text: OJ L 189, 3.7.1998, p. 42.

text: According to this provision, the State guarantee applies to loan agreements following 31 December 2004 for residential real estate.

text: Article 200

text: /B(1) to be inserted into the Law on credit institutions.

text: Article 200

text: /B(2) to be inserted into the Law on credit institutions

text: Article 200

text: /B(3) to be inserted into the Law on credit institutions. 6

text: Article 200

text: /B(4) to be inserted into the Law on credit institutions. 7 First sentence of

text: Article 210

text: (5a) to be inserted into the Law on credit institutions. 8 Second sentence of

text: Article 210

text: ECB Financial Stability Report of June 2010. All ECB documents are available on its website at www.ecb.europa.eu. 10 ECB Opinions

text: and

text: . 11 Recital 4 (COM(2011)142.final). 12 See ESRB Recommendation

text: of 21 September 2011 on lending in foreign currencies available on the ESRB’s website at www.esrb.europa.eu.

text: According to Law No LXXV of 2011, debtors may opt for a 36 month application of a fixed exchange rate of forint 180/1 Swiss francs, forint 250/1 euro and forint 200/100 yen. During that period, they will receive a credit line to accumulate the difference between the fixed and the actual exchange rates. After the period of application of the fixed exchange rates, debtors must repay the accumulated difference on a monthly basis. Law No LXXV of 2011 also introduces a quota for the forced sale of properties. 14 See paragraph 3.2 of Opinion

text: See paragraph 3.1.4 of Opinion

text: . In 2005, interest rates on mortgages denominated in foreign currencies such as Swiss francs and euro were around 4%, while rates on forint loans could be twice as much. Applying the lower monthly payments, a buyer could qualify for a loan in foreign currencies which exceeded the amount for which he could receive a loan in forint. As a result, Hungarian consumers had borrowed large amounts in Swiss francs before the start of the global crisis in 2008. When the exchange rate between forint and other currencies began to widen as a result of the crisis, credit institutions offered to extend loan periods, so that foreign currency borrowers could make lower monthly payments. The Government prohibited individuals from taking foreign currency mortgages. The ECB understands that the Law was subsequently amended on 1 January 2011 to take into account the ECB’s concerns. 16 See

text: Case C-464/98

text: , Westdeutsche Landesbank Girozentrale v Friedrich Stefan and Republik Österreich [2001] ECR I- 173.

title: Opinion of the European Central Bank of 4 November 2011 on foreign currency mortgages and residential property loan agreements (CON/2011/87)

text: OPINION OF THE EUROPEAN CENTRAL BANK of 4 November 2011 on foreign currency mortgages and residential property loan agreements (

text: ) Introduction and legal basis

text: On 19 September 2011, the European Central Bank (ECB) received a request from the Hungarian Ministry for the National Economy for an opinion on a draft law amending certain laws in relation to protecting homes (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 sixth indent of

text: Article 2(1) of Council Decision 98/415/EC of 29 June 1998

text: on the consultation of the European Central Bank by national authorities regarding draft legislative provisions , as the draft law relates to rules applicable to financial institutions insofar as they materially influence the stability of financial institutions and markets. 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.

text: 1. Purpose of the draft law

text: The draft law will amend the following legislation to establish a relief scheme for distressed borrowers in a foreign currency: (i) Law No XCIII of 1990 on duties, (ii) Law No CXVII of 1995 on personal income tax, (iii) Law No LXXXV of 1996 amending Law No XCIII of 1990 on duties and on administrative charges for certified copies of title deeds , (iv) Law No CXII of 1996 on credit institutions and financial enterprises (hereinafter the ‘Law on credit institutions’), (v) Law No XXX of 1997 on mortgage credit institutions and mortgage debentures, and (vi) Law No LXXV of 2011 on the system for the forced sale of residential properties and fixing the exchange rate for repayment of foreign-currency loans. The scheme applies to foreign currency loan agreements entered into by consumers with a State guarantee pursuant to Article 44 of Law No CXXXV of 2004 on the Republic of Hungary’s budget for 2005 , or a mortgage on a residential property in Hungary, and specifies the conditions for early repayment of the total amount payable by the consumer. In such cases, the financial institution which has granted the foreign currency loan, when defining the forint amount of the early repayment, must apply an exchange

text: rate of 180 HUF/CHF for Swiss francs, 250 HUF/EUR for euro and 200 HUF/100 JPY for yen where all of the following criteria are met: (a) the exchange rate used at the time the financial institution extended the loan affected by early repayment was not higher than the fixed exchange rate; (b) the financial institution has not terminated the loan agreement by the date on which the draft law takes effect, (c) the borrower submits to the financial institution providing the foreign currency loan a written claim for early repayment by 30 December 2011, (d) the borrower agrees, when filing a claim, to repay early any debt arising from bridge or combined account loans directly related to the foreign currency loan . If these criteria are met, the financial institution may not refuse a claim for early repayment and is obliged to arrange for closure directed at early repayment of the contract within 60 days of a claim . The financial institution may not charge for payment of expenses and other fees or commissions defined in Law No CLXII of 2009 on credit provided to consumers for early repayment . Also, in case of foreign currency loan agreements with consumers, the financial institution may solely charge in foreign currency for costs and fees directly related to the acquisition of foreign currency resources to fulfil and support the relevant contract, including interest-type handling costs . The draft law also provides that fees and costs related to entering into contracts, correspondence, statements and certificates, visits to customers, credit monitoring, notice of termination, collateral valuation and replacement, amendments to the contract, credit repayment insurance services or administration of the credit agreement and associated closure of the credit account may not be charged to the consumer in foreign currency .

text: 2. General observations

text: The appropriate time to consult the ECB

text: 2.1 The consulting authority submitted the draft law to the ECB on 19 September 2011 without (i) requesting an urgent procedure and (ii) setting an express time limit for the submission of the ECB’s opinion. On the same day, the Hungarian Parliament adopted the draft law which entered into force on the third day following its publication, i.e. on 29 September 2011 (hereinafter ‘the Law’). The ECB is also aware of the fact that another draft law amending certain provisions of the Law was adopted by the Parliament on 10 October 2011.

text: 2.2 The ECB reiterates its position that even cases of particular urgency do not relieve national authorities from their duty to consult the ECB and to allow sufficient time to take into account its views in accordance with Decision

text: . Any substantive amendments to the draft law have to be submitted to the ECB to allow it to adopt its opinion on the most recent text. Furthermore, the process of adoption of the draft law should have been suspended. The ECB’s observations on the provisions on which it was consulted do not eliminate the breach of the consultation obligation. The ECB would appreciate the Ministry for the National Economy giving due consideration to honouring its obligation to consult the ECB in the future.

