Banks, Financial Services, Latvia, Legislation

Approximately two-thirds of Parex banka assets worth around LVL 1.5 billion will be transferred to the new bank, the Latvian Privatization Agency's representative Juris Jakobsons told reporters. More than a half of Parex banka loan portfolio, worth about LVL 700 million, will also go to the new bank, as well as part of government deposits at Parex banka that were meant to stabilize the situation at the bank, writes LETA.

The bank will focus on the Baltic region.

The restructuring will normalize the bank's operations and make it self-sufficient, that is, the bank will no longer require continual state support.

Jakobsons went on to say that the restructuring strategy would help the state to retrieve as much money as possible from Parex banka, although this does not mean that 100% of state investments in the bank will be returned.

Parex banka board chairman Nils Melngailis informed that, as a result of restructuring Parex banka, the bank would be divided into two different organizations. One will continue to issue loans and accept deposits, the other will deal with asset management.

Both the financial organizations will honor their obligations, and there are no grounds to expect that any of them could go bankrupt.

Parex banka restructuring will not mean any major changes for the bank's customers. "We will be able to resume lending, because now one of the greatest problems is that we cannot issue loans due to restrictions. We expect that these restrictions will be lifted after the breakup," said Melngailis.

The European Bank for Reconstruction and Development (EBRD), a Parex banka shareholder, also wishes to become a shareholder in the new bank, said Melngailis.

Prime Minister Valdis Dombrovskis (New Era) informed that the government's decision on Parex banka restructuring was unanimous. Only the outgoing Foreign Minister Maris Riekstins (People's Party) did not vote.

As reported, the restructuring model for Parex banka offered by the international consulting company Nomura – transferring all the bank's "good" assets to a new bank, which is yet to be founded, instead of separating poor-quality assets and keeping the existing credit institution, may be a risky venture, besides, it may involve lengthy litigation for the state of Latvia, according to documents that LETA received previously.

According to the Finance Ministry, the pros of the model suggested by the consultant include its compliance with the interests and requirements of the European Commission and the European Bank for Reconstruction and Development, positive PR effect and improving the bank's reputation. The new bank would also have good liquidity and capital adequacy ratios.

The cons include the risk of litigation, the necessity of an investment of another LVL 100 million from the state budget, and complicated implementation of such a plan, which eventually could hamper the new bank's operations.

If a decision is made to establish a new bank on the basis of Parex banka, the state will have to go through the entire process – not just reaching agreements with correspondent banks and SWITF, but also developing a new banking system, making new investments in infrastructure and others. Consultant Nomura, however, suggests that the new Parex banka head offices on Citadeles Street go to the new bank.

The complicated process of establishing a new bank will increase operational risks, the Finance Ministry points out.

As for the high probability of litigation, this is due to the planned asset distribution model: an LVL 52.8 million investment into Parex banka subordinated capital by the bank's former shareholders is to be left with the current bank – which will most probably result in lawsuits being filed by these depositors as well as several pension funds. Furthermore, the asset distribution is to be done in accordance with a provision of the Law on Credit Institutions that several lawyers consider unconstitutional.

The bank's former shareholders have said that several pension funds and foreign banks, for instance, Deutsche Bank, had invested money into Parex banka subordinated capital, although the bulk of the investment is made up of investments by the bank's former owners, Viktors Krasovickis and Valerijs Kargins.

It is planned that assets worth LVL 1.5 billion will be transferred to the "good" bank, whereas Parex banka will be left with assets worth LVL 785 million – mostly made up of non-performing loans.

Nordea and DnB Nord Banka, which are already represented in Latvia, as well as Poland's PKO Bank Polski, Russia's Alfa Bank, Germany's Raiffeisen Bank and Erste Bank and several financial investors are mentioned as the potential buyers for the new bank.

As already reported, Nomura has been hired to develop and implement a Parex banka restructuring plan, and to organize sale of Parex banka and a new entity to be established as a result of the restructuring.

The Latvian Privatization Agency currently holds 76.6% stake in Parex banka, and EBRD has 19.7%.