EN 
 
 
OPINION OF THE EUROPEAN CENTRAL BANK 
of 10 September 2008 
at the request of the Banque centrale du Luxembourg 
on amendments to the draft law improving the legislative framework for Luxembourg as a 
financial centre and amending the Law of 23 December 1998 on monetary status and on the 
Banque centrale du Luxembourg 
(CON/2008/42) 
 
Introduction and legal basis  
On 24 July 2008 the European Central Bank (ECB) received a requ est from the Governor of the 
Banque Central du Luxembourg (BCL) for an opinion on amendments (hereinafter the ‘draft 
amendments’) proposed by the Government to the draf t law (hereinafter the ‘d raft law’) improving the 
legislative framework for Luxembourg as a financia l centre and amending the provisions on covered 
bonds in the Law of 5 April 1993 on the financial sector, the Law of  15 June 2004 on the company 
investing in risk capital, the La w of 23 December 1998 creating a commission in charge of prudential 
supervision of the financial sector and the Law of  23 December 1998 on monetary status and on the 
Banque centrale du Luxembourg (hereinafter the ‘BCL Law’).  
The ECB’s competence to deliver an opinion is based on Article 105(4) of the Treaty establishing the 
European Community and the third and sixth indents of  Article 2(1) of Counci l Decision 98/415/EC of 
29 June 1998 on the consultation of the European Ce ntral Bank by national authorities regarding draft 
legislative provisions1, as the draft law relates to the BCL and rules applicable to financial institutions 
insofar as they materially influence 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, the Governing Council has adopted this opinion. 
 
1.  Purpose of the draft law  
1.1 The ECB commented on the draft law in its Opinion CON/2008/172. The draft amendments take 
into account some of the ECB’s comments a nd introduce certain new elements aimed at 
reinforcing the framework for financial supervision and clarifying issues related to financial stability.  
                                                 
1  OJ L 189, 3.7.1998, p. 42.  
2  ECB Opinion CON/2008/17 of 15 April 2008 at the request of the Luxembourg Minister for the Treasury and the 
Budget on a draft law improving the legislative framework for Luxembourg as a financial centre and on a draft law 
relating to social insurance contributions.  
1.2 The draft law introduces , inter alia, the follow ing amendm ents to the BCL Law : 
(i) it clarifies the m ethod to be used by the BCL to implem ent the m inimum  reserve  
requirem ents;  
(ii) to rei nforce financial  stability, the draft law: (a) set s out that th e BCL will supervise the 
gene ral liquidity situa tion on the m arkets as well as evalua te m arket opera tors for this  
purpose; ( b) establ ishes t hat the BCL will cooper ate at the nat ional and i nternational le vel 
with a view  to ensuring financ ial stability; and (c) assigns to the BCL the power to grant, 
in exceptiona l circum stanc es, short-term  liquid ity assistance to its co unterparts, also on the  
basis  of a Sta te guara ntee provided to the BCL; 
(iii) it provides the lega l basis for the BCL ’s participation in public institutions, underta kings or 
public or private assoc iations.  
2. General observations 
A num ber of  the dra ft am endm ents are  proposed in response to recomm endations made by  the 
ECB in Op inion CON/ 2008/17, in particular t hose relati ng to minimum reserve req uirements. 
However , a number of the ECB ’s recomm endati ons, in particular wi th resp ect to the BCL’ s 
regulatory powers3, have not y et been taken into accoun t. The refore , the ECB would like to  
reiterate the commen ts mad e in Opinion CON/2 008/17 and als o prese nts a  num ber of ne w issues  
raised by the draft am endments. This opinion conce ntrates on the aspec ts of the draft law  
conce rning the BCL a nd its powers .  
3. Minimum  reserve requir ements  
3.1 Unde r the propose d amendm ents, Art icle 23 of the BCL Law will pr ovide that ‘the Ce ntral Bank 
shall be the depository for am ounts that credit institutions a re obliged to maintain by monetary 
control measures base d on Artic le 19 of the Statut e of th e Europ ean System o f Central Banks and 
of the European Ce ntral Bank’ (hereinafter the ‘ESCB Statute’).  
3.2 The ECB we lcom es that the scope of applicat ion of this provis ion has been restric ted ratione 
personae , i.e. to indi vidual credit i nstitutions , instead of to ‘ professionals of the  fina ncial sec tor’ 
and ratione mater iae with a n exclusive refere nce to Ar ticle 19 of the ESCB Statute, as 
recommen ded in Opinion  CON/2 008/17 . This n ational provision  is with out prejudice to the 
direct ap plication of Article 19.1 of the ESCB Statute, Article 2  of Regu lation ECB/2003 /9 of 
12 Decem ber 2003 on the application of m inimum reserves4 and Article 2 of Counci l Regulat ion 
(EC) No  2531/98 of 23 November 1998  concerning the app licatio n of min imum reserv es by  the 
European Ce ntral Bank5.  
4. The BCL’s  financi al stability function 
4.1 The ECB notes that under the dr aft amendm ents, certai n new pr ovisions wi ll be incl uded in the 
BCL Law, unde r whic h the BCL will be assigne d specific com petences in the area of financia l 
                                                 
