"Financial Stability Report" 2013/2014

Overall, moderate development is observed in the financial sector, i.e. the loan portfolio quality, operational efficiency and profitability are improving; capitalisation and liquidity remain high; the amount of deposits received has increased substantially, but lending is still weak, although it is slowly recovering. The non-bank financial sector is also profitable, experiencing some growth overall. The changeover to the euro in Latvia on 1 January 2014 was a significant structural change faced by the financial sector. According to the baseline scenario, moderate growth and further gradual improvement of borrowers' solvency are forecast in Latvia. However, the geopolitical tension in Russia and Ukraine increases external risks and uncertainty. Significant deterioration of external circumstances may have an impact on borrowers' solvency, lending recovery, expansion of operation of credit institutions and their profitability prospects. The key systemic risks to Latvia's financial stability stem from instability in the external environment and financial vulnerability of borrowers. The shock-absorption capacity of Latvia's credit institutions is high as their capitalisation and liquidity levels are high. Furthermore, Latvia's joining the euro area and the related participation of Latvia in the Banking Union are essential stabilising factors which along with important supervisory reforms in Europe (adoption of CRD IV/CRR and BRRD) further facilitate overall financial stability.