One of the tasks of Latvijas Banka is to contribute to the stability of Latvia's financial system.
- In 2024 and 2025, Latvijas Banka holds the presidency of the Nordic-Baltic Macroprudential Forum, bringing together the central banks and supervisory authorities of the region to cooperate on financial stability and macroprudential policy issues.
- In cooperation with the Ministry of Finance, international institutions, and the relevant authorities of the neighbouring countries, a joint Nordic-Baltic crisis simulation exercise was prepared and implemented in September 2024.
- During the reporting year, Latvijas Banka worked on analytical areas of public relevance, with a focus on lending and related factors.
- Latvijas Banka provided consultations to the government and estimates concerning the windfall tax to be imposed on banks in the process of drafting the Law on Solidarity Contribution.
- Latvijas Banka has reviewed its macroprudential policy framework and revised the analytical framework used for assessing the cyclical risks and setting the countercyclical buffer (CCyB) rate.
Financial stability assessment1See FSP_2024_EN.pdf.
Systemic risks2Systemic risk: a risk of disruptions in the financial system with the potential to have significant negative consequences for the discharge of the functions of the financial system as a whole and for the real economy (within a year).
:
- persistently weak economic activity and tight financial conditions that potentially affect bank customers and asset quality as well as limit economic recovery;
- persistently weak investment environment and insufficient lending support to investment;
- dependence on developments and policies in parent banks and their home countries;
- cyber-attacks and other large-scale unexpected disruptions in financial intermediation, including activities implemented to achieve geopolitical objectives.
Potential systemic vulnerabilities:
- unsustainable development of the housing market, including weak investment in housing stock renovation (delaying investment will result in larger costs and higher financing cyclicality, thereby undermining financial stability);
- climate-related and other natural risks, including loss of biodiversity (growing climate change and shifts in the resources available to the economy will result in greater investment needed for adaptation and climate effects mitigation measures, and may render certain existing economic activities unviable, thereby undermining financial stability).
Macroprudential policy
In 2024, Latvijas Banka reviewed its macroprudential policy framework and revised the analytical framework for assessing the cyclical risks and setting the CCyB rate.
Latvijas Banka carried out quarterly assessments of cyclical risks and the apropriatness of the set CCyB rate. In line with the cyclical risk assessments, the cyclical component of the CCyB rate was kept at zero. At the same time, within the framework of the positive neutral CCyB approach introduced on 18 December 2024, banks are to comply with Latvijas Banka's decision on applying a 0.5% CCyB rate adopted on 18 December 2023.
In 2024, Latvijas Banka also conducted its annual assessment of the identification of other systemically important institutions (O-SIIs) and O-SII buffers applicable to them. The relative significance of two O-SIIs as compared with other O-SIIs was assessed as declining; therefore, their capital buffers were reduced.
Cooperation with public authorities and international institutions on financial stability
In the reporting year, Latvijas Banka was extensively involved in drafting the Law on Solidarity Contribution and provided the required consultations to the responsible ministries and the Saeima, including:
- an opinion on the most effective ways of calibrating the contribution;
- an in-depth data-based analysis on the potential impact of the solidarity contribution on the profitability of credit institutions.
At the 2024 meeting of the Macroprudential Council, the managements of Latvijas Banka and the Ministry of Finance discussed the most significant systemic risks to financial stability as well as topical issues in macroprudential policy.
With interest rates declining from their previous all-time highs, 2024, in a way, marked an end to a serious stress test on all borrowers. Currently, it can be concluded that Latvia has successfully coped with this stress test scenario.
By organising multiple international events dedicated to this topic, leading initiatives aimed at the smart reinforcement of financial stability, and actively sharing experience with European counterparts, Latvia, to a certain extent, acted as the regional centre in the field of macroprudential policy.
Latvijas Banka continued to actively consult the government, the Saeima, and other institutions on financial sector taxation issues which are closely linked to interest rate developments, by helping to find and implement the best solutions serving the common interests of Latvia's society.
Close cooperation on improvements to the state funded pension scheme continued with the public institutions of the Republic of Latvia, with a view to enhancing the long-term return on its assets and income replacement upon retirement. Latvijas Banka also cooperated with the responsible ministries in drafting legislation aimed at reviewing the caps on state funded pension scheme management fees. This included the channelling of a larger share of the economy-of-scale savings generated in asset management to the state funded pension scheme participants.
Latvijas Banka provided its opinion to the Constitutional Court on the proposed amendments to the Consumer Rights Protection Law, on support to mortgage borrowers, as well as changes to the corporate income tax, differences between the types of financing used for ensuring the business of credit institutions and that of consumer lending service providers, and on circumstances distinguishing the business model of credit institutions from other business models used in lending services.
