Bank Account Holders in Latvia: Protect Your Account Balance and Qualify for Deposit Insurance Repayment When Banks in Latvia Fail or Stop
The Republic of Latvia is a country in the Baltic region of Northern Europe. The country is a member state of the European Union and participates in the European Single Market and the Monetary and Banking Union. Until 1991, Latvia was incorporated into the Soviet Union. The countries independence triggered political and economic reforms. A centrally planned system was replaced with free market principles. Despite the fact that these alterations triggered economic growth, the volatile economy remains susceptible to external influences.
The Latvian Economy and Financial Sector
Latvia has a population of nearly two million. Its open market economy is largely consumption driven and local consumption is an important determinant for economic growth. Market entry by foreign enterprises and foreign direct investment combined with privatization of state owned enterprises leaves only a few large companies in the hands of the state. The main sectors in the services industry comprise transportation, IT, construction, tourism and financial services. Trade partners include but are not limited to Lithuania, Germany, Poland and Russia.
In the wake of its independence, the local economy went through a period of fractious growth. This was highlighted by credit based speculation triggered by for example an unrealistic housing market bubble, large debt exposures and an unsustainable account deficit. Economic cycles and the recovery after a breakdown often occurs at the expense of public funds and the population. Examples of his were unraveled during the domestic banking crisis that affected Banka Baltija and the failed rescue mission of Parex Bank.
Banking is the predominant service in the Latvian financial industry. The sector largely conforms to the Basel Committee core principles for effective banking capitalization and supervision. It follows that banks are well capitalized, profitable and liquid. However, maturity mismatches are frequent. Also, the substantial proportion of non-resident deposits, foreign equity and the geographic location of the country make the country vulnerable for AML scandals, bank failure and loss in reputation. Recent bank failures of Trasta Komercbanka, ABLV Bank and AS PNB Banka reveal that dissolution procedures are lengthy and uncertain.
Banking and Financial Technology in Latvia
Banking in Latvia is dominated by universal banks that provide retail and corporate financial services to local and international clients. There are currently 16 banks in Latvia, of which 13 credit institutions are registered in Latvia and three credit institutions are registered in other EU countries. Total assets of the banking industry are over 24 billion Euro of which 20.5 billion euro are bank deposits. Reform of the financial sector seeks to secure the domestic financial system. Shell companies and other high risk customers are prohibited from using local credit and payment institutions.
Traditional banking is these days challenged by financial innovation and technology. FinTech allows for easy internet banking, fast (international) payment systems and efficient financial services. The FinTech industry is one of the fastest growing industries in Latvia. Firms like Mintos, TWINO, Nordigen, Altero and Jeffapp focus on crowdfunding and peer to peer lending. The country created a favorable climate for business incorporation and growth that benefits the financial sector.
Insolvency, Bankruptcy and Liquidation of Financial Institutions in Latvia
Over the years, the Latvian economy experienced several crises such as the domestic banking crisis, the Russian financial crisis, the global financial crisis, the European sovereign debt crisis and the global health crisis. Furthermore, the financial system used to contain flaws and attracted a wide range of foreign clients in the absence of strict regulation, capital flow restrictions and anti-money laundering protocols. As a result, the country acted as a gateway that allowed several obscure money launderers to utilize their laundromats and penetrate the global financial system. Trasta Komercbanka and ABLV Bank were allegedly part of these international financial scandals and shut down by the authorities.
Following the European guidelines, the Latvian government enhanced bank regulation. Being a member of the European Banking Union, Latvia participates in the supervisory and resolution mechanisms to protect and maintain the internal market for capital and the stability of the European single currency. As such, the Single Resolution Mechanism (SRM) assumes responsibility for the resolution of credit institutions that are supervised by the European Central Bank. The closure of both ABLV Bank and AS PNB Banka were approved by the European Central Bank after they were determined failing or likely to fail.
