Commission approves €103 million capital injections for 'Mortgage and Land Bank of Latvia'

The European Commission has approved, under EC Treaty state aid rules, two capital injections in favour of 'The Mortgage and Land Bank of Latvia' (LHZB). The measures amount to LV 72.79 million (€102.48 million). LHZB is currently in the process of phasing out its remaining commercial activities so as to become a pure development bank (i.e. supporting structural, economic and social policies on behalf of the state, in accordance with its public mission). The Commission concluded that the part of the capital injections that benefits LHZB's development bank activities does not constitute state aid, because, within the scope of those activities, LHZB only administers and operates state-supported lending programmes in accordance with the EC state aid rules. Insofar as the aid measures also benefit the remaining commercial activities of LHZB, the Commission found them in line with the EU's state aid rules as outlined in the Commission's October 2008 Communication on state support for banks in the current financial crisis, because they will be phased out by 31 December 2013.

Competition Commissioner Neelie Kroes said: “ The recapitalisation measures enable LHZB to carry on its public tasks as a development bank without unduly distorting competition.”

LHZB was established by the Latvian Government on 19 March 1993 as a state-owned bank. It has a market share of around 5 % in terms of total assets and ranks fifth among banks operating in Latvia. LHZB has a dual role, operating as a development bank and as a commercial bank. However, in recent years the bank has become the main channel for state-supported lending programmes such as SMEs, business start-ups, agriculture and rural areas and business-activities of socially vulnerable groups of the population. Simultaneously, LHZB has significantly decreased its commercial lending activities.

At present, the bank is in the process of phasing out its remaining commercial activities so as to become a pure development bank. This process will be finalised by the end of 2013.

The aid measures aim to strengthen LHZB's capital base to absorb expected potential losses and substantial provisioning on development loans. Without those measures, the bank would have difficulties to continue its activities as a development bank.

In order to ensure that the state measures supporting the bank do not unduly distort competition, Latvia committed to ensure that the bank will limit its commercial activities to the minimum and phase them out by 2013.