EN 
 
 
OPINION OF THE EUROPEAN CENTRAL BANK 
of 23 February 2006 
at the request of Latvijas Banka 
on draft amendments to the Regulation on calculating and fulfilling the minimum reserve 
requirements for banks 
(CON/2006/11)  
 1. On 30 January 2006 the European Central Bank (E CB) received a request from Latvijas Banka for 
an opinion on draft amendments to the Regulation on calculating and fulfilling the minimum reserve requirements for Banks (hereinafter the ‘Regulation’). Latvijas Banka is the national 
authority that will adopt the draft amendments. 
2. The ECB’s competence to deliver an opinion is b ased on Article 105(4) of the Treaty and the sixth 
indent of Article 2(1) of Council Decision 98/4 15/EC of 29 June 1998 on the consultation of the 
European Central Bank by national authorities regarding draft legislative provisions
1, as the 
legislative proposal contains provisions concerning ru les applicable to financial institutions insofar 
as they materially influence the stability of fina ncial institutions and mark ets. In addition, under 
Article 2(2) of Decision 98/415/EC, the authoritie s of Member States other than participating 
Member States are obliged to consult the E CB on any draft legislative 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 European Central Bank has adopted this opinion. 
3. The main objective of the draft amendments is to broaden the reserve base for the minimum 
reserve requirement in view of accelerating domestic lending growth and to contain credit 
expansion. The draft amendments also intend to harmonise the Regulation with the Law on credit 
institutions and Latvijas Banka’s Regulation on co mpiling the monthly financial position report of 
monetary financial institu tions and its appendices. 
General observations 4. The ECB notes that, although non-participating Member  States retain their powers in the field of 
monetary policy, it is nevertheless beneficial to  gradually achieve consis tency with Eurosystem 
standards so that credit institutions operating in their territory can already become acquainted with 
the minimum reserve requirements that will apply on ce the euro has been in troduced in Latvia.  
                                                     
 
1  OJ L 189, 3.7.1998, p. 42. 
2 5. The legal framework underlying the Eurosystem’s  minimum reserve system is laid down in: 
(i) Article 19 of the Statute of the European Sy stem of Central Banks and the European Central 
Bank; and (ii) Council Regulation (EC) No 2531/98 of 23 November 1998 concerning the 
application of minimum reserves by the European Central Bank2; and (iii) Regulation ECB/2003/9 
of 12 September 2003 on the app lication of minimum reserves3. The purpose of these legal acts, 
that are directly applicable to and binding on credit institutions in the euro area, is to ensure that the 
terms and conditions for the Eurosystem’s mini mum reserve system are uniform throughout the 
euro area. Taking into account the abovementioned legal framework for the Eurosystem’s reserve 
requirements, the ECB comments as follows on the draft amendments. 
6. First, in the course of preparing for the introduction of the euro in Latvia, Latvijas Banka will need 
to examine whether the Eurosystem’s requirement s can be fulfilled effectively and whether the 
necessary measures have been adopted in Latvia to  ensure that the authorities have the requisite 
powers, under Latvian law, to assist and coopera te with the ECB to collect and verify the 
information necessary for the Eurosystem’s minimum reserve system.  
7. Second, because the Eurosystem’s minimum reserve system is highly dependent on the 
Eurosystem’s statistical reporting requirements a nd because any changes to the statistical reporting 
requirements will have a direct influence on the size of minimum reserve holdings, a key element for achieving consistency between the Latvian minimu m reserve system and that of the Eurosystem 
is the introduction into Latvian law of statistical  reporting requirements corresponding to those of 
the Eurosystem.  
Specific observations 8. The ECB welcomes the broadening of the reserve base as it contributes to aligning Latvian 
reporting requirements with those of the Eurosy stem. Paragraph 3.2 of the current Regulation 
excludes from the reserve base deposits with a fixe d maturity of more than two years, deposits 
redeemable at notice with a notice period of more than two years, irrevocable (irredeemable before 
maturity) debt securities with an original matur ity of more than two years and repo transactions. 
The draft amendments delete pa ragraph 3.2, thus including the abovementioned liabilities in the 
reserve base. The ECB notes that this is consis tent with Article 3 of Regulation ECB/2003/9.  
9. Draft amendments also insert a new paragraph 4. 2 into the Regulation enabling Latvijas Banka to 
establish a different reserve ratio for each category of liabilities included in the reserve base. This 
provision does not necessarily differ from Article 4 of Regulation ECB/2003/9 that applies a fixed 
reserve ratio of 0% to deposits with agreed matu rity over two years, deposits redeemable at notice 
over two years, repos and debt securities issued with  an agreed maturity over two years, and a fixed 
reserve ratio of 2% to all other liabilities. However,  according to the consultation letter, the applied 
                                                     
