Latvijas Banka's View on LFNA Proposals Submitted to the Bureaucracy Reduction Action Group on May 5, 2026

ANNEX Latvijas Banka's View on Proposals Submitted by the Latvian Financial Institutions Association (LFNA) to the Bureaucracy Reduction Action Group on May 5, 2026

LFNA Proposal | Latvijas Banka's Comment

1. When implementing EU legislation, avoid implementing additional requirements ("regulatory layering"), implementing requirements only to the minimum extent set by the EU. 1.1. Set the countercyclical capital buffer, the size of which is determined by Latvijas Banka, at 0% in the middle of the economic cycle (during "normal" economic development, when no signs of overheating or crisis are observed). 1.2. Promote changes in EU regulations so that the Pillar 2 capital requirement (P2R) can be converted from a minimum requirement into a buffer in the event of financial difficulties. 1.3. For bank groups whose subsidiaries operate in Latvia, reduce regulatory obstacles to the mobility of capital and liquidity within the group.

1.1. We do not support this.

1. Given the probability of unexpected shocks, support for the timely provision of capital reserves has significantly increased in the EU¹ – currently, there is no EU country where neither a countercyclical capital buffer (CCyB) nor a systemic risk reserve is in force: • A CCyB requirement is set in 23 EU countries and another three European countries (UK, NO, IS) (26 in total). Among them, in 14 EU countries and another three European countries (UK, IS, NO), an early-cycle CCyB approach is implemented, where the CCyB rate is >0% in conditions where there is neither overheating nor crisis²; • A systemic risk reserve has been introduced in 16 EU countries and another three EEA countries (thus, 19 EEA countries in total). 1 It is understood that appropriate macroprudential capital reserves must be established in a timely manner, considering the high probability of sudden shocks, the fact that reserves cannot be created rapidly, and that capital reserves must be available during a crisis, which can be released, thereby reducing the decline in lending and the depth of the crisis, as well as promoting resilience. 2 14 EU countries implement a positive neutral CCyB approach (CCyB is maintained at a positive (>0%) base level in conditions where there is neither overheating nor crisis), and another 2 countries implement this approach de facto – CCyB is raised early in the cycle, but the approach is called early raising – thus, 16 EU countries in total. Adding 2 EEA countries (NO and IS) and also the UK, 19 countries in Europe implement a positive neutral CCyB approach.

2. Latvia's 1% CCyB base rate is by no means among the highest in the EU. Overall, the macroprudential capital reserves set in Latvia are the lowest in the Baltic and Nordic regions – in addition to other systemically important institutions (O-SII) reserve requirements, LT has 1% CCyB + 2% sectoral systemic risk reserve, EE – 1.5% CCyB, SE – 2% CCyB + 3% systemic risk reserve, FI – 1% systemic risk reserve, which applies to all risk-weighted assets.

3. The ECB also urges euro area member states to introduce and maintain macroprudential resilience reserves in a timely manner, especially considering the high geopolitical uncertainty³.

4. Early-cycle CCyB application is not contrary to either EU regulation or Basel standards⁴.

5. Although understandable that it is always unpopular in the industry, in the case of Latvia, it has proven to be a forward-looking decision made under conditions of good bank profits and rising lending.

6. Latvijas Banka has conducted an assessment of the long-term impact of changes in capital requirements on GDP. The assessment indicates that the benefits provided by capital reserves, when released during a crisis, are on average four times greater than the initial implementation costs associated with them.

7. It is important to note that in December 2025, Latvijas Banka reduced the number of O-SIIs from 5 to 3, as well as reduced the O-SII reserves for existing O-SIIs with the aim of promoting proportionality and a risk-based approach in supervision, which allows reducing service costs for clients of Latvian commercial banks.

8. Latvijas Banka actively advocates for broader enabling of the principle of proportionality in EU regulation at various international forums with the aim of reducing the supervisory burden on Latvian commercial banks.

