Transitional Economies: Banking, Finance, Institutions

By Yelena Kalyuzhnova; Michael Taylor | Go to book overview
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This chapter is based upon an earlier publication: Fleming, Chu and Bakker, ‘The Baltics Banking Crises Observed’, Policy Working Paper No. 1647, World Bank, September 1996. That publication has been updated with the help of staff from the Bank Group's Regional Baltic offices: Kristjan Kitvel (Estonia), Ilze Berzina (Latvia) and Peter Modeen (Lithuania).
The restructuring only addressed the claim of the bank on the former all-USSR Savings Bank head office in Moscow but not the rapidly growing portfolio of new bad loans. Artificial limits on its lending to private enterprises encouraged the bank to move more aggressively into interbank lending and lending to state enterprises of equally doubtful quality.
For example, while BOLIT undertook on-site examinations in nearly all private banks during the last two years, it refused, until very recently, to undertake such examinations in any of the state-owned banks, claiming that the problems of these banks were the government's responsibility, and not those of the regulator.
Although seven smaller banks had been declared insolvent in 1994: Lotta, Latvian Bank for Reconstruction and Development, Baltic Bank for Reconstruction and Development, Kurzeme, Sigulda, Tautas and Top-banka.
Other banks declared insolvent in 1995 were Latintrade, Latgale Commercial Bank, Liepajas Commercial Bank, Polarzviagzne Bank and Alejas Commercial Bank, Kredo Bank, Olti-Bank and Bauskas Bank.
This explanation for Bank Baltija's demise is contained in a paper by Hallagan, ‘Big Bang Banking Reform: the Latvian experience’, July 1995.
The bankruptcy of Bank Baltija was first petitioned at the end of 1995 by the Bank of Latvia but the owners successfully appealed against this order of the economic court. The bank was again declared bankrupt on 3 April 1996 by Riga District Court on the grounds that no feasible plan for rehabilitating and recapitalizing the bank had been presented. The legal battles surrounding the bank continued into 1999.
This funding was intended originally for balance of payments financing.
All references to the ranking of Lithuanian banks are based on end-June 1995 data.
Among these banks was Aura Bank (with total assets of US$37 million), which experienced serious liquidity problems during May 1995.
But already in August 1995, after the discovery during the first on-site examination of deposit-taking in foreign currency from shareholders at above-market interest rates and on-lending at below-market rates, BOLIT suspended the right of Vakaru Bank to make loans and issue guarantees (but not the right to take deposits) indefinitely.
The initial recapitalization proved to be inadequate, as many of the loans inherited by the new bank turned out to be uncollectible. The NEB was weakened by mismanagement in both credit and treasury operations, especially by continuing to provide interbank loans to the Social Bank, when all the other banks had ceased to provide such support. The transfer of Social Bank assets and liabilities to the NEB has also proved to be only a transfer of


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