Browse Profiles > Latvia > Core Principles for Effective Banking Supervision
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Latvia

Core Principles for Effective Banking Supervision

Summary
In 2002, the International Monetary Fund's (IMF) Financial System Stability Assessment (FSSA) determined that Latvia complied with the Core Principles to a high degree. At the level of individual principles, most were assessed as compliant. At the time of the report the legislative framework governing Latvia's financial sector was deemed generally consistent with international best practices and European Union (EU) directives. The prudential standards complied with international best practices in all areas. It should be noted, however, that the FSSA assessed the regulatory environment under the previous supervisory agency, the Bank of Latvia (BoL). Beginning July 1, 2001, the Financial and Capital Market Commission (FCMC) became responsible for the supervision of the banking system in Latvia. In a 2006 Selected Issues report, the IMF cautioned that Latvia's authorities needed to continue their commitment to maintaining a strong supervisory framework. However, there is insufficient information publicly available as to Latvia's compliance with the Core Principles since the inception of the FCMC as the banking sector supervisor.

    General Overview

    According to the 2002 International Monetary Fund (IMF) Financial System Stability Assessment (FSSA) of Latvia, "Latvia was assessed as having a high degree of compliance with the Core Principles, and most of the Core Principles were assessed as being compliant" (p. 28) As of 2002, the legislative framework governing Latvia's financial sector was generally consistent with international best practices and European Union (EU) directives. The prudential standards complied with international best practices in all areas. It should be noted, however, that the FSSA assessed the regulatory environment under the previous supervisory agency, the Bank of Latvia (BoL). Beginning July 1, 2001, the Financial and Capital Market Commission (FCMC) became responsible for the supervision of the banking system in Latvia (Latvian Banks website). In 2006, the IMF stated that "with regard to supervision, the Latvian authorities should maintain high standards in the supervisory framework" (IMF 2006b, p. 62).
    In its 2005 Annual Report, published in 2006, the FCMC states that it operated as an entirely autonomous public institution governed by its Board. In 2005, the budget for the FCMC's activities came from payments from Latvia's financial and capital market participants, the national State budget, and the BoL. Besides being responsible for banking supervision, the FCMC also carries out the supervision of Latvian insurance companies and insurance brokerage companies, participants of financial instruments market, as well as private pension funds (FCMC website).
    The laws governing banking supervision in Latvia are the Law on the Financial and Capital Market Commission and the Law On Credit Institutions. Pursuant to the Law on Credit Institutions, the FCMC issues and revokes licenses and supervises financial institutions according to the laws of Latvia and the regulations of the FCMC (Latvian Banks website).
    The IMF, in its 2006 Article IV Consultation with Latvia, points out that the regulatory and supervisory framework for banks needs to be strengthened, particularly because of the delayed Euro adoption and the risks stemming from the credit boom. The IMF states further that, in setting prudential standards, open positions in Euros should be treated the same as any other foreign currency. Moreover, the introduction of Basel II demands a closer and more effective cooperation with foreign supervisors. Finally, the IMF claims that financial data on the household sector need to be more accurate and stress tests should stimulate feedback channels between macroeconomic shocks and the banking sector.
    As of 2004, there were 23 banks in Latvia, one of them being a branch of a foreign bank (Latvian Banks website).


    The Principles

    1. (1) Clear responsibilities and objectives for each supervisory agency.

    Based on the information publicly available, no level of compliance can be assigned for this principle. Beginning July 1, 2001, the FCMC became responsible for the supervision of the banking system in Latvia. Previously, the BoL performed this task (Latvian Banks website). The IMF FSSA published in 2002 stated that the objectives and responsibilities of the supervisor were clearly defined in the laws and regulations. However, it should be noted that the FSSA assessed the performance of the former supervisory agency, the BoL, and not the current supervisor, the FCMC. There is insufficient information regarding Latvia's compliance with this Principle after the FCMC became the regulatory body.

    1.(2) Operational independence and adequate resources.

    Based on the information publicly available, no level of compliance can be assigned for this principle. Beginning July 1, 2001, the FCMC became responsible for the supervision of the banking system in Latvia. Previously, the BoL performed this task (Latvian Banks website). The IMF FSSA published in 2002 stated that Latvian laws and regulations outlined the responsibilities and objectives of the Bank of Latvia (BoL). The BoL was operationally independent and had adequate sources for the task. According to the 2005 Annual Report by the FCMC, which was published in 2006, the commission operated as an entirely autonomous public institution governed by its Board. In 2005, the budget for the FCMC's activities came from payments from Latvia's financial and capital market participants, the national State budget and from the BoL. However, there is insufficient information regarding Latvia's compliance with this Principle after the FCMC became the regulatory body.