9. It is important to note that after the great financial crisis, financial sector regulation in the EU and worldwide has changed fundamentally – the times when only minimum microprudential requirements were set for the financial sector have passed. Macroprudential requirements are designed to ensure overall financial stability and are an integral part of bank regulation set by EU legislation.

10. Ten years after the introduction of these requirements, the EU is evaluating the experience with the implementation of these requirements and is working on simplifying the macroprudential framework and reducing the number of reserves, but it is clear that timely capital reserves play a significant role in ensuring financial stability in one form or another.

1.2. The additional own funds requirement (P2R) is essentially a capital requirement set by the supervisor if a bank is exposed to risks not covered by the minimum own funds requirement (P1R). The aforementioned P2R and its determination procedure stem from a directive, the requirements of which are implemented in the Credit Institutions Law. P1R, on the other hand, is set directly by the EU in Regulation (No. 575/2013; CRR) and is binding on all banks. Currently, according to existing regulations, P2R must be complied with on a permanent basis, otherwise supervisory measures will be applied to the bank or even the FOLTF (failing or likely to fail) process will be initiated. Thus, for P2R to be considered a reserve, i.e., a non-mandatory requirement, in the event of financial difficulties, EU legislation based on Basel standards must first be changed (which contradicts the EU's commitment to continue to observe them), and only then national legislation accordingly, additionally providing, for example, changes regarding the application of supervisory measures and the initiation of the FOLTF process. Such changes would also affect the current approach to setting restrictions, for example, on the payment of dividends and the variable part of remuneration if the bank does not comply with the total capital reserve requirement. Thus, such an initiative – designating P2R as a reserve – is currently not supportable, because in this case, the significant risks identified by the supervisor, not covered by P1R, would be covered by a reserve, which the bank would have the right not to provide under stress conditions. Consequently, these risks would not be fully covered by capital, and this would not promote the protection of investors' and depositors' interests, nor the sustainable development and stability of the financial market. A similar initiative (combining P2R and the capital conservation reserve) is included among the simplification options being considered by the EBA, but currently it has not gained widespread support.

1.3. Latvia has not set any specific conditions for the mobility of capital and liquidity within the group. However, at the same time, member states where subsidiaries of parent companies registered in other member states operate must ensure that the mobility of capital and liquidity within the group does not pose a threat to their financial stability, thus the member state may use the right to set additional capital or liquidity requirements at the level of subsidiaries. The issue in question would be resolved by completing the creation of the European Banking Union and the creation of EDIS (European Deposit Insurance Scheme). Currently, all credit institutions to which such exemptions would be relevant are significant institutions, in whose context this decision would be made by the ECB (not Latvijas Banka).

2. Introduce the principle that banks provide information to state authorities only once. Thereafter, state authorities exchange this information among themselves. Consolidate reporting requirements to Latvijas Banka and other state authorities. We support this. This principle is already established in the State Administration Structure Law as one of the principles of state administration activity (if information necessary for making a state administration decision that regulates public-law relations with private persons is in the possession of another institution, the authority obtains it itself, rather than requesting it from the private person). We invite LFNA to specify concrete cases/processes where action is required.

3. Ensure that data necessary for banks' activities from state registers are available through a single channel. We support this. [Competence area of VARAM]

