Opinion of the European Central Bank of 11 December 2023 on a temporary mortgage loan borrower protection fee payable by credit institutions (CON/2023/42)
Date: 2023-12-11
Institutions: European Central Bank
Subjects: banking supervision, financial stability, monetary policy

EN 

ECB-PUBLIC 

OPINION OF THE EUROPEAN CENTRAL BANK 

of 11 December 2023 

on a temporary mortgage loan borrower protection fee payable by credit institutions 

(CON/2023/42) 

Introduction and legal basis 

On 30 November 2023 the European Central Bank (ECB) received a request from the Budget and Finance 

(Taxation) Committee of the Latvian Parliament (hereinafter the ‘Committee’) for an opinion on a draft law 

amending the Law on consumer rights protection1 (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  and  sixth  indents  of  Article 2(1)  of  Council  Decision 

98/415/EC2,  as  the  draft  law  relates  to  Latvijas  Banka,  contains  rules  applicable  to  financial  institutions 

insofar as they materially influence the stability of financial institutions and markets, and concerns the ECB’s 

tasks concerning the prudential supervision of credit institutions pursuant to Article 127(6) of the Treaty. 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 objective of the draft law is to establish a support mechanism consistent with the principle of a 

socially responsible State and aimed at mortgage borrowers for the purpose of house purchases or 

construction to safeguard the welfare of society, taking account of the considerable burden borne by 

households resulting from the increase in loan payments and consumer prices driven by the rise in 

the EURIBOR rate and inflation3. The explanatory memorandum accompanying the first draft of the 

draft  law  produced  by  the  Committee4  referred  to  the  preamble  of  the  Latvian  Constitution  which 

defines Latvia as a socially responsible State, justifying the need for horizontal support measures. 

The consultation request notes that ongoing dialogue with banks has not brought any tangible results 

in terms of increasing deposit rates and reducing mortgage loan interest rates and bank service fees, 

and that, therefore, administrative measures providing support to mortgage payers are considered 

necessary to protect them in their capacity as consumers. 

1   

2  

3  
4  

Patērētāju tiesību aizsardzības likums, Latvijas Vēstnesis, 104/105, 1.4.1999. 

Council Decision 98/415/EC of 29 June 1998 on the consultation of the European Central Bank by national authorities 
regarding draft legislative provisions (OJ L 189, 3.7.1998, p. 42). 
See Article 1 of the draft law introducing Section 8.4(1) into the Law on consumer rights protection. 
The draft law has evolved considerably since its inception, and no explanatory memorandum was submitted with the 
consultation request. 

 
 
 
 
 
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1.2   The draft law5 provides that credit institutions and companies, as well as permanent establishments 

(branches) in Latvia of foreign credit institutions and companies, that have received a special permit 

(licence) for the provision of consumer lending services in Latvia (hereinafter ‘fee payers’ or, in the 

singular, ‘fee payer’) will be under an obligation to pay a mortgage borrower protection fee. 

1.3   The  mortgage  borrower  protection  fee  will  be  set  at  0.5 %  per  quarter  of  the  total  amount  of 

outstanding mortgage credits issued by the fee payer as at 31 October 2023. The fee will be paid 

into a dedicated income account of the central government basic budget by the 23rd day of the first 

month of the reporting quarter. The fee is of a temporary nature: it will be applicable for 2024. The 

fee will not be applied to mortgage credits issued with fixed interest rates for the entire mortgage 

credit repayment period. 

1.4    The  fee  will  be  administered  by  the  State  Revenue  Service  (SRS).  Fee  payers  will  be  obliged  to 
submit  to  the  SRS  the  following  information  regarding  each  mortgage  borrower:  (1)  first  name, 

surname, personal identity number; (2) the number of the bank account to which the credit interest 

rate compensation is to be credited; and (3) the credit interest rate compensation calculated. The 

SRS  will  transfer  the  credit  interest  rate  compensation  to  the  borrower’s  bank  account  once  per 

quarter.  

1.5   The mortgage borrowers eligible to receive compensation are consumers with whom the fee payer 

has concluded a mortgage credit agreement provided that (1) the mortgage credit agreement was 

concluded by 31 October 2023 and the real estate pledged as collateral is located in Latvia, and (2) 

the outstanding mortgage credit does not exceed EUR 250 000. The amount of the credit interest 

rate  compensation  for  each  relevant  mortgage  is  set  at  30 %  of  interest  payments  calculated  in 

compliance  with  the  relevant  mortgage  credit  agreement  for  the  respective  quarter,  but  the 

compensation is limited to a level equal to no more than two percentage points from the interest rate 

set for that period. 

1.6    The draft law clarifies that disputes between a customer and a fee payer regarding the calculation of    

credit interest rate compensation are to be resolved in accordance with the procedure laid down in 

the Law on civil procedure6. 

2. 

