Parex Bank

Parex Bank was a Latvian bank founded in 1992 by Valērijs Kargins and Viktors Krasovickis as a privately owned full-service banking company in Riga, Latvia. Its services were marketed both locally and to international clients in both the West and Russia. Its failure and state takeover was one of the major events of the 2008-2010 Latvian financial crisis crisis in Latvia.[1]

Parex Bank
Private company
ISINLV0000800274 
IndustryFinancial services
Founded1992 (1992) in Riga, Latvia
Defunct2010 
Headquarters
Riga 
,
Latvia 
Key people
 Valērijs Kargins, Viktors Krasovickis
ProductsBanking
Websitewww.reverta.lv/lv//

History
Valērijs Kargins

On April 3, 1991, Parex Bank received the first licence issued to a private company for currency exchange operations in the territory of the Soviet Union – issued by the second President of the Bank of Latvia, Paul Sakss.[2] In May, Parex opened the first exchange office which is also visited by many clients from all over USSR.

In August 1991, Valērijs Kargins, along with Viktors Krasovickis and his wife Nina Kondratyev, reorganized Parex and became the new bank AS PAREX's sole owners. Kargins owned half of the shares, while the remaining 50% were distributed in similar amounts between Viktors Krosovickis and his wife.[3]

In January 1992, Parex Bank was founded, with the owners Valērijs Kargins and Viktors Krasovickis having equal shares in the bank. Krasovicki`s wife Nina did not participate in the bank`s future activities as they divorced that year. However, she continued to hold significant deposit in it.[4]

In 1993, about 30% of Parex Bank`s shares were bought by offshore company Europe Holdings Ltd and by the year 2001 its share (without voting rights) reached 51%.[5] The company remained in the list of owners until 2002, when Kargins and Krasovickis formally repurchased parts of Europe Holdings Ltd, again becoming the sole owners of the bank. However, by the end of 2007, around 14% of the Bank`s total paid-in share capital was in the hands of 59 small shareholders.[6]

2008-2010 Financial Crisis and PAREX takeover

Background

By the beginning of 2008, Britain had fully nationalized Northern Rock to save it from bankruptcy. In the second half of 2008, a number of large and pre-eminent banks and financial institutions went bankrupt, such as Lehman Brothers in the United States and Carnegie in Sweden.[7]

In autumn of 2008, after the bankruptcy of several major banks and financial institutions, the global financial crisis began in earnest. Several countries in the world had to seek international financial assistance, many countries provided support or even took over state-controlled banks and other credit institutions. In October 2008, the European Commission agreed on a plan to allow governments to engage in bank rescue.[8]

Following events

On July 30, 2008, in a letter from Financial and Capital Market Commission (FCMC) to the Chairman of the Board of Parex Bank titled, "On the results of the risk assessment of the bank," it was stated that an inspection had been carried out for the period from 12 November, 2007 to 18 January, 2008 and that the test results indicated that "the bank's performance [was] characterized by a moderate level of risk, and the methods used by the institution to manage risk [were] satisfactory, although improvements [were] needed in some areas."[7]

From August 18 until October 3, 2008, the FCMC conducted an inspection with the aim of reviewing and evaluating Parex's lending process. The inspection revealed significant shortcomings in the lending process; as the economic situation in Latvia and the world changed and the solvency of borrowers worsened, Parex had not set up the amount of provisions corresponding to the quality of the loan portfolio (40 million lats shortfall), as well as weaknesses in credit risk management.[7]

On October 14, 2008, the FCMC authorized Parex to include audited profit for the first half of 2008 in Tier 1 capital and to include Parex Group's audited profit for the first half of 2008 in Tier 1 capital of Parex Consolidation Group. This decision showed that Parex's capital adequacy position was relatively stable in mid-October 2008.[7]

On October 20, 2008, as a result of the inspection, more accurate information was obtained about the current or current financial situation of Parex. The FCMC informed Parex of the deficiencies found during the inspection and invited Parex representatives to negotiate the improvements of deficiencies. After the initial refusal, a meeting between FCMC and Parex representatives took place only a week later.[7]

Request for state support

On October 22, 2008, Parex owners privately requested state support to maintain the bank's solvency by proposing a state treasury deposit to Parex Bank. The Ministry of Finance rejected this suggestion. The outflow of money from Parex continued. Finance Minister Atis Slakteris discussed the situation with the FCMC and the Bank of Latvia, and on October 28 the Minister of Finance informed Prime Minister Ivars Godmanis. The authorities involved at the beginning of November concluded that Parex needs to be taken over by the state. Several options were considered - the full takeover of Parex banka into state ownership, the transfer of 51% of Parex banka's shares to the Mortgage and Land Bank, as well as the refusal of assistance. In the latter case, the state would have to pay the bank's customers at least LVL 660 million as a state guarantee for deposits. The Cabinet of Ministers supported the takeover of the bank into state ownership. It was considered that there would be no security for the use of public funds if the bank remained in the hands of its shareholders.[7]

On October 27, 2008, withdrawals from Parex began to accelerate rapidly. Due to the risk of default of capital adequacy ratios and taking into account the promise of Parex's major shareholders to increase the capital base in case of necessity, FCMC requested Parex to submit by 29 October 2008 the Parex Capital Adequacy Recovery Plan. On this day along, around 29 million lats of capital left Parex.[7]

Government takeover

In early November 2008, it was already clear that Parex's problems were so serious that it would involve the Cabinet of Ministers, and that Parex's takeover could be one of the most effective options for stabilizing the Latvian financial system by providing support to Parex.

