Opinion of the European Central Bank of 10 September 2008 at the request of the Banque centrale du Luxembourg on amendments to the draft law improving the legislative framework for Luxembourg as a financial centre and amending the Law of 23 December 1998 on monetary status and on the Banque centrale du Luxembourg (CON/2008/42)
Date: 2008-09-10
Institutions: European Central Bank
Subjects: Luxembourg, financial stability, financial supervision, foreign-exchange reserves, monetary policy, national law

EN 

OPINION OF THE EUROPEAN CENTRAL BANK 

of 10 September 2008 

at the request of the Banque centrale du Luxembourg 

on amendments to the draft law improving the legislative framework for Luxembourg as a 

financial centre and amending the Law of 23 December 1998 on monetary status and on the 

Banque centrale du Luxembourg 

(CON/2008/42) 

Introduction and legal basis 

On  24  July  2008  the  European  Central  Bank  (ECB)  received  a  request  from  the  Governor  of  the 

Banque  Central  du  Luxembourg  (BCL)  for  an  opinion  on  amendments  (hereinafter  the  ‘draft 

amendments’) proposed by the Government to the draft law (hereinafter the ‘draft law’) improving the 

legislative  framework  for  Luxembourg  as  a  financial  centre  and  amending  the  provisions  on  covered 

bonds  in  the  Law  of  5  April  1993  on  the  financial  sector,  the  Law  of  15  June  2004  on  the  company 

investing in risk capital, the Law of 23 December 1998 creating a commission in charge of prudential 

supervision  of  the  financial  sector  and  the  Law  of  23  December  1998  on  monetary  status  and  on  the 

Banque centrale du Luxembourg (hereinafter the ‘BCL Law’).  

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

European Community and 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 relates to the BCL and rules applicable to financial institutions 

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

1.1  The ECB commented on the draft law in its Opinion CON/2008/172. The draft amendments take 

into  account  some  of  the  ECB’s  comments  and  introduce  certain  new  elements  aimed  at 

reinforcing  the  framework  for  financial  supervision  and  clarifying  issues  related  to  financial 

stability.  

1  
2  

OJ L 189, 3.7.1998, p. 42.  
ECB  Opinion  CON/2008/17  of  15  April  2008  at  the  request  of  the  Luxembourg  Minister  for  the  Treasury  and  the 
Budget on a draft law improving the legislative framework for Luxembourg as a financial centre and on a draft law 
relating to social insurance contributions.  

 
 
 
 
                                                 
1.2  The draft law introduces, inter alia, the following amendments to the BCL Law: 

(i) 

it  clarifies  the  method  to  be  used  by  the  BCL  to  implement  the  minimum  reserve 

requirements;  

(ii) 

to  reinforce  financial  stability,  the  draft  law:  (a)  sets  out  that  the  BCL  will  supervise  the 

general  liquidity  situation  on  the  markets  as  well  as  evaluate  market  operators  for  this 

purpose; (b) establishes that the BCL will cooperate at the national and international level 

with a view to ensuring financial stability; and (c) assigns to the BCL the power to grant, 

in exceptional circumstances, short-term liquidity assistance to its counterparts, also on the 

basis of a State guarantee provided to the BCL; 

(iii) 

it provides the legal basis for the BCL’s participation in public institutions, undertakings or 

public or private associations.  

2. 

General observations 

A  number  of  the  draft  amendments  are  proposed  in  response  to  recommendations  made  by  the 

ECB  in  Opinion  CON/2008/17,  in  particular  those  relating  to  minimum  reserve  requirements. 

However,  a  number  of  the  ECB’s  recommendations,  in  particular  with  respect  to  the  BCL’s 
regulatory  powers3,  have  not  yet  been  taken  into  account.  Therefore,  the  ECB  would  like  to 

reiterate the comments made in Opinion CON/2008/17 and also presents a number of new issues 

raised  by  the  draft  amendments.  This  opinion  concentrates  on  the  aspects  of  the  draft  law 

concerning the BCL and its powers.  

3.  Minimum reserve requirements  

3.1  Under the proposed amendments, Article 23 of the BCL Law will provide that ‘the Central Bank 

shall be the depository for amounts that credit institutions are obliged to maintain by monetary 

control measures based on Article 19 of the Statute of the European System of Central Banks and 

of the European Central Bank’ (hereinafter the ‘ESCB Statute’).  