text: 3. Specific observations

text: 3.1 Financial stability and risks associated with foreign currency loans The ECB has pointed out on several occasions the risks associated with foreign currency loans . In particular, foreign currency loans represent a major risk to financial stability in several Member States in central and eastern Europe, particularly in Hungary where the share of foreign currency loans - especially those denominated in Swiss francs - is among the highest in the Union. The ECB in principle welcomes measures promoting responsible lending by credit institutions, enforcing market discipline and increasing the transparency of credit institutions’ activities to provide a higher level of consumer protection, especially in the area of loans relating to residential property . The proposal for a directive of the European Parliament and of the Council on credit agreements relating to residential property points to that direction by stating that foreign currency loans taken out by consumers to take advantage of the interest rate offered, but without having an adequate understanding of the currency risk involved, has posed problems in the EU mortgage markets . The European Systemic Risk Board (ESRB), in considering options to reinforce the resilience of the Union financial system, has identified as one of the challenges the potential problems arising from foreign currency borrowing by households and small and medium-sized enterprises within the Union. National authorities will need to take into consideration the ESRB recommendations recently adopted in this area . 3.2 Assessment of the Law The ECB notes the risks incurred by consumers when subscribing to foreign currency loans and the willingness of the Hungarian authorities to take policy action in this area in view of the importance of these foreign currency loans in Hungary. While noting the importance of complying with the rule of law and ensuring legal certainty, the ECB further observes in this respect that the Law is the latest effort of the Hungarian Government to provide relief for distressed foreign currency borrowers and thus ease the burden on the Hungarian economy. On 20 June 2011, the Hungarian

text: Parliament adopted Law No LXXV of 2011 without consulting the ECB . The ECB is not aware of any evaluation of the effect of previous efforts by the Hungarian authorities to curb foreign currency loans. As regards the scheme introduced by the Law, the ECB has the following concerns. First, the ECB considers that, in allowing borrowers to repay their debt at fixed exchange rates substantially below current market rates, the Law creates a situation that can substantially weaken the banking system’s stability and is likely to also have adverse spillover effects on the economy. Second, depending on take-up rates by debtors, the one-off losses for the Hungarian banking system from the repayment of foreign currency mortgages under the Law could adversely affect banks’ capital position at a time when their ability to accumulate capital by retaining earnings remains constrained, in part, by the financial sector tax introduced last year . As around 60% of the Hungarian banking sector is owned by foreign banking groups, cross-border spillover effects are expected since early repayments below current market rates could impact these banking groups’ consolidated profits. While parent undertakings of Hungarian banks established in other countries (hereinafter the ‘parent banks’) should be able to absorb the immediate financial impact, the Law, together with the financial sector tax, could increase the risk that parent banks reallocate some of the funds from their Hungarian subsidiaries to other subsidiaries which could deteriorate Hungarian banks’ lending capacity in the longer term. Third, in addition to the immediate adverse financial impact on the banking system, there may also be a number of negative macroeconomic externalities for the Hungarian economy including: (i) depreciation pressure on the exchange rate, (ii) higher country risk premia, (iii) upward pressure on domestic interest rates, (iv) weaker growth due to a further fall in lending activity and tighter credit conditions, and (v) deteriorating foreign investor sentiment as a result of an increase in legal uncertainty and perceived country risk. Fourth, the Law may also have a negative impact on public finances, among other factors due to an increase in the country risk premium reflecting potential problems in the banking system and the negative growth impact of the Law. While, at this stage, it is difficult to quantify the overall macroeconomic impacts, the net short term effect for growth is likely to be negative for Hungary.

text: Fifth, in a previous opinion on the ban on individuals taking foreign currency mortgages , the ECB pointed out that, if the proposed draft law has a cross-border effect, it may raise issues of compliance with Article 63 of the Treaty on free movement of capital and payments . The ECB also noted on this occasion that the free movement of capital and payments is without prejudice to, inter alia, ‘measures which are justified on grounds of public policy or public security’, as laid down in

text: Article 65(1)

text: (b) of the Treaty. However, as in the case of exceptions based on the principle of general good, the exemption in

text: Article 65(1)

text: (b) of the Treaty is narrowly interpreted by the Court of Justice of the European Union, with the implication that any such measure would, for example, need to meet the proportionality test. Under this test, restrictions are justified only if no less restrictive measure would suffice to reach the desired end. The ECB considers that the assessment of whether the measures imposed on financial institutions under the Law are in breach of the free movement of capital and payments, the freedom of establishment or other Union rules is entrusted to the Union institutions ensuring the application and observance of the Treaties.

text: Done at Frankfurt am Main, 4 November 2011.

text: [signed]

text: The Vice-President of the ECB

text: Vítor CONSTÂNCIO


text: OJ L 189, 3.7.1998, p. 42. 2 All ECB opinions are published on the ECB’s website at www.ecb.europa.eu.

text: See Opinion CON 2010/75,

text: , paragraph 2,

text: , paragraph 2 and

text: , paragraph 2.1. 4 See Opinions

text: and

text: . 5 See Opinions

text: , paragraph 3.1,

text: , paragraph 2.5.2 and

text: , paragraph 3.2. 6 See the Directorate General Competition staff working document of 30 April 2010, ‘The application of State aid rules to government guarantee schemes covering bank debt to be issued after 30 June 2011’, available on the European Commission’s website at www.ec.europa.eu.

publisher: Europeiska centralbanken

sprak: en

title: Opinion of the European Central Bank of 7 November 2011 on the extension of the Irish State guarantee of eligible liabilities of credit institutions (CON/2011/88)

serie: con

text: OPINION OF THE EUROPEAN CENTRAL BANK of 7 November 2011 on the extension of the Irish State guarantee of eligible liabilities of credit institutions (

text: ) Introduction and legal basis

type: rubrik

text: On 7 October 2011, the European Central Bank (ECB) received a request from the Irish Minister for Finance for an opinion on a draft Credit Institutions (Eligible Liabilities Guarantee) (Amendment) Scheme 2011 (hereinafter the ‘draft scheme’) amending the Credit Institutions (Eligible Liabilities Guarantee) Scheme 2009 (hereinafter the ‘ELG Scheme’). 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 sixth indent of

text: on the consultation of the European Central Bank by national authorities regarding draft legislative provisions , as the draft scheme relates to rules applicable to financial institutions insofar as they materially influence the stability of financial institutions and markets. 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.

type: stycke

text: 1. Purpose of the revised draft scheme

text: 1.1 The ELG Scheme was signed into law on 9 December 2009. The ECB was consulted on the ELG Scheme at the draft stage and adopted its Opinion

text: . Subsequently, the ECB adopted Opinions

text: and

text: on proposed amendments to the ELG Scheme. 1.2 The Irish Government now proposes a further prolongation of the validity of the ELG Scheme by 12 months, i.e. that eligible liabilities may be issued until 31 December 2012.

text: 2. The appropriate time to consult the ECB

text: The ECB notes that the Minister has requested the ECB to provide its opinion as soon as possible in order to ensure that Union State aid approval for the draft scheme can be obtained quickly and the draft scheme presented for parliamentary approval. The ECB reiterates its position as expressed in previous opinions that the consultation should take place at a point in the legislative process which affords the ECB sufficient time to examine the draft legislative provisions and to adopt its opinion in all required language versions, and which also enables the relevant national authorities to take the ECB’s opinion into consideration before the provisions are adopted.

