulatory clampdown by the U.S. which led to the liquidation of ABLV bank - a process which is ongoing - and a long overdue get-tough attitude from policymakers in Latvia.

"Our dialogue with the sector shows that the banks have been taking active measures and seeking new businesses approaches; the new models are being integrated in their business strategies. This has been a very scrupulous work with each bank, assessing all aspects in the new business model chosen by the bank. (...) I believe that already this year we will say good-bye to the terms as foreign customer banks and domestic banks," Putniņš said.

Latvian banks and in particular the banks operating in the foreign customer segment have experienced a dramatic decrease in foreign customer deposits, with domestic (80%) and the European Union member states (10%) deposits dominating, and their total share now amounting to 90% of all bank deposits in Latvia. As recently as 2015, more than half of deposits in Latvian banks were held by non-residents.

The Latvian banking sector is now focusing on attracting EU and EEA customers and "surrendering" most of its customer base from other sources, the FKTK statement said.

Clean-up efforts to prevent Latvian boutique banks being used for money-laundering and sanctions-busting are continuing in the sector, with FKTK handing out a huge fine as recently as October 19, as reported by LSM.

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