Opinion of the European Central Bank of 26 March 2009 at the request of the Latvian Financial and Capital Market Commission on a draft law amending the Law on deposit guarantees (CON/2009/31)
Date: 2009-03-26
Institutions: European Central Bank
Subjects: Latvia, bank deposit, financial stability, guarantee, national law, public institution

EN 

OPINION OF THE EUROPEAN CENTRAL BANK 

of 26 March 2009 

at the request of the Latvian Financial and Capital Market Commission  

on a draft law amending the Law on deposit guarantees  

(CON/2009/31) 

Introduction and legal basis 

On 23 March 2009 the European Central Bank (ECB) received a request from the Latvian Financial and 

Capital Market Commission (FCMC) for an opinion on a draft law (hereinafter the ‘draft law’) amending 
the Law of 3 June 1998 on deposit guarantees (hereinafter the ‘Law on deposit guarantees’1). 

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 provisions2, as the draft law 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 law 

The  draft  law  will  introduce  certain  changes  to  the  operation  of  the  Latvian  Deposit  Guarantee 

Fund (hereinafter the ‘Fund’), and in particular it will:  

(1)   broaden  the  scope  of  the  Fund’s  coverage  as  regards  branches  in  Latvia  of  banks  not 

registered in the European Union3; 

(2) 

clarify the scope of categories of depositors excluded from the Fund’s protection4; 

1  
2  
3  

4  

Published in Latvjas Vēstnesis, 162(1223) on 3 June 1998, as amended. 
OJ L 189, 3.7.1998, p. 42. 
See  amended  Article  2  of  the  Law  on  deposit  guarantees  (amendments  to  paragraph  2  and  deletion  of  paragraphs  3 
and 4(2)). 
See amended Article 17 points (4) and (6) of the Law on deposit guarantees. The new categories of excluded depositors 
are  (i)  specified  categories  of  persons  involved  in  management,  supervision  or  auditing  of  the  Fund  member;  and 
(ii) depositors who have obtained individual conditions for their deposit holdings that facilitated the deterioration of the 
Fund  member’s  financial  situation.  Such  categories  correspond  to  points  7  and  11  of  the  Annex  I  to  the  Directive 
94/19/EC on deposit-guarantee schemes (OJ L 135, 31.5.1994, p. 5).  

 
 
  
 
 
                                                 
(3)  

introduce risk-based calculation of premiums paid to the Fund by its members, as well as a 

possibility for a special temporary increase of the Fund’s premiums where deposit payouts 
have been made5; and  

(4) 

enhance the Fund’s deposit payout procedure, in particular by allowing for payments to be 
made through a selected commercial credit institution6.  

According  to  the  FCMC7,  such  amendments  are  necessary  in  order  to  address  the  present 

international  and  domestic  financial  situation  and  to  take  account  of  the  regulatory  regime 

introduced  by  Directive  2009/14/EC  of  the  European  Parliament  and  of  the  Council  of 

11 March 2009  amending  Directive  94/19/EC  on  deposit-guarantee  schemes  as  regards  the 
coverage level and the payout delay8.  

2.   General observations 

In its Opinion CON/2009/10 of 4 February 2009, the ECB has already commented on the special 

legislative measures proposed by the Latvian authorities to deal with the financial crisis, including 
the  changes  to  the  Law  on  deposit  guarantees9.  To  the  extent  relevant,  the  observations  made  in 

Opinion  CON/2009/10  also  apply  to  the  changes  proposed  by  the  draft  law.  The  present  opinion 

concentrates  on  the  selected  issues  specified  below  and  does  not  constitute  a  comprehensive 

assessment of the Law on deposit guarantees, nor of the implementation of Directive 2009/14/EC 

in  Latvia.  Nevertheless,  the  ECB  takes  this  opportunity  to  reiterate  that,  when  implementing 

Directive  2009/14/EC  or  otherwise  amending  the  legal  framework  for  operation  of  the  national 

deposit-guarantee schemes, Member States should act in a coordinated manner to avoid significant 

differences in national legal frameworks having a counterproductive effect, by creating distortions 
in global banking markets10. 

