Latvia: Compliance with the Core Principles / 2011

Principle 1: Objectives, independence, powers, transparency and cooperation
An effective system of banking supervision will have clear responsibilities and objectives for each authority involved in the supervision of banks.Each such authority should possess operational independence, transparent processes, sound governance and adequate resources, and be accountable for the discharge of its duties. A suitable legal framework for banking supervision is also necessary, including provisions relating to authorization of banking establishments and their ongoing supervision; powers to address compliance with laws as well as safety and soundness concerns; and legal protection for supervisors. Arrangements for sharing information between supervisors and protecting the confidentiality of such information should be in place.
Description
The main laws and regulations specifying the FCMC objectives, independence, powers, transparency and cooperation are as follows:
Law on the FCMC(available in Latvian)(FCMC law) (LV 20.06.2000, No 230/232),Credit Institution Law (available in Latvian)(LV 24.10.1995, No 163) (CIL), Law on the Financial Instruments Market (LV 11.12.2003, No. 175), Law on the Prevention of Laundering the Proceeds from Criminal Activity (Money Laundering) and of Terrorist Financing (LV 30.07.2008, No. 116) and Deposit Guarantee Law (LV 03.06.1998, No. 162).
Assessment
Compliant.
Comments

Principle 1(1): Responsibilities and objectives

An effective system of banking supervision will have clear responsibilities and objectives for each authority involved in the supervision of banks.
Description
The duties and objectives of the credit institution supervisory authority (the FCMC) are explicitly defined in the Law on the FCMC(available in Latvian)(Articles 5-9) and in the Credit Institution Law (available in Latvian) (Article 991). The FCMC enforces compliance with the laws and binding regulations.
The minimum prudential standards the credit institutions have to comply with (minimum initial capital, capital adequacy, limits on large exposures, liquidity requirements etc.) are outlined in the CIL and further specified in the regulations issued by the FCMC regarding regulatory requirements for credit institution activities and performance indicators, as well as reporting procedures (as prescribed in the EU directives and taking into account international best practices).
The FCMC enforces compliance with the laws and binding regulations. On-site examinations are performed by the staff of the FCMC. The FCMC issues operating licences to banks.
Assessment
Compliant.
Comments
Principle 1(2): Independence, accountability and transparency
Each such authority should possess operational independence, transparent processes, sound governance and adequate resources, and be accountable for the discharge of its duties.
Description
The independence, accountability and general structure of the FCMC are provided for in the Law on the FCMC(available in Latvian)(Articles 2 (2), 13, 27 and 28).According to the Law the FCMC shall make independent decisions within the limits of its authority, execute functions assigned to it by law, and be accountable for their execution. No one shall be entitled to interfere in the activities of the FCMC.
The FCMC Law stipulates that the FCMC shall be governed by its Board and prescribes the procedure for the appointment of its members.
The FCMC shall annually submit to the Parliament and the Ministry of Finance a written report on its performance during the reporting year and full annual financial accounts audited by a sworn auditor. The FCMC shall publish its balance sheet statement and the opinion of the sworn auditor in the official newspaper "Latvijas Vēstnesis" annually.
The objectives of FCMC and accountability for the compliance with these objectives are provided in the Strategy for governing and supervision of the financial and capital markets and activities of the Financial and Capital Market Commission for 2009-2011 URL: and the FCMC law (Section II and Section VIII)
FCMC provides competitive salaries for employees, thus being able to attract and retain professional and qualified staff. If necessary, outsourced expert services are used. Confidentiality restrictions are defined in an agreement between the FCMC and outsourced expert.
The FCMC's employees are offered both in-house training and training outside the FCMC, including training abroad. Working places in FCMC are equipped with all the office equipment and software required for carrying out supervisory functions. On-site examinations are mainly conducted in Riga; however, when carrying out on-site examinations outside Riga, FCMC's budget provides for adequate financing and incorporates costs for international cooperation.
Assessment
Compliant.
Comments
Principle 1(3): Legal framework
A suitable legal framework for banking supervision is also necessary, including provisions relating to authorisation of banking establishments and their ongoing supervision.
Description
The main laws and regulations: Credit Institution Law (available in Latvian), FCMC regulations and decisions.
Pursuant to CIL (Article 11), banks may begin their operations in the Republic of Latvia only after the receipt of a licence (permit) issued by the FCMC and the performance of the registration of commercial operations in accordance with the procedures specified by law.
CIL (Article 27) specifies that the FCMC may withdraw the licence (permit) of a credit institution in certain cases.
Pursuant to CIL (Article 12¹) credit institutions registered in another Member State may open branches in the Republic of Latvia without obtaining the licence (permit) specified in this Law only after the FCMC has received a notification from the credit institution supervisory institution of the relevant Member State.