 
2  OJ L 318, 27.11.1998, p. 1. 
3  OJ L 250, 2.10.2003, p. 10. 
3 reserve ratio for liabilities with an original matur ity of over two years would be larger than zero. 
Indeed, Latvijas Banka’s Council is authorised to set the level of required reserves as appropriate. 
The ECB notes that this measure does not contribu te to further bringing into line the Latvian 
reserve requirement level with that of the Eurosystem. 
10. The ECB also welcomes the introduction of a list of entities subject to minimum reserve 
requirements as it aligns the Regulation with Article 2 of Regulation ECB/2003/9. However, 
according to Article 2 of the Regulation ECB/2003/9, all credit institutions located in the euro area 
are subject to a minimum reserve requirement, while in Latvia currently neither electronic money institutions nor credit unions are covered by mi nimum reserve requirements. These differences 
between the Eurosystem and Latvia will need to  be eliminated on Latvia’s accession to the euro 
area, as further explained in the paragraphs below.  
11. Article 2(1) of Regulation ECB/2003/9 subject s the following categories of institutions to 
minimum reserve requirements: (a ) credit institutions as defined in the first subparagraph of 
Article 1(1) of the Consolidated Banking Directive
4, other than participating national central banks 
(NCBs); and (b) branches, as defined in Article 1( 3) of the Consolidated Banking Directive, of 
credit institutions as defined in the first subparagrap h of Article 1(1) of the same Directive, other 
than participating NCBs. Article 1(1) of the Consolidated Banking Directive defines a credit 
institution as (a) ‘an undertaking whose business is to receive deposits or other repayable funds 
from the public and to grant credits for its own account’; or (b) an electronic money institution 
within the meaning of Directive 2000/46/EC of th e European Parliament and of the Council of 
18 September 2000 on the taking up,  pursuit and prudential supervision of the business of 
electronic money institutions5. 
12. Article 1 of the Latvian Law on credit institutions  mirrors the definition of a credit institution 
contained in Article 1(1) of the Consolidated  Banking Directive and c overs: (a) banks – capital 
companies whose business is to receive deposits or other repayable funds from an unrestricted 
circle of clients, to grant credits for their own account and to provide other financial services; and 
(b) electronic money institutions – capital companies that issue and service electronic money and that are not banks. However, electronic mone y institutions are excluded from the scope of 
application of the Regulation as the Regulation ou tlines the procedure for calculating and fulfilling 
the minimum reserve requirements only for banks and branches of foreign banks registered in 
Latvia.  
13. The ECB notes that credit unions established in Latvia are not subject to the Law on credit 
institutions and that they are expressly excluded fro m the scope of application of the Consolidated 
                                                     
