EC okays state bailout of failed Parex Bank

Take note – story published 9 years and 10 months ago

The European Commission has found the public support measures granted by Latvia to joint-stock companies Reverta and Citadele (formerly Parex Bank) to be in line with EU state aid rules and has therefore closed its in-depth investigation of the state bailout of Latvia’s second-largest commercial bank in 2008.

The bailout and restructuring provided for “good bank” Citadele (handling mostly core assets) and “bad bank” Reverta (in charge of non-core, non-performing assets) to be spun off as the twin successors to Parex in 2010, in a plan approved by the EC in September of that year.

The EC investigation was opened in April 2014 to look into a subordinated loan to Parex that received excessive terms of maturity, excessive liquidity support given to both Parex and Reverta, as well as possible misuse of state aid to Citadele, which has maintained its wealth management business beyond approved EC deadlines for divestment.

However, the EC ruling states that “the measures were necessary to preserve the stability of the Latvian banking system and for an orderly resolution of Reverta.” The investigation found in favor of Latvia that all measures taken have been “limited to the minimum necessary”, whether to “ensure the orderly winding down of Parex,” help Citadele meet “more demanding solvency requirements” in order to be sold off, or to “avoid distortions of competition.”

The EC’s decision also finds Latvia to be in line with more recent rule updates adopted for banking communications during times of financial crisis in 2013. These set forth requirements for bank owners and junior creditors to contribute as a first resort in case of capital shortfalls before asking for public funding.

The ruling is a second piece of good news for Reverta as it attempts to claw back as much money as possible from the tangled web of assets and subordinated loans that it inherited from the wreckage of Parex.

From July 1, changes to legislation meant the company would no longer have to keep paying out millions of euros a year to the former owners of Parex who guided the bank to its spectacular collapse via so-called "sub-debts" - essentially loans the owners had issued to themselves. 

According to Reverta's figures, the amendments will save more than €4m a year in interest payments as well as subordinated obligations worth €75m until the state money used in the bailout has been repaid in full.

For its part Citadele is supposed to be sold off by the end of the year, and with the EC ruling removing a major worry for potential investors, suitors are expected to emerge in coming weeks.

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