3.2  The  ECB  welcomes  that  the  scope  of  application  of  this  provision  has  been  restricted  ratione 

personae, i.e. to individual credit institutions, instead of to ‘professionals of the financial sector’ 

and  ratione  materiae  with  an  exclusive  reference  to  Article  19  of  the  ESCB  Statute,  as 

recommended  in  Opinion  CON/2008/17.  This  national  provision  is  without  prejudice  to  the 

direct  application  of  Article  19.1  of  the  ESCB  Statute,  Article  2  of  Regulation  ECB/2003/9  of 
12 December 2003 on the application of minimum reserves4 and Article 2 of Council Regulation 

(EC) No 2531/98 of 23 November 1998 concerning the application of minimum reserves by the 
European Central Bank5.  

4. 

The BCL’s financial stability function 

4.1  The ECB notes that under the draft amendments, certain new provisions will be included in the 

BCL Law, under which the BCL will be assigned specific competences in the area of financial 

3  
4  
5  

See paragraphs 4.1 to 4.5 of Opinion CON/2008/17. 
OJ L 250, 2.10.2003, p. 10. 
OJ L 318, 27.11.1998, p. 1. 

2 

                                                 
stability,  and  in  particular  it  will  have  the  power  to  supervise  liquidity  management  in  the 

markets,  engage  in  institutional  cooperation  and  provide  emergency  liquidity  assistance  to  the 

BCL’s  counterparts.  The  assignment  of  such  new  competences  is  welcome,  as  it  will  facilitate 

the  BCL’s  effective  performance  of  its  financial  stability  role.  In  order  to  assist  the  BCL  in 

fulfilling this new role, the ECB would like to make the following points. 

Adaptations of the BCL Law in order to strengthen the BCL’s financial stability role  

4.2 

It  is  important  to  stress  the  strong  interdependencies  between  the  BCL’s  new  and  current 

competences.  As  highlighted  in  the  explanatory  memorandum,  it  is  important  to  supervise 

liquidity given the BCL’s role in the provision of liquidity in both normal and crisis situations. In 

practice,  to  properly  discharge  its  new  competences,  the  BCL  should  be  able  to  leverage  its 
existing  powers,  both  regulatory6  and  statistical.  However,  the  draft  amendments  falls  short  of 

acknowledging  an  explicit  and  formal  financial  stability  task  for  the  BCL,  encompassing  the 

broad  range  of  central  bank  contributions  to  financial  stability  by  monitoring,  assessing  and 

effectively  supporting,  by  means  of  emergency  liquidity  assistance,  the  financial  system  in 

Luxembourg.  Therefore,  the  ECB  recommends  that  Article  2(5)  of  the  BCL  Law  should  be 

amended  to  expressly  list  all  the  BCL’s  tasks,  including  the  task  of  contributing  to  financial 
stability7. This would allow the BCL to collect statistical information in the context of financial 

stability. In this latter respect, as the institutional structure of financial corporations is becoming 

increasingly  complex,  the  scope  of  information  and  data  extends  to  the  financial  corporations 

sector  as  a  whole,  which  includes  credit  institutions,  insurance  companies  and  special  purpose 

vehicles  for  securitisation  activities.  The  ECB  wishes  nevertheless  to  stress,  in  line  with  its 
previous opinions8, that information collection and sharing in the area of financial stability should 

be  consistent  with  Community  law  regulating  the  exchange  of  supervisory  and  statistical 
information  and  professional  secrecy9,  as  well  as  with  the  BCL  Law.  In  this  regard,  the  ECB 

would like to remind the consulting authority of its recommendations in Opinion CON/2008/17 

that regulatory powers include the enforcement of ECB legal acts, particularly in the collection, 

compilation and reporting of statistical data. 

6  
7 

8 
9 

See in particular paragraph 4 of Opinion CON/2008/17.  
See paragraph 7 of ECB Opinion CON/2001/10 of 25 May 2001 at the request of the Austrian Ministry of Finance on 
a  draft  Federal  law  establishing  and  organising  the  financial  market  supervisory  authority  [title  shortened]; 
paragraph 2.2. of ECB Opinion CON/2008/39 of 1 September 2008 at the request of the Polish Minister for Finance 
on a draft law on the Financial Stability Committee. 
See paragraph 3.2 of Opinion CON/2008/39. 
In  particular,  Articles  44  to  52  of  Directive  2006/48/EC  of  the  European  Parliament  and  of  the  Council  of  14  June 
2006  relating to  the taking  up and  pursuit  of  the  business  of  credit  institutions  (recast)  (OJ L 177,  30.6.2006,  p.  1); 
Article 13 of Council Regulation (EC) No 322/97 of 17 February 1997 on Community Statistics (OJ L 52, 22.2.1997, 
p. 1); Article 8 of Council Regulation (EC) No 2533/98 of 23 November 1998 concerning the collection of statistical 
information  by  the  European  Central  Bank  (OJ  L  318,  27.11.1998,  p.  8);  and  Article  3  of  Council  Regulation 
(Euratom, EEC)  No  1588/90  of  11  June  1990 on the  transmission of data  subject to  statistical confidentiality  to the 
Statistical  Office  of  the  European  Communities  (OJ  L  151,  15.6.1990,  p.  1);  Guideline  ECB/1998/NP28  of 
22 December  1998  concerning  the  common  rules  and  minimum  standards  to  protect  the  confidentiality  of  the 
individual  statistical  information  collected  by  the  European  Central  Bank  assisted  by  the  national  central  banks 
(OJ L 55, 24.2.2001, p. 72). 

