Uldis Cērps, CEO of Finance Latvia
April 8, 2025
Distinguished participants of the Baltic FinReg Summit 2025!
First, I would like to thank Cobalt and the European Investment Bank for having the opportunity to address this distinguished audience and for Finance Latvia Association for supporting this event.
I will use the next 20 minutes to share with you some thoughts on the changing regulatory landscape in the European Union and globally. In my presentation, I will focus on several broad themes: initiatives to create the Savings and Investment Union and complete the Banking Union, changes in capital requirements, sustainable finance, open finance, the digital euro, and financial fraud. What all these different areas have in common is that they will impact financial institutions in the EU through the need to adapt their IT systems, business practices, and risk management. All of them will require significant attention from senior management. Some of them will create additional costs, while others will create new opportunities. So, let’s dive in.
Let me start with the big picture. It seems unlikely that many truly transformative ideas will have a chance of being implemented in the European Union in the medium term, despite the bold recommendations of Mario Draghi[1], Enrico Letta[2] and Christian Noyer[3] in their recent reports on EU competitiveness, the future of the single market and the EU Savings and Investment Union. Just one example: I am skeptical about the creation of the “28th regime” of regulation that would allow firms to compete in the EU’s common financial markets without being exposed to the risks of regulation and taxation at the member state level[4]. The idea of creating such a regulatory regime is not new. The main reason for the lack of progress on this initiative is that the national policymakers are unlikely to agree to transfer more fiscal and decision-making powers to Brussels. Fragmented political leadership in many EU member states makes it more difficult to implement bold and transformative pan-European policies.
So let’s look at the initiatives that have a better chance of success.
The new European Commission has recently presented its Action Plan for 2025[5]. The Commission is keen to complete the Banking Union by further harmonizing deposit insurance[6] and improving the mechanism for dealing with failing banks. If successful, these measures could provide a boost to the cross-border deposit market in the EU. Although the volume of cross-border deposits in the euro area is currently low, it is growing rapidly. Households in the euro area hold a total of about €151 billion in accounts with euro area banks outside their home country, which represents about 1.6 percent of all household deposits with euro area banks[7]. The continued growth of the cross-border deposit market may expose the liability side of banks to more competition. This is particularly relevant for banks in the Baltic countries, all of which finance their assets almost exclusively through deposits.
Another important flagship project of the new EU Commission is the Savings and Investment Union[8]. The EU will seek to promote equity and debt markets to raise more funds for investment and strengthen the EU’s productivity and competitiveness, thus reducing its dependence on bank funding as the main source of external financing. If the EU succeeds in finalizing the planned initiatives announced on March 19[9], they will have a positive spillover effect on the Baltic economies and capital markets. Let us remember that there is no magic bullet for capital market development. In Europe, the problem is not so much the lack of cross-border activity, but rather the fragmentation of the markets and the lack of market depth[10]. But passively waiting for policymakers in Brussels to make decisions is not the right way forward. In this context, I would like to congratulate the Bank of Latvia on its “ten-step plan”[11] to develop local capital markets. The most impactful measure – organizing IPOs of state-owned companies – features prominently in this plan, as it did 30 years ago. Hopefully, there will be more political will now to implement these reforms. I also impatiently look forward to a comprehensive plan for capital market development which is to be presented by the Ministry of Finance in mid-April.
As local investors in the Baltics generally have a very low risk appetite, we need to implement policies that encourage savings and increase financial literacy among consumers and businesses alike, so that investors are comfortable with taking more risk. We need to facilitate long-term investment and diversify our financial system. Unfortunately, recent policy initiatives are not all positive for capital market development. In Latvia, while shifting the tax burden from the low-income earners to high-income earners have increased the opportunity for a larger share of the population to invest and save for retirement, the initiative was partly financed by increasing the capital gains tax rate by 5.5 percentage points, to 25.5% in 2025. The other measure, which was not conducive to the development of the capital market, was the temporary reduction of the contributions to the second-tier pension system by one percentage point. We all understand the urgent need to finance increased security and defense requirements. But the question is whether there are no better alternatives that do not undermine long-term savings, one of the engines of economic growth.
There is no shortage of positive examples of how smart government policies can encourage savings. For example, the Swedish Investment Savings Account (Investeringssparkonto) has more than 3 million users, largely because of its simple tax rules. Regardless of the level of risk, the annual tax rate is flat, currently around 1% of the size of the asset pool[12]. This year, the annual contribution that is exempt from personal income tax is equivalent to about 15 thousand euros, and next year it will increase to about 30 thousand euros. It is obvious that the current tax incentives for saving are much higher in Sweden than in Latvia. There are many other factors that have contributed to placing the Nordic countries at the forefront of capital market development in Europe, which are worthy of careful study.