3  See paragr aphs 4.1 to  4.5 of Opinion CON/200 8/17. 
4  OJ L 250 , 2.10.2003 , p. 10. 
5  OJ L 318, 27.11 .1998, p . 1. 
2 
stabi lity, and in particular it w ill have the power  to s upervise liquidit y managem ent in the 
markets, engage in institutional c ooperation an d provide em ergenc y liquidity  assistance to the  
BCL’ s counterparts. The assignm ent of such new competences is welcom e, as it will facilitate  
the BCL’ s effective pe rform ance of its fina ncial stability  role . In orde r to assist the BCL in 
fulfilling this new role, the ECB wou ld like to mak e the following points. 
Adaptations of the BC L Law in order to strengthen the BCL ’s financial stability role  
4.2 It is im portant to stress  the str ong interdependencies be twee n the BCL ’s new and c urrent 
competences. As highlighte d in the explana tory m emorandum , it is im porta nt to supervise  
liquidity given the BCL ’s role in the provision of liquidity in both norm al and crisis si tuations. In 
practice, to prope rly disc harge its ne w competences, the BCL should be able  to leverage its 
existing  powers, both regu latory6 and s tatistical. However, the draft am endm ents fa lls short of 
acknowle dging a n explic it and form al fina ncial stability tas k for the BCL, encom passing the  
broad ra nge of central bank c ontributions to fi nancial sta bility by  monitoring, assessing and 
effectively supporting, by means of em ergenc y liquidit y ass istance, t he financ ial system in 
Luxembourg. The refore, the EC B rec ommends t hat Art icle 2(5) of the BCL Law  should be 
amended to expressly  list all the BCL’ s tasks, including the ta sk of c ontributing to fina ncial 
stability7. This woul d allow the  BCL to collect statistical information in the context of finan cial 
stability. In this latter respect, as the institutional structure of financ ial corporations is be coming 
increas ingly com plex, the scope of inf ormation and data e xtends to the f inancial c orporations 
sector as a whole, w hich includes credit ins titutions, insurance companies and s pecial purpose 
vehicles for securitisation activities . The ECB wish es neve rtheless to stress , in line with its  
previous opinions8, that info rmation collection and  sharing  in the area of fina ncial sta bility should 
be co nsistent wit h Com munity law regulating the excha nge of supervisory and s tatistical 
inform ation and professiona l secrec y9, as well as with the BC L Law. In this regar d, the ECB  
would like to rem ind the cons ulting authority of its recomm endations in Opinion CON /2008/17 
that regulato ry powers include the enforcem ent of ECB lega l acts, pa rticularly in the c ollection, 
compilation and re porting of sta tistical data. 
                                                 
