Interview with Latvian Finance Minister Arvils Ašeradens

Sākums /

What are the government’s priorities and plans when it comes to the financial sector?

It is in Latvia’s interests to have a strong and active financial sector which supports the bloodstream of our economy and also performs a major role in economic development and the attraction of investments. That is of essential importance if we are to achieve one of the government’s stated priorities – transforming Latvia’s economy on the way from a developing country to a country of welfare.

The government’s declaration of operations includes the clear goal of pursuing policies in the financial market which facilitate its competitiveness and digital development while also supporting economic growth. We need to create a situation in which the economy can continue its transfer toward the export of innovative and high added-value goods and services. This will require investments in human capital so as to enhance productivity, increase the volume of investments, and heighten our country’s competitiveness in the global market. A priority in all of this is to develop our financial sector, because it is an inviolable component in globally integrated economic growth.

When it comes to the capital market, Latvia has something of a regulatory environment for securities. It ensures appropriate transparency in the market, as well as the protection of investors. Development of the capital market will be one of our key priorities during the next several years.

When it comes to the welfare of the people of Latvia, it is important for them to be active in saving up their money for unexpected crisis situations. One of the state programmes, therefore, offers savings bonds which are low-risk investments for individuals. Savings bonds can be a good first step for individuals as investors, because this allows them to learn more about the opportunities which the capital market affords while also diversifying people’s investments.

Development of the financial sector also includes the development of financial technologies, particularly focusing on the development of such technologies and their use in financial services so as to create products with high added value and to enhance the sector’s competitiveness. If Latvia is to be competitive in the European financial sector, we must facilitate the development of artificial intellect, major data, cloud solutions and other technologies so as to integrate them into financial services that are provided here.

When it comes to policy goals and steps that are to be taken in terms of financial market and sector policies in the medium term, the government has identified various priorities and anticipated results. The plan lists three developmental priorities and the work that must be done in each case:

1) Availability of financing and opportunities for investment:

Facilitating sustainable lending;
Development of the capital market and shaping of an investment culture;
Improving the financial knowledge of local residents.

2) Digitalisation and the availability of innovative services:

Establishment of an ecosystem which supports innovations;
Availability of an infrastructure which supports innovations;
Public education about the opportunities and risks of financial technologies.

3) Sustainable finances:

An institutional framework in pursuit of sustainable financial goals;
Availability of data to evaluate sustainability;
Greater public understanding about sustainable finances.

What do you think about Latvia’s current financial system? Do you think that it is stable from the perspective of local residents and business people?

Latvia’s financial system is stable in that our banks have a high level of capitalisation. Banks have sufficient capital reserves in general terms, and Latvia’s banking sector ended 2022 with record profits.

Latvia’s economy survived the Covid-19 pandemic far better than had been hoped. After an economic decline of 2.2% in 2020, the economy recovered quickly, with growth of 4.1% in 2021. In 2022, our economic situation was fully determined by Russia’s war in Ukraine. Trade links with Russia and Belarus ended, and a rapid increase in energy resources weakened economic growth throughout the world.

Despite the Covid-19 crisis and Russia’s war in Ukraine, however, the banking sector in Latvia has preserved stability and profits. Lending offers growth opportunities, however, and right now loans for entrepreneurship are developing unevenly and mostly in the SME segment. Household loans appear to be positive, because household demands for new homes are on the rise. Loans to households after a length period during which demand for them dropped have started to expand throughout the Baltic States and despite the presence of high inflation rates.

Do you think that the new regulations for banks are exaggerated? Have you managed to deal with the situation in which too much is asked of businesspeople in terms of unnecessary information?

Our goal is to facilitate lending without endangering financial stability and thus facilitating economic growth. Over the next few months, the Bank of Latvia plans to look at whether regulations should be eased when it comes to the proportion between lending volumes and bank capital. We hope to harmonise our regulations with those that exist in the other Baltic States. We will also look at reducing the amount of information which lending institutions are required to submit to the central bank for oversight purposes. We will also be revisiting the risk models which banks have developed. Hoping to encourage client mobility, we will correlate and regularly publish information about loan and deposit interest rates at banks in Latvia. We will also distribute information about commission fees on loans. The Bank of Latvia will regularly conduct and publish analysis about the availability of financing in Latvia, as well as about the causes of problems that have been identified. We also plan to correlate information from businesses so as to address causes which have led to refusals to provide financing.

There are, however, things that we still expect from banks in Latvia:

Higher deposit rates for households and companies so that the rates on deposits are in line with interest rates which banks receive from the central bank;
Reduced costs for bank clients, especially in terms of commission fees;
Valuation of the appropriateness of risk models so as to expand the diversity and availability of services by undertaking to increase lending volumes so as to increase the ambitions of companies to invest money on their own.

There has been some upheaval in the banking sector in recent years, most recently in terms of the Baltic International Bank last December. Has this sent negative signals to investors?