text: Article 3(4) of Decision 98/415/EC

text: also obliges Member States to suspend the adoption process for draft legislative provisions, pending receipt of the ECB’s opinion. The ECB would appreciate the Department of Finance giving due consideration to honouring their obligation to consult the ECB in the future, in accordance with Decision

text: 3. The draft scheme

text: 3.1 The purpose of the draft scheme is the extension of the issuance period under the ELG Scheme from 31 December 2011 to 31 December 2012. The Minister in his request for an opinion advises that a positive assessment by the ECB on financial stability grounds of the requirement for a prolongation of the guarantee of short term and interbank liabilities is considered essential by the European Commission to the Commission’s approval process as regards such state aid. 3.2 The ECB reiterates the views expressed in its previous opinions on the subject of the ELG Scheme and the Irish legislation on financial support to credit institutions . In particular, it recalls that coordination of the duration of national financial support schemes across the Union is of crucial importance in order to ensure a level playing field . The ECB also notes that it is the European Commission’s practice to approve Member States’ guarantee schemes for no longer than six months in advance . 3.3 Taking into account financial stability considerations, a further extension of the ELG Scheme would be beneficial. Moreover, the ECB understands that the extension of the ELG Scheme is safeguarded by the timely compliance of the Irish government with the ongoing European Union and International Monetary Fund (IMF) Programme for financial assistance to Ireland.

text: This opinion will be published on the ECB’s website. Done at Frankfurt am Main, 7 November 2011. [signed]

text: The President of the ECB

text: Mario DRAGHI

type: vagledning

utgivare: ecb


text: Article 2(1) of Decree-law No 245/89. 5 See Opinions

text: and

text: . All Opinions are available on the ECB’s website at www.ecb.europa.eu

title: Opinion of the European Central Bank of 9 November 2011 on the payment by the Banco de Portugal of an increase in Portugal’s quota with the International Monetary Fund (CON/2011/89)

text: OPINION OF THE EUROPEAN CENTRAL BANK of 9 November 2011 on the payment by the Banco de Portugal of an increase in Portugal’s quota with the International Monetary Fund (

text: ) Introduction and legal basis

text: On 11 October 2011, the European Central Bank (ECB) received a request from the Portuguese Ministry of Finance for an opinion on a decision by the Minister for State and for Finance authorising the increase of Portugal’s quota with the International Monetary Fund (IMF) (hereinafter the ‘draft decision’). 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 on the third indent of

text: Article 2(1) of Council Decision 98/415/EC of 29 June 1998

text: on the consultation of the European Central Bank by national authorities regarding draft legislative provisions , as the draft decision relates to the Banco de Portugal. 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.

text: 1. Purpose of the draft decision

text: On 15 December 2010, the Board of Governors of the IMF adopted Resolution No 66-2 proposing, inter th alia, increases in the quotas of all Fund members under the 14 General Review of Quotas. The required notices of consent to such increases must be received by the Fund by 31 December 2011. Pursuant to Decree-law No 245/89 of 25 August 1989 defining the intervention of the Banco de Portugal in the relationship with the International Monetary Fund, the Minister for Finance, on behalf of the Portuguese Government, has to authorise any change in the national quota after consulting the Banco de Portugal . The aim of the draft decision is to authorise the Banco de Portugal to pay the increase of Portugal’s quota from special drawing rights (SDR) 1 029,7 million to SDR 2 060,1 million. As stated in the Explanatory Memorandum attached to the consultation letter, 25% of the proposed quota increase must be paid in reserve assets and the remainder is payable in euro.

text: Article 19

text: (b) of the Organic Law on the Banco de Portugal expressly states that the prohibition of monetary financing enshrined in

text: Article 18

text: thereof does not apply to the financing of obligations of the

text: State towards the IMF. Thus, it is incumbent on the Banco de Portugal to make the ‘necessary deliveries in SDR, other members’ currency and euro’ on its own account . Furthermore, Portugal’s contribution to the IMF and the Banco de Portugal liabilities to the IMF are included in the Banco de Portugal’s balance sheet.

text: 2. General observations

text: The ECB notes that the Banco de Portugal is responsible for paying any increases in Portugal’s IMF quota upon the authorisation of the Minister for Finance. Several ECB opinions have noted that the tasks performed by a national central bank (NCB) must comply with the monetary financing prohibition under Article 123 of the Treaty and

text: Council Regulation (EC) No 3603/93 of 13 December 1993

text: specifying definitions for the application of the prohibitions referred to referred to in

text: Article 104

text: and

text: Article 104

text: (b)(1) [now

text: Article 123

text: and Article 125(1) of the Treaty on the Functioning of the European Union] . Pursuant to

text: Article 7 of Regulation (EC) No 3603/93

text: , the financing by NCBs of obligations falling upon the public sector vis-à-vis the IMF is not regarded as a credit facility within the meaning of Article 123 of the Treaty. Therefore, the ECB notes that the payment by the Banco de Portugal of the proposed increase in Portugal’s quota does not infringe the monetary financing prohibition.

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

text: Done at Frankfurt am Main, 9 November 2011.

text: [signed]

text: The President of the ECB

text: Mario DRAGHI


text: The Law on the Guarantee Fund for depositors and investors, see Consolidated Law No 133 of 22 February 2011and the Law on tax assessment, see Consolidated Law No 1365 of 29 November 2010. 3 The Winding-Up Department was set up by Section 3 of Law No 712 of 25 June 2010 amending the Guarantee Fund for Depositors and Investors of 1 October 2010, and is financially and organisationally separate from the ordinary guarantee obligations of the Danish DGS. The capital of the Winding-Up Department is provided entirely through mandatory contributions from the banking sector. See paragraph 1.5 of the ECB Opinion

text: . All ECB Opinions are available on the ECB’s website at www.ecb.europa.eu. 4 See Section 2(a) of the Law on the Guarantee Fund for depositors and investors.

text: The compensation scheme was originally introduced in April 2011 to provide greater incentives for sound banking institutions to take over distressed institutions. For a detailed description of the extension of the compensation scheme, see document No 181 of 7 September 2011 of the Financial Committee of the Danish Parliament and the political agreement of 25 August 2011. 6 Under Model II, a sound banking institution purchases the sound assets of the banking institution under resolution, and funds obtained from this purchase are counted towards the winding-up of the banking institution under resolution. With the application of Model II no depositors or other unsubordinated creditors incur losses, whereas shareholders and subordinated creditors are not covered by the compensation scheme.

title: Opinion of the European Central Bank of 9 November 2011 on a loss guarantee in connection with an extended compensation scheme (CON/2011/90)

text: OPINION OF THE EUROPEAN CENTRAL BANK of 9 November 2011 on a loss guarantee in connection with an extended compensation scheme (

text: ) Introduction and legal basis

text: On 12 October 2011, the European Central Bank (ECB) received a request from the Danish Ministry of Business Affairs and Growth for an opinion on a law amending the Law on the Guarantee Fund for depositors and investors and the Law on tax assessment (the issuance of a loss guarantee in connection with the use of an extended compensation scheme) (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 sixth indent of

text: on the consultation of the European Central Bank by national authorities regarding draft legislative provisions , as the draft law relates to the rules applicable to financial institutions insofar as they materially influence the stability of financial institutions and markets. 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.