In addition to the provisions of CIL, the FCMC is entitled to issue other requirements regulating the activities of credit institutions to reduce the inherent risks and to protect creditors' interests (Article 50 of CIL). Credit institutions are bound by regulations on the requirements governing the activity of credit institutions issued, pursuant to CIL, by the FCMC (Article 7).
Law on the FCMC empowers the FCMC to issue binding rules and take decisions setting out requirements for the functioning of financial and capital market participants and calculation and reporting of their performance indicators (Article 6).
Pursuant to CIL (Article 8), credit institutions are under obligation to submit to the FCMC all information it requires to perform its functions and to observe the deadlines set by FCMC.
Assessment
Compliant.
Comments
Principle 1(4): Legal powers
A suitable legal framework for banking supervision is also necessary, including powers to address compliance with laws as well as safety and soundness concerns.
Description
The main law defining legal powers is Credit Institution Law (available in Latvian).
CIL (Article 99.1) prescribes that, to ensure the security, stability and development of Latvia’s credit institution sector, the FCMC shall perform the supervision of credit institutions. The FCMC has a duty to take measures in order to prevent deficiencies in the operations of credit institutions and the credit institution sector, which threaten or may threaten the stable operation of a credit institution or the whole credit institution sector, interfere in the conduct of proper transactions, the provision of financial services or may cause significant losses in the overall State economy.
When exercising its duties, the FCMC is entitled to require that the credit institutions comply with laws, regulations and instructions and credit institutions are required to ensure such compliance.CIL defines sanctions (fines, administrative or criminal liability) to be imposed on a credit institution or its staff because of their non-compliance with CIL provisions (Chapter XV).
When making decisions, the FCMC is guided by opinions prepared by professional in-house experts, and if necessary outsourced experts.
Credit institutions are under an obligation to submit to the FCMC all information required by the FCMC and necessary for performing FCMC functions and observing the deadlines set by the FCMC (Article 8 of CIL). All the requested documentation has to be fully disclosed to the on-site examiners of the FCMC as well.
Assessment
Compliant.
Comments
Principle 1(5): Legal protection
A suitable legal framework for banking supervision is also necessary, including legal protection for supervisors.
Description
Credit Institution Law (available in Latvian)explicitly provides for protection of the FCMC employees and other authorized personnel against lawsuits for actions taken and/or omissions made while discharging their duties in good faith.
CIL provides that the FCMC shall be responsible for losses caused to third parties by the actions of employee or authorized person of the FCMC in performance of his/her work responsibilities or tasks in case that the employee or authorized person has intentionally acted unlawfully or with gross negligence. (Article 111 (7))
Assessment
Largely compliant.
Comments
Essential criterion 2 provides for ensuring protection of supervisory authorities and their employees against responsibility for any losses that may arise from their activities as well as against errors made provided that they have acted in good faith, therefore it should be considered whether, in addition to existing legal requirements, civil liability insurance for the FCMC and its employees would be necessary to cover litigation costs and other legal expenses as well as indemnity for losses to third party.
Principle 1(6): Cooperation
Arrangements for sharing information between supervisors and protecting the confidentiality of such information should be in place.
Description
The FCMC regularly cooperates with the Bank of Latvia and the Ministry of Finance. Pursuant to the Law on the FCMC (available in Latvian)(Article 10 (1)) at least once per quarter the FCMC shall submit information summary on the situation in the financial and capital markets to the Bank of Latvia and the Ministry of Finance.
The FCMC shall inform the Governor of the Bank of Latvia and Minister of Finance in writing on the short-term liquidity problems of a particular financial and capital market participant or its potential or actual insolvency. The FCMC shall be authorised to request the Bank of Latvia to extend a loan against collateral to any such credit institution (Article 10 (2)).
The FCMC and the Bank of Latvia shall share the statistic data relevant to execution of their tasks (Article 10 (3)).
The FCMC shall provide information on the financial status of specific credit-institutions upon a written request of the Governor of the Bank of Latvia (Article 11). URL:
FCMC has concluded a cooperation agreement with the Bank of Latvia.
FCMC has entered into Memoranda of Understanding with foreign supervisors on information sharing, and Memoranda of Understanding with foreign supervisors on consolidated supervision of cross-border banking entities URL:
FCMC supervisors exchange information within the supervisory colleges, the members of which are supervisors of cross-border credit institution group entities.
Assessment
Compliant.
Comments
Principle 2: Permissible activities
The permissible activities of institutions that are licensed and subject to supervision as banks must be clearly defined and the use of the word “bank” in names should be controlled as far as possible.
