[Stability of the financial sector of Latvia and the main factors behind it]
2005
Mjagkiha, L.
This paper examines the main factors behind the development of the Latvian banking sector since the year 2000: rapid lending expansion and its implication on asset quality, financial fragility of the corporate and household sector, their debt-servicing ability, real estate market developments in Latvia and its neighbouring countries, and the link between the lending boom and real estate prices. Two scenarios were developed - soft landing and hard landing - to assess the development of banks' profitability (net interest income) during the next five years. Both scenarios involve a decrease of lending growth rates as a result of interest rates increase in the euro area, drop in banks' interest margins, markets saturation in certain segments. Hard landing also includes the effect of price decrease on the real estate market, which accelerates the process of falling growth rates. As a result, banks' net interest income growth rate is expected to diminish within the next five years; the banks will obviously be forced to implement cost cutting measures, including lay-offs, to retain high profitability indicators which make them so attractive to foreign investors and syndicated lenders.
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