text: 1. Purpose of the draft law

text: 1.1 The draft law relates to the guarantee provided by the Winding-Up Department of the Danish Guarantee Fund for Depositors and Investors , which is a deposit-guarantee scheme (DGS) funded by the contributions by member banking institutions (hereinafter the ‘Winding-Up Department of the Danish DGS’). This guarantee is given to the Financial Stability Company, a State-owned bridge bank, and covers potential losses resulting from resolution procedures for banking institutions . The draft law will widen the scope of this guarantee by allowing the Winding-Up Department of the Danish DGS to issue a guarantee against losses incurred by the Financial

text: Stability Company A/S where it provides capital and liquidity support to its subsidiary taking over the non-performing assets of a failing banking institution in the form of ‘bad bank’ arrangement. 1.2 The winding-up process will be conducted in accordance with the extended compensation scheme, Model II, which was part of the political agreement (the so-called ‘Bank Package IV’) concluded in August 2011 and introduced by the Financial Committee of the Danish Parliament in September 2011 . The resolution instruments introduced on this occasion address the risk that small and medium-sized banking institutions might encounter liquidity or solvency problems once their current individual guarantees provided by the State expire in 2012 and 2013. More specifically, Model II of the extended compensation scheme establishes a regime under which the Financial Stability Company A/S, via the subsidiary company, may wind up the unsound part of a distressed banking institution . Under the draft law, Model II is conditional on the Winding-Up Department of the Danish DGS issuing a guarantee to the Financial Stability Company A/S, which will cover any losses incurred after the final winding up of the distressed banking institution. This guarantee ensures that the financial sector, via the Winding-Up Department of the Danish DGS, bears any loss stemming from the winding-up process and that no further burden is placed on the State by the expected losses related to individual State guarantees provided earlier to banking institutions. 1.3 The draft law also amends the Law on tax assessment to ensure that the tax exemption under the current compensation scheme also comprises compensation disbursed to the subsidiary company of the Financial Stability Company A/S in connection with the winding-up of the unsound part of the distressed banking institution.

text: 2. General observations

text: 2.1 The ECB welcomes the introduction of a widened loss guarantee scheme in connection with the extended compensation scheme, Model II, as this initiative will improve the possibilities for handling banking institutions in distress and avoid any depositors or other non-subordinated creditors incurring losses in connection with the resolution process. The ECB supports the arrangement under which the Winding-Up Department of the Danish DGS, which is providing the loss guarantee to the Financial Stability Company A/S, is organisationally and financially separate from the Guarantee Fund operated by the Danish DGS with the view to ensuring payouts of the guaranteed deposits. Such arrangement is aligned with Directive

text: of the European Parliament and of the Council of 30 May 1994 on deposit-guarantee schemes which requires

text: deposit-guarantee schemes to be in a position to pay duly verified claims by depositors in the periods specified by this Directive . 2.2 The ECB understands that the resolution process to which the draft law relates will be conducted in accordance with Union State aid rules in respect of the legal requirement for banking institutions to contribute financially to the extended functions of the Winding-Up Department of the Danish DGS and in respect of the involvement of the State-owned Financial Stability Company A/S in the resolution process. In addition, the ECB understands that Document No 181 of 7 September 2011 of the Financial Committee of the Danish Parliament establishing the extended compensation scheme has already been notified to the Commission and that a similar notification will be made in relation to the draft law.

text: [signed]

text: The President of the ECB

text: Mario DRAGHI


text: OJ L 189, 3.7.1998, p. 42.

text: Opinion

text: , paragraph 2.1 and Opinion

text: , paragraph 2.4.1. All ECB opinions are available on the ECB’s website at www.ecb.europa.eu. 3 Opinion

text: , paragraph 2.1 and Opinion

text: , paragraph 2.4.1. 4 ECB’s Convergence Report May 2010, p. 22. 5 ECB’s Convergence Report May 2010, p. 21; Opinion

text: , paragraph 2.2 and Opinion

text: , paragraph 2.4.2.

text: Opinion

text: , paragraph 2.3, Opinion

text: , paragraph 2.2, and Opinion

text: , 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

text: and

text: . 11 ECB’s Convergence Report May 2010, p. 22. 12 Opinion

text: , paragraph 2.2, Opinion

text: , paragraph 3.4, Opinion

text: , 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. 14

text: Article 23(3)

text: ECB’s Convergence Report May 2010, p. 23. 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)). 17 Caption 10 of Annex IV to Guideline ECB/2010/20. 18 ECB’s Convergence Report May 2010, p. 23. 19

text: , paragraph 3.7. 20 Opinion

text: , paragraph 2.1.

text: ECB’s Convergence Report May 2010, p. 248. 22 Opinion

text: , paragraph 2.3. 23 ECB’s Convergence Report May 2010, p. 248. 24 OJ L 332, 31.12.1993, p. 1. 25 See

text: Article 1(1)

text: (b)(ii) of

text: Council Regulation (EC) No 3603/93

text: . 26 ECB’s Convergence Report May 2010, p. 24. 27 ECB’s Convergence Report May 2010, p. 25.

text: 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. 29 Opinion

text: , paragraph 2.2.

title: Opinion of the European Central Bank of 10 November 2011 on the amendments to Lietuvos bankas’ profit distribution rules (CON/2011/91)

text: OPINION OF THE EUROPEAN CENTRAL BANK of 10 November 2011 on the amendments to Lietuvos bankas’ profit distribution rules (

text: ) Introduction and legal basis

text: 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

text: Article 2(1) of Council Decision 98/415/EC of 29 June 1998

text: on the consultation of the European Central Bank by national authorities regarding draft legislative provisions , 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.

text: 1. Purpose of the draft law

text: 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.

text: 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.

text: 2. General observations

text: 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

text: Article 123(1)

text: 3. Central bank independence

text: 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’) . 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 mandate . 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 resources . A Member State may not put its NCB in a position where it has insufficient financial resources to carry out its ESCB-related tasks . NCBs must also have sufficient financial means to carry out their other functions at all times, i.e. they must be able to

text: perform their national tasks, to meet their international obligations and to properly cover their administrative and operational expenses . 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 unimpaired . 3.4 Finally, NCB’s profits may be distributed to the State budget only after any accumulated losses have been covered 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 possible . 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 10 11 consultation three times since March 2009 . The ECB’s Convergence Report of May 2010 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 functioning . Moreover, frequent amendments do not comply with the accounting principles of consistency, comparability and continuity. 3.6 Treatment of losses Unlike the Law on Lietuvos bankas , 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

text: 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 assets . This could ideally be achieved by creating provisions against certain risks arising from an NCB’s activities, such as a provision for foreign 16 17 exchange rate, interest rate, credit risk, gold price and other risks . 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 created . 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 reiterates 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

text: 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

text: 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 tasks . 3.8.2 The ECB reiterates 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 requirement . 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.

text: 4. Monetary financing prohibition

text: 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

text: Council Regulation (EC) No 3603/93 of 13 December 1993

text: specifying definitions for the application of the prohibitions referred to in Articles

text: and

text: b(1) of the Treaty establishing the European Community . 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 parties . 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 repay . Moreover, the distribution of central bank profits which have not been fully realised, accounted for and audited does not comply with the monetary financing prohibition . 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

text: 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 cases 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

text: , 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

text: transferred to the State during that financial year, another means of remuneration for the transferred assets has to be provided for.

text: This opinion will be published on the ECB’s website. Done at Frankfurt am Main, 10 November 2011. [signed]

text: The President of the ECB

text: Mario DRAGHI


text: OJ L 189, 3.7.1998, p. 42.