 
4  Directive 2000/12/EC of the European Parliament and of  the Council of 20 March 2000 relating to the taking up and 
pursuit of the business of credit institutions (OJ L 126, 26. 5.2000, p. 1), as last amended by Directive 2004/69/EC 
(OJ L 125, 28.4.2004, p. 44). 
5  OJ L 275, 27.10.2000, p. 39. 
4 Banking Directive under the Accession Treaty6. However, as made clear in ECB Opinion 
CON/2005/8 on 1 April 2005 at the request of Lietuvos bankas on draft rules on minimum reserve requirements for credit institutions
7 the fact that ‘credit unions are exempt for prudential 
supervision purposes from the scope of applicati on of the Consolidated Banking Directive does not 
automatically imply that they will also be exem pt from the Eurosystem’s reserve requirements 
established for monetary policy purposes. Indeed, the ECB considers that in order to apply the 
Eurosystem’s reserve requirements it is necessary to  carry out a material test as to whether an 
institution fulfils the criteria laid down in the first subparagraph of Article 1( 1) of the Consolidated 
Banking Directive (i.e. whether its business is to re ceive deposits or other repayable funds from the 
public and to grant credits for its own account).’  
14. The exemption of Latvian credit unions from the EU  banking supervisory regi me is irrelevant to 
the application of Eurosystem minimum reserve requirements due to the very different purposes 
served by banking supervisory and minimum reser ve requirements. The legal basis for the 
imposition of minimum reserve requirements contained in Article 19.1 of the ESCB Statute clarifies that the ECB may require credit instit utions established in Member States to hold 
minimum reserve on accounts with the ECB and national central banks ‘in pursuance of monetary policy objectives.’ The first key function of the minimum reserve system is to stabilise money 
market interest rates. Its second important f unction is enlargement of the banking system’s 
structural liquidity shortage. The need for cred it institutions to hold reserves with central banks 
contributes to increasing the demand for central bank refinancing which, in turn, makes it easier for the ECB to steer money market rates through re gular liquidity-providing operations. Thus, the 
range of credit institutions that are within the ambit of minimum reserve requirements differs from 
the category of credit institutions that fall within the scope of prudential supervision. In the area of 
minimum reserve requirements the term ‘credit ins titution’ is clearly meant to denote all financial 
market operators whose activities are relevant for the growth of monetary aggregates. Consistent 
with this, Regulation ECB/2003/9 establishes a very  specific exemption regime unrelated to the 
exemption regime under the Consolidated Banking Di rective. In this respect, it is noted that 
Article 5(2) of Regulation ECB/2003/9 grants to  each institution an allowance of EUR 100 000 to 
be deducted from the amount of mini mum reserves, subject to conditions. 
15. Under Article 2 of the Latvian Law on credit uni ons, credit unions may provide a variety of 
financial services to their members , including  receiving their deposits and other repayable funds 
and providing loans to them, as well as other appropriate activities.  
16. Regarding the issue as to whether credit unions in  Latvia receive deposits from the ‘public’ within 
the meaning of the Consolidated Banking Directive’ s definition of a credit institution, the concept 
                                                     
 
6  Technical adaptations to Article 2( 3) of the Consolidated Banking Directive under Chapter 3 of Annex II to the 
Accession Treaty 2003.  
7  Paragraph 10. 
5 of the ‘public’ encompasses any natural or legal pe rson other than a credit or financial institution, 
while those entities that fund themselves only in  the interbank market s are excluded from the 
concept of the ‘public’ for this purpose. It is cl ear that a Latvian credit union may receive deposits 
from the ‘public’. In particular, a Latvian credit union may receive deposits from members that may include natural persons and their spouses, local governments, trade unions and other bodies. 
The fact that admission to membership of a Latvia n credit union is restricted to persons sharing a 
common place of residence in the territory of th e same local government or are otherwise linked to 
the specific local government (e.g. as owners of im movable property) or to persons employed by 
the same employer, or to persons sharing member ship of a particular organisation, such as a 
professional association, trade union or public sports  organisation, is irrelevant for this purpose. 
The key issue is that Latvian credit unions may r eceive deposits from persons other than credit or 
financial institutions. Therefore Latvian credit uni ons receive deposits ‘from the public’ within the 
meaning of the Consolidated Banking Directive. 
17. In the light of the above, the ECB considers that  credit unions established in Latvia will fall under 
the definition of a credit institution subject to Eurosystem minimum reserve requirements within 
the meaning of Regulation ECB/2003/9 on the intr oduction of the euro. It is also noted that 
subjecting the electronic money institutions and cr edit unions to the Eurosystem minimum reserve 
requirement should not present practical difficulties from a statistical perspective as both types of 
institutions are already included in the list of monetary and financial institutions produced by 
Latvijas Banka. 
18. Finally, the ECB may consider introducing certain transitional arrangements for the application of 
the Eurosystem’s minimum reserve system on the introduction of the euro in Latvia
8. This would 
involve a transitional maintenance period fo r credit institutions located in Latvia.  
 This opinion will be published on the ECB’s website.  Done at Frankfurt am Main, 23 February 2006.  
 
[signed] 
 
The President of the ECB 
Jean-Claude TRICHET 
                                                     
 
8  As in the case of Regulation ECB/2000/11 of 2 November 2000 concerning transitional provisions for the application of 
minimum reserves by the European Central Bank following th e introduction of the euro in Greece (OJ L 291, 18.11.2000, 
p. 28) and as stated in Opinions CON/2005/35 and CON/2005/8.