6  See in particular pa ragraph 4 of Opinion C ON/20 08/17.  
7 See p aragraph 7 of ECB  Opinion CON/20 01/10  of 2 5 May 2001 at the request of the Austrian Ministry of Finance on 
a dra ft Federal law establishing and organising the financial marke t supervi sory authority  [title shortene d]; 
paragraph 2.2. of ECB Op inion CON/2 008/39 of 1 Sep tember 2008 at th e requ est of the Po lish Minister f or Fin ance 
on a dra ft law on the Financ ial Stability Commit tee. 
8 See paragr aph 3.2 of Opinion CON/20 08/39. 
9 In particular, Articles 44 to 52 of Directive 2006/48 /EC of  the Eur opean Parliament and of the Co uncil o f 14 June 
2006  relating to the taking up and p ursuit of the business  of credit institu tions (recast) (OJ L 177, 30.6.2006, p. 1) ; 
Article 1 3 of Council R egulation (EC)  No 322/97 of 17 F ebruary 1997 on Com munity  Statistics (OJ L 5 2, 22.2.1997, 
p. 1); Article 8 of Co uncil Regulation (EC) No 2533 /98 of 23 Novemb er 19 98 concerning the collection o f statistical 
information by  the European Central Bank (OJ L  318, 27.1 1.1998, p. 8); and Arti cle 3 o f Council Reg ulation 
(Euratom, EEC) No 1588/ 90 of 11 June 1990 on the transmission of data subj ect to statistical confidentia lity t o the 
Statistical Office  of the European Communit ies (OJ L 151, 15.6.1990, p. 1 ); Gu ideline ECB /1998/NP28 of  
22 Dece mber 1998 concerning the  common rule s and min imum sta ndards  to protec t the c onfidentia lity of the 
individual statistical information co llected by the Eu ropean Central Ba nk a ssisted b y the na tional central bank s 
(OJ L 55, 24.2.2001, p. 7 2). 
3 
Centr al bank  supervis ion of liquidity m anagement  
4.3 Unde r the draft am endm ents, the BC L will be re sponsible for ‘s upervising the genera l liquidity 
situa tion on the m arkets as well as e valuating m arket operators for this  purpose ’. The draft 
amendm ents refer to a ‘c oordination and cooperatio n procedure’ for per forming this task , subject 
to agreem ents betwee n the BCL a nd the Comm ission de surveillance du sec teur financier (CSSF, 
Comm ission  for t he supervision of the  financ ial se ctor) and the Comm issariat aux ass urance s 
(Comm ision for insurance ), which will be in accorda nce with the  parties ’ legal powe rs10. 
In ge neral , the ECB  has cons istently favoured the involvem ent of centr al banks in prudentia l 
supervision to support the Eurosystem’s task of co ntrib uting to the adequate monitoring of risks 
to financial s tability in the euro area. This is of pa rticular im portance in a context in which the  
nature and scope of these ris ks are  affecte d by the introduction of the euro and the enhance d 
integration of fina ncial markets . In this resp ect, a dequa te access of central banks to prudential 
information and cooperat ion betwee n financ ial supervisory authorities and cent ral banks are 
essentia l. Furthe rmore, the recent m arket turm oil has confirm ed the importance of liquidity 
supervision over financial institutions and , in particula r, the c entral banks’ interest in banks’ 
liquidity risk managem ent.  
4.4 As emphasis ed by work in progress at EU level,  central ba nks ha ve to place a strong em phasis on 
the preve ntion of s ystemic liqui dity crises, as in general, the y rely on open market o perations t o 
implem ent th eir m onetar y policy dec isions a nd to distribute liquidity to the financ ial system and 
thereby  to the real economy . Ban ks’ liqu idity risk management is an  impo rtant issu e for cen tral 
banks because liquidity shocks at one bank can have kno ck-on effects an d cou ld disrup t the 
efficie ncy and sta bility of the m oney market in three ways. First, due to asymmetric inf ormation,  
a liquidity c risis a t one bank ca n lead to in creasing uncertainty  in the w holesale  and retail  
markets with respect to the liquid ity situation of other banks, w hich in se vere cases could lead to 
a drying-up of m oney market liquid ity and/or to a bank run. In less seve re cases, it could raise  
refinanc ing c osts for othe r banks a nd increase unce rtainty with respect to  future cas h-flows and 
market conditions, which w ould e xacerbate  liquidity m anagem ent. Second, the  large a nd 
increas ing share of interbank e xposures and m oney market i nstruments in banks’ funding can 
cause a knock-on effect, as li quidity problem s at one  bank directly translate into increasing 
liquidity pre ssure (e.g. due  to reductions in cash-inflows  and unexpected refina ncing 
requirem ents) on its interbank c ounterparties. Third, asset fire sales can lead to a market  
meltdown under certain circum stances, whic h in turn decreases the c ounterb alancing capac ity of 
all ba nks an d conseq uently, their liquidity risk-bearing capacity. In the pote ntial em ergence of a 
liquidity  crisis, centra l banks need to assess the scale of the liqu idity  proble m and the potential  
system ic implica tions of liquid ity stress. In orde r to m ake in form ed judgem ents, the y need 
reliable, compara ble and comprehensive information in a timely manner.  
                                                 
