Opinion of the European Central Bank of 23 February 2006 at the request of Latvijas Banka on draft amendments to the Regulation on calculating and fulfilling the minimum reserve requirements for banks (CON/2006/11)
Date: 2006-02-23
Institutions: European Central Bank
Subjects: Latvia, banking supervision, financial stability, foreign-exchange reserves, monetary policy, national law

EN 

OPINION OF THE EUROPEAN CENTRAL BANK 

of 23 February 2006 

at the request of Latvijas Banka 

on draft amendments to the Regulation on calculating and fulfilling the minimum reserve 

requirements for banks 

(CON/2006/11) 

1. 

On 30 January 2006 the European Central Bank (ECB) received a request from Latvijas Banka for 

an  opinion  on  draft  amendments  to  the  Regulation  on  calculating  and  fulfilling  the  minimum 

reserve  requirements  for  Banks  (hereinafter  the  ‘Regulation’).  Latvijas  Banka  is  the  national 

authority that will adopt the draft amendments. 

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 European Central Bank has adopted this opinion. 

3. 

The  main  objective  of  the  draft  amendments  is  to  broaden  the  reserve  base  for  the  minimum 

reserve  requirement  in  view  of  accelerating  domestic  lending  growth  and  to  contain  credit 

expansion. The draft amendments also intend to harmonise the Regulation with the Law on credit 

institutions and Latvijas Banka’s Regulation on compiling the monthly financial position report of 

monetary financial institutions and its appendices. 

General observations 

4. 

The ECB notes that, although non-participating Member States retain their powers in the field of 

monetary  policy,  it  is  nevertheless  beneficial  to  gradually  achieve  consistency  with  Eurosystem 

standards so that credit institutions operating in their territory can already become acquainted with 

the minimum reserve requirements that will apply once the euro has been introduced in Latvia.  

1  

OJ L 189, 3.7.1998, p. 42. 

 
 
 
                                                      
5. 

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. The purpose of these legal acts, 

that are directly applicable to and binding on credit institutions in the euro area, is to ensure that the 

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

euro area. Taking into account the abovementioned legal framework for the Eurosystem’s reserve 

requirements, the ECB comments as follows on the draft amendments. 

6. 

First, in the course of preparing for the introduction of the euro in Latvia, Latvijas Banka will need 

to  examine  whether  the  Eurosystem’s  requirements  can  be  fulfilled  effectively  and  whether  the 

necessary  measures  have  been  adopted  in  Latvia  to  ensure  that  the  authorities  have  the  requisite 

powers,  under  Latvian  law,  to  assist  and  cooperate  with  the  ECB  to  collect  and  verify  the 

information necessary for the Eurosystem’s minimum reserve system.  

7. 

Second,  because  the  Eurosystem’s  minimum  reserve  system  is  highly  dependent  on  the 

Eurosystem’s statistical reporting requirements and because any changes to the statistical reporting 

requirements will have a direct influence on the size of minimum reserve holdings, a key element 

for achieving consistency between the Latvian minimum reserve system and that of the Eurosystem 

is the introduction into Latvian law of statistical reporting requirements corresponding to those of 

the Eurosystem.  

Specific observations 

8. 

The  ECB  welcomes  the  broadening  of  the  reserve  base  as  it  contributes  to  aligning  Latvian 

reporting  requirements  with  those  of  the  Eurosystem.  Paragraph  3.2  of  the  current  Regulation 

excludes  from  the  reserve  base  deposits  with  a  fixed  maturity  of  more  than  two  years,  deposits 

redeemable at notice with a notice period of more than two years, irrevocable (irredeemable before 

maturity)  debt  securities  with  an  original  maturity  of  more  than  two  years  and  repo  transactions. 

The  draft  amendments  delete  paragraph  3.2,  thus  including  the  abovementioned  liabilities  in  the 

reserve base. The ECB notes that this is consistent with Article 3 of Regulation ECB/2003/9.  

9. 

Draft amendments also insert a new paragraph 4.2 into the Regulation enabling Latvijas Banka to 

establish a different reserve ratio for each category of liabilities included in the reserve base. This 

provision does not necessarily differ from Article 4 of Regulation ECB/2003/9 that applies a fixed 

reserve ratio of 0% to deposits with agreed maturity over two years, deposits redeemable at notice 

over two years, repos and debt securities issued with an agreed maturity over two years, and a fixed 

reserve ratio of 2% to all other liabilities. However, according to the consultation letter, the applied 

2  
3  

OJ L 318, 27.11.1998, p. 1. 
OJ L 250, 2.10.2003, p. 10. 

2 

                                                      
reserve ratio for liabilities with an original maturity of over two years would be larger than zero. 

