Published: 13.12.2023.
The events of the last year have raised the issue of the competition of Latvian commercial banks. Competition supervision is provided by the Competition Council, while the supervisor of the financial sector follows events and evaluates the stability and resilience of the banking sector, as well as the strategy of each individual bank and the success of its implementation.
13 banks, but no competition?
In total, there are nine commercial banks and four branches of foreign banks operating in Latvia, which is a large enough number to ensure competitive conditions. However, it is necessary to take into account each bank’s market niche, development strategy, products and their conditions, shareholder structure, ambitions for development and the ability to implement them, primarily in terms of capital adequacy. These are internal competitive factors, but external factors also play a major role – the business environment, tax regulation, state investment attraction strategy, the share of the shadow economy, the judicial system and insolvency regulation and practice.
Four largest banks have concentrated the largest market share in Latvia, but the other banks are also trying to conquer this market and compete. Competition is visible in the distribution of market segments, where each bank tries to find its niche and specialize. It should be noted that in 2019, Latvian commercial banks, which had previously focused on foreign customer service, changed their business models. Some commercial banks have succeeded in this relatively successfully, however, more significant progress requires more time.
In general, the Latvian banking sector is still undergoing transformation: individual banks are merging, which is generally a positive step, as volumes and competitiveness are increasing. In addition, there are some banks that no longer continue to provide services.
Competition is influenced by historical events
The current situation in the banking sector is largely a consequence of historical events. Latvia’s financial sector has experienced several upheavals, and each of them has had consequences. They have largely resulted in stricter regulation both in Latvia and throughout Europe and caution, which is not good for competition. The Covid-19 pandemic and the impact on the economy caused by Russia’s invasion of Ukraine have not helped this process either.
The decisions of this moment will also have an impact. During the rapidly growing interest rates, borrowers’ payments have increased, and banks’ profits have increased. Politicians, when evaluating the profit indicators of the four largest banks and looking for a solution to redistribute profits to support borrowers, should remember that we are also talking about the profits of the other nine banks, which could be an important and important stepping stone for development and promotion of competition.
The solution – a state bank?
Due to the availability of financial services and poor lending, there has been a proposal to create a state bank. The state has such a right, but the most important thing is to clearly understand the purpose of creating such a bank and the result to be achieved. Establishing a national bank will not be a quick, simple, or cheap solution, because regardless of the founder, it must receive a license from the European Central Bank and meet all requirements. In the view of the European Commission, a state bank must operate in free market and competitive conditions, and such a bank must not engage in services that can be defined as state aid.
Moreover, the capital of such a bank must be provided to the state not only at the licensing stage, but also in the following years, incl. also ensuring against the negative scenarios of the bank’s operation. State banks tend to have a higher risk appetite, set smaller interest margins and implement less stringent lending conditions. This usually results in an increase in bad loans and the need to strengthen the bank’s capital. This may mean that society as a whole will pay. It is also essential to prevent any political influence on the management of the state bank.
New foreign player
It was recently announced that a new foreign bank will enter the Lithuanian banking sector. Similar to Lithuania, Latvia also has this goal. This task is included in the Financial Sector Development Plan and delegated to the Investment and Development Agency of Latvia. Along with that, various formats of international relations have been used in order to create positive soil and understanding of the Latvian financial market and its desired development.
It is clear that the entry of a new international bank into Latvia is neither a quick nor an easy process, because in the opinion of global players, the Latvian and also the Baltic market is relatively small and quite complex. In the assessment of investors, the unattractive business environment, mainly tax regulation and instability reduce interest in Latvia, and the geopolitical situation of recent years does not help in this regard either.
However, it should be reminded that the European Union’s free market and capital flow policy gives every Latvian resident and entrepreneur the opportunity to use the products and services of any European bank or payment institution. We can already see that a number of services offered by foreign credit institutions are gaining popularity. And this aspect definitely plays and will play an important role in promoting competition and will force local banks to be more innovative, offer more profitable and convenient products.
What can a financial sector supervisor do?
The supervisor of the financial sector, for his part, can help promote competition in the sector with clear and comprehensible regulation. As a result of various crises, the financial sector is one of the most regulated sectors and all banks must meet the established requirements. The growth of smaller local capital banks is most significantly affected by limited capital. Attracting it in Latvian conditions is sometimes a difficult task, but the supervisor cannot help here. The requirements are the same for everyone.
Innovative technologies open up opportunities to break into new segments and fight for customers, increasing competitive opportunities, because the range of services and convenience play an important role in choosing a bank. The Bank of Latvia supports the implementation of new solutions, incl. providing a regulatory technology sandbox.
Banks that start to develop sustainability awareness and competences now will be in a better position to offer a variety of green (ESG) financial products in the future and to expand their market share as the European Green Deal transforms the economy.
Financial literacy of citizens is also important. In reality, the biggest driver of competition is a customer who is evaluative, understands financial services and, being able to compare the services provided by several banks, chooses the most suitable, convenient and cheapest one for him.
The commentary was prepared for the December 2023 issue of “IR Nauda” magazine
2023-12-13 08:13:16
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