CORE BANKING FUNCTIONS & OPERATIONS

Monetary Policy Implementation

As a member of the Eurosystem, Latvijas Banka participates in the decision-making process of the European Central Bank's (ECB) Governing Council. It implements the single monetary policy in Latvia through:

• Conducting open market operations with credit institutions.
• Providing standing facilities (marginal lending and deposit facilities).
• Applying minimum reserve requirements for credit institutions.
• The key interest rates are set centrally by the ECB for the entire euro area.

Currency Management

• Issuing euro banknotes and coins in Latvia as the sole legal issuer.
• Ensuring the circulation of cash, including processing, withdrawal of unfit notes, and distribution.
• Providing services to the public such as exchanging damaged currency, currency authentication, and selling collector coins.
• Facilitating the exchange of the former national currency, the lats, for euro at a fixed rate.

Banking Supervision

• Regulating and supervising the operation of the financial market and its participants, including credit institutions, insurance companies, payment institutions, and other financial entities.
• Since 2023, the functions of the Financial and Capital Market Commission (FCMC) have been integrated into Latvijas Banka, creating a single, powerful financial sector supervisor.
• As a member of the Single Supervisory Mechanism (SSM), it cooperates with the ECB in the supervision of significant banks.

Payment Systems Development

• Maintaining and developing modern payment systems, including the EKS (Electronic Clearing System) for retail payments and TARGET services for large-value payments.
• Promoting payment innovations such as instant payments and the Proxy Registry "Instant Links," which allows transfers using a mobile phone number.
• Participating in the development of the digital euro project at the Eurosystem level.

Financial Stability Oversight

Latvijas Banka is responsible for enhancing the stability of Latvia's financial system at the macro level. It publishes an annual Financial Stability Report, which identifies systemic risks and assesses the resilience of the financial sector. The bank also sets and implements macroprudential policy measures, such as capital buffer requirements for banks.

INSTITUTIONAL CHALLENGES & STRENGTHS

Policy Alignment

As a member of the Eurosystem, Latvijas Banka's monetary policy is fully aligned with the ECB. This provides a credible anchor for price stability but means that policy is set based on the needs of the entire euro area, which may not always perfectly match Latvia's specific economic cycle.

Banking Sector Strengths

• The Latvian financial sector is assessed as solid and resilient.
• The liquidity and capitalization ratios of credit institutions are robust and well above regulatory minimums.
• Borrower resilience is considered good, supported by strong income growth and declining inflation.

Strategic Challenges

• The most significant risks to financial stability are tied to weak economic activity and stringent lending conditions, which can hinder investment and growth.
• The economy is exposed to external shocks due to its small and open nature, as well as the regional geopolitical situation.
• Insufficient bank competition in certain lending segments and structural policy deficiencies are noted as areas of concern.

Organizational Structure

Core Policy Departments

• Monetary Policy Department
• Market Operations Department
• Financial Stability and Macroprudential Policy Department

Supervision & Compliance

• Credit Institutions Supervision Department
• Insurance and Pension Supervision Department
• Financial Technology Supervision Department
• Capital Market Supervision Department
• Anti-money Laundering Department
• Licensing and Sanctions Department

Strategic Functions

• Data and Statistics Department
• Communications and Financial Literacy Department
• Legal Department

Support Operations

• Finance Department
• Human Resources Department
• Information Technology Department
• Internal Audit Department

Macroeconomic Context

Latvijas Banka operates within the economic framework of the European Union and the euro area. The Latvian economy is small and open, making it sensitive to external demand and geopolitical developments. Key challenges include navigating the impacts of regional conflicts, managing inflation driven by external factors like food and energy prices, and stimulating domestic investment and lending. The government's fiscal policy is considered expansionary, with a focus on increased defense spending, which is expected to keep the budget deficit around 3% of GDP and raise the government debt level over the medium term.

This analysis reflects Latvijas Banka's position as a modern, integrated European central bank, focused on ensuring financial stability and fostering innovation while navigating a complex regional and global economic environment.