EN 
 
 
OPINION OF THE EUROPEAN CENTRAL BANK 
of 9 March 2009 
at the request of Riigikogu  
on a draft law on stabilising measures for the Estonian financial system 
(CON/2009/18) 
 
Introduction and legal basis  
On 25 February 2009, the European Central Bank (E CB) received a request from Riigikogu (Estonian 
Parliament) for an opinion on a Law amending the La w on the State budget, the Law on participation in 
legal persons in private law by the State and the La w on the rules of procedure and internal rules of 
Riigikogu  (hereinafter the ‘draft law’). 
The ECB’s competence to deliver 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 law relates to financial instituti ons and materially influences the stability of 
financial institutions and markets. In accordance with  the first sentence of Article 17.5 of the Rules of 
Procedure of the European Central Bank, th e Governing Council has adopted this opinion. 
 1.  Purpose and main features of the draft law 
1.1 The draft law has two main objectives: (a) to se cure the stability and functioning of the Estonian 
financial system, in particular the banking sector, including a level playing-field for banks located 
in other states with branches located in Estonia; and (b) to avoid or to limit the transfer of risks into 
the real economy and to secure the sustainable growth of the economy. 
1.2 The draft law provides for the use of Stabilisati on Reserve funds for the handling or prevention of a 
financial crisis that could cause difficulties or seri ous failures related to liquidity or solvency of 
credit institutions operating in Estonia or substa ntial failures in payment and settlement systems 
(hereinafter a ‘financial crisis’). Substantive draft measures, applicable in cases of financial crisis, 
include the following: (a) the Government may ac quire issued debt obligations in any form; 
(b) State guarantees can be granted to any person; and (c) the State may establish or acquire a company even without a majority holding in the company. 
                                                 
1  OJ L 189, 3.7.1998, p. 42.  
2  
1.3 Procedural aspects of the draft law provide for fast-track allocation of Stabilisation Reserve funds 
in case of financial crisis by Riigikogu  on a proposal by the Government and short deadlines for 
access to State budget resources in case of financial cr isis. Pursuant to a transitional provision, fast-
track proceedings in Riigikogu in case of financial crisis may be used until 1 July 2010 for the 
acquisition of a shareholdi ng or other financial assets, the gran t of a State guarantee, lending and 
borrowing or the acquisition of other obligations  and use of the Stabilisation Reserve funds.  
 2. General observations 2.1 The ECB was consulted on the draft law on 25 February 2009 and requested to issue an opinion by 
11 March 2009, i.e 10 days before the planned adop tion of the draft law. Given the turbulence in 
the international financial markets, the ECB has been flexible and has responded to consultation 
requests within a shorter time limit. In the present case, however, the ECB could have been consulted earlier, in particular since legislative proceedings began in Riigikogu  in relation to the 
draft law on 18 December 2008. In ECB Opinion CON/2008/14 at the request of Riigikogu  on a 
draft law amending the law on Eesti Pank
2, the ECB noted that Article 4 of Council Decision 
98/415/EC requires Member States to ensure that the ECB is consulted at an appropriate point in 
time to allow the consulting author ity to take its opinion into cons ideration before deciding on the 
substance of the draft legislative provisions. The E CB also noted that the obligation to consult the 
ECB at an appropriate stage in the Estonian legisl ative process must be resp ected in the future and 
that administrative procedures should be in place to  ensure timely consultation whenever such a 
consultation is mandatory.  
2.2 The ECB has recently issued several opinions w ith regard to measures taken by Member States in 
the context of the financial turbulence. It has emphasised the importance of a common approach 
aimed at restoring confidence in the financial markets and compliance with the Declaration on a 
concerted European action plan of the euro ar ea countries of 12 October 2008 (hereinafter the 
‘Declaration’)3. On that occasion, the heads of the euro  area countries confirmed their commitment 
to act together in a decisive and comprehe nsive way to restore confidence and the proper 
functioning of the financial system, with the aim of restoring appropriate and efficient financing 
conditions for the economy. They agreed on common principles to be followed by the European 
Union and euro area governments, central banks  and supervisors to avoid national measures 
adversely affecting the functioning of the single market and the other Member States. Such coordinated approach includes initiatives aimed at all of the following: (i) ensuring appropriate 
liquidity conditions for financial institutions; (ii) facilitating the funding of banks, which is 
currently constrained; (iii) provi ding financial instituti ons with additional capital resources so as to 
                                                 
