Opinion of the European Central Bank of 17 September 2025 on the establishment of special credit institutions with a lower initial capital threshold of EUR 1 million (CON/2025/28)

OPINION OF THE EUROPEAN CENTRAL BANK of 17 September 2025 on the establishment of special credit institutions with a lower initial capital threshold of EUR 1 million (CON/2025/28) Introduction and legal basis

On 10 July 2025 the European Central Bank (ECB) received a request from the Latvian Ministry of Finance for an opinion on a draft law amending the Law on credit institutions to introduce a new regulatory framework for special credit institutions with an initial capital that may not be less than EUR 1 million (hereinafter the ‘draft law’). The ECB’s competence to deliver an opinion is based on Article 25(1) of the Statute of the European System of Central Banks and of the European Central Bank, which provides, inter alia, that the ECB may be consulted by the competent authorities of the Member States on the implementation of Union legislation relating to the prudential supervision of credit institutions. In particular, the draft law contains provisions affecting the ECB’s tasks concerning the prudential supervision of credit institutions pursuant to Article 127(6) of the Treaty. In accordance with Article 17.5, first sentence, of the Rules of Procedure of the European Central Bank, the Governing Council has adopted this opinion.

1. Purpose of the draft law

1.1 As noted in the explanatory memorandum accompanying the draft law, the main objective of the draft law is to improve the regulation of the Law on credit institutions by defining a special credit institution and setting out its eligibility criteria, thereby facilitating the development of the financial market and its competitiveness in the credit institution sector as a whole, as well as the availability of financial services across the territory of Latvia. In order to facilitate the entry of new market participants and ensure the harmonisation of laws across the Baltic States, the explanatory memorandum accompanying the draft law notes the necessity of exercising all the options provided for in Article 12(4) of Directive 2013/36/EU of the European Parliament and of the Council (hereinafter the ‘CRD’) by setting the framework for the activities of a special credit institution and providing for a lower initial capital threshold of EUR 1 million. 1.2 Latvian law does not currently provide for any exemption from the minimum initial capital requirement of EUR 5 million established for credit institutions under the CRD. The draft law provides for a possibility to establish a special credit institution with a lower initial capital threshold of EUR 1 million.

1.3 In order to benefit from the exemption from the EUR 5 million initial capital requirement a credit institution would need to comply with the following non-cumulative criteria: (a) have a limited range of customers established according to the territorial principle, the employment principle, or the principle of community of interests within the meaning of the Law on credit unions ; (b) provide financial services exclusively in digital form; or (c) have a business model that envisages the provision of innovative services, which are new or significantly improved financial services in Latvia . No secondary legislation is envisaged in the draft law to further define these criteria. 1.4 The draft law does not limit the range of financial services that the above categories of credit institutions, which would benefit from the exemption from the EUR 5 million initial capital requirement, would be entitled to provide. Accordingly, they would be entitled to provide the same services as credit institutions subject to the full EUR 5 million initial capital requirement. 1.5 The explanatory memorandum accompanying the draft law notes that, taking into account that a special credit institution will be allowed to enjoy the freedom to provide services and the freedom of establishment in the Union, it will be subject to all the same prudential and other requirements for a credit institution as are currently established for a credit institution with an initial capital of no less than EUR 5 million.

2. General observations

2.1 The ECB notes that, within the framework of the Single Supervisory Mechanism (SSM), which is composed of the ECB and the national competent authorities, including Latvijas Banka, the ECB is, in accordance with all relevant Union law (and Latvian legislation transposing Union directives), exclusively competent to carry out, for prudential supervisory purposes, the tasks of authorising credit institutions and withdrawing authorisations of credit institutions . 2.2 Regarding the draft law’s objective of ensuring the harmonisation of laws across the Baltic States, the ECB was consulted by the Estonian Ministry of Finance in 2023 and adopted an opinion on a draft law that proposed to reduce the minimum initial capital requirement applicable to association banks from the current EUR 5 million to EUR 1 million in line with Article 12(4) of the CRD . The ECB understands that association banks are a particular category of credit institution that can exist only in the specific legal form of a commercial association and must be established by at least 50 persons , and, irrespective of the amount of capital contributed by any member to its share or initial capital, each member of the association bank has one vote at its general meeting . Notwithstanding these features, the ECB understands that the draft Estonian law does not limit the range of services that an association bank may provide, and that association banks may provide the same range of

services as credit institutions established as public limited companies (aktsiaselts) . However, the

ECB understands that the draft law has not been adopted by the Estonian legislator.