3 

                                                 
Central bank supervision of liquidity management  

4.3  Under the draft amendments, the BCL will be responsible for ‘supervising the general liquidity 

situation  on  the  markets  as  well  as  evaluating  market  operators  for  this  purpose’.  The  draft 

amendments refer to a ‘coordination and cooperation procedure’ for performing this task, subject 

to agreements between the BCL and the Commission de surveillance du secteur financier (CSSF, 

Commission  for  the  supervision  of  the  financial  sector)  and  the  Commissariat  aux  assurances 
(Commision for insurance), which will be in accordance with the parties’ legal powers10. 

In  general,  the  ECB  has  consistently  favoured  the  involvement  of  central  banks  in  prudential 

supervision to support the Eurosystem’s task of contributing to the adequate monitoring of risks 

to financial stability in the euro area. This is of particular importance in a context in which the 

nature  and  scope  of  these  risks  are  affected  by  the  introduction  of  the  euro  and  the  enhanced 

integration  of  financial  markets.  In  this  respect,  adequate  access  of  central  banks  to  prudential 

information  and  cooperation  between  financial  supervisory  authorities  and  central  banks  are 

essential.  Furthermore,  the  recent  market  turmoil  has  confirmed  the  importance  of  liquidity 

supervision  over  financial  institutions  and,  in  particular,  the  central  banks’  interest  in  banks’ 

liquidity risk management.  

4.4  As emphasised by work in progress at EU level, central banks have to place a strong emphasis on 

the prevention of systemic liquidity crises, as in general, they rely on open market operations to 

implement their monetary policy decisions and to distribute liquidity to the financial system and 

thereby to the real economy. Banks’ liquidity risk management is an important issue for central 

banks  because  liquidity  shocks  at  one  bank  can  have  knock-on  effects  and  could  disrupt  the 

efficiency and stability of the money market in three ways. First, due to asymmetric information, 

a  liquidity  crisis  at  one  bank  can  lead  to  increasing  uncertainty  in  the  wholesale  and  retail 

markets with respect to the liquidity situation of other banks, which in severe cases could lead to 

a drying-up of money market liquidity and/or to a bank run. In less severe cases, it could raise 

refinancing costs for other banks and increase uncertainty with respect to future cash-flows and 

market  conditions,  which  would  exacerbate  liquidity  management.  Second,  the  large  and 

increasing  share  of  interbank  exposures  and  money  market  instruments  in  banks’  funding  can 

cause  a  knock-on  effect,  as  liquidity  problems  at  one  bank  directly  translate  into  increasing 

liquidity  pressure  (e.g.  due  to  reductions  in  cash-inflows  and  unexpected  refinancing 

requirements)  on  its  interbank  counterparties.  Third,  asset  fire  sales  can  lead  to  a  market 

meltdown under certain circumstances, which in turn decreases the counterbalancing capacity of 

all banks and consequently, their liquidity risk-bearing capacity. In the potential emergence of a 

liquidity crisis, central banks need to assess the scale of the liquidity problem and the potential 

systemic  implications  of  liquidity  stress.  In  order  to  make  informed  judgements,  they  need 

reliable, comparable and comprehensive information in a timely manner.  

10  

See proposed Article 2(4) of the BCL Law. 

4 

                                                 
4.5  Against  this  background,  the  ECB  welcomes  the  attribution  to  the  BCL  of  specific  liquidity 

management competences. Moreover, the ECB notes that the draft law should clarify the powers 

assigned  to  the  BCL  in  order  to  fulfil  the  new  competences,  such  as  the  possibility  to  collect 

information from supervised entities and to perform on-site inspections. The ECB underlines that 

it  will  be  very  important  that the  cooperation  procedure,  which according  to the  BCL Law  will 

have to be agreed by the BCL and national supervisory authorities, be carefully designed to allow 

the  efficient  performance  by  each  authority  of  its  own  responsibilities,  without  unnecessarily 

increasing the administrative burden imposed on financial operators.  