And now I would like to turn from capital market development to – banking – and explore the regulatory issues that the industry is currently facing and how they may affect banks’ behavior.
One issue that is often discussed is the measurement of risk and the constraints imposed on internal models used to calculate regulatory capital requirements. The policy objective of such constraints, agreed globally at the Basel Committee on Banking Supervision, was to end the inconsistent modeling practices that banks used to calculate risk-based capital requirements. With the full implementation of Basel 3[13] and the introduction of the output floor, which acts as a backstop to capital requirements calculated using internal models, risk measurement will produce more homogeneous results as the floor is set as a percentage (72.5%) of the capital requirement calculated using the standardized approach[14]. However, such a floor may also result in a loss of risk sensitivity. The impact of the output floor is significant: it will lead to a 24% increase in minimum capital requirements for all EU banks, and significantly higher for low-risk portfolios[15], while having almost no impact in jurisdictions such as the United States. Moreover, capital requirements will increase most for the banks with the lowest historical losses[16]. Although the output floor will not be fully implemented in the EU until 2032, it can be seen as an important experiment in risk management. How do we know that the standardized supervisory models measure risk better than the internal models used by banks? If all banks start measuring risk in the same way, will this make individual banks and the financial system as a whole safer? Will banks have the same incentive to invest in measuring and understanding of risk if the capital relief element is partially removed? How will the level playing field for internationally active EU banks be affected?
The other issue high on the policy makers’ agenda is the securitization framework. A review of the current securitization framework is needed. Securitization can give investors access to new asset classes, and banks can get capital relief by sharing their risk with professional investors. It is reassuring that this issue is on the agenda of the new EU Commission.
Continuing with the topics of bank risk management, sustainable finance seems an appropriate area of regulation to address next.
Despite the change in the US policy, the EU remains committed to the Paris Agreement[17], with the goal of making the EU climate neutral by 2050. The new EU Commission plans to reduce the overall administrative and reporting burden, especially for smaller companies. A good example is the Omnibus Directive[18], which will consolidate the Corporate Social Reporting Directive, the Corporate Sustainability Due Diligence Directive, and the EU Taxonomy for Sustainable Activities.
The European Central Bank continues to position the European banking system at the forefront of decarbonization and sustainability. The ECB believes that financial institutions should view decarbonization as a unique strategic opportunity, rather than just an additional burden. This includes integrating climate-related risks into financial stability assessments, improving disclosure and promoting green finance.
However, the war in Ukraine has led countries to prioritize their own energy production, even from sources that increase carbon emissions. The European Green Deal has arguably shifted, so that the environmental agenda also includes an industrial component and a competitiveness component[19], as evidenced by the adoption of the Green Deal Industrial Plan[20] and the Net-Zero Industry Act[21]. We are hearing a clear message from policymakers about the importance of funding projects related to defense and energy security. These objectives should not be seen as conflicting with the sustainability agenda, and we should not overstate the potential difficulties of reconciling them. From a Baltic/Nordic perspective, adequate investments in defense and security are both ethically and socially desirable, especially when weighed against the potential consequences of not making them. Increased funding for defense and security is a tangible example of how the banking system can proactively address one of the biggest current risks to financial stability – geopolitical uncertainty[22].
And now – let’s move on from the risk management issues to another area that is potentially undergoing fundamental change – payments.
The Nordic-Baltic region is at the forefront of digital finance. Cash payments in Latvia have shrunk to 22% of the total,[23] and in our neighboring countries it is even lower– only about 10% in Sweden[24]. One way to further advance the digitalization of financial services is the use of open finance.
Traditionally, open finance is seen as the practice of using application programming interfaces to give third-party developers access to customer data, enabling them to build applications and services in the financial industry. Open finance is often seen as a way for “big tech” firms to enter the financial services industry.
In implementing open finance, we need to strike the right balance between managing risk and encouraging innovation. A prerequisite for smart, new services in the EU single market is that data from other sectors is available to the financial sector on the same terms as other sectors can collect data from the financial sector. There are important rights that need to be safeguarded, such as the protection of customer data. Appropriate liability and compensation models must be developed: future regulation must provide a mechanism for banks and other participants in the open finance ecosystem to be adequately compensated for sharing their own customer data. Use cases for open finance need to be developed on a demand-driven basis.
