EN 
 
 
  OPINION OF THE EUROPEAN CENTRAL BANK 
of 26 March 2009 
at the request of the Latvian Financial and Capital Market Commission  
on a draft law amending the Law on deposit guarantees  
(CON/2009/31) 
 Introduction and legal basis
 
On 23 March 2009 the European Central Bank (ECB) received a request from the Latvian Financial and 
Capital Market Commission (FCMC) for an opinion on a draft law (hereinafter the ‘draft law’) amending 
the Law of 3 June 1998 on deposit guarantees (hereinafter the ‘Law on deposit guarantees’1). 
The ECB’s competence to deliver an  opinion is based on Article 105(4) of the Treaty establishing the 
European Community and the sixth indent of Article 2(1) of Council Decision 98/415/EC of 
29 June 1998 on the consultation of the European Ce ntral Bank by national authorities regarding draft 
legislative provisions2, as the draft law relates to rules applicable  to financial institutions insofar as they 
materially influence the stability of financial ins titutions 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 
The draft law will introduce certain changes to the operation of the Latvian Deposit Guarantee 
Fund (hereinafter the ‘Fund’), and in particular it will:  
(1)  broaden the scope of the Fund’s coverage as regards branches in Latvia of banks not 
registered in the European Union
3; 
(2) clarify the scope of categories of de positors excluded from the Fund’s protection4; 
                                                 
1  Published in Latvjas V ēstnesis , 162(1223) on 3 June 1998, as amended. 
2  OJ L 189, 3.7.1998, p. 42. 
3  See amended Article 2 of the Law on deposit guarantees (amendmen ts to paragraph 2 and deletion of paragraphs 3 
and 4(2)). 
4  See amended Article 17 points (4) and (6) of the Law on de posit guarantees. The new categor ies of excluded depositors 
are (i) specified categories of persons involved in mana gement, supervision or auditing of the Fund member; and 
(ii) depositors who have obtained individu al conditions for their deposit holdings that facilitated the deterioration of the 
Fund member’s financial situ ation. Such categories correspond to points 7 and 11 of the Annex I to the Directive 
94/19/EC on deposit-guarantee scheme s (OJ L 135, 31.5.1994, p. 5).  
2 (3)  introduce risk-based calculation of premiums paid to the Fund by its members, as well as a 
possibility for a special temporary increase of  the Fund’s premiums where deposit payouts 
have been made5; and  
(4) enhance the Fund’s deposit payout procedure, in  particular by allowing for payments to be 
made through a selected co mmercial credit institution6.  
According to the FCMC7, such amendments are necessary in order to address the present 
international and domestic financ ial situation and to take acc ount of the regulatory regime 
introduced by Directive 2009/14/EC of the Eu ropean Parliament and of the Council of 
11 March 2009 amending Directive 94/19/EC on deposit-guarantee schemes as regards the 
coverage level and the payout delay8.  
 2.  General observations 
In its Opinion CON/2009/10 of 4 February 2009, the ECB has already co mmented on the special 
legislative measures proposed by the Latvian authorit ies to deal with the financial crisis, including 
the changes to the Law on deposit guarantees
9. To the extent relevant, the observations made in 
Opinion CON/2009/10 also apply to the changes proposed by the draft law. The present opinion 
concentrates on the selected issu es specified below and does not constitute a comprehensive 
assessment of the Law on deposit guarantees, nor of the implementation of Directive 2009/14/EC 
in Latvia. Nevertheless, the ECB takes this oppor tunity to reiterate that, when implementing 
Directive 2009/14/EC or otherwise amending the le gal framework for operation of the national 
deposit-guarantee schemes, Member States should act in a coordinated manner to avoid significant 
differences in national legal frameworks having a counterproductive effect, by creating distortions 
in global banking markets10. 
 
