Opinion of the European Central Bank of 23 October 2009 on the distribution of Lietuvos bankas’s profits (CON/2009/83)
Date: 2009-10-23
Institutions: European Central Bank
Subjects: Lithuania, central bank, financial year, financing method, national budget, national law, profit

EN 

OPINION OF THE EUROPEAN CENTRAL BANK 

of 23 October 2009  

on the distribution of Lietuvos bankas’s profits 

(CON/2009/83) 

Introduction and legal basis 

On 14 October 2009 the European Central Bank (ECB) received a request from the Lithuanian Ministry 

of Finance for an opinion on a draft law amending Article 23 of the Law on Lietuvos bankas as regards 

the rules on the distribution of the profits of Lietuvos bankas (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 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  Lietuvos  bankas.  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 

1.1  The draft law provides that Lietuvos bankas should contribute 70 % of its profit for the financial 

year  to  the  State  budget,  instead  of  50 %  of  its  profit,  as  currently  provided  for  in  the  Law  on 

Lietuvos bankas. The contribution to the State budget is to be made only after making a deduction 

to cover any losses carried forward from previous financial years. 

1.2  According  to  Article  23(3)  of  the  Law  on  Lietuvos  bankas  as  it  currently  stands,  the  profit  for  a 

financial  year  is  to  be  allocated  as  follows:  first,  to  cover  losses  carried  forward  from  previous 

financial years; second, to contribute to the State budget 50 % of the profit of Lietuvos bankas for 

the  financial  year  in  question,  after  making  any  deduction  to  cover  losses  carried  forward  from 

previous  financial  years;  and  third,  until  the  authorised  capital  reaches  200 million litas,  the 

remaining profit is allocated in equal parts between the authorised capital and the reserve capital, 

thereafter any residual amount is allocated to the reserve capital. 

1  

OJ L 189, 3.7.1998, p. 42.  

 
 
 
 
 
                                                 
2. 

General observations  

2.1  On 24 March 2009 the ECB adopted Opinion CON/2009/26 at the request of Lietuvos bankas on 

behalf of the Ministry of Finance of Lithuania on a draft law amending the Law on Lietuvos bankas 

as regards the rules on the distribution of the profits of Lietuvos bankas (this draft law hereinafter 

the  ‘March  draft  law’).  The  March  draft  law  provided  that  Lietuvos  bankas  should  contribute, 

extraordinarily, 100 % of its profit for the financial year 2008 to the State budget, instead of 50 % 

of  its  profit,  as  provided  for  in  the  Law  on  Lietuvos  bankas.  If  the  March  draft  law  had  been 

adopted,  Lietuvos  bankas  would  have  had  no  funds  to  transfer  to  the  authorised  and/or  reserve 

capital for 2008. 

2.2 

In Opinion CON/2009/26 the ECB noted that, first, the March draft law raised concerns regarding 

its compatibility with the institutional independence of Lietuvos bankas to the extent that it could 

have been construed as an instruction to Lietuvos bankas; and, second, it also raised concerns about 

the financial independence of Lietuvos bankas, as all its profit was to be contributed to the State 

budget. The ECB concluded that an ad hoc change to the rules on the distribution of profits, which 

reflected a particular financial need of the main shareholder and which took all the profits from the 

central  bank,  was  a  cause  of  particular  concern  and  was  not  compatible  with  the  Treaty  or  the 

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

‘Statute of the ESCB’). The ECB notes that its remarks were taken into account. 

2.3  The draft law proposes to increase the part of the profits of Lietuvos bankas to be transferred to the 

State  budget  from  50 %  to  70 %,  which  is  not  an  ad  hoc  change  but  an  amendment  of  the 

permanent  rule.  The  ECB’s  remarks  on  the  financial  independence  of  Lietuvos  bankas  and  the 

requirement 

to  comply  with 

the  monetary  financing  prohibition  expressed 

in  Opinion 

CON/2009/26, and in other subsequent opinions, remain valid. 

2.4  Central bank financial independence 

2.4.1  Each  Member  State  is  obliged  to  safeguard  the  institutional  and  financial  independence  of  its 

national central bank (NCB), thus ensuring the proper performance of its tasks under the Treaty and 
the Statute of the ESCB2. In particular, the compatibility of the Law on Lietuvos bankas with the 

requirements of Article 108 of the Treaty and the provisions of the Statute of the ESCB on central 

bank  independence  is  of  utmost  importance,  as  Lietuvos  bankas’s  primary  objective  of  price 
stability is best served by it being a fully independent institution with a precisely defined mandate3. 

