Latvia gained EU approval Monday to shore up the country's second-largest bank JSC Parex with another state capital injection.
The European Commission did not say how much Latvia would spend to buy new shares and long-term debt from the bank but said it would be based on European Central Bank recommendations and would require it the bank to pay a risk premium and a fee.
The recapitalization aims to give Parex a capital adequacy ratio of 11 percent to cover potential losses. Latvia has also promised to send regulators a restructuring plan to prove that the bank could survive in the long-term without state help.
EU regulators must check that large state bailouts don't trigger competition problems by giving one bank an unfair advantage over rivals.
A bank run on Parex last November only ended when the government stepped in to save it from collapse, buying a 51-percent stake for 2 lats ($3.85) and injecting some 200 million lats ($385 million) to keep it afloat.
The European Bank of Reconstruction and Development _ a lender owned by 61 nations _ last month agreed to buy a quarter of the bank for euro84.2 million ($115 million) and give it a euro22 million ($30 million) loan.
Latvia's deteriorating economy in turn forced the government to seek a euro7.5 billion ($10.23 billion) bailout from the European Union and the International Monetary Fund late last year.
The country has hit a deep recession after three years of stellar growth, when it led all EU members in gross domestic product growth. Bank lending is currently tight and the worsening economy may see more loans default.
The EU executive now expects the economy to shrink 13.1 percent this year, with unemployment surging to 15.7 percent.
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