EN ECB -PUBLIC 
 
 
OPINION OF THE EUROPEAN CENTRAL BANK  
of 7 September  2012  
on a capital increase of the Banque c entrale du Luxembourg  
(CON/ 2012 /69) 
 
Introduction and legal basis  
On 7 August 2012,  the European Central Bank (ECB) received a request from the  Banque central e du 
Luxembourg (BCL)  for an opinion on a draft law providing for a capital increase of the BCL and 
amending the L aw of 23 December 1998 on monetary status and on the Banque centrale du 
Luxembourg , as amended  (here inafter the ‘ BCL Law’) , (here inafter the ‘draft law’) . 
The ECB’s competence to deliver an opinion is based on Articles 127(4) and 282(5) of the Treaty on 
the Functioning of the European Union and the  third  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 law relates to the BCL . 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 draft law provides for a n increase of the BCL ’s capital, by the creation of an authorised  capital  up 
to EUR 1  500 million, EUR  900 million of which will be paid up. A grand- ducal regulation may 
increase the paid -up capital within the limits of the authorised capital by methods such as the 
incorporation of reserves. Article 4 of the BCL L aw, as current ly draft ed, refers to the initial amount of 
BCL capital, EUR  25 million, which may be increased witho ut limit by incorporation of reserves by 
grand -ducal regulation, on a proposal from the central bank2. The BCL ’s authorised  capital was 
effectively increased up to EUR 175 million in 2009, on such basis . By virtue of the draft law, the 
incorporation of res erves would now be authorised only within the  limits  of the authorised capital.  The 
explanatory memorandum to the draft law  explains that the increase  in authorised capital (up to 
EUR  1 500 million ) and paid- up capital (up to EUR 900 million) is necessary to provide the BCL with 
an appropriate capital base in order for it to fully and independently discharg e its financial obligations 
within a financial system that has evolved considerably in recent  years . In this latter respect, reference 
is made to the cap ital contributions to be made by the BCL to the ECB and the Bank for International 
Settlements (BIS) , the need to finance the arrangements with the International Monetary Fund (IMF),  
                                                
1  OJ L 189, 3.7.1998, p. 42.  
2  Law of 24 October 2008.  
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2 as well as the increased risks of the BCL’s day -to-day activities in the light of increased  foreign 
exchange risks and interest rate and credit risks.  
 
2. General observations  
2.1 The ECB welcomes the proposed increase of  the BCL’s authorised capital. The principle of 
financial independence requires a national central bank (NCB)  within the European System of 
Central Banks (ESCB)  to have sufficient means not only to perform its ESCB or Eurosystem -
related tasks,  but also its national tasks , e.g. financing its administration and own operations. 
Such financial independence is assessed  from the perspective of whether any third party is able 
to exercise either direct or indirect influence not only over an NCB’s tasks, but also over its 
ability to fulfil its mandate, both operationally in terms of manpower , and financially in terms of 
appropriate financial resources3. In this respect , financial independence primarily implies that an 
NCB should always be sufficiently capitalised4. In particular, the ECB is of the view that the 
higher the level of capital, reserves and provisions against financial risks is, the higher the 
safeguards against future losses are. For this reason, an NCB must be free to independently create financial provisions to safeguard the real value of its capital and assets. Furthermore, 
Member States may not hamper  NCBs fr om building up their reserve capital to a level which is 
necessary for a member of the Eurosystem to fulfil its tasks
5. As mentioned in the ECB’s 
Convergence Reports 2010 and 20126, any situation should be avoided whereby for a prolonged 
period of time an NCB’s net equity is below the level of its statutory capital or is even negative, 
including where losses beyond the level of capital and the reserves are carried over. Any such situation may negatively impact on the NCB’s ability to perform not only its ES CB or 
Eurosystem -related tasks,  but also its national tasks. Moreover, such a situation may affect the 
credibility of the Eurosystem’s monetary policy. Therefore, the event of an NCB’s net equity 
becoming less than its statutory capital , or even negative w ould require that the respective 
Member State provides the NCB with an appropriate amount of capital , at least up to the level of 
the statutory capital , within a reasonable period of time so as to comply with the principle of 
financial independence. The fi nancial independence of a central bank may also be strengthened 
by arrangements whereby the operational costs for the discharge of some of its  tasks are borne by 
the entities concerned by such tasks
7. 
2.2 The ECB welcomes the  increase of the BCL ’s capital,  as the BCL initially  had a relatively 
‘modest ’ capital  of EUR 25 million8, considering : (a) the importance of the financial market in 
Luxembourg ; and (b) that  the BCL is  the third largest national central bank within the 
                                                
