All three had banking crises at the same time: a bigger one in the early 1990s, caused by the aforementioned liquidity crisis, and a smaller one a year ago, caused by the Russian financial crisis.
All three have now more or less recovered from the last shake-up and are awaiting the same development that will bring them in line with European banking systems: increasing the required foundation capital to 5 million euros ($5.37 million).
But the Baltics' banking systems may not behave similarly when the new regulations come into power at year's end.
And the reason lies at the surface. There are 10 banks in Lithuania, six in Estonia and 26 in Latvia. It does not take much to find the odd one out.
The number of banks in Latvia is completely unsustainable in the small domestic market, especially since after the Russian financial crisis, the domestic market is all the banks have got, as the opportunities of dealing abroad have diminished and the Rigas Komercbanka example made other banks twice shy.
Moreover, many Latvian banks are relatively small and often too specialized. As a result, many have a shortage of the long-term resources necessary to expand and introduce new services. Thus, they stay small and overspecialized, completing the vicious circle.
As well as harming the overall efficiency of the banking system, this makes many banks' outlook on surviving in the increasingly competitive and hugely overcrowded domestic market rather grim.
To an extent, this will happen in all three Baltic states, and all three banking systems will have to undergo certain structural changes. But while in Estonia and Lithuania the changes may not be visible to an uninitiated observer, banking changes in Latvia are likely to jolt everyone. In one way or other, the number of Latvian banks will have to decrease almost fivefold, getting down to the more sustainable five or six.
So, buckle up for the next year's ride - we are likely to see some bank take-overs, mergers and a couple of bankruptcies thrown in for good measure.
Of course, the year 2000 in Latvia will not be as dramatic as 1993 in Estonia, when one of the three largest Estonian banks went bankrupt and the other two were merged, with smaller banks going bust in the background.
Estonia saw little of bank bail-outs, and many depositors never got their money back. Latvia now has the law on guarantees for deposits of physical persons and the deposit guarantee fund, which provides compensation for up to 500 lats ($862), and by 2008 is planning to provide as much as 13,000 lats.
The largest banks, whose capital is well above the required 5 million euros, will stay on the market, picking up depositors' from the ruins of smaller banks, and occasionally swallowing the banks whole.
An obvious buyer on the Latvian financial market is Unibanka, backed by the capital and expertise of Skandinaviska Enskilda Banken, which already secured a strong foothold in the Baltics. To no great surprise, it has announced its intention to acquire one of the Latvian banks and, according to its president, Andris Berzins, currently leads talks with several potential candidates.
Hansabanka, backed by another Scandinavian bank, Swedebank, and currently the biggest bank in the Baltics, is also on the list of could-be buyers. But Hansabanka may not be able to resist attractive offers from smaller banks, which are likely to start flooding in by the end of the year, when the Law on Credit Institutions will require an increase of foundation capital to 5 million euros.
Other giants of Latvian finance, Parex and Rietumu banks may also be among the buyers.
And while the drama may not match that seen in Estonia, the results of the structural banking reforms will be similar to those of Estonian crisis: the Latvian banking system will emerge leaner and healthier. So may some depositors' wallets. But that's a different story.
Diana Kudayarova, a Riga native and current student at Harvard University, is a guest columnist for TBT.
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