The Baltic Course  

Non-residents’ attack

By Olga Pavuk

The unique situation in the Baltic states’ banking sector is such that more than a half of all depositors of the Latvian banks are traditionally non-residents.

Non-resident clients in Latvian commercial banks in the first quarter of 2003 reached 51.8% (in first six months – 52%), in Lithuania – 4.8%, and in Estonia – 11.4%. Non-residents from CIS countries very willingly deposit their financial resources in the banks of Baltic countries that will soon join EU and NATO. And these investments are channelled into mortgage and credit sectors in local markets.

Photo: A.F.I.

Estonian banks are most effective

According to expert assessment from Latvijas Unibanka, in the first seven months of 2003 total amount of assets in all Baltic banks (revalidated in euro) has grown by 7.1%, or by 1.26 billion euro to a total of 18.99 billion euro.

At the end of July 2003, assets of Latvian banks accounted for 7.87 billion euro – by 3.9% more than in the beginning of the year. A revalidation in lats has shown that the growth was even higher, i.e. by 13.9%. This difference can also be explained by the lower change rate of lats against Euro.

Most effective banks in the Baltic are that of Estonia. According to a research performed by the auditing firm Deloitte & Touche, banking assets’ return during 2002 in Estonia equalled to 2.8%, in Lithuania – 1.3%, and in Latvia – 0.9%. Experts believe that this Baltic banks’ performance, first of all, indicates the gains Estonian banks acquired from banks’ consolidation. Secondly, expert forecast from Deloitte & Touche has shown that market of bank services in Latvia and Lithuania can expect a wave of consolidation in the next two years too as ‘many local banks have abandoned the hope of becoming universal banks’.

Credits grow whereas rates fall down

Interest rates for bank credits have continued to decrease and hence a corresponding grow in mortgage credits. Last year Bank of Estonia’s forecast concerning possible increase in bank’s credit rates has not come true, unlike in the neighbouring countries, i.e. in Estonian banks credit rates remained practically at the same level (see: table).

Thus, during firsts six months in 2003 the amount of credits issued by Latvian commercial banks to private individuals for purchase of apartments increased by 42.8% (to 101.612 million lats), totalled 339.2 million lats in the end of July, according to data from the Association of Latvian Commercial Banks. About 55.2% out of all credits have been issued by three most active banks in mortgage service, i.e. Hansabanka (23,4%), Latvijas Unibanka (18,8%) and Hipoteku banka (13%).

Bankers disclaim any contemplation concerning possible real estate market overheating. According to Ugis Zemturis, Hansabanka’s deputy boards’ chairman and member of the board in Hansabanka Group: “Banks, of course, slightly boosted the process. They were interested in providing mortgage credits. But we have to be realistic: if we look at how many households took mortgage credits, the number would be ridiculously low. In Latvia, for example, it is 7–8%, in Estonia – 12%, whereas corresponding average figures in Europe is 30–40%, or even 50%. We have a huge potential in the sector, and we cannot speak of over-capacity”. 

Still, Bank of Estonia has warned those who took mortgage to buy real estate only because of such a low bank credit rate. The Aripaev newspaper writes that according to Central bank estimates, that serves as a basis for credits in Estonia, Euribor (European Interbank Offered Rate) can change quite fast, and as a result the price of issued credits could rise, too. If credit payments increase approximately by 10%, says Bank of Estonia, they could become unbearable to creditors, and a bank might therefore go bust.

Black listed debtors 

Active crediting market development in Latvia has led to creation of a black list of debtors.  Although statistics of the Financial and Capital Market Commission indicate that risk, doubtful and lost credits account only for 1%, on 1 October 2003 the board of the Bank of Latvia introduced a Register of Debtors. It contains a list of those clients (data basis of the Bank of Latvia can be seen on the server of Payment system management) who having received loans in banks, did not somehow managed to cover the burden themselves with timely payments.

The new document determines that all the banks registered in the country are obliged to submit information on all the wrongdoers until June 2, 2003. This information on disloyal clients will be available not only to official bodies and Financial and Capital Market Commission authorities, but to the debtors themselves too. Dishonest debtor can be traced everywhere, e.g. his name will stay in the Register even after repayment of the debt. Not only banks, but disloyal debtors too can get right information about the event from the Register, after fulfilling some requirements.


Bank’s confidentiality – a dying tradition


The notion of bank’s confidentiality for its clients that has existed in Europe for several centuries is under a threat of extinction.


Frightening news spreading around that from January 1st, 2004, banks and credit institutions in the EU member states will be obliged to exchange information on their clients accounts and deposits. From May 2004 10 new member states will join the alliance, including the Baltic states. It practically means that fiscal control offices in all EU countries will get access to data on accounts of their fellow citizens, and in particular, information on accounts in European tax heavens. 

