EN 
 
 
OPINION OF THE EUROPEAN CENTRAL BANK 
of 31 May 2006 
at the request of the Latvian Financial and Capital Market Commission  
on draft amendments to the Regulation on compliance with liquidity requirements 
(CON/2006/26)  
 Introduction and legal basis
 
On 27 April 2006 the European Central Bank (ECB) r eceived a request from the Latvian Financial and 
Capital Market Commission for an opinion on draft amendments to the Regula tion on compliance with 
liquidity requirements (hereinafter the ‘draft amen dments’). The Latvian Fina ncial and Capital Market 
Commission is the national authority that will adopt the draft amendments. 
The ECB’s competence to de liver an opinion is based on Article 105(4) of the Treaty establishing the 
European Community and the sixth indent of Article 2(1) of Council Decision 98/415/EC of 
29 June 1998 on the consultation of the European Central Bank by national authorities regarding draft 
legislative provisions1, as the draft amendments relate to rules a pplicable to financial institutions insofar 
as they materially influence the stability of financial institutions and markets. In addition, under Article 2(2) of Decision 98/415/EC, the authorities of  Member States other than participating Member 
States are obliged to consult the ECB on any draft le gislative provisions on the instruments of monetary 
policy. In accordance with the first sentence of Article 17.5 of the Rules of Procedure of the European 
Central Bank, the Governing Council has adopted this opinion. 
 1.  Purpose of the draft law 
The main objective of the draft amendments is to in crease the short-term liquidity of the banking system 
by both increasing the minimum liquidity ratio and amending the formula for its calculation.  
The draft amendments provide for an increase in the liquidity ratio from 30 % to 50 % of the total current 
liabilities of the bank. The draft amendments also adju st the basis for calculating the liquidity ratio by 
including only the surplus of claims on monetary fina ncial institutions (MFIs) with a residual maturity of 
less than 30 days over current liabilities to MFIs with a residual maturity of less than 30 days. 
 
                                                     
 
1  OJ L 189, 3.7.1998, p. 42. 
2 2. General observations  
2.1 According to the consultation letter from the La tvian Financial and Capital Market Commission to 
the ECB, the draft amendments are designed as a precautionary measure to maintain financial 
stability and the intention is not to address conc erns about the financial standing of individual 
credit institutions. The ECB understands from the expl anatory note to the draft amendments that, 
although at present the indicators of financial strength and asset quality of the Latvian banking sector are satisfactory, existing macroeconomic risks require a slowdown in lending rates. The 
explanatory note states that the rapid growth in  lending rates has been one of the essential factors 
driving domestic demand, thus increasingly affecti ng both inflation and the current account deficit. 
Furthermore, rapid lending growth has increased maturity imbalances between the banking sector’s 
assets and liabilities, thus increasing the liquidity risk . The explanatory note goes on to state that in 
view of the above, a set of measures for risk m itigation has been considered, incorporating both 
monetary measures and those measures at th e disposal of the banking supervisor. 
2.2 The ECB notes that, according to the above explan ation, the envisaged change in the supervisory 
regime for liquidity is not meant to serve pr udential purposes but rather macroeconomic ones, 
notably to overcome the difficulty in countering ex cessive credit growth in a country with a peg to 
the euro. The ECB would emphasise that the use of supervisory tools such as the liquidity ratio for 
macroeconomic purposes is not an uncommon practice in Member States. There have been similar 
cases where specific circumstances have determined the purpose of supervisory tools, in particular 
to address the potential risks related to strong credit growth (e.g. in Estonia
2).  
2.3 In that respect, the ECB assu mes that the relevant national authorities – in considering the 
effectiveness of the envisaged measure – have give n due consideration to all relevant implications, 
including the possible structural and competitive eff ects of the fact that the measure will not apply 
to foreign branches. 
2.4  The ECB understands that, while the consulting authority is the Latvia n Financial and Capital 
Market Commission, the initiative to propose draf t amendments to the Regulation on compliance 
with liquidity requirements originated with Latvij as Banka. In this context, the ECB would like to 
recall that the objectives of the legislation are of  a financial stability – and not monetary policy – 
nature. Any measures involving monetary policy instruments should fall under the authority of Latvijas Banka.  
 
                                                     
 
2  ECB Opinion CON/2006/3 of 13 January 2006 at the request of  Eesti Pank on a draft decree establishing a procedure to 
calculate and comply with reserve requirements and draf t decree amending Decree No 12 of 12 July 2002 on credit 
institutions’ prudential ratios.  
3 This opinion will be published on the ECB’s website.  
  Done at Frankfurt am Main, 31 May 2006.  
 
[signed] 
 
The President of the ECB 
Jean-Claude TRICHET