Bank resolution in Latvia is an interplay between national insolvency law, the SRM and the European Bank Recovery and Resolution Directive (BRRD). The objective of bank resolution is to restructure or resolve a credit institution in distress in an orderly, quick, safe and efficient manner. Available resolution tools include but are not limited to a bail-in tool, a sale of business tool, a bridge bank facility and the asset separation tool. Determination of resolution tools follows the No Creditor should be Worse Off than under Liquidation (NCWOL) principle. The creditor or insolvency hierarchy applies irrespective of the administration or resolution decree. Therefore, statutory administration and deposit insurance are essential to ensuring maximum account balance repayments.
Bank Deposit Protection in Latvia
Businesses and consumers use payment systems and liquidity provided by credit institutions. Payment facilities and checking accounts are used by some to finance their day to day expenses, others are in the luxury position that they can invest or save an account surplus. Credit institutions and universal banks intermediate between savers and borrowers and act as security firms as issuers and investors of notes, bonds and other equity. Credit institutions use a variety of means to protect themselves from loan defaults of their customers. Still, stressful situations may occur and banks can fail. Deposit insurance is an arrangement to maintain confidence in the banking system while resolution planning defines the solution for the troubled bank.
The Latvian Deposit Guarantee Fund (DGF) protects bank deposits held by account holders eligible for DGS compensation when a bank that operates in Latvia fails or is likely to fail. The fund is managed by the Financial and Capital Market Commission (FCMC). The DGF of Latvia operates in line with the EU directive on deposit guarantee schemes (2014/49/EU) and insures account balances up to 100.000 euro. Deposit protection in Latvia applies per depositor whilst multiple accounts of the same depositor are aggregated.
Bank deposit protection in Latvia is triggered by the unavailability if deposits held with a licensed and supervised credit institution that participates in the DGF. The unavailability of funds is determined by the European Central Bank (ECB), the court declares the institution insolvent, the license to operate is revoked by the FCMC, or when the FCNC determines that the institution is unable to fulfil depositor redemptions.
Upon the activation of the DGF, efficient claim verification and short repayment times must be warranted. This requires strict collaboration between the FCMC, the failed bank and the creditors. The failed institution is asked to provide the FCMC with a detailed list of depositors and their account balances. The FCMC may verify and reimburse eligible depositors their insured account balance either directly or via an authorized agent bank. Creditors whose claim is honored transfer their rights for the insured amount only to the FCMC who receives a priority position in the future liquidation of the bank. Payment is normally made within 10 business days. However, the FCMC and the agent bank may request additional information from the claimant in order to ensure that the correct amounts are being repaid to the correct account holders.
Asset Recovery for International Creditors
To protect and preserve assets, a bank in serious trouble is placed under statutory administration pending resolution. A moratorium on transactions is imposed but depending on the complexity of the resolution plan, the administrator may allow restricted access to deposits and facilities. The first real opportunity to get a substantial repayment is via the deposit guarantee scheme, the Latvian DGF. Such bank deposit protection is tailored towards domestic retail customers. International creditors and foreign businesses therefore sometimes experience difficulties to comply with the requirements of the administrator or the DGF, placing their account balance at risk.
For creditors whose claim is not covered under the bank deposit protection scheme, or whose account balance exceeds the limits of deposit insurance, the latest version of the Latvian Insolvency Law (into force since 21 December 2021) applies. It is important to realize that secured creditors must request the sale of pledged property of the debtor shortly after the administration is announced. Furthermore, creditors have no right to request security during restructuring or reorganization of the bank. Assets of the bank must be protected and only the financial obligations included on the plan of measures of legal protection may be processed. Creditors seeking a priority position must therefore plead a strong case that supersedes the provisions in the Latvian insolvency laws.
Contact us for More Information…
Legal Floris LLC helps international creditors recover their account balances and investment funds when their banks fail or their investments disappear. Due to our vast experience in dozens of bank failures in different countries, we are often able to maximize repayments and minimize risks for our clients. Contact us right now to find out how we can help you to reclaim your account balance when your bank in Latvia is forced to stop:
- Visit: www.depositguaranteeclaim.com/free-case-evaluation
- Call: 00357 25 057 544 or 001 646 513 2855
- Email: [email protected]
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