Opinion of the European Central Bank of 1 July 2022 on the mobilisation of credit claims as collateral in central bank operations (CON/2022/23)

OPINION OF THE EUROPEAN CENTRAL BANK of 1 July 2022 on the mobilisation of credit claims as collateral in central bank operations (CON/2022/23) Introduction and legal basis

On 19 May 2022 the European Central Bank (ECB) received a request from the Lithuanian Ministry of Finance for an opinion on draft amendments to Law No XII-2769 on real estate related credit and Law XI- 2153 on consumer credit (hereinafter the ‘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 fifth indents of Article 2(1) of Council Decision 98/415/EC , as the draft laws relate to Lietuvos bankas and payment and settlement systems. In accordance with the first sentence of Article 17.5 of the Rules of Procedure of the European Central Bank, the Governing Council has adopted this opinion.

1. Purpose of the draft laws

1.1 As noted in the consultation request and the explanatory memorandum accompanying the draft laws, the main purpose of the draft laws is to enable Lietuvos bankas to take over rights and obligations under consumer credit and residential real estate related credit agreements in the event that a financial market participant that pledged rights under these agreements to Lietuvos bankas defaults. Under current Lithuanian law, the rights and obligations under existing consumer and residential real estate related credit agreements may only be owned by or assigned to persons included in the public lists of credit providers and consumer credit providers, respectively. Lietuvos bankas is not included in any of the lists, and therefore these restrictions limit its ability to liquidate such claims in case they have been provided as security in the context of Eurosystem monetary policy operations or the provision of liquidity loans by Lietuvos bankas. 1.2 The draft laws stipulate that when Lietuvos bankas, in the performance of its functions, assumes the rights and obligations under consumer and residential real estate related credit agreements of a credit provider, the legal limitation to transfer the rights and obligations under existing consumer and

residential real estate related credit agreements only to a person included in the public list of consumer credit providers or public list of credit providers will not apply to Lietuvos bankas. 1.3 As noted in the explanatory memorandum, the draft laws enable Lietuvos bankas to appropriate pledged consumer and residential real estate related credit pools and create the legal preconditions to enforce the collateral represented by these credit claims in the event of default of a central bank counterparty.

2. General observations

2.1 Credit claims have been accepted as eligible collateral in Eurosystem monetary policy and intraday credit operations since 1 January 2007 . The scope for accepting eligible credit claims has been extended by the additional credit claims (ACC) framework under which certain additional types of credit claims, such as residential mortgages or consumer loans, may also qualify as eligible collateral in certain euro area jurisdictions, provided that they meet certain additional specific criteria. Lietuvos bankas is one of the Eurosystem central banks that have made use of this possibility . 2.2 The provisions of the draft laws aim at excluding legal and financial risks associated with credit claims accepted as collateral by Lietuvos bankas. In this respect, the existing restrictions hinder the process of liquidating collateral in the form of consumer credit and residential real estate related credit agreements. According to the requirement laid down in the second indent of Article 18.1 of the Statute of the European System of Central Banks and of the European Central Bank, lending by the ESCB central banks must be based on adequate collateral. As regards credit claims, this requirement encompasses inter alia that a valid security is created over credit claims and that the credit claim can be swiftly realised in the event of a counterparty default . 2.3 The ECB welcomes the draft provisions, which eliminate the limitations for Lietuvos bankas to take over rights and obligations under consumer and residential real estate related credit claims, as they have the effect of broadening the range of assets eligible as collateral and increasing the amount of collateral available for mobilisation in Eurosystem monetary policy and intraday credit operations in the context of the ACC framework of Lietuvos bankas, as well as in the emergency liquidity assistance (ELA) operations of Lietuvos bankas. As such, the draft amendments will enhance the capacity of financial market participants to obtain liquidity support when needed. Moreover, in expanding the pool of eligible collateral against which the Lietuvos bankas may extend credit in ELA operations, the draft laws could contribute to maintaining the stability of the financial system in Lithuania.

2.4 Annex VI, Section 1 to Guideline (EU) 2015/510 (ECB/2014/60) provides for the cross-border use of credit claims. While demand for the cross-border use of Lithuanian credit claims might currently be limited, the possibility cannot be excluded that this demand might increase in the future. In recent years other euro area Member States have consulted the ECB on draft legislative provisions designed to exclude certain legal risks which Eurosystem national central banks (NCBs) might face in relation to the mobilisation of credit claims as collateral in central bank operations, e.g. provisions to exclude set-off rights for credit claims mobilised as collateral in central bank operations. While in certain Member States the relevant draft legislative provisions proposed to protect only that particular Member State’s central bank, some Member States have also proposed to extend protection to the ECB and the other NCBs in the European System of Central Banks (ESCB) . Against this background, the ECB invites the consulting authority to consider extending the protection of the draft laws to the ECB and the other NCBs in the ESCB, with a particular view to the possible cross-border mobilisation of Lithuanian credit claims as collateral in future Eurosystem credit operations. 2.5 The draft laws eliminate the restrictions for Lietuvos bankas to take over rights and obligations under consumer and residential real estate related credit agreements. This is proposed to be achieved by means of exempting Lietuvos bankas from the requirements to be included in the public lists of consumer credit providers and credit providers when Lietuvos bankas is assigned rights and obligations under existing consumer and residential real estate related credit agreements. The ECB notes that, based on a literal interpretation of the text of the draft laws, this exemption is applicable not only to the transfer of collateral into Lietuvos bankas’s ownership, but also to the later point in time when Lietuvos bankas realises its collateral rights by selling the credit claims to a third party which is not in the public lists of consumer credit providers and credit providers. In this respect, the explanatory memorandum accompanying the draft laws states that Lietuvos bankas must ensure that it carries out the transfer of rights and obligations under existing consumer and residential real estate related credit agreements to a person included in the public lists of consumer credit providers and credit providers. Accordingly, applying these draft provisions in a formulaic manner might raise concerns with regard to whether the wording of the draft laws is aligned with the intentions of the consulting authority. Therefore, the consulting authority is invited to consider whether the precise wording of the draft laws could, for the sake of legal certainty, be further clarified to ensure their full effectiveness and intended purposes. In this respect, it is noted that the absence of restrictions concerning mobilisation and realisation of credit claims constitutes an eligibility criterion for the mobilisation of credit claims as collateral in Eurosystem monetary policy and intraday credit operations . Thus, the restriction for Lietuvos bankas to transfer the rights and obligations under existing consumer and residential real estate related credit agreements only to persons included in the public lists of consumer credit providers and credit providers would prevent the fulfilment of this eligibility criterion. To ensure the eligibility of consumer and residential real estate related credit claims for monetary policy and intraday credit operations the draft laws should exclude Lietuvos

bankas and, if applicable, the ECB and the other NCBs in ESCB from the requirement to transfer credit claims only to persons in the public lists of consumer credit providers and credit providers. This opinion will be published on EUR-Lex. Done at Frankfurt am Main, 1 July 2022. [signed]

The President of the ECB

Christine LAGARDE