I hope that the EU policymakers will take these considerations into account when designing the FIDA Directive. If it is not possible to address these concerns, one option would be to withdraw the FIDA proposal so that all the energy of the financial sector can be focused on the introduction of the digital euro. This would also be in line with the European Commission’s simplification agenda.
We cannot have a conversation about regulatory change without mentioning the elephant in the room – the digital euro. While no decision has been taken to introduce the EU’s digital currency, preparations for this new form of central bank money are well underway, both by the ECB[25] and by EU legislators[26], as well as in most other developed countries. In the EU context, there are several issues that require further reflection and close dialog with the financial industry.
If the digital euro is to serve as a credible alternative to commercial bank money, especially in times of crisis, it must also be widely used in “normal” times by both businesses and private individuals. But what will the widespread use of the digital euro mean for banks?
For large universal banks, commission income could be as high as a quarter of total income, and a significant proportion of commission income comes from payments. If the digital euro becomes the dominant way to make payments, and regulation does not adequately compensate banks for making these payments, this could adversely affect banks’ revenues, in addition to bearing the costs of integrating the digital euro into their systems. Over the past 3 years, several non-papers[27] have highlighted the importance of an appropriate compensation model, to preserve financial stability and minimize the adverse effects.
Moreover, the extent of the impact of the digital euro on banks depends on how customers perceive and use it. If customers use the digital euro only as a substitute for physical cash to make payments, the banking system should not be adversely affected. However, if customers use the digital euro as a form of savings and as an alternative to bank deposits, there will be an impact on commercial banks’ balance sheets through a reduction in the volume of deposits and, correspondingly on the asset side through a shrinking liquidity pool or reduced lending. While the limited academic literature suggests that these changes are relatively modest, affecting at most 5% of the banks’ deposit base, the impact could be larger if the uptake is very significant. This could have implications for financial stability and needs to be closely monitored and analyzed. Effective risk mitigation measures, such as limits on digital euro holdings at the individual wallet level, need to be put in place, bearing in mind that such limits represent a trade-off between financial stability and the widespread use of the euro area digital currency. Holding limits have been extensively discussed and analyzed by the euro area central banks[28].
Finally, I would like to talk about the issue that is currently receiving the most media attention – financial fraud. If we take Latvia as a case study, in 2024 more than 15 million euro were defrauded from customers of Latvia’s largest banks. Note that this is after the banks have successfully stopped fraud of almost the same amount. In other words, bank customers are being defrauded of more than 1 million euros every month. Despite all the efforts to improve financial literacy, we see no break in the negative trend.
What are regulators and legislators planning to do? One solution would be to advance the establishment of a proactive, real-time information-sharing platform for financial crime investigations, even before the application of the Third Payment Services Directive and the Payment Services Regulation. Estonia is currently a pioneer in this field. The idea is very simple: if a bank suspects that a transaction may be fraudulent, it can use a secure communication channel to notify the receiving bank, fintech, or neobank, thus giving the receiving institution the opportunity to perform additional due diligence and freeze the payment, thereby preventing the fraud. Such a system should serve as an effective deterrent to fraudsters looking for easy prey in the complex systems of our markets. In Latvia, we hope to be able to make progress in this area during 2025. We hope that Nordic countries will be interested in joining us, as financial fraud is global in nature, and defenses can only be effective if we cooperate seamlessly across borders.
In the EU, the rise of financial fraud has led to regulatory proposals under the Payment Services Regulation in the form of a shared liability model. The EU Commission wants impersonation fraud[29] cases to be subject to a compensation model that obliges payment service providers and electronic communication service providers to reimburse a consumer who is a victim of impersonation fraud for the full value of fraudulent transactions. Both the Third Payment Services Directive and the Payment Services Regulation have entered the EU’s ordinary legislative procedure. Depending on the legislative process, the final agreed texts are expected to enter into force by the end of 2025. The question is whether a system that completely removes all responsibility for preventing financial fraud from the customer will lead to more responsible customer behavior and, consequently, diminished financial losses.
The current high level of financial fraud also demonstrates the need to continue investing in financial literacy. Again, taking Latvia as an example, 42 percent of the population still do not understand how interest rates work, and 18% always or sometimes share their PIN or Internet banking access codes with close friends[30]. Surveys suggest that the problem is not diminishing over time, pointing to the shortcomings of the education system. This means that we cannot expect the private or the public sector to solve the problem alone. There is a clear business case for government agencies, banks and financial market associations to support various financial education initiatives in a coordinated manner, based on a comprehensive national strategy. I hope that our collective efforts will lead to a reversal of the negative trend in financial literacy during the coming years.
