Opinion of the European Central Bank of 7 January 2009 at the request of the Latvian Ministry of Finance on a draft regulation establishing procedures for issue and supervision of bank loan guarantees (CON/2009/2)
Date: 2009-01-07
Institutions: European Central Bank
Subjects: Latvia, banking supervision, credit guarantee, financial stability, loan

EN 

OPINION OF THE EUROPEAN CENTRAL BANK 

of 7 January 2009 

at the request of the Latvian Ministry of Finance  

on a draft regulation establishing procedures for issue and supervision of bank loan guarantees 

(CON/2009/2) 

Introduction and legal basis 

On 29 December 2008 the European Central Bank (ECB) received a request from the Latvian Ministry of 

Finance  for  an  opinion  on  a  draft  regulation  establishing  procedures  for  issue  and  supervision  of  bank 

loan guarantees (hereinafter the ‘draft regulation’).  

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 regulation relates to 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 regulation 

The  main  objective  of  the draft  regulation  is  to  establish  a  procedure  whereby the  Latvian Minister  for 

Finance may issue guarantees in the name of the State for loans of banks registered in Latvia in order to 

reduce general economic risks, avoid social and economic crisis, or minimise the impact thereof, and to 

ensure  availability  of  financing  in  the  event  of  extraordinary  situations.  The  draft  regulation  also 

establishes a procedure for the servicing and supervision of the guarantees. 

2.  General observations 

2.1  The legal basis for the adoption of the draft regulation is Article 37(6) of the Law on budget and 

financial management. Article 37(6) was added to the Law on budget and financial management on 
14 November 20082 as part of Latvian measures to stabilise the financial markets. Another part of 

1  
2  

OJ L 189, 3.7.1998, p. 42.  
Published in Latvijas Vēstnesis, 183 (3967) on 25 November 2008. 

 
 
 
 
 
                                                 
the stabilisation measures was a Law on bank takeovers3 which was adopted on 18 December 2008. 

It should be noted that the ECB was not consulted on the amendments to the Law on budget and 

financial management and that the ECB received the consultation request regarding the draft law on 

bank takeovers on 29 December 2008, after that law was adopted. Regarding these two stabilisation 
measures, therefore, the ECB reiterates its previous position4 that even cases of particular urgency 

do not release national authorities from their duty under Article 105(4) of the Treaty to consult the 

ECB  on  draft  legislative  provisions  falling  within  its  fields  of  competence.  The  ECB  has  been 

flexible  and  has  responded  within  short  time  limits  to  consultation  requests  received  during  the 

financial turmoil and reminds the Latvian authorities of the need to consult it on draft legislation at 

a stage in the legislative process that allows sufficient time to take into account its views. It follows 

from Article 3(4) of Decision 98/415/EC that once a consultation request has been submitted to the 

ECB, Member States are obliged to suspend the process of adoption of draft legislative provisions, 

pending  receipt  of  the  ECB’s  opinion  or  the  expiry  of  a  time  limit  set  for  the  submission  of  the 
ECB’s opinion, in accordance with Decision 98/415/EC5.  

2.2  The ECB has issued a number of opinions on State measures taken by Member States to address the 

global  financial  crisis,  which  all  emphasise  the  importance  of  a  common  approach  aimed  at 

restoring confidence in financial markets. Similarly, the ECB notes that the conclusions adopted at 

the  Ecofin  meeting  on  7 October 2008  highlighted  common  principles  to  guide  Member  States’ 
actions6.  Moreover,  the  ECB  notes  that  on  12 October  2008  the  Heads  of  State  of  the  euro  area 
issued a ‘Declaration on a concerted European action plan of the euro area countries’7 (hereinafter 

the  ‘Declaration’),  in  which  they  confirmed  their  commitment  to  act  together  in  a  decisive  and 

comprehensive  way  in  order  to  restore  confidence  and  the  proper  functioning  of  the  financial 

system and to restore appropriate and efficient financing conditions for the economy. They agreed 

on  common  principles  to  be  followed  by  the  EU  and  euro  area  governments,  central  banks  and 

supervisors, to avoid national measures adversely affecting the functioning of the single market and 

the  other  Member  States.  This  coordinated  approach  includes  initiatives  aimed  at  ensuring 

appropriate  liquidity,  facilitating  the  funding  of  banks  by  various  means,  providing  additional 

capital resources to financial institutions and recapitalising distressed banks. These principles were 

also endorsed for all Member States by the European Council on 16 October 2008. As pointed out 

