Opinion of the European Central Bank of 10 November 2011 on the amendments to Lietuvos bankas’ profit distribution rules (CON/2011/91)
Date: 2011-11-10
Institutions: European Central Bank
Subjects: Lithuania, central bank, financial year, financing method, loss, national law, profit

EN 

ECB-PUBLIC 

OPINION OF THE EUROPEAN CENTRAL BANK 

of 10 November 2011  

on the amendments to Lietuvos bankas’ profit distribution rules 

(CON/2011/91) 

Introduction and legal basis 

On 14 October 2011, the European Central Bank (ECB) received a request from Lietuvos bankas for an 

opinion on a draft law amending and supplementing Article 23 of the Law on Lietuvos bankas as regards 

the rules on the distribution of Lietuvos bankas’ profit (hereinafter the ‘draft law’). 

The ECB’s competence to deliver an opinion is based on Articles 127(4) and 282(5) of the Treaty on the 

Functioning of the European Union 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  Pursuant to Article 23(3) of the Law on Lietuvos bankas, profit for a financial year is allocated in 

the following order:  

(a) 

first, to cover losses carried forward from previous financial years;  

(b) 

second, 70 % is distributed to the State budget, after deducting losses  carried forward from 

the previous financial years; 

(c) 

third, remaining profit is allocated equally between authorised and reserve capital, until the 

authorised capital reaches LTL 200 million;  

(d) 

fourth, residual profit is allocated to reserve capital. 

1.2  The draft law amends the procedure for calculating Lietuvos bankas’ profit contribution to the State 

budget, the profit distribution and loss coverage rules.  

1.2.1  The draft law amends the reference period for calculating Lietuvos bankas’ profit to be distributed 

to the State budget. Instead of basing the calculation on the preceding financial year, as provided 

for  in  the  Law  on  Lietuvos  bankas,  it  will  be  based  on  the  average  profit  of  the  preceding  three 

financial years.  

1  

OJ L 189, 3.7.1998, p. 42.  

 
 
 
 
                                                 
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1.2.2  The  following  are  to  be  deducted  before  distribution  to  the  State budget:  (a)  30  %  of  the  market 

value of Lietuvos bankas’ real property transferred to the State Property Fund during the preceding 

financial  year;  and  (b)  if  Lietuvos  bankas’  reserve  capital  is  lower  than  five  times  the  authorised 

capital, an amount equal to this difference. 

1.2.3  Where the profit, based on the average profit of the preceding three years, is greater than the profit 

of the preceding financial year, the remaining part of Lietuvos bankas’ distribution is to be paid to 

the State budget from Lietuvos bankas’ reserve capital. 

1.2.4  As  in  the  case  of  the  Law  on  Lietuvos  bankas,  remaining  profit  is  allocated  equally  between 

authorised  and  reserve  capital,  until  the  authorised  capital  reaches  LTL  200 million;  thereafter 

residual profit is allocated to the reserve capital. 

1.3  The draft law is expected to enter into force on 1 January 2012. 

2. 

General observations  

Any transfer of national central bank (NCB) resources to a Member State, either in the form of a profit 

distribution scheme or any equivalent form, needs to comply with the limitations imposed in this respect 

by the Treaty, in particular with the principle of central bank independence pursuant to Article 130 of the 

Treaty, and with the prohibition on monetary financing laid down in Article 123(1). 

3.   Central bank independence 

3.1  Each Member State is obliged to safeguard the institutional and financial independence of its NCB, 

thus ensuring the proper performance of its tasks under the Treaty and the Statute of the European 
System of Central Banks and the European Central Bank (hereinafter the ‘Statute of the ESCB’)2. 

The  compatibility  of  the  Law  on  Lietuvos  bankas  with  the  requirements  of  Article  130  of  the 

Treaty and the provisions of the Statute of the ESCB on central bank independence is therefore of 

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

3.2  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 to fulfil its mandate, both operationally in terms of manpower and financially in 
terms of appropriate financial resources4. A Member State may not put its 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 

2  

3 
4
5 

Opinion CON/2009/53, paragraph 2.1 and Opinion CON/2009/83, paragraph 2.4.1. All ECB opinions are available on the 
ECB’s website at www.ecb.europa.eu. 
Opinion CON/2009/26, paragraph 2.1 and Opinion CON/2009/83, paragraph 2.4.1. 
ECB’s Convergence Report May 2010, p. 22. 
ECB’s  Convergence  Report  May  2010,  p.  21;  Opinion  CON/2009/53,  paragraph  2.2  and  Opinion  CON/2009/83, 
paragraph 2.4.2. 

