Weak and expensive lending is a problem that can be observed not only in Latvia, but also in Lithuania.
For several years now, in negotiations with commercial banks, the Bank of Latvia has been insistently updating lending, as we see both the need and the opportunity for commercial banks, especially large and market-dominant banks, to make a greater contribution to the Latvian economy.
The banking sector must be profitable, because only then is it stable and resistant to crises. However, particularly high returns, that is, well above historical levels, may indicate an imbalance.
If such a profit was generated by banks providing the blood flow of the economy, that is, through active and thoughtful lending, then I think that the issue of additional profit tax would not be relevant.
However, currently in Latvia, Lithuania and also in a number of other countries
a situation is emerging where banks’ profits can grow rapidly without them taking risks.
Lithuania sees a solidarity payment, or an additional tax on profits, as a solution, which is planned to be directed to the needs of the state.
In Latvia, we are trying to follow a different path – to achieve faster crediting and more favorable conditions for Latvian companies and households, which would give the economy a larger and more permanent contribution than a tax.
The choice is in the hands of commercial banks. The Bank of Latvia expects commercial banks to act in three directions.
First, higher deposit rates for households and businesses. Namely, that the deposit rates of citizens and companies follow the interest rate that banks receive from the central bank.
Deposit rates in Latvia should not be lower than those we see in other Baltic countries.
Second, it is necessary to reduce the costs faced by bank customers, especially commissions. They not only make lending and other services provided by banks more expensive, but also limit customer mobility and competition between banks.
The third direction is the preparation of a favorable environment and mood for the increase of lending, in order to break the unfavorable trend of the previous business cycle for the volume of credits in the economy to consistently shrink. Assess the adequacy of risk models, improve the variety and availability of services, express a clear commitment to increasing the volume of lending in order to increase the ambitions of companies to invest.
Martin KazaksPresident of the Bank of Latvia