Financial Stability Report. 2015

The most significant indicators characterising Latvia's financial sector developmentcontinue to improve: credit institutions' total profit, cost efficiency and return on equityare on a rise and their capitalisation and liquidity remain high. Against the backgroundof moderate economic growth, domestic borrowers' creditworthiness and loan portfolioquality of credit institutions are gradually improving. At the same time, loans granted bycredit institutions to residents continue on a downward trend. Prolonged weak lendinghinders investment expansion, constraining the potential of sustainable economic growthand narrowing the future income base of credit institutions. Deteriorating externalmacrofinancial environment and growing uncertainty related thereto continue to posemajor risks to Latvia's economic growth and financial stability. External macrofinancialrisks have risen primarily due to increasing economic and political risks in Russia.Meanwhile, the high capitalisation and liquidity level of the Latvian credit institutionssuggest that they are in a good position to absorb potential external and internal shocks.This is also confirmed by the results of macroeconomic stress tests, sensitivity analysis andliquidity stress tests carried out by Latvijas Banka. Launching of the SSM in November2014 is an important factor for strengthening the financial stability in Latvia and othereuro area countries.