Opinion of the European Central Bank of 24 June 2009 on the distribution of Latvijas Banka’s profits (CON/2009/53)
Date: 2009-06-24
Institutions: European Central Bank
Subjects: Latvia, central bank, financial year, national law, profit

EN 

OPINION OF THE EUROPEAN CENTRAL BANK 

of 24 June 2009  

on the distribution of Latvijas Banka’s profits 

(CON/2009/53) 

Introduction and legal basis 

On  12  June  2009  the  European  Central  Bank  (ECB)  received  a  request  from  Latvijas  Banka  for  an 

opinion  on  a  draft  law  amending  the  Law  on  Latvijas  Banka  as  regards  the  distribution  of  Latvijas 

Banka’s profits (hereinafter the ‘draft law’). Latvijas Banka has requested the ECB’s opinion before the 

submission of the draft law to the Latvian Parliament. 

The  ECB’s  competence  to  deliver  an  opinion  is  based  on  Article  105(4)  of  the  Treaty  establishing  the 

European Community and the third 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  Latvijas  Banka.  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 main objective of the draft law is to amend Article 181(2) of the Law on Latvijas Banka increasing 

the payment  for the use of State capital from 15% to 50% of Latvijas Banka’s profits for the reporting 

year. 

2. 

General observations  

2.1  Member  States  are  obliged  to  safeguard  the  institutional  and  financial  independence  of  their 

national central banks (NCBs), thus ensuring the proper performance of their tasks under the Treaty 

and  the  Statute  of  the  European  System  of  Central  Banks  and  of  the  European  Central  Bank 

(hereinafter  the  ‘Statute  of  the  ESCB’).  In  particular,  the  compatibility  of  the  Law  on  Latvijas 

Banka  with  the  requirements  of  Article  108  of  the  Treaty  and  the  provisions  of  Article  7  of  the 

Statute  of  the  ESCB  concerning  central  bank  independence  is  of  utmost  importance,  as 

1  

OJ L 189, 3.7.1998, p. 42.  

 
 
 
 
 
                                                 
Latvijas Banka’s  primary  objective  of  price  stability  is  best  served  by  a  fully  independent 
institution with a precisely defined mandate2. 

2.2  With regard to financial independence, a Member State may not put its NCB in a position where it 

has  insufficient  financial  resources  to  carry  out  its  ESCB  or  Eurosystem-related  tasks.  The  NCB 

must  also,  at  all  times,  have  sufficient  financial  means  to  carry  out  its  other  functions,  i.e.  to 

perform its national tasks, to meet its international obligations and properly cover its administrative 
and operational expenses3.  

2.3  The ECB recognises the current financial situation in Latvia as well as the need to rebuild Latvia’s 

macroeconomic stability and enhance its credibility. However, it notes that the use of central bank 

financial resources may be counterproductive from the credibility point of view if confidence in the 

financial stability and independence of the NCB is undermined. 

2.4 

In  addition  to  the  issue  of  financial  independence,  national  rules  on  the  distribution  of  NCBs’ 

profits  must  comply  with  the  monetary  financing  prohibition  laid  down  in  Article  101(1)  of  the 

Treaty and 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) [now Articles 101 and 
103(1)]  of  the  Treaty4.  As  referred  to  in  previous  ECB  opinions5,  to  comply  with  the  monetary 

financing prohibition, it is of crucial importance that the distribution of profits, by instalments or in 

full, does not imply advances on future or provisional profits but is rather the result only of profits 

that are fully realised, accounted for and audited, which in turn requires due calculation of profits 

and losses.  

3. 

Specific comments  

3.1  According  to  the  current  wording  of  Article  181  of  the  Law  on  Latvijas  Banka,  Latvijas  Banka 

transfers to a State general budget account indicated by the State Treasury: (i) part of its profits for 

the reporting year, which is calculated by applying the tax rate established by the Law on corporate 

income tax (currently 15%); and (ii) payment for the use of State capital forming 15% of the profits 

for the reporting year. Under the draft law the payment for the use of State capital will be increased 

to 50% of the profits for the reporting year. 

