Opinion of the European Central Bank of 1 December 2005 at the request of Národná banka Slovenska on a draft law amending the Act No 118/1996 Coll. on the protection of bank deposits and on amendments to certain laws, as last amended (CON/2005/50)
Date: 2005-12-01
Institutions: European Central Bank
Subjects: Slovakia, bank deposit, financial stability, guarantee, national law

EN 

OPINION OF THE EUROPEAN CENTRAL BANK 

of 1 December 2005 

at the request of Národná banka Slovenska  

on a draft law amending the Act No 118/1996 Coll. on the protection of bank deposits and on 

amendments to certain laws, as last amended  

(CON/2005/50) 

1. 

On 19 September 2005 the European Central Bank (ECB) received a request from Národná banka 

Slovenska  (NBS)  for  an  opinion  on  a  draft  law  (hereinafter  the  ‘draft  law’)  amending  the  Act 

No 118/1996 Coll. on the protection of bank deposits and on amendments to certain laws, as last 

amended (hereinafter the ‘Act’ or the ‘Deposit Protection Act’).  

2. 

The ECB’s competence to deliver an opinion is based on the second indent of Article 105(4) of the 

Treaty  establishing  the  European  Community,  and  in  particular  on  the  third  and  sixth  indents  of 

Article 2(1) of Council Decision 98/415/EC of 29 June 1998 on the consultation of the European 
Central  Bank  by  national  authorities  regarding  draft  legislative  provisions1,  as  the  draft  law 

contains  provisions  concerning  a  national  central  bank  (NCB)  and  rules  applicable  to  financial 

institutions insofar as they materially influence the stability of financial institutions and markets. In 

addition, the ECB notes that its role under Article 237(d) of the Treaty of ensuring that NCBs fulfil 
their  obligations  thereunder2,  which  includes  ensuring  that  they  comply  with  the  prohibition  on 

monetary financing laid down in Article 101 of the Treaty, makes it necessary to ascertain whether 

the draft law and operations conducted by NBS thereunder are compatible with this prohibition. 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. 

The draft law 

3. 

According to the explanatory memorandum to the draft law, the draft law establishes a framework 

for  a  potential  decrease  in  the  level  of  commercial  banks’  annual  contributions  to  the  Slovak 

Deposit  Protection  Fund  (hereinafter  the  ‘Fund’).  Under  the  current  Slovak  deposit-guarantee 

1  
2  

OJ L 189, 3.7.1998, p. 42. 
See also Recital 9 to Council Regulation (EC) 3603/93 of 13 December 1993 specifying definitions for the application of 
the prohibitions referred to in Articles 104 and 104b(1) of the Treaty (OJ L 332, 31.12.1993, p. 1), which provides that 
notwithstanding the role assigned to the Commission pursuant to Article 169 (now Article 226) of the Treaty, it is for the 
ECB, pursuant to Articles 109f(9) (now Article 117(9)) and 180 (now Article 237) of the Treaty, to ensure that NCBs 
honour the obligations laid down by the Treaty. 

 
 
 
 
                                                      
scheme, the amount of the annual contribution, which is the same for all banks, is determined by 

the  Fund  specifying  a  level  between  0.1%  and  0.75%  of  the  amount  of  protected  deposits.  The 

annual  contribution  during  a  period  when  the  Fund  is  repaying  a  loan  made  to  finance 

compensation payments for unavailable deposits under the scheme is set at the upper limit of the 

annual contribution range, i.e., at 0.75%. In addition, currently the Fund must fix the amount of the 

annual  contribution  in  the  upper  half  of  the  contribution  range,  i.e.,  between  0.425%  and  0.75%, 

during  a  period  when  it  does  not  have  sufficient  funds  to  meet  compensation  payments  at  the 

minimum level of 1.5% of the total value of protected deposits.  

4. 

By contrast, under the draft law the Fund would henceforth have to determine the amount of the 

annual contribution during a period when it is repaying a loan made to finance compensation for 

unavailable  deposits  within  a  potentially  lower  range  of  between  0.35%  and  0.75%  or,  with  the 

prior  written  consent  of  NBS,  within  a  range  of  between  0.2%  and  0.75%  of  the  amount  of 

protected  deposits.  Further,  during  a  period  when  it  is  not  repaying  such  a  loan  and  does  not 

possess sufficient funds to make compensation payments at the minimum rate of 1.5% of the total 

value of protected deposits, the Fund would henceforth have to determine the amount of the annual 

contribution at a lower minimum rate of 0.2% of the amount of protected deposits. In this second 

case, the draft law would allow the lower minimum rate to be set without the prior written consent 

of NBS. 

5. 

