Opinion of the European Central Bank of 19 December 2008 at the request of Latvijas Banka on draft amendments to the Regulation on the use of Latvijas Banka’s monetary policy instruments (CON/2008/89)
Date: 2008-12-19
Institutions: European Central Bank
Subjects: Eurosystem, Latvia, central bank, financial stability, intra-EU payment, monetary policy, risk management

EN 

OPINION OF THE EUROPEAN CENTRAL BANK 

of 19 December 2008 

at the request of Latvijas Banka 

on draft amendments to the Regulation on the use of Latvijas Banka’s monetary policy 

instruments 

(CON/2008/89) 

Introduction and legal basis 

On 8 December 2008 the European Central Bank (ECB) received a request from Latvijas Banka for an 

opinion  on  draft  amendments  to  the  Regulation  on  the  use  of  Latvijas  Banka’s  monetary  policy 

instruments (hereinafter 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 fifth indent of Article 2(1) 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 amendments relate to payment and settlement systems and 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 amendments 

The main objective of the draft amendments is to amend Latvijas Banka’s rules on eligible collateral in 

order to comply with Guideline ECB/2007/2 of 26 April 2007 on a Trans-European Automated Real-time 
Gross  settlement  Express  Transfer  system  (TARGET2)2  in  relation  to  Latvijas  Banka’s  intraday  credit 

operations in euro. Under the draft amendments, Latvijas Banka’s risk control measures are amended to 

further harmonise Latvijas Banka’s monetary policy operational framework with that of the Eurosystem. 

In  addition,  the  draft  amendments  correct  the  deviant  spelling  of  the  name  of  the  single  currency  in 

Latvian throughout the text of the Regulation on the use of Latvijas Banka’s monetary policy instruments 

(hereinafter  the  ‘Regulation’).  Finally,  due  to  the  financial  turmoil  and  the  downgrading  of  Latvia’s 

sovereign issuer rating, Latvijas Banka intends to lower the minimum issuer and issue rating requirements 

for eligible securities in its credit operations. 

1  
2  

OJ L 189, 3.7.1998, p. 42.  
OJ L 237, 8.9.2007, p. 1. 

 
 
 
 
 
                                                 
2. 

General observations 

2.1  Although non-participating Member States retain their powers in the field of monetary policy, it is 

nevertheless  beneficial  for  them  to  gradually  achieve  consistency  with  Eurosystem  standards  so 

that  credit  institutions  operating  in  their  territories  can  become  acquainted  with  the  requirements 

that will apply once these Member States have adopted the euro. Such gradual harmonisation prior 

to  the  adoption  of  the  euro  will  contribute  to  the  smooth  integration  of  the  national  central  bank 

into  the  Eurosystem.  Accordingly,  the draft  amendments  further  align  the  Latvian  framework  for 

the use of monetary policy instruments with that of the Eurosystem.  

2.2  The ECB previously commented on the Regulation and other regulations in the field of monetary 
policy  instruments3.  In  its  opinions,  the  ECB  emphasises  the  need  to  further  align  the  Latvian 

minimum  reserves  regime  with  Eurosystem  standards  and  makes  the  point  that  Latvian  credit 

unions should also be subject to reserve requirements. The ECB notes that all comments previously 

made on the Latvian minimum reserves regime still remain valid. 

2.3  The ECB welcomes the draft amendments to Latvijas Banka’s rules on eligible collateral aimed at 

implementing  Guideline  ECB/2007/2.  This  opinion  is,  however,  without  prejudice  to  any  future 

ECB assessment of the implementation of Guideline ECB/2007/2 by Latvijas Banka. 

3. 

Specific observations 

3.1 

Spelling of the single currency 

The ECB welcomes that paragraph 1.2 of the draft amendments eliminates the discrepancy between 

the  name  of  the  single  currency  in  Latvian  in  the  Regulation  (‘eiro’)  and  the  name  of  the  single 

currency in Latvian as established under Community law (‘euro’). 

3.2  Definition of ‘related undertakings’ 

Paragraph 1.1 of the draft amendments defines ‘related undertaking’ as (i) a company in which a 

counterparty, either directly or indirectly, owns 20 % or  more of its total capital; (ii) a company, 

which,  either  directly  or  indirectly,  owns  20 %  or  more  of  the  total  capital  of  a  counterparty;  or 

(iii) a company, in which the company mentioned [in item ii above], either directly or indirectly, 

owns 20 % or more of its total capital. Although the definition does not literally mirror the ‘close 

link’  definition  contained  in  Guideline  ECB/2000/7  of  31  August  2000  on  monetary  policy 
instruments and procedures of the Eurosystem4, it is essentially consistent with ECB requirements. 

3  

4  

See ECB Opinion CON/2006/49 of 23 October 2006 at the request of Latvijas Banka on a draft regulation for the use of 
Latvijas  Banka’s  monetary  policy  instruments  and  ECB  Opinion  CON/2007/12  of  30  April  2007  at  the  request  of 
Latvijas Banka on draft amendments to the Regulation on the use of Latvijas Banka’s monetary policy instruments and 
the  Regulation  on  Latvijas  Banka’s  securities  settlement  system.  See  also  ECB  Opinion  CON/2006/11  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. 
OJ L 310, 11.12.2000, p. 1. 

