EN 
 
 
OPINION OF THE EUROPEAN CENTRAL BANK 
of 7 January 2009 
at the request of the Latvian Ministry of Finance  
on a draft regulation establishing procedures fo r issue and supervision of bank loan guarantees 
(CON/2009/2) 
 Introduction and legal basis
 
On 29 December 2008 the European Central Bank (ECB) received a request from the Latvian Ministry of 
Finance for an opinion on a draft regulation establis hing procedures for issue and supervision of bank 
loan guarantees (hereinafter the ‘draft regulation’).  
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 provisions1, as the draft regulation relates to rules app licable 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 regulation The main objective of the draft regulation is to est ablish a procedure whereby the Latvian Minister for 
Finance may issue guarantees in the name of the State fo r loans of banks registered in Latvia in order to 
reduce general economic risks, avoid social and economic crisis, or minimise the impact thereof, and to ensure availability of financing in the event of extraordinary situations. The draft regulation also 
establishes a procedure for the servici ng and supervision of the guarantees. 
 2. General observations 
2.1 The legal basis for the adoption of the draft re gulation is Article 37(6) of the Law on budget and 
financial management. Article 37( 6) was added to the Law on budge t and financial management on 
14 November 2008
2 as part of Latvian measures to stabilise the financial markets. Another part of 
                                                 
1  OJ L 189, 3.7.1998, p. 42.  
2  Published in Latvijas V ēstnesis , 183 (3967) on 25 November 2008. 
2 the stabilisation measures was a Law on bank takeovers3 which was adopted on 18 December 2008. 
It should be noted that the ECB was not consu lted on the amendments to the Law on budget and 
financial management and that the ECB received th e consultation request regarding the draft law on 
bank takeovers on 29 December 2008, after that la w was adopted. Regarding these two stabilisation 
measures, therefore, the ECB reiterates its previous position4 that even cases of particular urgency 
do not release national authorities from their duty un der Article 105(4) of the Treaty to consult the 
ECB on draft legislative provisions falling within its fields of competence. The ECB has been flexible and has responded within short time li mits to consultation requests received during the 
financial turmoil and reminds the Latvian authorities of  the need to consult it on draft legislation at 
a stage in the legislative process th at allows sufficient time to take into account its views. It follows 
from Article 3(4) of Decision 98/415/EC that once a consultation request has been submitted to the 
ECB, Member States are obliged to suspend the pr ocess of adoption of draft legislative provisions, 
pending receipt of the ECB’s opinion or the expi ry of a time limit set for the submission of the 
ECB’s opinion, in accordance with Decision 98/415/EC
5.  
2.2 The ECB has issued a number of opinions on St ate measures taken by Member States to address the 
global financial crisis, which all emphasise th e importance of a comm on approach aimed at 
restoring confidence in financial markets. Similarl y, the ECB notes that the conclusions adopted at 
the Ecofin meeting on 7 October 2008 highlighted common principles to guide Member States’ actions
6. Moreover, the ECB notes that on 12 October 2008 the Heads of State of the euro area 
issued a ‘Declaration on a concerted Europ ean action plan of the euro area countries’7 (hereinafter 
the ‘Declaration’), in which they confirmed thei r commitment to act together in a decisive and 
comprehensive way in order to restore confiden ce and the proper functio ning of the financial 
system and to restore appropriate and efficient financing conditions for the economy. They agreed 
on common principles to be followed by the EU and euro area governments, central banks and 
supervisors, to avoid national measures adversely affecting the functioning of the single market and 
the other Member States. This coordinated approach includes initiatives aimed at ensuring 
appropriate liquidity, facilitating the funding of banks by various means, providing additional 
capital resources to financial institutions and recap italising distressed banks. These principles were 
also endorsed for all Member States by the European Council on 16 October 2008. As pointed out 
                                                 