Indeed, Latvijas Banka’s Council is authorised to set the level of required reserves as appropriate. 

The  ECB  notes  that  this  measure  does  not  contribute  to  further  bringing  into  line  the  Latvian 

reserve requirement level with that of the Eurosystem. 

10.  The  ECB  also  welcomes  the  introduction  of  a  list  of  entities  subject  to  minimum  reserve 

requirements  as  it  aligns  the  Regulation  with  Article  2  of  Regulation  ECB/2003/9.  However, 

according to Article 2 of the Regulation ECB/2003/9, all credit institutions located in the euro area 

are subject to a minimum reserve requirement, while in Latvia currently neither electronic money 

institutions  nor  credit  unions  are  covered  by  minimum  reserve  requirements.  These  differences 

between  the  Eurosystem  and  Latvia  will  need  to  be  eliminated  on  Latvia’s  accession  to  the  euro 

area, as further explained in the paragraphs below.  

11.  Article 2(1)  of  Regulation  ECB/2003/9  subjects  the  following  categories  of  institutions  to 

minimum  reserve  requirements:  (a)  credit  institutions  as  defined  in  the  first  subparagraph  of 
Article 1(1) of the Consolidated Banking Directive4, other than participating national central banks 

(NCBs);  and  (b)  branches,  as  defined  in  Article  1(3)  of  the  Consolidated  Banking  Directive,  of 

credit institutions as defined in the first subparagraph of Article 1(1) of the same Directive, other 

than  participating  NCBs.  Article  1(1)  of  the  Consolidated  Banking  Directive  defines  a  credit 

institution  as  (a)  ‘an  undertaking  whose  business  is  to  receive  deposits  or  other  repayable  funds 

from  the  public  and  to  grant  credits  for  its  own  account’;  or  (b)  an  electronic  money  institution 

within  the  meaning  of  Directive  2000/46/EC  of  the  European  Parliament  and  of  the  Council  of 

18 September  2000  on  the  taking  up,  pursuit  and  prudential  supervision  of  the  business  of 
electronic money institutions5. 

12.  Article  1  of  the  Latvian  Law  on  credit  institutions  mirrors  the  definition  of  a  credit  institution 

contained  in  Article  1(1)  of  the  Consolidated  Banking  Directive  and  covers:  (a)  banks  –  capital 

companies  whose  business  is  to  receive  deposits  or  other  repayable  funds  from  an  unrestricted 

circle of clients, to grant credits for their own account and to provide other financial services; and 

(b) electronic money institutions – capital companies that issue and service electronic money and 

that  are  not  banks.  However,  electronic  money  institutions  are  excluded  from  the  scope  of 

application of the Regulation as the Regulation outlines the procedure for calculating and fulfilling 

the  minimum  reserve  requirements  only  for  banks  and  branches  of  foreign  banks  registered  in 

Latvia.  

13.  The  ECB  notes  that  credit  unions  established  in  Latvia  are  not  subject  to  the  Law  on  credit 

institutions and that they are expressly excluded from the scope of application of the Consolidated 

4  

5  

Directive  2000/12/EC  of  the  European  Parliament  and  of  the  Council  of  20  March  2000  relating  to  the  taking  up  and 
pursuit  of  the  business  of  credit  institutions  (OJ  L  126,  26.5.2000,  p.  1),  as  last  amended  by  Directive  2004/69/EC 
(OJ L 125, 28.4.2004, p. 44). 
OJ L 275, 27.10.2000, p. 39. 

3 

                                                      
Banking  Directive  under  the  Accession  Treaty6.  However,  as  made  clear  in  ECB  Opinion 

CON/2005/8 on 1 April 2005 at the request of Lietuvos bankas on draft rules on minimum reserve 
requirements  for  credit  institutions7  the  fact  that  ‘credit  unions  are  exempt  for  prudential 

supervision purposes from the scope of application of the Consolidated Banking Directive does not 

automatically  imply  that  they  will  also  be  exempt  from  the  Eurosystem’s  reserve  requirements 

established  for  monetary  policy  purposes.  Indeed,  the  ECB  considers  that  in  order  to  apply  the 

Eurosystem’s  reserve  requirements  it  is  necessary  to  carry  out  a  material  test  as  to  whether  an 

institution fulfils the criteria laid down in the first subparagraph of Article 1(1) of the Consolidated 

Banking Directive (i.e. whether its business is to receive deposits or other repayable funds from the 

public and to grant credits for its own account).’  