2 

 
                                                 
3.3  Prohibition of the use of subordinated debt 

Paragraph 1.9 of the draft amendments contains a new provision concerning the prohibition of the 

use of subordinated debt as collateral and states that, as regards eligible securities, rights to receive 

their principal and interest payments cannot be subordinated to the rights of other debt securities 

holders of the same issuer. This provision is in line with Guideline ECB/2000/7. It should be noted 

that  the  ECB  has  recently  taken  steps  to  further  expand,  on  a  temporary  basis,  the  collateral 

framework  and  enhance  the  provision  of  liquidity.  The  Eurosystem  will  add  subordinated  debt 

instruments  when  they  are  protected  by  an  acceptable  guarantee  to  the  list  of  assets  eligible  as 

collateral in its credit operations. This provision will remain in force until the end of 2009. 

3.4  Lowering the rating requirements 

Paragraph 1.12 of the draft amendments lowers the minimum issuer and issue rating requirements 

and  provides  that  the  credit  rating  of  securities  and  of  the  issuer  of  securities  for  long-term 

liabilities in lats or foreign currencies must be equal to or higher than at least one of the following 

ratings: BBB– (Fitch Ratings), Baa3 (Moody’s Investors Service), and BBB– (Standard & Poor’s). 

The ECB notes that this amendment introduces a  discrepancy with Guideline ECB/2000/7 which 

provides  for  a  single  A  credit  rating  threshold.  However,  it  should  be  noted  that  as  part  of  the 

interim  measures  taken  to  further  expand  the  collateral  framework,  the  ECB  lowered  the  credit 

threshold for marketable and non-marketable assets from A- to BBB-, with the exception of asset-
backed securities, until the end of 20095. 

To  the  extent  that  lowering  the  rating  requirements  is  related  to  the  downgrading  of  Latvia’s 

sovereign  issuer  rating,  the  ECB  would  point  to  Article  102  of  the  Treaty  which  prohibits  NCBs 

from taking measures granting privileged access by the public sector to financial institutions if such 

measures  are  not  based  on  prudential  considerations.  Furthermore,  the  rules  on  mobilisation  or 

pledging of debt instruments enacted by the NCBs must not be used as a means of circumventing 
the prohibition on privileged access6. In this respect, lowering rating requirements should normally 

be motivated by the need to adjust the list of eligible collateral indiscriminately for both private and 

public issuers. The ECB would appreciate that such intention as regards the proposed measures be 

made clear. 

3.5  Liquidity categories 

The  introduction  of  liquidity  category  III  in  paragraph  1.16  of  the  draft  amendments,  which 

includes  other  debt  securities  of  credit  institutions,  and  the  addition  to  liquidity  category  II  in 

paragraph 1.15 of the draft amendments of covered bonds and debt instruments issued by corporate 

issuers  is  inconsistent  with  the  current  categorisation  set  out  under  Guideline  ECB/2000/7. 

According  to  Guideline  ECB/2000/7,  only  jumbo  covered  bonds  (with  a  volume  of  at  least 

5  
6  

Guideline ECB/2008/18 of 21 November 2008 on temporary changes to the rules relating to eligibility collateral. 
See Article 3(2) of and recital 10 to Council Regulation (EC) No 3604/93 of 13 December 1993 specifying definitions for 
the  application  of  the  prohibition  of  privileged  access  referred  to  in  Article  104a  [now  Article  102]  of  the  Treaty 
(OJ L 332, 31.12.1993, p. 4). See also p. 30 of the ECB Convergence Report of December 2006 and p. 25 of the ECB 
Convergence Report of May 2008. 

3 

                                                 
EUR 1 billion,  for  which  at  least  three  market  makers  provide  regular  bids  and  ask  quotes)  are 

included in category II. Traditional covered bank bonds and debt instruments issued by corporate 

issuers fall within category III. 

3.6  Additional valuation markdown 

The  ECB  notes  that  introducing  an  additional  valuation  markdown  of  5 %  in  case  of  theoretical 

valuation of Latvijas Banka’s eligible assets in paragraph 1.18 of the draft amendments is in line 

with  the  valuation  markdown  of  5 %  for  theoretically  priced  instruments  under  Guideline 

ECB/2008/13 of the European Central Bank of 23 October 2008 amending Guideline ECB/2000/7 
on  monetary  policy  instruments  and  procedures  of  the  Eurosystem7.  Guideline  ECB/2008/13 

applies from 1 February 2009. 

3.7  Exclusion of covered bonds from the ‘close link’ prohibition 

Paragraph 1.6 of the draft amendments provides that the prohibition of close links does not apply to 

covered bonds. The exemption of covered bonds in Guideline ECB/2000/7 only applies to covered 

bank  bonds  issued  in  accordance  with  the  criteria  set  out  in  Article  22(4)  of  Council  Directive 

85/611/EEC  of  20  December  1985  on  the  coordination  of  laws,  regulations  and  administrative 
provisions relating to undertakings for collective investment in transferable securities (UCITS)8, or 

cases in which debt instruments are protected by specific comparable legal safeguards. The ECB 

understands  that  in  Latvia  only  the  debt  instruments  issued  in  accordance  with  the  Law  on 

mortgage  bonds  would  comply  with  Article  22(4)  of  Directive  85/611/EEC  and  be  treated  as 

covered  bonds.  The  draft  amendments  should  clarify  that  only  the  instruments  issued  under  the 

Law on mortgage bonds are exempted from the prohibition of ‘close links’.  

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

Done at Frankfurt am Main, 19 December 2008. 

[signed] 

The President of the ECB 

Jean-Claude TRICHET 

7  
8  

Not yet published in the Official Journal. 
OJ L 375, 31.12.1985, p. 3. 

4