Regarding  the  draft  law’s  reference  to  loans  made  to  the  Fund  to  finance  compensation  for 

unavailable  deposits,  the  ECB  takes  note  that  pursuant  to  Article  24(3)  of  the  Act  No  566/1992 

Coll. on Národná banka Slovenska, as last amended (hereinafter the ‘NBS Act’), NBS itself may 

provide a loan to the Fund. The Fund may request such a loan from NBS pursuant to the Deposit 

Protection Act3. Furthermore, under the Deposit Protection Act the Fund may apply to other banks 
for such a loan, and a State guarantee may be granted for loans extended to the Fund4. In addition 

to  any  such  loan  from  NBS  or  other  banks,  the  ECB  notes  that  the  Fund’s  resources  under  the 

Deposit Protection Act potentially include, inter alia, repayable assistance funds and government 

subsidies to support the fulfilment of the Fund’s tasks and the deposit-guarantee scheme, within the 
scope and under conditions set by the State budget for the relevant year5.  

Recent developments in relation to the Fund 

6. 

The explanatory memorandum to the draft law states that the draft law is based on an initiative of 

the Slovak Banking Association to prepare the legal framework for a potential decrease in the level 

of  banks’  contributions  to  the  Fund.  According  to  the  explanatory  memorandum,  the  Banking 

3  
4  

5  

Article 13(2) of the Deposit Protection Act. 
The Fund may approach a bank of foreign origin for a loan only with the prior approval of NBS (see Article 13(2) of the 
Act).  State  guarantees  on  loans  made  by  NBS  or  other  banks  are  granted  pursuant  to  Articles  8  to  13  of  the  Act 
No 386/2002 Coll., on State debt and State guarantees and amending the Act No 291/2002 Coll. on the State Treasury 
and amending certain laws, as last amended. 
See Article 13(1) of the Act. 

2 

 
 
                                                      
Association  argues  that  a  decrease  in  annual  contributions  (which  the  explanatory  memorandum 

states  are  some  of  the  highest  in  the  EU)  would  mean  that  the  banks  in  Slovakia  would  not  be 

forced to look for ways to avoid paying contributions to the Fund. The explanatory memorandum 

also states that a decrease in annual contributions may lead to an increase in interest rates payable 

on bank deposits. 

7. 

The ECB understands that, in recent years, the Fund has had a negative share capital as a result of 

past problems in the Slovak banking sector. The ECB understands that the Fund is currently also 

indebted  to  NBS  as  a  result  of  a  loan  that  NBS  provided  to  the  Fund  on  29  October  2001  to 

overcome  problems  in  the  Slovak  banking  system.  The  ECB  understands  that  this  loan  was 

originally  due  to  be  repaid  on  30  December  2005.  However,  the  ECB  understands  that  on 

15 February 2005 it was agreed by way of an addendum to the loan agreement of 29 October 2001 

that  the  original  deadline  for  repayment  would  be  extended  to  31  January  2007.  The  ECB 

understands that the loan has declined from an original principal amount of SKK 15 653 641 000 
(EUR 358 231 480) to SKK 7 358 390 000 (EUR 189 668 780) at year-end 20046.  

Funding of the deposit-guarantee scheme  

8. 

Deposit protection is an important element of the financial safety net and therefore contributes to 

safeguarding financial stability. The Financial Stability Forum (FSF) has noted that sound funding 

arrangements are critical to the effectiveness of a deposit-guarantee system and the maintenance of 
public  confidence7.  Funding  can  be  assured  in  various  ways,  and  in  its  recently  published 

consultation  paper  on  the  review  of  Directive  94/19/EC  of  the  European  Parliament  and  of  the 
Council  of  30  May  1994  on  deposit-guarantee  schemes8  (hereinafter,  the  ‘Deposit-Guarantee 

Schemes  Directive’  or  the  ‘Directive’),  the  European  Commission  noted  that  there  exists  a  wide 

diversity of funding mechanisms between the different national deposit-guarantee schemes within 
the  EU9.  This  diversity  is  a  consequence  of  the  fact  that  the  Directive  recognises  that  it  is  not 

indispensable to harmonise the methods of financing schemes guaranteeing deposits, given, on the 

one hand, that the cost of financing such schemes must be borne, in principle, by credit institutions 

themselves  and,  on  the  other  hand,  that  the  financing  capacity  of  such  schemes  must  be  in 

proporition to their liabilities. The Directive emphasises that this must not, however, jeopardise the 
stability of the banking system of the Member State concerned10. 

6  
7  
8  

9  

10  

This information is based on the Fund’s Annual Report 2004. 
Financial Stability Forum, Guidance for Developing Effective Deposit Insurance Systems (Sept. 2001), p. 26. 
Directive  94/19/EC  of  the  European  Parliament  and  of  the  Council  of  30  May  1994  on  deposit-guarantee  schemes 
(OJ L 135, 31.5.1994, p. 5). 
European Commission DG Internal Market and Services, Consultation paper entitled ‘Review of the Deposit Guarantee 
Schemes  Directive  (94/19/EC)’,  14  July  2005,  published  on  the  Commission’s  website  at  www.europa.eu.int/ 
comm/internal_market/bank/docs/guarantee/consultationpaper_en.pdf. 
See Recital 23 to the Deposit-Guarantee Schemes Directive. 

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9. 