3.2  With  regard  to  profit  allocation  rules,  an  NCB’s  Statute  may  prescribe  how  profits  are  to  be 

allocated. However, even though amendments to such rules are possible, it is important to shield 

the  rules  related  to  the  distribution  of  profits  from  third-party  interests  and  to  ensure  a  legal 
framework  that  provides  a  stable  and  long-term  basis  for  the  central  bank’s  functioning6. 

Furthermore,  according  to  the  principle  of  financial  independence,  as  stressed  by  the  ECB  in  its 

2 
3 
4 
5 
6  

See ECB Opinion CON/2007/14. All ECB opinions are available on the ECB’s website at www.ecb.europa.eu. 
 See the ECB’s Convergence Report May 2008, p. 20. 
 OJ L 332, 31.12.1993, p. 1. 
 See e.g. Opinion CON/2008/82. 
See Opinion CON/2007/14. 

2 

 
                                                 
 
convergence  reports  as  regards  financial  provisions  or  buffers,  an  NCB  must  be  free  to  create 
independently  financial  provisions  to  safeguard  the  real  value  of  its  capital  and  assets7.  In  this 

regard, it is recalled that the economic purpose of central bank capital and reserves is to ensure that 

the  central  bank  will  always  and  in  all  circumstances  have  at  its  disposal  the  necessary  financial 

resources to conduct monetary policy. However, the ECB notes that, according to Article 19 of the 

Law on Latvijas Banka, Latvijas Banka will use the reserve capital to cover possible losses. The 

need  to  ensure  a  long-term  perspective  as  regards  the  distribution  of  profits  should  be  borne  in 

mind. Indeed, it is of utmost importance to allow sufficient provisions of reserves during years of 

profits  to  allow  Latvijas  Banka  to  face  possible  losses  without  weakening  its  financial  means  to 

implement its monetary policy. 

The ECB further notes that in principle it is not optimal for the central bank to create reserves only 

after  transferring  a  large  portion  of  its  profits  to  the  Treasury.  Should  Latvijas  Banka  run  into  a 

situation of negative equity in the future (i.e. losses exceeding currently accumulated reserves), it 

would be hard to rebuild it out of the stream of future ‘net’ earnings under such an arrangement. 

Although  Latvijas  Banka  still  had  positive  capital  and  reserves  at  the  end  of  2008,  prudence  is 

required to ensure stable and sufficient financial resources in the long term. 

3.3  Moreover,  the  ECB  notes  that  the  current  calculation  of  the  total  rate  of  Latvijas  Banka’s  profit 

distribution involves, apart from the fixed part set by the draft law at 50% of the reported profits, 

also  the  additional  part  linked  to  the  tax  rate  established  by  the  Law  on  corporate  income  tax. 

Potential  amendments  to  the  Law  on  corporate  income  tax  would  result  in  changes  to 

Latvijas Banka’s total contribution to the State budget. While in principle both calculation methods 

are  admissible,  the  ECB  considers  that  for  the  sake  of  legal  certainty,  and  to  achieve  a  better 

safeguard  of  Latvijas  Banka’s 

financial 

independence, 

the  maximum  contribution  of 

Latvijas Banka  to  the  State  budget  should  rather  be  determined  by  a  single  fixed  rate  of 

Latvijas Banka’s  annual  profits,  set  in  the  Law  on  Latvijas  Banka.  Alternatively,  if  the  current 

twofold calculation of the total rate of Latvijas Banka’s profit distribution is maintained, the ECB 

recommends that, in view of Latvijas Banka’s obligations under the Treaty and the Statute of the 

ESCB, any changes to its financial obligations towards the State should be decided in cooperation 

with the Council of Latvijas Banka, taking into account its specific central bank tasks. 

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

Done at Frankfurt am Main, 24 June 2009. 

7  

See the ECB’s Convergence Report May 2008, p. 21. 

3 

[signed] 

The President of the ECB 

Jean-Claude TRICHET