Banks must make a much larger contribution to development of Latvia's economy - Kazaks

  • 2023-03-16
  • LETA/TBT Staff

RIGA - Banks must make a much larger contribution to the development of Latvia's national economy, lending more actively and helping the country grow faster, President of the Bank of Latvia Martins Kazaks emphasized to LETA, commenting the discussions in Lithuania about the introduction of solidarity payments for banks with the aim of limiting excessive profits.

The president of the Bank of Latvia emphasized that 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 banks, the Bank of Latvia has been insistently speaking about lending, as it sees both a need and an opportunity for banks, especially large and market-dominant banks, to make a greater contribution to the Latvian economy.

At the same time, Kazaks noted that so far we have heard more about what banks cannot do, but instead there is a desire to hear what they can and will do, so that lending becomes a form of support for the growth of Latvia's economy, and not an obstacle.

"The banking sector must be profitable, because only then it is stable and resistant to crises. However, particularly high profits, that is, well above historical levels, can indicate imbalance. If such profits are formed by banks providing the blood circulation of the economy, that is, through active and thoughtful lending, I think the issue of additional profit taxes would not be relevant," Kazaks emphasized.

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 any risks. Namely, by making profit as the difference between the interest rates they receive from the central bank and what they pay for customer deposits, explained Kazaks.

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. Kazaks pointed out that Latvia is trying to follow a different path - to achieve faster lending and more favorable conditions for Latvian companies and households, which would give the economy a bigger and more permanent contribution than a tax.

"If the situation does not change, i.e. if lending continues to be weak, loan rates among the highest and deposit rates among the lowest in the eurozone, then politicians may eventually decide to consider an additional tax on particularly high bank profits ("windfall profit tax"), thus redistributing the benefits for the entire society. Faster lending and higher deposit rates would be a much better solution economically," emphasized Kazaks.

He also emphasized that the choice is in the hands of the banks.