    1.(3) A suitable legal framework for authorization and ongoing supervision.

    Based on the information publicly available, no level of compliance can be assigned for this principle. Beginning July 1, 2001, the FCMC became responsible for the supervision of the banking system in Latvia. Previously, the BoL performed this task (Latvian Banks website). The IMF FSSA published in 2002 stated that the legal framework for banking supervision was suitable, including for the authorization of banking establishments and their ongoing supervision. However, it should be noted that the FSSA assessed the performance of the former supervisory agency, the BoL, and not the current supervisor, the FCMC and there insufficient information regarding Latvia's compliance with this Principle after the FCMC became the regulatory body.

    1.(4) A suitable legal framework to address compliance with laws as well as safety and soundness concerns.

    Based on the information publicly available, no level of compliance can be assigned for this principle. Beginning July 1, 2001, the FCMC became responsible for the supervision of the banking system in Latvia. Previously, the BoL performed this task (Latvian Banks website). The IMF FSSA published in 2002 stated that Latvia had a suitable legal framework for banking supervision, which addressed compliance with laws as well as soundness and safety concerns. However, it should be noted that the FSSA assessed the performance of the former supervisory agency, the BoL, and not the current supervisor, the FCMC and there insufficient information regarding Latvia's compliance with this Principle after the FCMC became the regulatory body.

    1.(5) Legal protection for supervisors.

    Based on the information publicly available, no level of compliance can be assigned for this principle. Beginning July 1, 2001, the FCMC became responsible for the supervision of the banking system in Latvia. Previously, the BoL performed this task (Latvian Banks website). The IMF FSSA published in 2002 stated that Latvia's legal framework for banking supervision ensured the legal protection of supervisors. However, it should be noted that the FSSA assessed the performance of the former supervisory agency, the BoL, and not the current supervisor, the FCMC and there insufficient information regarding Latvia's compliance with this Principle after the FCMC became the regulatory body.

    According to a 2002 report by the World Bank on the Financial Sector Assessment of Latvia, a draft law which provides for indemnity for supervisory staff of the FCMC was expected to be adopted by the end of 2001.However, no subsequent information is, as yet, available as to the enactment of this law.

    1.(6) Arrangement for sharing of information between supervisors and protection of confidentiality of shared information.

    Based on the information publicly available, no level of compliance can be assigned for this principle. Beginning July 1, 2001, the FCMC became responsible for the supervision of the banking system in Latvia. Previously, the BoL performed this task (Latvian Banks website). The IMF FSSA published in 2002 stated that the legal framework for banking supervision included arrangements for sharing information between supervisors. However, it should be noted that the FSSA assessed the performance of the former supervisory agency, the BoL, and not the current supervisor, the FCMC and there insufficient information regarding Latvia's compliance with this Principle after the FCMC became the regulatory body.

    2. Clearly defined permissible activities for banks and control of the use of the word 'bank'.

    Based on the information publicly available, no level of compliance can be assigned for this principle. Beginning July 1, 2001, the FCMC became responsible for the supervision of the banking system in Latvia. Previously, the BoL performed this task (Latvian Banks website). The IMF FSSA published in 2002 stated that permissible activities of licensed institutions were clearly defined. The Bank of Latvia set criteria and rejected applications for establishments that did not meet the standards test. However, there is insufficient information regarding Latvia's compliance with this Principle after the FCMC became the regulatory body.

    3. Criteria for structure, directors, operating plan, controls, financial condition and capital base.

    Based on the information publicly available, no level of compliance can be assigned for this principle. Beginning July 1, 2001, the FCMC became responsible for the supervision of the banking system in Latvia. Previously, the BoL performed this task (Latvian Banks website). There is insufficient information regarding Latvia's compliance with this Principle after the FCMC became the regulatory body.

    4. Authority to review and reject transfer of ownership.

    Based on the information publicly available, no level of compliance can be assigned for this principle. Beginning July 1, 2001, the FCMC became responsible for the supervision of the banking system in Latvia. Previously, the BoL performed this task (Latvian Banks website). The IMF FSSA published in 2002 stated that bank supervisors had effective authority to review and reject significant transfers of ownership or controlling interests in banks. However, there is insufficient information regarding Latvia's compliance with this Principle after the FCMC became the regulatory body.