3  
4  

5  

6  

7  

Published in Latvijas Vēstnesis, 202 (3986) on 30 December 2008. 
See paragraph 2.4 of ECB Opinion CON/2008/76 of 25 November at the request of the Slovenian Ministry of Finance on 
a draft law amending the Law on public finance. 
See Title IV, Section 1 of the Guide to consultation of the European Central Bank by national authorities regarding draft 
legislative provisions, available on the ECB’s website at www.ecb.europa.eu. 
According to these principles: (i) interventions should be timely and the support should in principle be temporary; (ii) the 
interests  of  taxpayers  should  be  protected;  (iii) existing  shareholders  should  bear  the  due  consequences  of  the 
intervention;  (iv) the  Government  should  be  in  a  position  to  bring  about  a  change  of  management;  (v) management 
should  not  retain  undue  benefits;  (vi) governments  may  have,  inter  alia,  the  power  to  intervene  in  remuneration; 
(vii) legitimate  interest  of  competitors  must  be  protected,  in  particular  through  the  State  aid  rules;  and  (viii) negative 
spill-over effects should be avoided. 
Available on the website of the French Presidency at www.ue2008.fr. 

2 

                                                 
in  relevant  ECB  opinions8,  it  is  of  utmost  importance  that  the  operations  conducted  by  national 

authorities  do  not  interfere  by  any  means  with  euro  area  monetary  policy  and/or  with  the 

Eurosystem’s  refinancing  operations.  In  this  context,  as  regards  the  Latvian  support  measures 

proposed under the draft regulation, the ECB considers that they should aim at: (a) addressing the 

funding problems of liquidity-constrained solvent banks by improving the functioning of the market 

for  bank  debt  of  longer  term  maturity;  (b)  preserving  the  level  playing  field  among  financial 

institutions and avoiding market distortions; and (c) ensuring consistency with the management of 
liquidity by Latvijas Banka9. 

3. 

Specific observations 

3.1 

Implementation of the support measures 

As stated in its Article 17, the draft regulation is a temporary measure and will only apply until 31 

December  2009.  The  ECB  notes  that  this  provision  is  in  line  with  the  principles  stated  in  the 

Declaration which point to the temporary features of such support schemes.  

3.2  Selection of beneficiary credit institutions 

Pursuant to Article 3 of the draft regulation, only branches of banks registered outside Latvia are 

ineligible to benefit from the State guarantee arrangements. The ECB therefore understands that the 

draft  regulation  applies  to  all  solvent  Latvian  banks,  including  Latvian  subsidiaries  of  foreign 

banks. The ECB welcomes the non-discriminatory application of the above provisions, as it avoids 

distortion of the level playing field as regards the treatment of domestic financial institutions and 
subsidiaries  of  foreign  institutions10.  This  also  appears  to  be  in  line  with  the  Commission’s 
guidance on the eligibility criteria for beneficiary institutions11. 

8  

9  

10  

11  

See,  in  particular,  ECB  Opinion  CON/2008/52  of  17 October 2008  at  the  request  of  the  Spanish  State  Secretary  for 
Economic Affairs on a Royal Decree-Law creating a Fund for the acquisition of financial assets and on a Royal Decree-
Law adopting urgent financial and economic measures in relation to the concerted European action plan of the euro area 
countries and ECB Opinion CON/2008/79 of 27 November 2008 at the request of the Greek Ministry of Economy and 
Finance on a draft law on enhancing liquidity of the economy to address the impact of the international financial crisis 
and on a draft decision on its implementation. 
See, e.g. paragraph 2.1.2 of ECB Opinion CON/2008/62 of 29 October 2008 at the request of the Swedish Ministry of 
Finance on a draft ordinance on State guarantees for banks etc. 
On this aspect see, in particular, ECB Opinion CON/2008/44 of 3 October 2008 at the request of the Irish Minister for 
Finance  on  a  draft  Credit  Institutions  (Financial  Support)  Bill  2008.  See  also  ECB  Opinion  CON/2008/48  of 
15 October 2008 at the request of the Irish Minister for Finance on a draft Credit Institutions (Financial Support) Scheme 
2008.  See also ECB  Opinion  CON/2008/52  and  ECB  Opinion  CON/2008/55  of  20  October  2008  at  the  request  of  the 
Austrian Ministry of Finance on draft legal measures to ensure the stability of the Austrian financial market, as well as 
ECB  Opinion  CON/2008/67  of  13  November  2008  at  the  request  of  the  Spanish  Ministry  for  Economic  Affairs  and 
Finance on a draft order implementing Royal Decree-Law 7/2008 authorising State guarantees. 
See paragraph 18 of the Commission’s guidance, specifying that ‘The eligibility criteria of financial institutions … must 
be  objective,  taking  due  account  of  their  role  in  the  relevant  banking  system  and  the  overall  economy,  and  non-
discriminatory  so  as  to  avoid  undue  distortive  effects  on  neighbouring  markets  and  the  internal  market  as  a  whole.  In 
application  of  the  principle  of  non  discrimination  on  the  grounds  of  nationality,  all  institutions  incorporated  in  the 
Member State concerned, including subsidiaries, and with significant activities in that Member State should be covered 
by the scheme.’ 