On December 13 last year, the council of the Finance and Capital Markets Commission declared that Baltic International Bank SE was a financial institution which was or would soon be facing financial difficulties. This decision was based on the fact that the bank never did implement a sustainable strategy. Its strategy was not appropriate for a bank and could not be pursued, and so that equally meant that for a long time the bank did not have a profitable business model. It is also true that the bank had serious problems with internal management. The decision shows that oversight agencies are active when it comes to issues in the sector, but this is not an issue which could have a negative effect on our ability to attract foreign investments.

What do you think about how our government institutions have been doing in the fight against money laundering?

The approach of government institutions when it comes to combatting money laundering is focused on a partnership among oversight and control institutions in various formats so as to harmonise their practices. If we look at priorities in the financial sector, we see that the practices of oversight and control institutions must be shored up so as to reduce money laundering and the financing of terrorism and proliferation. One of the formats includes the Latvian Finance Ministry, the Office for Prevention of Laundering of Proceeds Derived from Criminal Activity, as well as other oversight and control institutions, all of which take part in various meetings to enhance collaboration. The aim is to encourage co-operation among these institutions, as well as exchanges of information while also pursuing unified practices in oversight and control steps so as to ensure that tasks identified in normative acts are pursued effectively and to also ensure that there is a unified understanding of the risks and trends of money laundering and the financing of terrorism and proliferation.

What about government institutions in terms of sanctions? Can you confirm that Latvia and the business sector have generally taken these into account?

In general terms, Latvia welcomes the work which government institutions have done to implement sanctions and prevent any evasion of same. The establishment of a special council to co-ordinate the sanctions was a good way of ensuring effective co-ordination among institutions and of a unified approach toward the application of normative acts in the realm of international and domestic sanctions. This council involves people from government institutions, non-governmental organisations, as well as state-owned companies. This means full coverage of all of the levels of collaboration.

We believe that the effective application of sanctions is an instrument that will bring Russia’s aggression against Ukraine to a halt. We support the idea of transferring frozen and immobilised Russian resources to Ukraine for its restoration. This is an area in which there must be great activity.

Government institutions which are involved in the application of sanctions have worked actively in partnership with the private sector by exchanging information, answering major questions, and organising informative seminars and conferences.

What are your priorities when it comes to ensuring stability in the financial sector and pursuing the combatting of money laundering this year and for the next three years?

Our priorities in this regard will be as follows:

Strengthening the oversight system in the financial sector by providing appropriate level of financing and human resources;
Preparation for the 6th round of Moneyval evaluations in support for the effectiveness of the existing system;
Latvia as a potential candidate for the headquarters of the European Union’s Anti-Money-Laundering Authority (AMLA).

We see Rīga as a home for AMLA headquarters because we offer a strong, secure, modern and effective environment which provides services to the people of Europe and to our domestic market. Latvia has unique experience with money laundering, and that offers us with unique advantages in the European Union. We’ve just now set up a system which merges the best practices of the financial sector with human resources with vast experience with reforms and with identifying and preventing crime.

Once we get the highest rating from Moneyval, we will have a higher technical correspondence level than most FATF member states. Our approach toward oversight of money laundering is the most progressive and risk-based approach of all. The EU’s central oversight structure should enhance oversight and ensure better co-operation between the Office for Prevention of Laundering of Proceeds Derived from Criminal Activity (FID) and other oversight and control institutions. There must also be pan-European support for the FID so that it an ensure closer co-operation, exchanges of information, joint analyses, as well as more harmonized steps in identifying and preventing financial crimes.

What are your views about virtual assets? What’s been happening in this regard?

Latvia supports European Union regulations in the area of virtual assets and the need to bring them closer to international standards such as the 15th FATTF recommendation about such assets and those who provide the relevant services. This is particularly true given the increasing spread and use of cryptocurrencies, as well as the risks which are associated with the use of ever-new technologies in financial transactions.

A proposal for a European Parliament and Council regulation on cryptocurrency markets is in its finishing stages of development right now. This will amend Directive (EU) 2019/1937 (MICA). Once MICA is introduced throughout the EU, there will be unified regulations and a unified licensing system for providers of crypto-asset services. The Finance Ministry wants to apply the MICA regulations in Latvia, and so we have bene preparing our own norms and regulations so as to identify the competent institution in Latvia which will oversee the providers of virtual asset services. We must thing abut the authority of this institution, as well as the procedure for issuing licenses to service providers. The draft law will be submitted to the Cabinet of Ministers by July 1 of this year.

The presiding country of the European Council and the European Parliament have reached provisional agreement on the text of MICA, and Latvia supports that text in general terms. MICA will take effect 20 days after it is published in the official digest of the EU, and it will be applied 18 months after it takes effect. MICA will set out requirements for the main emitters of virtual assets, for the work and oversight of virtual asset service providers, as well as detailed protections for holders of cryptocurrencies, as well as other clients of these service providers.