    5. Authority to review major acquisitions and investments.

    Based on the information publicly available, no level of compliance can be assigned for this principle. Beginning July 1, 2001, the FCMC became responsible for the supervision of the banking system in Latvia. Previously, the BoL performed this task (Latvian Banks website). The IMF FSSA published in 2002 stated that bank supervisors had the authority to establish criteria for reviewing major acquisitions and investments by banks. However, there is insufficient information regarding Latvia's compliance with this Principle after the FCMC became the regulatory body.

    6. Minimum capital adequacy requirements (meet Basle Capital Accord for internationally active banks).

    The IMF FSSA published in 2002 stated that prudential limits were compliant with the Core Principles. The BoL carried out effective supervision and regulation of credit institutions' capital adequacy. Minimum capital adequacy requirements were more stringent than those established by the Basel Capital Accord. However, beginning July 1, 2001, the FCMC became responsible for the supervision of the banking system in Latvia. Previously, the BoL performed this task (Latvian Banks website). There is insufficient information regarding Latvia's compliance with this Principle after the FCMC became the regulatory body.

    According to the 2006 IMF Article IV Consultation with Latvia, EU member states are expected to implement the EU Capital Requirements Directive.

    7. A method exists for the evaluation of procedures related to loans, investments and portfolio management.

    The IMF FSSA published in 2002 stated that prudential limits were compliant with the Core Principles. The Bank of Latvia had implemented effective supervision and regulation mechanisms for evaluating credit institutions' investment criteria, credit policies, loan evaluation and loan loss provisioning, which were in line with the Core Principles. Minimum capital adequacy requirements were more stringent than those established by the Basel Capital Accord. However, beginning July 1, 2001, the FCMC became responsible for the supervision of the banking system in Latvia. Previously, the BoL performed this task (Latvian Banks website). There is insufficient information regarding Latvia's compliance with this Principle after the FCMC became the regulatory body.

    8. Policies, practices and procedures for evaluating the quality of assets and the adequacy of loan loss provisions and reserves.

    The IMF FSSA published in 2002 stated that prudential limits were compliant with the Core Principles. The IMF FSSA published in 2002 stated that prudential limits were compliant with the Core Principles. The Bank of Latvia implemented effective supervision and regulation mechanisms for evaluating credit institutions' investment criteria, credit policies, loan evaluation and loan loss provisions, which were in line with the Core Principles. Minimum capital adequacy requirements were more stringent than those established by the Basel Capital Accord. However, beginning July 1, 2001, the FCMC became responsible for the supervision of the banking system in Latvia. Previously, the BoL performed this task (Latvian Banks website). There is insufficient information regarding Latvia's compliance with this Principle after the FCMC became the regulatory body.

    9. Prudential limits and management information system on concentration of exposure.

    The IMF FSSA published in 2002 stated that prudential limits were compliant with the Core Principles. Beginning July 1, 2001, the FCMC became responsible for the supervision of the banking system in Latvia. Previously, the Bank of Latvia performed this task (Latvian Banks website). The Bank of Latvia implemented effective supervision and regulation mechanisms for large exposure limits, which were in line with the Core Principles. However, there is insufficient information regarding Latvia's compliance with this Principle after the FCMC became the regulatory body.

    10. Arm's length rule and monitoring for connected lending.

    The IMF FSSA published in 2002 stated that prudential limits were compliant with the Core Principles. Beginning July 1, 2001, the FCMC became responsible for the supervision of the banking system in Latvia. Previously, the BoL performed this task (Latvian Banks website). The Bank of Latvia implemented effective supervision and regulation mechanisms for monitoring connected lending, which were in line with the Core Principles. However, there is insufficient information regarding Latvia's compliance with this Principle after the FCMC became the regulatory body.

    11. Policies and procedures for country risk and transfer risk.

    The IMF FSSA published in 2002 stated that prudential limits were compliant with the Core Principles. Beginning July 1, 2001, the FCMC became responsible for the supervision of the banking system in Latvia. Previously, the BoL performed this task (Latvian Banks website). The Bank of Latvia implemented effective supervision and regulation mechanisms for country risk, which were in line with the Core Principles. However, there is insufficient information regarding Latvia's compliance with this Principle after the FCMC became the regulatory body.

    12. Measuring and monitoring market risk. Limit and/or specific capital charge on market risk exposure.

    The IMF FSSA published in 2002 stated that prudential limits were compliant with the Core Principles. Beginning July 1, 2001, the FCMC became responsible for the supervision of the banking system in Latvia. Previously, the BoL performed this task (Latvian Banks website). The Bank of Latvia implemented effective supervision and regulation mechanisms for measuring and monitoring market risk, which were in line with the Core Principles. However, there is insufficient information regarding Latvia's compliance with this Principle after the FCMC became the regulatory body.

