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Press Release of July 15, 1999

  

 

On July 15, 1999 the Council of the Bank of Latvia approved the "Regulation for Compiling the Report on Country Risk", "Regulation for Assessing Assets and Off-balance Sheet Liabilities" and amended the "Regulation for Preparing Credit Institutions' Monthly Balance Sheet Statement and its Appendices" approved on November 14, 1996.

The "Report on Country Risk" and the regulation for its compilation, which will become effective as of October 1, 1999 will regularly provide the Bank of Latvia, the credit institutions supervisory body, with information that will enable it to evaluate country risk inherent in credit institutions' operations. Country risk is associated with assets and off-balance sheet items arising from transactions with foreign non-residents (including governments). Unlike ordinary business risks, country risk is related to losses that can occur if the foreign borrower (including the government) defaults on his/ her liabilities due to political, social and economic conditions in his/ her respective country. An instance of this would be the inability of the Russian government and other Russian borrowers to settle their debts resulting in major losses for Latvian banks in 1998.

One of the 25 Core Principles for Effective Banking Supervision, established by the Basle Banking Supervision Committee, to whose full implementation the Bank of Latvia has strongly committed itself, prescribes that the banking supervisory body must be certain that banks manage successfully the country risk inherent in their international lending and investment operations. Pursuant to the new regulations, the Bank of Latvia will regularly receive information on concentration of bank assets and off-balance sheet liabilities in certain countries, term structure of these assets and factors affecting the country risk. Together with the information on types of assets allocated abroad, to be provided as of September 1, 1999 on the basis of Appendix H to the "Monthly Balance Sheet Statement", introduction of this new report will enhance the enforcement of the above core principle for effective banking supervision.

The "Regulation for Assessing Assets and Off-balance Sheet Liabilities" will become effective as of January 1, 2000. Its development and approval have been encouraged by the considerable qualitative changes in crediting and credit risk management practices of Latvian banks. This regulation will replace the currently effective "Provisions for Evaluating Credits and Off-balance Sheet Items".

The "Regulation for Assessing Assets and Off-balance Sheet Liabilities" will apply to evaluation of all kinds of loans and other assets and off-balance sheet liabilities involving credit risk. This regulation provides guidelines for quality evaluation of assets and off-balance sheet liabilities, their classification in accordance with the determined credit risk, as well as for reporting changes in their quality in financial statements.

The regulation clarifies the mechanism for credit evaluation based on loan classification. It prescribes that the result of deterioration in asset quality and the corresponding special provisions can be determined not only on the basis of the classification and the amount of special provisions established for each loan category, but also by applying other methods.

The regulation stipulates new procedures for evaluation of groups of small homogeneous loans (such as consumption loans, credit card loans etc.). When a credit institution has accumulated the required experience and developed the relevant procedures, deterioration in the quality of such loans and the amount of special provisions may be established on the basis of the credit portfolio instead of individual loans.

The "Report for Evaluation of Assets and Off-balance Sheet Liabilities" includes a new section where restructured loans are stated separately. A restructured loan is one whose terms are significantly altered in favour of the borrower due to his/ her financial difficulties, i.e., he or she is granted relief that would not have been granted otherwise. Information on restructured loans will ensure a more thorough analysis of credit institution activity results and quality of their loan portfolio and will provide the bank and the supervisory body with the possibility to discover, in a timely manner, potential problems with asset quality.

This regulation has been developed in accordance with the consultative paper of the Basle Banking Supervision Committee "Loan Accounting and Credit Risk Discovery Practice and Related Issues" that has been published in October 1998 and clarifies the Basle core principles for effective banking supervision. Implementation of the recommendations set out in this document is necessary in order to harmonise the supervisory approach to the evaluation of credit risk on an international scale.

The amendments to the "Regulation for Preparing Credit Institutions' Monthly Balance Sheet Statement and its Appendices" will become effective as of January 1, 2000, with the exception of Article 3.1.2, for which a transitory period, from January 1, 2000 to June 30, 2000, has been established. These amendments are related to the fact that the information systems of the Bank of Latvia and commercial banks have been improved in order to enable electronic provision of statistical information of the monthly balance sheet statements. The amended regulation includes procedures for preparation and submission of statistical reports electronically, as well as examples of how statements should be compiled.