Money supply growth impeded by revoking "Latvijas Krājbanka's" licence

In May, just like in March, the money supply dropped for formal reasons. If in March it was the credit institution licence issued to "Parex banka" that was annulled, then on 10 May the Finance and Capital Market Commission annulled the licence granted to "Latvijas Krājbanka". As a consequence, this bank's indicators were excluded in May from the summary data of monetary financial institutions, yet again bringing down the level of main monetary indicators. Thus the amount of total money supply was still at a relatively low level, trailing both the record level of the end of last year and the indicator in May of last year. The impact of excluding "Latvijas Krājbanka's" indicators was relatively small, however, vis-à-vis the total balances of both domestic loans (2.7%) and deposits (2.3%).

The amount of cash currency in circulation was brought down, unusual for this month, by the requirement of the Law on Declaring the Property Status and Undeclared Income of Natural Persons to transfer to a bank account cash deposits in excess of 10000 lats by 1 June. As a result the amount of cash currency in circulation outside banks' cash departments dropped by 3.0%, with household deposits with banks growing simultaneously.

If the impact of the annulled credit institution licence is excluded, the total balance of loans in May dropped by only 23 mil. lats while lending to businesses slightly increased and a small rise in consumer lending was also observed. The annual loan drop rate also remained at the -6.8% level.

The money indicator M3 that characterizes the amount of cash and non-cash currency in the economy, dropped in May by 0.3%, with domestic overnight deposits dropping by 1.0%, and deposits with an agreed maturity and deposits redeemable at notice growing.

The above leads to the conclusion that with the indicators of the two banks that have lost their licences excluded, a rather substantial rise in money supply is observed, whereas the drop in loans remains low and is primarily the result of housing loans being gradually repaid. Similar trends can be expected also in the coming months, but a substantial growth, with the external risks at a continued high level, cannot be expected. The rise in household deposits that brought up the rise in cash currency will abate as a result of the seasonal impact of summer; these deposits could also be reduced by some of the cash currency deposited with banks by 1 June being withdrawn.