2  All ECB opinions are available on th e ECB’s website at www.ecb.europa.eu. 
3  Available on the website of the French Presidency at www.ue2008.fr. 
3 continue to ensure the proper financing of the economy; (iv) allowing for an efficient 
recapitalisation of distressed banks; (v) ensuring sufficient flexibility in the implementation of 
accounting rules given current exceptional market circumstances; and (vi) enhancing cooperation 
procedures among European countries4.  
2.3 Moreover, the ECB notes that the explanatory me morandum to the draft law refers to the guidance 
provided by the Ecofin Council to the Member States in the conclusions of its  meeting of 7 October 
20085. The Ecofin Council recommended that: (i) in terventions should be timely and the support 
should in principle be temporary; (ii) the inter est of taxpayers should be protected; (iii) existing 
shareholders should bear the due consequences of the intervention; (iv) the Government should be 
in a position to bring about a change of mana gement; (v) management should not retain undue 
benefits; (vi) governments may have, inter alia , the power to intervene in remuneration; 
(vii) legitimate interests of competitors must be protected, in particular the State aid rules; and 
(viii) negative spill-over effects should be avoi ded. The European Council also endorsed these 
principles for all Member States on 16 October 20086. Against this background, the ECB highlights 
that all initiatives put in place by national govern ments to restore confidence in the financial 
markets should be aimed at implementing such  common principles, in the spirit of close 
cooperation with other Member States and EU institutions. 
2.4 The ECB notes that the draft law does not mention any central bank involvement. Given how 
important it is in the context of the measures unde r consideration to decide whether a situation 
actually constitutes a ‘financial crisis’, the ECB would recommend that the decision-making 
process in this respect should be specified and that use should be made of the macro-prudential analysis carried out by Eesti Pank. 
 If Eesti Pank’s expertise is requested in practice, e.g. to benefit from its macro-prudential analysis 
as described above, the ECB expects that such in volvement will comply fully with the prohibition 
on monetary financing laid down in  Article 101(1) of the Treaty, read in conjunction with Council 
Regulation (EC) No 3603/93 of 13 December 1993 speci fying definitions for the application of the 
prohibitions referred to in Articles 104 and 104b(1) of the Treaty
7. Moreover, the ECB expects that 
any expertise or advisory tasks performed by E esti Pank in connection with State support measures 
will be carried out in a manner fully compatible  with Eesti Pank’s institutional and financial 
independence, thereby safeguarding the proper pe rformance of its tasks under the Treaty and the 
Statute of the European System of Centra l Banks and of the European Central Bank8. Furthermore, 
                                                 
