At the local level, Latvia's central bank head Einars Repse is hospitable to the idea of inevitable bank mergers.
"In the future, the process of bank mergers will intensify as a result of increasing competition that results from the diminishing opportunities in the CIS markets, and globalization in the world including the Baltic states," he said.
Two dates coming up might see a reduction in the number of banks. One is April 1, the deadline for Latvia's banks to get their annual reports to the Bank of Latvia. On April 1 balance sheets will end some of the speculation on how badly the Russian crisis has hurt some banks and how much a loss they have to report based on provisioning and write-offs.
Further off is New Year's Day, a second day of reckoning, the deadline for banks to meet a 75 percent increase in capitalization.
Latvia's Minister of Finance Ivars Godmanis told the Latvian state radio listening audience the same on March 20, citing new capitalization requirements and the central bank's stringent supervision as some of the pressures forcing a reduction in the number of banks.
The process of elimination may have already started when independent Latvia's oldest bank, Rigas Komercbanka, ceased operations March 7 under orders from Repse because the bank's liabilities exceeded its assets. Creditors and investors are trying to reopen the bank which still retains a license to operate.
Other banks and their stockholders may have to jump a hurdle at the end of 1999 when Latvian law raises banks capitalization requirement to 5 million ECUs, about 3.5 million lats ($6.25 million) from its present level at 2 million lats. "That means that the banks that lack such capital, but are nevertheless willing to continue their operations either will have to seek ways to attract funds or will have to opt for mergers," Repse said.
At this moment, the April 1 deadline for banks to submit their reports to the central bank has no great significance because no bank's equity is currently below the required 2 million lats, said Teodors Tverijons, head of the Latvian Commercial Banks Association.
Godmanis thinks the number of banks will decline, and when the music stops, he hopes the strongest banks with German or Swedish shareholders will prevail. That way, there will be less sleep lost around April 1 when annual reports are due, Godmanis said.
Presently, German shareholders hold stakes in Vereinsbank Riga. Swedish Skandinaviska Enskilda Banken has purchased shares in Latvia's Unibanka, and Latvijas Investiciju Banka is owned 100 percent by Scandinavian Merita Nordbanken. Sweden's Swedbank owns shares in Estonia's Hansapank which owns Hansabank-Latvia.
Tverijons declined to say whether Latvians can trust their banks. Instead, bank customers need to look at the banks' bottom lines when shopping banks. He advised that depositors in a market society exercise an informed choice, but let the buyer beware.
"There are banks to choose from. Banks publish their balance sheets every quarter. What we see in these reports are concrete figures," Tverijons said. "Banks are in such condition today that customers should not think whether a banks is safe, but criteria should be where is the best service or proximity to their home."
There are cases in banking that defy forecast, Tverijons said. "Even last July, Russia was not considered a risk for any investor."
But while some foreign embassies, schools and charitable organizations thought Komercbanka was firmly afloat, the bank was hemorrhaging from heavy exposure in Russian markets, and on cash transfusions, it was being buoyed up by the Bank of Latvia.
While the bank's financial problems in August were blamed on rumors generated by competing banks and journalist reports, which bank spokespersons said caused customers to make a run on deposits, the Bank of Latvia said the bank was safe. Following suspension of operations on March 7, the Bank of Latvia and Komercbanka conceded that Russian involvement was about 27 percent, twice the original claims.
"It wasn't clear in the fall how much banks had invested in Russia," Tverijons said.
Some banks have issued year's end statements ahead of the deadline, but others are waiting until March 31. Repse's staff, meanwhile, has made estimates on the liquidity of banks in Latvia.
"Except for Rigas Komercbanka, liquidity is around 11 percent, surpassing standards of international banking and the Bank of Latvia's requirement of 10 percent, Repse said.
"Furthermore, many banks have started off the first months of 1999 with a profit. If banks generate profit, then after a while they will overcome any losses."
Bank forecasts can be self-fulfilling, Repse told reporters March 10.
"The central bank can't give out warnings to people to take their money out of banks because it would harm the health of banks," he said. The Bank of Latvia put a stop to early withdrawal of long-term deposits and withdrawal of money by organizations except for payroll and invoices during a run on customer deposits in August.
When the Bank of Latvia suspended operations at RKB, such deposits were blocked and owners have to wait to see the fate of the bank.
"The responsibility of a bank's president is business strategy," Repse said. "In the case of Rigas Komercbanka, it has been an unsuccessful business strategy. This failure is a thing that the depositors, Bank of Latvia and the head of Komercbanka are sorry about."