10  See proposed Article 2( 4) of the BC L Law. 
4 
4.5 Agai nst this backgr ound, the ECB welcom es the attribution to the BCL of specific liquidity 
managem ent competences. More over, the ECB note s that the dra ft law should clarify  the powers  
assigned to the BCL in order to  fulfil the new c ompetences, s uch as the  possibility to collec t 
information from super vised en tities a nd to perform on-site inspections. The ECB u nderlines that 
it will be  very im porta nt that the cooperation  proce dure, w hich according to the BCL Law will 
have t o be ag reed b y the BCL and national su pervisory author ities, be caref ully designed to allow 
the e fficient perform ance by each authority of its own res ponsibilities, without unneces sarily 
increas ing the adm inistrative  burden imposed on financ ial operators.  
4.6 The ECB also recom mends including a provisio n in the BC L Law setti ng out the principles  
according to whic h costs relate d to supervis ory ta sks will be  covere d, w ithout prejudice to the 
principle of financial  independence.  
Clarification of the BC L’s institutional  framework   
4.7 The proposed Article 2(5) of the BCL  Law states  that ‘in view of its tasks relating to monetar y 
policy and to the prom otion of t he smooth fu nctioning of payment s ystems, as well as 
contributing to t he good managem ent of policies im plem ented by authorities c oncerning 
prudential su pervision of credi t institutions an d the financial system’s stabil ity, while respecting 
its inde pende nce and the part ies’ lega l powers, the Bank s hall coopera te with the Government 
and w ith prudential supervision authorities a t national leve l, as w ell as wi th other ce ntral banks at 
the Com munity and international le vel to co ntribute to ensu ring fina ncial sta bility, in particula r 
within com mittees se t up for this purpose ’11. As set out in the explanatory memorandum12, this 
provision is aim ed at im plem enting the ‘Mem orand um of Unde rstanding on cooperation betwee n 
the f inancial supe rvisory authorities, ce ntral banks and f inance m inistries of the Eur opea n Union 
on cross-border financ ial stability’ of 1 June 2008  (hereina fter the  ‘MoU ’)13.  
4.8 As regar ds coo peration under the proposed Article 2(5) of the BCL Law, t he ECB un derstands 
that the Government in tentionally repeats the relevant Treat y provision in order to  underline the 
importa nce of cooperation between  all a uthorities involved at the national, Community and 
international level , in order to a void a  fina ncial crisis endangeri ng financ ial system  stabil ity14. 
However , when considering this provision in the broader co ntext of Ar ticle 2 of the BC L La w 
(‘tasks and le gal status of the BCL’), there is an  imbalance be tween pr oposed Article 2(5) of t he 
BCL Law , which lists all of the BCL ’s tasks (including its contr ibution to financial  stability) and 
Article  2(2) of the BC L Law, w hich simply states that ‘the m ain task of the BCL sha ll be to 
participate in the  execution of the tas ks of the ESCB with a view to ac hieving its object ives’. In 
addition, res tricting national, Com munity and international c ooperation to fina ncial s tability 
issues is inac curate , give n that such cooperation is releva nt to all ESCB tasks. F or the sake of 
clarity, the BCL’ s tas ks, includin g contributing to financial  stability as set out in this opinion, 
                                                 
11  See proposed Article 2( 5) of the BC L Law. 
12  See paragr aph 2 of the exp lanatory memo randu m. 
13  The text of the MoU i s availa ble on the ECB’s  website at www.e cb.europa.e u. 
14  See pag e 4 of the exp lanatory memorandum.  
5 
should be listed in Article 2(2) of the BCL Law . As to proposed Article 2(5) of the BCL Law, for 
the sa ke of accurac y, a distinc tion s hould be draw n betwee n domestic coope ration, w hich could  
focus on financial  stability, in respect of the parties’s respective legal  powers  and independence 
and Com munity a nd inte rnational cooperation, which would e ncompass all of the BCL’ s tasks , 
including con tributing to financial stability. 
Provis ion of emergency  liquidity  assistance  
4.9 The proposed Article 27-2 of the BCL  Law pr ovides that ‘The C entral Ban k may in exce ptional 
circum stance s gra nt short-term  loans to its  coun terparties while respecting its indepe ndenc e and 
the provisions p rohibiting monetar y financing. It shall grant loans on the basis o f adequa te 
colla teral w hich m ay consist of a Sta te gua rantee und er the conditions previously  agreed betwee n 
the State  and the Central Bank. The Centra l Bank’s privilege in Article 27-1(1) shall appl y to 
these loans’15.  
4.10 As regards the provision of em ergenc y liquidity assistance , while it has no objection to s upport 
given by ce ntral banks in exceptiona l circum stances and on a ca se-by-case basis to tem porarily 
illiquid cre dit institutions16, it is the ECB’ s view  that ‘national legislation foreseeing the 
financing by NCBs o f credit institutions other than in connec tion with central banking tas ks 
(such as mo netary policy, payment systems o r temp orary liqu idity support op eratio ns), in  
particular to support insolvent credit and/or ot her fi nanc ial ins titutions, is inc ompatible with the 
monetary finan cing prohib ition’17.  
4.11 In view of the above, the ECB str ongly welcom es the dra ft law , whic h establishes the legal basis  
for the possible extension of emergenc y liquidity assistance  by the BCL in the form  of short-te rm 
loans extended t o its counter parts, while  at the sam e tim e providing for appropria te lega l 
safeguards  of centra l bank indepe ndenc e and com pliance with the monetar y financing prohibition 
under Ar ticle 101 of t he Treat y18. As regards this latter aspect, the ECB notes  that the concrete  
form ulation of certain elements of the draft provisi on needs to be  clarifie d so that full c omplianc e 
of the proposed Artic le 27 -2 o f the BCL Law with t he monetary financing prohibition is  
achie ved. First, instead of a gene ral ref erence t o the conce pt of m onetary financing, the proposed 
provision should be draf ted more precisely to ref er explicitly to the prohibition o n monetar y 
financing as defi ned by Community law or direc tly to Artic le 101 of the Treaty19. Second, the  
part of the propose d provision allow ing for Sta te guarantees to be used as  collateral in c onnection 
with em ergency liquidity assist ance should be c omplemented by the requirem ent tha t the 
supporte d credit institution rem ains solvent. Third, th e proposed provision should unequivocally 
                                                 