4. Consistently continue to fully apply a risk-based approach in the field of anti-money laundering and counter-terrorist financing: 4.1. reduce the volume of formal requirements for low-risk clients; 4.2. when implementing the new EU legislative package on anti-money laundering, do not apply additional national requirements ("regulatory layering"). The proposal in general is not specific. We ask LFNA to provide detailed information about its essence, including indicating the legislation whose requirements are excessive. Already in 2024, including in response to LFNA proposals, Latvijas Banka's regulations were reviewed and amended, reducing the administrative burden and promoting the application of a risk-based approach. Regarding the application of requirements to low-risk clients, we expect further progress specifically from the industry side. Latvijas Banka's observations during on-site inspections and within the framework of off-site supervision indicate exactly the incomplete understanding of market participants regarding the practical application of a risk-based approach. Relevant conclusions have been sent to the addressees, and improvement measures are being introduced. A thematic inspection on the availability of financial services and the application of a risk-based approach was conducted in all credit institutions and branches of credit institutions of EU member states, and within its framework: • guidelines⁵ were published to ensure effective financial inclusion, which among other things provide examples of good and undesirable practices regarding effective communication with clients, including complaint assessment and publication of information about the credit institution's target clients; • individual recommendations were provided and individual supervisory measures were taken regarding the proportionate application of AML/CFT requirements, taking into account the observations made in the thematic inspection, as well as the offer of basic accounts, pricing policy, strengthening the quality of customer service and communication; • individual meetings were organized with the largest financial institutions (8 in total) to explain the proportionate application of a risk-based approach and discuss other current issues. We draw attention to the fact that the MONEYVAL report on Latvia also gave a positive assessment regarding work in the field of low-risk clients in the banking sector.

5. Recognize that fully digital processes and business models are the basic standard for bank services. Repeal the regulation on the mandatory opening of bank branches in state regions. Allow banks themselves to choose where to open branches and decide whether to continue working in more than 20 branches opened on a mandatory basis. Currently, monitoring of requirement implementation and compliance is being carried out, including the collection of statistical information and customer satisfaction. The Credit Institutions Law currently sets a 2-year period during which Latvijas Banka provides the Saeima with an assessment of the effectiveness of this legal regulation and the expediency of its further application, taking into account changes in the demand for in-person financial services and other ways of providing financial services offered in the market, as well as an assessment regarding the availability of financial services and financial inclusion of all groups of society. Additionally, we draw attention to the fact that the number of bank branches per km² and per population in Latvia is still one of the lowest compared to other EU member states. Moreover, to reduce the cost burden, commercial banks have the opportunity to offer alternative service points with lower presence intensity than full-time branches.

6. Repeal advertising restrictions for bank services, especially lending services. Implement only EU legislation requirements, without applying additional national requirements ("regulatory layering"). In general, we support this. Regarding mortgage loans, advertising restrictions have already been repealed; regarding consumer loans, the proposal is generally supportable, considering that the circumstances have changed significantly compared to the stage of adoption of these amendments. • We support that restrictions should be transformable from categorical prohibitions into guidelines based on certain principles. Advertising content should promote responsible borrowing. • With the repeal of advertising restrictions, a financial literacy campaign for citizens should be expanded, especially regarding lending services and responsible solvency assessment. This could be formed as a joint project between LFNA/credit institutions and Latvijas Banka.

7. Continuously review and repeal outdated regulatory requirements and other rules. We support this. On the part of Latvijas Banka, we follow up daily and regularly invite the industry to identify obstacles. For example, currently Latvijas Banka is working on proposals for reducing the industry's reporting burden identified at the end of 2025 (20 recommendations in total). A discussion with the industry on them is planned for June of this year. We invite LFNA to submit detailed information about other proposals, if any, and invite the industry, including using the format of Latvijas Banka's Consultative Financial Market Council, to continue to actively work on this issue in dialogue with Latvijas Banka.

8. Supervisory and policy-making bodies should continue a structured dialogue with the industry, forming regulation in cooperation with financial market participants and financial service consumers. A good example is the active dialogue with policymakers on the issue of regulating overdraft fees for legal persons. We support this, and on the part of Latvijas Banka, we follow this principle in the performance of daily functions. This principle, in our opinion, also applies to the industry: dialogue must be two-sided and meaningful, and as a result, the best solution should be achieved with benefits for Latvian citizens and entrepreneurs.

