The banking sector in Latvia is strongly integrated in the European banking system, with the European Union banks accounting for 61% of all assets and 70% of the total loan portfolio.

The amount of guaranteed deposits has been increased to EUR 50’000.

Major sources of bank financing are liabilities to banks (42% of total assets), mainly to the parent banks (31% of total assets), and deposits (42% of total assets).

The ability and willingness of foreign parent banks to finance their subsidiaries and banks in Latvia arise no doubts. In 2008, the amount of funding attracted from parent banks increased by 21% or 1.2 billion lats compared to 2007.

Despite economic downturn, the main performance ratios of commercial banks have remained satisfactory in 2008:

1) assets have increased by 6%;

2) the loan portfolio has increased by 11.2%, with an increase for households by 7% and for enterprises by 13.1% (in previous 5 years loan portfolio grew by 37-59% annually; from 2003-2006 loan growth rate for households outpaced that for businesses by 25-42%);

3) deposits have decreased slightly in 2008 - by 4% (resident deposits have increased by 8,7%, while those of non-residents plummeted by 19.2%; the former constitute 61% of total deposits compared to 54% a year earlier);

4) the liquidity indicator of the banking sector decreased slightly during 2008 - to 52.8% compared to 55.7% at the end of 2007 (minimum requirement – 30%);

5) the average capital adequacy ratio of the banking sector at the end 2008 was 11.8% (12.6% at the beginning of 2008), which is well-above the minimum requirement of 8%.

Due to an increase in expenses related to provisions and costs of funding, profitability of banks has plummeted considerably – by 79%. In total, 16 banks and 1 branch of a foreign bank ended the reporting year with profit, while remaining 5 banks and 4 branches of foreign banks reported loss.

The regulator of Latvian financial markets (Financial and Capital Market Commission) monitors the market and checks performance of all the commercial banks on daily basis. In order to avert the situation that loan loss provisions for some banks could be insufficient, the regulator recurrently inspects banks and, if needed, requires increasing the amount of provisions.

JSC “PAREX BANKA”

The government of Latvia has acquired majority stake (84.83%) in JSC “Parex banka” in order to ensure stability in the financial system of Latvia. The decision followed a sharp drop in deposits of the bank, and rapid deterioration in liquidity and capital adequacy ratios.

Currently the situation in the bank has stabilized; the number of deposits has increased in January.

The government has supported the provision of State guarantee for the roll-over repayment of Parex banka’s syndicated loans. Guarantee will be effective provided that the banking syndicates agree to the restructuring and the extension of the term of the loans.

Parex banka’s proposal to the syndicated lenders envisages the following loan repayment schedule: 20% of the principal amount are scheduled for repayment by March 2009 with the remaining sum to be split in two payments – 50% in February 2010 followed by 30% in January 2012.