Law on Financial Sustainability


Published: 0000-00-00

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Translated from Lithuanian
 
REPUBLIC OF LITHUANIA
LAW ON
financial sustainability
 
22 July 2009  No XI-393
 
Vilnius
 
 
 
PREAMBLE
 
The Seimas of the Republic of Lithuania,
having regard to the fact that the financial sector, a significant share whereof in Lithuania is taken by the banking sector, should be attributed to the most vulnerable sectors whose condition is likely to substantially affect national economy, the confidence placed by the population and economic entities in the national financial system, the sustainability of this system and that it is necessary to ensure the possibilities of use of proper and timely measures of reinforcing the stability of the financial system; 
having regard to the provisions of the Communication from the Commission of 13 October 2008 on the application of State aid rules to measures taken in relation to financial institutions in the context of the current global financial crisis (OJ 2008 C 207, p. 8), the Communication from the Commission of 15 January 2009 on the recapitalisation of financial institutions in the current financial crisis: limitation of aid to the minimum necessary and safeguards against undue distortions of competition (OJ 2009 C 10, p. 2), the Communication from the Commission of 25 February 2009 on the treatment of impaired assets in the Community banking sector (OJ 2009 C 72, p. 1),
passes this Law.
 
CHAPTER ONE
GENERAL PROVISIONS
 
Article 1.  Objective and Purpose of the Law
1. The purpose of this Law shall be to provide for the measures enhancing the financial sustainability of the banking system with a view to protecting the key public interests.  
2. This Law shall stipulate the measures which, when necessary, may be taken to reinforce the financial stability and soundness (hereinafter referred to as a “measure (measures) to enhance financial stability”) of the banks and branches of foreign banks established in the Republic of Lithuania (hereinafter referred to as a “bank (banks)”) , the objectives, conditions of and the procedure for applying them.
3. Other laws shall apply to the use of measures to enhance the financial stability to the extent that this Law does not stipulate otherwise.
 
Article 2. Measures to Enhance Financial Stability and Application Thereof
1. Under this Law, the following measures to enhance financial stability may be applied:
1) state guarantee;
2) redemption of bank assets;
3) participation of the State in the capital of the bank;
4) taking over of a bank’s shares for public needs.
2. Measures to enhance financial stability shall be applied by the Government of the Republic of Lithuania (hereinafter referred to as the “Government”) or an institution authorised by it in accordance with the procedure laid down by laws and other legal acts. The Bank of Lithuania shall participate in enhancing the stability of the banking system and applying the measures to enhance financial stability in accordance with the procedure laid down by the legal acts regulating its activities and this Law.
3. The Government or an institution authorised by it shall decide on the application of measures to enhance financial stability where the application of such measures is requested by the bank and/or the bank’s shareholders holding a proportion of the bank’s authorised capital and/or voting rights granting the right to control the activities of the bank (hereinafter referred to as the “bank’s controlling shareholders”) or a person which is the founder of a branch of a foreign bank (in the case of a branch of a foreign bank) in the Republic of Lithuania, also where the Bank of Lithuania submits to the Government or an institution authorised by it a conclusion referred to in subparagraph 1 of paragraph 1 of Article 3 of this Law.
4. One or more measures to enhance financial stability applicable to a specific bank shall be selected having regard to the principles specified in paragraph 2 of Article 3 of this Law and other provisions of this Law, to the financial position of the bank and its operation prospects, to the situation in the financial sector of the Republic of Lithuania and global financial markets, to the request of the bank whereto the measures to enhance financial stability are applicable and a conclusion and recommendations of the Bank of Lithuania concerning the applicable measure to enhance financial stability, to the information received from the Bank of Lithuania on the measures applied or being applied in respect of the bank under other laws, where they were or are being applied, to a conclusion, recommendations or information on the measures applied as obtained from the supervisory authorities of other EU Member States responsible for supervision of foreign banks, where the bank is controlled or the branch of a foreign bank has been established by a foreign bank licensed in another EU Member State, in the event of receipt of such a conclusion, recommendations or information, the subject-matter of the applicable measure to enhance financial stability, the objectives of application thereof and other material circumstances.
5. Recommendations regarding a specific applicable measure to enhance financial stability, also regarding the conditions of application of this measure shall be presented, together with the conclusion referred to in subparagraph 1 of paragraph 1 of Article 3 of this Law to the Government or to an institution authorised by it by the Bank of Lithuania.
6. Measures to enhance financial stability may be applied to a bank whose financial position jeopardises the stability and soundness of the banking system and/or to a bank which, in the event of reorganisation or in other cases, assumes the obligations of such a bank.
 
