The Single Resolution Mechanism (SRM) has been in place since 2015. Latvijas Banka, as the resolution authority in Latvia, is a member of the SRM, a position filled until 2023 by the FCMC, and together with the Single Resolution Board (SRB) and the other national resolution authorities of the EU it is constantly working to improve and strengthen the SRM. Resolution covers credit institutions and investment firms that are subject to the requirements of the Law on the Recovery and Resolution of Credit Institutions and Investment Firms. The prudential regulation and supervision of those institutions is designed to minimise the damage that could be caused by liquidity and solvency crises. At the same time however, it has to be remembered that credit institutions and investment firms are private companies, and that although they are subject to tight regulation, and regulation is vital, they may still have problems and fail. The objective of the resolution authorities is to safeguard financial stability by minimising disruptions to the economy and protecting taxpayers from losses when the failure of a market participant becomes inevitable.
Resolution covers credit institutions and investment firms that are subject to the requirements of the Law on the Recovery and Resolution of Credit Institutions and Investment Firms. The prudential regulation and supervision of those institutions is designed to minimise the potential damage from liquidity and solvency crises. The objective of the resolution authorities is to safeguard financial stability by minimising disruptions to the economy and protecting taxpayers from loss when the failure of a market participant becomes inevitable.
Resolution is a proactive function. Clear processes for resolving credit institutions and investment firms have been developed over the years, and the main focus is currently on strengthening crisis preparedness, which means providing Latvijas Banka as the resolution authority with all the tools it needs to respond to any potential crisis, to implement the resolution scheme, and to manage any restructuring, recapitalisation or transfer strategy that is required for a market participant.
The functions of the resolution authority for credit institutions that are subject to direct supervision by the ECB within the framework of the SSM and cross-border credit institution groups are discharged by the SRB, but Latvijas Banka's representatives participate in the resolution processes implemented by the SRB and in preparing the SRB's decisions, including those on setting the minimum requirement for own funds and eligible liabilities. Three Latvian credit institutions and one branch of a credit institution from another Member State, accounting for 83% of the total assets of credit institutions, were under the direct responsibility of the SRB in 2023. Latvijas Banka as the national resolution authority is responsible for the resolution function for the remaining six credit institutions and two investment firms.
In 2023, the priorities in resolution were:
- to continue the operationalisation of the resolution Building on the experience of previous years, Latvijas Banka integrated and updated several operational regulation processes for resolution in 2023, particularly those concerning the planning of resolution and setting the minimum requirement for own funds and eligible liabilities, and it participated in several dry-run exercises to enhance the resolution process that were organised by the SRB, and in the EC's structural support project 23EE09 Technical support for national handbook for Estonia, Lithuania and Latvia. Within the framework of this project, the operationalisation process for the application of resolution tools will be developed and organised, which includes drafting of the working documents like decisions, draft contracts, procedures, and methodologies that are required for the resolution tools to be ready to be applied by the end of 2024. This project is an important step in strengthening the capacity of the resolution process and ensuring it can be implemented effectively if needed.
- to ensure resolution plans are kept up to date and to approve decisions on the minimum requirements for own funds and eligible Resolution plans are updated at least once a year to account for any changes in the market and in the credit institutions and investment firms themselves, with a view to ensuring crisis readiness and enhancing the institutions' resolvability.
Eight resolution plans were updated in 2023 in line with the business models and risks of the credit institutions, including five resolution plans of credit institutions under Latvijas Banka's direct responsibility; the resolution plan of one credit institution was not reviewed, because that institution was subject to simplified requirements under which resolution plans may be reviewed every two years. Staff from Latvijas Banka also participated in the updating processes for resolution plans organised by the SRB for the three credit institutions under the direct responsibility of the SRB.
The success of the resolution of a failing institution depends largely on whether the institution has sufficient minimum own funds and eligible liabilities to allow it to absorb losses or recapitalise in a crisis. The minimum requirements for own funds and eligible liabilities were reviewed and reset in 2023 for all the credit institutions in Latvia. The minimum requirements for own funds and eligible liabilities for the six credit institutions under the direct responsibility of Latvijas Banka were set in accordance with the strategies outlined in their business plans, and decisions on implementing the minimum requirements for own funds and eligible liabilities set by the SRB were passed for the three institutions under the SRB's direct remit;
- to ensure timely contributions to the Single Resolution Fund (SRF).
In close cooperation with the national resolution authorities including Latvijas Banka, the SRB is responsible for calculating the annual ex ante contribution payable to the SRF by each institution under the provisions of the SRB Regulation, and for managing and using the SRF. The contributions of Latvia's credit institutions to the SRF made in accordance with the SRB's calculations amounted to 3.6 million euro in 2023, and they total 54.9 million euro since 2015.
The objective of the SRF is to provide funding that can be called upon in a crisis to resolve a credit institution. The SRF was built up from contributions made by credit institutions in Member States including those in Latvia, with a view to gradually reaching its target level of at least 1% of the amount of the deposits covered at the credit institutions of all the participating Member States, and as at 31 December 2023, this target level had been reached. This is a major accomplishment of the SRM, and it provides a substantial fund that can be drawn on in a crisis. It also means that no contributions will be made by credit institutions in 2024 unless the fund is called upon to support a resolution during the year.
