Latvijas Banka as the national macroprudential authority is responsible not only for financial stability analysis and analytical and advisory input into macroprudential measures, but since the merger of the FCMC and Latvijas Banka on 1 January 2023, it is also responsible for defining and implementing macroprudential policy, including the application of macroprudential tools.

lb gp 2023 citats 3 elmars zakulisLatvijas Banka as the national macroprudential authority is responsible not only for financial stability analysis and analytical and advisory input into macroprudential measures, but since the merger of the FCMC and Latvijas Banka on 1 January 2023, it is also responsible for defining and implementing macroprudential policy, including the application of macroprudential tools.



Macroprudential policy

Latvijas Banka took several significant macroprudential policy decisions in 2023.

The first was that Latvijas Banka decided to follow a new approach, defined as positive neutral, to the application of the countercyclical capital buffer1. In this approach, the countercyclical capital buffer rate is maintained at a certain base level above 0% in the standard risk environment, which is the neutral phase of the financial cycle when the cyclical systemic risk in neither heightened nor significantly low. To implement the new approach, the Council of Latvijas Banka decided to set the countercyclical buffer rate at 0.5% as of 18 December 2024 and at 1% as of 18 June 2025.

International experience shows that the gradual and forward-looking accumulation of a safety buffer:

  • helps to mitigate the effect of large unexpected shocks;
  • reduces the uncertainty associated with timely identification of risks and their materialisation;
  • provides more flexibility to the implementation of macroprudential policy throughout the financial cycle, as the countercyclical capital buffer is the macroprudential capital tool that can most easily be released in the event of a financial crisis.

Given the current good financial conditions of credit institutions, resilience buffers can be built up without any adverse pro-cyclical effects.

 

Secondly, Latvijas Banka reviewed its BBMs on 18 December 2023 and introduced amendments to the Regulation on Credit Risk Management2See more details in Latvijas Banka Reviews Regulation on Credit Risk Management | Latvijas Banka and Borrower-Based Measures | Latvijas Banka. See also the section on Changes in Regulatory Requirements Framework in this Annual Report.
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  • the DSTI and DTI requirements for loans to purchase housing in a building labelled as energy efficient (class C or higher) were eased;
  • a more flexible approach was introduced for buy-to-let housing

The annual identification and recognition of other systemically important institutions and the recalibration of the capital buffer rates that apply to them was also carried out3See more details in Capital Buffer for Other Systemically Important Institutions | Latvijas Banka.
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Analytical research and publications

Latvijas Banka analysed a very broad range of topics related to financial stability and macroprudential policy in 2023. A lot of focus was given to the factors influencing lending. These include the borrower’s ability to repay loans, the financial health of businesses, increases in interest rates, the supply of housing, and the challenges created by negative equity.

Research placed a very strong focus on the financial sector, but also addressed climate-related risks and insurance against them, and the impact of this on the insurance sector. Climate risk stress tests developed by Latvijas Banka identified flood risks as the most significant physical risks from climate change in Latvia. In addition to assessing climate change risks, Latvijas Banka launched an evaluation of the exposures of Latvian banks to biodiversity risk in the context of financial stability. An assessment was carried out to determine how dependent Latvia's commercial banks and major economic sectors are on ecosystem services and how they impact natural capital. This assessment used data from the Credit Register of Latvijas Banka and the ENCORE4ENCORE (Exploring Natural Capital Opportunities, Risks and Exposure) database contains information on 167 economic sectors and 21 ecosystem services and it sets out how the economic sectors depend and impact on the natural capital.
 database. This assessment

was complemented by an evaluation of country-specific environmental factors in a survey of Latvian environmental experts.

Latvijas Banka continued working on refining its credit risk stress testing methodologies by designing a GaR model for developing stress test scenarios. The methodology was also supplemented by a profit forecasting module to reflect the role of credit institutions' profit for the reporting year as a risk- absorbing factor.

The articles on changes in Latvia's macroprudential institutional framework and the positive neutral countercyclical capital buffer approach were eriten, and the methodology for assessing the impact of macroprudential capital tools was elaborated further.

Latvijas Banka also continued to analyse other topics of relevance to financial stability in 2023, such as the use of machine learning tools in analysing payment trends, the potential for lowering the cap on the fixed commission fee charged by second pension pillar managers, the impact of introducing the digital euro on the banking sector, the impact of TLTRO funding on the balance sheets of banks in the euro area, and the linkages between non-banks and the banking sector and the securitisation done by Latvia's FinTechs.

