Among the banks that service foreign clients there are some that are considering leaving Latvia in favour of establishing a foothold in another country, says Finance Capital and Market Commission chairman Pēters Putniņš.
He did not say exactly how many such banks there are in Latvia.
When asked if business models of banks servicing foreign clients have been creative so far, Putniņš said no. «I would like to say no, this is not something we had expected. We wanted to see a cautious and precisely calculated business foundation with a vision for the future. Those are more like business models created in difficult times for a new sector, considering the situation now present on our region’s market and globally,» he said.
FCMC chairman notes that in current market conditions the domestic market could serve as a jumping off point for banks. However, Latvia is a small country, its population is small and they are not too wealthy. The country’s economy is also small and lacks output. This is why Latvia alone is not enough for banks and they will have to turn to cross-border transactions.
«It is clear it would be foolish to assume the banks present in Latvia can depend on the domestic market. I think everyone agrees. The next logical step is using cross-border transactions. However, if there are foreign countries, we have to ask where to stabilize this business model. Russia and other CIS countries immediately create a number of problems and increased risks, which we have all seen in the past twenty years. The number of banks present in Europe is not small. Germany alone has thousands of banks. There is no shortage of banking services. Is there something unique we can offer? Perhaps the level of service? This is the biggest challenge for our banks,» said Putniņš.
He also said Latvia’s market is largely divided – depositors and clients have already found their banks.
«The next question is – how to make money? Loans take with them savings, because there will always be someone who fails to repay the loan. All this requires rich and influential shareholders to stand behind banks. Experience is also an important factor. If the bank throughout its life has focused on transactions, it lacks experience in other directions. To provide lending services, one needs a different kind of experience. On the other hand, there needs to be an active business model. Large banks in Latvia already complain about a shortage of businesses to lend money to. Yes, we can reduce standards for lending conditions, but this would carry with it a potentially larger risk of non-repayment. To cover this risk, we would need considerable monetary reserves,» said Putniņš.
With that, according to the head of FCMC, banks could not come up with anything creative in new business models.
«There is no way to come up with anything creative here. All banks registered here will not go far with Latvia’s market alone. It’s an axiom, and there is no need to look for politically correct terms. The Baltic market is not enough to resolve it, because this market has the same banks as Latvia. To compete with Scandinavian banks, we need a way to attract the same cheap resources they do,» said Putniņš.
When asked if this is starting to outline in potential consolidation of banks, Putniņš said he cannot say anything specific. On top of that, he said it is unlikely there is some intense activity going in this direction.
«Clearly one characteristic is that shareholders in banks that service foreign clients have gotten used to fending for themselves. Each bank has its own clientele and approach. Merging could be a solution, but it does not always fit every bank’s individual situation. If there are two banks suffering from the same problems, what is the point of merging them? This will not help resolve problems. Merging could be a solution for former non-resident banks that now have a larger number of local clients, because some business volume is lost, whereas shareholders still retain a part of functional business. Banks that dealt with only non-resident transactions in the past will have to think about other solutions. One such possible solution is change of jurisdiction, and we will get there,» said Putniņš, adding that change of jurisdiction means issue of banking license in some other country and leaving Latvia.
When asked if there are many banks that could change jurisdiction, Putniņš said: «Let’s not talk about the number, but there are thoughts in this direction. We have nothing against this. However, we have to keep in mind that to receive a license in another country, the bank needs to be great shape and have a convincing vision for the future. No one wants to welcome someone who does not have a clear vision for development.»
He also said new business models of banks that until now have focused on servicing foreign clients can be considered cautious.
«At first glance, there has been enough information needed for risk assessment. However, this is only the beginning. Now banks have to make sure their models function well and convince FCMC as much, as well as present a sufficiently high profitability index. Additionally, everything should have moderate risk at the most, because high risks are a no-go for Latvia. We will see as much this year and the next. We need a couple of years to see for certain,» said Putniņš.
He added that this year FCMC intends to follow how new models are implemented and if banks are able to profit at a specific risk level.
Putniņš also mentioned that monitoring does not mean «repressive measures». «Before we chase someone away from our market, we give them a chance to prove themselves. If we provide the right to change a business model, people have to be given a chance to use these rights. We will see how the situation develops,» he said.