Opinion of the European Central Bank of 9 March 2009 at the request of Riigikogu on a draft law on stabilising measures for the Estonian financial system (CON/2009/18)
Date: 2009-03-09
Institutions: European Central Bank
Subjects: Estonia, banking, financial intervention, financial stability, foreign-exchange reserves, monetary crisis, national law

EN 

OPINION OF THE EUROPEAN CENTRAL BANK 

of 9 March 2009 

at the request of Riigikogu 

on a draft law on stabilising measures for the Estonian financial system 

(CON/2009/18) 

Introduction and legal basis 

On  25  February  2009,  the  European  Central  Bank  (ECB)  received  a  request  from  Riigikogu  (Estonian 

Parliament) for an opinion on a Law amending the Law on the State budget, the Law on participation in 

legal  persons  in  private  law  by  the  State  and  the  Law  on  the  rules  of  procedure  and  internal  rules  of 

Riigikogu (hereinafter the ‘draft law’). 

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  law  relates  to  financial  institutions  and  materially  influences  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 and main features of the draft law 

1.1  The draft law has two main objectives: (a) to secure the stability and functioning of the Estonian 

financial system, in particular the banking sector, including a level playing-field for banks located 

in other states with branches located in Estonia; and (b) to avoid or to limit the transfer of risks into 

the real economy and to secure the sustainable growth of the economy. 

1.2  The draft law provides for the use of Stabilisation Reserve funds for the handling or prevention of a 

financial  crisis  that  could  cause  difficulties  or  serious  failures  related  to  liquidity  or  solvency  of 

credit  institutions  operating  in  Estonia  or  substantial  failures  in  payment  and  settlement  systems 

(hereinafter a ‘financial crisis’). Substantive draft measures, applicable in cases of financial crisis, 

include  the  following:  (a)  the  Government  may  acquire  issued  debt  obligations  in  any  form; 

(b) State  guarantees  can  be  granted  to  any  person;  and  (c)  the  State  may  establish  or  acquire  a 

company even without a majority holding in the company. 

1  

OJ L 189, 3.7.1998, p. 42.  

 
 
 
 
                                                 
1.3  Procedural aspects of the draft law provide for fast-track allocation of Stabilisation Reserve funds 

in  case  of  financial  crisis  by  Riigikogu  on  a  proposal  by  the  Government  and  short  deadlines  for 

access to State budget resources in case of financial crisis. Pursuant to a transitional provision, fast-

track  proceedings  in  Riigikogu  in  case  of  financial  crisis  may  be  used  until  1  July  2010  for  the 

acquisition of a shareholding or other financial assets, the grant of a State guarantee, lending and 

borrowing or the acquisition of other obligations and use of the Stabilisation Reserve funds.  

2. 

General observations 

2.1  The ECB was consulted on the draft law on 25 February 2009 and requested to issue an opinion by 

11 March 2009, i.e 10 days before the planned adoption of the draft law. Given the turbulence in 

the  international  financial  markets,  the  ECB  has  been  flexible  and  has  responded  to  consultation 

requests  within  a  shorter  time  limit.  In  the  present  case,  however,  the  ECB  could  have  been 

consulted  earlier,  in  particular  since  legislative  proceedings  began  in  Riigikogu  in  relation  to  the 

draft law on 18 December 2008. In ECB Opinion CON/2008/14 at the request of Riigikogu on a 
draft  law  amending  the  law  on  Eesti  Pank2,  the  ECB  noted  that  Article  4  of  Council  Decision 

98/415/EC requires Member States to ensure that the ECB is consulted at an appropriate point in 

time to allow the consulting authority to take its opinion into consideration before deciding on the 

substance of the draft legislative provisions. The ECB also noted that the obligation to consult the 

ECB at an appropriate stage in the Estonian legislative process must be respected in the future and 

that  administrative  procedures  should  be  in  place  to  ensure  timely  consultation  whenever  such  a 

consultation is mandatory.  