4  See the Brussels European Council of 15-16 Oc tober 2008, Presidency Co nclusions, available at 
www.consilium.europa.eu. 
5  See ‘Immediate responses to Financial Turmoil’, Ecof in Council Conclusions of 7 October 2008, available at 
www.ue2008.fr. 
6   See the Brussels European Council of 15-16 Oc tober 2008, Presidency Conclusions, paragraph 3. 
7  OJ L 332, 31.12.1993, p. 1. 
8  See paragraph 3.3 of ECB Opinion CON/2008/79 of 27 November  2008 at the request of the Greek Ministry of Economy 
and Finance on a draft law on enhancing liquidity of the econo my to address the impact of the international financial 
crisis and on a draft decision on its implementation. Also paragraph 3.10 of  ECB Opinion CON/2008/81 of 1 December 
2008 at the request of the Hungarian Ministry of Finance on a draft law on strengthening the financial intermediary 
4 the ECB also expects that the support measures en visaged in the draft law will be exclusively 
financed from the State budget and that, to the extent that their funding may require State 
borrowing, this will not include pre-financing or refinancing of the State budget by Eesti Pank9.  
 3. Specific observations 3.1 Implementation of the support measures  
3.1.1 The draft law provides for temporary fast-track proceedings of Riigikogu  in the event of a financial 
crisis for certain listed measures on a proposal by the Government. The specific deadline applicable 
to these proceedings is 1 July 2010. The draft la w does not specify termination or expiry of the 
draft financial crisis measures. In accordance with the general conditions applicable to the grant of 
a State guarantee, a measure is approved and terminated by a resolution of Riigikogu,  which must 
set the commencement and expiry dates. In respect of Government lending, the respective agreements will be prepared by the Ministry of  Finance. The ECB repeats that any open-ended 
scheme is not in line with the Declaration and shou ld be avoided. In particular, the Declaration 
clearly draws attention to the need for any dom estic support schemes to be temporary in nature, 
even if they can be extended or renewed
10. The ECB recommends that provisions on the temporary 
nature of the support measures are clearly inserte d into the draft law, as well as provisions 
establishing means aimed at terminating/ redeeming the abovementioned measures. 
3.1.2 In addition, the draft law does not specify any c onditions, rules or limitations applicable to persons 
and/or entities to whom/which financial crisis measures are to be provided, except that the 
measures are ‘for solving or preventing a financia l crisis’. In this context, the ECB strongly 
recommends that the consulting authority should clarify the coverage of the proposed support measures under the draft law. It also draws atten tion to the importance of putting a transparent, 
predictable framework in place by defining the te rms and conditions for financial institutions to 
have recourse to it in cases of financial crisis only and the parame ters of and limitations to the 
exercise by the Estonian authorities of their power s when deciding whether or not to activate the 
support measures and on the conditions subject  to which they should be activated. 
                                                                                                                                                             
