Europe to wind down Latvia's ABLV Bank targeted by US over sanctions

European authorities will close ABLV Bank AS, the Latvian lender facing U.S. accusations of money laundering tied to North Korea that’s central to the political scandal shaking the euro zone this week.

The European Central Bank initiated the radical step to stem the turmoil engulfing one of the currency area’s smallest members, saying Latvia’s third-largest lender was failing or likely to fail. It followed an ECB freeze on ABLV payments after the allegations triggered an exodus of deposits. Latvia’s representative on the ECB Governing Council also was detained a week ago amid bribery allegations.

Despite ABLV saying it raised more than 1.36 billion euros ($1.67 billion) over four business days, the ECB said it lacked adequate cash liquidity and referred the lender to Europe’s Single Resolution Board. The SRB deemed the bank non-critical for financial stability and said restructuring wasn’t in the public interest, making the bank the fourth victim of the ECB death penalty. ABLV, which has denied the U.S. money-laundering accusations, said the closure is a political move.

“The bank is likely unable to pay its debts or other liabilities as they fall due,” the ECB said in a statement on Saturday in Frankfurt. “The bank did not have sufficient funds which are immediately available to withstand stressed outflows of deposits before the payout procedure of the Latvian deposit-guarantee fund starts.”

The ECB also decided to prohibit the bank from accepting new depositors or increasing the amounts of existing depositors, a spokesman for the central bank said on Saturday. The measure is an additional safeguard to ensure that no fresh money is deposited with the bank before the commencement of insolvency proceedings under national law, he said.

The initial payment moratorium, announced Monday, deepened a swirl of events that included accusations of Russian meddling and widespread corruption and tested the ECB’s ability to supervise banks across 19 countries’ financial systems. It also threatened to slow the expansion of the euro area, with Bulgaria’s hopes of adopting the currency taking a hit.

Latvia Central Bank Governor Ilmars Rimsevics, freed on Monday after two days in custody, has denied the bribery allegations, saying he never accepted or has explicitly been offered a bribe. While the government has said the probe around Rimsevics isn’t linked to ABLV, the two cases have shaken the country, which has struggled to overcome a string of money-laundering scandals.

‘Political Considerations’

In accepting the matter from the ECB, the resolution authority said neither ABLV nor its Luxembourg-based subsidiary provide “critical functions” and their failure won’t have a "significant adverse impact" on financial stability.

ABLV took a different view. It said the funds it accumulated to strengthen its liquidity ensured 86 percent of its demand deposits.

“It was absolutely sufficient for the bank to resume executing payments and meet all obligations toward its clients," ABLV said in a statement. "Yet due to political considerations the bank was not given a chance to do it.”

Latvia’s central bank said late Friday it had tripled emergency liquidity assistance to ABLV after input from the ECB and local regulators. That followed the ECB’s demand -- its first -- that Latvia’s Financial and Capital Markets Commission impose the moratorium to stabilize outflows after a “significant deterioration of the bank’s financial position.”

ABLV saw 600 million euros of deposits and securities, equivalent to 18 percent of its liabilities at end-September, withdrawn after the U.S. Treasury announcement, according to Peters Putnins, the chairman of the Latvian financial regulator. The bank meets liquidity and capital-adequacy ratio rules, Ernests Bernis, the bank’s chief executive officer, has said.

Deposits Insured

ABLV and a subsidiary will be wound down under Latvian and Luxembourg law, meaning eligible deposits are protected up to 100,000 euros, the SRB said in a statement early Saturday.

Putnins, who’s also a member of the ECB’s supervisory board, said officials wouldn’t need to tap the nation’s deposit insurance fund for payouts that must be started no later than March 7. About 470 million euros would be needed, according to preliminary estimates. The question of covering holdings of more than 100,000 euros can’t be addressed as long as the bank still has a license, which is decided by the ECB, he said.

“Taxpayers don’t have to worry: the bank itself will make these payments with its own resources,” Putnins told reporters. He said a bond repaid by ABLV this week didn’t violate the moratorium because the funds stayed in client accounts at the bank.

Finance Minister Dana Reizniece-Ozola called for changes aimed at reducing risk in Latvia’s lenders to accelerate. Her ministry and parliament are discussing a potential audit of the financial regulator’s decisions, although she said she saw no reason not to believe the commission. The banking sector "has to be cleaned up," she said, stressing that the problem was isolated to ABLV and the country of 2 million wasn’t suffering from a banking crisis.

“In the last two years, there have been very clear signals from our international partners about the situation with the banks,” she told journalists. “This is a clear signal to other banks that the situation is serious.”

ABLV Chairman Olegs Fils, Bernis and his wife Nika Berne, directly and indirectly, held about 87 percent of ABLV voting shares as of Nov. 1. The heads of the bank’s divisions, employees, customers and business partners also own shares, according to its website.

Comparatively Small

With a 3.63 billion-euro balance sheet at the end of September, ABLV is comparatively small by international standards. It has been directly supervised by the ECB since late 2014.

The ABLV case could negatively affect “some” other banks in the former Soviet republic that focus on servicing non-resident clients, S&P said on Thursday. It added the total exposure of the deposit guarantee fund to non-resident focused banks, including ABLV, is close to 2.2 billion euros or equivalent to 7.5 percent of the country’s gross domestic product.

Still, even under a scenario of substantial spillover, the Latvian government’s exposure “is not material or potentially capable of undermining the country’s strong fiscal position,” it said.