text: Notably, with: (a)

text: Article 6 of Council Regulation (EC) No 1338/2001 of 28 June 2001

text: laying down measures necessary for the protection of the euro against counterfeiting (OJ L 181, 4.7.2001, p. 6); (b) Decision ECB/2010/14 of 16 September 2010 on the authenticity and fitness checking and recirculation of euro banknotes (OJ L 267, 9.10.2010, p. 1); and (c)

text: Regulation (EU) No 1210/2010

text: of the European Parliament and the Council of 15 December 2010 concerning authentication of euro coins and handling of euro coins unfit for circulation (OJ L 339, 22.12.2010, p. 1).

text: Paragraph 2.1 of Opinion

text: . All ECB opinions are published on the ECB’s website at www.ecb.europa.eu.

text: Paragraphs 2.1 and 2.3 of Opinion

title: Opinion of the European Central Bank of 11 November 2011 on protection against counterfeiting and on the preservation of the quality of cash circulation (CON/2011/92)

text: OPINION OF THE EUROPEAN CENTRAL BANK of 11 November 2011 on protection against counterfeiting and on the preservation of the quality of cash circulation (

text: ) Introduction and legal basis

text: On 17 October 2011, the European Central Bank (ECB) received a request from the German Ministry of Finance for an opinion on a draft law amending the Law on the Deutsche Bundesbank (hereinafter the ‘draft Bundesbank Law’) and a draft law amending the Law on coins (hereinafter the ‘draft Law on coins’). The ECB’s competence to deliver an opinion is based on Article 127(4) and 282(5) of the Treaty on the Functioning of the European Union and the first, second and third indents of

text: Article 2(1) of Council Decision 98/415/EC of 29 June 1998

text: on the consultation of the European Central Bank by national authorities regarding draft legislative provisions , as the draft legislation concerns currency matters, means of payment and the Deutsche Bundesbank. 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.

text: 1. Purpose of the draft legislation

text: 1.1 The draft legislation aims to bring the German legal framework for protection against counterfeiting in line with recent Union legislation in this area . 1.2 The draft Bundesbank Law foresees, inter alia, widening of the institutions subject to duties regarding the detainment and submission of counterfeit banknotes in order to comply with

text: Regulation (EC) No 1338/2001

text: . In that context, the new Section 36(4a) provides that parties not ensuring that euro banknotes and coins are checked for authenticity or that counterfeits are detected, as specified in the relevant Union legislation, are deemed to have committed an administrative offence. The new Section 36a empowers the Ministry of Finance to issue more detailed provisions concerning submission duties, including the possibility of notifying transactions

text: with banknote handling systems to the Bundesbank. The new Section 37a concerns provision of information and checks, according to which parties subject to the detention obligation under Section 36(1) seeking to recirculate banknotes have to inform the Bundesbank on request on the origin of the banknotes, their processing and the handling machines used. Section 37a(2) provides that the Bundesbank may carry out checks on such parties. According to Section 37a(3), the Bundesbank should prohibit parties contravening the obligation to check required by Decision ECB/2010/14 from recirculating banknotes or certain denominations thereof or from performing checks using certain banknote handling systems. In addition, some editorial changes are made. 1.3 The draft Law on coins states that the Bundesbank exercises the responsibilities provided for in

text: Regulation (EU) No 1210/2010

text: , and provides that an administrative offence is deemed to have occurred by not ensuring that coins are subject to an authentication procedure, and by failing to submit or failing to submit on time the relevant coins to the Bundesbank. The latter duty also applies to information requests.

text: 2. General observations

text: 2.1 The ECB welcomes the draft legislation and it is confident that its provisions will ensure the preservation of euro banknotes in circulation, resulting in continued public confidence in euro banknotes . 2.2 As Decision ECB/2010/14 applies to cash handlers by virtue of

text: Article 6(1) of Regulation (EC) No 1338/2001

text: , which refers to procedures defined by the ECB for checking euro banknotes, there is no strict need to implement Decision ECB/2010/14 into German law. 2.3 The ECB considers it essential that any draft legislation implementing Decision ECB/2010/14 does not deviate from its common provisions, unless this is explicitly provided for in Decision ECB/2010/14. Any national implementing measures should clarify the primacy and direct application of Union law on the authenticity and fitness checking and recirculation of euro banknotes with which cash handlers must comply. In this context and for consistency reasons, the ECB favours the use of direct references to Decision ECB/2010/14 or, alternatively, reproduction of its provisions without any alterations or additions . 2.4 In addition, although national authorities are not formally obliged to consult the ECB on the implementation of the Member States’ obligation to take the necessary measures to ensure that breaches of

text: are subject to effective, proportionate and deterrent sanctions, the ECB believes it is beneficial to harmonise throughout the Union the national measures implementing this obligation to the extent possible, subject to national peculiarities .

text: 3. Administrative fines and corrective measures

text: 3.1 Where cash handlers breach the obligations set out in the Union legislation to which the draft Law on coins refers, this results in an administrative fine, in some cases of up to EUR 20 000, in other cases of up to EUR 5 000. In the case of banknotes, the Law on the Deutsche Bundesbank provides for a fine of up to 100 000 EUR. In addition,

text: Article 37

text: a of the draft Bundesbank law introduces the possibility for the Bundesbank to impose corrective measures on cash handlers that breach these obligations regarding banknotes. According to this provision, the Bundesbank should prohibit parties contravening the obligation to check required by Decision 2010/14 from recirculating banknotes or certain denominations thereof or from performing checks using certain banknote handling systems. 3.2 The ECB notes the importance of effective, proportionate and deterrent sanctions . To ensure the deterrent effect of the administrative fines, the maximum amount should be a fine which effectively deters cash handlers from breach of their obligations. While it is up to the Member States’ legislators to define the particular amounts of the administrative fines, they should aim for a certain degree of harmonisation across the Member States to contribute to the establishment of a level playing field among cash handlers within the euro area without prejudice to: (a) the particularities of the cash cycle and the organisation of cash handlers at national level; and (b) the consistency of the levels of financial sanctions available in their legal orders .

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

text: Done at Frankfurt am Main, 11 November 2011.

text: [signed]

text: The President of the ECB

text: Mario DRAGHI


text: OJ L 189, 3.7.1998, p. 42.

text: Law 30(I)/2001, Episimi Efimerida tis Dimokratias No 3481, 16.3.2001. The Laws on State aid control transposed the State aid acquis, entrusting the Office of the Commissioner for State aid control with monitoring its correct implementation in Cyprus.

text: All ECB Opinions are available on the ECB’s website at www.ecb.europa.eu.

text: See, for instance, paragraph 3.4 of ECB Opinion

text: See paragraph 3.7 of ECB Opinion

text: See Conclusions of the European Council of 17 June 2010.

text: See European Commission, Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the European Central Bank, ‘Bank Resolution Funds’, COM(2010) 254 final, 26.5.2010 and European Commission Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee, the Committee of the Regions and the European Central Bank ‘An EU Framework for Crisis Management In the Financial Sector’, COM(2010) 579 final, 20.10.2010.

text: See the Recommendations of the Governing Council of the European Central Bank on the pricing of recapitalisations, 20 November 2008 (hereinafter the ‘ECB’s recommendations’).