2.2  The ECB has recently issued several opinions with regard to measures taken by Member States in 

the  context  of  the  financial  turbulence.  It  has  emphasised  the  importance  of  a  common  approach 

aimed  at  restoring  confidence  in  the  financial  markets  and  compliance  with  the  Declaration  on  a 

concerted  European  action  plan  of  the  euro  area  countries  of  12  October  2008  (hereinafter  the 
‘Declaration’)3. On that occasion, the heads of the euro area countries confirmed their commitment 

to  act  together  in  a  decisive  and  comprehensive  way  to  restore  confidence  and  the  proper 

functioning  of  the  financial  system,  with  the  aim  of  restoring  appropriate  and  efficient  financing 

conditions  for  the  economy.  They  agreed  on  common  principles  to  be  followed  by  the  European 

Union  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.  Such 

coordinated  approach  includes  initiatives  aimed  at  all  of  the  following:  (i)  ensuring  appropriate 

liquidity  conditions  for  financial  institutions;  (ii)  facilitating  the  funding  of  banks,  which  is 

currently constrained; (iii) providing financial institutions with additional capital resources so as to 

2  
3  

All ECB opinions are available on the ECB’s website at www.ecb.europa.eu. 
Available on the website of the French Presidency at www.ue2008.fr. 

2 

 
 
                                                 
continue  to  ensure  the  proper  financing  of  the  economy;  (iv)  allowing  for  an  efficient 

recapitalisation  of  distressed  banks;  (v)  ensuring  sufficient  flexibility  in  the  implementation  of 

accounting rules given current exceptional  market circumstances;  and (vi) enhancing cooperation 
procedures among European countries4.  

2.3  Moreover, the ECB notes that the explanatory memorandum to the draft law refers to the guidance 

provided by the Ecofin Council to the Member States in the conclusions of its meeting of 7 October 
20085. The Ecofin Council recommended that: (i) interventions should be timely and the support 

should  in  principle  be  temporary;  (ii)  the  interest  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  interests  of  competitors  must  be  protected,  in  particular  the  State  aid  rules;  and 

(viii) negative  spill-over  effects  should  be  avoided.  The  European  Council  also  endorsed  these 
principles for all Member States on 16 October 20086. Against this background, the ECB highlights 

that  all  initiatives  put  in  place  by  national  governments  to  restore  confidence  in  the  financial 

markets  should  be  aimed  at  implementing  such  common  principles,  in  the  spirit  of  close 

cooperation with other Member States and EU institutions. 

2.4  The  ECB  notes  that  the  draft  law  does  not  mention  any  central  bank  involvement.  Given  how 

important  it  is  in  the  context  of  the  measures  under  consideration  to  decide  whether  a  situation 

actually  constitutes  a  ‘financial  crisis’,  the  ECB  would  recommend  that  the  decision-making 

process  in  this  respect  should  be  specified  and  that  use  should  be  made  of  the  macro-prudential 

analysis carried out by Eesti Pank. 

If Eesti Pank’s expertise is requested in practice, e.g. to benefit from its macro-prudential analysis 

as described above, the ECB expects that such involvement will comply fully with the prohibition 

on monetary financing laid down in Article 101(1) of the Treaty, read in conjunction 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 Treaty7. Moreover, the ECB expects that 

any expertise or advisory tasks performed by Eesti Pank in connection with State support measures 

will  be  carried  out  in  a  manner  fully  compatible  with  Eesti  Pank’s  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 Bank8. Furthermore, 

4  

5  

6   
7  
8  

the  Brussels  European  Council  of  15-16  October  2008,  Presidency  Conclusions,  available  at 

See 
www.consilium.europa.eu. 
See  ‘Immediate  responses  to  Financial  Turmoil’,  Ecofin  Council  Conclusions  of  7  October  2008,  available  at 
www.ue2008.fr. 
See the Brussels European Council of 15-16 October 2008, Presidency Conclusions, paragraph 3. 
OJ L 332, 31.12.1993, p. 1. 
See paragraph 3.3 of 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. Also paragraph 3.10 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 

3 

 
                                                 
the  ECB  also  expects  that  the  support  measures  envisaged  in  the  draft  law  will  be  exclusively 

financed  from  the  State  budget  and  that,  to  the  extent  that  their  funding  may  require  State 
borrowing, this will not include pre-financing or refinancing of the State budget by Eesti Pank9.  

