Opinion of the European Central Bank 14 December 2006 at the request of Eesti Pank on a draft decree establishing a procedure to calculate and comply with reserve requirements (CON/2006/59)
Date: 2006-12-14
Institutions: European Central Bank
Subjects: Estonia, Eurosystem, credit institution, credit rating, economic convergence, euro, financial stability, interest, monetary policy, mortgage

EN 

OPINION OF THE EUROPEAN CENTRAL BANK 

14 December 2006  

at the request of Eesti Pank 

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

(CON/2006/59) 

Introduction and legal basis 

On  27  November  2006  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 

(hereinafter the ‘draft decree’). 

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

European  Community  and  Article 2(2)  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 decree relates to 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 decree 

The purpose of the draft decree is to achieve greater convergence with the Basel II framework. The draft 

decree  mainly  amends  the  basis  for  calculating  the  reserve  requirement  by  means  of  excluding  the 

residential  mortgage  loan  portfolio,  hence  returning  to  a  purely  liability-based  reserve  requirement 

calculation.  In  addition,  a  number  of  technical  changes  are  introduced  to  the  framework  including  an 

adjustment  of  the  penalty  rate,  the  abolition  of  the  daily  minimum  level  requirement  on  settlement 

accounts,  and  changes  to  the  contractual  relationship  between  Eesti  Pank  and  credit  institutions.  It  is 

envisaged that the draft decree will enter into force on 1 January 2007.  

2. 

General observations 

2.1   The  ECB  has  already  analysed  the  Estonian  minimum  reserve  system  in  Opinion  CON/2006/32, 

where  it  emphasised  the  fact  that  differences  between  the  Estonian  and  Eurosystem’s  minimum 

reserve systems would need to be eliminated on adoption of the euro by Estonia. In this context, the 

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2 

OJ L 189, 3.7.1998, p. 42.  
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. 

 
 
 
 
 
                                                 
ECB welcomes the proposed exclusion of the residential mortgage loan portfolio from the basis for 

calculating the reserve requirement, which brings the Estonian minimum reserve system closer to 
that of the Eurosystem3. 

2.2  The ECB also welcomes the abolition of the daily minimum level requirement of 40 % on credit 

institutions’ settlement accounts with Eesti Pank, which further harmonises the Estonian minimum 

reserve system with that of the Eurosystem. 

2.3  The ECB takes note of the change in the penalty rate which brings the Estonian penalty rate closer 

to the Eurosystem framework by making the rate dependent on a policy rate rather than applying a 

fixed rate (currently a 20 % annual rate is applied). Nevertheless, the ECB would like to draw Eesti 

Pank’s attention to the fact that Eesti Pank’s penalty rate is linked to the minimum bid rate of the 

Eurosystem’s  main  refinancing  operations,  whereas  the  Eurosystem  applies  a  rate  linked  to  the 
marginal lending rate. Under the Eurosystem framework4 a payment of up to 5 percentage points 

above the marginal lending rate can be applied to the amount of the reserve requirement which the 

relevant institution failed to provide. Depending on the severity of the infringement the Eurosystem 

may also impose higher penalties, such as a payment of up to twice the  marginal lending rate or 

require  the  relevant  institution  to  establish  a  non-interest-bearing  deposit  with  the  ECB  or  the 

national central banks of up to three times the amount of the reserve requirement which the relevant 

institution failed to provide.  

2.4  Moreover, as already noted in Opinion CON/2006/35, Article 1 of Appendix 1 to the draft decree 

establishing  a  procedure  to  calculate  and  comply  with  reserve  requirements  does  not  list  all  EU 

Member States. Furthermore, under Article 2 of Appendix 1, a liquidity portfolio may contain only 

such debt securities that meet the criteria specified in the subsections of Article 2. In that context, 

the  draft  decree  treats  the  debt  issue  in  euro  of  the  euro  area  Member  States’  Governments 

differently from those of other EU Member States’ Governments in terms of the required minimum 

credit rating. 

2.5   However, there are still significant differences between the Estonian minimum reserve system and 

that of the Eurosystem, which mainly derive from the different functions assigned to each of them. 

These differences from the legal framework under which the Eurosystem operates will have to be 

eliminated on adoption of the euro by Estonia. 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 of the European Central Bank; (ii) Regulation (EC) No 2531/98; (iii) Regulation 
ECB/2003/9 of 12 September 2003 on the application of minimum reserves6; and (iv) in relation to 

the definition and calculation of the reserve base, Regulation ECB/2001/13 of 22 November 2001 

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5 
6  

The ECB understands that Appendix 4 to the draft decree will also be amended accordingly. 
Article  7(1)  of  Council  Regulation  (EC)  No  2531/98  of  23  November  1998  concerning  the  application  of  minimum 
reserves  by  the  European  Central  Bank  (OJ  L  318,  27.11.1998,  p.  1).  Regulation  as  amended  by  Regulation  (EC) 
No 134/2002 (OJ L 26, 26.1.2002, p. 1). 
See paragraph 10 of Opinion CON/2006/3. 
OJ L 250, 2.10.2003, p. 10.  

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concerning  the  consolidated  balance  sheet  of  the  monetary  financial  institutions  sector7.  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.  

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

Done at Frankfurt am Main, 14 December 2006. 

[signed] 

The President of the ECB 

Jean-Claude TRICHET 

7  

OJ L 333, 17.12.2001, p. 1. Regulation as last amended by Regulation ECB/2004/21 (OJ L 371, 18.12.2004, p. 42). 

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