The Council of Latvijas Banka has approved the Annual Report of Latvijas Banka for 2023. In addition to the financial statements for 2023 and the unqualified independent auditors' report, it covers the last year's economic environment and economic development in Latvia and the euro area as well as provides information on the operation of the national central bank and its accomplishments in the areas within its mandate.
Pursuant to the Law on Latvijas Banka, the financial statements were audited by independent external auditors recommended by the Governing Council of the European Central Bank and approved by the Council of the European Union.
Latvijas Banka has received a positive auditors' opinion on its financial statements for 2023 from the auditing company SIA ERNST & YOUNG BALTIC.
Latvijas Banka concluded 2023 with better financial results than previously projected, given the global geopolitical and economic developments that prompted the European Central Bank to raise interest rates significantly to tame inflation in the euro area.
As a result of successful management of Latvijas Banka's gold and financial investments, their value rose by 298 million euro or 5% per annum during the year. Consequently, the total amount of Latvijas Banka's capital and reserves increased by 143 million euro or 24%, totalling 730 million euro at the end of the year. Meanwhile, Latvijas Banka's expense on deposits increased significantly as the European Central Bank raised interest rates. Interest expense on deposits from Latvian credit institutions amounted to 174 million euro, while those from the Latvian government – to 45 million euro.
Given the above increase in interest expense, Latvijas Banka concluded 2023 with losses of 54 million euro, which were absorbed from the reserve capital established specifically for such purposes pursuant to the Law on Latvijas Banka. The losses do not impair the central bank's ability to implement an effective monetary policy and do not incur expenses for the state.
Latvijas Banka appropriated 58 million euro to the state budget last year: the above amount of 45 million euro being appropriated as interest on government deposits with the central bank and an additional amount of 13 million euro – through taxes.
Similar financial results are also expected to be achieved by many other central banks, given their primary focus on the fulfilment of the main task of the central banks – the implementation of monetary policy – in circumstances that require decisive action to contain the surge in prices. With the monetary stance changing and the interest rates declining, Latvijas Banka and other central banks are expected to return to profit generation in the medium term.
Since the restoration of its operation in 1992, Latvijas Banka overall has earned more than 750 million euro of which almost 450 million euro were appropriated to the state budget. At the same time, it should be taken into account that the key task of central banks is to implement monetary policy rather than to generate profit.
The integration of the Financial and Capital Market Commission (FCMC) into Latvijas Banka ranks among the most significant accomplishments of Latvijas Banka in 2023. It supports accelerated development across multiple areas, particularly sustainability and data management, while also streamlining the execution of several functions through enhanced synergy. For example, the changes in the methodology for managing the Deposit Guarantee Fund have resulted in generating profit and increasing the amount of the fund by 6 million euro respectively. In addition, the total number of employees has been reduced by 18% over the last four years, following the Saeima's endorsement of integrating the FCMC into Latvijas Banka. This reduction has preserved not only the workload and the scope of functions but has also substantially increased them in certain areas, such as data management.
In 2023, Latvijas Banka implemented a series of measures to ensure a bona fide customer-friendly financial sector, including by simplifying the regulatory framework, instructing banks to counter the risk of excessive claims and by improving the basic account solution. Likewise, the development of the capital market has been facilitated by both implementing a 10-step programme for the development of Latvia's capital market and by organising the Capital Market Forum to bring together the leaders and policy makers of the area.
Since spring, Latvijas Banka together with other institutions in the Council of the Financial Sector Development chaired by the Prime Minister has been addressing issues related to more active lending and achieved the goal of simplifying the refinancing process of mortgage loans, carried out the analysis of access to financing, ensured the publication of the interest rates applied by commercial banks and reduced the regulatory barriers to lending. The work on simplifying the process of refinancing for businesses is also underway.
In the face of the geopolitical challenges and reinforcing the financial sector's preparedness for crisis situations, special attention has been paid to security issues. The management framework for critical financial services has been developed and, in cooperation with commercial banks, the preservation of their network of ATMs across regions has been ensured. To enhance the availability of cash, Latvijas Banka has also drafted pertinent amendments to the law and submitted them to the Ministry of Finance.