4.6  The  ECB  also  recommends  including  a  provision  in  the  BCL  Law  setting  out  the  principles 

according  to  which  costs  related  to  supervisory  tasks  will  be  covered,  without  prejudice  to  the 

principle of financial independence.  

Clarification of the BCL’s institutional framework  

4.7  The proposed Article 2(5) of the BCL Law states that ‘in view of its tasks relating to monetary 

policy  and  to  the  promotion  of  the  smooth  functioning  of  payment  systems,  as  well  as 

contributing  to  the  good  management  of  policies  implemented  by  authorities  concerning 

prudential supervision of credit institutions and the financial system’s stability, while respecting 

its  independence  and  the  parties’  legal  powers,  the  Bank  shall  cooperate  with  the  Government 

and with prudential supervision authorities at national level, as well as with other central banks at 

the Community and international level to contribute to ensuring financial stability, in particular 
within committees set up for this purpose’11. As set out in the explanatory memorandum12, this 

provision is aimed at implementing the ‘Memorandum of Understanding on cooperation between 

the financial supervisory authorities, central banks and finance ministries of the European Union 
on cross-border financial stability’ of 1 June 2008 (hereinafter the ‘MoU’)13.  

4.8  As regards cooperation under the proposed Article 2(5) of the BCL Law, the ECB understands 

that the Government intentionally repeats the relevant Treaty provision in order to underline the 

importance  of  cooperation  between  all  authorities  involved  at  the  national,  Community  and 
international  level,  in  order  to  avoid  a  financial  crisis  endangering  financial  system  stability14. 

However,  when  considering  this  provision  in  the  broader  context  of  Article  2  of  the  BCL  Law 

(‘tasks and legal status of the BCL’), there is an imbalance between proposed Article 2(5) of the 

BCL Law, which lists all of the BCL’s tasks (including its contribution to financial stability) and 

Article  2(2)  of  the  BCL  Law,  which  simply  states  that  ‘the  main  task  of  the  BCL  shall  be  to 

participate in the execution of the tasks of the ESCB with a view to achieving its objectives’. In 

addition,  restricting  national,  Community  and  international  cooperation  to  financial  stability 

issues  is  inaccurate,  given  that  such  cooperation  is  relevant  to  all  ESCB  tasks.  For  the  sake  of 

clarity,  the  BCL’s  tasks,  including  contributing  to  financial  stability  as  set  out  in  this  opinion, 

11  
12  
13  
14  

See proposed Article 2(5) of the BCL Law. 
See paragraph 2 of the explanatory memorandum. 
The text of the MoU is available on the ECB’s website at www.ecb.europa.eu. 
See page 4 of the explanatory memorandum.  

5 

                                                 
should be listed in Article 2(2) of the BCL Law. As to proposed Article 2(5) of the BCL Law, for 

the sake of accuracy, a distinction should be drawn between domestic cooperation, which could 

focus on financial stability, in respect of the parties’s respective legal powers and independence 

and Community  and  international  cooperation, which  would  encompass  all of the  BCL’s  tasks, 

including contributing to financial stability. 

Provision of emergency liquidity assistance 

4.9  The proposed Article 27-2 of the BCL Law provides that ‘The Central Bank may in exceptional 

circumstances grant short-term loans to its counterparties while respecting its independence and 

the  provisions  prohibiting  monetary  financing.  It  shall  grant  loans  on  the  basis  of  adequate 

collateral which may consist of a State guarantee under the conditions previously agreed between 

the  State  and  the  Central  Bank.  The  Central  Bank’s  privilege  in  Article  27-1(1)  shall  apply  to 
these loans’15.  

4.10  As regards the provision of emergency liquidity assistance, while it has no objection to support 

given by central banks in exceptional circumstances and on a case-by-case basis to temporarily 
illiquid  credit  institutions16,  it  is  the  ECB’s  view  that  ‘national  legislation  foreseeing  the 

financing  by  NCBs  of  credit  institutions  other  than  in  connection  with  central  banking  tasks 

(such  as  monetary  policy,  payment  systems  or  temporary  liquidity  support  operations),  in 

particular to support insolvent credit and/or other financial institutions, is incompatible with the 
monetary financing prohibition’17.  