Cooperation with public authorities in the field of financial stability

In 2023, Latvijas Banka conducted an assessment of the development trends in borrower solvency and lending, inter alia:

  • providing advice and data-based analysis on the impact of the corporate income tax reform on capitalisation of non-financial corporations;
  • conducting an in-depth analysis of the initiatives to support mortgage borrowers and presented the results at the sittings of the Budget and Finance (Taxes) Commission of the Parliament;
  • provided to the Ministry of Finance an in-depth analysis of the issues associated with non-financial corporations having negative equity.

At the 2023 meeting of the Macroprudential Council, representatives of Latvijas Banka and the Ministry of Finance discussed the most significant systemic risks to financial stability5. Special attention was paid to the policy measures that are required to promote financial stability. It was concluded that the banking sector was financially sound and that the circumstances were appropriate for strengthening the resilience of the banking sector by introducing a positive neutral approach to the countercyclical capital buffer.

Latvijas Banka continued to work closely with representatives of the public authorities of the Republic of Latvia and managers of the state funded pension plans by proposing amendments to the Law on State Funded Pensions that would improve the method of capping the fixed component of the commission fee and supplement the regulatory framework for the variable component of the commission fee charged for managing second pillar pension assets.

International cooperation on financial stability

Latvijas Banka continued to participate actively in 2023 in the financial stability forums of the Nordic and Baltic countries.

As chair of the technical sub-stream on secure information exchange of the Nordic-Baltic Stability Group6A cooperation group bringing together central banks, supervisory and resolution authorities and ministries of finance of the Nordic and Baltic countries for the purpose of cross-border crises coordination, information exchange and its generation.
 (NBSG), Latvijas Banka produced a progress report, and as a member of the NBSG sub-stream on legal impediments to information exchange, it contributed to a status report on legal impediments to information exchange between functions and institutions at the national level in the event of a possible crisis. In addition to that, work continued on preparing the 2024 crisis exercise scenario.

Since the beginning of 2023, the work stream on borrower-based measures (BBM) of the Nordic- Baltic Macroprudential Forum (NBMF) has been jointly chaired by Latvijas Banka and Lietuvos bankas. The main topics examined by the work stream are the calibration of BBM frameworks, the impact of these instruments and their practical application, and other related issues like risks and trends in lending and real estate markets. The work stream produces semi-annual reports giving the highlights of the national BBM frameworks and newly adopted measures, with thematic boxes on the latest developments like international work on BBMs in the commercial real estate segment, and the initiatives for integrating sustainability into BBMs at the EU-level and within the national BBM frameworks. Experts from Latvijas Banka are also regularly involved in the discussions of the second work stream of the NBMF on capital-based measures (CBM), addressing topics such as macroprudential instruments and how they affect banks' capital, including the calibration of them, impact assessments, national practices and other key issues.

Towards the end of 2023, the joint project with the IMF to analyse Nordic-Baltic cross-border payment flows, money laundering threats and vulnerabilities (Nordic-Baltic Technical Assistance Project – Financial Flows Analysis, AML/CFT Supervision, and Financial Stability) was approaching its final stage, and Latvijas Banka provided assistance in preparing the report, and also developed an in-house solution for a tool to identify payment flow anomalies.

Latvijas Banka contributed to the assessment of the euro area's systemic risks to financial stability and of its macroprudential policy by participating in the work of the Financial Stability Committee, which comprises representatives of the ECB and of the national central banks and supervisory authorities of the Banking Union, and its sub-groups. Latvijas Banka also participated in the Advisory Technical Committee of the ESRB and its working groups, providing input on drafting policy and analysis documents, and preparing opinions at the EU level.

Latvijas Banka shared its experience on topical macroprudential policy issues like incorporating sustainability factors into Latvia's DSTI and DTI ratios with other national central banks, when it participated in the NBMF BBM working group and the NBMF research event in Tallinn, and at the ECB and the ESRB, and an international conference in Bratislava organised by the international think tank Bruegel and Národná banka Slovenska.

Latvijas Banka worked with Professor Dalvinder Singh of the University of Warwick in 2023, and the results of this collaboration were a discussion of the research on Exogenous Shocks and ECB Significant-Bank Risk Profile: Rethinking Crisis Management Frameworks, and debates about exogenous shocks and consultations on Latvia's insurance sector, while a round table discussion Exogenous Shocks and European Banks: Does Crisis Preparedness and Crisis Management Need Rethinking? was held in Warwick.

Latvijas Banka continued to participate actively in the work of the international NGFS network by helping develop the concept of short-term climate scenarios and prepare the Conceptual Note on Short-Term Climate Scenarios.

Latvijas Banka's research on stress testing of flood risks was presented to the Physical Risks Group of the NGFS.

Operational areas