Opinion of the European Central Bank of 24 June 2009 on further financial market stabilisation measures (CON/2009/54)
Date: 2009-06-24
Institutions: European Central Bank
Subjects: Germany, credit institution, financial stability, national law, payment system, securities

EN 

OPINION OF THE EUROPEAN CENTRAL BANK 

of 24 June 2009  

on further financial market stabilisation measures  

(CON/2009/54) 

Introduction and legal basis 

On  26  May  2009,  the  European  Central  Bank  (ECB)  received  a  request  from  the  German  Federal 

Ministry  of  Finance  for  an  opinion  on  a  draft  law  on  the  further  development  of  financial  market 

stabilisation (hereinafter the ‘draft law’). On 15 June 2009, the ECB received a further request from the 

German Federal Ministry of Finance for an opinion on a proposal to amend the wording of the draft law 

(hereinafter the ‘proposed amendment’). 

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 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 and the proposed amendment 

1.1  While  the  German  Federal  Government  has  already  taken  steps  to  stabilise  the  financial  markets 
with the Law on financial market stabilisation2, credit institutions nevertheless hold large volumes 

of structured securities (e.g. asset backed securities, collateralised debt obligations, etc.) and there 

are  further  assets  with  increased  default  risks  in  the  balance  sheets  of  credit  institutions  and 

financial services institutions. These securities and assets are difficult to evaluate and are not easily 

sold in a volatile market environment. They entail credit and liquidity risks that may result in the 

write-off  of  the  value  of  the  securities.  Thus,  confidence  in  the  holders  of  these  instruments  and 

their financial resources may be impaired. 

1  
2  

OJ L 189, 3.7.1998, p. 42.  
Law on financial market stabilisation of 17 October 2008, (2008) Bundesgesetzblatt I, p. 1982. 

 
 
 
 
                                                 
1.2  The draft law 

1.2.1  Against  this  background,  the  draft  law  provides  for  short-term  measures  to  remove  structured 

securities  from  the  balance  sheets  of  financial  holding  companies,  credit  institutions  and  their 

subsidiaries  (hereinafter  the  ‘transferring  institutions’).  It  also  creates  certainty  with  regard  to 

write-offs. 

1.2.2  Under  the  draft  law,  a  transferring  institution  may  transfer  structured  securities  (hereinafter  the 
‘transferred  securities’)  at  a  reduced  book  value3  to  a  special  purpose  vehicle  (SPV)  that  is 

established for this purpose. In return, the transferring institution receives bonds for the same value 

issued  by  the  SPV  and  guaranteed  by  the  Sonderfonds  Finanzmarktstabilisierung  (SoFFin, 

Financial Market Stabilisation Fund), i.e. by the State. Thus, the transferring institution has State 

guaranteed bonds instead of volatile assets on its balance sheet. The interest and repayment of the 

bonds  are  serviced  from  the  cash  flows  of  the  transferred  securities.  In  return,  the  transferring 

institution pays a guarantee fee adequately reflecting the risk connected to the transferred securities 

to the Government (the SoFFin). The real economic value of the securities is determined at the time 

the securities are transferred. If, based on a risk evaluation, the value of the securities is reduced, an 

additional deduction is made and the resulting value is the ‘fundamental value’. 

1.2.3  The  transferring  institution  is  obliged  to  pay  a  compensatory  fee  from  the  amount  available  for 

distribution  to  shareholders.  The  compensatory  fee  is  equal  to  the  difference  between  the 

discounted book value and the fundamental value and is paid in equal annual instalments over the 

life of the structured security, up to a maximum of 20 years. This payment is made to the SPV to 

compensate for expected losses arising from the purchase of the asset. The interest rate advantage 

arising  from  the  deferred  payment  of  the  difference  between  the  reduced  book  value  and  the 

fundamental  value  must  be  remunerated  in  the  form  of  a  market-based  fee  for  the  SoFFin’s 

guarantee. 

