In summer 2008, FCMC invited representatives of Parex bank to the meeting of the Board to discuss the results of bank exposure assessment pursuant to inspection findings, consider lending and investment policy, monitor the Bank's client and customer service. Then the Commission conducted inspection in Parex during which found material shortcomings in the lending process (the Bank did not make provisions appropriate to the quality of loan portfolio, their deficiency made 40 mln lats), as well as drawbacks in credit risk management. However, in the middle of October 2008 the capital adequacy level of Parex was relatively stable.
After the exact information about the actual financial standing of Parex was obtained by FCMC, and they notified the bank of the deficiencies and invited representatives of Parex to discuss possibilities to improve the situation. The meeting took place by the end of October. About this time, when the increasing deposit outflow began from Parex, and the concern of default risk appeared, regarding compliance with capital adequacy ratio and Parex major shareholders' commitments to increase bank's capital base if needed. FCMC requested Parex to submit an action plan for restoring the Bank's capital adequacy by 29 October 2008; on this date, Parex lost about 29 mln lats of deposits. The Bank's liquidity indicator fell to 7.89% (the regulatory minimum being 8%).
During the inspection in Parex aimed at assessing Bank's financial instruments portfolio, which was held on 31 October, it was ascertained that the Bank had to revaluate it. As a result of revaluation and provisions, the portfolio shrank by 28 mln lats. FCMC informed the Bank of Latvia and ministry of finance about the problems in Parex. Deposit outflow continued, and bank's regulatory minimum indicators rapidly deteriorated. In the period from 31 August to 31 October 2008 withdrawal of deposits amount over 191 mln lats. Capital adequacy fluctuated around the critical margin of 8%, and liquidity ratio was 33.41%. Taking into account all these factors, FCMC imposed increased control over Parex activities, forbidding the bank to issue new loans and acquire new financial instruments. Parex was requested to increase its equity capital, and shareholders invested 3 mln lats in it.
At the beginning of November 2008 it became clear that Parex faced serious problems and would go bankrupt without state assistance, and its takeover was considered as a measure necessary for stabilization of financial system of Latvia. It was ascertained that if the State would take full control over the Bank and provide support to it, Parex activities could stabilize. The takeover was made after holding negotiations with Parex majority shareholders Valerijs Kargins and Viktors Krasovickis, who both owned 84.83% of Parex share capital, which resulted in their agreement to transfer the 51% stake of the Bank to the state. The state for its part undertook to support Parex issuing sureties for the refinancing of the Parex syndicated loans and to ensure funding used as a basis for the creation of the subordinated capital (in the amount of up to 200 mln lats during two years term). Parex liquidity ratio was supported.
The Investment Agreement was signed by the Mortgage Bank, Parex, the Republic of Latvia, V. Kargins and V. Krasovickis on 10 November 2008. As a further step, it was decided to seek a strategic investor for Parex to stabilize the Bank's financial standing. V.Kargins and V.Krasovickis received rights to repurchase shares, provided that all expenses in relation to the financial assistance, loans and guarantees issued by the State would be repaid.
On the same date, Monetary Fund instructed the State Treasury to place a term deposit totaling 199 999 924.63 lats with Parex. This deposit was funded from Latvian treasury bills, and Parex used the acquired securities to borrow the funding from the Bank of Latvia to support liquidity. Then, MoF required the State Treasury to place a term deposit in the amount of 100 000 000 lats with Parex until 19.11.2008. A pledge agreement was signed with Parex regarding collateral of the funds; later the term was extended.