5  

6  
7  
8  
9  

10  

Risk-based  calculation  of  the  Fund  premiums  will  apply  from  1  January  2010;  see  amended  Article  8  of  the  Law  on 
deposit guarantees (new wording in paragraphs (2) to (22) and in paragraph (6)) together with the point 9 of the draft law. 
See new Articles 131 and the paragraphs (1) to (4) added to Article 20 of the Law on deposit guarantees. 
See consultation letter received by the ECB on 23 March 2009 from the FCMC.  
OJ L 68, 13.3.2009, p. 3.  
See paragraph 3.1 of ECB Opinion CON/2009/10 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. All ECB opinions 
are available on the ECB website at www.ecb.europa.eu. 
See paragraph 2.1 of 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 C 314, 9.12.2008, p. 1); paragraph 2.1 
of  ECB  opinion  CON/2008/61  of  28  October  2008  at  the  request  of  the  Belgian  Minister  for  Finance  on  a  draft  royal 
decree implementing the Law of 15 October 2008 on measures promoting financial stability and in particular establishing 
a State guarantee for the provision of credit in the context of financial stability, in relation to the protection of deposits 
and life insurance and amending the Law of 2 August 2002 on the supervision of the financial sector and on financial 
services;  and  paragraph  2.1  of  ECB  Opinion  CON/2009/20  of  10  March  2009  at  the  request  of  the  Central  Bank  of 
Cyprus  and  of  the  Cypriot  Authority  for  the  Supervision  and  Development  of  Cooperative  Societies  on  certain  draft 
regulations related to the Deposit Protection Scheme.  

2 

 
 
                                                 
3. 

Specific observations 

3.1  Participation in the Fund 

The draft law broadens the scope of the Fund’s coverage as regards branches in Latvia of non-EU 
banks11. Such branches will become mandatory and unconditional members of the Fund, unlike the 

branches in Latvia of credit institutions established in another Member State, which may participate 

in  the  Fund  upon  notification  and  on  a  ‘supplementary  cover’  basis,  i.e.  to  the  extent  that  the 

deposit-guarantee scheme of the home Member State does not cover all the categories of deposits 

protected in Latvia or the amount of compensation offered by the home Member State’s scheme is 
less than amount applicable under the Latvian provisions12. While such provisions are in line with 

the  requirements  of  Article  4(2)  of  Directive  94/19/EC,  they  provide  for  different  treatment  of 

branches of EU banks and non-EU banks operating in Latvia. Under such provisions, the Fund will 

fully cover the guaranteed deposits held with the branches of credit institutions established in non-

EU  countries,  while  it  will  only  top-up  the  coverage  of  deposits held  with  the  branches  of credit 

institutions established in the EU Member States. 

3.2 

Sanctioning regime 

The draft law, together with the existing provisions of the Law on deposit guarantees, introduces a 

sanctions  regime  under  which  members  of  the  Fund  who  do  not  comply  with  the  financial 

obligations of Fund participation may, after one month’s notice: (i) in the case of banks established 

in Latvia and branches in Latvia of non-EU banks, have their banking licence revoked; or (ii) in the 

case of branches in Latvia of credit institutions established in other Member States, have their Fund 
participation  terminated13.  The  ECB  understands  that  the  intention  behind  the  proposed  sanction 

provisions  is  to  establish  an  effective  sanctioning  system  in  relation  to  all  categories  of  Fund 

members.  However,  the  ECB  draws  the  attention  of  the  FCMC  to  Article  3(2)  and  (3)  and 

Article 4(4)  of  Directive  94/19/EC  that  establish  minimum  rules  for  sanctions  procedures  in 
relation to non-compliant members of national deposit-guarantee schemes14. The ECB recommends 

that  the  Law  on  deposit  guarantees,  as  amended  by  the  draft  law,  should  be  aligned  with  the 

provisions  of  Directive  94/19/EC,  in  particular  as  regards  the  involvement  in  the  sanction 

procedures of the relevant supervisory authorities and the required period of notice.  