1.2.4  Any  funds  remaining  after  the  SPV’s  dissolution  are  paid  to  the  transferring  institution’s 

shareholders. If the compensatory fee fails to cover losses stemming from the transferred securities, 

the transferring institution is liable and must fully compensate the Government for such losses out 

of the amount available for distribution to shareholders. As a consequence, the shareholders of the 

transferring institution are responsible for all losses stemming from the transferred securities. 

1.2.5  The transferring institutions eliminate the risks associated with the transferred securities once they 

are written down to the reduced book value. To attract new investors and to shield them from the 

risks  associated  with  the  transferred  securities,  the  transferring  institutions  may  issue  preferential 

shares,  which  may  also  have  voting  rights.  Such  preferential  rights  have  priority  over  other 

shareholders and the SoFFin’s claims.  

3  

This is the higher of 90 % of the book value as stated in the last audited annual accounts or the real economic value as 
defined by the Commission;  this haircut on the book value is subject to the proviso that the transferring institution retains 
a core capital ratio of at least 7 %. 

2 

 
 
                                                 
1.3  The proposed amendment  

1.3.1  The 

proposed 

amendment 

provides 

for 

the 

transformation 

of 

the 

current 

Finanzmarktstabilisierungsanstalt (Financial Market Stabilisation Authority) into the Bundesanstalt 

für  Finanzmarktstabilisierung  (FMSA,  Federal  Authority  for  Financial  Market  Stabilisation),  a 

Federal  authority  with  legal  capacity  under  public  law,  within  the  sphere  of  responsibility  of  the 

Federal Ministry of Finance. Further, under the proposed amendment the deadline for applying to 

the FMSA for support measures is extended until 31 December 2010. 

1.3.2  In  substance,  the  proposed  amendment  provides  for  measures  to  clean  up  the  balance  sheets  of 

credit  institutions,  financial  holding  companies,  their  subsidiaries  and  SPVs  with  respect  to  risk 

positions and non-strategic business areas. These transferring institutions are able to transfer these 

risk  positions  and  business  areas  to  an  organisationally  and  financially  independent  winding-up 

agency separately established under public law for each institution by and under the supervision of 

the FMSA. As the winding-up agencies are not subject to the provisions of the Banking Act within 
the framework of the EU law requirements of the Banking Directive4, the assets transferred to the 

winding-up agencies are not subject to the own funds requirements. 

1.3.3  The registered office, tasks, organisation, governance and surveillance etc. of these agencies are to 

be regulated in the statutes of each agency, which are to be published in the Federal Bulletin. 

1.3.4  The principle of proprietary responsibility applies, so that a winding-up agency and the direct and 

indirect  owners  of  the  transferring  institutions  which  have  a  stake  in  the  winding-up  agency  are 

liable to pay compensation for any losses. This is a direct and comprehensive liability for the losses 

of  the  winding-up  agency.  At  the  same  time,  the  liability  of  the  State  is  to  be  excluded  as  far  as 

possible. 

1.3.5  According to the explanatory memorandum accompanying the proposed amendment, consideration 

for  the  transfer  of  risk  positions  and business  areas  depends  on  the  design  of the  transfer  and  on 

who  is  ultimately  liable  for  the  transferred  assets.  As  stated  in  the  explanatory  memorandum,  a 

Landesbank  (a  bank  owned  by  a  German  Federal  State)  should  only  be  able  to  use  this  scheme 

once  the  Federal  States  that  hold  shares  in  that  Landesbank  have  committed  themselves  to  a 

reorganisation of the Landesbank sector. 

2. 

General observations  

2.1  All the comments and recommendations in relation to the rescue package of the German authorities 

made by the ECB in Opinion CON/2008/57 and Opinion CON/2009/24 apply equally to the draft 

law and the proposed amendment.  

4  

See Section A. of the explanatory memorandum accompanying the proposed amendment. 

