Opinion of the European Central Bank of 4 February 2009 at the request of the Latvian Financial and Capital Market Commission on draft amendments to certain legal acts in connection with the financial turmoil (CON/2009/10)
Date: 2009-02-04
Institutions: European Central Bank
Subjects: Latvia, bank deposit, credit institution, financial solvency, financial stability, national law

EN 

OPINION OF THE EUROPEAN CENTRAL BANK 

of 4 February 2009 

at the request of the Latvian Financial and Capital Market Commission  

on draft amendments to certain legal acts in connection with the financial turmoil 

(CON/2009/10) 

Introduction and legal basis 

On 2 February 2009 the European Central Bank (ECB) received a request from the Latvian Financial and 

Capital  Market  Commission  (FCMC)  for  an  opinion  on  draft  amendments  to  the  following  legal  acts 

(hereinafter  the  ‘draft  amendments’):  (a)  the  Law  on  deposit  guarantees;  (b)  the  Law  on  credit 

institutions;  (c)  the  Law  on  civil  procedure;  and  (d)  the  Law  on  the  Financial  and  Capital  Market 

Commission.  

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  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 

1.1  The main objectives of the draft amendments to the Law on deposit guarantees are: (a) to clarify 

further  the  definition  of the  ‘unavailability’  of deposits;  (b)  to  provide  that  compensation  will  be 

paid within a maximum period of twenty working days; and (c) to provide that if the resources of 

the Latvian Deposit Guarantee Fund are insufficient, compensation will be paid to depositors from 

the State budget. 

1.2  The  main  objective  of  the  draft  amendments  to  the  Law  on  credit  institutions  is  to  extend  the 

FCMC’s powers to allow it to deal more effectively with troubled banks. 

In particular, the FCMC is authorised to take measures in any of the following circumstances: (a) if 

a  credit  institution  fails  to  comply  with  national  or  EU  laws  and  regulations;  (b)  if  a  credit 

1  

OJ L 189, 3.7.1998, p. 42.  

 
 
 
 
                                                 
institution’s operations threaten its own stability or solvency, the security or stability of the banking 

sector  in  Latvia,  or  to  cause  significant  losses  to  the  economy  of  the  State:  (c)  if  a  there  is  an 

excessive outflow of deposits or other secured funds from a credit institution.  

The  measures  that  the  FCMC  may  take  include:  (a)  requiring  the  credit  institution  to  take  the 

necessary steps to remedy such situation or submit a plan of action to the FCMC by a set deadline; 

(b)  issuing  a  warning  to  the  credit  institution;  (c)  giving  the  credit  institution’s  decision-making 

bodies,  managers  and  members  binding  written  orders  necessary  to  remedy  such  situation; 

(d) establishing restrictions on the rights and actions of the credit institution, including entirely or 

partially suspending its authority to provide financial services, as well as restrictions on fulfilment 

of  its  obligations;  (e)  imposing  restrictions  on  the  credit  institution  in  relation  to  execution  of 

deposit  obligations;  (f)  appointing  one or  more  authorised  representatives  from  the  FCMC  to  the 

credit institution; (g) imposing on the credit institution the responsibility to reduce the level of risk 

in relation to its transactions, services  and systems; (h) requesting Latvijas  Banka to suspend the 

provision of credit to the credit institution; (i) imposing fines. 

Under the draft amendments, an authorised representative of the FCMC may be appointed to take 

over  the  management  of  the  credit  institution  with  a  wide  range  of  powers  to  administer  it.  The 

operations of the credit institution’s shareholders in general meeting, its council, board and other 

executive  institutions,  as  well  as  the  persons  authorised  to  bind  the  credit  institution,  will  be 

suspended. The authorised representative will be authorised to call and participate in meetings of 

the  credit  institution’s  shareholders,  council  or  board  with  the  right  to  propose  issues  to  be 

reviewed. No decision may be adopted if it is opposed by the authorised representative. 

1.3  The main objective of the draft amendments to the Law on civil procedure is to reduce the period 

for the Court to decide on an insolvency from 15 days to five days. 

1.4  The  main  objective  of  the  draft  amendments  to  the  Law  on  the  Financial  and  Capital  Market 

Commission is to provide for the FCMC’s rights to take decisions to restrict the rights, obligations 

and operations of market participants. 