Considering the close links between the economies, financial sectors, and the geographical links between the Nordic and Baltic states, Latvijas Banka continued its active participation in Nordic-Baltic cooperation forums on financial stability in 2024. The Governor of Latvijas Banka chaired the Nordic-Baltic Macroprudential Forum (NBMF) which brings together the central banks and supervisory authorities of the respective countries to cooperate on financial stability and macroprudential policy issues.
Within the NBMF, Latvijas Banka, together with Lietuvos Bankas, continued to chair the work stream on borrower-based measures or BBMs measures aimed at preventing borrowers' insolvency risks (among them one of the most widely known is the debt service to income ratio (DSTI)). Considering the proven effectiveness of these measures in limiting borrower insolvency risks during high inflation in past years, and rapidly rising interest rates, the main areas explored by the work stream were calibration of those instruments, impact assessment, and more effective implementation practices.
Latvijas Banka's experts are regular participants on the NBMF's work stream on capital buffer instruments. The work stream is used to exchange experience regarding capital buffer calibration approaches, impact assessments as well as application practices across the countries.
In the reporting year, Latvijas Banka contributed to the assessment of the euro area's systemic risks to financial stability and its macroprudential policy by participating in the work of the Financial Stability Committee, comprising representatives of the ECB and 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 into drafting policy and analysis documents, and preparing opinions at the EU level.
Together with the ECB and the ESRB, Latvijas Banka organised a research workshop in Riga on the financial stability implications of high interest rates, where eight papers on various aspects of the impact of those high rates were presented. The audience included more than 100 on-site and remote participants from the ECB, ESRB, ESMA, EBA, IMF, Latvijas Banka, and other EU central banks and supervisory authorities as well as academia.
Latvijas hosted the annual workshop for financial stability on a rotational basis in 2024, where participants exchanged the latest research findings in the area of financial stability.
Latvijas Banka continued to participate in the Nordic-Baltic Stability Group3A cooperation group bringing together central banks, supervisory and resolution authorities, and finance ministries of the Nordic and Baltic states for the purpose of cross-border crisis coordination, information development and exchange.
(NBSG) sub-stream on legal impediments to information exchange between the functions and institutions involved in financial crisis prevention in the Nordic and Baltic countries as well as the ECB.
Latvijas Banka had an active role in developing the scenario for the Nordic-Baltic financial crisis simulation exercise in 2024. The objective was to test the crisis management competence of institutions and their ability to take coordinated decisions in high uncertainty and time-constrained circumstances, in order to improve the countries' financial crisis preparedness, achieve maximum effectiveness of action plans, and strengthen long-term financial stability. The exercise was conducted in September, with almost 450 online participants from the central banks, supervisory and resolution authorities, and finance ministries of Latvia, Denmark, Estonia, Finland, Iceland, Lithuania, Norway, and Sweden as well as from the EU institutions – EC, ECB, SRB and EBA. The crisis simulation exercise was also observed by the IMF.
In 2024, Latvijas Banka shared its experience with integrating macroprudential policy sustainability factors in Latvia's DSTI and DTI (debt to income) ratios, presenting its practical experience at both international training events organised by the Joint Vienna Institute and bilateral discussions with counterparts from other central banks.
Latvijas Banka shared its experience with the positive neutral cyclical buffer approach with the ECB Task Force and participated in preparing its report on using the CCyB early in the cycle in EEA countries4Joint ECB/ESRB report on using the countercyclical capital buffer to build resilience early in the cycle.
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Latvijas Banka also continued to be actively involved in the work of the NGFS through its participation in the assessment of short-term climate scenarios.
Analytical research and publications
Latvijas Banka continued to analyse a very broad range of topics related to financial stability and macroprudential policy in 2024. Significant attention was paid to lending and the factors affecting it, like borrowers' creditworthiness, interest rate developments, housing availability, and housing loans, including loans for energy efficient housing.
By combining various data sources, the borrowers' vulnerability analysis framework was prepared using State Revenue Service data. Additionally, the impact of the corporate income tax reform was analysed based on the financial performance data of companies.
Latvijas Banka introduced further improvements to its macroeconomic credit risk stress testing methodology by using the GaR model for developing stress test scenarios. The model enables building scenarios with a pre-defined probability, eliminating the need to identify the specific shocks behind the respective GDP developments. The incorporation of credit institutions' profit forecasts as a risk-absorbing factor in the stress testing methodology was further enhanced by complementing the methodology with the potential effects of the Law on Solidarity Contribution.
In 2024, Latvijas Banka also continued to analyse and publish articles on other developments pertinent to the context of financial stability – on the use of machine learning tools in evaluating the Baltic stock exchange issuer announcements and their impact on stock pricing as well as detecting anomalies in the cross-border payments of bank customers. The latest developments in crypto-assets were also examined. In addition, the profitability of credit institutions was assessed.