9. Repeal taxes and fees applicable only to banks – a significant prerequisite for the competitiveness of banks in Latvia Specific fees are applied to banks in Latvia that: • are not applied to other financial institutions, • are not applied to other industries, • create unequal competitive conditions in the Baltic and EU, • reduce banks' ability to allocate capital to lending. Proposals: 9.1. from 2027, repeal the Solidarity Contribution and the Financial Stability Fee, 9.2. ensure tax neutrality in the financial sector compared to other economic sectors, 9.3. refrain from introducing new sectoral taxes in the financial sector, 9.4. regularly compare supervisory costs in Latvia with other European countries and for Latvijas Banka to achieve the highest supervisory efficiency and lowest supervisory costs in the Baltic. Reducing the tax burden and costs caused by compliance with bank regulatory requirements increases banks' lending capacity and improves the availability of financing for the economy.

9.1.–9.3. Regarding taxes and fees in general, we support, but it must be directed to the government.

9.4. Regarding supervisory costs: Latvijas Banka regularly conducts cost comparisons with other countries and within the framework of the annual supervisory cost consultation process, presents these results to the industry (both bilaterally and within the framework of Latvijas Banka's Consultative Financial Market Council), finds opportunities to reduce costs or limit their increase, and justifies cost changes. We will continue to do so. See Annex No. 2, the updated explanatory material, which we already provided to the Bureaucracy Reduction Action Group in 2025 in response to industry proposals. Currently, a proposal for the optimization of deposit guarantee fund contributions is being advanced, thereby reducing the cost burden on banks, once an optimal long-term sustainable amount of the deposit guarantee fund is reached. We draw attention to the fact that what is mentioned in point 9.4 – achieving maximum supervisory efficiency and maintaining the lowest costs – is not possible to implement simultaneously. This would inevitably lead to a deterioration in the quality of supervision and negatively affect the interests of society.

10. Relaxation of capital requirements The European Banking Federation (EBF) consistently emphasizes that capital requirements should support lending and should be comparable to capital requirements in other international financial centers with which EU banks compete. Especially important for Latvia: 10.1. apply only minimum, objectively necessary macro-prudential requirements, 10.2. review the size of the additional capital buffer and determine its volume in accordance with actual risks, 10.3. not apply the countercyclical capital buffer to Latvian banks during the "normal" phase of the economic development cycle (when there is neither crisis nor overheating),

Latvian banks' capital requirements are currently the lowest in the region, and Latvian banks have the best conditions in terms of competitiveness. In practice, we have long observed that banks hold capital above the required amount (which could be released for lending) (see detailed information in Annex No. 1).

1. The macroprudential capital reserves set in Latvia are the lowest in the Baltic and Nordic regions (see point 1).
2. The only releasable macroprudential capital reserve set in Latvia – 1% CCyB – is an objective necessity, especially under current external geopolitical uncertainty. Latvia cannot afford to repeat the mistake of the great financial crisis and make its banking sector even less resilient than in neighboring countries and EU countries.
3. Latvijas Banka has already made a decision in the direction of reducing regulation: • In 2025, Latvijas Banka reduced the number of O-SIIs from 5 to 3 and reduced the O-SII capital reserves for existing O-SIIs; • Since 2023, Latvijas Banka has reduced, but in December 2024, abolished the increased risk weight for risk transactions secured by a mortgage on commercial real estate registered in Latvia for banks applying the standardized approach. 10.4. ensure stability and long-term predictability of capital requirements. Such an approach would allow banks to plan better in the long term and lend to the economy more purposefully. • In 2025, Latvijas Banka reduced the number of O-SIIs from 5 to 3 and reduced the O-SII capital reserves for existing O-SIIs; • Since 2023, Latvijas Banka has reduced, but in December 2024, abolished the increased risk weight for risk transactions secured by a mortgage on commercial real estate registered in Latvia for banks applying the standardized approach.
4. Currently, the average voluntary reserves of the banking sector above all requirements exceed 5%. None of the TOP 5 banks have reserves lower than 3%, and overall, reserves fluctuate in the range from 13.9% to 0.8%. Most banks currently maintain much higher reserves than those set by the supervisor, which leads to the conclusion that capital requirements are not a limiting factor for further lending development. This was also confirmed in practice when, in June 2025, when the 1% CCyB (which is fully releasable in crisis conditions) came into force, lending growth to the private non-financial sector reached 9.4% and the increase continued. This again confirms that other factors and political decisions have been more significant for lending development.
5. Estimates show that if banks increase the loan portfolio by an additional 2.3 billion euros, only half of the already available large voluntary capital reserves held by banks would be used.
6. In the event of any increase in capital requirements, banks are provided with a sufficient transition period for the implementation of these requirements. The Capital Requirements Directive provides for a 12-month implementation period, but in its practice, when setting the CCyB rate, Latvijas Banka applied an even longer – 18-month implementation period. The CCyB requirement has not changed since its introduction. We draw attention to the fact that the so-called stress capital reserve, which is annually and individually determined for the largest banks based on US stress tests, is much more variable, less transparent, less predictable, and sometimes can be much higher than in the EU.