2.4.2  The  concept  of  financial  independence  should  be  assessed  from  the  perspective  of  whether  any 

third party is able to exercise either direct or indirect influence not only over an NCB’s tasks but 

also over its ability (understood both operationally in terms of manpower, and financially in terms 
of appropriate financial resources) to fulfil its mandate4. Therefore, a Member State may not put its 

2  
3 
4

Opinion CON/2009/53, paragraph 2.1. All ECB opinions are published on the ECB’s website at www.ecb.europa.eu. 
Opinion CON/2009/26, paragraph 2.1. 
The ECB’s Convergence Report May 2008, pp. 20-21; and ECB Opinions CON/2008/9, CON/2008/10, CON/2008/34, 
CON/2008/82, CON/2009/4, CON/2009/26, and CON/2009/53. 

2 

                                                 
 
 
 
NCB in a position where it has insufficient financial resources to carry out its ESCB-related tasks5. 

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

they  must  be  able  to  perform  their  national  tasks,  to  meet  their  international  obligations  and 
properly to cover their administrative and operational expenses6. 

2.4.3  The  ECB  also  reminds  the  consulting  authority  that  Articles  28.1  and  30.4  of  the  Statute  of  the 

ESCB (the latter applies to Member States that have adopted the euro) provide for the possibility of 

further  calls  being  made  on  the  NCBs  to  make  contributions  to  the  ECB’s  capital  and  to  make 
further  transfers  of  foreign  reserves7.  The  principle  of  financial  independence  requires  that 

compliance  with  these  provisions  would  leave  an  NCB’s  ability  to  perform  its  functions 

unimpaired. 

2.5  The monetary financing prohibition 

2.5.1  National  rules  on  the  distribution  of  an  NCB’s  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 Treaty8.  

2.5.2  As referred in ECB Opinion CON/2009/59 of 14 July 2009 on the taxation of the Banca d’Italia’s 

gold  reserves,  those  provisions  prohibit  central  bank  (ECB  or  NCB)  credit  facilities  in  favour  of 

Community institutions or bodies or in favour of the Member States or their public sector bodies, 

as  well  as  direct  central  bank  purchases  of  debt  instruments  from  such  entities.  With  a  view  to 

preserving the integrity of the central bank’s balance sheet, the monetary financing prohibition is of 
key importance to ensuring the primary monetary policy objective of price stability9, which must 

not  be  impeded.  Therefore,  the  prohibition  must  be  interpreted  extensively  to  ensure  its  strict 
application10. Thus, even though Article 101(1) of the Treaty refers to ‘credit facilities’, i.e. with 

the  obligation  to  repay  such  credit,  this  prohibition  may  also  apply  a  fortiori  to  other  forms  of 

funding, i.e. without the obligation to repay, since Article 101 of the Treaty has the overall aim of 

public  financial  discipline  and  of  prohibiting  NCBs  from  financing  the  public  sector.  Both  the 

ultimate  objective  and  the  spirit  of  these  provisions  must  be  taken  into  account  in  their 
interpretation11. 

5 
6 
7  
8 
9 
10  
11  

The ECB’s Convergence Report May 2008, p. 20; and Opinion CON/2009/53, paragraph 2.2. 
Opinion CON/2009/26, paragraph 2.3; and Opinion CON/2009/53, paragraph 2.2. 
The ECB’s Convergence Report May 2008, p. 20. 
OJ L 332, 31.12.1993, p. 1. 
Article 105(1) of the Treaty; and Article 2 of the Statute of the ESCB. 
The ECB’s Convergence Report May 2008, p. 22. 
Opinion CON/2003/27, paragraph 9. 

3 

 
                                                 
3. 

Specific comments  

3.1  The  draft  law  modifies  the  rules  on  the  allocation  of  Lietuvos  bankas’s  profits  in  the  current 

financial  turmoil.  While,  according  to  the  consulting  authority,  the  aim  of  the  draft  law  is  to 

enhance the stability and credibility of the Lithuanian financial system, the ECB stresses that it is, 

in any circumstances, particularly important to secure and strengthen the independence of Lietuvos 

bankas, and even more so in periods of crisis. Moreover, overcoming the current financial turmoil 
depends on the ability of central banks to carry out their functions independently12. 

3.2  With regard to profit allocation, an NCB’s statutes may prescribe how its profits are to be allocated. 

Even though amendments to such rules are possible, they should not be changed frequently. It is 

important to protect the rules relating 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 
functioning13. 

3.3  As the ECB noted in its Convergence Report of May 200814, the distribution of its profits is one of 

the areas of financial independence where an NCB is most vulnerable to outside influence. In this 

context  the  ECB  understands  that  the  draft  law  will  reduce  the  financial  means  available  to 

Lietuvos bankas for allocation to its authorised and/or reserve capital. According to the principle of 

financial  independence  (as  stressed  by  the  ECB  in  all  its  convergence  reports,  including  the 

Convergence Report of May 2006 regarding Lithuania), with regard to making financial provisions 

or  buffers  an  NCB  must  be  free  to  decide  independently  on  making  financial  provisions  to 

safeguard the real value of its capital and assets.  