Article 3. Circumstances and Principles of the Use of Measures to Enhance Financial Stability
1. The Government or an institution authorised by it shall apply measures to enhance financial stability under the following circumstances:
1) in the presence of a conclusion of the Bank of Lithuania that the bank has liquidity problems or there exists a real threat of having such problems in the future, and the measures which the Bank of Lithuania is allowed to apply in compliance with legal acts are insufficient to deal with the liquidity problems of the bank, or in the presence of a conclusion that there exists a real threat of the bank becoming insolvent;
2) there is a ground for a conclusion that, in the event of a failure to apply the measures to enhance financial stability as stipulated by this Law, the stability and soundness of the banking system will be jeopardised.
2. Measures to enhance financial stability shall be applied in compliance with the following principles:
1) the bank, shareholders and heads thereof must assume responsibility for the consequences of their activities and for the obligations which would allow to enhance the stability and soundness of the bank’s operations and to ensure the implementation of the applied measures to enhance financial stability and the efficient and rational use of monetary resources and assets allocated by the State;
2) regard must be paid to the financial possibilities of the State, and the aim must be to use the monetary resources and assets of the State in an efficient and rational manner;
3) the legal acts regulating State aid must be complied with;
4) measures to enhance financial stability must be applied temporarily, that is, in the presence of exceptional circumstances – in the event of a real threat to the stability and sound operation of the banking system, and the applied measures to enhance financial stability must be reviewed in accordance with the procedure and within the time limits stipulated by the legal acts regulating State aid;  
5) measures to enhance financial stability should be applied in a timely manner.
 
Article 4. Conditions of Application of Measures to Enhance Financial Stability
1. Where the Government or an institution authorised by it takes a decision on the application of a measure to enhance financial stability, with the exception of a resolution on the taking over of a bank’s shares for public needs, the decision shall be accompanied by stipulation of the terms and conditions of application of the measure to enhance financial stability, which must be complied with by the bank and/or the bank’s controlling shareholders (the person which is the founder of a branch of a foreign bank) over the period of application of the measure to enhance financial stability.
2. The period of application of measures to enhance financial stability shall be of a limited duration specified by the Government.
3. The price of a measure to enhance financial stability or the price for the use of the measure to enhance financial stability shall be determined taking account of the market value, risks and/or other factors likely to affect the price.
4. The terms and conditions of application of a measure to enhance financial stability shall be specified having regard to the principles stipulated in paragraph 2 of Article 3 of this Law, to the subject-matter of the measure to enhance financial stability, the objectives of application thereof and to other material circumstances. In determining the terms and conditions of application of the measure to enhance financial stability, the following must, inter alia, be stipulated:
1) requirements for the drawing up and implementation of a plan for restructuring of the activities of the bank and ensuring future stable and sound operation of the bank;
2) restrictions on the payment of dividends and bonuses;
3) restrictions on the remuneration rates of members of the bank’s bodies and other payments;
4) requirements for credit volume to finance national economy;
5) requirements for replacement of members of the bank’s bodies;
6) prohibition of inappropriate use of measures to enhance financial stability, including the prohibition of the use of information on the measures to enhance financial stability for the purposes of the bank’s marketing or the bank’s operation development.
5. Upon taking a decision on application of a measure to enhance financial stability in respect of a bank, a written notice shall be given thereof to the bank and/or to shareholders of the bank (the person which is the founder of the branch of a foreign bank). The notice shall indicate the measure to enhance financial stability and the terms and conditions of application thereof. The bank and/or the bank’s controlling shareholders (the person which is the founder of the branch of the foreign bank) must, within the time limits laid down in the received notice, inform the authority which has taken a decision on application of the measure to enhance financial stability in respect of the bank whether they agree with the proposed terms and conditions of application of the measure to enhance financial stability.
6. A measure to enhance financial stability shall be applied solely upon conclusion of an agreement with a bank and/or the bank’s controlling shareholders. This agreement shall provide for the obligations of the bank and/or the bank’s controlling shareholders to comply with the terms and conditions of application of the measure to enhance financial stability, with the exception of the cases when the bank’s shares are taken over for public needs.
7. A bank and/or the bank’s controlling shareholders (the person which is the founder of the branch of a foreign bank) requesting to apply a measure to enhance financial stability must provide to the Government or to an institution authorised by it, within the time limits laid down by them, the information required for taking of a decision on the measure to enhance financial stability and, upon conclusion of an agreement on the application of the measure to enhance financial stability, provide the information required for controlling compliance with the terms and conditions of application of the measure to enhance financial stability in accordance with the procedure and within the time limits laid down in the agreement.
 