11  

12  
13  
14  

Resulting  from  amendments  to  Article  2(2)  and  the  deletion  of  Articles  2(3)  and  2(4)(2)  of  the  Law  on  deposit 
guarantees. 
See new paragraphs (2)(2) and (41) in Article 2 of the Law on deposit guarantees. 
See the current paragraphs (4) and (5) and the new paragraphs (6) and (7) in Article 12 of the Law on deposit guarantees. 
The provisions require that appropriate measures should be taken to ensure compliance, in the first instance by the home 
supervisory authority of the  relevant institution, in collaboration with the national guarantee-scheme of the institution or 
of  its  foreign  branch,  as  relevant.  Only  if  these  measures  fail  to  secure  compliance,  and  after  an  appropriate  period  of 
notice  of  not  less  than  12  months,  may  the  non-compliant  institution  or  its  foreign  branch  be  excluded  from  the 
institution’s  home  country  guarantee-scheme  or  from  the  supplementary  cover  of  the  branch’s  host  country  guarantee-
scheme, with the consent of the institution’s home supervisory authority.  

3 

                                                 
3.3  Calculation of contributions to the Fund 

The draft law introduces the possibility that levels of contributions to the Fund by its members may 

be differentiated according to specified prudential criteria, such as the capital adequacy ratio of a 
Fund member, its liquidity and large exposures ratios, and the quality of its loan portfolio15. In its 

previous opinions on draft national provisions proposing changes to the calculation of contributions 

to  national  deposit-guarantee  schemes,  the  ECB  has  welcomed  the  principle  of  risk-based 
premiums16, while at the same time it has emphasised that sound funding arrangements are critical 
to the schemes’ effectiveness and to the maintenance of public confidence in the banking system17. 

At  present,  Directive  94/19/EC  does  not  prescribe  any  method  for  financing  deposit-guarantee 

schemes,  as  long  as:  (i)  the  costs  of  financing  are  borne,  in  principle,  by  the  credit  institutions 

themselves;  (ii) the  financing  capacity  of  the  scheme  is  in  proportion  to  credit  institutions’ 

liabilities;  and  (iii) the  stability  of  the  banking  system  of  the  Member  State  concerned  is  not 
jeopardised18. However, Directive 2009/14/EC provides that, by 31 December 2009, the European 

Commission  must  present  a  report  concerning,  inter  alia,  the  harmonisation  of  the  funding 

mechanisms  of  deposit-guarantee  schemes  and  possible  models  for  introducing  risk-based 
contributions19.  Any  changes  to  national  legal  frameworks  for  the  operation  of  the  deposit-

guarantee schemes will need to take into account the work initiated at Community level. 

3.4  Reduction of delays in the payout of guaranteed deposits 

As  noted  in  previous  ECB  opinions20,  reducing  delays  in  making  payouts  of  guaranteed  deposits 

may strengthen depositor confidence and play a key role in the effectiveness of deposit-guarantee 

schemes.  At  the  same  time,  it  is  essential  that  a  pragmatic  approach  should  be  taken  to  the 

reduction  of  payout  delays,  thereby  preserving  the  credibility  of  the  deposit-guarantee  schemes. 

Moreover,  it  is  important  to  establish  efficient  operational  processes  for  verifying  claims  and 

reimbursing  depositors,  as  well  as  for  ensuring  that  sufficient  funding  is  available.  The  ECB 

acknowledges  the  intention  behind  the  draft  law  to  provide  for  speedy  payout  procedures,  in 

particular  by  imposing  on  Fund  members  a  requirement  to  make  daily  updated  lists  of  entitled 
depositors and of the amounts of guaranteed deposits21. Such measures appear to be in line with the 

objectives of Directive 2009/14/EC, which specifies that Member States should aim to ensure the 
continuity of banking services, in particular in periods of financial turmoil22.  

