Financial Stability Report 2026

Global geopolitical uncertainty has been further heightened by warfare in the Middle East. The global and domestic impact of persistently high uncertainty and geopolitical shocks, including warfare in the Middle East – supply chain constraints, higher inflation, deterioration of economic sentiment, and sharp fluctuations in the prices of financial assets, as well as cyber incidents and other large-scale unexpected disruptions to financial intermediation – also pose a systemic risk to the stability of the Latvian financial sector.

The effects of geopolitical shocks on Latvia's financial system are mitigated by its still limited direct financial link to the epicentres of these shocks. However, warfare in the Middle East has increased the credit risk of borrowers in the most energy-intensive sectors and may slow the previously strong growth in lending. The extent of the indirect impact of warfare on the Latvian financial system largely depends on its intensity and duration.

Lower interest rates, a better financial situation for borrowers, and a stronger incentive for banks to lend significantly spurred domestic lending, and previously persistently insufficient lending support for investment has started to increase. At the same time, the loan-to-GDP ratio remains low. In addition, several structural business environment factors – highlighted in previous financial stability reports – continue to limit investment and lending. These include the shadow economy, the availability of human capital, and the financial capital market. A weak investment environment has long constituted a significant systemic structural deficiency hampering Latvia's development and competitiveness.

More active housing lending contributed to the activity of the housing market and also facilitated the development of new real estate projects. In 2025, the share of bank-financed housing purchase transactions reached its highest level in the last seven years. Amid declining supply, housing prices have started to grow at a faster pace, dampening the improvement in affordability, while price increases remain moderate overall. Insolvency risks in the real estate sector generally continued to decline, and the commercial real estate market started to gradually stabilise. However, a number of structural risks, including high construction costs, continue to affect the development of this market. In the office space segment, a mismatch between supply and demand persists, and tenant relocation to newer office buildings is reinforcing market polarisation and affecting occupancy rates. More sustainable development of the real estate market and the promotion of a high-quality and accessible housing stock require a significantly faster pace of building renovations, including large investments in improving energy efficiency.

Overall, solvency and resilience of borrowers in Latvia remain solid. Household debt payment discipline is very good. In the corporate sector, loan quality deteriorated somewhat already towards the end of 2025, mainly as the risk of deteriorating quality in forborne loans identified in the previous report materialised; yet the deterioration affected only a narrow group of companies. However, rising energy and labour costs, together with the increase in EURIBOR already priced in by financial markets, will continue to exert downward pressure on corporate profitability and debt-servicing capacity.

Latvia is implementing a clear commitment to strengthening its defence capabilities which is of crucial importance for promoting financial stability. However, a more substantial improvement in the return on public spending required to provide financing for defence and other priority public expenditure has been delayed, while public debt continues to rise. Accordingly, there are growing risks of rapid changes in fiscal policy, including tax policy, which may negatively affect the business and investment environment, as well as their predictability. Delays in a more substantial improvement in the return on public expenditure increases the risk of sharp future adjustments to fiscal policy, including tax policy, and creates systemic vulnerabilities. This is amplified by weaker economic growth in Latvia caused by global uncertainty and geopolitical shocks.

Latvia's financial system remains stable. The short- and longer-term liquidity indicators of credit institutions are at a sufficient level, and the level of funding and liquidity risk in the credit institution sector remains low. Overall, the capital buffers of credit institutions are sufficient to absorb potential losses in the event of financial shocks. While the profits of credit institutions decreased in 2025 due to lower interest rates, higher provisioning expenses, and solidarity contributions, they remain robust and continue to underpin strong capitalisation. The growing Latvian non-bank financial sector still has a limited impact on financial stability in Latvia.

Latvijas Banka's macroprudential policy focuses on the sustainability of the financial sector and the proportionality of regulation. As part of a positive neutral CCyB approach, the CCyB base rate of 1% further strengthens the resilience of banks. This is particularly important amid heightened external uncertainty. Borrower-based measures continue to promote compliance with responsible and sustainable lending standards. In 2025, Latvijas Banka revised and simplified the analytical framework for the identification of O-SIIs and the calculation of O-SII capital buffer rates. As a result, the number of O-SIIs declined from five to three institutions. The revised framework is more appropriate for the specificities of the Latvian financial sector and more proportionate from a supervisory perspective.