[EN] 
 
 
OPINION OF THE EUROPEAN CENTRAL BANK 
Of 13 January 2006 
at the request of Eesti Pank 
on a draft decree  establishing a procedure to ca lculate and comply with reserve requirements and 
draft decree amending Decree No 12 of 12 July 20 02 on credit institutions’ prudential ratios  
(CON/2006/3)  
 1. On 30 December 2005 the European Central Bank (E CB) received a request from Eesti Pank for an 
opinion on a draft decree establishing a procedur e to calculate and comply with reserve 
requirements and a draft decree amending Decree No 12 of 12 July 2002 on credit institutions (hereinafter ‘draft decrees’). 
2. The ECB’s competence to deliver an opinion is  based 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 provisions1, 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 Governing Council has adopted this opinion. 
3. The main objective of the draft decrees is to take  precautionary financial sector policy measures to 
address the potential risks related to continuing stro ng credit growth, in particular the brisk increase 
in home mortgages. In particular, the draft decr ees increase the risk weighting from 50% to 100% 
for all loans secured by mortgages on residential pr operty located in Estonia in the capital adequacy 
calculation. By repealing a provision in Decree  No 12 of 2 July 2002 on credit institutions’ 
prudential ratios, as amended, the risk weighting of 50% (category III) no longer applies to loans 
secured by first-ranking mortgages on residential pr operty located in Estoni a. Instead, these loans 
will be classified as category IV risks weighted as 100%.  
4. In addition, the draft decrees provide that where the risk weighting of the loans secured by first-
ranking mortgages on residential property remains below 100% in the calculation of the compulsory reserve requirement for all credit ins titutions, including the branches of foreign credit 
                                                     
 
1  OJ L 189, 3.7.1998, p. 42. 
 
2 institutions, loans issued with th e aim of purchasing and/or renoving housing are to be included in 
the reserve requirement calculation basis to the exte nt by which the actually applied risk weighting 
remains below 100%.  
5. The minimum reserve requirement for credit institutions is one of Eesti Pank’s main policy 
instruments. It operates a currency board system under which the Estonian kroon’s exchange rate 
has been fixed against the euro . Due to the currency board arrangement, Eesti Pank does not carry 
out open market operations.  
6. 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 a pplication of minimum reserves3; and (iv) relating to the definition 
and calculation of the reserve base, Regulation ECB/2001/13 of 22 November 2001 concerning the 
consolidated balance sheet of the monetary financial institutions sector4. The purpose of these legal 
acts, which are directly applicable to and binding on  euro area credit institutions, is to ensure that 
the terms and conditions for the Eurosystem’s mi nimum reserve system are uniform throughout the 
euro area. In the Eurosystem's  framework, reserve requirements primarily pursue the aims of 
stabilising money market interest rates, and creati ng or enlarging a structural liquidity shortage. 
Moreover, reserve requirements are calculated from banks' liabilities, particul arly deposits and debt 
securities issued.  
7. The current Estonian minimum reserve system therefore differs quite substantially from the 
Eurosystem’s reserve requirement framework. In its 2004 Convergence Report, the ECB noted that 
Estonian law does not anticipate Eesti Pank’ s legal integration into the Eurosystem5. The draft 
decree establishing a procedure to calculate and comply with reserve requirements would further 
widen the divergence between the two. Accordin g to the draft decree, reserve requirements 
safeguard financial stability by requiring banks to  hold liquidity buffers. The draft decree modifies 
the Estonian minimum reserve system by including banks’ assets, i.e. loans secured by mortgages on residential property located in Estonia and he nce deviating from a pure liability-based reserve 
requirement calculation.  
8. These significant differences from the legal framewo rk under which the Eurosystem operates will 
have to be eliminated on adoption of the euro by Estonia. Furthermore, the ECB may have to 
consider introducing transitional arrangements for the application of the Eurosystem’s minimum 
reserve system for the introduction of the euro in Estonia, as was the case when Greece adopted the 
                                                     
 
2  OJ L 318, 27.11.1998, p. 1. 
3  OJ L 250, 2.10.2003, p. 10.  
4  OJ L 333, 17.12.2001, p. 1.  
5  Convergence Report 2004, p. 36.  
 
3 euro on 1 January 2001. This may involve a tran sitional maintenance period for credit institutions 
located in Estonia as well as transitional provisi ons for credit institutions located in other 
participating Member States.  
9. The draft decree establishing a procedure to calcula te and comply with the reserve requirement has 
been drafted on the basis of Article 14(4) of Eesti Pank Act. However, the Decree on the same subject currently in force has been drafted on th e basis of Article 14(4) of Eesti Pank Act and 
Article 80(5) of the Credit Institutions Act, wh ich provides that ‘Eesti Pank shall establish the 
uniform rate of liquid assets to be deposited with Eesti Pank and the procedure for the use of such 
assets’. Therefore, ECB would welcome a clarifica tion of the legal basis for the draft decree and 
the relationship with Article 80(5) of the Credit Institutions Act.  
10. The ECB notes that Article 9.3 of Appendix 1 of the draft decree establishing a procedure to 
calculate and comply with reserve requirements does not list all EU Member States. Moreover, 
under Article 9.4 liquidity portfolio may contain on ly such debt securities that meet the criteria 
specified in subsections of Article 9.4. In that context, the draft decree treats the euro area Member 
States Government’s issues differently from the ot her EU Member States Governments’ issues in 
euro in terms of required minimum credit rating.  
11. The ECB would welcome use of terms and concep ts derived from Community law in the draft 
decrees. In particular, Article 9.3, and Articles 9. 3.1, 9.4.1 and 9.4.2 of Appendix 1 to the draft 
decree establishing a procedure to calculate and comply with reserve requirements refer to ‘supranational issuers of the EU’ and ‘euro ar ea countries’ instead of ‘supranational debt 
instruments’ and ‘euro area Member States’.  
12. This opinion will be published on the ECB’s website. 
  Done at Frankfurt am Main, 13 January 2006. 
 
[signed] 
 
The President of the ECB 
Jean-Claude TRICHET