text: See paragraph 18 of Communication from the Commission - The application of State aid rules to measures taken in relation to financial institutions in the context of the current global financial crisis (OJ C 270, 25.10.2008, p. 8).

title: Opinion of the European Central Bank of 15 November 2011 on the management of financial crises and the setting up of an independent financial stability fund (CON/2011/93)

text: OPINION OF THE EUROPEAN CENTRAL BANK of 15 November 2011 on the management of financial crises and the setting up of an independent financial stability fund (

text: ) Introduction and legal basis

text: On 20 October 2011, the European Central Bank (ECB) received a request from the Cypriot Ministry of Finance for an opinion on two draft laws. The first relates to the management of financial crises (hereinafter the ‘draft law on financial crisis management’) and the second establishes an independent financial stability fund to support the stability of the financial system (hereinafter the ‘draft financial stability fund law’). On 9 November 2011, the Cypriot Ministry of Finance submitted revised versions of the two draft laws. 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

text: on the consultation of the European Central Bank by national authorities regarding draft legislative provisions , as the draft laws relate to the Central Bank of Cyprus and to rules applicable to financial institutions, insofar as they materially influence the stability of financial institutions and markets. 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.

text: 1. Purpose of the draft laws

text: 1.1 The draft law on financial crisis management aims at enabling the Cypriot Ministerial Council, following a proposal of the Central Bank of Cyprus and taking into account the opinion of the relevant supervisory authority, to take, at times of financial crisis, measures addressing liquidity and/or solvency problems in the financial system and/or to enhance the capital base and/or the balance sheet of financial institutions in Cyprus, in a manner consistent with Union State aid rules and the Laws of 2001 to 2009 on State aid control . These include (i) government loans to financial institutions; (ii) government guarantees for loans to be taken by financial institutions and/or bonds issued by financial institutions for an appropriate price; (iii) the provision of capital to financial

text: institutions in return for a corresponding participation in their ownership structure; (iv) government loans or guarantees for an appropriate price and/or a grant for the Deposit Protection Schemes to cover any deficit that may arise in the pay-outs to depositors, in the event of their activation; (v) government loans or guarantees for an appropriate price and/or a grant for the Financial Stability Fund to assist it in fulfilling its mission. 1.2 The draft financial stability fund law aims at establishing an independent, self-financing fund (‘the Fund’) to enhance the current crisis management and resolution framework in Cyprus and contribute to financial stability. The objectives of the Fund are to (i) support and fund the resolution of ailing credit institutions, avoiding the use of public funds, and (ii) maintain public confidence in the financial system while minimising moral hazard in case of the Fund’s intervention.

text: 2. General observations on the draft law on financial crisis management

text: 2.1 Member States have already consulted the ECB on numerous national measures adopted in response to the global financial crisis. Given the broad scope of the support measures envisaged in the draft law, the consulting authority is invited to take into account the ECB’s opinions on similar draft legislative provisions in other Member States . 2.2 The ECB stresses that it is of the utmost importance that support operations conducted by the national authorities do not interfere with the conduct of the single monetary policy and/or with the Eurosystem’s refinancing operations . Given the interdependencies of the Member States’ policy responses to the financial crisis, previous ECB opinions have also drawn attention to the importance of a concerted approach throughout the Union to restore confidence in the financial markets .

text: 3. General observations on the draft financial stability fund law

text: 3.1 The setting up of bank resolution funds, financed by levies, has already been addressed by the European Council’s Conclusions and by the European Commission, which proposes that all Member States set up ex ante resolution funds as part of the planned Union crisis management and resolution framework .

text: 3.2 In line with Opinion

text: , the ECB reiterates that the primary purpose of resolution funds is to mitigate the effects of a bank failure for the different stakeholders, including customers, the real economy and taxpayers. In particular, this implies that resolution funds should not be used for any form of bailout or to avoid a bank’s insolvency. As the existence of resolution funds may raise moral hazard concerns, stringent conditions for their use need to be defined, including no automatic correspondence between the pay-in and pay-out to the fund, with decisions about the use of the funds taken by independent and accountable public authorities. The ECB also reiterates that, when adopting resolution tools for financial institutions, Member States should act in a coordinated manner to avoid significant differences across the Union.

text: 4. Specific observations on the draft law on financial crisis management

text: 4.1 Underlying principles and triggers for the activation of the national support measures 4.1.1 Section 5 of the draft law on financial crisis management defines the general principles underlying the measures in Section 4 to be taken by the Cypriot Ministerial Council. Following Opinion

text: , the consulting authority has (i) expressly provided that any government support measures will be of limited duration and the draft law itself is of temporary duration, (ii) expressly excluded inter-bank deposits, subordinated loans and collateralised liabilities from the scope of application of the government guarantees provided for in the draft law, (iii) covered the pricing of government guarantees consistently with recommendations by the ECB’s Governing Council , (iv) stipulated that government guarantees for loans to be taken by financial institutions and/or bonds issued by them are to be consistent with the monetary policy of the Eurosystem, and (v) stated that the proposed arrangements comply with Union State aid rules. 4.1.2 Under Section 4(1)(a)(ii) of the draft law, the Cypriot Ministerial Council may issue government guarantees for loans taken out by banks, while, under Section 5(b), government support measures may also be taken vis-à-vis financial institutions facing or likely to face ‘insolvency problems’. The ECB reminds the consulting authority that the aims of government guarantees of bank debt should be to: (i) address the funding problems of liquidity-constrained but solvent banks by improving the functioning of the market for bank debt of longer term maturity; (ii) preserve the level-playing field amongst financial institutions by avoiding market distortions; and (iii) ensure consistency with the management of liquidity by the Central Bank of Cyprus. 4.1.3 Second, the ECB reminds the consulting authority that it is important to ensure that financial institutions benefiting from government support measures do not profit from the undue use of their guaranteed status to engage in a heightened level of activities, distorting the market and facilitating abnormal balance sheet growth. In this regard, the ECB reiterates the importance of establishing appropriate safeguards such as limits on the marketing of financial products or on the expansion of

text: their activities on the basis of government guarantees. The ECB recommends amending the draft law on financial crisis management to include such safeguards. 4.1.4 Third, as regards government recapitalisation measures, the ECB draws the consulting authority’s attention to the ECB’s recommendations. The aim of recapitalisation measures should be to strengthen the capital position of fundamentally sound financial institutions. The ECB’s recommendations stress that the pricing conditions for recapitalisation measures should be riskbased and market-oriented, taking into consideration the specific risk of both the specific instrument chosen for injecting capital and the institution concerned. Specific features of the instruments for capital injections should be appropriately chosen so that, while being consistent with capital adequacy requirements and encouraging an early end to the State’s capital support of banks, these do not result in an excessive increase in the cost of capital. The ECB draws the consulting authority’s attention to the need to ensure that the State’s shareholder role as a result of a possible future recapitalisation under the draft law is limited in time. In this respect, and in accordance with the ECB’s recommendations, the Cypriot authorities should consider setting out terms for the redemption or conversion of the instruments, either on the basis of a fixed period of time or depending on market conditions, to preserve the temporary nature of the State’s involvement and to discourage financial institutions from relying on such involvement for an extensive period of time. 4.1.5 Fourth, regarding the triggers for the activation of the government support measures, the ECB understands that these are to be deduced from a combination of the definition of the term ‘financial crisis’ in Section 2 of the draft law, and Section 4(2) and Section 5 on the general principles for the support measures. The ECB recommends amending the draft law to specify that access by financial institutions to that framework is activated in emergency cases only. 4.2 Beneficiary financial institutions Pursuant to Section 2 of the draft law on financial crisis management, its provisions are to apply to the ‘financial institutions’ referred to in it, provided that these have been established and licensed in Cyprus. The ECB understands that, with the exception of branches of banks and other financial institutions registered outside Cyprus, the draft law applies to all financial institutions in Cyprus, including the Cyprus-based subsidiaries of foreign financial institutions. The ECB welcomes the non-discriminatory application of the draft law, which is conducive to the equal treatment of domestic and foreign financial institutions, and in line with the Commission’s guidance on the eligibility criteria for beneficiary institutions . 4.3 Central bank involvement in the support measures 4.3.1 The ECB notes that, pursuant to Section 4 of the draft law, the Cypriot Ministerial Council will decide following a recommendation by the Central Bank of Cyprus whether to support a domestic

