Page 1 of 4THE PRESIDENT
OPINION OF THE EUROPEAN CENTRAL BANK
at the request of the Portuguese Ministry of Finance on two draft legislative provisions
amending (i) the legal framework of credit inst itutions and financial companies concerning the
Deposit Guarantee Fund and (ii) the executive order governing the activities of the Deposit
Guarantee Fund 
(CON/99/15)
1. On 23 September 1999, the European Central Bank (ECB) received a request from the
Portuguese Ministry of Finance for an ECB Opinion concerning (i) a draft legislative act whichamends the legal framework of credit institutions and financial companies, approved by DecreeLaw No. 298/92 of 31 December (‘Regime Geral das Instituições de Crédito e das SociedadesFinanceiras’), concerning the Deposit Guarantee Fund and (ii) a draft executive order thatamends the Executive Order No. 285-B/95 (Series II) of 19 September, which lays downdetailed rules governing the activities of the Deposit Guarantee Fund.
2. The ECB’s competence to deliver an opinion is based on Article 105 (4), second indent of the
EC Treaty and on Article 2 (1), third and last  indents, of Council De cision (EC) No. 98/415 of
29 June 1998, on the consultation of the European Central Bank by national authoritiesregarding draft legislative provisions, as the legislative act deals with national central banks andwith rules applicable to financial institutions which can have a material influence on thestability of financial institutions and financial markets. In accordance with Article 17.5 firstsentence of the Rules of Procedure of the European Central Bank, the Governing Council of theECB has adopted this opinion. The draft legislative provisions were submitted to the ECB in itsofficial original version in Portuguese accompanied by a courtesy translation in English.
3. The main purpose of the draft legislative act is, on the one hand, to enlarge the scope of
activities of the Deposit Guarantee Fund, allowing for its intervention in situations of financialreorganisation of credit institutions and, on the other hand, to encourage the co-operationbetween Banco de Portugal and the Deposit Guarantee Fund in the aforementioned situations.This is particularly relevant for the legal framework of credit institutions and financial
Page 2 of 4companies in Portugal, since the general law relating to preventive bankruptcy measures and to
measures of reorganisation of undertakings and protection of creditors does not apply to creditinstitutions.
4. According to the ‘Regime Geral das Instituições de Crédito e das Sociedades Financeiras’,
Banco de Portugal, as the banking supervision authority, may decide to take exceptional
measures whenever the interests of depositors, investors and other creditors or the safeguard ofthe normal functioning of the money, financial and foreign exchange markets, are threatened.
Among these measures, Banco de Portugal may require the institution concerned to prepare areorganisation plan, whose acceptance by Banco de Portugal may be made conditional uponcapital reduction or increase, disposal of shareholdings and other assets or upon any otherconditions as deemed appropriate by Banco de Portugal. The draft legislative act allows Bancode Portugal, in the context of its intervention in the institution concerned, to invite the DepositGuarantee Fund to co-operate in the reorganisation process, particularly by granting monetary
or financial support or by participating in possible capital increases. The amendments
introduced in Article 142 of the legal framework of credit institutions and financial companies,approved by Decree Law No. 298/92 of 31 December, achieve this objective. 
5. The ECB notes that the remaining provisions of the draft legislative have the purpose of
adapting the Deposit Guarantee Fund to its new function of co-operating in actions intended tore-establish the solvency and liquidity of credit institutions (see amendments introduced inArticles 155, 158 and 163 of the legal framework of credit institutions and financial companies,approved by Decree Law No. 298/92 of 31 Dece mber and the new Article 167-A added to the
same Decree Law).
