Along with its approval, Latvia's central bank advanced RKB 15.5 million lats ($26.3 million) at 4 percent interest - some of which may not return to the Bank of Latvia's vaults, but worth the risk to jump start RKB for the good of the Latvian banking sector, Bank of Latvia Governor Einars Repse said.
"I have a feeling that money frozen in RKB will not create a good situation in Latvia," Repse said. "Latvian state institutions have expressed a readiness to invest 15.5 million lats as well as 1 million in government funds to strengthen trust in Latvia's banking system. I think it is possible to restore Rigas Komercbanka to a healthy bank."
That health depends on RKB finding at least another 7 million lats, bankers say, on top of 1 million lats from Latvia's government and a loan and capitalization package from another major investor, the European Bank for Reconstruction and Development, to the tune of $9 million.
The central bank declared RKB closed March 7 and succeeded a few days later in having the Riga District Court declare the bank insolvent.
The government of Latvia has its own budget deficit of approximately 7.5 million lats, related in part to the Russian financial situation and its effect on tax-paying enterprises.
So why is the Bank of Latvia loaning money to RKB when there is a state budget deficit of 7.5 million lats? Repse had an answer for reporters at his monthly press conference on May 12.
"This money will not have a direct reflection on the budget deficit. Later, when we sell our shares to a strategic investor, we will try to get all the money back," he said. RKB is a special case, Repse said, because it is Latvia's oldest bank which has a large number of clients.
"Its insolvency was not caused by misbehavior or dishonesty of the management, but because of a mistake in investing in Russian T-bills."
No large gap exists between the Bank of Latvia's interest rate on the RKB deal and current interbank loan rates that have dipped even below 4 percent recently, Repse observed. Interbank rates have been falling for five consecutive months.
The Bank of Latvia's decision on the restructuring plan submitted by RKB was held up temporarily for additional information last week.
"Rigas Komercbanka has not submitted its 1998 report. To be sure of our decision we need to see the report to give us the whole picture," said Ilmars Rimsevics of the Bank of Latvia.
Bankers expect that clarity to come with a scrutiny of RKB's operations by international auditing firm Ernst & Young. RKB's creditors asked for the audit, which will last about 10 days.
The come-back plan could have the bank open by the end of June.