The financial management system of Latvijas Banka has been developed to ensure support to decision- making, financial risk management and efficient use of financial resources. Major financial transactions of Latvijas Banka are related to the management of financial assets and the implementation of monetary policy.

Chart 1. Balance sheet of Latvijas Banka
(assets/liabilities (–); millions of euro)

 

 

Assets of Latvijas Banka increased by 677 million euro in 2022. The main changes in assets and liabilities were as follows:

  • as a result of purchases under the PEPP and PSPP, assets of monetary policy operations increased by 1351 million euro;
  • the decline in the market value of debt securities due to the significant increase in interest rates and the reduction in investment portfolios resulted in a decrease in investment assets by 733 million euro;
  • as a result of cross-border payments, liabilities to the ECB for the settlement result in TARGET2 increased by 5047 million euro;
  • borrowed funds, excluding government deposits, decreased by 2040 million euro, mainly due to the decrease in the volume of repurchase agreements.

Latvijas Banka finances its operation primarily from the income generated from managing financial investments and from monetary policy operations. Latvijas Banka does not receive any financing from the state budget. Instead, it transfers 70% of the profit made during the reporting year to the state budget. In 2022, Latvijas Banka did not make any profit. Over the last five years, Latvijas Banka’s profit totalled 89 million euro, of which an amount of 62 million euro was transferred to the state budget.

In 2022, Latvijas Banka’s income from financial investment management and monetary policy operations was affected by the uncertainty prevailing in the financial markets and Russia’s war in Ukraine. With the economies important to Latvijas Banka’s investments recovering after the lifting of Covid-19 restrictions and the supply chain bottlenecks intensifying and energy and food prices rising at the same time, inflation hit record highs. To curb inflation, central banks began to sharply raise base interest rates, leding to a fall in investment market value. With the ECB raising interest rates, income from the Eurosystem’s monetary policy operations also decreased at the same time.

Chart 2. Latvijas Banka’s profit
(millions of euro)

 

 

The financial performance of Latvijas Banka in 2022 was mainly affected by the following factors:

  • the significant interest rate rise in the most important investment markets of Latvijas Banka caused a decrease in the market value of debt securities and increased the negative revaluation result of financial assets and positions by 305.1 million euro;
  • the reduction by 420.1 million euro in the valuation account changeswas affected by the afore-mentioned rise in interest rates;
  • a lower average security yield and higher costs of hedging currency risks reduced net interest income for investment management by 28 million euro;
  • lower interest income on the deposits received and higher interest expenses on the intra-Eurosystem liabilities as a result of the increase in interest rates reduced the net income for monetary policy operations by 20.8 million euro;
  • taking into account the negative revaluation result of financial assets and positions caused by the large increase in interest rates, Latvijas Banka used its provisions for financial risks in the amount of 280.6 million euro.
Management and organisation