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

3.3  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 whose currency is 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  reserves.  The  principle  of  financial  independence  means  that 
compliance with these provisions requires an NCB to be able to perform its functions unimpaired7. 

3.4  Finally,  NCB’s  profits  may  be  distributed  to  the  State  budget  only  after  any  accumulated  losses 
have  been  covered8  and  financial  provisions  deemed  necessary  to safeguard  the  real  value  of  the 

NCB’s capital and assets have been created. Temporary or ad hoc legislative measures amounting 
to instructions to the NCBs in relation to the distribution of profit are not possible9. 

3.5  Stability of profit distribution rules 

3.5.1  The  frequency  of  amendments  to  the  rules  on  the  distribution  of  Lietuvos  bankas’  profit  raises 

specific concerns from the central bank independence perspective.  

3.5.2  The amendments to the rules on the distribution of Lietuvos bankas’ profit have been submitted for 
consultation three times since March 200910. The ECB’s Convergence Report of May 201011 noted 

that the distribution of NCB’s profit is one of the areas of financial independence where an NCB is 

most  vulnerable  to  outside  influence.  An  NCB’s  statutes  may  prescribe  how  its  profit  is  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 profit from third-party 

interests and to ensure a legal framework that provides a stable and long-term basis for an NCB’s 
functioning12.  Moreover,  frequent  amendments  do  not  comply  with  the  accounting  principles  of 
consistency, comparability13 and continuity.  

3.6  Treatment of losses 

Unlike the Law on Lietuvos bankas14, the draft law no longer explicitly ensures that profit is paid to 

the State budget only after accumulated losses from previous financial years have been covered. To 

the contrary, it is uncertain whether, notwithstanding Lietuvos bankas’ profits or losses, it would 

6 

Opinion  CON/2009/26,  paragraph  2.3,  Opinion  CON/2009/53,  paragraph  2.2,  and  Opinion  CON/2009/83, 
paragraph 2.4.2. 
7  
ECB’s Convergence Report May 2010, p. 21. 
8  
 ECB’s Convergence Report May 2010, p. 23. 
9  
 ECB’s Convergence Report May 2010, p. 23. 
10  
 See Opinions CON/2009/26 and CON/2009/83. 
11  
ECB’s Convergence Report May 2010, p. 22. 
12 
Opinion CON/2007/14, paragraph 2.2, Opinion CON/2009/26, paragraph 3.4, Opinion CON/2009/83, paragraph 3.2. 
13     Guideline  ECB/2010/20  of  11  November  2010  on  the  legal  framework  for  accounting  and  financial  reporting  in  the 
European  System  of  Central  Bank  (recast)  (OJ  L  35,  9.2.2011,  p.  31).  Lietuvos  bankas  also  follows  the  principles  of 
consistency and comparability when preparing financial statements, as stated in its Annual Report 2010, pp. 95-96. The 
Annual Report is available on Lietuvos bankas’ website at www.lbank.lt. 
Article 23(3)(1). 

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still need to make contributions to the State budget, without first covering the uncovered losses for 

the  previous  financial  years.  This  is  incompatible  with  central  bank  financial  independence. 

Therefore, the current provision of the Law on Lietuvos bankas, specifying that profit is paid to the 

State budget only after accumulated losses from previous financial years have been covered, has to 

be maintained in the Law on Lietuvos bankas.   

3.7  Creation of financial provisions 

3.7.1  The ECB reiterates that NCBs must be free to independently create financial provisions or buffers 
to safeguard the real value of their capital and assets15. This could ideally be achieved by creating 

provisions  against  certain  risks  arising  from  an  NCB’s  activities,  such  as  a  provision  for  foreign 
exchange rate, interest rate, credit risk, gold price16 and other risks17.  

3.7.2  The draft law raises specific concerns from the central bank independence perspective since profits 

may be distributed to the State budget only after any accumulated losses from previous years have 

been covered and financial provisions deemed necessary to safeguard the real value of the NCB’s 
capital and assets have been created18. 