Some still managed to sustain the privilege 

Only Belgium, Austria and Luxembourg managed to protect their former practice of revealing such confidential information only in cases of criminal prosecution of a person in question. However, starting from January 2004, will have to pay 15% “anonymity duty”, which will increase to 20% by the year 2007 and to 35% in 2010, if by that time laws on deposits confidentiality still survive.

Bank account confidentiality is still maintained in Switzerland, the country that is in no hurry at all to join the EU. The reason is clear enough, i.e. banking service provides for more that 11% of the country’s GDP. Switzerland laws provide for up to three years imprisonment for revealing confidential bank information. Country’s bank regulations determine at the same time the so-called advance tax in the amount of 35%, to be withdrawn from all bank deposits. In case of tax evasions, the state would anyway get its 35%. The Swiss authorities suggested to all EU member states the same regime to follow towards all foreigners. Quite notably that approximately 300 years ago French royalties became first the clients of Swiss banks mostly due to the latter’s confidentiality.

A serious argument towards cancellation of excessive confidentiality in banking matters was combat against corruption, smuggling, drug dealing and other crimes that have acquired international dimension.  

Latvian NCPCB is above the law

In Latvia, where the state bodies have already declared a holy war to bribery and illegal trade, National Corruption Prevention and Combat Bureau (NCPCB) has revealed its intention to get access to banking secrets. That could be a first step towards getting information on bank accounts of all physical and legal persons. These anti-corruption bureau officers have already visited several times various banks demanding confidential information.

Preparation of amendments to existing legislation started already during the winter this year, and in August, assembly of responsible ministerial officials, i.e. state secretaries, already showed support, approved and forwarded proposals to related ministries for co-ordination. If everything goes as planned, national Parliament (Saeima) will evaluate the amendments in the first reading. In case the process proceed the way anti-corruption Bureau wanted, all banks will be obliged to render any information on their clients to NCPCB at their requests.

Presently, such confidential information is available only through the Prosecutor’s General Office. But NCPCB claims that such procedure takes too much time, which consequently can hinder effective investigation.

This article is based on information from Latvian press.



Photo: A.F.I

Teodors Tverijons,

Latvian Commercial Banks Association, President

“Certainly, I am against NCPCB’s extension of authority. And this is not only my opinion. We live in a law-based society and therefore everything must go according to law. Why so many organisations (Security police, Finance and Tax police, etc.) can manage their duties without direct access to banks, but NCPCB can not? Why do they need such privileges? The consequences could be devastating. Mind you, for banks there is no difference whom to supply such information to, e.g. Prosecutor’s General Office or anti-corruption bureau. This is not a problem; the problem lies somewhere else. Thus, in the Prosecutor’s Office there is a special department, which after receiving a request for such sensitive information makes and analyses whether it is really necessary to provide access to bank’s data base. If a new law is adopted the situation will change. Officers from NCPCB would simply come to banks and demand information they need. More than that, there have already been such precedents when KNAB’s officers showed up in the banks requiring such data. But the law has not been adopted yet! Thus NCPCB is already acting like a capricious maiden, i.e. she has not done anything yet, but already demands so much. And very often this bureau people do succeed, especially with the support of the Prime Minister and of the right parties.”


  • Latvian Rietumu banka was allowed to open its representative office in Lithuania where it already owns a company of finance brokers Baltijos vertybiniai popieriai.
  • Lithuanian Siauliu bankas increases the stock capital by 5 million lits by selling newly issued shares of a Swedish company East Capital Asset Management to a daughter company of the Lithuanian investing company Invalda-Pozityvios investicijos and to two physical entities.
  • In August, Lithuanian Business Bank, which belongs to Bank of Moscow, acquired share capital of 18.695% in Estonian Krediidipank.
  • German Dresdner Bank and Latvian Lateko banka signed an agreement in August providing the latter with an inter-bank credit of 1 million euro.
  • Ukio banko investicine grupe (UBIG) – an investment group of Lithuanian commercial bank Ukio bankas – officially renewed enterprise operation at Bosnian plant Birac belonging to it. Besides the aluminium refinery plant and the Balkan Investment Bank, UBIG also owns shareholdings of other ten enterprises in the region.
  • Austrumeiropas Sabalansetais fonds, an open fund established by the investment society Parekss ieguldijumu sabiedriba, is registered in Latvia. The new fund will mainly operate in Euro. 
  • Shareholders of Latvijas Krajbanka reached a decision to start public trade of shares that previously were sold through closed emissions, therefore the bank’s all 9 million shares will be available to public. 
  • The Board of Hansapank, the biggest banking group in the Baltic states has reduced its profit margin from 20% to 10%. That happened due to the fact that the group has already increased drastically its share in the Baltic financial market and according to expectations that financial sector is not going to grow so rapidly any more in general.
  • Lithuanian Hansabankas, the second in size in the country, has made its shareholders an offer to increase bank’s share capital. Presumably, this step is closely interrelated to bank’s intention to acquire 100% of shares of the biggest Lithuanian life insuring company Lietuvos draudimo gyvybes draudimas for 63.5 million lits.