15  See pro posed Article 27-2. 
16  See the EC B’s 1999 An nual Report, p. 99 and the ECB’s December 20 06 Fin ancial Stab ility Review, p . 17 availab le 
on the ECB ’s website at www .ecb.europa.eu. 
17  See the ECB’s May  2006 Co nvergence Repor t, p. 68 ; the December 2006 Convergence Report, p. 30; the May 200 7 
Conv ergence Report, p. 22 and the M ay 2008 C onvergence R eport, p. 24, which are available on the ECB’s websi te at 
www.ecb. europa. eu. 
18  See paragr aph 4 of the exp lanatory memo randu m. 
19  See p . 240 of the ECB ’s May 2008 Con vergence Report on Article 14 of th e Law LVI II of 2001 on the Mag yar 
Nemzet i Bank. 
6 
ensu re the independence of the BC L in deciding on the extensi on of emergenc y liquidity 
assistance . To this  end, when referring to the BCL’ s indepe ndence, the propose d provision  
should s tipulate th at the same scope of independe nce is ass igned to the BCL as re gards the  
extension of emergenc y liquidity  assis tance as is a vailable under Artic le 5(2) of the BCL Law 
with respec t to the performance by  the BCL of its ESCB-re lated tas ks20. The ECB conside rs, in 
particular, that ens uring the full independence o f the BC L in deci ding on the e xtension of 
emergenc y liquidity assistance w ill establis h appropria te conditi ons for the possible acceptanc e 
by the BC L of a Sta te guara ntee in connection wit h suc h exte nded emergenc y liquidity 
assistance . In deciding whether a Sta te guara ntee may be accepted, the central bank should, in  
particular, a ssess whethe r the guara ntee is ec onomically  ade quate for emerge ncy liquidity 
assistance  purposes as  well as legally valid and enforceable  under na tiona l law. 
5. Central bank par ticipation in public ins titutions, un dertakings or pub lic or p rivate  
assoc iations   
5.1 Unde r the proposed Article 26-1 of the BCL Law,  ‘the Ce ntral Ban k may take and dispose of 
participation in pu blic inst itutions, un dertakings or pu blic or pri vate associat ions21. The  
explana tory memorandum  states that this am endment provides the legal basis for the  BCL’ s 
participation in external organisat ions. The e xplanatory memorandum notes in this co ntext that 
the BCL curre ntly participat es in the Soc iety for Worl dwide Interba nk Fi nancial  
Teleco mmu nicatio n (SWIFT), th e Grou pement d’intérêt économiq ue pou r la promotion et la 
gestion des systèm es de paiem ent au Luxem bourg (SYPAL-G ie) and the F inancial Tec hnology 
Trans fer Agency (AT TF) and m ay participa te in future Euros ystem activit ies22.  
5.2 The ECB notes with inte rest the abovem entioned provision as an elem ent whic h could further 
facili tate the evolution of the financial market i nfrastr ucture in Luxembourg, its integration 
within the European  environment and further market harm onisation.  
 
This opinion will be publ ished on t he ECB’s  webs ite.  
 
 
Done  at Frankfurt am Mai n, 10 Septem ber 2008. 
 
[signed] 
 
The President of the ECB 
Jean-Cla ude TRICHET 
                                                 
20  Alter natively a referen ce to th e same level of ind ependence as prov ided fo r in Article 108 o f the Treaty could be 
considered.  
21  See Article 26-1 of the BCL Law, as introduce d by the Arti cle V(6) of the dra ft law. 
22  See paragr aph 3 of the exp lanatory memo randu m. 
7