On November 8, 2008, the Cabinet of Ministers decided to acquire a controlling interest in Parex Bank. The country, represented by the Privatization Agency, became the largest shareholder of Parex Bank. The European Bank for Reconstruction and Development (EBRD) also acquired a share in Parex Bank over time.[9]

Split into Reverta and Citadele

As a result of the restructuring carried out on August 1, 2010, Parex was split into two separate institutions; Reverta was founded as a "solution bank" with the aim of recovering the public funds invested in its rescue. At the same time, Parex's "good" assets along with its credit institution services such as account and deposit servicing, credit lending were taken on by Citadele.[9]

In December 2010, Reverta paid LVL 9.7 million in interest payments on the use of the state deposit.[10]

Reverta had recovered 58 million lats by the end of the reporting period within five months of August 1, 2010. [10]

On December 28, 2011, a Reverta shareholders' meeting made a decision on voluntary withdrawal from the credit institution's license.[9]

On March 15, 2012, the Financial and Capital Market Commission (FCMC) supports the request of Parex banka and revokes the license of the bank's credit institution. The change of the company's operating model was a natural and carefully considered step, considering that the services characteristic of credit institutions are not provided by Parex since 1 August 2010.[9]

May 8, 2012 marked a major milestone in Parex banka's operations: the bank is starting to work as a professional asset management company - Reverta Joint Stock Company. With an active portfolio of nearly one billion euros, Reverta is the largest asset manager in the Baltic region and ranked among the leading analogue companies in Eastern and Central Europe.[9]

Causes of Parex's demise

According to investigations carried out in the wake of the crisis, it has been suggested that causes included

  • Global financial turmoil;
  • Increased withdrawal of deposits from Parex rig and Parex customer due to lack of financial resources, especially for residents of neighboring countries of Latvia;
  • Two contracts with syndicated lenders on June 29, 2007 for a EUR 500 million loan and on February 21, 2008 for a loan of EUR 275 million. Loans had to be repaid early in 2009, but Parex would not be able to do so due to the fall in the value of the securities portfolio;
  • As a result of the global financial crisis, the quality of Parex's foreign securities portfolio had deteriorated; Parex did not have a parent bank that would give Parex creditors additional guarantees or other collateral. [7]

Economic effects

The state takeover of Parex has been seen as one of the major causes of the 2008-2010 financial crisis in Latvia, causing a chain reaction in the Latvian economy and requiring the government to take a €4.5 billion in bailout loans from the International Monetary Fund, the European Union and the World Bank.[11]

See also

References
  1. "Former Parex owners ordered to pay back millions". Public Broadcasting of Latvia. Retrieved 2019-05-17.
  2. "Vesti.lv: Каргин Superstar. Часть 14". vesti.lv. Retrieved 2019-05-08.
  3. "Vesti.lv: Каргин Superstar. Часть 12". vesti.lv. Retrieved 2019-05-08.
  4. "Kargins un Krasovickis procentos saņēmuši gandrīz astoņus miljonus". Apollo.lv (in Latvian). 2009-12-03. Retrieved 2019-05-08.
  5. (PDF) https://www.nasdaqbaltic.com/upload/reports/prx/2002_ar_lv_lvl.pdf. Missing or empty |title= (help)
  6. Li, Tong Shu; Spaulding, Jesse (2016-01-13). "A PDF upload option for proposal creation". doi:10.15363/thinklab.d138. Cite journal requires |journal= (help)
  7. "AS "PAREX BANKA" PĀRŅEMŠANAS APSKATS" (PDF). 2009-05-12.
  8. "Pasaules finanšu krīze. Turpinājums sekos". TVNET (in Latvian). 2008-11-07. Retrieved 2019-05-13.
  9. "Vēsture - Reverta". 2012-10-09. Archived from the original on 2012-10-09. Retrieved 2019-05-13.
  10. "AS "PAREX BANKA" 2010. GADA PĀRSKATS UN NEATKARĪGU REVIDENTU ZIŅOJUMS" (PDF). May 5, 2011.
  11. "Financial assistance to Latvia". European Commission - European Commission. Retrieved 2019-05-17.
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