Opinion of the European Central Bank of 4 November 2024 on the imposition of a temporary solidarity contribution on credit institutions for national security purposes (CON/2024/35)
Date: 2024-11-04
Institutions: European Central Bank
Subjects: banking supervision, financial stability, monetary policy

ECB-PUBLIC 

EN 

OPINION OF THE EUROPEAN CENTRAL BANK 

of 4 November 2024  

on the imposition of a temporary solidarity contribution on credit institutions for national security 

purposes 

(CON/2024/35) 

On  4  October  2024  the  European  Central  Bank  (ECB)  received  a  request  from  the  Latvian  Ministry  of 

Finance for an opinion on a draft law on the imposition of a temporary solidarity contribution (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 Article 2(1), third and sixth indents, of Council Decision 98/415/EC1, 

as  the  draft  law  concerns  Latvijas  Banka  and  rules  applicable  to  financial  institutions  insofar  as  they 

materially influence the stability of financial institutions and markets. In accordance with Article 17.5, first 

sentence, 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  imposes  an  obligation  to  pay  a  temporary  solidarity  contribution  on  credit  institutions 

established in Latvia as well as branches of credit institutions from other countries in Latvia (hereinafter 

the  ‘solidarity  contribution  payers’).  The  contribution  is  temporary  in  nature  –  it  applies  during  the 

payment periods starting in 2025, 2026 and 2027. 

1.2  The objective of the solidarity contribution is, under conditions of increased national security risks, to 

seek direct or indirect additional resources to meet fiscal needs relating to the national security of the 

State, in solidarity with Latvian society as a whole. The draft law provides that the solidarity contribution 

payers  are  to  make  solidarity  contributions  to  the  State  budget  through  atypically  high  net  interest 

income,  or  indirectly  by  significantly  increasing  lending  amounts  to  non-financial  corporations, 

households, and non-profit organisations that provide services to Latvian households. This will translate 

into an increase in economic activity and promote total budget revenues, which will in turn enable an 

increase in the financing of growing national security needs in the coming years. 

1.3  The explanatory memorandum accompanying the draft law states that the rationale for the draft law is 

based,  inter  alia,  on  the  following  elements.  First,  the  profitability  of  credit  institutions  was  mainly 

supported by the ECB’s policies to reduce inflation, which led to a sharp increase in market interest 

rates. As loans with variable interest rates account for more than 90 % of the credit portfolios of Latvian 

credit institutions, the interest rates applied to loans increased with market interest rates, resulting in a 

significant increase in the interest income of credit institutions. The assets of credit institutions in Latvia 

1  

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). 

 
 
 
 
 
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consist mainly of loans, while loans to non-financial corporations and households account for more than 

50 % of the total assets of credit institutions. For most loans in Latvia, the interest rate is composed of 

two components: the base rate, which is variable over time and largely follows the short-term Euribor 

rate; and the fixed interest rate added, which is determined by credit institutions on an individual basis, 

taking into  account credit risk and other factors. As a result  of this  principle of credit  pricing,  higher 

central bank interest rates were almost automatically reflected in higher lending rates, consequently 

resulting  in  higher  interest  incomes  for  credit  institutions.  Second,  the  interest  income  of  credit 

institutions  has  increased  as  a  result  of  excess  liquidity  placed  at  the  central  bank  and  other  credit 

institutions. Third, deposits from non-financial corporations and households account for around 70 % 

of credit institutions’  liabilities. This means  that the price of funding and interest  expenses for credit 

institutions  are  also  closely  linked  to  the  cost  of  deposits.  While  deposit  rates  have  increased,  in 

particular for  longer-term  deposits, they have increased at  a slower pace than  money  market rates. 

One reason for this is the high proportion of demand deposits, for which interest is not paid in most 

cases, in total deposits. As a result, credit institutions’ funding costs have increased at a much slower 

pace  than  credit  interest  rates.  Fourth,  the  returns  on  equity  and  on  credit  institutions’  assets  were 

strong in 2023 and well above the euro area average. As income grows much faster than costs, the 

cost-efficiency of credit institutions has significantly improved. Fifth, lending in Latvia remains sluggish, 

with credit to non-financial corporations and households remaining at only 27.5 % of gross domestic 

product (GDP) in the first quarter of 2024. Sluggish lending has been a persistent and structural problem 

in Latvia. The outstanding amount of credit to non-financial corporations, measured against GDP, is 

currently not far from 2004 levels, but in the housing sector the current level is the lowest since Latvia’s 

accession to the EU and is closer to low and lower-middle income countries than high-income countries.  