2.  General observations 

2.1 

In line with the ‘Declaration on a concerted European action plan of the euro area countries’ issued 
by the Heads of State of the euro area on 12 October 2008 (hereinafter the ‘Declaration’)2, the ECB 

notes  that  Member  States  must  act  in  a  coordinated  manner  to  avoid  significant  differences  in 

national  implementation  having  a  counter-productive  effect  and  creating  distortions  in  global 

banking  markets.  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 

2  

The Declaration is available on the French Presidency’s website at www.ue2008.fr 

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all  Member  States  by  the  European  Council  on  16  October  2008.  The  Declaration  also 

acknowledges the need to work in cooperation with the ECB.  

2.2  As a general remark and in line with its previous opinions3, the ECB reiterates the importance of 

ensuring  that  the  regulatory  practice  under  the  draft  amendments  will  be  conducted  in  full 

compliance  with  the  relevant  Community  law  provisions,  including  EU  single  market  principles 

and financial services legislation, as well as competition and State aid rules. In the latter respect, 

the ECB draws the consulting authority’s attention to the Commission’s recently adopted guidance 
on compliance by financial sector support schemes with EU State aid rules4. 

3. 

Specific observations 

3.1  Draft amendments to the Law on deposit guarantees 

As noted in past ECB opinions, deposit protection is an important element of the financial safety 
net  and  contributes  to  safeguarding  financial  stability5.  The  ECB  notes,  with  reference  to  the 

proposed shortening of the payout periods for the guaranteed deposits, that this is also the objective 

of the amendments currently proposed to Directive 94/19/EC of the European Parliament and of the 
Council of 30 May 1994 on deposit-guarantee schemes6. In line with its opinion on the proposed 
amendments  to  Directive  94/19/EC7,  the  ECB  welcomes  the  Latvian  authorities’  intention  to 

significantly  reduce  delays  in  payouts  of  guaranteed  deposits  and  thereby  strengthen  depositors’ 

confidence. At the same time, a pragmatic approach should be taken to introducing the necessary 

reduction in payout delays, thereby preserving the credibility of the deposit-guarantee scheme. This 

implies,  inter  alia,  establishing  efficient  operational  processes  for  verifying  claims  and  paying 

depositors. 

Further, and as confirmed also by international standards, sound funding arrangements are critical 

to the effectiveness of deposit-guarantee schemes and to the maintenance of public confidence in 

3  

4  

5  

6  
7  

See, for example, paragraph 3.3 of Opinion CON/2008/57 of 21 October 2008 at the request of the German Ministry of 
Finance on a Law on the implementation of a package of measures to stabilise the financial market and an order on its 
implementation. 
See ‘Communication from the Commission – The application of State aid rules to measures taken in relation to financial 
institutions  in  the  context  of  the  current  global  financial  crisis’  (OJ  C  208  of  25.10.2008,  p.  8). Also  ‘Communication 
from the Commission – The recapitalisation of financial institutions in the current financial crisis: limitation of aid to the 
minimum necessary and safeguards against undue distortions of competition’, available on the Commission’s website at 
www.ec.europa.eu 
See  paragraph  8  of  ECB  Opinion  CON/2005/50  of  1  December  2005  at  the  request  of  Národná  banka  Slovenska  on a 
draft law amending the Act No 118/1996 Coll. on the protection of bank deposits and on amendments to certain laws, as 
last amended; also paragraph 2.5 of ECB Opinion CON/2007/26 of 27 August 2007 at the request of the Polish Minister 
for Finance on a draft law amending the Law on the Bank Guarantee Fund. 
OJ L 135, 31.5.1994, p. 5. 
See ECB Opinion CON/2008/70 of 18 November 2008 at the request of the Council of the European Union on a proposal 
for  a  Directive  of  the  European  Parliament  and  of  the  Council  amending  Directive  94/19/EC  on  deposit-guarantee 
schemes as regards the coverage level and the payout delay (OJ L 314, 9.12.2008, p. 1). 

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the  banking  system8.  Directive  94/19/EC  does  not  currently  prescribe  a  method  for  financing 

deposit-guarantee schemes, provided that all of the following conditions are satisfied: (a) the costs 

of financing are borne, in principle, by credit institutions themselves; (b) the financing capacity of 

the scheme is in proportion to credit institutions’ liabilities; (c) the stability of the banking system 
of  the  Member  State  concerned  is  not  jeopardised9.  The  arrangements  adopted  in  the  case  of  the 

Latvian Deposit Guarantee Fund should therefore be consistent with these broad principles.  

