Press Release of March 7, 1999



The Bank of Latvia has decided to suspend all financial operations conducted by the joint stock company Rigas Komercbanka as of March 7, 1999 and to file an application with the Riga Regional Court to declare Rigas Komercbanka insolvent. The decision has been necessitated by the inability of Rigas Komercbanka to settle its debt obligations and the fact that major shareholders and creditors have not taken the necessary steps to restore the bank's equity to a sufficient level, thereby bringing the bank's rehabilitation and restructuring activities to a halt. Furthermore, the bank's debts exceed its assets.

As a result of the crisis of financial markets in Russia, 27.5% of the assets of Rigas Komercbanka are still blocked in the bank's accounts with Russian banks or financial companies. These funds were invested in the Russian Federation Treasury bills and federal and municipal bonds. The restructuring of the market for these securities as yet has not taken place. 1.3% of the assets of Rigas Komercbanka were placed with Russian banks in the form of credits or acquired bills. Total deposits of Rigas Komercbanka in Russia amount to almost 23 million lats. Devaluation of the Russian rouble has caused additional losses. According to the International Accounting Standards and based on the evaluations of the bank's investments in Russia by international auditing companies, losses of Rigas Komercbanka not covered by its equity could be as high as 30 million lats. Substantial funds, about 73 million lats, have been withdrawn from the bank as a result of the run since last August. The losses caused by external events, such as the freezing of assets in Russia and devaluation of the rouble, and those related to the bank run have resulted in a serious shock to Rigas Komercbanka.

When banks find themselves in such critical situations, it is usual for their shareholders to come to their assistance. Unfortunately, this did not happen. The shareholders of Rigas Komercbanka, who must also share the responsibility for the bank's investments in Russia, have failed to find a way for successful restructuring of the bank and ensuring its continued existence. Discussions with potential investors have also proven unsuccessful. Such situation has occurred despite the Bank of Latvia's express willingness to participate in the rehabilitation of Rigas Komercbanka as an equal partner with the bank's shareholders and major creditors. Regrettably, the Bank of Latvia's proposal was rejected. Under these circumstances, the Bank of Latvia sees no alternative, but to file an application with the court to declare Rigas Komercbanka insolvent in accordance with the procedures stipulated by the law.

It is particularly regrettable that the largest shareholder of the bank, the European Bank for Reconstruction and Development, which owns 23.07% of Rigas Komercbanka shares and has two of its representatives on the bank's council, has failed to exercise due influence on the bank's management to ensure prudential investment policy as well as has failed to prevent passing of business decisions harmful to the bank. It has also failed to provide sufficient assistance in the bank's rehabilitation.

The operating license of Rigas Komercbanka has not been revoked, and the bank still has an opportunity to continue negotiations, both with the existing shareholders and potential strategic investors, regarding investments in the bank and restoring its solvency.

Should these negotiations fail to be productive, reimbursement of the depositors' funds will be affected. The bank's assets are sufficient for meeting claims by natural persons up to 500 lats. Other natural and legal persons will receive only partial reimbursement of their deposits in accordance with the ranking of creditors' claims as set out in the Law "On Credit Institutions".

Other working banks in Latvia have either withdrawn their funds from Russia or have reduced them significantly. Their activities have been affected less by the developments in Russia. If losses were incurred, only the shareholders actually suffered. As a whole, the stability of the Latvian banking system is not threatened. The Bank of Latvia expresses its true regret about the hardship currently experienced by Rigas Komercbanka.