4.11  In view of the above, the ECB strongly welcomes the draft law, which establishes the legal basis 

for the possible extension of emergency liquidity assistance by the BCL in the form of short-term 

loans  extended  to  its  counterparts,  while  at  the  same  time  providing  for  appropriate  legal 

safeguards of central bank independence and compliance with the monetary financing prohibition 
under Article 101 of the Treaty18. As regards this latter aspect, the ECB notes that the concrete 

formulation of certain elements of the draft provision needs to be clarified so that full compliance 

of  the  proposed  Article  27-2  of  the  BCL  Law  with  the  monetary  financing  prohibition  is 

achieved. First, instead of a general reference to the concept of monetary financing, the proposed 

provision  should  be  drafted  more  precisely  to  refer  explicitly  to  the  prohibition  on  monetary 
financing  as  defined  by  Community  law  or  directly  to  Article  101  of  the  Treaty19.  Second,  the 

part of the proposed provision allowing for State guarantees to be used as collateral in connection 

with  emergency  liquidity  assistance  should  be  complemented  by  the  requirement  that  the 

supported credit institution remains solvent. Third, the proposed provision should unequivocally 

15  
16  

17  

18  
19  

See proposed Article 27-2. 
See the ECB’s 1999 Annual Report, p. 99 and the ECB’s December 2006 Financial Stability Review, p. 17 available 
on the ECB’s website at www.ecb.europa.eu. 
See the ECB’s May 2006 Convergence Report, p. 68; the December 2006 Convergence Report, p. 30; the May 2007 
Convergence Report, p. 22 and the May 2008 Convergence Report, p. 24, which are available on the ECB’s website at 
www.ecb.europa.eu. 
See paragraph 4 of the explanatory memorandum. 
See  p.  240  of  the  ECB’s  May  2008  Convergence  Report  on  Article  14  of  the  Law  LVIII  of  2001  on  the  Magyar 
Nemzeti Bank. 

6 

                                                 
ensure  the  independence  of  the  BCL  in  deciding  on  the  extension  of  emergency  liquidity 

assistance.  To  this  end,  when  referring  to  the  BCL’s  independence,  the  proposed  provision 

should  stipulate  that  the  same  scope  of  independence  is  assigned  to  the  BCL  as  regards  the 

extension  of  emergency  liquidity  assistance  as  is  available  under  Article  5(2)  of  the  BCL  Law 
with respect to the performance by the BCL of its ESCB-related tasks20. The ECB considers, in 

particular,  that  ensuring  the  full  independence  of  the  BCL  in  deciding  on  the  extension  of 

emergency  liquidity  assistance  will  establish  appropriate  conditions  for  the  possible  acceptance 

by  the  BCL  of  a  State  guarantee  in  connection  with  such  extended  emergency  liquidity 

assistance.  In  deciding  whether  a  State  guarantee  may  be  accepted,  the  central  bank  should,  in 

particular,  assess  whether  the  guarantee  is  economically  adequate  for  emergency  liquidity 

assistance purposes as well as legally valid and enforceable under national law. 

5. 

Central  bank  participation  in  public  institutions,  undertakings  or  public  or  private 

associations  

5.1  Under  the  proposed  Article  26-1  of  the  BCL  Law,  ‘the  Central  Bank  may  take  and  dispose  of 
participation  in  public  institutions,  undertakings  or  public  or  private  associations21.  The 

explanatory  memorandum  states  that  this  amendment  provides  the  legal  basis  for  the  BCL’s 

participation  in  external  organisations.  The  explanatory  memorandum  notes  in  this  context  that 

the  BCL  currently  participates 

in 

the  Society 

for  Worldwide 

Interbank  Financial 

Telecommunication  (SWIFT),  the  Groupement  d’intérêt  économique  pour  la  promotion  et  la 

gestion  des  systèmes  de  paiement  au  Luxembourg  (SYPAL-Gie)  and  the  Financial  Technology 
Transfer Agency (ATTF) and may participate in future Eurosystem activities22.  

5.2  The  ECB  notes  with  interest  the  abovementioned  provision  as  an  element  which  could  further 

facilitate  the  evolution  of  the  financial  market  infrastructure  in  Luxembourg,  its  integration 

within the European environment and further market harmonisation.  

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

Done at Frankfurt am Main, 10 September 2008. 

[signed] 

The President of the ECB 

Jean-Claude TRICHET 

20  

21  
22  

Alternatively  a  reference  to  the  same  level  of  independence  as  provided  for  in  Article  108  of  the  Treaty  could  be 
considered. 
See Article 26-1 of the BCL Law, as introduced by the Article V(6) of the draft law. 
See paragraph 3 of the explanatory memorandum. 

7