IMF warns Latvia about non-resident use of bank deposits

RIGA, Nov 26 (Reuters) - The International Monetary Fund warned Latvia on Monday about the growing amount of funds deposited in the country’s banks by non-residents, which regulators say comes from Russia and other former Soviet states.

In an otherwise upbeat report on the economy of the small Baltic state as it heads towards euro adoption in 2014, the IMF said the rise in non-resident deposits created risks.

“The rather rapid increase of non-resident deposits in the banking system warrants vigilance,” the Fund said in a report after its officials visited the country. The IMF and EU led a bailout of Latvia worth 7.5 billion euros in late 2008.

Latvia’s FKTK regulator has said deposits by non-residents account for almost half the total in the bank system. Funds from crisis-hit Cyprus have expanded Latvian banks’ traditional role as a haven for depositors from Russia and other former Soviet states.

The IMF said the rise of such deposits created a risk to international reserves via sovereign backing for a deposit guarantee scheme, and was therefore a significant liability for the government.

“The supervision of NRD (non-resident deposit) specialised banks should be sufficiently intensive and frequent given their relatively higher risks,” the IMF added.

The Fund said regulators had done well to set higher capital requirements for banks specialising in such deposits, and that in future a greater proportion of this capital should be held in more liquid assets.

Such wariness is partly due to the 2008 failure of Parex bank, whose non-resident liabilities helped push Latvia into seeking a bailout from the IMF and European Union and applying austerity measures that shrank the country’s economy by a quarter between 2008 and 2010.

The IMF forecast the economy would expand 5 percent this year before slowing in 2013, in line with a government forecast and a touch higher than the 4.5 percent forecast in the Fund’s recent global outlook forecast report.

It said Latvia’s goal of adopting the euro in 2014 appeared within reach. (Reporting by Aleks Tapinsh, writing by Patrick Lannin; Editing by Ruth Pitchford)