The main market participants in the Latvian financial market are banks. Their assets which include trust assets and transit credits, constitute approximately 90% of Latvia´s financial sector assets. Financial market and credit institutions are regulated in Latvia in accordance to Law on credit institutions and EU Regulation No 575/2013. EU-legislation on broker and capital adequacy rules are strongly based on international Basel II and Basel III regulation.
Initial capital requirements in Latvia
In Latvia the initial capital of credit institutions must not be less than five million euros. The initial capital may consist of one or several following items, which correspond to the requirements of EU Regulation No 575/2013 (regarding Common Equity Tier 1 items):
- shares, as well as other capital instruments and respective premiums;
- retained earnings or losses;
- other accrued income indicated in the statement of comprehensive income;
- other reserves;
- profit of the current business year.
Capital adequacy rules in Latvia
Capital banks are required to hold to guard against the operational and financial risks. As the main principle, the greater the risk to which a particular bank is exposed, the greater the amount of capital that the bank needs to hold as so called buffer to safeguard its economic stability, and solvency.
According to Latvian law on credit institutions a credit institution may not use its Common Equity Tier 1 capital. EU regulation No 575/2013 requires that a credit institution maintains its Common Equity Tier 1 indicator at 4.5 per cent of the total exposure value. The specific risk own funds requirement for non-securitization debt instruments is 8.0 per cent. This includes the total capital and assets of the bank.
In addition to the mandatory amount of 4.5 per cent of Common Equity Tier 1 capital required, all the banks are required to hold a capital conservation and a countercyclical capital buffer, in order to ensure that they accumulate a sufficient capital base to enable them to absorb possible losses in the event of a crisis.
It is required that institutions disclose the following information regarding compliance with the requirements for a counter-cyclical capital buffer:
(a) the geographical distribution of its credit exposures relevant for the calculation of its countercyclical capital buffer;
(b) the amount of its institution specific countercyclical capital buffer.