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Press Release of March 11, 1999

  

 

On March 11, at its regular meeting, the Council of the Bank of Latvia approved the following regulations: "Regulation for Receiving Bank of Latvia Permits Governing Credit Institutions' Operations", "Regulation for Consolidated Annual Financial Statements of Banks" and "Regulation for Consolidated Supervision of Banks", as well as amended the "Regulation for Annual Financial Statements of Credit Institutions" and the "Monthly Balance Statement for Credit Institutions".

The "Regulation for Receiving Bank of Latvia Permit Governing Credit Institutions' Operations", developed pursuant to Articles 7 and 13 of the Law "On Credit Institutions", will replace the "Regulation for Amending the Charter, Changing the Shareholders, the Initial Capital, Management, the Chief Accountant, the Legal Address, the Name of Credit Institutions, and Undertaking Merger or Split-up of Credit Institutions" and Merger or Division of Credit Institutions" approved by the Council of the Bank of Latvia on March 15, 1996.

The regulation shall take effect on May 1, 1999.

These regulations clarify and supplement the requirements and list the documents to be submitted as regards identification of credit institutions' shareholders, financial standing of shareholders, as well as qualifying holdings by shareholders in other companies (business ventures), in particular distinguishing whether said companies include credit institutions, financial institutions or financial holding companies.

As regards increasing the share capital and submitting an announcement on a new share issue, a distinction has been made between public share issues and rights issues by determining that, in a public share issue, only the total number of shares to be purchased by the existing and potential shareholders who intend to obtain or increase, directly or indirectly, a qualifying holding in a bank, should be specified.

Until now, upon becoming a shareholder of a credit institution, a natural person was required to submit the declaration of his/her annual income only when the investment exceeded 14 000 lats. In the future, any person, planning to purchase shares in a rights issue, must fully prove sufficiency of his/her funds irrespective of the investment amount.

A new article 7.4 has been incorporated in the section "Qualifying Holding" in order to prevent a situation where a person purchases small amounts of shares over several years, but, when acquiring or increasing a qualifying holding, proves sufficiency of his/her free funds only for the amount of shares ensuring acquisition or increase of the qualifying holding.

This article shall become effective as of May 1, 2001.

Considering recommendations by the International Monetary Fund and the "Guidelines for Establishing an Internal Control System in Credit Institutions" approved by the Council of the Bank of Latvia, these guidelines incorporate a provision that a credit institution must inform the Bank of Latvia 30 calendar days in advance should the credit institution intend to provide new financial services. Simultaneously, the credit institution must submit to the Bank of Latvia a description of policies and procedures for management of the corresponding risks.

The "Regulation for Consolidated Annual Financial Statements of Banks" have been developed on the basis of the rights, delegated to the Bank of Latvia by Article 76 of the Law "On Credit Institutions", to require consolidated annual financial statements from credit institutions. The same article also entitles the Bank of Latvia to establish procedures and deadlines for submission of bank annual financial statements. The regulation is established in accordance with the EU accounting directives and are harmonized with the International Accounting Standards as prescribed by the Law "On Credit Institutions".

 

Consolidated annual financial statements must provide investors and other persons with information about the financial standing and activity results of the group consisting of the bank (parent undertaking) and its subsidiaries as a whole.

The regulation specifies the banks that are required to prepare consolidated annual financial statements; cases where a subsidiary may be exempt from inclusion in the consolidated annual financial statements; layout of the consolidated annual financial statements; consolidation methods and procedures; information to be disclosed in the notes to the consolidated annual financial statements; as well as procedures for approval, submission and publication of consolidated annual financial statements.

Consolidated annual financial statements will provide information both about the group and the bank as the parent undertaking. As a result, the banks preparing consolidated annual financial statements will be exempt from the requirement to submit to the Bank of Latvia individual annual financial statements in compliance with the Bank of Latvia "Regulation for Annual Financial Statements of Credit Institutions".

Credit institutions shall observe these regulations when preparing annual financial statements for 1999 and subsequent years.

The "Regulation for Consolidated Supervision of Banks" (shall become effective as of May 1, 1999) has been developed on the basis of the amendments to the Law "On Credit Institutions" adopted by the Republic of Latvia parliament on May 21, 1998. Pursuant to these amendments, consolidated supervision of banks has been introduced in Latvia as of January 1, 1999. It is an important step in harmonizing the Latvian banking legislation with the requirements of the EU directives and improving the efficiency of supervision.

