ANNUAL REPORT 2014 in Charts, the Dots Indicate the Actual Data, and the Lines Reflect the Smoothing Approximation of the Data

ISSN 1407–1800 LATVIJAS BANKA: ANNUAL REPORT 2014 In Charts, the dots indicate the actual data, and the lines reflect the smoothing approximation of the data. The smoothing approximation of the daily data is more distinguished than the curve of the actual data. Details may not add because of rounding-off. – no transactions or no outstanding amounts in the period. x no data available or no computation of indicators possible. 0 the indicator is below 0.5 but over 0, or the result of the computation of the indicator is 0. © Latvijas Banka, 2015 The source is to be indicated when reproduced. Photos: Ieva Lūka and Andris Tenass The cut-off date is 27 April 2015. ISSN 1407–1800 Latvijas Banka K. Valdemāra iela 2A, Riga, LV-1050 Tel.: +371 67022300 Fax: +371 67022420 http://www.bank.lv [email protected] CONTENTS Foreword of the Governor 5 3 Statements of Vision, Mission and Values of Latvijas Banka 8 Economic Environment 9 Global and Euro Area Economic Environment 10 Currency and Financial Markets 10 Real Sector 12 Latvia's Economic Environment 14 Inflation and Prices 14 Gross Domestic Product 15 Labour Market 18 Foreign Trade, Balance of Payments and External Debt 19 Fiscal Developments 21 Credit Institution Developments 23 Money Supply 24 Lending and Deposit Rates 28 Foreign Exchange and Interbank Market 30 Securities Market 33 LATVIJAS BANKA: ANNUAL REPORT 2014 REPORT ANNUAL BANKA: LATVIJAS Operations and Activities of Latvijas Banka 35 Legal Framework and Functions. Latvijas Banka in the Eurosystem and Institutions of the European Union 36 Development, Adoption and Implementation of the Eurosystem's Monetary Policy 37 Investment Management 41 Currency in Circulation 42 Payment and Settlement Systems 46 Financial Stability 50 Operation of the Credit Register 51 Statistics 52 Providing Financial Services to the Government 54 Advisory Activities and Information to the Public 54 Cooperation with International Organisations and Foreign Central Banks 59 Management and Organisation of Latvijas Banka 61 Organisational Structure of Latvijas Banka 62 Management Principles and Development 65 Resource Management 65 Risk Management 68 Internal and External Audit 69 Financial Statements of Latvijas Banka for the Year Ended 31 December 2014 71 Independent Auditors' Report 121 Appendices 122 1. Monetary Indicators in 2014 123 2. Month-End Balance Sheets of Latvijas Banka for 2014 124 3. Organisational Units of Latvijas Banka at the End of 2014 126 4. Participation of Latvijas Banka in the European System of Central Banks 128 5. Representation of Latvijas Banka in International Organisations 130 6. Latvijas Banka Publications and Major Publications by the Experts of Latvijas Banka in 2014 131 7. Highlights of Eurosystem Monetary Policy and Other Important Tasks in 2014 133 8. 2014 Highlights of Regulatory Documents Adopted in Pursuit of the Main Tasks of Latvijas Banka 138 9. Glossary 140 ABBREVIATIONS 4 ABSPP asset-backed securities purchase programme BIS Bank for International Settlements BRIC countries Brazil, Russia, India and China CBPP3 third covered bond purchase programme CPI Consumer Price Index CSB Central Statistical Bureau of Latvia EBA European Banking Authority EC European Commission ECB European Central Bank EEA European Economic Area EFC Economic and Financial Committee EKS Electronic Clearing System of Latvijas Banka EMU Economic and Monetary Union ERM II exchange rate mechanism II ESA 2010 European System of Accounts 2010 ESCB European System of Central Banks ESFS European System of Financial Supervision LATVIJAS BANKA: ANNUAL REPORT 2014 REPORT ANNUAL BANKA: LATVIJAS ESRB European Systemic Risk Board EU European Union EURIBOR Euro Interbank Offered Rate Eurostat Statistical Bureau of the European Union FCMC Financial and Capital Market Commission FRS US Federal Reserve System GDP gross domestic product HICP Harmonised Index of Consumer Prices IMF International Monetary Fund INTS internet statistical database of Latvijas Banka IP Internet Protocol IT information technologies JSC joint stock company LCD Latvian Central Depository Ltd. limited liability company LTRO longer-term refinancing operations M1 narrow monetary aggregate M2 intermediate monetary aggregate M3 broad monetary aggregate MFI monetary financial institution Ministry of Finance Ministry of Finance of the Republic of Latvia NCB national central bank OECD Organisation for Economic Co-operation and Development OPEC Organisation of Petroleum Exporting Countries OTC over-the-counter trading SAMS Interbank Automated Payment System of Latvijas Banka SEPA Single Euro Payments Area SJSC state joint stock company SSM Single Supervisory Mechanism TLTRO targeted longer-term refinancing operations UK United Kingdom UN United