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 institutions and financial companies concerning the Deposit Guarantee Fund and (ii) the executive order governing the activities of the Deposit Guarantee Fund (CON/99/15)
Date: 1999-10-27
Institutions: European Central Bank
Subjects: Portugal, bank deposit, credit institution, financial stability, guarantee, institutional activity, national law, public institution

THE 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 institutions 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 which

amends the legal framework of credit institutions and financial companies, approved by Decree

Law No. 298/92 of 31 December (‘Regime Geral das Instituições de Crédito e das Sociedades

Financeiras’),  concerning  the  Deposit  Guarantee  Fund  and  (ii)  a  draft  executive  order  that

amends  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.

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 Decision (EC) No. 98/415 of

29 June  1998,  on  the  consultation  of  the  European  Central  Bank  by  national  authorities

regarding draft legislative provisions, as the legislative act deals with national central banks and

with  rules  applicable  to  financial  institutions  which  can  have  a  material  influence  on  the

stability  of  financial  institutions  and  financial  markets.  In  accordance  with  Article  17.5  first

sentence of the Rules of Procedure of the European Central Bank, the Governing Council of the

ECB has adopted this opinion. The draft legislative provisions were submitted to the ECB in its

official 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 financial

reorganisation  of  credit  institutions  and,  on  the  other  hand,  to  encourage  the  co-operation

between 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 1 of 4

companies 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 credit

institutions.

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 of

the 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 a

reorganisation  plan,  whose  acceptance  by  Banco  de  Portugal  may  be  made  conditional  upon

capital  reduction  or  increase,  disposal  of  shareholdings  and  other  assets  or  upon  any  other

conditions as deemed appropriate by Banco de Portugal. The draft legislative act allows Banco

de Portugal, in the context of its intervention in the institution concerned, to invite the Deposit

Guarantee 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 to

re-establish  the  solvency  and  liquidity  of  credit  institutions  (see  amendments  introduced  in

Articles 155, 158 and 163 of the legal framework of credit institutions and financial companies,

approved by Decree Law No. 298/92 of 31 December 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 de

Portugal reserves the right to decide on aa capital increase and to further decide that the capital

increase is preceded by the absorption of the institution’s losses by the relevant ‘positive’ items

of  own  funds.  Banco  de  Portugal  may  also  invite  the  Deposit  Guarantee  Fund  or  other

institutions  to  co-operate  in  the  reorganisation  process,  in  particular,  through  the  granting  of

adequate  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  some

further  clarification  be  given  to  the  possibility  of  Banco  de  Portugal  to  decide  on  a  capital

increase  of  a  troubled  institution,  as  foreseen  in  the  proposed  paragraph  4  of  Article  142.  It

could be made clearer, in the context of the other provisions of Article 142, that this  decision of

Page 2 of 4

Banco  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 de

Portugal 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 or

other 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 and

Syndesmos" 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 law 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  conditions  laid  down  in  its  Organic  Law,  to  grant

temporarily to the Deposit Guarantee Fund the financial resources required to meet the latter’s

immediate needs. The ECB would like to note that the financial resources granted by Banco de

Portugal 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 Law

of  Banco  de  Portugal)  and  cannot  be  used  for  the  special  intervention  of  the  Fund  in  the

situations  foreseen  under  the  proposed  new  Article  167-A,  which  relate  to  specific  cases  of

financial  distress  involving  member  credit  institutions.  This  interpretation  results  from

paragraph 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,  it

should also be mentioned that according to Article 14.4  of  the  ESCB  Statute,  national  central

banks  may  perform  functions  other  than  those  specified  in  the  ESCB  Statute  unless  the

Governing 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 tasks

of Banco de Portugal as described in the draft legislative act under consultation would interfere

with 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 end

to situations of financial distress involving member credit institutions. Moreover, it is stipulated

that  the  Fund  shall  confine  its  financial  support  operations  to  the  cases  in  which  financial

distress situations are most likely to come to an end within a short period of time, the objectives

Page 3 of 4

are  clearly  outlined  and  defined,  the  way  how  the  Fund’s  support  will  end  is  ensured,  and  a

recourse  to  loans  or  to  special  contributions  from  member  credit  institutions  is  not  involved.

The  ECB  notes  therefore  that  the  Deposit  Guarantee  Fund  may  have,  in  certain  situations,  a

prominent role  in  crisis  management  of  credit  institutions  in  Portugal.  The  ECB  welcomes  in

this 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  the

competencies of Banco de Portugal as overseer of financial stability, in accordance with Article

12 (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  a

mere consequence of the new functions of the Deposit Guarantee Fund in the field of financial

reorganisation 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 decision

concerning the types of support to a troubled institution should be made in close co-operation

with 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

Page 4 of 4