3 

 
 
 
                                                 
2.2 

In line with its previous opinions, the ECB emphasises the following: 

(i)  when  adopting  measures  to  deal  with  the  financial  crisis,  Member  States  should  act  in  a 

coordinated  manner  in  order  to  avoid  significant  differences  in  national  implementation 

having a counter-productive effect, which may involve distortions in global banking markets. 

Moreover, it is crucial to ensure consistency with the management of liquidity and with the 
operational framework of the Eurosystem5. Such considerations are particularly important in 

ensuring a sufficiently level playing field within the euro area;  

(ii)  

the  ECB  welcomes  the  fact  that  the  SoFFin,  as  well  as  the  newly  created  FMSA,  is 

organisationally  separate  from  the  Deutsche  Bundesbank,  as  recommended  in  Opinion 

CON/2008/57.  In  this  respect,  the  ECB  reiterates  its  comments  made  in  paragraph  3.1  of 

Opinion CON/2008/57 on other aspects of compliance with Article 101 of the Treaty;  

(iii)   as  concerns  eligibility  for  support,  the  ECB  notes  that,  as  mentioned  in  Opinion 

CON/2008/57,  the  measures  under  the  draft  law  are  available  to  credit  institutions  and 

financial  holding  companies  which  have  their  registered  office  in  Germany,  or  their 

subsidiaries. 

2.3  The Eurosystem has assessed the features and implementation modalities of asset support schemes 
and has developed a number of guiding principles6 for the attainment of the following objectives: 

(i) safeguarding financial stability and restoring the provision of credit to the private sector while 

limiting moral hazard; (ii) ensuring that a level playing field within the single market is maintained 

to the maximum extent possible; and (iii) containing the impact of possible asset support measures 

on  public  finances.  The  seven  guiding  principles  identified  are  sufficiently  broad  to  apply  to  all 

schemes  falling  under  the  wide  category  of  asset  support  measures.  These  concern:  (i)  the 

voluntary  nature  of  participation,  with  institutions  with  large  concentrations  of  impaired  assets 

being given priority; (ii) a broad definition for eligible assets; (iii) transparency of valuation of the 

assets;  (iv)  an  adequate  degree  of  risk  sharing;  (v)  a  sufficiently  long  duration  of  the  schemes; 

(vi) governance of the institution according to business principles; and (vii) making such support 

schemes conditional on certain commitments by the participants. 

2.4  The draft law 

2.4.1  The  draft  law  provides  for  an  asset  support  scheme  according  to  which  a  transferring  institution 

sets up its own SPV and transfers securitised assets to it. In exchange, the SPV issues Government 

guaranteed  bonds  to  the  transferring  institution.  Moreover,  under  the  draft  law,  the  original 

shareholders  of  the  transferring  institution  remain  liable  for  any  of  the  SPV’s  losses,  as  long  as 

these are covered by the future amounts available for distribution to shareholders of the transferring 

institution. Under this model, the securities are removed from the transferring institutions’ balance 

5  

6  

See  Opinion  CON/2008/57.  All 
www.ecb.europa.eu/ecb/legal/opinions/html/index.en.html. 
Guiding  Principles  for  Bank  Asset  Support  Schemes  issued  on  25  February  2009,  available  on  the  ECB  website  at 
www.ecb.europa.eu. 

ECB  website 

available 

opinions 

ECB 

the 

are 

on 

at 

4 

 
 
                                                 
sheets, while on the other hand the profit distributable to the shareholders will continue to be used 

until  all  risks  of  the  securities  are  covered.  For  this  reason,  the  draft  law  may  be  considered  a 

‘hybrid’ asset support scheme. 