system and paragraphs 3.2.2 and 3.2. 3 of ECB Opinion CON/2009/3 of 8 Januar y 2009 at the request of the Slovenian 
Ministry of Finance on a draft decree laying down criteri a and conditions for the impl ementation of State capital 
investments and for the conversion of St ate claims into capital shares under Ar ticle 81.a of the Law on public finance. 
9  In this regard see, for instance, the following: paragraph 3.3 of ECB Opinion CON/2008/88 of 19 December 2008 at the 
request of the Slovenian Ministry of Finance on a draft decr ee laying down criteria and condi tions for granting guarantees 
under Article 86.a of the Law on public finance; paragr aph 3.2.3 of ECB Opinion CON/2008/92 of 22 December 2008 at 
the request of the Slovenian Ministry of Finance on a draf t decree laying down criteria and conditions for granting loans 
under Article 81.a of the Law on public finance and paragraph 3.2.3 of ECB Opinion CON/2009/3. 
10  ‘In all cases, these actions will be designed in order to a void any distortion in the level playing-field and possible abuse at 
the expense of non beneficiaries of th ese arrangements. As a consequence the scheme will be limited in amount, 
temporary  (emphasis is ours) and will be applied under close scrutiny of financial authorities …’ (Declaration, supra  
fn. 3). Also see Communication from the Commission, The A pplication of State Aid Rules to Measures Taken in 
Relation to Financial Institutions in the context of the current  global financial crisis, available at www.eur-lex.europa.eu, 
paragraph 24. 
5 3.2 Selection of beneficiary institutions 
The definition of ‘financial crisis’ in the draft law refers to credit institutions operating in Estonia. 
However, except for the exclusion of  certain persons specified in § 402(3) of the Law on the State 
budget, the draft law does not specify who is eligible  to be granted a State guarantee in a financial 
crisis, and in particular whether subsidiaries of  foreign banks are also covered. The ECB draws 
attention to the Declaration which states, inter alia , that Member States’ actions should ‘avoid any 
distortion in the level playing-field’ and that ‘all the financial institutions incorporated and 
operating in [euro area] countries and subsidiaries of  foreign institutions with  substantial operations 
[should] be eligible’ to benefit from the actions in  question. The ECB has previously stated that 
‘arrangements that may be seen as providing prefer ential treatment to specified institutions should 
be avoided’11. The ECB also draws attention to th e Commission’s guidance on the eligibility 
criteria for beneficiary institutions12. 
3.3 Relationship with the central bank’s monetary policy 
3.3.1 The ECB reminds the consulting authority that, in lin e with the Declaration, Member States have to 
act in a coordinated manner to avoid the possibility of significant differences in national implementation having a counter-p roductive effect and creating distortions in global banking 
markets. In the interests of ensuring a level play ing-field, it is crucial to harmonise the form of 
State guarantees, both within the euro area and the EU. In particular, the ECB repeats that 
uncoordinated decisions among Member States should be avoided as they may involve a fragmentation of the euro area money market. In th is regard, the ECB draws attention to a set of 
recommendations issued by its Governing Council on  20 October 2008 concerning the appropriate 
framework for the granting of govern ment guarantees on bank debt issuance
13. Against this 
background, the ECB has the following remarks. 
3.3.2 First, the ECB understands that, under the draft la w, State guarantees may be issued to cover all 
types of liabilities of domestic financial ins titutions and national depos it-guarantee schemes. The 
ECB therefore notes that the draft law does not ex clude from its material scope of application, 
expressly or by implication, interbank deposits, su bordinated or collatera lised liabilities such as 
covered bonds14. The ECB reiterates the need to a void State guarantees covering interbank 
                                                 
11  See paragraph 3.4 of ECB Opinion CON/ 2008/48 of 15 October 2008 at the request of the Irish Minister for Finance on a 
draft Credit Institutions (F inancial Support) Scheme 2008. 
12  See Communication from the Commission, The Application of State Aid Rules to Measures Taken in Relation to 
Financial Institutions in the context of the current global fina ncial crisis, paragraph 18, specifying that ‘The eligibility 
criteria of financial institutions … must  be objective, taking due account of their role in the relevant banking system and 
the overall economy, and non-discriminatory so as to avoi d undue distortive effects on neighbouring markets and the 
internal market as a whole. In appl ication of the principle of non discrimi nation on the grounds of nationality, all 
institutions incorporated in the Member State concerned, in cluding subsidiaries, and with significant activities in that 
Member State should be covered by the scheme.’ 
13  See the Recommendations of the Governing Council of the European Central Bank on government guarantees for bank 
debt, 20 October 2008, availa ble on the ECB’s website at 
http://www.ecb.europa.eu/pub/pdf/oth er/recommendations_on_guaranteesen.pdf. 
14  The ECB notes that the explanatory memorandum to the draft law states that Estonian banking is dominated by 
subsidiaries and branches of the major S candinavian banks and that, due to the high  concentration of the banking sector, it 
was not considered practical to guarantee interbank loans as in other Member States. 
6 deposits, in particular, as these could entail a substa ntial distortion in the various national segments 
of the money market by potentially increasing short-term debt issuance activity across Member States. 
3.3.3 Second, the ECB understands that, by extension, St ate guarantees for loans taken out by banks may 
be granted. In this respect, the ECB repeats that  such arrangements for the granting of government 
guarantees on bank debt should, in their practi cal implementation, aim at: (i) addressing the 
funding problems of liquidity-constrained solven t banks by improving the functioning of the 
market for bank debt of longer term maturity; and (ii) preserving the level playing-field among 
financial institutions and avoiding market distortions. 
3.3.4 Third, as regards the pricing of the State guarant ees, it is crucial to ensure harmonisation and 
coordination of the price determination of such guarantees within the euro area and the EU where a 
level playing-field is of the essence. In particular, it is important to ensure that the price of a State 
guarantee is risk-based and market-oriented and determined on the basis of the costs of a 
corresponding guarantee in the market. 
3.3.5 Fourth, it is important to ensure that beneficiar y financial institutions may not profit from undue use 
of their guaranteed status to engage in a heighten ed level of activities which distort the market and 
facilitate abnormal balance sheet growth. In th is regard, the ECB reiterates the importance of 
establishing appropriate safeguards such as limits  on the marketing of financial products or on 
expansion of activities on the basis of State guarantees. 
3.3.6 Fifth, under the draft law, the Government may acquire assets from financial institutions. In this 
respect, the ECB has a number of observations which are important from a monetary policy 
perspective. Although such measures should help to restore confidence in the Estonian banking 
system, it is important that the price applied for the acquisition of fi nancial institutions’ assets 
should be determined in a coordinated manner w ithin the EU. The ECB notes the importance of the 
price determination of these transactions. 
3.4 Conditions for State capital investments 
3.4.1  In line with the Declaration, the ECB re iterates that uncoordinated decisions amongst Member 
States should be avoided, as they may lead to si gnificant differences in the treatment of financial 
institutions across Member States. This remark also applies to measures related to State capital 
investments. 
3.4.2 The ECB takes the opportunity to restate the points made in its previous opinions. In particular, the 
ECB draws Riigikogu’s  attention to the specific recommendations made by its Governing Council 
on recapitalisations
15 (hereinafter the ‘Recommendations on the pricing of recapitalisation’). In this 
respect, the ECB notes that the aim of any recap italisation measures should be to strengthen the 
                                                 