General observations  

The  ECB  has recently adopted opinions on  measures driven by similar considerations as  the draft  law, 

including a draft Italian law on the imposition of an extraordinary tax on credit institutions7, a draft Lithuanian 

law  establishing  a  temporary  solidarity  contribution  applicable  to  credit  institutions8,  a  draft  Slovenian 

legislative provision imposing a temporary tax on the balance sheets of banks and savings banks9 and a 

draft Spanish law on the imposition of temporary levies on operators in the energy sector, credit institutions 

5  

6  

7  
8 
9  

The draft law has been further revised since its submission to the ECB for consultation and it was passed at a third 
and final reading on 6 December 2023. In the present opinion the ECB refers to the text of the law, namely the 
Amendments to the Consumer Rights Protection Law (Nr.367/Lp14) submitted for adoption at third reading, available 
on the Latvian Parliament’s website at www.saeima.lv. 
Civilprocesa likums, Latvijas Vēstnesis, 326/330, 3.11.1998. 

See Opinion CON/2023/26. All ECB opinions are published on EUR-Lex. 
See Opinion CON/2023/9. 
See Opinion CON/2023/35. 

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and  financial  credit  establishments10.  In  these  opinions,  the  ECB  considered  legislative  initiatives 

introducing temporary levies and taxes applicable to credit institutions from the monetary policy, financial 

stability and prudential supervision perspectives.  

3. 

The appropriate time to consult the ECB 

The ECB notes that the draft law was already passed by the Latvian Parliament on 6 December 2023, but 

that the legislative procedure is not yet complete pending promulgation by the President or referral back to 

the Parliament11. The ECB must be consulted at an appropriate stage in the legislative process. The ECB 

has emphasised on several occasions in its opinions that even in cases of particular urgency, or where the 

legislation  has  reached  an  advanced  stage,  the  national  authorities  are  not  relieved  of  their  duty  under 

Articles 127(4) and 282(5) of the Treaty to consult the ECB at an appropriate stage in the national legislative 

process that allows sufficient time for (1) the ECB to examine the draft legislative provisions and (2) the 

relevant  national  authorities  to  take  the  ECB’s  opinion  into  consideration  before  the  provisions  are 

adopted12.  

4. 

Monetary policy considerations   

4.1  The  euro  area  inflation  rate  reached  record  levels  over  the  course  of  2022  and  posed  significant 

challenges for the conduct of monetary policy. Guided by its primary objective of maintaining price 

stability, the ECB has taken determined action to ensure a timely return of inflation to the 2 % target 

over the medium term. Key ECB policy rates were raised by a cumulative 450 basis points between 

July 2022 and September 2023, with the intention of dampening demand and guarding against the 

risk of a persistent upward shift in inflation expectations. In parallel, net purchases of assets have 

ended, the asset purchase programme’s portfolio is declining at a measured and predictable pace, 

and the ECB stands ready to adjust all instruments within its mandate to ensure that inflation returns 

to  the  ECB’s  medium-term  target  and  to  preserve  the  smooth  functioning  of  monetary  policy 

transmission.  

4.2  The conditions on which borrowers access bank credit play an important role in the  impact of the 

transmission of monetary policy on aggregate demand and ultimately on inflation rates. The recent 

increases in policy rates have  so far been rapidly transmitted to Latvian lending rates on housing 

loans.  If  implemented,  the  draft  law  would  impair  the  pass-through  of  higher  rates  to  household 

borrowing conditions net of the envisaged 30 % credit interest rate compensation.  

4.3  Evidence shows that banks’ net interest income typically tends to expand on impact as policy rates 

increase. This effect is faster the greater the weight of short-term or variable interest rate loans within 

bank balance sheets. However, as the tightening cycle proceeds, this positive income effect can be 

offset by lower lending volumes, a higher cost of funding, losses recorded in the securities portfolio 

and an increase in provisions resulting from potential deterioration of the quality of the credit portfolio. 

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11  

12  

See Opinion CON/2022/36.  

See Article 71 of the Constitution of the Republic of Latvia (Latvijas Republikas Satversme),  Latvijas Vēstnesis, 43, 
1.7.1993. 
See, for example, paragraph 2.1 of Opinion CON/2019/9, paragraph 2.1 of Opinion CON/2018/42 and Chapter 2 of 
Opinion CON/2014/87. 

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The realisation of downside risks in the current environment may significantly reduce the repayment 

capacity of debtors and translate into lower bank profitability. The net effect of tighter monetary policy 

on bank profitability when measured across the policy cycle may therefore be less positive, or even 

negative, over an extended horizon13. Against this backdrop, care should be taken to ensure that any 

measures taken do not hamper the ability of banks to maintain solid capital bases, which are required 

to ensure the smooth transmission of monetary policy. 

5. 

Financial stability considerations 

5.1  The implementation of the draft law is expected to entail financial costs for the Latvian banking sector. 

The  consulting  authority  has  not  submitted  an  explanatory  memorandum  containing  an  impact 

assessment  regarding  the  profitability,  capitalisation  and  future  lending  capacity  of  the  banking 

sector.  