2.4.2  Since  the  shareholders  of  the  transferring  institutions  thereby  have  to  fully  bear  the  cost  of  the 

scheme  as  long  as  the  transferring  institutions  exist,  moral  hazard  as  well  as  incentives  to 

participate  are  likely  to  be  limited.  In  addition,  possible  complexities  in  determining  the  correct 

value of the transferred securities are partially circumvented, as valuation only has an effect for the 

addressees of the distributable profits of the transferring institution. If the transferred securities are 

overvalued, the compensation fee paid over the guarantee period would be too low. The difference 

would  then  be  paid  from  future  distributable  profits,  which  would  not  be  distributed  to  the 

shareholders  but  to  the  Government.  In  the  event  of  undervaluation,  the  opposite  occurs  and  the 

shareholders would profit from the SPV’s profits. The effect of the scheme on the federal budget 

and debt may be limited, given that upfront payments by the government are not necessary. 

2.4.3  For the reasons given in paragraphs 2.4.1 and 2.4.2 above, the scheme provided for by the draft law 

is broadly in line with the guiding principles, subject to the specific observations below. 

2.5  The proposed amendment 

2.5.1  The proposed amendment defines in very broad terms: (i) the possible beneficiaries of the scheme, 

(ii)  the  types  of  assets  to  be  covered,  and  (iii)  the  conditions  and  modalities  of  the  scheme 

introduced by the proposed amendment. These must be laid down in the statutes of each winding-

up agency. The proposed amendment thus leaves a wide margin of discretion to the FMSA and the 

Ministry of Finance to decide whether to establish a winding-up agency and on whether to specify 

further  the  modalities  and  conditions  for  the  transfer  of  assets  to  such  agency.  The  ECB 

recommends  that  the  proposed  amendment  should  follow  the  guiding  principles  set  out  in 

paragraph  2.3  above  and  it  should  be  specified  that  the  proposed  amendment,  and  any 

implementing  measures  or  decisions  adopted  pursuant  to  the  proposed  amendment,  should  be 

interpreted in the light of these guiding principles. 

2.5.2  The  ECB  notes  that  the  initial  deadline  for  applying  for  support  measures  by  the  SoFFin  is 
prolonged  for  one  year  until  31  December  2010.  As  stated  before7,  the  ECB  emphasises  that 

harmonisation  regarding  the  expiry  of  the  various  financial  support  measures  within  a  particular 

country and the national financial support schemes across the EU is of crucial importance in order 

to ensure a level playing field.  

2.5.3  Due to the general nature of the drafting of the proposed amendment, no more specific comments 

can be made on it at this point. 

7  

See Opinion CON/2009/6. 

5 

 
 
 
                                                 
3. 

Specific observations on the draft law 

3.1  Eligibility of assets as collateral in Eurosystem refinancing operations 

3.1.1  The  draft  law  does  not  specify  any  restrictions  on  the  guaranteed  bonds  that  will  be  provided  in 

exchange for the transferred securities. 

3.1.2  The ECB assumes that the debt securities issued by the SPV will be straight bonds rather than, for 

example,  structured  securities.  This  is  important  for  the  eligibility  of  these  bonds  in  Eurosystem 

credit  operations.  It  should  be  noted  that  for  example  subordinated  securities  with  an  appropriate 

guarantee may be only temporarily eligible as collateral for Eurosystem refinancing operations, i.e. 

until the end of 2010. For legal certainty reasons, clarification of this issue in the draft law would be 

welcomed. 

3.1.3  The  ECB  understands  that,  according  to  the  draft  law,  the  SoFFin’s  guarantee  covers  all  issuer 

obligations  in  relation  to  payments  of  principal,  interest  and  any  other  amounts  due  under  the 

transferred securities. Again, this is important for the eligibility of these bonds in Eurosystem credit 

operations. 

3.1.4  The  draft  law  does  not  specify  whether  the  SPV  may  sell  or  pledge  the  transferred  securities 

received or whether they must be held to maturity. If they can be repoed out or sold by the SPV 

(which  will  not  be  a  counterparty  to  the  Eurosystem),  then  they  may  be  available  for  use  as 
collateral in Eurosystem credit operations8. 