text: financial institution or to exercise any of the other powers conferred on it. The ECB expects that the involvement of the Central Bank of Cyprus would not extend beyond such a recommendation and to otherwise comply fully with the monetary financing prohibition laid down in Article 123(1) of the Treaty. In particular, the ECB expects that the support measures envisaged in the draft law will be exclusively financed from the State budget and that, to the extent that their funding may require State borrowing, this will not include pre-financing or refinancing of the State budget by the Central Bank of Cyprus. 4.3.2 The ECB also expects that the Cypriot Ministerial Council will use its powers in connection with State support measures in a manner fully compatible with the institutional and financial independence of the Central Bank of Cyprus, thereby safeguarding the proper performance of its tasks under the Treaty and the Statute of the European System of Central Banks and of the European Central Bank. The reference in Section 16(a) of the draft law to the Laws of 2002 to 2007 on the Central Bank of Cyprus is welcome. 4.4 Additional measures in Sections 7 to 10 of the draft law on financial crisis management Sections 7 to 10 of the draft law on financial crisis management provide for a number of powers vested in the Cypriot Minister for Finance to be exercised when the measures laid down in Section 4(1)(a) are taken, and by way of derogation from the Law on Companies and the Law on cooperative credit institutions. These powers include (i) restrictions in the exercise of the voting rights attaching to shares or the voting rights possessed by the shareholders of the beneficiary financial institution; (ii) appointment of the majority of the members of the Board of Directors of the beneficiary financial institution; and (iii) increase of the share capital of the beneficiary financial institution. The ECB notes that, unlike the measures set out in Section 4 of the draft law, the above measures may be ‘recovery and resolution measures’, to be taken by the resolution authority in the context of a comprehensive bank recovery and resolution regime. The ECB understands that the inclusion of these measures in the draft law is temporary, until such time as an operational recovery and resolution framework has been established in Cyprus, and that the consulting authority will reconsider in the future their interplay with the recovery and resolution framework that is to apply, in the future, to financial institutions operating in Cyprus, and on which the ECB expects to be consulted. 4.5 Section 15 of the draft law on financial crisis management provides for a number of deviations in its application to cooperative credit institutions. The ECB notes that, without prejudice to the separate supervisory regime to which cooperative credit institutions are subject in Cyprus, these qualify as fully-fledged credit institutions for the purposes of the banking legislation. Moreover, the risks to which they are exposed, or those to which they may expose the domestic financial system, are not qualitatively different from those of non-cooperative credit institutions. It follows that cooperative credit institutions should be treated, also for the purposes of the draft law, in a manner that guarantees a level playing field for them and non-cooperative credit institutions (banks) operating in Cyprus. The ECB recommends amending the draft law accordingly.

text: 5. Specific observations on the draft financial stability fund law

text: 5.1 Section 4(2) of the draft financial stability fund law, on the Fund’s purposes, should be amended to include, among its objectives, the maximisation of the value of the good assets of an ailing or failed credit institution and the facilitation of the quickest possible return to their productive use, as part of its mitigation of the effects of a bank failure on different stakeholders. 5.2 Section 16(1) of the draft financial stability fund law, on the use of the Fund’s resources, does not specify the different resolution measures that the Fund will cover. The ECB understands that this is because a dedicated recovery and resolution framework for financial institutions operating in Cyprus has yet to be established. Besides, the conditions subject to which the funds collected are to be used are not clearly specified except by an implicit reference in Sections 16(1) and (2) to the Management Committee’s discretion to decide whether to make disbursements on a case-by-case basis. 5.3 Several of the provisions of the draft law confer on the Fund’s Management Committee public law decision-making powers that are neither necessarily consistent with its management tasks, under Section 23 of the draft financial stability fund law, nor with its responsibilities. For instance, the Management Committee may exempt credit institutions from making contributions to the Fund (Section 5 of the draft law), impose sanctions on anyone breaching the provisions of the draft law independently from the competent supervisory authority (Section 18(3) of the draft law), and, as mentioned above, take discretionary decisions as to whether or not to make disbursements to a credit institution (Section 16 of the draft law). The ECB notes that such decisions should be taken by the appropriate resolution authority, rather than by the Management Committee, and invites the consulting authority to reconsider the scope of the powers conferred on it, some of which are more appropriate for a resolution authority. 5.4 Section 22 of the draft financial stability fund law addresses the issue of the Fund’s governance structure. The ECB is satisfied that the draft law provides sufficient guarantees for the Management Committee to operate as an independent body and for the statutory enshrinement of its functional independence from the Government. However, the ECB continues to stress the need for the authorities in Cyprus to ensure that the proposed bank resolution fund’s management is entrusted to those national authorities that would be de jure or de facto responsible for resolving ailing financial entities. 5.5 Finally, the ECB continues to stress the need for the draft financial stability fund law to provide for (i) replenishing the Fund, where part or all of its funds are used to support an ailing bank’s liabilities, and (ii) the Fund’s winding-up.

text: This opinion will be published on the ECB’s website. Done at Frankfurt am Main, 15 November 2011. [signed]

text: The President of the ECB

text: Mario DRAGHI


text: OJ L 189, 3.7.1998, p. 42.

text: Notably, with: (a)

text: Council Regulation (EC) No 1338/2001 of 28 June 2001

text: laying down measures necessary for the protection of the euro against counterfeiting (OJ L 181, 4.7.2001, p. 6) (b) Decision ECB/2010/14 of 16 September 2010 on the authenticity and fitness checking and recirculation of euro banknotes (OJ L 267, 9.10.2010, p. 1); and (c)

text: Regulation (EU) No 1210/2010

text: of the European Parliament and the Council of 15 December 2010 concerning authentication of euro coins and handling of euro coins unfit for circulation (OJ L 339, 22.12.2010, p. 1).

