Opinion of the European Central Bank of 13 January 2006 at the request of Eesti Pank on a draft decree establishing a procedure to calculate and comply with reserve requirements and draft decree amending Decree No 12 of 12 July 2002 on credit institutions’ prudential ratios (CON/2006/3)
Date: 2006-01-13
Institutions: European Central Bank
Subjects: Estonia, credit institution, financial stability, foreign-exchange reserves, monetary policy, national law

[EN] 

OPINION OF THE EUROPEAN CENTRAL BANK 

Of 13 January 2006 

at the request of Eesti Pank 

on a draft decree  establishing a procedure to calculate and comply with reserve requirements and 

draft decree amending Decree No 12 of 12 July 2002 on credit institutions’ prudential ratios  

(CON/2006/3) 

1. 

On 30 December 2005 the European Central Bank (ECB) received a request from Eesti Pank for an 

opinion  on  a  draft  decree  establishing  a  procedure  to  calculate  and  comply  with  reserve 

requirements  and  a  draft  decree  amending  Decree  No  12  of  12  July  2002  on  credit  institutions 

(hereinafter ‘draft decrees’). 

2. 

The ECB’s competence to deliver an opinion is based on Article 105(4) of the Treaty and the sixth 

indent 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 

legislative proposal contains provisions concerning rules applicable to financial institutions insofar 

as  they  materially  influence  the  stability  of  financial  institutions  and  markets.  In  addition,  under 

Article  2(2)  of  Decision  98/415/EC,  the  authorities  of  Member  States  other  than  participating 

Member  States  are  obliged  to  consult  the  ECB  on  any  draft  legislative  provisions  on  the 

instruments of monetary policy. 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. 

3. 

The main objective of the draft decrees is to take precautionary financial sector policy measures to 

address the potential risks related to continuing strong credit growth, in particular the brisk increase 

in home mortgages. In particular, the draft decrees increase the risk weighting from 50% to 100% 

for all loans secured by mortgages on residential property located in Estonia in the capital adequacy 

calculation.  By  repealing  a  provision  in  Decree  No  12  of  2  July  2002  on  credit  institutions’ 

prudential ratios, as amended, the risk weighting of 50% (category III) no longer applies to loans 

secured by first-ranking mortgages on residential property located in Estonia. Instead, these loans 

will be classified as category IV risks weighted as 100%.  

4. 

In addition, the draft decrees provide that where  the risk weighting of the loans secured by first-

ranking  mortgages  on  residential  property  remains  below  100%  in  the  calculation  of  the 

compulsory reserve requirement for all credit institutions, including the branches of foreign credit 

1  

OJ L 189, 3.7.1998, p. 42. 

 
 
 
                                                      
institutions, loans issued with the aim of purchasing and/or renoving housing are to be included in 

the reserve requirement calculation basis to the extent by which the actually applied risk weighting 

remains below 100%.  

5. 

The  minimum  reserve  requirement  for  credit  institutions  is  one  of  Eesti  Pank’s  main  policy 

instruments. It operates a currency board system under which the Estonian kroon’s exchange rate 

has been fixed against the euro. Due to the currency board arrangement, Eesti Pank does not carry 

out open market operations.  

6. 

The  legal  framework  underlying  the  Eurosystem’s  minimum  reserve  system  is  laid  down  in: 

(i) Article  19  of  the  Statute  of  the  European  System  of  Central  Banks  and  the  European  Central 

Bank;  and  (ii)  Council  Regulation  (EC)  No  2531/98  of  23  November  1998  concerning  the 
application of minimum reserves by the European Central Bank2; and (iii) Regulation ECB/2003/9 
of 12 September 2003 on the application of minimum reserves3; and (iv) relating to the definition 

and calculation of the reserve base, Regulation ECB/2001/13 of 22 November 2001 concerning the 
consolidated balance sheet of the monetary financial institutions sector4. The purpose of these legal 

acts, which are directly applicable to and binding on euro area credit institutions, is to ensure that 

the terms and conditions for the Eurosystem’s minimum reserve system are uniform throughout the 

euro  area.  In  the  Eurosystem's  framework,  reserve  requirements  primarily  pursue  the  aims  of 

stabilising  money  market  interest  rates,  and  creating  or  enlarging  a  structural  liquidity  shortage. 

