18.07.2017.

Financial Stability Report 2017

Financial Stability Report 2017
Photo by: Latvijas Banka
The latest Financial Stability Report 2017 has been published. The Report provides analysis and assessment of the macrofinancial environment in Latvia, development and risks of the financial sectors and the systemically important payment and settlement systems.

The major risks to Latvia's financial stability are associated with the potential deterioration of the external macrofinancial environment and protracted high uncertainty. Latvia is a small and open economy, hence external factors can adversely affect the economic growth and profitability of its credit institutions. Although external demand has started to grow more vigorously and the financial market stress has also in general moderated, the external environment is subject to high uncertainty.
The financial stability developments in the home countries of the parent banks are essential for Latvia. Risks related to the real estate market imbalances in Sweden and Norway and/or risk repricing do not recede as the rise in real estate prices and household debt persists despite the already high levels reached. Should the risks materialise, they are likely to adversely affect the borrowing terms of the parent banks relying on market financing and the economic growth in the Nordic-Baltic region via the trade and confidence channels. The financial indicators of the parent banks and their subsidiaries in Latvia are sound, while the significance of parent bank funding for their subsidiaries in Latvia has shrank considerably.

With credit institutions increasingly relying on IT in their operations, as well as with the development of innovative financial technology products, IT security risk has the potential to become a systemic vulnerability to financial institutions. The issue of whether the IT security risk could potentially become a systemic risk to Latvia's financial system has been discussed in one of the appendices.

The financial cycle is showing signs of upswing, while the cyclical risks remain low in Latvia. The projected improvement in the economic growth in Latvia is favourable for the domestic borrower creditworthiness, lending development and credit institution profitability.

The share of foreign customer deposits in aggregate deposits held in credit institutions has contracted notably, mostly on account of the introduction and supervision of significantly stricter AML/CTF requirements both in Latvia and abroad. The latter as well as more severe customer due diligence should be considered an important step towards promotion of sustainable development of Latvia's financial sector. Credit institution liquidity risk is limited as the amount of liquid assets maintained by credit institutions is large. Results of the liquidity stress tests conducted by Latvijas Banka suggest that credit institutions' capacity to absorb the shocks caused by potential financing outflows remains high.

The overall profitability risk of credit institutions at systemic level is below average as their return ratios are fairly high; however, profitability trends in the groups of credit institutions servicing domestic customers and foreign customers differ. Credit institution solvency risk at systemic level is low as capital adequacy ratios of credit institutions are high. The results of the macroeconomic stress tests and sensitivity analysis conducted by Latvijas Banka suggest that credit institutions' capacity to absorb shocks is overall good.

Accelerated growth of non-bank financial sector persists, but the share of its assets in Latvia's financial sector still remains quite small. In 2016, the sector's growth was primarily on account of increased household savings to provide for the future pension in the state-funded pension scheme and private pension plans and the growth of loans granted by non-banks.

According to Latvijas Banka's assessment of the financial risks of the systemically important financial market infrastructures, TARGET2-Latvija and DENOS provide efficient and secure payment and settlement environment, and their smooth operation facilitates financial stability.

The systemic risks to Latvia's financial stability are overall limited and the capacity of Latvia's credit institutions to absorb a potential increase in the systemic risks is good in general; nevertheless, there are several measures that could contribute to the financial system stability: 1) additional individual liquidity requirements, based on LCR, shall be established for the credit institutions, whose business model requires higher liquidity buffers within Pillar II framework; 2) the annual contributions of the market participants to the FCMC should be set in proportion to the source of the ML/TF risks; 3) active cooperation in preventing IT security risks is required, inter alia by strengthening the coordination framework for limiting/containing IT security risks and minimising the negative consequences.

The Financial Stability Report comprises an appendix on the O-SII capital buffer calibration method and an appendix containing an overview of the results of an extensive SME and credit institution survey on obstacles to SME growth and lending, conducted at the request of Latvijas Banka.
 

Financial Stability Report (ISSN 1691–1199; ISSN 2500-9710 for the electronic publication) is issued annually in Latvian and in English. The Report provides analysis and assessment of the macrofinancial environment in Latvia, development and risks of the credit institution and non-bank financial sectors, and the systemically important payment and settlement systems. 
Starting with the first issue of 2006, the publication is available only in electronic form.

APA: (2024, 28. mar.). Financial Stability Report 2017. Taken from https://www.macroeconomics.lv/node/2660
MLA: "Financial Stability Report 2017" www.macroeconomics.lv. Tīmeklis. 28.03.2024. <https://www.macroeconomics.lv/node/2660>.

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