Nipping a new crisis in the bud

There was a nasty sense of dŽjˆ vu about the news from Latvia last week that the central bank had stepped in to close Rigas Komercbanka. When I first arrived in the Baltics in 1995, the biggest news was of collapsing Latvian banks.

The largest of them, Banka Baltija, remains in the headlines to this day due to the size of its losses and the numbers of private citizens who lost money in it.

Four years later it seems as though nothing much has changed. RKB, like Banka Baltija, is a bank with large numbers of private and commercial customers throughout Latvia.

RKB, also like Banka Baltija, seems from the public pronouncements coming out of the Bank of Latvia to have been the victim of events in Russia rather than anything closer to home.

Scratch the surface, however, and it becomes evident that plenty is different between these two cases, and plenty has changed.

The Latvian banking sector is, for a start, much better regulated than it was in 1995.

Stricter requirements are in place covering, for example, accounting, financial reporting, auditing, capital adequacy and even fitness to be a bank shareholder in the first place.

While there was more than a whiff of scandal about the death of Banka Baltija, so far it seems that this is not likely to be the case with Komercbanka.

It could very well be that the closure of Komercbanka is an example of a bank that simply got into trouble due to business decisions, taken in good faith, that with the benefit of 20/20 hindsight turned out to be bad ones.

In other words, it is quite possible that when the history books are written, Komercbanka will be seen to have been a business casualty. In a strange way, this is progress.

It is still early days of course, and the fate of the bank is far from sealed.

Indeed, there has been criticism leveled at the Bank of Latvia, not least from Teodors Tverijons, head of the Latvian Commercial Banks Associations, for having taken precipitate action.

As he put it, the 1995 banking crisis took away people's confidence for a long time.

By 1998 confidence had largely returned, but the closure of Komercbanka represents another huge step backwards and in his opinion has probably put an end to any attempts to re-finance the bank.

Certainly, it is true that confidence is the fuel of the banking business and it is always a cause for concern when something happens to reduce that confidence.

Central banks always take a risk when they close down a bank, but it is also true that decisive action is sometimes better for a banking system than no action at all.

Meanwhile, the Bank of Latvia can be reassured by the fact that banking crises do not only happen in Latvia. Listening to the radio at the weekend, I was intrigued to hear the following story that has a clear echo in Latvia.

The Indonesian government, it was reported, has decided to close 38 banks, take over seven others and inject capital into nine more at a cost of $35 billion. Sorting out the banking sector is widely seen as the key to economic recovery in Indonesia and there is no reason why the same logic should not apply to Latvia, albeit on a much smaller scale.

Only time will tell what will eventually be salvaged from Komercbanka, but I would not be at all surprised if, in the final analysis, the Bank of Latvia has once again proved itself to be a shrewd operator in a difficult and volatile market.