3.2  Financial Stability 

3.2.1  The  scheme  provided  for  by  the  draft  law  is  expected  to  offer  two  possible  sources  of  relief  for 

transferring  institutions.  First,  the  exchange  of  transferred  securities  for  government  guaranteed 

bonds may provide transferring institutions with collateral that can be used to access central bank 

liquidity.  Second,  from  a  regulatory  perspective,  exchanging  securities  subject  to  high  capital 

requirements for government guaranteed bonds may free up capital.  

3.2.2  The  provision  of  liquidity  and  the  freeing  up  of  capital  would  allow  transferring  institutions  to 

continue  their  lending  activity.  Despite  the  cap  on  the  haircut  of  10 %,  the  risk  is  that  some 

institutions may have limited incentives to participate in the scheme because of low capital buffers. 

However, this risk is limited by the condition that the transferring institution retains a core capital 

ratio of at least 7 % and the haircut is only needed if the fundamental value is lower than the book 

value.  In  addition,  potential  new  investors  could  be  discouraged  from  injecting  capital  into  the 

transferring institution due to a future allocation of distributable profits to cover the SPV’s losses; 

however, this is mitigated by the ability of the transferring institutions to issue preferential shares 

granting  new  shareholders  priority  over  the  SoFFin’s  claims.  Since  the  draft  law  allows  for 

compensation  for  potential  losses  in  the  form  of  share  issues  to  the  SoFFin  and  this  implies 

8  

This requires that the transferred securities fulfil the ECB’s eligibility criteria and are repoed out or sold to an eligible 
Eurosystem counterparty. 

6 

 
 
                                                 
increased government involvement in the banking sector, the ECB considers that an assessment of 

the extent of this additional public involvement should be made and exit strategies be formulated. 

3.2.3  Finally, the ECB understands that the transferring institutions continue as going concerns, i.e. they 

will  not  be  wound  up.  Therefore,  a  condition  for  participation  is  the  maintenance  of  adequate 

capital levels, a sound business policy and a solid business model. In the event of the transferring 

institution’s  insolvency  and  a  loss  on  the  SPV’s  portfolio,  the  Government  would  become 

responsible for losses on the guaranteed transferred securities. Consequently, the Government has 

an  incentive  to  avoid  the  insolvency  of  a  transferring  institution  by  providing  further  support 

measures. In this regard, the draft law may necessitate further public support measures. 

3.3   Accounting 

3.3.1  In the context of the implementation of the draft law, the ECB notes that the accounting treatment 

of  the  transferred  securities  is  unclear.  Under  the  current  proposal,  the  shareholders  of  the 

transferring institutions remain liable to cover any losses on the transferred securities out of their 

future amounts available for distribution to shareholders. Clarification is required as to whether: (i) 

the accounts of the SPVs must be consolidated; and (ii) the transferred assets meet the requirements 

for  derecognition  under  IAS  39.  In  addition,  given  that  transferring  institutions  remain  liable  for 

losses, they may not obtain relief from an accounting perspective. However, further clarifications in 

this  regard  would  be  helpful,  and  the  ECB  understands  that  such  clarifications  may  already  be 

under preparation. 

3.3.2  Under the draft law, the ‘compensatory fee’ is paid annually by the transferring institutions from 

their  distributable  income,  over  a  maximum  of  20  years.  The  obligation  to  pay  this  fee  is 

inextricably  linked  to  the  decision  and  ability  of  the  transferring  institution  to  pay  dividends  to 

shareholders.  In  this  context,  it  should  be  further  assessed  whether  this  scheme  achieves  its 

intended  purpose  given  that  it  is  unclear  whether  transferring  institutions  are  required  to  set  up 

provisions (against net income) for these additional losses in their annual financial statements.  

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

Done at Frankfurt am Main, 24 June 2009. 

The President of the ECB 

Jean-Claude TRICHET 

7