14.  The exemption of Latvian credit unions from the  EU banking supervisory regime is irrelevant to 

the  application  of  Eurosystem  minimum  reserve  requirements  due  to  the  very  different  purposes 

served  by  banking  supervisory  and  minimum  reserve  requirements.  The  legal  basis  for  the 

imposition  of  minimum  reserve  requirements  contained  in  Article  19.1  of  the  ESCB  Statute 

clarifies  that  the  ECB  may  require  credit  institutions  established  in  Member  States  to  hold 

minimum reserve on accounts with the ECB and national central banks ‘in pursuance of monetary 

policy  objectives.’  The  first  key  function  of  the  minimum  reserve  system  is  to  stabilise  money 

market  interest  rates.  Its  second  important  function  is  enlargement  of  the  banking  system’s 

structural  liquidity  shortage.  The  need  for  credit  institutions  to  hold  reserves  with  central  banks 

contributes to increasing the demand for central bank refinancing which, in turn, makes it easier for 

the  ECB  to  steer  money  market  rates  through  regular  liquidity-providing  operations.  Thus,  the 

range of credit institutions that are within the ambit of minimum reserve requirements differs from 

the category of credit institutions that fall within the scope of prudential supervision. In the area of 

minimum reserve requirements the term ‘credit institution’ is clearly meant to denote all financial 

market  operators  whose  activities  are  relevant  for  the  growth  of monetary  aggregates.  Consistent 

with  this,  Regulation  ECB/2003/9  establishes  a  very  specific  exemption  regime  unrelated  to  the 

exemption  regime  under  the  Consolidated  Banking  Directive.  In  this  respect,  it  is  noted  that 

Article 5(2) of Regulation ECB/2003/9 grants to each institution an allowance of EUR 100 000 to 

be deducted from the amount of minimum reserves, subject to conditions. 

15.  Under  Article  2  of  the  Latvian  Law  on  credit  unions,  credit  unions  may  provide  a  variety  of 

financial  services  to  their  members,  including  receiving  their  deposits  and  other  repayable  funds 

and providing loans to them, as well as other appropriate activities.  

16.  Regarding the issue as to whether credit unions in Latvia receive deposits from the ‘public’ within 

the meaning of the Consolidated Banking Directive’s definition of a credit institution, the concept 

6  

7  

Technical  adaptations  to  Article  2(3)  of  the  Consolidated  Banking  Directive  under  Chapter  3  of  Annex  II  to  the 
Accession Treaty 2003.  
Paragraph 10. 

4 

                                                      
of the ‘public’ encompasses any natural or legal person other than a credit or financial institution, 

while  those  entities  that  fund  themselves  only  in  the  interbank  markets  are  excluded  from  the 

concept of the ‘public’ for this purpose. It is clear that a Latvian credit union may receive deposits 

from  the  ‘public’.  In  particular,  a  Latvian  credit  union  may  receive  deposits  from  members  that 

may include natural persons and their spouses, local governments, trade unions and other bodies. 

The fact that admission to membership of a Latvian credit union is restricted to persons sharing a 

common place of residence in the territory of the same local government or are otherwise linked to 

the specific local government (e.g. as owners of immovable property) or to persons employed by 

the  same  employer,  or  to  persons  sharing  membership  of  a  particular  organisation,  such  as  a 

professional  association,  trade  union  or  public  sports  organisation,  is  irrelevant  for  this  purpose. 

The key issue is that Latvian credit unions may receive deposits from persons other than credit or 

financial institutions. Therefore Latvian credit unions receive deposits ‘from the public’ within the 

meaning of the Consolidated Banking Directive. 

17. 

In the light of the above, the ECB considers that credit unions established in Latvia will fall under 

the  definition  of  a  credit  institution  subject  to  Eurosystem  minimum  reserve  requirements  within 

the  meaning  of  Regulation  ECB/2003/9  on  the  introduction  of  the  euro.  It  is  also  noted  that 

subjecting the electronic money institutions and credit unions to the Eurosystem minimum reserve 

requirement should not present practical difficulties from a statistical perspective as both types of 

institutions  are  already  included  in  the  list  of  monetary  and  financial  institutions  produced  by 

Latvijas Banka. 

18.  Finally, the ECB may consider introducing certain transitional arrangements for the application of 
the Eurosystem’s minimum reserve system on the introduction of the euro in Latvia8. This would 

involve a transitional maintenance period for credit institutions located in Latvia.  

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

Done at Frankfurt am Main, 23 February 2006. 

[signed] 

The President of the ECB 

Jean-Claude TRICHET 

8  

As in the case of Regulation ECB/2000/11 of 2 November 2000 concerning transitional provisions for the application of 
minimum reserves by the European Central Bank following the introduction of the euro in Greece (OJ L 291, 18.11.2000, 
p. 28) and as stated in Opinions CON/2005/35 and CON/2005/8. 

5