3. 

Specific observations 

3.1 

Implementation of the support measures  

3.1.1  The draft law provides for temporary fast-track proceedings of Riigikogu in the event of a financial 

crisis for certain listed measures on a proposal by the Government. The specific deadline applicable 

to  these  proceedings  is  1  July  2010.  The  draft  law  does  not  specify  termination  or  expiry  of  the 

draft financial crisis measures. In accordance with the general conditions applicable to the grant of 

a State guarantee, a measure is approved and terminated by a resolution of Riigikogu, which must 

set  the  commencement  and  expiry  dates.  In  respect  of  Government  lending,  the  respective 

agreements  will  be  prepared  by  the  Ministry  of  Finance.  The  ECB  repeats  that  any  open-ended 

scheme  is  not  in  line  with  the  Declaration  and  should  be  avoided.  In  particular,  the  Declaration 

clearly  draws  attention  to  the  need  for  any  domestic  support  schemes  to  be  temporary  in  nature, 
even if they can be extended or renewed10. The ECB recommends that provisions on the temporary 

nature  of  the  support  measures  are  clearly  inserted  into  the  draft  law,  as  well  as  provisions 

establishing means aimed at terminating/redeeming the abovementioned measures. 

3.1.2  In addition, the draft law does not specify any conditions, rules or limitations applicable to persons 

and/or  entities  to  whom/which  financial  crisis  measures  are  to  be  provided,  except  that  the 

measures  are  ‘for  solving  or  preventing  a  financial  crisis’.  In  this  context,  the  ECB  strongly 

recommends  that  the  consulting  authority  should  clarify  the  coverage  of  the  proposed  support 

measures  under  the  draft  law.  It  also  draws  attention  to  the  importance  of  putting  a  transparent, 

predictable  framework  in  place  by  defining  the  terms  and  conditions  for  financial  institutions  to 

have  recourse  to  it  in  cases  of  financial  crisis  only  and  the  parameters  of  and  limitations  to  the 

exercise by the Estonian authorities of their powers when deciding whether or not to activate the 

support measures and on the conditions subject to which they should be activated. 

9  

10  

system and paragraphs 3.2.2 and 3.2.3 of ECB Opinion CON/2009/3 of 8 January 2009 at the request of the Slovenian 
Ministry  of  Finance  on  a  draft  decree  laying  down  criteria  and  conditions  for  the  implementation  of  State  capital 
investments and for the conversion of State claims into capital shares under Article 81.a of the Law on public finance. 
In this regard see, for instance, the following: paragraph 3.3 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; paragraph 3.2.3 of ECB Opinion CON/2008/92 of 22 December 2008 at 
the request of the Slovenian Ministry of Finance on a draft decree laying down criteria and conditions for granting loans 
under Article 81.a of the Law on public finance and paragraph 3.2.3 of ECB Opinion CON/2009/3. 
‘In all cases, these actions will be designed in order to avoid any distortion in the level playing-field and possible abuse at 
the  expense  of  non  beneficiaries  of  these  arrangements.  As  a  consequence  the  scheme  will  be  limited  in  amount, 
temporary  (emphasis  is  ours)  and  will  be  applied  under  close  scrutiny  of  financial  authorities  …’  (Declaration,  supra 
fn. 3).  Also  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, available at www.eur-lex.europa.eu, 
paragraph 24. 