                                                 
5  Risk-based calculation of the Fund premiums will appl y from 1 January 2010; see amended Article 8 of the Law on 
deposit guarantees (new wordin g in paragraphs (2) to (22) and in paragraph (6)) together with the point 9 of the draft law. 
6  See new Articles 131 and the paragraphs (1) to (4) added to Article 20 of the Law on deposit guarantees. 
7  See consultation letter received by the ECB on 23 March 2009 from the FCMC.  
8  OJ L 68, 13.3.2009, p. 3.  
9  See paragraph 3.1 of ECB Opinion C ON/2009/10 of 4 February 2009 at the request of the Latvian Financial and Capital 
Market Commission on draft amendments to certain legal acts in connection with th e financial turmoil. All ECB opinions 
are available on the ECB we bsite at www.ecb.europa.eu. 
10  See paragraph 2.1 of ECB Opinion CON/2008/70 of 18 November 2008 at the request of the Council of the European 
Union on a proposal for a Directive of the European Parl iament and of the Council amending Directive 94/19/EC on 
deposit-guarantee schemes as regards the coverage level and the payout delay (O J C 314, 9.12.2008, p. 1); paragraph 2.1 
of ECB opinion CON/2008/61 of 28 October 2008 at the request  of the Belgian Minister for Finance on a draft royal 
decree implementing the Law of 15 October 2008 on measures promoting financial stab ility and in particular establishing 
a State guarantee for the provision of credit in the context of financial stability, in relation to the protection of deposits 
and life insurance and amending the Law of 2 August 2002 on th e supervision of the financia l sector and on financial 
services; and paragraph 2.1 of ECB Opinion CON/2009/20 of 10 March 2009 at the request of the Central Bank of 
Cyprus and of the Cypriot Authority for the Supervision and Development of Cooperative  Societies on certain draft 
regulations related to the Deposit Protection Scheme.  
3 3. Specific observations 
3.1 Participation in the Fund  
The draft law broadens the scope of the Fund’s c overage as regards branches in Latvia of non-EU 
banks11. Such branches will become mandatory and unconditional members of the Fund, unlike the 
branches in Latvia of credit institutions establishe d in another Member State, which may participate 
in the Fund upon notification and on a ‘supplementary cover’ basis, i.e. to the extent that the deposit-guarantee scheme of the home Member State does not cover all the categories of deposits 
protected in Latvia or the amount of compensati on offered by the home Member State’s scheme is 
less than amount applicable under the Latvian provisions
12. While such provisions are in line with 
the requirements of Article 4(2) of Directive 94/ 19/EC, they provide for different treatment of 
branches of EU banks and non-EU banks operating in  Latvia. Under such provisions, the Fund will 
fully cover the guaranteed deposits  held with the branches of cr edit institutions established in non-
EU countries, while it will only top-up the coverage  of deposits held with the branches of credit 
institutions established in the EU Member States. 
3.2 Sanctioning regime  
The draft law, together with the existing provi sions of the Law on deposit guarantees, introduces a 
sanctions regime under which members of the Fund who do not comply with the financial 
obligations of Fund participation may, after one m onth’s notice: (i) in the case of banks established 
in Latvia and branches in Latvia  of non-EU banks, have their banking licence revoked; or (ii) in the 
case of branches in Latvia of credit institutions established in other Member States, have their Fund 
participation terminated13. The ECB understands that the intention behind the proposed sanction 
provisions is to establish an effective sanctioning  system in relation to all categories of Fund 
members. However, the ECB draws the attenti on of the FCMC to Article 3(2) and (3) and 
Article 4(4) of Directive 94/19/EC that estab lish minimum rules for sanctions procedures in 
relation to non-compliant members of national deposit-guarantee schemes14. The ECB recommends 
that the Law on deposit guarantees, as amended by  the draft law, should be aligned with the 
provisions of Directive 94/19/EC, in particular  as regards the involvement in the sanction 
procedures of the relevant supervisory aut horities and the required period of notice.  
                                                 
11  Resulting from amendments to Article  2(2) and the deletion of Articles 2(3) and 2(4)(2) of the Law on deposit 
guarantees. 
12  See new paragraphs (2)(2) and (41) in Article 2 of the Law on deposit guarantees. 
13  See the current paragraphs (4) and (5) and the new paragra phs (6) and (7) in Article 12 of  the Law on deposit guarantees. 
14  The provisions require that appropriate m easures should be taken to ensure complia nce, in the first instance by the home 
supervisory authority of the  relevant institution, in collabor ation with the national guarantee-scheme of the institution or 
of its foreign branch, as relevant. Only if these measures fail to secure compliance, and after an appropriate period of 
notice of not less than 12 months, may the non-compliant institution or its foreign branch be excluded from the 
institution’s home country guarantee-scheme or from the s upplementary cover of the branch’s host country guarantee-
scheme, with the consent of the ins titution’s home supervisory authority.  
4 3.3 Calculation of contributions to the Fund 
The draft law introduces the possibility that levels of contributions to the Fund by its members may 
be differentiated according to specified prudential cr iteria, such as the capital adequacy ratio of a 
Fund member, its liquidity and large exposures ratios, and the quality of its loan portfolio15. In its 
previous opinions on draft nationa l provisions proposing changes to the calculation of contributions 
to national deposit-guarantee schemes, the ECB has welcomed the principle of risk-based 
premiums16, while at the same time it has emphasised that sound fundi ng arrangements are critical 
to the schemes’ effectiveness and to the mainte nance of public confidence in the banking system17. 
At present, Directive 94/19/EC does not prescribe any method for financing deposit-guarantee schemes, as long as: (i) the costs of financing ar e borne, in principle, by the credit institutions 
themselves; (ii) the financing capacity of the scheme is in proportion to credit institutions’ liabilities; and (iii) the stability of the banking system of the Member State concerned is not jeopardised
18. However, Directive 2009/14/EC provides th at, by 31 December 2009, the European 
Commission must present a report concerning, inter alia , the harmonisation of the funding 
mechanisms of deposit-guarantee schemes and possible models for introducing risk-based 
contributions19. Any changes to national legal frameworks for the operation of the deposit-
guarantee schemes will need to take into acc ount the work initiated at Community level. 
3.4 Reduction of delays in the payout of guaranteed deposits  
As noted in previous ECB opinions20, reducing delays in making payouts of guaranteed deposits 
may strengthen depositor confidence and play a key role in the effectiveness of deposit-guarantee 
schemes. At the same time, it is essential that a pragmatic approach should be taken to the 
reduction of payout delays, thereby preserving th e credibility of the deposit-guarantee schemes. 
Moreover, it is important to establish efficien t operational processes for verifying claims and 
reimbursing depositors, as well as for ensuring that  sufficient funding is available. The ECB 
acknowledges the intention behind the draft law to provide for speedy payout procedures, in 
particular by imposing on Fund members a requi rement to make daily updated lists of entitled 
depositors and of the amounts of guaranteed deposits21. Such measures appear to be in line with the 
objectives of Directive 2009/14/EC, which specifies that Member States should aim to ensure the 
continuity of banking services, in partic ular in periods of financial turmoil22.  
                                                 