Finally, the ECB underlines that the Latvian Deposit Guarantee Fund’s funding arrangements must, 

inter  alia,  comply  with  the  monetary  financing  prohibition  laid  down  in  the  Treaty,  and  in 

particular with the prohibition on national central banks providing overdraft facilities or any other 
type of facility within the meaning of Article 101 of the Treaty10, as more specifically considered in 
past ECB opinions11 and in the ECB’s Convergence Reports12.  

3.2  Draft amendments to the Law on credit institutions 

The ECB welcomes the draft amendments to the Law on credit institutions to the extent that they 

will  strengthen  the  FCMC’s  powers  to  intervene  when  the  stability  of  either  individual  credit 

institutions  or  the  financial  system  as  a  whole  is  jeopardised.  Moreover,  the  ECB  notes  that  in 

certain  cases  the  FCMC  may  adopt  decisions  provided  that  the  Cabinet  of  Ministers  does  not 

object. The ECB emphasises that operational independence of supervisory authorities vis-à-vis the 

political  authorities  is  an  essential  and  internationally  recognised  standard  for  supervision  of 

financial  markets.  In  this  respect,  the  ECB  notes  that  the  draft  amendments  to  the  Law  on  credit 

institutions  could  give  rise  to  concerns  regarding  the  operational  independence  of  the  Latvian 

supervisory  authorities,  which  should  be  addressed  by  introducing  appropriate  legislative 

safeguards. 

The ECB understands that the proposed provision giving the FCMC the power to request Latvijas 

Banka to suspend providing credit to a specific credit institution in view of its worsening financial 

situation should be without prejudice to the principle of central bank independence, as established 

by  Article  108  of  the  Treaty  and  repeated  in  Article  7  of  the  Statute  of  the  European  System  of 
Central  Banks  and  of  the  European  Central  Bank13.  These  provisions,  inter  alia,  require  that 

Latvijas  Banka  does  not  seek  or  take  any  instructions  from  other  bodies  of  the  Latvian 

8  

9  

10  

11  

12  
13  

Financial Stability Forum, ‘Guidance for Developing Effective Deposit Insurance Systems’, September 2001, point V.4 
(‘Funding’),  p.  26.  International  Association  of  Deposit  Insurers,  Core  Principles  for  Effective  Deposit  Insurance 
Systems, 29 February 2008. 
See the twenty-third recital to Directive 94/19/EC. The proposed amending Directive calls for the Commission to submit 
a  report  on  a  harmonisation  of  the  funding  mechanisms  of  deposit-guarantee  schemes  by  31 December  2009  to  the 
European  Parliament  and  the  Council  (see  Article  1(6)  of  the  proposed  amending  Directive,  introducing  changes  to 
Article 12 of Directive 94/19/EC). 
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 Treaty (OJ L 332, 31.12.1993, p. 1). 
See  paragraph  1.2  of  ECB  Opinion  CON/2008/70;  see  also  paragraph  3.1  of  ECB  Opinion  CON/2008/57;  as  well  as 
paragraph 3.2 of ECB Opinion CON/2008/59 of 24 October 2008 at the request of the Swedish Ministry of Finance on a 
draft proposal on stabilising measures for the Swedish financial system. 
See, for example, the ECB’s Convergence Report December 2006, p. 30. 
As also expressed in Article 13(2) of the Law on Latvijas Banka. 

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administration and that such bodies undertake to respect this principle and do not seek to influence 

Latvijas  Banka’s  decision-making  bodies  in  the  performance  of  their  tasks.  The  ECB  therefore 

recommends redrafting the provision in question to make it clear that while the FCMC may provide 

a negative assessment of the creditworthiness of a credit institution to Latvijas Banka, it may not 

request the suspension of credit to that credit institution. This would emphasise that the FCMC’s 

power  is  without  prejudice  to  Latvijas  Banka’s  independence  to  decide  whether  credit  should  be 

provided to a credit institution. 

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

Done at Frankfurt am Main, 4 February 2009. 

[signed] 

The President of the ECB 

Jean-Claude TRICHET 

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