Annex No. 1 Graphic representation of capital requirements for credit institutions in Latvia and Europe

Figure 1. Voluntary capital reserves held by credit institutions in euro area countries at the end of the 4th quarter of 2025 (% of total risk-weighted exposure (TREA)) Latvian credit institutions' voluntary capital reserves are among the highest in the euro area. Source: ECB.

Figure 2. Releasable capital reserves set for credit institutions in euro area countries* at the end of the 4th quarter of 2025 (% of total risk-weighted exposure (TREA)) Source: ECB.

• Releasable capital reserves (i.e., those that can be reduced or canceled during a crisis or when respective risks decrease) consist of CCyB and (sectoral) systemic risk reserve (since sectoral systemic risk reserves apply only to a certain segment of total risk transactions, for the purpose of comparability, they are expressed here not as the set rate against the respective risk transaction segment, but against total risk transactions).

Figure 3. CCyB rate in European countries at the end of the 1st quarter of 2026 (% of total risk-weighted exposure (TREA)) CCyB requirements are set in almost all EEA countries (and UK). The CCyB requirement set in Latvia is not among the highest. Source: European Systemic Risk Board, ECB. Note. A CCyB requirement is set in 23 EU countries and another three European countries (UK, NO, IS) (26 in total). Among them, in 14 EU countries and another three European countries (UK, IS, NO), an early-cycle CCyB approach is implemented, where the CCyB rate is >0% in conditions where there is neither overheating nor crisis. [Chart Data: Countries listed: IS, UK, NL, SE, PL, IE, EE, CZ, HU, LV, LT, SI, ES, PT, CY, GR, DK, NO, BG, HR, SK, BE, FR, RO, DE, LU. Categories: Current CCyB Rate, Announced CCyB Rate Increase, Cyclical Component of CCyB Rate, Positive Neutral CCyB Rate. Countries implementing positive neutral CCyB approach highlighted.]

Figure 4. Average voluntary capital reserves of credit institutions and the CCyB rate set in Latvia (% of total risk-weighted exposure (TREA)) Source: Latvijas Banka. Note. The 1% CCyB rate applies only to risk transactions of private non-financial sector residents; therefore, when applied to the total risk transaction portfolio, it averages 0.8% of TREA.

Figure 5. Capital requirements set for Latvian credit institutions and voluntary capital reserves held by credit institutions above requirements (% of total risk-weighted exposure (TREA)) The average voluntary reserves of the Latvian banking sector above all requirements exceed 5%. None of the TOP 5 banks have reserves lower than 3%. Most banks maintain much higher reserves than those set by the supervisor, which leads to the conclusion that capital requirements are not a limiting factor for further lending development. In December 2025, Latvijas Banka reduced the number of O-SIIs from 5 to 3, as well as reduced the O-SII reserves for existing O-SIIs with the aim of promoting proportionality and a risk-based approach in supervision. Source: Latvijas Banka. Note. Credit institutions are also bound by CCyB requirements set abroad and other capital reserve requirements mutually recognized by Latvijas Banka, if credit institutions have risk transactions to which these requirements apply. [Chart Data: Years 2015-2025. Categories: Voluntary Capital Reserves, Pillar 2 Recommended Capital Reserve, CCyB, Recognized Capital Reserves Set Abroad*, O-SII Capital Reserves, CCoB, Pillar 2 Capital Reserve Requirements, Minimum Capital Requirements.]