15  See amended Article 8(2) of  the Law on deposit guarantees. 
16  See paragraph 3.2 of ECB Opinion CON/2008/51 of 17 Octobe r 2008 at the request of the Greek Ministry of Economy 
and Finance on a draft law on, inter alia , the establishment of the ‘Depositors and Investors of Credit Institutions 
Compensation Fund’. 
17  See paragraph 2.5 of the ECB Opinion CON/2007/26 of 27 Augus t 2007 at the request of the Polish Minister for Finance 
on a draft law amending the Law on the Ba nk Guarantee Fund; see also  the Financial Stability Forum, ‘Guidance for 
Developing Effective Deposit Insurance Systems’, Sept ember 2001, point V.4 (‘Funding arrangements’), p. 26. 
18  See recital 23 of Directive 94/19/EC. 
19  See Article 12(1) of Directive 94/19/EC, as am ended by Article 1(7) of Directive 2009/14/EC. 
20  See paragraph 2.2 of Opinion CON/2008/70 and paragraph 2.2 of Opinion CON/2009/20. 
21  See new Article 131 of the Law on deposit guarantees. 
22  See recital 13 of Directive 2009/14/EC. 
5 3.5 Payments of guaranteed deposits through a commercial credit institution 
The new paragraphs (1) to (4) of Article 20 of the Law on deposit-guarantees provide the 
possibility that payments of the guaranteed de posits could be made: (i) through one or more 
selected commercial credit institutions, or (ii) by transferring the guaranteed deposits, to the extent 
protected by the Fund, to another credit institution. The draft law does not clarify the criteria for selecting the credit institution responsible for th e payout procedures, the precise tasks to be 
assigned to such a credit institution, or its liability. In this context, the ECB refers to Article 10(1) 
of Directive 94/19/EC
23 which requires that ‘[d]eposit-guara ntee schemes shall be in a position to 
pay duly verified claims by depo sitors in respect of unavailable deposits’. This means that it is 
primarily the responsibility of the national deposit- guarantee scheme to ensu re that the guaranteed 
deposits are made available to entitled depositors in an orderly and timely manner, whatever the 
payment system chosen. It is therefore important to  clarify the elements of the proposed provisions 
referred to above, and in particul ar to ensure that the credit institution appointed will have 
sufficient resources available to ensure orde rly and timely payouts under the deposit-guarantee 
scheme. In addition, the responsibility of the co mmercial credit institution appointed should be 
limited to the technical payment of the guaranteed  deposits and should not include the verification 
of the claimants’ entitlement to payment, fo r which the national deposit-guarantee scheme is 
responsible.  
3.6 More generally, the appointment of a commercial credit institution to act as payment administrator 
may raise concerns because of issues of distortion of competition and moral hazard, as well as issues related to the potential to increase pressures in the distribution of  liquidity. In particular, if a 
specific commercial credit institution were pre-appoint ed for this function, this could be viewed as 
a guarantee from the government th at the credit institution in ques tion would remain viable. Similar 
concerns may be related to an alternative solu tion under the amended Article 20(1)(2) of the Law 
on deposit guarantees, whereby the service-providing credit institution may, in practice, acquire customer accounts from an institution in rela tion to which deposit-guarantee payments are 
activated. In view of the above, the ECB recommends strengthening the Fund’s own technical capacities as opposed to providing for temporary out sourcing solutions as the principal method for 
ensuring that the payment of guaranteed deposits is properly organised
24. 
 
                                                 
23  As amended by Article 1(6) of Directive 2009/14/EC. 
24  See the ECB opinions issued in the context of the present financial crisis, which emphasise the need to protect the 
operational capacity of the existi ng national deposit-guarantee schemes; see paragraph 3.10 of ECB Opinion 
CON/2008/48 of 15 October 2008 at the request of the Irish Mini ster for Finance on a draft Credit Institutions (Financial 
Support) Scheme 2008; and paragraph 2. 2 of ECB Opinion CON/2008/69 of 17 November 2008 at the request of the 
Irish Minister for Finance on a draft Financial Services (Deposit Guarantee Scheme) Bill 2008. 
6 This opinion will be published on the ECB’s website. 
 Done at Frankfurt am Main, 26 March 2009. 
 
[signed] 
 
The President of the ECB 
Jean-Claude TRICHET