Pursuant to Article 501 of the Law "On Credit Institutions", banks must comply with the capital adequacy requirement, limits on exposures, restrictions on investments in movable and immovable property and participation in capital of companies (business ventures) on the basis of consolidated financial statements. This regulation is binding for banks whose subsidiaries and joint ventures are credit institutions or financial institutions and for banks whose parent undertakings are financial holding companies registered in Latvia.

New regulatory requirements are introduced to restrict transfer of banking activities to unregulated or underregulated related companies, to evaluate additional risks related to the activities conducted by banks through related companies and to take a more informed decision about the financial standing of these banks.

The "Regulation for Consolidated Supervision of Banks" establishes procedures for preparation of necessary financial statements and information for the purposes of consolidated supervision; determine companies to be included in the consolidated annual financial statements, as well as describe calculation of the indicators characterizing the regulatory requirements on the basis of consolidated financial statements.

Any bank subject to supervision on a consolidated basis must submit to the Credit Institutions Supervision Department of the Bank of Latvia a report on the consolidation group's composition, consolidated financial statements (i.e., consolidated balance statement and consolidated profit and loss statement), calculations of the indicators characterizing regulatory requirements on the basis of consolidated financial statements four times a year.

At present Latvian commercial banks mainly control small leasing companies and have also acquired qualifying holdings in the capital of insurance companies, brokerage and investment companies. According to the information on direct investments by banks, only 3 banks are currently subject to consolidated supervision.

Considering the tendencies in integration of the Latvian financial sector, as well as gradual expansion of bank activities abroad, timely implementation of consolidated supervision will encourage the stability and security of the banking sector.

Amendments to the "Regulation for Annual Financial Statements of Credit Institutions" approved by the Council of the Bank of Latvia on November 14, 1996 are made within the framework of the continued harmonization of laws and regulations with the EU directives, as well as incorporating amendments to the Law "On Credit Institutions" made on May 21, 1998.

 

The amendments to the regulation are related to disclosure of additional information in the notes to the annual financial statements about the average number of credit institution's employees, salaries of its council and board members and total amounts of advances, loans, guaranties etc. extended to them, as well as of information related to subordinated claims, liabilities and claims on associated and related companies. The requirement that information about appropriation of the profit in the reporting year should be disclosed separately in the annual financial statements has been deleted.

Credit institutions shall comply with this regulation when preparing annual financial statements for 1999 and subsequent years.

There were several reasons for making amendments to the "Monthly Financial Position Report of Credit Institutions" approved by the Council of the Bank of Latvia on November 14, 1996.

The "Statistical Requirements for Stage Three" included in the Bank of Latvia's activity framework, considering Latvia's commitment to accession to the European Union, require introduction of new terms, such as "monetary financial institution", "government", "other non-banks" and to change the content of Appendix B to the monthly financial position report, as well as to make new appendices: Appendix H "Items in Monthly Balance Statement of Credit Institutions, Country Breakdown", Appendix I "Items in Monthly Balance Statement of Credit Institutions, Currency Breakdown", and Appendix J "Assets and Liabilities under Management".

Information submitted to the Bank of Latvia according to the new reporting format will provide the possibility to:
- improve preparation of the national balance of payments in accordance with breakdown by country, calculate more precisely cash flows resulting from exchange rate fluctuations, and report trust transactions under the items of the national balance of payments;
- implement country risk control and supervision of trust transactions;
- improve research and analysis of financial markets in accordance with breakdown by region, expand analysis of financial instruments and start analysis of bank trust transactions;
- for the Central Statistical Bureau, to obtain broader information about extended credits and investments according to the country breakdown.

The amendments shall become effective as of September 1, 1999.

On March 10, 1999 the Bank of Latvia Board approved a new version of the "Regulation for Interbank Settlements Effected by the Bank of Latvia", and it will become effective as of April 1, 1999.

The purpose of this document is to complete the shift to electronic settlements in the Bank of Latvia interbank settlement systems started in November 1998. As of April 1, 1999 the Bank of Latvia interbank net settlement (clearing) system will accept and process only electronic documents. No changes are expected in the electronic gross settlement system, while documents on gross settlements submitted by banks in a paper form will be changed into an electronic version at the Bank of Latvia by charging an appropriate commission fee.

As a result, complete information about any payment, including customer and payment details, will be transmitted to the recipient bank in an electronic form. All information to be transmitted shall be encoded and protected by digital signatures, thus bank customers can be certain that only the recipient bank will receive the information about payments. Introduction of this principle will gradually release the banking system from unnecessary flow of documents and will provide opportunities for development of interbank electronic settlement systems up to establishment of the real time settlement system in the future.