Latvian government approves merger of financial regulator with central bank

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The Cabinet of Ministers on May 26 supported in principle merging the Bank of Latvia with the financial regulator, the Financial and Capital and Market Commission (FKTK), the LETA newswire reported.

As reported by LSM previously, the idea was formally floated last week after months of general discussion on the subject. According to the government's decision, the two institutions will be merged either in 2022 or in 2023.

The Finance Ministry's report reviewed by the government states that adding regulatory functions to the Bank of Latvia will benefit the public. In the meantime, the risks identified must be dealt with through appropriate risk mitigation measures, including an appropriate division of duties, rights and responsibilities of the two institutions.

As a result of the merger, macroprudential policies will become more effective, and the merged institution's decisions will also become more effective. According to the Finance Ministry, the merger will also reduce personnel, financial and material costs in the medium term. The total annual operating expenditures of the merged institution are estimated to be about EUR 1.6 million or 3.4 percent lower than the expenditures of the two separate institutions. The merger will also contribute to more coordinated and efficient development of the financial sector.

The most significant risks from the merger include greater concentration of influence in the financial system, as well as a potential conflict of interest between monetary policy and macro- and microprudential supervision.

The Finance Ministry points out that the merger may potentially impact the central bank's reputation. It is also possible that claims could be filed over microprudential supervision and regulatory decisions against the merged institution, which may pose threat to the institution's financial independence.

However, the Finance Ministry explains that the identified risks can be managed by implementing appropriate risk mitigation measures, including appropriate division of duties, rights and responsibilities, operation of the internal control system and regulatory framework.

After merging the FKTK with the Bank of Latvia, the Finance Ministry will continue to develop financial and capital market policy.

The merger will still need to be approved by Saeima.

The FKTK was established on July 1, 2001. It is an autonomous public institution, which carries out the supervision of Latvian banks, credit unions, insurance companies and insurance brokerage companies, participants of financial instruments market, as well as private pension funds, payment institutions and electronic money institutions.

The nature of the dividing lines between the two institutions has come under question as part of the ongoing court case involving former central bank governor Ilmārs Rimševičs. He denies offering to use his position to influence regulatory decisions taken by the FKTK.

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