Latvia’s parliament is poised to pass legislation that would slash mortgage interest rates for one year and leave open a potential extension in the latest hit for the Nordic lenders in the Baltic region.
Lawmakers voted 85-0, with 5 abstentions, to approve the cuts on Thursday in the second of three readings. The bill may still be amended before the final reading.
The Baltic country’s financial sector — dominated by Nordic lenders such as Swedbank AB and SEB AB — has seen profits rise as about 95% of housing and non-financial corporate loans have floating rates, boosting banks’ net interest income as deposit rates have been slow to catch up. Latvia’s central bank and government have repeatedly called on banks to consider lowering the cost of servicing the mortgages.
“Guys, pick yourselves up, here I’m talking to the banking sector: do what is long term good for the economy, and good for the industry,” central bank Governor Martins Kazaks told a conference on Wednesday. “Talk to the government and find a solution rather than kind of a tit for tat outcome that is damaging for everyone else.”
Estonia, Latvia and Lithuania, where the same banking groups dominate, had the highest interest rates on mortgage loans in the euro area in September, according to the European Central Bank. The proposed legislation comes after months of talks between politicians and lenders looking for relief for households after the ECB raised rates at 10 consecutive meetings to 4%.
“Our middle class is very fragile, and practically this situation is destroying our middle class,” Janis Reirs, chairman of the parliament’s budget committee, said in an interview with Delfi. “I am not ashamed to support people with average incomes.”
Calls to cut mortgage rates come as demands for measures to curb bank profits grow louder across much of Europe. Neighboring Estonia’s government in September agreed with mainly Nordic-owned banks to increase dividend payments — and thereby taxes on dividends — rather than imposing a direct levy. Lithuania imposed a time-limited windfall tax on its lenders.
Read More: Swedish Banks Face Profit Hit After Lithuania Lawmakers Back Tax
The lack of an agreement has led to escalating potential costs. The legislation is likely to affect a large part of the €4.7 billion ($5 billion) in mortgage loans, while raising legal risks of “hundreds of millions” of euros if challenged in the constitutional court or an international court of arbitration, according to the annotation of the proposed law.
The financial sector has criticized the proposal for not being targeted, benefiting wealthy households as well as overriding contracts and raising legal risks.
“Investors and the financial sector, after such a decision, will be reluctant to invest in an unpredictable country where price regulation and intervention in the economy in the traditions of the Soviet Union are returning,” Ieva Tetere, chief executive officer of SEB’s Latvian unit, said in a statement, referring to the period before the three nations regained their independence in the early 1990s.
--With assistance from Milda Seputyte.
(Updates with vote results in 2nd paragraph.)