3  Published in Latvijas V ēstnesis , 202 (3986) on 30 December 2008. 
4  See paragraph 2.4 of ECB Opinion CON/2008/76 of 25 November at the request of the Sloveni an Ministry of Finance on 
a draft law amending the Law on public finance. 
5  See Title IV, Section 1 of the Guide to consultation of the European Central Bank by national authorities regarding draft 
legislative provisions, available on th e ECB’s website at www.ecb.europa.eu . 
6  According to these principles: (i) interv entions should be timely and the support should in principle be temporary; (ii) the 
interests of taxpayers should be protected; (iii) existing shareholders should bear the due consequences of the 
intervention; (iv) the Government should be in a position to bring about a change of management; (v) management 
should not retain undue benefits ; (vi) governments may have, inter alia , the power to intervene in remuneration; 
(vii) legitimate interest of competitors must be protected, in particular through the State aid rules; and (viii) negative 
spill-over effects should be avoided. 
7  Available on the website of the Fr ench Presidency at www.ue2008.fr. 
3 in relevant ECB opinions8, it is of utmost importance that the operations conducted by national 
authorities do not interfere by any means with euro area monetary policy and/or with the 
Eurosystem’s refinancing operations. In this context, as regards the Latvian support measures 
proposed under the draft regulation, the ECB consid ers that they should aim at: (a) addressing the 
funding problems of liquidity-constrained solvent banks by improving the functioning of the market for bank debt of longer term maturity; (b) pr eserving the level playing field among financial 
institutions and avoiding market distortions; and (c ) ensuring consistency with the management of 
liquidity by Latvijas Banka
9. 
 3. Specific observations 
3.1 Implementation of the support measures 
As stated in its Article 17, the draft regulati on is a temporary measure and will only apply until 31 
December 2009. The ECB notes that this provision is in line with the principles stated in the Declaration which point to the temporary features of such support schemes.  
3.2 Selection of beneficiary credit institutions 
Pursuant to Article 3 of the draft regulation, onl y branches of banks registered outside Latvia are 
ineligible to benefit from the State guarantee arra ngements. The ECB therefore understands that the 
draft regulation applies to all solvent Latvian banks, including Latvian subsidiaries of foreign 
banks. The ECB welcomes the non-discriminatory app lication of the above provisions, as it avoids 
distortion of the level playing field as regards th e treatment of domestic financial institutions and 
subsidiaries of foreign institutions
10. This also appears to be in  line with the Commission’s 
guidance on the eligibility criteria for beneficiary institutions11. 
                                                 