    According to the 2005 Annual Report by the FCMC, in 2004 and 2005 the Commission continued enhancing the system for ongoing risk-based monitoring of individual market participants.

    13. Comprehensive risk management processes.

    The IMF FSSA published in 2002 stated that prudential limits were compliant with the Core Principles. Beginning July 1, 2001, the FCMC became responsible for the supervision of the banking system in Latvia. Previously, the BoL performed this task (Latvian Banks website). The Bank of Latvia implemented effective supervision and regulation mechanisms for risk management, which were in line with the Core Principles. However, there is insufficient information regarding Latvia's compliance with this Principle after the FCMC became the regulatory body.

    14. Adequate internal controls.

    The IMF FSSA published in 2002 stated that prudential limits were compliant with the Core Principles. Beginning July 1, 2001, the FCMC became responsible for the supervision of the banking system in Latvia. Previously, the BoL performed this task (Latvian Banks website). The Bank of Latvia implemented effective supervision and regulation mechanisms for internal control and audit of credit institutions, which were in line with the Core Principles. However, there is insufficient information regarding Latvia's compliance with this Principle after the FCMC became the regulatory body.

    15. Strict "know-your-customer" rules and high ethical and professional standards.

    The IMF FSSA published in 2002 stated that prudential limits were compliant with the Core Principles. Beginning July 1, 2001, the FCMC became responsible for the supervision of the banking system in Latvia. Previously, the BoL performed this task (Latvian Banks website). According to the IMF's 2002 FSSA, rules for the prevention of money laundering were in line with international standards. However, there is insufficient information regarding Latvia's compliance with this Principle after the FCMC became the regulatory body.

    According to the 2005 Annual Report by the FCMC, the FCMC required internal control systems of the market participants to be drafted in the way to ensure the implementation of the Know Your Client (KYC) principle

    16. Effective supervisory system consisting of on-site and off-site supervision.

    Based on the information publicly available, no level of compliance can be assigned for this principle. Beginning July 1, 2001, the FCMC became responsible for the supervision of the banking system in Latvia. Previously, the BoL performed this task (Latvian Banks website). The IMF FSSA published in 2002 stated that the banking supervision consists of on-site and off-site supervision. According to the 2005 Annual Report by the FCMC, the specialists of the Commission conducted 34 bank inspections in 2005.

    17. Regular contact with bank management and understanding of bank's operations.

    Based on the information publicly available, no level of compliance can be assigned for this principle. Beginning July 1, 2001, the FCMC became responsible for the supervision of the banking system in Latvia. Previously, the BoL performed this task (Latvian Banks website). The IMF FSSA published in 2002 stated that bank of Latvia supervisors maintain regular contact with bank management.

    18. Analytical reports and statistical returns on solo and consolidated basis.

    Based on the information publicly available, no level of compliance can be assigned for this principle. Beginning July 1, 2001, the FCMC became responsible for the supervision of the banking system in Latvia. Previously, the BoL performed this task (Latvian Banks website). The IMF FSSA published in 2002 stated that bank supervisors collected, reviewed, and analyzed banks' prudential reports and statistical returns on a solo and consolidated basis.

    19. Independent validation of supervisory information through on-site examination or external auditors.

    Based on the information publicly available, no level of compliance can be assigned for this principle. Beginning July 1, 2001, the FCMC became responsible for the supervision of the banking system in Latvia. Previously, the BoL performed this task (Latvian Banks website). The IMF FSSA published in 2002 stated that the Bank of Latvia used on-site examinations and auditor reports for an independent validation of supervisory information.

    20. Ability to supervise on a consolidated basis.

    Based on the information publicly available, no level of compliance can be assigned for this principle. Beginning July 1, 2001, the FCMC became responsible for the supervision of the banking system in Latvia. Previously, the BoL performed this task (Latvian Banks website). The IMF FSSA published in 2002 stated that the Bank of Latvia supervised banks on a consolidated basis.

    According to the 2005 Annual Report by the Financial FCMC, the FCMC supervised 14 banks, which were part of banking groups. The FCMC evaluated the operations of the groups' member companies, including leasing companies. The examinations focused on whether internal control and risk management systems were in place.

    21. Consistent accounting policies and practices that provide a true and fair view of the financial condition of the bank.

    Based on the information publicly available, no level of compliance can be assigned for this principle. Beginning July 1, 2001, the FCMC became responsible for the supervision of the banking system in Latvia. Previously, the BoL performed this task (Latvian Banks website). The IMF FSSA published in 2002 stated that the laws and regulations governing accounting standards and practices enabled supervisors to obtain a true and fair view of the financial conditions of banks. The accounting standards were satisfactory. International Financial Reporting Standards (IFRSs) are required in the consolidated accounts and annual accounts of banks (EC 2006).