In  this  context,  the  prudence  of  enabling  a  decrease  in  annual  contributions  (within  a  range  of 

between  0.35%  and  0.75%,  or  between  0.2%  and  0.75%)  during  a  period  when  the  Fund  is  still 
repaying loans11 taken out to finance compensation payments under the scheme, or where the Fund 

does not possess sufficient funds to make compensation payments itself, might be questioned. The 

current level  of contributions is understandable in the light of recent developments in the Slovak 

banking  sector.  Indeed,  some  Member  States  which  have  not  experienced  problems  of  the  kind 

experienced in Slovakia maintain a much higher level of funds in the scheme in relation to the total 

deposits protected by the scheme than that currently maintained under the Slovak deposit-guarantee 

scheme. There might therefore be a risk that the changes proposed under the draft law could delay 

the establishment of a financial buffer within the Slovak deposit-guarantee scheme at a time when 

its financial position may still be vulnerable. 

10.  Notwithstanding  these  remarks,  the  ECB  acknowledges  that  it  is  difficult  to  evaluate  fully  the 

impact  of  the  proposed  changes  under  the  draft  law  without  undertaking  a  detailed  and  more 

comprehensive  study  of  all  relevant  elements  affecting  the  Slovak  banking  system.  As  noted  in 

paragraph  8,  the  Deposit-Guarantee  Schemes  Directive  has  not  harmonised  the  methods  of 

financing  deposit-guarantee  schemes  within  the  EU,  which  are  left  at  the  discretion  of  Member 

States to determine. In these circumstances the ECB would only emphasise the general framework 

provided  by  Community  law  in  accordance  with  which  the  financing  capacity  of  such  schemes 

must  not  be  allowed  to  jeopardise  the  stability  of  the  banking  system  of  the  Member  State 

concerned. 

Prohibition on monetary financing 

11.  Under Article 237(d) of the Treaty the ECB is entrusted with the task of ensuring compliance by 

the  NCBs  with  the  prohibition  on  monetary  financing  laid  down  in  Article  101  of  the  Treaty. 

Article 101(1) of the Treaty provides that ‘[o]verdraft facilities or any other type of credit facility 

with  the  ECB  or  with  the  central  banks  of  the  Member  States  …  in  favour  of  Community 

institutions or bodies, central governments, regional, local or other public authorities, other bodies 

governed  by  public  law,  or  public  undertakings  of  Member  States,  shall  be  prohibited’.  As 

previously noted by the ECB, ‘[a]lready in 1993 the Committee of Governors of the central banks 

of  the  Member  States  of  the  European  Economic  Community  noted  that  this  prohibition  is  of 

‘essential importance’ to ensure that ‘monetary policy [is not] hindered in the pursuit of its primary 

objective  of  price  stability.  Furthermore,  central  bank  financing  of  the  public  sector  lessens  the 
pressure for fiscal discipline’12. Therefore, this prohibition must be interpreted in a strict manner’13. 

11  
12  
13  

Currently, the only loan that the Fund is repaying is to NBS. 
Letter to Commission President Delors of 20 April 1993.  
Paragraph 6 of ECB Opinion CON/2005/1 of 3 February 2005 at the request of the Italian Ministry of Economic Affairs 
and  Finance  on  a  draft  law  amending  Law  Decree  No  7  of  25  January  1999,  as  converted  by  Law  No  74  of 
25 March 1999, concerning urgent provisions on Italian participation in the International Monetary Fund’s interventions 
to confront severe financial crises of its member countries. 

4 

 
 
                                                      
The Fund is established under the Deposit Protection Act as a legal entity registered in the Slovak 

Companies  Registry,  and  qualifies  as  a  ‘body  governed  by  public  law’  within  the  meaning  of 

Article  101(1)  of  the  Treaty.  The  provision  of  loans  by  NBS  to  the  Fund  as  permitted  under 

Article 24(3) of the NBS Act constitutes a credit facility within the meaning of Article 101(1) of 

the  Treaty.  Therefore,  the  ECB  considers  the  provision  of  loans  in  the  present  case  to  be 

incompatible with Article 101(1) of the Treaty. 

12.  Regarding the outstanding loan made by NBS to the Fund in October 2001, the ECB notes that this 

loan was made prior to the Slovak Republic’s accession to the EU, and that in strict legal terms the 

loan was not subject to the prohibition on monetary financing under Article 101 of the Treaty at the 

time it was granted. However, the ECB notes that any extension of the loan following the Slovak 

Republic’s accession to the EU on 1 May 2004 would need to be assessed taking into account the 

monetary  financing  prohibition.  The  loan  was  originally  scheduled  to  be  repaid  on  30 December 

2005.  The  ECB  considers  that  extending  the  loan’s  maturity  would  constitute  a  breach  of  the 

monetary financing prohibition under the Treaty. The necessary arrangements should therefore be 

made for the Fund to repay the loan to NBS on 30 December 2005, as originally agreed. 

13.  Finally,  the  ECB  would  like  to  emphasise  that  in  its  next  Convergence  Report  in  2006  it  will 

address  the  compliance  of  national  legislation  with  the  prohibition  on  monetary  financing  under 

Article 101 of the Treaty. 

14.  This opinion will be published on the ECB’s website six months after its adoption. 

Done at Frankfurt am Main, 1 December 2005. 

[signed] 

The President of the ECB 

Jean-Claude TRICHET 

5