text: Paragraphs 2.1 and 2.3 of Opinion

text: . All ECB opinions are published on the ECB’s website at www.ecb.europa.eu. 5

text: Article 6(2) of Regulation (EC) No 1338/2001

title: Opinion of the European Central Bank of 18 November 2011 on protection against counterfeiting and on the preservation of the quality of cash circulation (CON/2011/94)

text: OPINION OF THE EUROPEAN CENTRAL BANK of 18 November 2011 on protection against counterfeiting and on the preservation of the quality of cash circulation (

text: ) Introduction and legal basis

text: On 20 October 2011, the European Central Bank (ECB) received a request from the Italian Ministry of Economic Affairs and Finance for an opinion on draft legislative provisions amending Decree-Law No 350 of 25 September 2001, converted into law by Law No 409 of 23 November 2001, as well as Decree- Law No 262 of 3 October 2006, converted by Law No 286 of 24 November 2006 (hereinafter the ‘draft legislative provisions’). On the same day, the ECB received a request from the Banca d’Italia for an opinion on a set of draft Banca d’Italia acts laying down: (a) secondary provisions on cash handling activities (hereinafter the ‘draft secondary provisions’), and (b) a guide for cash handlers on statistical reporting obligations (hereinafter the ‘draft guide’). The ECB’s competence to deliver an opinion is based on Article 127(4) and 282(5) of the Treaty on the Functioning of the European Union and the first, second and third indents of

text: Article 2(1) of Council Decision 98/415/EC of 29 June 1998

text: on the consultation of the European Central Bank by national authorities regarding draft legislative provisions , as the draft legislation concerns currency matters, means of payment and the Banca d’Italia. 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.

text: 1. Purpose of the draft legislation

text: 1.1 The draft legislation aims at aligning the Italian legal framework for protection against counterfeiting with recent Union legislation in this area . 1.2 The draft legislative provisions, inter alia, increase the number of institutions subject to duties regarding the detection and prevention of use of counterfeit banknotes in order to comply with

text: Regulation (EC) No 1338/2001

text: . In that context, Article 8 of Decree-Law No 350/2001 has been

text: replaced.

text: Article 8(1)

text: to (5), as amended by the draft legislative provisions, aim at implementing

text: Article 6(1) of Regulation (EC) No 1338/2001

text: and

text: Article 3 of Regulation (EU) No 1210/2010

text: . In particular,

text: Article 8(1)

text: , as amended by the draft legislative provisions, obliges cash handlers to check and detect counterfeit and unfit euro banknotes and coins whereas paragraphs 4 and 5, as amended by the draft legislative provisions, impose on cash handlers the obligation to remove counterfeit and unfit banknotes and coins from circulation and hand them over to the Italian authorities. 1.3

text: Article 8(6)

text: , as amended by the draft legislative provisions, appoints the Italian National Centre for the Analysis of Coins (CNAC) to perform the tasks set out in

text: Regulation (EU) No 1210/2010

text: Article 8(7)

text: , as amended by the draft legislative provisions, empowers the Banca d’Italia to conduct inspections at the premises of cash handlers to monitor compliance with Decision ECB/2010/14, Article 8 of Decree-Law No 350/2001, as amended by the draft legislative provisions, and the secondary provisions with reference to euro banknotes. In this context, the Banca d’Italia may receive assistance from the tax police, subject to the same limits applying to investigations against tax evasion. 1.4

text: Article 8(8)

text: , as amended by the draft legislative provisions, concerns agreements between the Banca d’Italia, the Ministry and the CNAC, as well as other relevant authorities, on increasing cooperation in this area.

text: Article 8(9)

text: , as amended by the draft legislative provisions, empowers the Banca d’Italia and the Ministry to adopt implementing provisions, such as the abovementioned secondary provisions.

text: Article 8(10)

text: to (12), as amended by the draft legislative provisions, set out financial sanctions and consequences in case of breach of

text: Article 8

text: itself, Decision ECB/2010/14,

text: Regulation (EC) No 1338/2001

text: and

text: Regulation (EU) No 1210/2010

text: . 1.5

text: Article 8

text: -bis, as introduced by the draft legislative provisions, aims at implementing

text: Article 4 of Regulation (EC) No 1338/2001

text: Article 8

text: -ter, as introduced by the draft legislative provisions concerns professional secrecy. The draft legislative provisions also amend and insert in Article 2 of Decree-Law No 262/2006 paragraphs 152 to 153-bis, which refer to reporting obligations to the Ministry and related sanctions. 1.6 The draft secondary provisions further clarify Decision ECB/2010/4 for the benefit of addressees. The draft guide explains in detail reporting obligations for cash handlers.

text: 2. General observations

text: 2.1 The ECB is confident that the draft provisions will ensure the authenticity and integrity of euro banknotes and coins in circulation, resulting in continued public confidence in the euro. 2.2 As Decision ECB/2010/14 applies to cash handlers by virtue of

text: , which refers to procedures defined by the ECB for checking euro banknotes, there is no strict need to implement Decision ECB/2010/14 in Italian law. Nevertheless, the ECB notes that the draft secondary provisions will contribute to the adequate implementation of this Decision.

text: 2.3 The ECB considers it essential that any draft legislation implementing Decision ECB/2010/14 does not deviate from its common provisions, unless this is explicitly provided for in Decision ECB/2010/14. Any national implementing measures should clarify the primacy and direct application of Union law on the authenticity and fitness checking and recirculation of euro banknotes with which cash handlers must comply. In this context, and for consistency reasons, including ensuring a level-playing field for cash handlers across Member States, the ECB favours the use of direct references to Decision ECB/2010/14 or, alternatively, reproduction of its provisions without any alterations or additions . In this regard, the ECB notes that the draft secondary provisions contain rules further detailing the outsourcing requirements of Article 3(2) of Decision ECB/2010/14. The ECB understands that the purpose of the draft secondary provisions is to limit any risks associated with such outsourcing and that they will supplement Decision ECB/2010/14. 2.4 In addition, although national authorities are not formally obliged to consult the ECB on the implementation of the Member States’ obligation to take the necessary measures to ensure that breaches of

text: are subject to effective, proportionate and deterrent sanctions, the ECB believes it is beneficial to harmonise throughout the Union the national measures implementing this obligation to the extent possible, subject to national peculiarities .

text: 3. Sanctions

text: 3.1 According to Article 8(10) of Decree-Law No 350/2001, as amended by the draft legislative provisions, where cash handlers breach the obligations set out in

text: Article 8

text: itself, the implementing provisions or the Union legislation to which the draft legislative provision refers, this would result in the imposition of an administrative fine between EUR 5 000 and 50 000. In addition,

text: Article 8(11)

text: to (13), as amended by the draft legislative provisions, introduces the possibility for the Banca d’Italia or the Ministry to require a non-compliant cash handler to take additional corrective measures, with a possible impact on the conduct of supervision and oversight by the relevant authorities. 3.2 The ECB notes the importance of effective, proportionate and deterrent sanctions . The maximum amount of administrative fines should effectively deter cash handlers from breaching their obligations. While it is up to the national legislator to determine the levels, they should aim for a certain degree of harmonisation across the Member States to contribute to the establishment of a level playing field among cash handlers within the euro area without prejudice to: (a) the

text: particularities of the cash cycle and the organisation of cash handlers at national level; and (b) the consistency of the levels of financial sanctions available in their legal orders . This opinion will be published on the ECB’s website. Done at Frankfurt am Main, 18 November 2011. [signed]

text: The President of the ECB

text: Mario DRAGHI