4 

 
                                                                                                                                                             
3.2 

Selection of beneficiary institutions 

The definition of ‘financial crisis’ in the draft law refers to credit institutions operating in Estonia. 
However, except for the exclusion of certain persons specified in § 402(3) of the Law on the State 

budget, the draft law does not specify who is eligible to be granted a State guarantee in a financial 

crisis,  and  in  particular  whether  subsidiaries  of  foreign  banks  are  also  covered.  The  ECB  draws 

attention to the Declaration which states, inter alia, that Member States’ actions should ‘avoid any 

distortion  in  the  level  playing-field’  and  that  ‘all  the  financial  institutions  incorporated  and 

operating in [euro area] countries and subsidiaries of foreign institutions with substantial operations 

[should]  be  eligible’  to  benefit  from  the  actions  in  question.  The  ECB  has  previously  stated  that 

‘arrangements that may be seen as providing preferential treatment to specified institutions should 
be  avoided’11.  The  ECB  also  draws  attention  to  the  Commission’s  guidance  on  the  eligibility 
criteria for beneficiary institutions12. 

3.3  Relationship with the central bank’s monetary policy 

3.3.1  The ECB reminds the consulting authority that, in line with the Declaration, Member States have to 

act  in  a  coordinated  manner  to  avoid  the  possibility  of  significant  differences  in  national 

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

markets.  In  the  interests  of  ensuring  a  level  playing-field,  it  is  crucial  to  harmonise  the  form  of 

State  guarantees,  both  within  the  euro  area  and  the  EU.  In  particular,  the  ECB  repeats  that 

uncoordinated  decisions  among  Member  States  should  be  avoided  as  they  may  involve  a 

fragmentation of the euro area money market. In this regard, the ECB draws attention to a set of 

recommendations issued by its Governing Council on 20 October 2008 concerning the appropriate 
framework  for  the  granting  of  government  guarantees  on  bank  debt  issuance13.  Against  this 

background, the ECB has the following remarks. 

3.3.2  First,  the  ECB  understands  that,  under  the  draft  law,  State  guarantees  may  be  issued  to  cover  all 

types  of  liabilities  of  domestic  financial  institutions  and  national  deposit-guarantee  schemes.  The 

ECB  therefore  notes  that  the  draft  law  does  not  exclude  from  its  material  scope  of  application, 

expressly  or  by  implication,  interbank  deposits,  subordinated  or  collateralised  liabilities  such  as 
covered  bonds14.  The  ECB  reiterates  the  need  to  avoid  State  guarantees  covering  interbank 

11  

12  

13  

14  

See paragraph 3.4 of 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  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,  paragraph  18,  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.’ 
See the Recommendations of the Governing Council of the European Central Bank on government guarantees for bank 
at 
the 
2008, 
debt, 
http://www.ecb.europa.eu/pub/pdf/other/recommendations_on_guaranteesen.pdf. 
The  ECB  notes  that  the  explanatory  memorandum  to  the  draft  law  states  that  Estonian  banking  is  dominated  by 
subsidiaries and branches of the major Scandinavian banks and that, due to the high concentration of the banking sector, it 
was not considered practical to guarantee interbank loans as in other Member States. 

available 

October 

website 

ECB’s 

on 

20 

5 

                                                 
deposits, in particular, as these could entail a substantial distortion in the various national segments 

of  the  money  market  by  potentially  increasing  short-term  debt  issuance  activity  across  Member 

States. 

3.3.3  Second, the ECB understands that, by extension, State guarantees for loans taken out by banks may 

be granted. In this respect, the ECB repeats that such arrangements for the granting of government 

guarantees  on  bank  debt  should,  in  their  practical  implementation,  aim  at:  (i)  addressing  the 

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

market  for  bank  debt  of  longer  term  maturity;  and  (ii)  preserving  the  level  playing-field  among 

financial institutions and avoiding market distortions. 

3.3.4  Third,  as  regards  the  pricing  of  the  State  guarantees,  it  is  crucial  to  ensure  harmonisation  and 

coordination of the price determination of such guarantees within the euro area and the EU where a 

level playing-field is of the essence. In particular, it is important to ensure that the price of a State 

guarantee  is  risk-based  and  market-oriented  and  determined  on  the  basis  of  the  costs  of  a 

corresponding guarantee in the market. 