15  
16  

17  

18  
19  
20  
21  
22  

See amended Article 8(2) of the Law on deposit guarantees. 
See paragraph 3.2 of ECB Opinion CON/2008/51 of 17 October 2008 at the request of the Greek Ministry of Economy 
and  Finance  on  a  draft  law  on,  inter  alia,  the  establishment  of  the  ‘Depositors  and  Investors  of  Credit  Institutions 
Compensation Fund’. 
See paragraph 2.5 of the 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;  see  also  the  Financial  Stability  Forum,  ‘Guidance  for 
Developing Effective Deposit Insurance Systems’, September 2001, point V.4 (‘Funding arrangements’), p. 26. 
See recital 23 of Directive 94/19/EC. 
See Article 12(1) of Directive 94/19/EC, as amended by Article 1(7) of Directive 2009/14/EC. 
See paragraph 2.2 of Opinion CON/2008/70 and paragraph 2.2 of Opinion CON/2009/20. 
See new Article 131 of the Law on deposit guarantees. 
See recital 13 of Directive 2009/14/EC. 

4 

                                                 
3.5  Payments of guaranteed deposits through a commercial credit institution 

The  new  paragraphs  (1)  to  (4)  of  Article  20  of  the  Law  on  deposit-guarantees  provide  the 

possibility  that  payments  of  the  guaranteed  deposits  could  be  made:  (i)  through  one  or  more 

selected commercial credit institutions, or (ii) by transferring the guaranteed deposits, to the extent 

protected by the Fund, to another credit institution. The draft law does not clarify the criteria for 

selecting  the  credit  institution  responsible  for  the  payout  procedures,  the  precise  tasks  to  be 

assigned to such a credit institution, or its liability. In this context, the ECB refers to Article 10(1) 
of Directive 94/19/EC23 which requires that ‘[d]eposit-guarantee schemes shall be in a position to 

pay  duly  verified  claims  by  depositors  in  respect  of  unavailable  deposits’.  This  means  that  it  is 

primarily the responsibility of the national deposit-guarantee scheme to ensure that the guaranteed 

deposits  are  made  available  to  entitled  depositors  in  an  orderly  and  timely  manner,  whatever  the 

payment system chosen. It is therefore important to clarify the elements of the proposed provisions 

referred  to  above,  and  in  particular  to  ensure  that  the  credit  institution  appointed  will  have 

sufficient  resources  available  to  ensure  orderly  and  timely  payouts  under  the  deposit-guarantee 

scheme.  In  addition,  the  responsibility  of  the  commercial  credit  institution  appointed  should  be 

limited to the technical payment of the guaranteed deposits and should not include the verification 

of  the  claimants’  entitlement  to  payment,  for  which  the  national  deposit-guarantee  scheme  is 

responsible.  

3.6  More generally, the appointment of a commercial credit institution to act as payment administrator 

may  raise  concerns  because  of  issues  of  distortion  of  competition  and  moral  hazard,  as  well  as 

issues related to the potential to increase pressures in the distribution of liquidity. In particular, if a 

specific commercial credit institution were pre-appointed for this function, this could be viewed as 

a guarantee from the government that the credit institution in question would remain viable. Similar 

concerns may be related to an alternative solution under the amended Article 20(1)(2) of the Law 

on  deposit  guarantees,  whereby  the  service-providing  credit  institution  may,  in  practice,  acquire 

customer  accounts  from  an  institution  in  relation  to  which  deposit-guarantee  payments  are 

activated.  In  view  of  the  above,  the  ECB  recommends  strengthening  the  Fund’s  own  technical 

capacities as opposed to providing for temporary outsourcing solutions as the principal method for 
ensuring that the payment of guaranteed deposits is properly organised24. 

23  
24  

As amended by Article 1(6) of Directive 2009/14/EC. 
See  the  ECB  opinions  issued  in  the  context  of  the  present  financial  crisis,  which  emphasise  the  need  to  protect  the 
operational  capacity  of  the  existing  national  deposit-guarantee  schemes;  see  paragraph  3.10  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;  and  paragraph  2.2  of  ECB  Opinion  CON/2008/69  of  17  November  2008  at  the  request  of  the 
Irish Minister for Finance on a draft Financial Services (Deposit Guarantee Scheme) Bill 2008. 

5 

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

Done at Frankfurt am Main, 26 March 2009. 

[signed] 

The President of the ECB 

Jean-Claude TRICHET 

6