Flash Comment: Latvia - November 28, 2011: Latvijas Krājbanka to file for bankruptcy

1. Flash comment
Economic commentary by Economic Research Department November 28, 2011
Latvijas Krājbanka to file for bankruptcy
Assets of Top10 Latvian banks, On November 16, 2011 the government of Lithuania nationalized
EUR bn (September 2011)
Bank Snoras and applied interim measures of protection of the
UniCredit 3.2 bank’s assets. On November 24 the Bank of Lithuania (which
carries out bank supervision in Lithuania) revoked the Bank Snoras
Latvijas Krājbanka 3.3 % of total
license and submitted the claim to the court to declare its
LHZB 3.5
bankruptcy. The decision was made after fraud was discovered, i.e.
Citadele 6.3
of the Bank Snoras reported EUR 2.36 billion assets around EUR
Rietumu 6.6 1
1 billion were found missing or incorrectly accounted.
ABLV 8.1
DnB NORD 8.4 Bank Snoras is the major owner of Latvijas Krājbanka (hereinafter
– LKB) in Latvia. Latvian financial markets’ supervisor Financial
Nordea 10.8
and Capital Market Commission moved quickly by applying certain
SEB banka 12.8
restrictions on the activities of LKB (e.g., debit transactions,
Swedbank 18.5
including via online banking, ATMs and cash, with both natural and
Source: LKA 0 2 4 6 legal persons in the amount that exceeds EUR 100 000 per
calendar month) on November 17, followed by suspension of
Deposits of Top10 Latvian banks, provision of all financial services on November 21. Fraud was also
EUR bn (September 2011) discovered in LKB where assets were found to be short by about
EUR 140 million of the total EUR 960.5 million reported by the
LHZB 4.1
bank. After the Bank of Lithuania made decision to file for
DnB NORD 4.2 bankruptcy of Bank Snoras, it was decided that LKB will also be
NORVIK 4.7 % of total wound down, i.e. this week Financial and Capital Market
Nordea 5.1 Commission (i.e., November 28 – December 2, 2011) will submit
Latvijas Krājbanka 5.2 the application for declaring the LKB insolvency proceedings to the
SEB 8.5
court. In compliance with the Law on Deposit Guarantees, each
client will be reimbursed at maximum EUR 100 000. Pay-out of
Citadele 9.2
reimbursements will begin tomorrow on 29 November, 2011.
Rietumu 10.3
ABLV 13.1 Outcome
Swedbank 14.0
This is an isolated case of bank management fraud. LKB is not a
Source: LKA 0 1 2 3 systemically important bank and does not pose risk to the stability
of the banking system. Despite its large number of clients (about
230 thousand entitled for deposit guarantee reimbursement) in
Government 10 year bond yields, %
terms of asset and deposit volumes it is a small bank. Majority of
18 deposits have been small and 99.8% of depositors will fully recover
15 their money. Other banks have been fast to open accounts to LKB
clients to ensure that the payment system is not disrupted. Banks
12 are quick to attract corporate clients and interruptions of good
9 investment projects are likely to be brief. Albeit LKB bankruptcy is
expected to weaken consumer and corporate confidence, the
6 impact on Latvian economic activity will be contained and minor.
3
Response from financial markets has been muted and increases in
bond yields reflect regional turmoil rather than LKB specific events.
0
2008 2009 2010 2011 There is, however, certain impact on public finances. First,
Latvia Lithuania Italy Germany municipalities and state/ municipality owned companies had
Source: Reuters Ecowin deposits with the bank at about EUR 115 million (0.7% of GDP).
Some of this money will be lost. This may: (i) force the government
to incur extra expenditures to compensate public institutions for the
lost financial means, and (ii) yield fewer dividends from its
companies that have lost part of their financial means. Yet, this
1
For more details, see our today’s Flash comment on Lithuania “AB Bank Snoras goes into bankruptcy”.

2. Flash comment
Economic commentary by Economic Research Department November 28, 2011
would have a very limited impact on the budget as revenues so far
exceed the plan by about 5% and in the first ten months of 2011
budget deficit was only about 1% of GDP – significantly below the
target of 4.5% deficit.
Second, LKB clients are entitled to reimbursements from Deposit
Guarantee in the amount of EUR 485 million. The current size of
the Deposit Guarantee fund is EUR 214 million. The shortfall can
be easily covered by sales of LKB assets, yet in short term the
state will have to step. This is not a problem as the state Treasury
has ample reserves amounting to EUR 1.73bn (12% of GDP) at the
end of October 2011.
The overall impact of LKB bankruptcy on Latvian economic activity
is expected to be minor and contained.
Mārtiņš Kazāks
Deputy Group Chief Economist
Chief Economist in Latvia
+ 371 6 744 5859
martins.kazaks@swedbank.lv
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