3.3.5  Fourth, it is important to ensure that beneficiary financial institutions may not profit from undue use 

of their guaranteed status to engage in a heightened level of activities which distort the market and 

facilitate  abnormal  balance  sheet  growth.  In  this  regard,  the  ECB  reiterates  the  importance  of 

establishing  appropriate  safeguards  such  as  limits  on  the  marketing  of  financial  products  or  on 

expansion of activities on the basis of State guarantees. 

3.3.6  Fifth,  under  the  draft  law,  the  Government  may  acquire  assets  from  financial  institutions.  In  this 

respect,  the  ECB  has  a  number  of  observations  which  are  important  from  a  monetary  policy 

perspective.  Although  such  measures  should  help  to  restore  confidence  in  the  Estonian  banking 

system,  it  is  important  that  the  price  applied  for  the  acquisition  of  financial  institutions’  assets 

should be determined in a coordinated manner within the EU. The ECB notes the importance of the 

price determination of these transactions. 

3.4  Conditions for State capital investments 

3.4.1  In  line  with  the  Declaration,  the  ECB  reiterates  that  uncoordinated  decisions  amongst  Member 

States should be avoided, as they may lead to significant differences in the treatment of financial 

institutions  across  Member  States.  This  remark  also  applies  to  measures  related  to  State  capital 

investments. 

3.4.2  The ECB takes the opportunity to restate the points made in its previous opinions. In particular, the 

ECB draws Riigikogu’s attention to the specific recommendations made by its Governing Council 
on recapitalisations15 (hereinafter the ‘Recommendations on the pricing of recapitalisation’). In this 

respect,  the  ECB  notes  that  the  aim  of  any  recapitalisation  measures  should  be  to  strengthen  the 

15  

Recommendations  of  the  Governing  Council  of  the  European  Central  Bank  on  the  pricing  of  recapitalisations, 
20 November 
at 
on 
http://www.ecb.europa.eu/pub/pdf/other/recommendations_on_pricing_for_recapitalisationsen.pdf. 

available 

website 

ECB’s 

2008, 

the 

6 

                                                 
capital  position  of  fundamentally  sound  financial  institutions  in  order  to  improve  the  functioning 

and  stability  of  the  banking  system  and  to  ensure  the  proper  financing  of  the  economy.  In 

particular, a consistent approach should be used in defining the conditions for recapitalisations and 

the pricing of the instruments intended to provide Tier 1 capital to financial institutions. The ECB 

underlines  the  importance  of  appropriate  pricing  for  recapitalisations  in  terms  of  the  goals  of 

enhancing the stability of the financial system, facilitating a return to normal market conditions and 

ensuring  the  proper  financing  of  the  economy.  In  the  Recommendations  on  the  pricing  of 

recapitalisations,  the  ECB  stresses  that  the  pricing  conditions  for  capital  support  should  be  risk-

based  and  market-oriented,  determined  by  taking  into  consideration  the  specific  risk  of  both  the 

specific instrument chosen for injecting capital and the institution concerned. Specific features of 

the instruments for capital injections, such as preference shares, should be appropriately chosen so 

that, while encouraging an early end to the State’s capital support of banks, they do not result in an 

excessive increase in the cost of capital. 

3.4.3  Moreover,  in  line  with  previous  ECB  opinions16,  it  should  be  ensured  that  such  measures  are  in 

accordance with the requirements of Community competition law, in particular State aid rules, and 

that  the  State’s  role  as  shareholder  is  limited  in  time.  In  this  respect,  in  accordance  with  the 

Recommendations on the pricing of recapitalisations, it must be stressed that terms  should  be  set 

for the redemption or conversion of the instruments either on the basis of a period of time or the 

development of market conditions so as to retain the temporary nature of the State’s involvement 

and discourage financial institutions from maintaining such involvement for an extensive period of 

time. 

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

Done at Frankfurt am Main, 9 March 2009. 

[signed] 

The President of the ECB 

Jean-Claude TRICHET 

16  

See e.g. paragraph 3.1.3 of ECB Opinion CON/2009/3. 

7