Latvian bank Latvijas Krajbanka will likely be wound up, the government said Friday, after the Russian owner of its defunct Lithuanian parent Snoras was detained amid claims of fraud.
"The main consideration was whether Snoras bank as the main shareholder was prepared to support Krajbanka," Prime Minister Valdis Dombrovskis told reporters.
"Now we know this scenario has been ruled out," he said after a meeting of Latvia's cabinet, banking regulators and law enforcement authorities.
Late Thursday, Lithuania's central bank launched moves to liquidate Snoras.
Dombrovskis said his centre-right cabinet would meet again next Monday and that the liquidation of Krajbanka was the "most likely scenario".
Nils Usakovs, leader of Latvia's left-leaning opposition, criticised the government.
"When Lithuania declared an emergency situation in Snoras bank, Latvian government officials claimed that Krajbanka would not be affected," he said.
On Monday, Latvia's regulators had announced they were freezing Krajbanka's operations and taking over its management.
The move came after Snoras was put under administration on November 16 amid a fraud probe in Lithuania, a fellow European Union member and former Soviet-ruled republic.
The state has guaranteed deposits of up to 70,000 lats (100,000 euros, $133,000).
Around 150 million lats is available from an existing compensation fund but with the required total set to hit 350 million lats, the remainder will have top come from state coffers via a long-term loan, said treasury spokesman Kaspars Abolins.
Savers will be paid via state-owned Citadele bank from Tuesday, with the option to take cash, open a Citadele account or transfer their money to another bank.
Since Wednesday, Krajbanka customers have been able to withdraw up to 50 lats per day. From Sunday, all its branches and ATMs will remain closed.
Ironcially, Citadele was formed from the wreckage of Parex, once Latvia's largest locally-owned bank, which was nationalised in November 2008 after depositors jittery about a spiralling economic crisis began pulling out cash.
A month later, the government was forced to turn to the EU and International Monetary Fund for a 7.5-billion-euro loan package, paid out in slices in exchange for one Europe's most draconian austerity drives.
Latvia's economy shrank by 18 percent in 2009, the deepest recession in the 27-nation EU, but has been recovering for over a year.
On Thursday, British police acting on a Lithuanian warrant arrested Russian businessman Vladimir Antonov, Snoras' main shareholder who also owns English football club Portsmouth.
Snoras' top Lithuanian shareholder Raimondas Baranauskas was also detained in Britain.
Lithuanian prosecutors probing alleged asset-stripping suspect Antonov and Baranauskas -- who respectively own 68.1 percent and 25.3 percent of Snoras -- of misappropriating property and forgery of documents. They could face 10 years in prison.
Latvian police chief Ints Kuzis said that although they had also opened an investigation into Antonov, he was happy to let Lithuania take the lead in the Russian's extradition.
Snoras was Lithuania's fourth-largest bank by capital size and fifth in terms of assets according to its own financial data.
It owns a 67.9 percent stake in Krajbanka, which at the end of September was Latvia's sixth-largest bank in terms of deposits held.
In terms of assets, Krajbanka ranked ninth among 31 banks in Latvia, whose market is dominated by Nordic players.