    22. Adequate supervisory measures to ensure timely corrective action.

    Based on the information publicly available, no level of compliance can be assigned for this principle. Beginning July 1, 2001, FCMC became responsible for the supervision of the banking system in Latvia. Previously, the BoL performed this task (Latvian Banks website). The IMF FSSA published in 2002 stated that while supervisory measures were generally adequate, amendments to the Law on Credit Institutions regarding the Bank of Latvia's ability to stop bank activities that endanger, or may endanger, safety and soundness would further improve compliance. However, it should be noted that the FSSA assessed the performance of the former supervisory agency, the BoL, and not the current supervisor, the FCMC.

    23. Banking supervisors must practice global consolidated supervision over their internationally-active banking organizations.

    Based on the information publicly available, no level of compliance can be assigned for this principle. Beginning July 1, 2001, the FCMC became responsible for the supervision of the banking system in Latvia. Previously, the BoL performed this task (Latvian Banks website). The IMF FSSA published in 2002 stated that rules and regulation on cross-border banking were generally satisfactory.

    24. International exchange of information with other supervisors.

    Based on the information publicly available, no level of compliance can be assigned for this principle. Beginning July 1, 2001, the FCMC became responsible for the supervision of the banking system in Latvia. Previously, the BoL performed this task (Latvian Banks website).

    25. Supervision of local operation of foreign banks and information sharing with home country supervisors.

    Based on the information publicly available, no level of compliance can be assigned for this principle. Beginning July 1, 2001, the FCMC became responsible for the supervision of the banking system in Latvia. Previously, the BoL performed this task (Latvian Banks website). The IMF FSSA published in 2002 stated that host-country supervision, and supervision over foreign banks, is compliant with the relevant Core Principles.

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    Sources of Assessment

    Financial and Capital Markets Commission, "Annual Report Financial and Capital Markets Commission of the Republic of Latvia for 2005," March 2006. Available from Financial and Capital Markets Commission website. Accessed on May 9, 2007. (FCMC 2006)

    International Monetary Fund, "Republic of Latvia: Financial System Stability Assessment, including Reports on Observance of Standards and Codes on the following topics: Banking Supervision, Payment Systems; Securities Regulation; Insurance Regulation; Corporate Governance; and Monetary and Financial Policy Transparency," Country Report No. 02/67, Washington, D.C.: IMF, March 2002. Available from International Monetary Fund website. Accessed on May 9, 2007. (IMF 2002)

    World Bank and International Monetary Fund, "Latvia - Financial Sector Assessment," January 2002. Available from World Bank website. Accessed on May 9, 2007. (WB 2002)

    Relevant Organizations

    Association of Latvian Commercial Banks (ALCB)

    Bank of Latvia - Latvijas Banka (BoL)

    Financial and Capital Markets Commission- Finansu Un Kapitala Tirgus Komisija (FCMC)

    Ministry of Finance - Latvijas Republikas Finansu Ministrija (MoF)



    Relevant Legislation/Regulation

    Law on the Bank of Latvia, 1992 (as amended in 2006)

    Law on Credit Institutions, 1995 (as amended in 2002)

    Guidelines for Establishing an Internal Control System, 2001

    Regulation for Compiling the Report on Country Risk, 1999

    Regulation for Assessing Assets and Off- balance Sheet Liabilities, 1999

    Regulation for Preparing Credit Institutions' Monthly Balance Sheet Statement and its Appendices 1996 (as amended in 1999)



    Supplementary Sources

    Bank of Latvia, "Core Principles for Effective Banking Supervision," 2000. Available from Bank of Latvia website. Accessed on May 9, 2007. (BoL 2000)

    European Commission, "Planned Implementation of the IAS Regulation (1606/2002) in the EU and EEA," May 2006. Available from European Commission website. Accessed on May 10, 2007. (EC 2006)

    International Monetary Fund, "Republic of Latvia: 2006 Article IV Consultation--Staff Report; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for the Republic of Latvia," Country Report No. 06/353, Washington, D.C.: IMF, October 2006. Available from International Monetary Fund website. Accessed on May 9, 2007. (IMF 2006a)

    International Monetary Fund, "Republic of Latvia: Selected Issues," Country Report No. 06/354, Washington, D.C.: IMF, October 2006. Available from International Monetary Fund website. Accessed on May 9, 2007. (IMF 2006b)

    Latvian Banks website. Accessed on May 9, 2007. (Latvian Banks website)
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