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Document Type

Case Study

Case Series

Ad hoc Emergency Liquidity Programs

Abstract

Heading into the Global Financial Crisis, JSC Parex banka was Latvia’s second-largest bank in terms of assets, comprising 13.8% of total assets in the Latvian banking sector. In autumn 2008, Parex faced a capital shortfall owing to massive credit and market losses in addition to liquidity problems and deposit runs of 240 million Latvian lats (LVL; USD 428.6 million). Parex had two senior syndicated loans maturing in February and June 2009, totaling EUR 775 million (USD 992 million). Latvian authorities said they doubted that Parex would be able to pay back, extend, or replace these loans. Authorities intervened at the beginning of November 2008 to provide liquidity, take over the management, and commit to inject capital at a later date if necessary. To provide liquidity, the Latvian Treasury deposited Treasury securities with Parex that Parex could use as collateral to borrow cash from the Bank of Latvia; the transaction resulted in a term deposit liability for Parex to the Treasury. Parex also posted lower-quality collateral to Treasury for the deposits. The parliament amended its Law on Budget and Financial Management to expand the Treasury’s scope for making term deposits in commercial banks. The Treasury granted liquidity support from November 2008 to August 2010. In August 2010, the Latvian Privatization Agency split Parex into a new good and remaining bad bank, at which point the liquidity support was also split. The good bank, AS Citadele banka, took four term deposits that were converted to equity for a recapitalization of LVL 103 million. The bad bank, AS Reverta, took eight term deposits, some of which were converted to equity. In total, Citadele repaid Treasury the full amount of term deposits that it owed, EUR 203.7 million, and EUR 14.7 million in interest—interest accruing since the split of the bank in August 2010 until March 2012. Citadele also paid the Treasury an additional compensation of LVL 3.5 million. In December 2011 all of Reverta’s outstanding term deposits were converted to debt securities. Reverta repaid EUR 240.1 million of the principal and EUR 154.7 million in interest through 2021. As of the writing of this case, Reverta was still in liquidation. The state had lost EUR 339.7 million in liquidity support and lost a total of EUR 767.5 million in the overall rescue of Parex.

Date Revised

2025-04-15

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