Description
Only banks registered in the Republic of Latvia and foreign bank branches, as well as other EU Member State banks and the branches thereof, which according to the procedures specified in Credit Institution Law (available in Latvian) have commenced the provision of financial services in the territory of the Republic of Latvia, are permitted to solicit the receipt of deposits and other repayable funds, and to receive them (Article 9 (3) of CIL).
Pursuant to CIL (Article 11), banks may commence their operations in the Republic of Latvia only after the receipt of a licence (permit) issued by the FCMC and the performance of the registration of commercial operations in accordance with the procedures specified by law. According to CIL (Article 12¹) credit institutions registered in another Member State may open branches in Latvia without obtaining the licence (permit) specified in this Law only after the FCMC has received a notification from the credit institution supervisory institution of the relevant Member State.
A list of licensed banks and branches of foreign banks as well as a list of other banking services providers from the EEA (under the freedom to provide services) operating within Latvia is available on the website of the FCMC URL:
Pursuant to CIL (Article 9 (1)), a person that provides financial services in the Republic of Latvia shall be forbidden from using in its name (a company) or for the purposes of self-advertising the words "credit institution", "bank" in any grammar case and combinations thereof, that may result in misleading idea of its operations under CIL.
Assessment
Compliant.
Comments
Principle 3: Licensing criteria
The licensing authority must have the power to set criteria and reject applications for establishments that do not meet the standards set. The licensing process, at a minimum, should consist of an assessment of the ownership structure and governance of the bank and its wider group, including the fitness and propriety of Board members and senior management, its strategic and operating plan, internal controls and risk management, and its projected financial condition, including its capital base. Where the proposed owner or parent organization is a foreign bank, the prior consent of its home country supervisor should be obtained.
Description
1) The licensing of credit institutions is regulated by Credit Institution Law (available in Latvian) and Law on the FCMC(available in Latvian)(LV 20.06.2000, No 230/232)
2) FCMC has issued prudential regulations to specify the procedure for granting licenses (permits) to credit institutions Regulations on the Issue of Credit Institution and Credit Union Operating Licences, Obtaining Permits Regulating the Operation of Credit Institutions and Credit Unions, Settlement of Documents and Provision of Information(available in Latvian)(25.09.2009, No.112, LV 01.10.2009, No.156).
3) The licensing authority and the banking supervisor is the same institution - the FCMC.
4) The CIL outlines the main criteria for founders of credit institutions. Pursuant to the CIL (Article 14), the FCMC shall consider an application for license within three months but not later than 12 months after the receipt of all necessary documents.
Prior to receiving a license and commencing its operations, a credit institution to be established must comply with the FCMC requirements and ensure compliance with such requirements throughout its future operations. All founders of credit institutions must submit documents identifying the founders and their owners, including information on the owners as natural persons (Article 6.6) and documents on their financial standing (Article 6.6.2) and reputation. These requirements are being constantly applied in supervision of credit institutions. Banks must submit the economic rationale for the bank's proposed activity (business plan) including its banking strategy, financial projections for the next three years (budget, balance sheet, profit and loss account, capital adequacy calculation) and the organizational structure of the bank, clearly indicating the rights and responsibilities of the members of its supervisory board and executive board, precisely defining the tasks of the bank's structural units and their managers, including the duties, authority, and subordination of the internal audit and its manager. The FCMC reviews the bank's proposed activity (business plan), financial projections for the next three years (budget, balance sheet, profit and loss account, and capital adequacy calculation), the bank's market research and other information that the bank's founders considered necessary to submit (Article 9 of the Regulation). The minimum initial capital of a bank shall be equal to five million euro, which have been converted to lats in accordance with the exchange rate set by the Bank of Latvia on the day when the decision to issue a license (permit) for the operation of the bank has been taken.
The CIL (Article 14) prescribes criteria when the FCMC shall be entitled to refusea license to a credit institution, int. al., if in the establishment of credit institution the law has not been complied with and the documents submitted by the credit institution contain false information, the FCMC determines that the financial funds which are invested in the equity capital of the credit institution have been acquired in unusual or suspicious financial transactions or there are no documents to prove the lawful acquisition of such financial funds. Where the FCMC is not satisfied with the internal control, operating or managerial system in a credit institution, it refuses to grant a license to the credit institution to be established.
The progress of newly established banks is assessed through the regular supervision process. Pursuant to the CIL the FCMC can revoke the license if the credit institution has not commenced its operations within 12 months after the day when the license was issued or the credit institution fails to comply with the requirements of the CIL and other laws regulating the operations of credit institutions, and the regulatory regulations and orders of the FCMC.