6. The ECB notes that, in relation to the amendments to Article 142, Banco de Portugal will have
an extended role over the financial reorganisation of a troubled institution. Namely, Banco dePortugal reserves the right to decide on aa capital increase and to further decide that the capitalincrease is preceded by the absorption of the institution’s losses by the relevant ‘positive’ itemsof own funds. Banco de Portugal may also invite the Deposit Guarantee Fund or otherinstitutions to co-operate in the reorganisation process, in particular, through the granting ofadequate monetary or financial support, or through their participation in the capital increase
decided by Banco de Portugal, who shall be also responsible for guiding and defining such co-
operation in terms of the timeframe. In this regard, the ECB would like to suggest that somefurther clarification be given to the possibility of Banco de Portugal to decide on a capitalincrease of a troubled institution, as foreseen in the proposed paragraph 4 of Article 142. Itcould be made clearer, in the context of the other provisions of Article 142, that this  decision of
Page 3 of 4Banco de Portugal relates to the appropriateness of a capital increase so that the troubled
institution is able to fulfil its commitments. The ECB understands that a decision of Banco dePortugal on a capital increase would not, however, involve the obligation for the shareholders of
the institution or for any other investors and institutions, including the Deposit Guarantee Fund,to indeed subscribe the capital increase. These remain free to subscribe or not the capital
increase. The ECB would therefore welcome a clarification of this point in order to avoid the
impression that Banco de Portugal could enforce a capital increase on unwilling shareholders orother investors and institutions. In this context, the ECB would like to draw the attention of the
Portuguese authorities to the jurisprudence of the European Court of Justice in the "Karella andSyndesmos" line of cases (cases C-381/89, C-19/90 and C-20/90, C- 134/91 and C-135/91, and
C-441/93) on the compatibility with Community la w of national rules providing for an increase,
by administrative measures, of the capital of a company in financial difficulties.
7. The ECB notes, in relation to the new paragraph 2 of Article 159, that Banco de Portugal will be
able, in an urgent situation and under the cond itions laid down in its Organic Law, to grant
temporarily to the Deposit Guarantee Fund the financial resources required to meet the latter’simmediate needs. The ECB would like to note that the financial resources granted by Banco dePortugal to the Fund under this provision are lent  without prejudice to its obligations as part of
the ESCB and based on adequate collateral (see Articles 24.1 (c) and 25 (b) of the Organic Lawof Banco de Portugal) and cannot be used for the special intervention of the Fund in thesituations foreseen under the proposed new Article 167-A, which relate to specific cases offinancial distress involving member credit institutions. This interpretation results fromparagraph 2 of the proposed Article 167-A, which states that the Fund shall confine its financial
support operations to situations which, among other criteria, do not involve the recourse of the
Fund to loans or to special contributions from member credit institutions. In this context, itshould also be mentioned that according to Article 14.4 of the ESCB Statute, national centralbanks may perform functions other than those specified in the ESCB Statute unless theGoverning Council of the ECB finds, by a majority  of two-thirds of the votes cast, that these
interfere with the objectives and tasks of the ESCB. The ECB does not anticipate that the tasksof Banco de Portugal as described in the draft legislative act under consultation would interferewith the objectives and tasks of the ESCB.
8. The ECB notes, in relation to the new Article 167-A, relating to financial support rules, that the
Deposit Guarantee Fund will be able to participate in operations deemed adequate to put an endto situations of financial distress involving member credit institutions. Moreover, it is stipulatedthat the Fund shall confine its financial support operations to the cases in which financialdistress situations are most likely to come to an end within a short period of time, the objectives
Page 4 of 4are clearly outlined and defined, the way how the Fund’s support will end is ensured, and a
recourse to loans or to special contributions fr om member credit institutions is not involved.
The ECB notes therefore that the Deposit Guarantee Fund may have, in certain situations, aprominent role in crisis management of credit institutions in Portugal. The ECB welcomes inthis regard that the execution of any financial support operation by the Deposit Guarantee Fund
is made dependent upon an opinion of Banco de Portugal that the operation is adequate to the
resolution of the situation in question. This provision is appropriate taking into account thecompetencies of Banco de Portugal as overseer of financial stability, in accordance with Article12 (c) of the Organic Law of Banco de Portugal.
9. The proposed amendments to the Executive Order No. 285-B/95 (Series II) of 19 September,
which lays down detailed rules governing the activities of the Deposit Guarantee Fund, are amere consequence of the new functions of the Deposit Guarantee Fund in the field of financialreorganisation of credit institutions, in particular of the amendments introduced in Articles 142,
155 and 158 of the legal framework of credit institutions and financial companies, approved by
Decree Law No. 298/92 of 31 December. The ECB welcomes in this regard that any decisionconcerning the types of support to a troubled institution should be made in close co-operationwith Banco de Portugal.
10. The ECB confirms that it has no objections to this ECB Opinion being made public by the
competent national authorities at their discretion.
Done at Frankfurt am Main on 27 October 1999.
The President of the ECB
[signed]
Willem F. Duisenberg