Opinion of the European Central Bank of 7 September 2012 on a capital increase of the Banque centrale du Luxembourg (CON/2012/69)
Date: 2012-09-07
Institutions: European Central Bank
Subjects: Luxembourg, capital increase, central bank, national law

EN 

ECB-PUBLIC 

OPINION OF THE EUROPEAN CENTRAL BANK 

of 7 September 2012  

on a capital increase of the Banque centrale du Luxembourg 

(CON/2012/69) 

Introduction and legal basis 

On 7 August 2012, the European Central Bank (ECB) received a request from the Banque centrale du 

Luxembourg  (BCL)  for  an  opinion  on  a  draft  law  providing  for  a  capital  increase  of  the  BCL  and 

amending  the  Law  of  23  December  1998  on  monetary  status  and  on  the  Banque  centrale  du 

Luxembourg, as amended (hereinafter the ‘BCL Law’), (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  the  BCL.  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 provides for an increase of the BCL’s capital, by the creation of an authorised capital up 

to  EUR  1  500  million,  EUR 900  million  of  which  will  be  paid  up.  A  grand-ducal  regulation  may 

increase  the  paid-up  capital  within  the  limits  of  the  authorised  capital  by  methods  such  as  the 

incorporation of reserves. Article 4 of the BCL Law, as currently drafted, refers to the initial amount of 

BCL  capital,  EUR  25  million,  which may  be  increased  without  limit  by  incorporation of  reserves  by 
grand-ducal  regulation,  on  a  proposal  from  the  central  bank2.  The  BCL’s  authorised  capital  was 

effectively  increased  up  to  EUR  175  million  in  2009,  on  such  basis.  By  virtue  of  the  draft  law,  the 

incorporation of reserves would now be authorised only within the limits of the authorised capital. The 

explanatory  memorandum  to  the  draft  law  explains  that  the  increase  in  authorised  capital  (up  to 

EUR 1 500 million) and paid-up capital (up to EUR 900 million) is necessary to provide the BCL with 

an appropriate capital base in order for it to fully and independently discharge its financial obligations 

within a financial system that has evolved considerably in recent years. In this latter respect, reference 

is made to the capital contributions to be made by the BCL to the ECB and the Bank for International 

Settlements (BIS), the need to finance the arrangements with the International Monetary Fund (IMF), 

1  
2  

OJ L 189, 3.7.1998, p. 42.  
Law of 24 October 2008. 

 
 
 
 
                                                
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as  well  as  the  increased  risks  of  the  BCL’s  day-to-day  activities  in  the  light  of  increased  foreign 

exchange risks and interest rate and credit risks. 

2.  General observations  

2.1  The  ECB  welcomes  the  proposed  increase  of  the  BCL’s  authorised  capital.  The  principle  of 

financial  independence  requires  a  national  central  bank  (NCB)  within  the  European  System  of 

Central  Banks  (ESCB)  to  have  sufficient  means  not  only  to  perform  its  ESCB  or  Eurosystem-

related  tasks,  but  also  its  national  tasks,  e.g.  financing  its  administration  and  own  operations. 

Such financial independence is 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 resources3. In this respect, financial independence primarily implies that an 
NCB  should  always  be  sufficiently  capitalised4.  In  particular,  the  ECB  is  of  the  view  that  the 

higher  the  level  of  capital,  reserves  and  provisions  against  financial  risks  is,  the  higher  the 

safeguards  against  future  losses  are.  For  this  reason,  an  NCB  must  be  free  to  independently 

create  financial  provisions  to  safeguard  the  real  value  of  its  capital  and  assets.  Furthermore, 

Member States may not hamper NCBs from building up their reserve capital to a level which is 
necessary  for  a  member  of  the  Eurosystem  to  fulfil  its  tasks5.  As  mentioned  in  the  ECB’s 
Convergence Reports 2010 and 20126, any situation should be avoided whereby for a prolonged 

period of time an NCB’s net equity is below the level of its statutory capital or is even negative, 

including  where  losses  beyond  the  level  of  capital  and  the  reserves  are  carried  over.  Any  such 

situation  may  negatively  impact  on  the  NCB’s  ability  to  perform  not  only  its  ESCB  or 

Eurosystem-related tasks,  but  also  its  national tasks.  Moreover,  such  a  situation  may  affect  the 

credibility  of  the  Eurosystem’s  monetary  policy.  Therefore,  the  event  of  an  NCB’s  net  equity 

becoming  less  than  its  statutory  capital,  or  even  negative  would  require  that  the  respective 

Member State provides the NCB with an appropriate amount of capital, at least up to the level of 

the  statutory  capital,  within  a  reasonable  period  of  time  so  as  to  comply  with  the  principle  of 

financial independence. The financial independence of a central bank may also be strengthened 

by arrangements whereby the operational costs for the discharge of some of its tasks are borne by 
the entities concerned by such tasks7. 