The next five years will be marked by many regulatory challenges. These challenges will range from calculating regulatory capital to dealing with climate risk. In addition, certain businesses, such as payments, may be fundamentally disrupted not only by new entrants but also by alternatives such as the digital euro. To remain competitive, financial institutions will need to be alert to these changes, be well prepared, and decide on the right strategy for the future.
[1] https://commission.europa.eu/topics/eu-competitiveness/draghi-report_en.
[2] https://single-market-economy.ec.europa.eu/news/enrico-lettas-report-future-single-market-2024-04-10_en.
[3] https://www.ebf.eu/wp-content/uploads/2024/05/EN-Report-Developing-European-capital-markets.pdf.
[4] The EU tech sector in particular has been arguing for the freedom to establish a legal entity which would be able to move its headquarters freely within the EU and be taxed on an EU level.
[5] https://commission.europa.eu/document/download/f80922dd-932d-4c4a-a18c-d800837fbb23_en?filename=COM_2025_45_1_EN.pdf.
[6] https://commission.europa.eu/document/download/7617998c-86e6-4a74-b33c-249e8a7938cd_en?filename=COM_2025_45_1_annexes_EN.pdf.
[7] https://www.ecb.europa.eu/press/blog/date/2024/html/ecb.blog20241024~a31e84aa61.en.html.
[8] https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/14488-Savings-and-Investments-Union_en.
[9] https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/14488-Savings-and-Investments-Union_en.
[10] See Lannoo, K., Thomadakis, A. and Arnal, J. (2024), Staying ahead of the curve: Shaping EU financial sector policy under von der Leyen II, Task Force Report, Centre for European Policy Studies, European Capital Markets Institute and European Credit Research Institute, Brussels.
[11] https://datnes.latvijasbanka.lv/files/10_solu_programma_2025.pdf.
[12] https://www.skatteverket.se/privat/skatter/vardepapper/investeringssparkontoisk.4.5fc8c94513259a4ba1d800037851.html.
[13] https://www.bis.org/bcbs/basel3.htm.
[14] The standardized approach is set by the legislator and can conceptually be viewed as a regulatory model that applies to all banks regardless of size, business model or complexity.
[15] https://www.financesweden.se/media/4429/191122_copenhagen-economics_final-basel-iii-evaluation.pdf.
[16] https://www.financesweden.se/media/4429/191122_copenhagen-economics_final-basel-iii-evaluation.pdf.
[17] https://unfccc.int/process-and-meetings/the-paris-agreement.
[18] https://commission.europa.eu/publications/omnibus-i_en
[19] https://www.euractiv.com/section/energy-environment/news/green-deal-is-no-longer-an-ecological-but-an-economic-agenda-says-senior-eu-climate-official.
[20][20] https://ec.europa.eu/commission/presscorner/detail/en/ip_23_510.
[21] https://single-market-economy.ec.europa.eu/industry/sustainability/net-zero-industry-act_en.
[22]https://www.ecb.europa.eu/press/pr/date/2024/html/ecb.pr241120~63b6e2f737.en.html#:~:text=Elevated%20debt%20levels%20and%20high,concerns%20over%20sovereign%20debt%20sustainability.
[23] https://www.bank.lv/aktualitates-banklv/zinas-un-raksti/jaunumi/17203-maksajumu-radars-bezskaidras-naudas-maksajumi-latvija-sasniegusi-vesturiski-augstako-ipatsvaru.
[24] https://www.riksbank.se/en-gb/payments–cash/payments-in-sweden/payments-report-2025/trends-on-the-payments-market/the-swedish-payments-market-is-almost-entirely-digital.
[25] https://www.ecb.europa.eu/press/pr/date/2024/html/ecb.pr241202~d0b19e5e1b.en.html.
[26] https://finance.ec.europa.eu/publications/digital-euro-package_en.
[27] https://www.eerstekamer.nl/eu/overig/20220923/non_paper_by_france_germany_italy/document.
[28] https://www.ecb.europa.eu/euro/digital_euro/progress/html/index.en.html.
[29] There have been attempts to define “impersonation fraud” very broadly.
[30] https://www.bank.lv/images/pielikumi/fails/Finansu-pratibas-aptauja-2022.pdf.
