The Ministry of Finance (FM) said May 21 it has submitted a proposal to the cabinet that would place Latvia’s independent financial regulator, the Financial and Capital Markets Commission (FKTK) under the wing of the Latvian Central Bank (LB).
“The addition of the FKTK to the Bank of Latvia is the logical conclusion of the overhaul of the financial sector. Synergies of information and competencies will help the assessment of risks in financial institutions more comprehensively, allowing for more operational, informed and problem-oriented decisions. This will allow for more effective monitoring and development of the financial sector in the future. In the long run, the additions could also lead to saving of resources,” Minister of Finance Jānis Reirs said.
The work of the dual-function institution is planned to start in 2022 or 2023 said Reirs, with his ministry suggesting the move could save around €1.6 million each year.
The move already has backing from Santa Purgaile, the head of the FKTK who said:
“The implementation of monetary policy and financial sector supervision functions in a single institution is not a unique experience. There are several countries in Europe where such a model is successfully implemented. The merger of the FKTK and the Bank of Latvia offers the chance to maintain financial stability and mitigate systemic risks.”
Similarly, central bank governor Mārtiņš Kazāks signalled there were potential benefits to the merger of the institutions.
“There are several important preconditions for the smooth accession of the FKTK to the Bank of Latvia and a positive impact on the Latvian economy…. One of the most significant is the change in the central bank’s governance model, including the separation of monetary policy and financial sector supervisory functions. Therefore, one of my short-term priorities will be the development of a new, modern law ‘On the Bank of Latvia’,” Kazāks said.
There is no common approach or best practice in international standards regarding the role of the central bank and the degree of its involvement in the supervision of the financial sector. Curently in 11 of the 19 euro area Member States – including Lithuania – supervision of the financial sector is a responsibility of the central bank.