FinMin says troubled Latvia bank sector to fall under ECB supervision

By bne IntelliNews December 14, 2012

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Latvia's three biggest banks could fall under European Central Bank supervision (ECB) when new banking rules take effect, Latvian Finance Minister Andris Vilks said on December 13. That would likely present some challenges for the ECB considering the problems of transparency in the Latvian banking system.

Vilks did not offer additional details on his announcement, which was made via his Twitter account, according to Bloomberg. EU finance ministers agreed on December 13 to put the ECB in charge of all Eurozone banks with assets of at least €30bn. The deal for a single supervisory mechanism is the first step on the road towards a Eurozone banking union, and paves the way for the currency bloc's firewall fund to provide direct bailouts to banks.

Latvia hopes to join the single currency bloc in 2014. Assuming the European Parliament approves the banking supervisor deal, the ECB should begin its task of monitoring Europe's largest banks from March 2013. It would be responsible for up to 6,000 banks from January 2014.

Latvian banks have come under intense scrutiny after accusations that they are used for money-laundering operations by figures from the former Soviet Union, and most damaging of all, that they were involved in the laundering of cash for the Russian officials mixed up in the notorious murder of Russian lawyer Sergei Magnitsky. bne has also reported several times over the last year on the connection of Latvian banks to murky deals centered on the Ukrainian government.

In November, in an otherwise upbeat report on the country, the IMF warned about the growing amount of funds deposited in the country's banks by non-residents. Latvia's Financial and Capital Market Commission (FKTK) says that such capital constitutes close to half of all deposits in Latvian banks, with levels rocketing recently due to the risks in crisis-hit Cyprus - Russia's traditional offshore haven.

On top of that, the national regulator was widely criticized for its failures in preventing huge losses at Krajbanka when the country's sixth largest bank collapsed in November 2011, as well as the catastrophic fall of Parex in 2008. Again, both banks were heavily connected to Russian money.

Those failures saw an extremely political process thrown up in October, when the parliament refused to re-elect Janis Brazovskis, the deputy chairman at the watchdog, with conspiracy theories abounding.

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