3 

 
                                                 
3.3 

Scope of the obligations covered by State guarantees 

Pursuant to Article 2 of the draft regulation, a guarantee may be issued in respect of existing loans 

with  a  maturity  of  no  more  than  three  years,  and  in  respect  of  loans  taken  out  to  refinance  such 

loans  with  a  maturity  of  no  less  than  six  months  and  no  more  than  three  years.  The  ECB 

understands  that  the  draft  regulation  could  not  be  intended  to  apply  to  interbank  deposits, 
subordinated  liabilities  and  collateralised  liabilities  such  as  covered  bonds12.  The  ECB  notes 

however that this intention is not made expressly clear in the text of the draft regulation and that it 

is  unclear  in  particular  whether  the  guarantees  provided  by  the  Latvian  State  cover  interbank 

deposits. The ECB therefore recommends that the draft regulation further clarifies the coverage of 

State  guarantees.  In  this  respect,  the  ECB  reiterates  that  State  guarantees  to  cover  interbank 

deposits  should  be  avoided  as  they  have  the  potential  to  interfere  with  the  conduct  of  a  central 

bank’s  liquidity-providing  operations,  and  thus  with  the  transmission  of  monetary  policy 
decisions13.  

3.4  Charges imposed on receiving credit institutions 

Pursuant to Articles 11 and 12 of the draft regulation, remuneration for the provision of guarantees 

will consist of a credit risk margin based on five-year credit default swap spreads of 40 large euro 

area banks. In addition the Ministry of Finance will charge 50 basis points for processing the fee 
and a 10 basis points annual servicing fee. In its previous opinions14, the ECB has emphasised that 

it is crucial to ensure the coordination of the pricing of State guarantees within the euro area and 

the EU, given that a level playing field is of the essence. The price of a State guarantee should be 

risk-based  and  market-oriented,  and  determined  on  the  basis  of  the  costs  of  a  corresponding 

guarantee in the market. In this respect, the ECB appreciates the additional information provided. It 

is important that the pricing of the State guarantee should link the level of charges to be paid by the 

receiving  credit  institutions  with  the  residual  maturity  of  the  guaranteed  obligations  and  with 

maturities exceeding one year. The ECB also stresses the need for further harmonisation within the 

euro area to ensure that government support measures do not have a negative impact on the single 
monetary policy of the euro area15. 

3.5  Central bank involvement in the support measures 

The ECB understands that the Ministry of Finance will consult Latvijas Banka in order to prepare a 

draft  decision  to  issue  a  guarantee  or  refusal  to  issue  a  guarantee.  The  ECB  appreciates  that  the 

draft  regulation  recognises  Latvijas  Banka’s  expertise  in  this  way  and  that  it  is  expected  that 

12  
13  

14  
15  

See the Commission’s Press release of 23 December 2008, IP/08/2054. 
See paragraph 3.2 of ECB Opinion CON/2008/80 of 28 November 2008 at the request of the Polish Minister for Finance 
on a draft law on the provision of State Treasury support to financial institutions. 
See paragraph 3.4 of ECB Opinion CON/2008/76. 
See  e.g.  paragraph  3.2  of  ECB  Opinion  CON/2008/52  and  paragraph  3.7  of  ECB  Opinion  CON/2008/81  of 
1 December 2008  at  the  request  of  the  Hungarian  Ministry  of  Finance  on  a  draft  law  on  strengthening  the  financial 
intermediary system, as well as paragraph 3.2 of ECB Opinion CON/2008/88 of 19 December 2008 at the request of the 
Slovenian  Ministry  of  Finance  on  a  draft  decree  laying  down  criteria  and  conditions  for  granting  guarantees  under 
Article 86.a of the Law on public finance.  

4 

                                                 
Latvijas Banka’s involvement will not go beyond an advisory and procedural role. The ECB also 

expects that Latvijas Banka will fully comply with the prohibition on monetary financing laid down 
in Article 101(1) of the Treaty16, interpreted in line with Council Regulation (EC) No 3603/93 of 

13 December  1993  specifying  definitions  for  the  application  of  the  prohibitions  referred  to  in 
Articles  104  and  104b(1) of  the  Treaty17  and  that  Latvijas  Banka  will  conduct such  function  in  a 

manner fully compatible with its institutional and financial independence thereby safeguarding the 

proper performance of its tasks under the Treaty and the Statute of the European System of Central 

Banks and of the European Central Bank. 

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

Done at Frankfurt am Main, 7 January 2009. 

[signed] 

The President of the ECB 

Jean-Claude TRICHET 

16  
17  

See paragraph 3.2 of ECB Opinion CON/2008/52. 
OJ L 332, 31.12.1993, p. 1. 

5