Opinion of the European Central Bank of 31 May 2006 at the request of the Latvian Financial and Capital Market Commission on draft amendments to the Regulation on compliance with liquidity requirements (CON/2006/26)
Date: 2006-05-31
Institutions: European Central Bank
Subjects: Latvia, financial stability, monetary policy, money-market liquidity, national law

EN 

OPINION OF THE EUROPEAN CENTRAL BANK 

of 31 May 2006 

at the request of the Latvian Financial and Capital Market Commission  

on draft amendments to the Regulation on compliance with liquidity requirements 

(CON/2006/26) 

Introduction and legal basis 

On 27 April 2006 the European Central Bank (ECB) received a request from the Latvian Financial and 

Capital Market Commission for an opinion on draft amendments to the Regulation on compliance with 

liquidity  requirements  (hereinafter  the  ‘draft  amendments’).  The  Latvian  Financial  and  Capital  Market 

Commission is the national authority that will adopt the draft amendments. 

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  Central  Bank  by  national  authorities  regarding  draft 
legislative provisions1, as the draft amendments relate to 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. 

1.   Purpose of the draft law 

The main objective of the draft amendments is to increase the short-term liquidity of the banking system 

by both increasing the minimum liquidity ratio and amending the formula for its calculation.  

The draft amendments provide for an increase in the liquidity ratio from 30 % to 50 % of the total current 

liabilities  of  the  bank.  The  draft  amendments  also  adjust  the  basis  for  calculating  the  liquidity  ratio  by 

including only the surplus of claims on monetary financial institutions (MFIs) with a residual maturity of 

less than 30 days over current liabilities to MFIs with a residual maturity of less than 30 days. 

1  

OJ L 189, 3.7.1998, p. 42. 

 
 
 
 
 
                                                      
2. 

General observations  

2.1  According to the consultation letter from the Latvian Financial and Capital Market Commission to 

the  ECB,  the  draft  amendments  are  designed  as  a  precautionary  measure  to  maintain  financial 

stability  and  the  intention  is  not  to  address  concerns  about  the  financial  standing  of  individual 

credit institutions. The ECB understands from the explanatory note to the draft amendments that, 

although  at  present  the  indicators  of  financial  strength  and  asset  quality  of  the  Latvian  banking 

sector  are  satisfactory,  existing  macroeconomic  risks  require  a  slowdown  in  lending  rates.  The 

explanatory note states that the rapid growth in lending rates has been one of the essential factors 

driving domestic demand, thus increasingly affecting both inflation and the current account deficit. 

Furthermore, rapid lending growth has increased maturity imbalances between the banking sector’s 

assets and liabilities, thus increasing the liquidity risk. The explanatory note goes on to state that in 

view  of  the  above,  a  set  of  measures  for  risk  mitigation  has  been  considered,  incorporating  both 

monetary measures and those measures at the disposal of the banking supervisor. 

2.2  The ECB notes that, according to the above explanation, the envisaged change in the supervisory 

regime  for  liquidity  is  not  meant  to  serve  prudential  purposes  but  rather  macroeconomic  ones, 

notably to overcome the difficulty in countering excessive credit growth in a country with a peg to 

the euro. The ECB would emphasise that the use of supervisory tools such as the liquidity ratio for 

macroeconomic purposes is not an uncommon practice in Member States. There have been similar 

cases where specific circumstances have determined the purpose of supervisory tools, in particular 
to address the potential risks related to strong credit growth (e.g. in Estonia2).  

2.3 

In  that  respect,  the  ECB  assumes  that  the  relevant  national  authorities  –  in  considering  the 

effectiveness of the envisaged measure – have given due consideration to all relevant implications, 

including the possible structural and competitive effects of the fact that the measure will not apply 

to foreign branches. 

2.4   The  ECB  understands  that,  while  the  consulting  authority  is  the  Latvian  Financial  and  Capital 

Market Commission, the initiative to propose draft amendments to the Regulation on compliance 

with liquidity requirements originated with Latvijas Banka. In this context, the ECB would like to 

recall that the objectives of the legislation are of a financial stability – and not monetary policy – 

nature.  Any  measures  involving  monetary  policy  instruments  should  fall  under  the  authority  of 

Latvijas Banka.  

2  

ECB Opinion CON/2006/3 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.  

2 

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

Done at Frankfurt am Main, 31 May 2006. 

[signed] 

The President of the ECB 

Jean-Claude TRICHET 

3