Nations US United States of America VAT Value Added Tax WTO World Trade Organisation FOREWORD OF THE GOVERNOR 5 LATVIJAS BANKA: ANNUAL REPORT 2014 REPORT ANNUAL BANKA: LATVIJAS We now have had one year with the euro. We can enjoy a more convenient flow of money, reduce the servicing costs of public debt, save the costs of currency conversion, and live without worry about the possible devaluation of the national currency. Despite the uncertainty caused by the geopolitical situation, the euro has helped to keep the economic growth rate in the positive territory. At the same time, we have found out that the euro is no magic wand or a panacea for the solution of all problems. Even though the monetary policy carried out by the Eurosystem is favourable to Latvia's economic development, it is up to us to continue decisive reconstruction and modernisation of the economy, also raising its competitiveness. The economy of Latvia in 2014 was significantly impacted by the developments in external markets, including the complicated geopolitical situation in eastern neighbouring countries, the rapid drop in the exchange rates of currencies of CIS countries, and the slow recovery rate of the euro area economy. The influence of the developments in the euro area economy was decisive, for the EU countries are the most important trading partners of Latvia. The euro area growth in 2014 was weaker than expected, giving rise to concerns about future growth prospects in the region. For that reason, large scale monetary policy measures were launched in the euro area in order to stimulate economic activity in Europe and prevent low inflation risks. The Governing Council of the European Central Bank took several important decisions and, in January 2015, announced the launch of an extended asset purchase programme. Latvia has been an active participant in addressing significant euro area economic growth issues. Latvia's accomplishments in overcoming the economic crisis and organising its economy are important for the entire euro area, for tasks of similar complexity – putting the fiscal policy in order, regaining economic competitiveness, carrying out structural reforms – are on the agenda of all European countries. A stimulating monetary policy can achieve better results only if structural reforms are implemented in the entire euro area simultaneously, strengthening both the common economy and the economies of individual members of the monetary union. The rate of economic growth slowed in Latvia in 2014, and Latvijas Banka therefore called for complex growth-stimulating measures in various areas. This call has been heard, as evidenced by the decisive actions taken by the Government and the Saeima of the Republic of Latvia, in the Insolvency Law amending the provisions impeding creditors' 6 activities. However, many other problems are to be addressed, including maintaining rational and sustainable budget policy amidst sluggish economic growth, carrying out reforms in education and healthcare, and establishing order in the legal environment. In 2014, the growth of the gross domestic product in Latvia was stable albeit gradually losing momentum. This dynamics resulted from a weaker contribution by those sectors which had been the main engines of growth in previous years. At the same time, further growth was ensured by the sectors oriented towards domestic demand – trade, construction, and public services. A cause for concern was the prolonged period of low investment activity, which was probably related to the decisions by entrepreneurs to postpone investment in view of the negative geopolitical situation. Persisting uncertainty in the geopolitical situation may continue to dampen entrepreneurs' risk appetite and investments in business expansion as well as to prevent households from making bigger purchases, thus stimulating the formation of accruals. The resumed LATVIJAS BANKA: ANNUAL REPORT 2014 REPORT ANNUAL BANKA: LATVIJAS operation of JSC KVV Liepājas metalurgs in 2015 and low oil prices have a potential positive impact on the growth of the Latvian economy. As for the work of Latvijas Banka in 2014, it must be emphasised that the year was a transition period in many areas. Active participation in the Eurosystem had the effect of significantly changing the discharge of some of Latvijas Banka's functions. The duties of Latvijas Banka in the area of international cooperation increased significantly as it integrated into the Eurosystem. Latvijas Banka became a fully-fledged monetary policy implementer. That had a favourable effect on the ability of the Latvian financial system to make use of important financial resources under a series of targeted longer-term refinancing operations (TLTROs) launched by the Eurosystem in 2014 and the expanded asset purchase programme which started

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