Latvian financial regulator: banks now focused on domestic market

The head of Latvia's financial regulator, the Financial and Capital Markets Commission (FKTK) said February 5 that a huge overhaul of the banking system was now "in a closing phase" and that in future Latvian banks would focus on the domestic market instead of seeking to attract overseas cash - sometimes of dubious origins.   

FKTK summarized Q4 2018 data on the transformation process of Latvian banking sector, which was technically launched in 2016 but which massively accelerated a year ago when US regulators floated allegations of massive money laundering in the Latvian banking sector, which led to the collapse of ABLV bank.

Ever since then, the banks, the regulator, policymakers and law enforcement have been engaged in a massive drive to clean up the sector or risk being regarded as a money-laundering hub and consequently frozen out of mainstream financial flows.  

Complex measures implemented in 2018 "have substantially changed the Latvian banks' customer base and enabled the introduction of new business models with a further focus on the servicing and attraction of domestic and European Union (EU) customers," the regulator said.

FKTK chairman Pēters Putniņš said: "We can now with satisfaction look at the dominance of local deposits... The sustainability of domestic deposits and even the gradual increase in their deposits have been particularly important during the transformation phase, reaching the historically highest level of domestic deposits - 13 billion euro... Particularly great efforts were made last year, with banks abandoning the risky customer segment even more rapidly than before."

According to the FKTK data the Latvian banking sector now has domestic deposits accounting for 91% of all banking deposits, of which 80% are deposited by local customers, 11% by residents of other EU member states and 9% by customers from other countries. As recently as 2015, domestic deposits were outweighed by non-resident deposits.

The sharp decline in foreign deposits has seen them shrink from 53% of all deposits in 2015 to 20% at the present, which FKTK said demonstrated "stabilization in the segment."

Not without interest to the US authorities, in comparison with 2014, foreign customers’ payments with US dollars have contracted more than 20 times, hitting the all-time low level observed in the two last quarters of 2018, which FKTK said "shows a historic turn in the Latvian banking sector's business approach."

However, the outflow of cash has left the sector smaller, if safer, than before. In 2015 around 23 billion euros were deposited in Latvian banks. Today the figure is around 16 billion, a reduction of 30%. In 2015 overseas cash was worth 12 billion euros. Today it is just 3 billion.

In August the Latvian government launched a newsletter in English to update the international community on reforms in the Latvian financial sector. Originally planned for release every two weeks, it now seems to appear less frequently, with the most recent appearing on January 16.

However, as recently reported by LSM, FKTK also recently updated the way it presents its data to an international audience. 

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