2.2  The  ECB  welcomes  the  increase  of  the  BCL’s  capital,  as  the  BCL  initially  had  a  relatively 
‘modest’ capital of EUR 25 million8, considering: (a) the importance of the financial market in 

Luxembourg;  and  (b)  that  the  BCL  is  the  third  largest  national  central  bank  within  the 

3  
4  

5  
6  
7  
8  

See the ECB’s Convergence Report 2012, p. 26. 
See the ECB’s Convergence Report 2012, p. 25; See Opinion CON/2010/88. All ECB opinions are published on the 
ECB’s website at www.ecb.europa.eu.  
See the ECB’s Convergence Report 2012, p. 27; see also, in this regard, Opinion CON/2008/34, paragraph 4.2. 
See the ECB’s Convergence Report 2010, pp. 21 and 22 and the ECB’s Convergence Report 2012, pp. 25 and 26. 
See paragraph 2 of Opinion CON/2012/35.  
See the preparatory work on the draft law. 

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Eurosystem in terms of liquidity granted to credit institutions and the amount of collateral used 
for  its  monetary  policy  operations9.  The  Luxembourg  authorities  have  been  aware  of  this 
imbalance  since  the  BCL’s10  establishment  and  have,  for  this  reason,  previously  introduced 
various  mechanisms11  intended  to  strengthen  the  BCL’s  financial  position  without  a  capital 

increase. However, despite this, the ECB has repeatedly recommended that the BCL’s financial 
independence needs to be ensured12 . At a time of renewed need for the provision of additional 

liquidity to the banking sector and in order to cope with the disruption to segments of the money 

and financial markets that are hindering  monetary policy transmission to the real economy, the 

BCL  may  need  to  take  further  additional  risks  on  its  balance  sheet  to  continue  to  ensure  price 

stability  over  the  medium  term.  In  this regard,  it  is  critical  at  all times  that the  BCL  possesses 

sufficient capital to conduct its functions and that it remains in a position to ensure the continued 

existence of financial buffers corresponding to the level of risks taken by it, by the replenishment 

of provisions and additional reserves, including retained profits, in order to constantly  preserve 

an appropriate level of own funds.  

3. 

Capital base effectively needed by the BCL 

3.1  The  ECB  notes  that,  pursuant  to  the  preparatory  work  on  the  draft  law,  one  reason  for  the 
increase of the BCL’s capital is linked to Luxembourg’s arrangements with the IMF13. The ECB 

understands  that,  further  to  Resolution  No  66-2  on  the  ‘Fourteenth  General  Review  of  Quotas 

and  Reform  of  the  Executive  Board’  adopted  on  15  December  2010,  the  Luxembourg’s  IMF 

quota  might  increase  from  SDR  418.7  million  to  SDR  1  321.8  million  (a  net  increase  of 

SDR 903.1 million). In its capacity as fiscal agent, the BCL would immediately contribute 25 % 

of such increase (SDR 225.78 million) to the IMF. In addition, Luxembourg has entered into a 

bilateral loan arrangement with the IMF, up to EUR 2.06 billion.  

3.2 

In  addition  to  these  contributions  to  the  IMF  arrangements,  it  is  notable  that  the  BCL  already 

contributed  SDR  65.7  million  to  the  BIS  in  2011  and  will  contribute  EUR  8.7  million  to  the 

increased capital of the ECB.  