2.3 The ECB was not consulted by the Lithuanian authorities on the Lithuanian Law on banks , which

established a regime for ‘specialised banks’ under Lithuanian law with a minimum initial capital

banks are defined as credit institutions established in the Republic of Lithuania authorised to

engage, and which engage, in receiving deposits and other repayable funds from non-professional

market participants and in lending thereto, and which assume the risk and liability related thereto,

and have the right to provide such other financial services that are specified in the Law on banks .

2.4 Other SSM jurisdictions have exercised the option under the CRD to establish a regime for the

authorisation of particular categories of credit institutions with an initial capital of less than EUR 5

CRD into their national laws have followed a heterogeneous approach. Some of those Member

States have introduced geographic limitations , some have limited the services that can be provided

by such credit institutions , and some have simply transposed the provisions of the CRD without

any further specifications . In terms of implementation of the exception, the ECB has not granted

authorisations to credit institutions with initial capital lower than EUR 5 million, except under the

Lithuanian specialised banks regime.

2.5. Against this backdrop, it seems difficult to conclude that the draft law would achieve its goal of

ensuring the harmonisation of laws across the Baltic States. The draft law would not align with the

current Estonian regime, where there is no legal framework for special credit institutions.

Furthermore, the draft Estonian law on which the ECB was consulted in 2023 envisaged a narrower

category of special credit institution than that envisaged by the draft law. Rather, the draft law

appears to be designed to harmonise the Latvian regime with the Lithuanian regime, albeit subject to different detailed terms and conditions.

3. Specific observations

3.1 Particular categories of special credit institutions under the draft law and scope of services provided 3.1.1 Under the CRD, Member States may grant authorisation to particular categories of credit institutions with an initial capital of less than EUR 5 million, subject, inter alia, to the conditions that the initial capital is no less than EUR 1 million and that the Member States concerned must notify the Commission and the European Banking Authority (EBA) of their reasons for exercising that option . As noted in the recitals of the CRD, in order to secure a sustainable and diverse Union banking culture which primarily serves the interest of the citizens of the Union, small-scale banking activities, such as those of credit unions and cooperative banks, should be encouraged . Accordingly, the ECB understands that the purpose of the exception for the authorisation of particular categories of credit institutions under the CRD is to accommodate certain types of credit institutions that do not have the same risk profile or business scale as larger credit institutions, such as local savings banks, cooperative banks, or credit unions. By doing so, the Union legislator sought to encourage a diverse banking sector, supporting smaller community-based or specialised institutions that play important roles in local economies and financial inclusion. Therefore, the exercise of the option conferred on Member States under the CRD is, in principle, only justified in respect of institutions that have a local scope of activity with a limited risk profile. 3.1.2 The draft law provides for a EUR 1 million initial capital requirement for three categories of credit institutions. The ECB understands the first category to include, inter alia, credit unions, which, after the entry into force of the draft law, would have the option to convert into credit institutions with an initial capital requirement of minimum EUR 1 million. However, this category ultimately seems to target applicants that have established a territorial, employment or common interest focus in their statutes. While this appears to be a distinctive definition, it opens the field to a future broad spectrum of commercial banking activities that could be pursued by a special credit institution after obtaining authorisation to commence the activity of a credit institution. Similarly, the second category – credit institutions that provide financial services exclusively in digital form – appears to be a very broad and not particularly distinctive category of credit institution. The same applies to the third category – credit institutions that have a business model that envisages the provision of innovative services which are new or significantly improved financial services in Latvia. This also appears to be a very broad and not particularly distinctive category of credit institution. While the CRD does not provide any further guidance regarding the particular categories which under the national law may be entitled to benefit from reduced initial capital requirements, the CRD does confine the exemption to particular categories. The ECB invites the legislator to consider whether the criteria for qualifying as a credit institution falling within the three categories of credit institutions are sufficiently clear, unique and distinctive, and to reinforce the proposed criteria to foster such clarity, and also ensure an accurate