15  Recommendations of the Governing Council of the Eur opean Central Bank on the pr icing of recapitalisations, 
20 November 2008, available on the ECB’s website at 
http://www.ecb.europa.eu/pub/pdf/other/recommenda tions_on_pricing_for_recapitalisationsen.pdf. 
7 capital position of fundamentally s ound financial institutions in orde r to improve the functioning 
and stability of the banking system and to ensure the proper financing of the economy. In particular, a consistent approach should be used in defining the conditions for recapitalisations and 
the pricing of the instruments intended to provid e Tier 1 capital to financial institutions. The ECB 
underlines the importance of appropr iate pricing for recapitalisations in terms of the goals of 
enhancing the stability of the financial system, fac ilitating a return to normal market conditions and 
ensuring the proper financing of the economy . In the Recommendations on the pricing of 
recapitalisations, the ECB stresses that the prici ng conditions for capital support should be risk-
based and market-oriented, determined by taking into consideration the specific risk of both the 
specific instrument chosen for in jecting capital and the institution concerned. Specific features of 
the instruments for capital injecti ons, such as preference shares, shoul d be appropriately chosen so 
that, while encouraging an early end to the State’ s capital support of banks, they do not result in an 
excessive increase in the cost of capital. 
3.4.3 Moreover, in line with previous ECB opinions
16, it should be ensured that such measures are in 
accordance with the requirements of  Community competition law, in pa rticular State aid rules, and 
that the State’s role as shareholder is limited in time. In this respect , in accordance with the 
Recommendations on the pricing of recapitalisations, it must be stressed that terms  should be set for the redemption or conversion of the instrument s either on the basis of a period of time or the 
development of market conditions so as to retain the temporary nature of the State’s involvement 
and discourage financial institutions from maintain ing such involvement for an extensive period of 
time. 
 This opinion will be published on the ECB’s website.   Done at Frankfurt am Main, 9 March 2009. 
 
[signed] 
 
The President of the ECB 
Jean-Claude TRICHET 
 
                                                 
16  See e.g. paragraph 3.1.3 of ECB Opinion CON/2009/3.