The ongoing war initiated by Russia against Ukraine has sparked widespread discussions among the general public in Latvia and the rest of Europe about the scale and application of sanctions. In this area, the Latvian financial sector, in cooperation with the public sector, was setting an example, fully and properly implementing the sanctions imposed on Russia and Belarus and helping the customers of commercial banks to comply with the regulatory framework.
With the aim of bolstering the international reputation of the financial sector, preparations for the sixth round of mutual evaluations by the Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (MONEYVAL) started in 2023. Scheduled for launch in the fourth quarter of 2024, this round will conclude in 2025.
To strengthen the regulatory framework of pension funds, Latvijas Banka developed and submitted a proposal to the Saeima in 2023, advocating for a reduction in the management fees applicable to the 2nd pillar pension funds. This endeavour would overall generate savings exceeding 100 million euro for the population over a decade. The Saeima and the government have already supported several other proposals made by Latvijas Banka. Therefore, starting from mid-2024, fund managers will be obliged to assess the suitability of the plans selected by the 2nd pillar pension scheme participants based on their age and needs, while as of 2026, the new participants who have not selected a pension plan will be automatically linked to the more profitable 2nd pillar pension plans.
In the field of FinTech companies, several initiatives have been launched by engaging in a dialogue with the industry participants. Preparations have been made to ensure access to the payment systems of the central banks for non-bank payment service providers following the approval of the uniform criteria for the euro area. In addition, the administrative burden of FinTech companies has been reduced and the licensing process has been simplified. The most important future challenges are related to the effective implementation of the European-level regulation on crypto-asset markets (MiCA) in Latvia.
In the field of cash and non-cash payments, 2023 was marked by both the decision taken at euro area level to start the next investigation phase of the digital euro project and the execution of the practical preliminary work by choosing the design themes for the third series of euro banknotes. The volume and the total value of instant payments provided by Latvijas Banka also continued on an upward trend, representing increases of 42% and 35% respectively in comparison with 2022. A total of 52.9 million instant payments worth 22.4 billion euro were processed throughout the year, with their share between Latvian credit institutions increasing to approximately 45%. The number of active instant links contained in the Proxy Registry "Instant Links" exceeded 840 thousand, while the number of requests reached 19 million. In addition, the new European-level TARGET system was successfully introduced in interbank settlements with foreign countries in 2023.
Significant efforts have also been made to enhance financial literacy of the public. A series of educational events were organised – the annual Financial Literacy Week, the adult education programme "Enhance your money management skills!" and the educational lessons at schools. In 2023, the teaching aid "My Economics" was used around 450 000 times (almost twice as many as in 2022), while the number of visitors to the Knowledge Centre "Money World" increased by 76%, reaching around 4500. In 2024, special attention will be given to long-term provisioning, and it is also planned to develop best practice guidelines on fraud detection and prevention for commercial banks.
Activities in the field of sustainability and climate change have been carried out, helping the Latvian financial sector to better prepare for future challenges and establishing a sustainable management award.
The economists of Latvijas Banka have actively analysed topics pertinent to the development of the Latvian, the euro area and the global economies, such as access to financing and monetary policy transmission, fiscal policy and government support instruments. More than 100 analytical articles, 16 high-level scientific articles and working papers on economics, financial stability and the financial sector development were published in 2023. The results of the working papers were presented at 50 academic conferences and seminars. In 2024, in the field of economic research, it is planned to focus on the issues regarding the factors restricting lending in the regions, alongside exploring the underlying disparities in loan volumes and interest rates in Latvia relative to the euro area as a whole.
"2023 was a productive and fruitful year for Latvijas Banka. As the colleagues from the Financial and Capital Market Commission joined the team of Latvijas Banka, it has become even more powerful and stronger. A secure and developed financial sector, a better accessibility of financial services and a bona fide customer-friendly banking sector represent the domains where substantial progress has been made and where our efforts will also persist in the future. The year has also been successful in terms of fulfilling the most important task of the central bank, namely to implement a decisive monetary policy and utilise it to tame inflation in Latvia and the euro area. The inflation dragon has been tamed, paving the way for gradual interest rate cuts already in the near future. The foundations have been laid for a new cycle of economic growth to begin in 2024,"
emphasises Mārtiņš Kazāks, Governor of Latvijas Banka.