Moreover, reserve requirements are calculated from banks' liabilities, particularly deposits and debt 

securities issued.  

7. 

The  current  Estonian  minimum  reserve  system  therefore  differs  quite  substantially  from  the 

Eurosystem’s reserve requirement framework. In its 2004 Convergence Report, the ECB noted that 
Estonian  law  does  not  anticipate  Eesti  Pank’s  legal  integration  into  the  Eurosystem5.  The  draft 

decree establishing a procedure to calculate and comply with reserve requirements would further 

widen  the  divergence  between  the  two.  According  to  the  draft  decree,  reserve  requirements 

safeguard financial stability by requiring banks to hold liquidity buffers. The draft decree modifies 

the Estonian minimum reserve system by including banks’ assets, i.e. loans secured by mortgages 

on residential property located in Estonia and hence deviating from a pure liability-based reserve 

requirement calculation.  

8. 

These significant differences from the legal framework under which the Eurosystem operates will 

have  to  be  eliminated  on  adoption  of  the  euro  by  Estonia.  Furthermore,  the  ECB  may  have  to 

consider  introducing  transitional  arrangements  for  the  application  of  the  Eurosystem’s  minimum 

reserve system for the introduction of the euro in Estonia, as was the case when Greece adopted the 

2  
3  
4  
5  

OJ L 318, 27.11.1998, p. 1. 
OJ L 250, 2.10.2003, p. 10.  
OJ L 333, 17.12.2001, p. 1.  
Convergence Report 2004, p. 36.  

2 

 
                                                      
euro on 1 January 2001. This may involve a transitional maintenance period for credit institutions 

located  in  Estonia  as  well  as  transitional  provisions  for  credit  institutions  located  in  other 

participating Member States.  

9. 

The draft decree establishing a procedure to calculate and comply with the reserve requirement has 

been  drafted  on  the  basis  of  Article  14(4)  of  Eesti  Pank  Act.  However,  the  Decree  on  the  same 

subject  currently  in  force  has  been  drafted  on  the  basis  of  Article  14(4)  of  Eesti  Pank  Act  and 

Article  80(5)  of  the  Credit  Institutions  Act,  which  provides  that  ‘Eesti  Pank  shall  establish  the 

uniform rate of liquid assets to be deposited with Eesti Pank and the procedure for the use of such 

assets’. Therefore, ECB would welcome a clarification of the legal basis for the draft decree and 

the relationship with Article 80(5) of the Credit Institutions Act.  

10.  The  ECB  notes  that  Article  9.3  of  Appendix  1  of  the  draft  decree  establishing  a  procedure  to 

calculate  and  comply  with  reserve  requirements  does  not  list  all  EU  Member  States.  Moreover, 

under  Article  9.4  liquidity  portfolio  may  contain  only  such  debt  securities  that  meet  the  criteria 

specified in subsections of Article 9.4. In that context, the draft decree treats the euro area Member 

States Government’s issues differently from the other EU Member States Governments’ issues in 

euro in terms of required minimum credit rating.  

11.  The  ECB  would  welcome  use  of  terms  and  concepts  derived  from  Community  law  in  the  draft 

decrees.  In  particular,  Article  9.3,  and  Articles  9.3.1,  9.4.1  and  9.4.2  of  Appendix  1  to  the  draft 

decree  establishing  a  procedure  to  calculate  and  comply  with  reserve  requirements  refer  to 

‘supranational  issuers  of  the  EU’  and  ‘euro  area  countries’  instead  of  ‘supranational  debt 

instruments’ and ‘euro area Member States’.  

12.  This opinion will be published on the ECB’s website. 

Done at Frankfurt am Main, 13 January 2006. 

[signed] 

The President of the ECB 

Jean-Claude TRICHET 

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