3.3 

In view of the above, the ECB recommends that the competent Luxembourg authorities closely 

cooperate  with  the  BCL  in  order  to  determine  the  precise  level  of  the  capital  increase.  In  this 

9  
10  

11  

12  

13  

See, in particular, paragraph 8 of Opinion CON/2005/12.  
See  Report  of  the  Commission  des  Finances  et  du  Budget  (Commission  of  Finances  and  Budget  in  Luxembourg, 
10.12.1998) on draft law No 4468/07, p. 2. 
Such mechanisms include the special BCL lien (see Article 27-1. (1) of the BCL Law), the term deposit by the State 
of  an  initial  amount  of  EUR  575  million  repayable  at  the  rate of EUR 5  million  per  month  and  for  which  the State 
authorised the BCL to set aside the returns (see the preparatory work of the draft law: such agreement also contains 
provisions concerning the issue of Luxembourg euro coins and the State’s guarantee in favour of the BCL in the event 
of losses linked to foreign exchange risks and other risks on transactions relating to the IMF and to other obligations 
deriving  from  international  monetary  cooperation  agreements  binding  upon  Luxembourg),  as  well  as  the 
reimbursement of the BCL’s costs of compilation of balance of payments by virtue of the Law of 28 June 2000’. 
See  paragraph  3  of  Opinion  CON/98/39,  Opinion  CON/2008/17,  paragraph  3.2  of  Opinion  CON/2009/7  and 
paragraph 3.2.2 of Opinion CON/2009/46.  
See page 1 of the explanatory memorandum to the draft law.  

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respect,  it  would  be  advisable  to  carefully  consider  the  BCL’s  expected  day-to-day  and 

exceptional  spending  needs  given  the  recent  extension  of  the  BCL’s  tasks,  including  possible 

emergency  liquidity  assistance,  in  the  context  of  the  current  financial  crisis.  Such  cooperation 

would serve to respect the BCL’s financial independence, but it would also take account of the 
fact that the BCL is best placed to assess its required level of reserve capital14.  

3.4  The  ECB  notes  the  distinction  made  in  the  draft  law  between  authorised  and  paid-up  capital, 

which could lead to ambiguity as to the type of ‘capital’ to which other provisions of the BCL 

Law  refer.  Furthermore,  the  ECB  notes  that  the  draft  law  restricts  the  flexibility  that  already 

exists  in  Article  4  of  the  BCL  Law,  whereby  reserves  might  be  incorporated  by  grand-ducal 

regulation, on the proposal of the BCL and without any limit, which the ECB has welcomed in 
Opinion  CON/2008/1715.  The  reasons  for  now  changing  Article  4  are  not  transparent  from  the 

explanatory memorandum.  

4. 

Replenishment of BCL reserves 

4.1  As currently drafted, Article 31 of the BCL Law provides that ‘the allocation of the profit to the 

BCL’s reserve fund shall be compulsory so long as the total of the capital and the reserve fund 

falls  short  of  the  total  of  the  BCL’s  assets  which  do  not  yield  freely-available  income,  after 

deduction of liabilities which form the direct counterpart of such assets’.  

4.2  This provision was added by the Government in November 1998 to the then draft BCL Law in 

reaction  to  a  BCL  opinion  that  strongly  recommended  an  overall  strengthening  of  the  BCL’s 
financial independence16. With respect to Article 31, the explanatory memorandum advised that 

‘in light of the unforseeability of the future financial developments, the Government does share 

the view that is of utmost importance to provide for a possible carry-forward and payment of a 

loss and to encourage the BCL to build up reserves’. This provision was intentionally drafted to 

mean that the BCL reserves could be indefinitely built up as long as required by the BCL balance 

sheet,  without  limiting  the  amount  of  such  reserves  to  a  specific  percentage  of  the  nominal 

capital.   

4.3  The  ECB  understands  that  the  nominal  increase  of  the  paid-up  BCL  capital  will  restrict  the 

BCL’s ability to build up its reserves under Article 31, a measure which was carefully designed 

in  1998  under  the  assumption  that  the  BCL  would  have  a  relatively  modest  capital.  The 

possibility  to  build  up  and  replenish  reserves  is  very  important  considering,  inter  alia,  the 
absence  of  provisions  regarding  the  coverage  of  potential  losses  for  the  BCL17  and  the  ECB 

expects to be consulted on any amendment to Article 31 to introduce such a mechanism.  

14  
15  
16  

17  

See the ECB’s Convergence Report 2012, p. 27; see also paragraph 2.1 of Opinion CON/2010/88. 
See paragraph 2.3. 
See the BCL opinion addressed to the President of the Luxembourg Chamber of deputies on 6 November 1998, draft 
law 4468/2, 4469/2, ordinary session 1998/99. 
See Opinion CON/98/39. 

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

Done at Frankfurt am Main, 7 September 2012. 

[signed] 

The President of the ECB 

Mario DRAGHI 

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