application of the envisaged provisions to institutions that have a local scope of activity with a limited risk profile. 3.1.3 Furthermore, in the event that the Latvian legislator pursues the lower initial capital requirement, the ECB suggests that it should consider specifying the range and type of services that credit institutions with a lower initial capital may provide in order to provide sufficient clarity to possible applicants and to better manage risks in the banking sector . As outlined above, this should focus on low-risk local banking activities. 3.2 Initial capital level of special credit institutions 3.2.1 The ECB cautions that the combination of a high number of potential new entrants to a market of rather limited size and relatively low capital levels could lead to increased risks if market players prove to be less risk averse or engage in more aggressive behaviour in order to obtain market shares. Therefore, the ECB encourages the Latvian legislator to thoroughly consider whether lowering the initial capital requirement for special credit institutions to EUR 1 million is a good legislative choice in terms of policy for the banking market . This becomes even more relevant when the objective of the draft law is to improve regulation and facilitate the development of the financial market and its competitiveness in the credit institution sector. 3.2.2 Furthermore, a credit institution must comply with the own funds requirements as set by the relevant applicable Union and national law, including Regulation (EU) No 575/2013 of the European Parliament and of the Council . The amount of own funds required on authorisation is determined on the basis of an entity's business plan and the risks that it intends to undertake according to the methodology described in Chapter 8 of the EBA Guidelines of 11 November 2021 on a common assessment methodology for granting authorisation as a credit institution under Article 8(5) of Directive 2013/36/EU (EBA/GL/2021/12) . 3.3 Licensing process and conditions for special credit institutions 3.3.1 If the lower initial capital requirement is implemented, the ECB considers that supervisors would need to consider sufficient assurances to ensure that the abovementioned risks do not materialise, in particular by applying a thorough scrutiny in the assessment of authorisation applications jointly with the ECB. This could be achieved through a careful and comprehensive challenge of proposed business plans, including enhanced business plan stress testing. Furthermore, institutions authorised under such a regime may materially depart from the business model they applied for, for example through a shift towards riskier activities, or by failing to deliver on the digital and innovative ambitions proposed in their applications, or may have difficulties in achieving scale efficiency. Consequently, the ECB also invites the Latvian legislator to consider amending the draft law to

require applicants to prepare and submit an exit plan as a prerequisite for the granting of authorisation. 3.3.2 To sum up, the ECB invites the Latvian legislator to thoroughly consider whether lowering the initial capital requirement for special credit institutions to EUR 1 million is a good choice in terms of policy for the banking market. Should the Latvian legislator decide to proceed, the ECB would suggest that the draft law be amended in two respects in order to ensure that the exceptional national treatment it provides for credit institutions avoids undue banking risks building up. First, as concerns the categories of special credit institutions under the draft law, the ECB suggests ensuring that these are targeted categories with limited risk and business profiles, so that they qualify as a sufficiently precisely defined and distinctive category of particular credit institution within the meaning of the CRD and thus warranting the exceptional national capital treatment. These should be institutions that have a local scope of activity with a limited risk profile. In addition, the range and type of activities falling under that definition should be specified. Second, the Latvian legislator is invited to consider requiring a mandatory, credible exit plan with clear triggers as a prerequisite for the granting of an authorisation as a special credit institution.

This opinion will be published on EUR-Lex.

Done at Frankfurt am Main, 17 September 2025.

[signed]

The President of the ECB

Christine LAGARDE