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Press Release of November 16, 2000

  

 

At its November 16, 2000 regular meeting, the Council of the Bank of Latvia resolved to leave unaltered the refinancing rates and the interest rates for bank deposits with the Bank of Latvia and for lombard loans.

Please note that the interest rates set by the Bank of Latvia are as follows:
- refinancing rate - 3.5% per annum;
- interest rates for bank deposits with the Bank of Latvia:
             - for 7 days - 1.5% per annum;
             - for 14 days - 1.75% per annum;
- interest rates for lombard rates:
             - up to 10 days - 5.5% per annum;
             - 11 - 20 days - 6.5% per annum;
             - over 21 days - 7.5% per annum.


On November 16, 2000, the Council of the Bank of Latvia also resolved to reduce the credit institutions reserve requirement and amended its September 17, 1998 Resolution No. 49/4 "On Establishing Credit Institution Performance Indicators". Both resolutions will become effective on December 1, 2000.

From now on, the reserve requirement for banks and foreign bank branches registered in the Republic of Latvia will be 6%. Reserve requirements are long-term tools for regulating money supply, and central banks do not often change this requirement. With view to development of the banking system, the reserve requirement established by the Bank of Latvia has been changed only twice: set at 8% in July 1993, the reserve requirement remained unchanged until January 2000 when it was lowered to 7%of the average balances of funds of any kind attracted for any term. Currently, the reserve requirements set by the Bank of Latvia are governed by the "Procedure for Calculating a Credit Institution's Reserve Requirements" as approved by the Council of the Bank of Latvia and amended in its Resolution of March 13, 1997..

In the Latvian financial system, the reserve requirement still plays a key role in regulating money supply. Compliance with the reserve requirement encourages stability, as well as enhances efficiency of open market operations, such as repos, currency swaps, and secondary market operations. 

Harmonisation of monetary policy regulations with the requirements of the European Central Bank (ECB) is a pre-condition for Latvia's integration into the European Monetary Union (EMU). The ECB has set a 2% reserve requirement for credit institutions in the EMU member states. Among the objectives of the Bank of Latvia is therefore to harmonise the reserve requirements and to approach the level set by the ECB. At the beginning of 2000, the Bank of Latvia started gradual harmonisation of its reserve requirement with that established by the ECB by reducing the reserve requirement for banks by 1%.

Concurrently with the reduction of the reserve requirement, the Bank of Latvia will gradually reduce the proportion of cash to be used for the purposes of complying with the reserve requirement and will eventually abolish using cash for this purpose. As of December 1, 2000, the average vault cash balance in reserves of banks and foreign bank branches registered in the Republic of Latvia must not exceed 40% as compared to the current 50%. The ECB includes only bank settlement accounts in its reserve requirement, and cash is not used for this purpose.

The amendment to the September 17, 1998 Resolution No. 49/4 passed "On Establishing Credit Institution Performance Indicators" passed by the Bank of Latvia's Council concerns imposing restrictions on exposures to Zone B countries. Such restrictions where introduced in October 1998, i.e., shortly after the onset of the 1998 financial crisis in Russia, to curb country risk inherent in credit institution operations. It was established that exposure to residents of a single Zone B country, including Estonia and Lithuania, but excluding Latvia, must not exceed 25% of a credit institution's own funds, while total exposures to residents of Zone B countries are not to exceed own funds of a credit institution by more than twofold.

In view of the market integration processes and similar national economy development results in Latvia, Estonia and Lithuania, total exposure of a credit institution to residents of Estonia and Lithuania has been reduced. Total exposures to residents of these countries must not exceed 50% (formerly at 25%).