8  See, in particular, ECB Opinion C ON/2008/52 of 17 October 2008 at the request of the Spanish State Secretary for 
Economic Affairs on a Royal Decree-Law cr eating a Fund for the acquisition of fi nancial assets and on a Royal Decree-
Law adopting urgent financial and economic measures in relation to the concerted European action plan of the euro area 
countries and ECB Opinion CON/2008/79 of 27 November 2008 at  the request of the Greek Ministry of Economy and 
Finance on a draft law on enhancing liquidity of the economy to address the impact of the international financial crisis 
and on a draft decision on its implementation. 
9  See, e.g. paragraph 2.1.2 of ECB Op inion CON/2008/62 of 29 October 2008 at the request of the Swedish Ministry of 
Finance on a draft ordinance on State guarantees for banks etc. 
10  On this aspect see, in particular, ECB Opinion CON/2008/44 of 3 October 2008 at the request of the Irish Minister for 
Finance on a draft Credit Institutions (Financial Support) Bill 2008. See also ECB Opinion CON/2008/48 of 
15 October 2008 at the request of the Irish  Minister for Finance on a draft Credit Institutions (Financial Support) Scheme 
2008. See also ECB Opinion CON/2008/52 and ECB Opinion CON/2008/55 of 20 October 2008 at the request of the 
Austrian Ministry of Finance on draft legal measures to ensure  the stability of the Austrian financial market, as well as 
ECB Opinion CON/2008/67 of 13 November 2008 at the reques t of the Spanish Ministry for Economic Affairs and 
Finance on a draft order implementing Royal D ecree-Law 7/2008 authoris ing State guarantees. 
11  See paragraph 18 of the Commission’s guida nce, specifying that ‘The eligibility criteria of financial institutions … must 
be objective, taking due acco unt of their role in the relevant banki ng system and the overall economy, and non-
discriminatory so as to avoid undue distortive effects on ne ighbouring markets and the intern al market as a whole. In 
application of the principle of non disc rimination on the grounds of nationality, all institutions incorporated in the 
Member State concerned, including subsidiaries, and with si gnificant activities in that Me mber State should be covered 
by the scheme.’ 
4 3.3 Scope of the obligations covered by State guarantees 
Pursuant to Article 2 of the draft regulation, a gua rantee may be issued in respect of existing loans 
with a maturity of no more than three years, and in respect of loans taken out to refinance such 
loans with a maturity of no less than six m onths and no more than three years. The ECB 
understands that the draft regulation could not be intended to apply to interbank deposits, 
subordinated liabilities and collaterali sed liabilities such as covered bonds12. The ECB notes 
however that this intention is not made expressly cl ear in the text of the draft regulation and that it 
is unclear in particular whether the guarantees provided by the Latvian State cover interbank 
deposits. The ECB therefore recommends that the draft regulation further clarifies the coverage of State guarantees. In this respect, the ECB reite rates that State guarantees to cover interbank 
deposits should be avoided as they have the poten tial to interfere with the conduct of a central 
bank’s liquidity-providing operations, and thus  with the transmission of monetary policy 
decisions
13.  
3.4 Charges imposed on receiving credit institutions 
Pursuant to Articles 11 and 12 of the draft regulati on, remuneration for the provision of guarantees 
will consist of a credit risk margin based on five-y ear credit default swap spreads of 40 large euro 
area banks. In addition the Ministry of Finance will charge 50 basis points for processing the fee 
and a 10 basis points annual servicing fee. In its previous opinions14, the ECB has emphasised that 
it is crucial to ensure the coordination of the pr icing of State guarantees within the euro area and 
the EU, given that a level playing field is of th e essence. The price of a State guarantee should be 
risk-based and market-oriented, and determined  on the basis of the costs of a corresponding 
guarantee in the market. In this respect, the ECB a ppreciates the additional information provided. It 
is important that the pricing of the State guarantee should link the level of charges to be paid by the 
receiving credit institutions with the residual matu rity of the guaranteed obligations and with 
maturities exceeding one year. The ECB also stresse s the need for further harmonisation within the 
euro area to ensure that government support meas ures do not have a negative impact on the single 
monetary policy of the euro area15. 
3.5 Central bank involvement in the support measures 
The ECB understands that the Ministry of Finance will consult Latvijas Banka in order to prepare a 
draft decision to issue a guarantee or refusal to  issue a guarantee. The ECB appreciates that the 
draft regulation recognises Latvijas Banka’s experti se in this way and that it is expected that 
                                                 
12  See the Commission’s Press releas e of 23 December 2008, IP/08/2054. 
13  See paragraph 3.2 of ECB Opinion CON/2008/80 of 28 November  2008 at the request of the Polish Minister for Finance 
on a draft law on the provision of State Treasury support to financial institutions. 
14  See paragraph 3.4 of ECB Opinion CON/2008/76. 
15  See e.g. paragraph 3.2 of ECB Opinion CON/2008/ 52 and paragraph 3.7 of ECB Opinion CON/2008/81 of 
1 December 2008 at the request of the Hungarian Ministry of Finance on a draft law on strengthening the financial 
intermediary system, as well as paragraph 3.2 of ECB Opinion CON/2008/88 of 19 December 2008 at the request of the 
Slovenian Ministry of Finance on a draft decree laying down criteria and conditions for granting guarantees under 
Article 86.a of the Law on public finance.  
5 Latvijas Banka’s involvement will  not go beyond an advisory and procedural role. The ECB also 
expects that Latvijas Banka will fully comply with  the prohibition on moneta ry financing laid down 
in Article 101(1) of the Treaty16, interpreted in line with Council Regulation (EC) No 3603/93 of 
13 December 1993 specifying definitions for the a pplication of the prohibitions referred to in 
Articles 104 and 104b(1) of the Treaty17 and that Latvijas Banka will conduct such function in a 
manner fully compatible with its institutional a nd financial independence thereby safeguarding the 
proper performance of its tasks under the Treaty and the Statute of the European System of Central 
Banks and of the European Central Bank.  
 This opinion will be published on the ECB’s website.    Done at Frankfurt am Main, 7 January 2009. 
 
[signed] 
 
The President of the ECB 
Jean-Claude TRICHET 
 
                                                 
16  See paragraph 3.2 of ECB Opinion CON/2008/52. 
17  OJ L 332, 31.12.1993, p. 1.