1.4  The base for the temporary solidarity contribution is calculated as the net interest income that is 50 % 

greater than the average net interest income in the credit institution’s consolidated financial statements 

in the five-year reference period from 2018 to 2022. The net interest income and the average annual 

net interest income are multiplied by the base calculation factor of the solidarity contribution. The base 

is reduced by the deposit insurance premiums paid to the Deposit Insurance Fund and by contributions 

to  the  Single  Resolution  Fund  in  accordance  with  Regulation  (EU)  No  806/2014  of  the  European 

Parliament and of the Council2. The solidarity contribution is 60 % of the base. 

1.5  The draft law provides for a solidarity contribution rebate which ensures that a discount of up to 100 % 

is applied if the credit institution reaches a certain rate of credit growth during the payment period. The 

credit growth indicator is the annual growth rate of total loans from the solidarity contribution payer to 

Latvian  non-financial  corporations,  households  and  non-profit  institutions  serving  households.  The 

information  contained  in  the  Credit  Register  maintained  by  Latvijas  Banka  will  be  used  for  the 

calculation of the credit growth rate. The rebate is calculated by comparing the credit growth rate of the 

solidarity contribution payer with the forecast annual growth rate of GDP at current prices set out in the 

Law on the State Budget for the payment period. In order to apply the rebate, the solidarity contribution 

payer must ensure that the growth rate of credit during the payment period is at least 1.75 times higher 

2  

Regulation (EU)  No 806/2014 of  the  European  Parliament and of  the  Council of 15 July  2014 establishing uniform 
rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the framework of 
a Single Resolution Mechanism and a Single Resolution Fund and amending Regulation (EU) No 1093/2010 (OJ L 
225, 30.7.2014, p. 1). 

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than the annual growth rate of the GDP at current prices used by the State Budget Law for the calendar 

year corresponding to the payment period. A rebate of 100 %, 75 %, 50 % and 25 % of the amount of 

the solidarity contribution calculated in the payment period is applied if its credit growth rate reaches or 

exceeds, respectively, the growth rate of GDP multiplied by a factor of 2.5, 2.25, 2 and 1.75. 

1.6  According  to  the  explanatory  memorandum  accompanying  the  draft  law,  the  motivation  for  the 

introduction of the rebate is to provide an incentive for credit institutions to significantly increase their 

lending  to  the  economy,  as  this  would  support  economic  activity  and  thus  indirectly  contribute  to 

increasing the revenues of the Latvian State, in the context of sluggish lending growth. The draft law 

sets a ceiling for the payment of the solidarity contribution at 33 % of the amount of the payer’s profits 

before the application of corporate income tax and the solidarity contribution. Furthermore, the solidarity 

contribution is not payable if the solidarity contribution payer suffers losses as a result of its economic 

activity during the payment period. 

1.7  The solidarity contribution payer makes quarterly advance payments of the solidarity contribution during 

the payment period. The advance solidarity contribution must be paid by the 23rd day of the second 

month following the respective quarter of the advance payment period into a special income account 

of the State Budget opened for this purpose. The rebate also applies to the quarterly advance payments 

of the solidarity contribution. 

1.8  The solidarity contribution is administered by the State Revenue Service. Latvijas Banka submits the 

information required for the administration of the solidarity contribution that is at its the disposal to the 

State Revenue Service by 10 June of the year following the payment period, or at the request of the 

State Revenue Service. 

2. 

Monetary policy considerations   

2.1  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.  More recently, following a period  of rate 

stabilisation, key interest rates have been reduced in view of the ongoing disinflationary process.   

2.2  The conditions under which credit institutions operate play a key role in the transmission of monetary 

policy to financing conditions in the economy, and thus in the impact of monetary policy on aggregate 

demand and ultimately on inflation rates. The ECB's observations as to the impact of the draft law 

on monetary policy are set out below. 

2.3  First,  the  draft  law  adversely  affects  the  conditions  at  which  credit  institutions  operate,  so  that  its 

overall effects on lending growth and thus indirectly on the State budget are unclear, especially over 

the long term. On the one hand, the draft law will lead to a decline in credit institutions’ profitability, 

albeit from a relatively high position compared with the situation in other euro area jurisdictions, and 

thus erode the taxation base relevant for the standard tax on credit institutions’ profits. A decline in 

profitability, if prolonged, might limit credit institutions’ ability to provide credit to the Latvian economy 

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in  the  long  run.  On  the  other  hand,  the  rebate  that  is  conditional  on  the  lending  amount  of  the 

individual  credit  institution  provides  an  incentive  for  its  provision  of  credit  in  the  short  run.  The 

incentive achieved by the rebate may be especially effective in increasing lending to Latvian  non-

financial companies, which has been assessed to be structurally subdued in  particular because of 

credit supply constraints in a context of relatively low competition among credit institutions3. Careful 

monitoring and assessment of the two opposite effects of the draft law on lending growth and State 

revenues will be needed. 