3.7.3  In the same vein, in order to ensure the proper performance of its tasks under the Treaty and the 

Statute of the ESCB, the NCB needs to maintain adequate net equity to be covered against potential 
risks  arising  from  the  nature  of  its  activities.  In  this  context  the  ECB  reiterates19  that  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 at non-Eurosystem NCBs 

than  at  the  Eurosystem  NCBs.  The  higher  the  ratio  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 net equity to a level corresponding to 

that of the Eurosystem NCBs. 

3.8  Legal status of Lietuvos bankas’ assets 

3.8.1  Opinion CON/2010/4220 noted the ECB’s concern at the unclear legal status of Lietuvos bankas’ 

assets. The ECB understands that the Lithuanian State is currently considered to be the legal owner 

of Lietuvos bankas’ real property and that, as a result, there is a risk that Lietuvos bankas is only 

able to dispose of this property with governmental approval. This legal situation undermines both 

the  institutional  as  well  as  the  financial  independence  of  Lietuvos  bankas.  From  an  institutional 

ECB’s Convergence Report May 2010, p. 23. 

15  
16    As  regards  the  ECB,  ‘Taking  into  due  consideration  the  nature  of  the  ECB’s  activities,  the  Governing  Council  may 
establish a provision for foreign exchange rate, interest rate, credit and gold price risks in the balance sheet of the ECB. 
The Governing Council shall decide on the size and use of the provision on the basis of a reasoned estimate of the ECB’s 
risk  exposures’  (Article  7  of  Decision  ECB/2010/21  of  11  November  2010  on  the  annual  accounts  of  the  European 
Central Bank (recast) (OJ L 35, 9.2.2011, p. 1)).  
Caption 10 of Annex IV to Guideline ECB/2010/20. 
ECB’s Convergence Report May 2010, p. 23. 
CON/2009/83, paragraph 3.7. 
Opinion CON/2010/42, paragraph 2.1.  

17  
18  
19  
20 

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perspective,  State  authorities  could  instruct  Lietuvos  bankas  on  the  real  estate  assets  held  by  it. 

Lietuvos bankas’ financial independence would be undermined since it would no longer be entirely 

free to decide on the allocation of its resources and could be unable to secure sufficient means for 
the performance of its tasks21. 

3.8.2  The  ECB  reiterates22  its  understanding  that  this  problem  has  arisen  because  no  national  law 

explicitly specifies whether Lietuvos bankas has the right to own the assets, or whether Lietuvos 

bankas  can  only  manage  and  hold  such  assets  on  trust.  The  ECB  also  reiterates  that  the  current 

legal status of Lietuvos bankas’ real property is incompatible with the central bank independence 
requirement23. 

3.8.3  The draft law does not clarify the legal status of Lietuvos bankas’ real property assets. The Law on 

Lietuvos bankas should specifically state that Lietuvos bankas legally owns the assets belonging to 

it, i.e. ensuring that the legal title and economic control of the assets will rest with Lietuvos bankas. 

4.  Monetary financing prohibition 

4.1   National  rules  on  the  distribution  of  an  NCB’s  profit  must  comply  with  the  monetary  financing 

prohibition laid down in Article 123(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) of the Treaty establishing the European Community24. Those provisions 

prohibit central banks from providing overdraft facilities or any other type of credit facility to the 

public  sector,  which  includes  any  financing  of  the  public  sector’s  obligations  vis-à-vis  third 
parties25.  In  interpreting  Article  123  of  the  Treaty,  the  ultimate  objective  and  the  spirit  of  the 

monetary  financing  prohibition  must  be  taken  into  account,  i.e.  the  overall  aim  of  public  finance 

discipline  and  the  aim  of  prohibiting  NCBs  from  financing  the  public  sector.  Against  this 

background,  the  monetary  financing  prohibition  may  also  apply  to  other  forms  of  funding,  i.e. 
without the obligation to repay26. Moreover, the distribution of central bank profits which have not 

been  fully  realised,  accounted  for  and  audited  does  not  comply  with  the  monetary  financing 
prohibition27.  

