Latvijas Banka has published its latest Financial Stability Report, which analyses the development and resilience of Latvia's financial system.
In the past year, the economy and financial sector have faced several significant challenges, including the economic downturn caused by the Russian invasion of Ukraine, widespread and rapid cost increases, the energy crisis in Europe, challenges related to compliance with sanctions imposed on Russia and Belarus, and the swift pace of interest rate hikes by central banks to curb high inflation. However, due to prudent lending practices and a relatively low credit burden on the economy, Latvia's financial system remains stable, and the ability of credit institutions to absorb shocks is good – they have sufficient capital and liquidity buffers. It is expected that the shock-absorbing capacity of the banking sector will continue to improve as the profitability of credit institutions further strengthens their resilience.
Latvia considers taking steps to enhance resilience through macroprudential capital buffers. This can be done with lesser procyclical effects when credit institutions have sufficient voluntary capital buffers, good profitability, and low financing costs.
The Financial Stability Report also includes several thematic supplements and appendices on topics such as the impact of natural disasters on Latvia's economy and the insurance industry, the ability of borrowers to withstand cost and interest rate increases, managing compliance risks, possibilities for web scraping of data on real estate advertisements, the availability of new housing, digital euro, changes in Latvia's macroprudential institutional framework. As in previous reports, the results of stress tests conducted on credit institutions by Latvijas Banka are also presented. Additionally, Latvijas Banka has expanded the framework for testing the resilience of credit institutions by incorporating tests on the transition of the banking sector and physical risks.