2.4  Second, the draft law may create distortions in the transmission of monetary policy depending on the 

credit institutions’ business models, which could adversely impact the efficient allocation of credit in 

the economy. Credit institutions might optimise the profitability and fiscal impact of the application of 

the draft law over the three years of its application, depending on their individual situations. These 

may differ, notably as regards each credit institution’s business model, including its sector of activity 

and  client  base,  so  that  the  implications  of  the  draft  law  will  be  heterogeneous.  This  concern  is, 

however, offset by the fact that most Latvian credit institutions have similar business models and it 

is  assessed  that  the  current  allocation  of  credit  in  the  economy  is  not  efficient  in  view  of  existing 

supply constraints.   

2.5  Third, the draft law entails pro-cyclical effects: it was designed for a phase of increasing policy rates 

but will not have the envisaged effects on State revenues in  an easing phase of monetary policy. 

Past increases in policy rates have so far been rapidly transmitted to interest rates on loans issued 

in  Latvia,  but  the  recent  monetary  policy  easing  is  reverting  this  and  lending  has  rebounded  to  a 

greater extent in Latvia as compared to the euro area as a whole without the State’s intervention 

through such a law. 

2.6  Evidence shows that credit institutions’ 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 balance sheets of credit institutions. However, the tightening cycle has also resulted in 

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.  The 

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

capacity of debtors and translate into lower profitability of credit institutions. The net effect of tighter 

monetary  policy  on  profitability  when  measured  across  the  policy  cycle  may  therefore  be  less 

positive, or even negative, over an extended horizon. Against this backdrop,  and noting the latest 

ECB key interest rate reductions, which could limit credit institutions’ net interest income, care should 

be taken to ensure that any measures taken do not hamper the ability of credit institutions to maintain 

solid capital bases, which are required to ensure the smooth transmission of monetary policy. 

3. 

Financial stability considerations 

3.1  The  ECB  has  previously  warned  about  possible  negative  effects  of  extraordinary  tax  regimes  on 

financial stability owing to such legislative measures having the potential to make it more difficult for 

3  

See page 22 of the Latvijas Banka report, ‘Financing of the Economy’, October 2023, available on Latvijas Banka’s 
website at www.latvijasbanka.lv. 

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credit institutions to build up a sound capital base, as their retained earnings will be reduced, thus 

making  them  less  resilient  to  economic  shocks4.  At  the  same  time,  the  temporary  solidarity 

contribution may make attracting equity capital investors and wholesale funding more costly for credit 

institutions,  as  domestic  and  foreign  investors  may  have  less  appetite  to  invest  in  Latvian  credit 

institutions. 

3.2  Regarding the rebate, the mechanism is designed to incentivise credit institutions to increase lending 

by  providing  discounts  on  the  solidarity  contribution,  hence  supporting  financial  intermediation, 

economic activity and revenues for the State. However, by setting larger rebates for stronger credit 

growth rates, the draft law may have the unintended effect of incentivising credit institutions to provide 

lending to riskier borrowers. Competition among credit institutions for a limited pool of borrowers may 

also induce them to charge lending rates which are not commensurate with the risks they are taking. 

Borrower  based  measures  are  already  in  place  in  Latvia,  which  should  limit  a  deterioration  in 

standards in respect of lending to households. At the same time, the authorities should make sure 

that  lending  standards  are  also  maintained  for  other  lending  categories.  The  maintenance  of 

adequate lending standards is important to avoid higher losses for credit institutions in the medium 

and  long  run,  which  could  have  an  impact  on  credit  institutions’  capital.  Moreover,  incentivising 

stronger lending growth could erode solvency positions by increasing risk-weighted assets, causing 

credit institutions to be left with smaller solvency ratios after the expiration of the rebate. Finally, as 

the rebate is based on the nominal GDP forecast at the time when the budget is adopted (the year 

prior to the calculation of the solidarity contribution and rebate), it is possible that credit institutions 

may  need  to  make  lending  decisions  in  an  environment  that  could  be  very  different  from  that 

envisaged at the time the budget was adopted. 

3.3  Two welcome features of the draft law are, first, that it sets a ceiling for the payment of the solidarity 

contribution at 33 % of the amount of the solidarity contribution payer’s profits before the application 

of corporate income tax and, second, that the solidarity contribution is not payable if the solidarity 

contribution payer suffers losses because of its economic activity during the payment period. At the 

same time, it would also be useful to analyse potential behavioural effects associated with the ceiling, 

inter alia by shifting the cost base, in order to minimise credit institutions’ profitability and the solidarity 

contribution. 