3  See the ECB’s Convergence Report 201 2, p. 2 6. 
4  See the ECB’s Convergence Report 2012, p. 25;  See Opinion  CON/2010/88.  All ECB opinions are published on the 
ECB’s website at www.ecb.eu ropa.eu.  
5  See the ECB’s Convergence Report 2012, p. 27; s ee also, in this regard, Opinion CON/2008/34, paragraph 4.2 . 
6  See the ECB’s Convergence Report 2010, p p. 21 and 22 and the ECB’s Convergence Report 2012, pp . 25 and 26. 
7  See paragraph  2 of Op inion  CON/2012/35.  
8  See the preparatory work o n the draft law.  
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3 Eurosystem in terms of liquidity granted to credit institutions  and the amount of collateral used 
for its monetary policy operations9. The Luxembourg authorities have been  aware of this 
imbalance since the BCL’s10 establishment  and have, for this reason, previously introduced 
various mechan isms11 intended to strengthen the BCL’s financial position without  a capital 
increase . However, despite this,  the ECB has repeatedly recommended that  the BCL’s financial 
independence needs to be ensured12 . At a time of renewed ne ed for the provision of additional 
liquidity to the banking sector and in order to cope with the disruption to segments of the money 
and financial markets that are hindering monetary policy transmission to the real economy, the 
BCL may need to take further additional risks on its balance sheet to continue to ensure price 
stability over the medium term. I n this regard , it is critical at all times  that the BCL possesses 
sufficient capital to co nduct its functions and that it  remains  in a position to ensure the  continued 
existence of financial buffer s corresponding to the level of risks taken  by it, by the replenishment 
of provisions and additional reserves, including retained profits, in order to constantly preserve 
an appropriate level of own funds.  
 
3. Capital base effectively needed by the BCL  
3.1 The ECB notes that, pursuant to the preparatory work on the draft law, one reason for the 
increase of the BCL ’s capital is linked to Luxembourg’s arrangements with the IMF13. The ECB 
understands that, further to Resolution No 66- 2 on the ‘Fou rteenth General Review of Quotas 
and Reform of the Executive Board’ adopted on 15 December 2010, the Luxembourg’s IMF 
quota might increase from SDR  418.7 million to SDR  1 321.8 million (a net increase of 
SDR  903.1 million) . In its capacity as fiscal agent,  the BCL would immediately contribute  25 % 
of such increase ( SDR  225.78 million) to the IMF . In addition, Luxembourg has entered into a 
bilateral loan arrangement with the IMF, up to EUR  2.06 billion.  
3.2 In addition to these contributions to the IMF arra ngements, it is notable that the BCL already 
contributed SDR  65.7 million to the BIS in 2011 and will contribute EUR 8.7 million to the 
increased capital of the ECB .  
3.3 In view of the above , the ECB recommends  that the competent Luxembourg  authorit ies closely  
cooperate  with the BCL in order to determine the precise level  of the capital increase . In this 
                                                