5.2  The  draft  law  emphasises  that  rising  mortgage  loan  payments  and  the  rising  cost  of  living  put 

pressure  on  household  balance  sheets.  Requiring  banks  to  partially  reimburse  loan  interest 

payments to borrowers whose cost burden has significantly increased can support financial stability 

by  mitigating  credit  risk,  for  example,  by  allowing  borrowers  to  recover  from  temporary  liquidity 

shortages. However, the eligibility criteria laid down in the draft law do not sufficiently limit the scope 

of borrowers entitled to a reduction in mortgage loan interest payments as the draft law will impact 

the majority of outstanding mortgages. In addition, while it is estimated that around 13 % of borrowers 

in Latvia could face financial strain due to rising prices and interest rates, the impact of interest rate 

rises  on  the  overall  solvency  of  households  will  be  moderate  and  the  larger  effect  is  expected  to 

come from consumer price surges14, potentially limiting the desired effect of the draft law. Historically 

low non-performing loan rates across Latvian banks also challenge the justification of the draft law. 

5.3  The widespread and untargeted  reduction  in effective  loan  interest payments that adoption of the 
draft law is envisaged to achieve could give rise to financial stability concerns. Bank profitability will 

be unduly lowered if borrowers who are able to make payments benefit from the compensation fee15. 

Reduced bank profitability implies a lower capacity for banks to retain earnings and thus may reduce 

capital  available  to  credit  institutions.  Beyond  reducing  bank  resilience,  this  could  have  adverse 

effects on bank credit supply. The lower profitability resulting from the application of the  draft law 

could push banks to offer less favourable credit terms and increase lending rates, and may lead to 

lower credit supply, which can then adversely affect real economic growth.  

5.4  The resulting lower profitability and capital would reduce credit institutions’ capacity to build up extra 

capital  buffers  to  protect  them  against  future  economic  shocks.  This  is  especially  the  case 

considering that Latvia is in the process of implementing a special corporate income tax regime for 

credit  institutions,  frontloading  the  tax  payment  without  waiting  for  the  profit  distribution.  This 

particular measure should not, however, have an impact on the total amount of tax paid by credit 

institutions, as taxes already paid will be discounted from taxes to be paid after the profit distribution. 

13  
14  

15  

See paragraph 3.4 of Opinion CON/2023/26 and paragraph 3.4 of Opinion CON/2023/35. 
See Appendix 2 (‘Borrowers’ ability to withstand rises in costs and interest rates’) of Latvijas Banka’s Financial Stability 
Report 2023, available on Latvijas Banka’s website at www.bank.lv. 
See paragraph 3.3 of Opinion CON/2023/8. 

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5.5  The  fee  proposed  in  the  draft  law  may  also  lead  to  fragmentation  in  the  domestic  and  European 

financial system because of the heterogeneous nature of the banking sector16. This would particularly 

be the case where reliance on mortgage interest income for some credit institutions is relatively high 

compared to other activities. Furthermore, the draft law could distort market competition and impair 

the level playing field across the banking union17.  

5.6  The  draft  law  may  generate  additional  unintended  consequences  with  negative  implications  for 

financial stability. Domestic and foreign investors could have less appetite to invest in Latvian credit 

institutions, as adoption of the draft law would lower the profitability outlook of credit institutions18. 

5.7 

In the light of the above, the ECB recommends that the draft law is complemented by a thorough 

analysis of the potential negative consequences for the banking sector19. The analysis should detail 

the  specific  impact  of  the  proposed  fee  on  (1)  the  provision  of  new  lending  and  (2)  competition 

conditions in the market. 

6. 

Considerations relating to the prudential supervision of credit institutions 

6.1  The  ECB  understands  that  the  draft  law  would  apply  to  significant  credit  institutions  directly 

supervised  by  the  ECB  and  less  significant  credit  institutions  directly  supervised  by  national 

competent authorities under the oversight of the ECB within the framework of the Single Supervisory 

Mechanism. 

6.2 

It is also the ECB’s understanding that the basis on which the proposed fee would be established 

does not take into consideration, inter alia, the full business cycle and the cost of credit risk, as it is 

being computed based on balances instead of profitability. Moreover, the draft law would result in 

additional operational burdens and costs given the need to administer the fee calculation. 

This opinion will be published on EUR-Lex.  

Done at Frankfurt am Main, 11 December 2023 

[signed] 

The President of the ECB 

Christine LAGARDE 

16  
17  
18  
19  

See paragraph 3.5 of Opinion CON/2023/9. 
See paragraph 3.6 of Opinion CON/2023/9. 
See paragraph 3.3 of Opinion CON/2023/9. 

See paragraph 3.4 of Opinion CON/2022/36 and paragraph 3.7 of Opinion CON/2023/9. 

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