3.4  The  proposed  solidarity  contribution  may  lead  to  fragmentation  in  the  domestic  and  European 

financial system because of the heterogeneous nature of the banking sector. This may particularly 

be the case where the interest income of some credit institutions is relatively high compared to other 

activities.  Moreover,  the  temporary  solidarity  contribution  is  implemented  for  a  three-year  period, 

which is long. Finally, it is the ECB’s understanding that credit institutions established after 2022 are 

to be exempted from the temporary solidarity contribution due to the impossibility of calculating the 

contribution  base,  which  could  contribute  to  the  creation  of  an  uneven  playing  field  as  between 

incumbents and new players. 

4  

The ECB has previously opined on draft legislation introducing taxes applicable to credit institutions in several Member 
States.  See  Opinions  CON/2016/1,  CON/2019/18,  CON/2019/40,  CON/2019/44,  CON/2020/28,  CON/2022/36,  
CON/2023/9, CON/2023/26, CON/2023/35 and CON/2023/45. All ECB opinions are published on EUR-Lex. 

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3.5 

In the light of the above, the ECB recommends that in order to assess whether the application of 

solidarity contribution poses risks to financial stability, and in particular whether it has the potential 

to impair the banking sector’s resilience and cause market distortion, a thorough analysis of potential 

negative  consequences  for  the  banking  sector  should  be  undertaken5.  Careful  analysis  of  the 

potential negative effects of the temporary solidarity contribution on the banking sector and its impact 

on financial stability is particularly important in the current context of elevated geopolitical uncertainty 

and volatility in financial markets. 

4. 

Considerations relating to the prudential supervision of credit institutions 

4.1  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. 

4.2  The  basis  on  which  the  temporary  solidarity  contribution  would  be  established  does  not  take  into 

consideration the full business cycle6.  

4.3   The solidarity contribution may affect the credit risk strategy of credit institutions and incentivise them 

to  increase  their  loan  portfolios  to  benefit  from  the  rebate  mechanism  and  reduce  their 

payments. While the draft law’s objective is acknowledged in the light of subdued lending, it should 

not result in a worsening of credit institutions’ credit risk profiles as a result of pursuing imprudent 

credit  growth,  opting  for  relaxed  credit  loan  origination  and  underwriting  standards  with  limited 

restrictions for entering into new market segments. Credit institutions must ensure sufficient capital 

positions  and  adequate  levels  of  provisioning  on  a  forward-looking  basis,  as  well  as  robust  risk 

management  practices, as a prerequisite for a sustainable increase  in credit supply and  ensuring 

well-managed credit risk exposures. Potential negative effects of increased credit risk exposures and 

their impact on the safety, soundness and stability of credit institutions should be reflected in credit 

institutions’ business, funding and capital plans. Moreover, any impact on credit institutions’ overall 

risk profile needs to be closely monitored. 

5. 

Role of Latvijas Banka in providing information to the State Revenue Service 

The ECB understands that the obligation imposed on Latvijas Banka under the draft law to submit to 

the State Revenue Service the information necessary for administration of the solidarity contribution 

is not a new task of Latvijas Banka. In accordance with the Law on Latvijas Banka, Latvijas Banka 

already  has  the  duty  to  provide  all  necessary  information  and  data  for  the  performance  of  the 

functions of the State Revenue Service7. The ECB understands that this duty of  Latvijas Banka is 

5  

6  

7  

See  paragraph  3.4  of  Opinion  CON/2022/36,  paragraph  3.7  of  Opinion  CON/2023/9,  paragraph  4.6  of  Opinion 
CON/2023/26 and paragraph 4.5 of Opinion CON/2023/45. 

See paragraph 4.2 of CON/2023/9. 

See Article 77(3) of the Law on Latvijas Banka.  

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without  prejudice  to  the  obligation  to  maintain  professional  secrecy  in  respect  of  confidential 

prudential supervisory information under Union law8. 

6.   Other observations  

The  draft  law  ensures  that  the  solidarity  contribution  is  to  be  temporary  in  nature.  The  ECB  has 

previously recommended that a clear separation is necessary between the extraordinary proceeds 

and  the  general  budgetary  resources  of  a  government  to  avoid  their  use  for  general  fiscal 

consolidation purposes9.  In this regard, the draft law seems to take previous ECB recommendations 

into  account,  as  the  ECB  understands  that  the  proceeds  of  the  solidarity  contribution  will  be 

specifically directed to increasing fiscal spending to address increased national security risks.   

This opinion will be published on EUR-Lex.  

Done at Frankfurt am Main, 4 November 2024. 

[signed] 

The President of the ECB 

Christine LAGARDE 

8  

9  

See, e.g., Article 53 of Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access 
to the activity of credit institutions and the prudential supervision of credit institutions, amending Directive 2002/87/EC 
and repealing Directives 2006/48/EC and 2006/49/EC (OJ L 176, 27.6.2013, p. 338). 

See paragraph 3.2.2 of Opinion CON/2010/62, paragraph 3.1 of Opinion CON/2022/36 and paragraph 3.4 of Opinion 
CON/2023/9, . 

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