4.2  Proposed three-years average rule and contribution to the State budget from the reserve capital 

4.2.1  The application of the proposed three-years average rule would result in a contribution by Lietuvos 

bankas’ to the State budget which would be disconnected from the realised profit of the financial 

year under consideration. Moreover, if the contribution to the State budget, calculated according to 

the three-years average rule, is higher than the profit of the preceding financial year, the draft law 

21  
22  
23  
24 
25  
26  
27  

ECB’s Convergence Report May 2010, p. 248. 
Opinion CON/2010/42, paragraph 2.3. 
ECB’s Convergence Report May 2010, p. 248. 
OJ L 332, 31.12.1993, p. 1. 
See Article 1(1)(b)(ii) of Council Regulation (EC) No 3603/93. 
ECB’s Convergence Report May 2010, p. 24. 
ECB’s Convergence Report May 2010, p. 25. 

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provides that the remaining part of Lietuvos bankas’ contribution is to be paid to the State budget 

from  Lietuvos  bankas’  reserve  capital.  The  proposed  three-years  average  rule  is  therefore  not 

compatible with the monetary financing prohibition. 

4.2.2  Moreover, should the proposed rule apply to the distribution to be paid to the State budget before 

the  financial  year  starting  on  1  January  2015,  the  profit  of  the  financial  years,  from  which  a 

contribution was already paid to the State budget on the basis of the legislative provisions in force 

at that time, would be taken into account again. It means that the same realised profit will be used 

more than once to calculate and distribute Lietuvos bankas’ contribution to the State budget. This 
would in some cases28 temporarily increase the level of the contribution due to the State budget and 

would  amount  to  the  distribution  of  Lietuvos  bankas’  profit  which  has  not  been  fully  realised, 

contrary to the monetary financing prohibition. For this reason, the draft law should not apply to 

the distribution of profit for the current financial year ending 31 December 2011 which in any case 

have to be excluded.  

4.3  Transfer of Lietuvos bankas’ real property 

4.3.1  As  stated  in  Opinion  CON/2010/4229,  under  the  current  legal  situation,  it  is  unclear  whether 

Lietuvos bankas could independently sell its real property and keep the proceeds from the sale. If 

Lietuvos bankas cannot keep the proceeds, this raises doubts as to whether the current legislation is 

compatible with the monetary financing prohibition. To be compatible with the monetary financing 

prohibition,  the  transfer  to  the  State  of  NCB  assets,  e.g.  real  property,  must  be  remunerated  at 

market value of the real property transferred to it and the transfer of the real property to the State 

should occur at the same time as the remuneration. 

4.3.2  The  draft  law  implies  that  Lietuvos  bankas  would  transfer  its  real  property  to  the  State  free  of 

charge  during  the  financial  year.  The  transfer  will  then  be  compensated  or  netted  at  the  time  of 

profit distribution to the State budget, i.e. after the completion of the financial year. This belated 

compensation or netting is a form of credit to the public sector incompatible with the prohibition on 

monetary  financing.  To  comply  with  the  monetary  financing  prohibition,  the  calculation  of  the 

property’s  market  value,  the  transfer  of  ownership  and  remuneration  must  all  occur  at  the  same 

time. 

4.3.3  Moreover,  if  the  calculated  average  profit  of  Lietuvos  bankas  for  the  preceding  three  financial 

years  is  insufficient  to  compensate  for  the  property  transferred  to  the  State,  it  is  unclear  how  the 

transferred  property  would  be  remunerated.  This  could  also  restrict  Lietuvos  bankas’  right  to 

independently  decide  on  the  sale  of  its  property,  since  the  prospects  for  Lietuvos  bankas’  profit 

accumulation for the financial year, due to the compensation for the transfer or property via netting 

only,  are  likely  to  obstruct  a  property  transfer  decision  of  Lietuvos  bankas.  If  insufficient  or  no 

profit  is  generated  during  a  financial  year  and  Lietuvos  bankas  is  not  compensated  for  assets 

28  

29 

Lietuvos bankas’ profits for the last three financial years amounted to approximately LTL 364 million in 2008, LTL 519,4 
million in 2009 and LTL 90.5 million in 2010. Lietuvos bankas’ Annual Report of 2010, p. 111. 
Opinion CON/2010/42, paragraph 2.2.  

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transferred to the State during that financial year, another means of remuneration for the transferred 

assets has to be provided for. 

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

Done at Frankfurt am Main, 10 November 2011. 

[signed] 

The President of the ECB 

Mario DRAGHI 

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