3.4   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. According to Article 23(2) of the Law on Lietuvos bankas, Lietuvos bankas uses 

the reserve capital to cover possible losses of a financial year. There must be regard for the long-

term  perspective  of  the  distribution  of  profits.  It  is  of  the  utmost  importance  to  make  sufficient 

provisions of reserve capital during years of profit to allow Lietuvos bankas to face possible losses 
without weakening its financial means for implementing its monetary policy15. 

3.5 

In  principle  it  is  not  optimal  for  a  central  bank  to  create  reserves  only  after  transferring  a  large 
portion of its profits to the State budget16. Should Lietuvos bankas experience negative equity in 

the  future  (i.e.  losses  exceeding  accumulated  reserves),  it  would  be  hard  to  rebuild  it  out  of  the 

stream  of  future  profits  under  such  an  arrangement.  Although  Lietuvos  bankas  had  positive  net 

equity at the end of 2008 and expects it to be positive also at the end of 2009, prudence is required 

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

12  
13 
14  
15  
16  

Opinion CON/2009/26, paragraph 3.2. 
Opinion CON/2007/14, paragraph 2.2; and Opinion CON/2009/26, paragraph 3.4. 
The ECB’s Convergence Report May 2008, p. 21. 
Opinion CON/2009/53, paragraph 3.2. 
Opinion CON/2009/53, second subparagraph of paragraph 3.2. 

4 

                                                 
3.6  The  ECB  recommends  that,  in  view  of  Lietuvos  bankas’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 Board of Lietuvos bankas, taking into account its specific central bank tasks17. 

It is not clear from the consultation letter whether the consulting authority initiated the draft law in 

cooperation  with  Lietuvos  bankas,  after  careful  and  cautious  assessment  of  the  current  status  of 

Lietuvos  bankas’s  reserve  capital,  including  projections  of  negative  scenarios.  Since  an  NCB  is 

best placed and has all the necessary tools to evaluate these circumstances and to make forecasts, 

any new regime for the allocation of profits to the State should be made in close coordination with 

Lietuvos bankas.  

3.7  The data available to the ECB shows that, relatively, the net equity (including capital and reserves) 

of non-Eurosystem NCBs  is  much lower than that of the Eurosystem NCBs; the data also shows 

that the ratio between risk-bearing assets and net equity is several times higher in non-Eurosystem 

NCBs than in the Eurosystem NCBs (the higher the ratio is in absolute terms, the lower the ability 

of  a  central  bank  to  cover  the  risk  of  adverse  asset  price  movements  or  defaults).  The  ECB 

understands that Lietuvos bankas is still in the process of building up its reserve capital to a level 

corresponding to that of the Eurosystem NCBs. 

4. 

Final observations 

4.1  Summarising  the  above  arguments,  the  ECB  concludes  that  the  reduction  of  the  financial  means 

available  to  Lietuvos  bankas  for  allocation  to  its  reserve  capital  could  hamper  Lietuvos  bankas 

from continuing the process of building up its reserve capital to a level corresponding to that of the 

Eurosystem  NCBs.  It  could  undermine  Lietuvos  bankas’  financial  independence  as,  in  the  worst 

scenario, if the reserve capital of Lietuvos bankas were not sufficient to cover possible losses, there 

could be a threat that Lietuvos bankas would not autonomously be able to avail itself of sufficient 

financial  resources  to  fulfil  its  mandate.  This  could  impair  its  independent  functioning.  Each 

Member State  must ensure that its NCB has sufficient financial resources to  carry out its ESCB-

related tasks.  

4.2  Moreover, any amendment to the rules on the distribution of Lietuvos bankas’s profits should only 

be  initiated  in  coordination  with  Lietuvos  bankas,  which  is  best  placed  to  provide  an  expert 

assessment  of  the  amount  or  ratio  of  the  reserve  capital  necessary  to  cover  its  possible  needs  or 

losses  related  to  its  operational  activities,  including  performance  of  its  ESCB-related  tasks.  Only 

once  such  a  detailed  impact  assessment  has  been  made,  can  the  ECB  make  a  final  analysis  of 

compliance with the monetary financing prohibition. 

17  

Opinion CON/2009/53, paragraph 3.3. 

5 

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

Done at Frankfurt am Main, 23 October 2009. 

[signed] 

The President of the ECB 

Jean-Claude TRICHET 

6