EN 
 
 
OPINION OF THE EUROPEAN CENTRAL BANK 
of 24 June 2009  
on the distribution of Latvijas Banka’s profits 
(CON/2009/53) 
 
Introduction and legal basis  
On 12 June 2009 the European Central Bank (ECB) received a request from Latvijas Banka for an 
opinion on a draft law amending the Law on Latvij as Banka as regards the distribution of Latvijas 
Banka’s profits (hereinafter the ‘draft law’). Latv ijas Banka has requested the ECB’s opinion before the 
submission of the draft law to the Latvian Parliament. 
The ECB’s competence to deliver an  opinion is based on Article 105(4) of the Treaty establishing the 
European Community 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 Latvijas Banka. In accordance with the first sentence of 
Article 17.5 of the Rules of Procedure of the Eur opean Central Bank, the Governing Council has adopted 
this opinion. 
 1.  Purpose of the draft law 
The main objective of the draft law is to amend Article 18
1(2) of the Law on Latvijas Banka increasing 
the payment for the use of State capital from 15% to  50% of Latvijas Banka’s profits for the reporting 
year. 
 2. General observations  2.1 Member States are obliged to  safeguard the institutional and financial independence of their 
national central banks (NCBs), thus ensuring the proper performance of their tasks under the Treaty 
and the Statute of the European System of Central Banks and of the European Central Bank (hereinafter the ‘Statute of the ESCB’). In pa rticular, the compatibility of the Law on Latvijas 
Banka with the requirements of Article 108 of th e Treaty and the provisions of Article 7 of the 
Statute of the ESCB concerning central bank i ndependence is of utmost importance, as 
                                                 
1  OJ L 189, 3.7.1998, p. 42.  
2 Latvijas Banka’s primary objective of price stabil ity is best served by a fully independent 
institution with a precisely defined mandate2. 
2.2 With regard to financial independence, a Memb er State may not put its NCB in a position where it 
has insufficient financial resources to carry out its ESCB or Eurosystem-related tasks. The NCB 
must also, at all times, have sufficient financial means to carry out its other functions, i.e. to 
perform its national tasks, to meet its internati onal obligations and properl y cover its administrative 
and operational expenses3.  
2.3 The ECB recognises the current financial situation in Latvia as well as the need to rebuild Latvia’s 
macroeconomic stability and enhance its credibility.  However, it notes that the use of central bank 
financial resources may be counterproductive from the credibility point of view if confidence in the 
financial stability and independe nce of the NCB is undermined. 
2.4 In addition to the issue of financial indepe ndence, national rules on the distribution of NCBs’ 
profits must comply with the monetary financing prohibition laid down in Article 101(1) of the Treaty and Council Regulation (EC) No 3603/93 of  13 December 1993 specifying definitions for 
the application of the prohibitions referred to  in Articles 104 and 104b(1) [now Articles 101 and 
103(1)] of the Treaty
4. As referred to in previous ECB opinions5, to comply with the monetary 
financing prohibition, it is of crucial importance that  the distribution of profits, by instalments or in 
full, does not imply advances on future or provisional  profits but is rather the result only of profits 
that are fully realised, accounted for and audited, which in turn requires due calculation of profits 
and losses.  
 3. Specific comments  3.1 According to the current wording of Article 18
1 of the Law on Latvijas Banka, Latvijas Banka 
transfers to a State general budget account indicated by  the State Treasury: (i) part of its profits for 
the reporting year, which is calculated by applying the tax rate established by the Law on corporate 
income tax (currently 15%); and (ii) payment for the use of State capital forming 15% of the profits 
for the reporting year. Under the draft law the paym ent for the use of State capital will be increased 
to 50% of the profits for the reporting year. 
3.2 With regard to profit allocation rules, an NCB’s Statute may prescribe how profits are to be 
allocated. However, even though amendments to such  rules are possible, it is important to shield 
the rules related to the distribution of profits from third-party interests and to ensure a legal 
framework that provides a stable and long-te rm basis for the central bank’s functioning6. 
Furthermore, according to the principle of financ ial independence, as stressed by the ECB in its 
                                                 
2  See ECB Opinion CON/2007/14. All ECB opinions are av ailable on the ECB’s webs ite at www.ecb.europa.eu. 
3  See the ECB’s Convergence Report May 2008, p. 20. 
4  OJ L 332, 31.12.1993, p. 1. 
5  See e.g. Opinion CON/2008/82. 
6  See Opinion CON/2007/14. 
3 convergence reports as regards financial provision s or buffers, an NCB must be free to create 
independently financial provisions to safegua rd the real value of its capital and assets7. In this 
regard, it is recalled that the economic purpose of cen tral bank capital and reserves is to ensure that 
the central bank will always and in all circumstan ces have at its disposal  the necessary financial 
resources to conduct monetary policy. However, th e ECB notes that, according to Article 19 of the 
Law on Latvijas Banka, Latvijas Banka will use the reserve capital to cover possible losses. The 
need to ensure a long-term perspective as regard s the distribution of profits should be borne in 
mind. Indeed, it is of utmost importance to allo w sufficient provisions of reserves during years of 
profits to allow Latvijas Banka to face possible losses without weakening its financial means to 
implement its monetary policy. 
The ECB further notes that in principle it is not optimal for the central bank to create reserves only 
after transferring a large portion of its profits to the Treasury. Should Latvijas Banka run into a situation of negative equity in the future (i.e . losses exceeding currently accumulated reserves), it 
would be hard to rebuild it out of the stream of future ‘net’ earnings under such an arrangement. 
Although Latvijas Banka still had positive capital a nd reserves at the end of 2008, prudence is 
required to ensure stable and sufficien t financial resources in the long term. 
3.3 Moreover, the ECB notes that the current calcula tion of the total rate of Latvijas Banka’s profit 
distribution involves, apart from the fixed part set by the draft law at 50% of the reported profits, also the additional part linked to the tax rate established by the Law on corporate income tax. 
Potential amendments to the Law on corporat e income tax would result in changes to 
Latvijas Banka’s total contribution to the State budget. While in principle both calculation methods 
are admissible, the ECB considers that for the sak e of legal certainty, and to achieve a better 
safeguard of Latvijas Banka’s financial i ndependence, the maximum contribution of 
Latvijas Banka to the State budget should rather be determined by a single fixed rate of 
Latvijas Banka’s annual profits, set  in the Law on Latvijas Banka. Alternatively, if the current 
twofold calculation of the total rate of Latvijas Banka’s profit distribution is maintained, the ECB 
recommends that, in view of Latvijas Banka’s obligations under the Treaty and the Statute of the ESCB, any changes to its financial obligations to wards the State should be decided in cooperation 
with the Council of Latvijas Banka, taking into account its specific central bank tasks. 
 This opinion will be published on the ECB’s website.  Done at Frankfurt am Main, 24 June 2009. 
[signed] 
The President of the ECB 
Jean-Claude TRICHET 
                                                 
7  See the ECB’s Convergence Report May 2008, p. 21.