The large amount of nonresident deposits in Latvia's banking system is risky, the International Monetary Fund said in its report about the Latvian economy.
According to IMF data, nonresident deposits in Latvian banks have comprised more than 50 percent of total deposits since 1999.
Any sudden withdrawal of non-resident deposits could result in financial in stability, IMF economists stressed.
The Bank of Latvia and the Financial and Capital Market Supervisory Commission have started to prepare regular financial sector stability reports. The first draft report indicates that only one small and one medium-size bank could possibly face liquidity problems if their nonresident deposits were withdrawn, said the IMF.
"Broadly matching nonresident deposits with liquid, high-quality foreign assets reduces the risks associated with deposit outflows," stated the IMF report.
"Moreover, given Latvia's role as a financial hub and safe haven for CIS residents, such deposits have been resilient to regional crisis, actually increasing by 57 percent in 1999 after the Russian crisis."
Another risk making Latvia's banking system vulnerable to changes on global markets is the large amounts of foreign exchange lending, said the IMF, as 54 percent of all domestic credits in Latvia were in foreign exchange at the end of 2002.
However, the fact that Latvia's largest banks are foreign-owned may limit this risk.