• Recognized capital reserves set abroad

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Annex No. 2 Explanation provided by the Latvijas Banka to the Working Group on Reducing Bureaucracy under the leadership of R. Kronbergs regarding the proposal on the amount of Latvijas Banka's supervisory costs, updated with 2025 data

Topic: Finance

Problem/Situation Description:

Proposal: Reduce Latvijas Banka's supervisory costs (per one bank asset unit) to at least the level found in Estonia and Lithuania.

In Latvijas Banka's view, the proposal to "reduce Latvijas Banka's supervisory costs (per one bank asset unit) to at least the level found in Estonia and Lithuania" is not related to reducing bureaucracy or administrative burden; it is a sector cost issue, which we regularly address. However, its implementation would undoubtedly improve banks' profitability indicators (supervision payments in 2025 were 9.4 million euros, or 0.8% of banks' total expenses (in 2024, 8.8 million euros or 0.7%); banks' net consolidated profit in 2025, according to available unaudited information provided by banks, will reach 375.0 million euros (in 2024 it was 570.6 million euros)).

The model for financing the financial sector supervision implemented in Latvia and recognized in international practice, including by the European Central Bank, stipulates that expenses related to the regulation and supervision of the financial market and its participants, resolution application, and compensation system provision are covered by market participants and are not financed from the state budget or central bank funds (which would mean diverting a portion of the central bank's profit to the banking sector rather than paying dividends to the state budget).

The number of supervised banks in the Baltic states is similar – in Latvia 10 banks, 4 foreign bank branches, and 5 banks in liquidation; in Lithuania – 13 banks and 5 foreign bank branches; in Estonia – 9 banks and 5 foreign bank branches. The regulation of bank activities and the supervisory approach are largely unified, and there are no significant differences in the level of labor and other costs either; therefore, there is no basis to consider that bank sector supervisory costs in Latvia could be significantly lower than in neighboring countries. This is also evidenced by banks' payments for their supervision, which in 2025 were 9.4 million euros and 10.1 million euros respectively in Latvia and Estonia (see Figure 1), while in Lithuania 9.1 million euros are projected for 2025. The volume of bank payments in Latvia has decreased by 2% over the last six years, while in Lithuania and Estonia it has increased two-fold (by 133% and 106% respectively).

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Source: Latvijas Banka data, https://www.lb.lt/, https://www.fi.ee/en.

The amount of the supervisory fee depends not only on the payment rate but also on the calculation base – in the case of banks, the volume of their assets. Over the last six years, the payment rate for Latvian banks has decreased by approximately one-third, unlike in other Baltic states where the payment rate has increased, despite the rapid growth of bank assets (in Estonia, the rate increased by 21% in 2024, and in Lithuania, the rate increased by 6% in 2025).

In recent years, the volume of bank assets in Lithuania and Estonia has grown significantly faster than in Latvia (see Figure 2).

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Source: Central bank data

When planning the amount of payments by financial market participants, within the framework of the laws regulating the activities of the respective financial market participants, Latvijas Banka will continue to balance both the total amount of market participants' payments and supervisory expenses, as well as the amount of payments made by the specific sector with the resources necessary for its supervision.

A reduction in the rates applicable to bank supervisory payments per one asset unit to the level of Lithuania and Estonia would create a supervisory funding shortfall for Latvijas Banka of 4 million euros per year, while improving the return on bank sector assets would be only negligible – by 0.01 percentage points. Therefore, Latvijas Banka can ensure a significant reduction in the aforementioned rate only when, by increasing the volume of lending by banks and facilitating the availability of other financial services, the volume of their assets does not significantly lag behind the level of neighboring countries.

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Figure 3.