9  See, in particular, paragraph 8 of  Opinion CON/ 2005/12.  
10  See Report of the Commission des Finances et du Budget (Commission of Finances and Budget in Luxembourg, 
10.12.1998) on draft l aw No 4468/07, p. 2.  
11  Such mechanisms include the special BCL lien  (see Article 27 -1. (1) of the BCL Law ), the term deposit by the State 
of an initial amount of EUR 575 million repayable at the rate of EUR 5 million  per month and for which the State 
authorised the BCL to set aside the returns ( see the prep aratory work of the draft law: s uch agreement also contains 
provisions concerning the issue of Luxembourg euro coins and the State’s guarantee in fa vour of the BC L in the event 
of losses linked to foreig n exchange risks and other risks on transactions relating to the IMF  and to other obligations 
deriving from international monetary cooperation agreements binding upon Luxembourg ), as well as the 
reimbursement of the BCL’s costs of compilation of balance of  payments by virtue of the Law of 28 June 2000’.  
12  See paragraph 3 of Opinion CON/98/39, Opinion CON/2008/17, paragraph 3.2 of Opinion CON/2009/7 and 
paragraph  3.2.2 of Opinion CON/2009/46.  
13  See page 1 of the e xplanatory memorandum to the draft law.  
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4 respect, it would be advisable to carefully consider the  BCL’s  expected day-to-day and 
exceptional spending need s given  the recent extension of the BCL’s tasks,  including possible 
emergency liquidity assistance , in the context of the current financial crisis.  Such cooperation 
would serve to respect  the BCL ’s financial independence , but it would also take account  of the 
fact that the BCL is best placed to as sess its  required level of reserve capital14.  
3.4 The ECB notes the distinction made in the draft law between authorised and paid- up capital , 
which could lead to ambiguity as to the type of ‘capital’ to whi ch other provisions of the BCL 
Law refer. Furtherm ore, the ECB notes that the draft law restricts the flexibility that already 
exists in Article 4 of the BCL L aw, whereby reserves might be incorporated by grand -ducal 
regulation, on the proposal of the BCL and without any limit , which  the ECB has welcomed  in 
Opinion CON/2008/1715. The reasons for  now changing Article 4 are not transparent from the 
explanatory memorandum .  
 
4. Replenishment of BCL reserves  
4.1 As current ly draft ed, Article 31  of the BCL Law provides that  ‘the allocation of the profit to the 
BCL’s reserve fund shall be compulsory so long as the total of the capital and the reserve fund 
falls short of the total of the BCL ’s assets which do not yield freely -available income, after 
deduction of liabilities which form the direct counterpart of such assets’ .  
4.2 This provision was  added by the Government in November 1998 to the then draft BCL Law in 
reaction to a BCL opinion that strongly recommended an overall strengthening of the BCL’s 
financial independence16. With respect to Article 31, t he expla natory memorandum advised that 
‘in light of the unforseeability of the future financial developments , the Government does share 
the view that is of utmost importance  to provide for a possible carry- forward and payment of a 
loss and to encourage the BCL to build up reserves’. This provision was intenti onally drafted to 
mean  that the BCL reserves could be indefinitely built up as long as required by the BCL balance 
sheet, without limiting the amount of such reserves to a specific percentage of the nominal 
capital.   
4.3 The ECB understands that  the nominal increase of the paid- up BCL capital will restrict the 
BCL’s ability to build up its  reserves under Article 31 , a measure which  was carefully  designed  
in 1998 under the assumption that the BCL would have a  relatively modest capital . The 
possibility to build up and replenish reserves is very important considering, inter alia , the 
absence of provisions regarding the coverage of potential losses for the BCL17 and the ECB 
expects to be consulted on any amendment to  Article 31 to introduce such a mechanism .  
 
                                                
14  See the ECB’s Convergence Report 201 2, p. 2 7; see also  paragraph 2.1 of Opinion  CON/2010/88 . 
15  See paragraph 2.3.  
16  See the BCL opinion addressed to the President of the Luxembourg Chamber of deputies on 6 November 1998, draft 
law 4468/2, 4469/2, ordinary session 1998/99.  
17  See Opinion CON/98/39.  
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5 This opinion will be published on the ECB’s website.  
 
 
Done at Frankfurt am Main, 7 September 2012 . 
 
[signed]  
 
The President of the ECB  
Mario DRAGHI