CHAPTER TWO
STATE GUARANTEES AND REDEMPTION OF BANK ASSETS
 
Article 5. State Guarantees
1. State guarantees may be granted in respect of the loans received by the bank after the entry into force of this Law or the financial obligations assumed otherwise and increasing the liquidity of the bank or otherwise enhancing the bank’s stability and soundness, with the exception of guarantees in respect of interbank deposits.
2. The amount of the bank’s obligations guaranteed by the State may not exceed the equity of the bank or, in the case of guarantees in respect of performance of the obligations of a branch of a foreign bank, the amount of such obligations may not exceed the amount of required reserves calculated for the branch over the current period of holding required reserves and multiplied by three. The term of the bank’s obligations whose performance is guaranteed by the State may not exceed three years and may not be shorter than three months.
3. A decision on granting of State guarantees under this Article shall be taken by the Government on the recommendation of the State Loan Commission.
4. Having consulted the Bank of Lithuania, the Government shall lay down the terms and conditions of and the procedure for granting and fulfilling the State guarantees provided for in this Article, including the principles of determining the guarantee fee and the requirement to secure discharge of the obligations which might arise after the State fulfils the guarantor’s obligations by pledging the assets of the bank and/or the bank’s controlling shareholders (the person which is the founder of the branch of a foreign bank) acceptable for the provider of the guarantee and/or by other acceptable means of securing discharge of the obligation according to the principle that the value of the pledged assets valued by an independent property valuer may not be less than the amount of the granted loan.  
 
Article 6. Redemption of Bank Assets
1. A bank’s assets may be redeemed only in the case when the Bank of Lithuania presents a conclusion that the use of this measure to enhance financial stability would allow to restore implementation of prudential requirements or would otherwise consolidate the stability and soundness of the bank.
2. The bank’s assets shall be redeemed under the terms and conditions and at the price specified in the agreement entered into with the bank. Valuation of the bank’s assets shall be performed by an audit firm and/or a property valuation entity. The valuation expenses shall be borne by the bank.
3. The assets redeemed from the bank shall be transferred by the right of trust to the entities referred to in the Law on the Management, Use and Disposal of State and Municipal Assets.
 
CHAPTER THREE
PARTICIPATION OF THE STATE IN THE BANK’S CAPITAL
 
Article 7. Modes of Participation of the State in the Capital of a Bank
1. The State may participate in the capital of a bank:
1) by granting to the bank a subordinated loan;
2) by acquiring the newly issued shares of the bank;
3) by acquiring all or a part of the bank’s shares from the bank’s shareholders.
2. The State shall participate in the capital of a bank in the modes specified in paragraph 1 of this Article where, with a view to enhancing the stability and sound operation of the bank, it is necessary to increase the bank’s equity capital, to ensure the proper implementation of the terms and conditions of application of measures to enhance financial stability by means of participation in the activities of the bank’s bodies and appropriate decision-making.
3. Subordinated loans shall be granted in accordance with the procedure laid down by the Government.
4. An agreement on the subordinated loan granted by the State must stipulate a possibility of converting the subordinated loan into the bank’s shares.  
5. After the bank’s shares are transferred into the ownership of the State and where necessary, other measures to enhance financial stability as stipulated by this Law shall be applied to the bank, and/or other actions required to ensure the stability and soundness of the banking system shall be taken in accordance with the procedure laid down by laws.
 
CHAPTER FOUR
TAKING OVER OF A BANK’S SHARES FOR PUBLIC NEEDS  
 
Article 8. Taking over of a Bank’s Shares for Public Needs  
1. The Government shall have the right to take a bank’s shares over for public needs only in exceptional cases, where the taking of the bank’s shares over into the ownership of the State is necessary for the State to take timely action required to ensure the stability and soundness of the banking system and where other available measures are not appropriate or the measures already applied are not sufficient for this purpose. The bank’s shares shall be taken over for public needs under a resolution of the Government with a fair recompense in accordance with the procedure laid down in paragraphs 6 and 7 of this Article.
2. The right of ownership to the shares being taken over shall be transferred to the State upon the entry into force of a resolution of the Government on the taking over of the bank’s shares for public needs. The resolution of the Government on the taking over of the bank’s shares for public needs shall enter into force in accordance with the provisions of the Law on Procedure of Publication and Coming into Force of Republic of Lithuania Laws and Other Legal Acts regulating the entry into force of the decisions of the Government to be taken without delay. Managers of securities accounts must forthwith, upon receipt of an effective resolution of the Government on the taking over of the bank’s shares for public needs, make entries in the securities accounts regarding the transfer of the right of ownership to the shares to the State.  
3. The shares taken over shall be managed, used and disposed of by the right of trust by an institution authorised by the Government or another legal person authorised by the Government.
4. A resolution of the Government on the taking over of a bank’s shares for public needs shall, inter alia, indicate the grounds for the taking over of shares for public needs and the procedure for settling with the bank’s shareholders.
5. A resolution of the Government on the taking over of a bank’s shares for public needs shall be delivered to the bank, which must, not later than within five days, give a notice thereof by registered mail to each former shareholder of the bank. The notice shall contain information on the adopted resolution of the Government and the information that former shareholders must, within five days from the receipt of the notice, give a written notice to the bank of data of the accounts opened (held) with a credit institution whereto the funds obtained from the bank’s shares taken over should be transferred.
6. The price of the bank’s shares shall be approved by the Government having regard to recommendations of an audit firm and/or a property valuation entity. The expenses of setting the price of the bank’s shares shall be covered from the funds of the State. When setting the price of the bank’s shares, no regard may be had to the measures to enhance financial stability already applied or likely to be applied to the bank under this Law. The bank must provide the persons setting the price of the bank’s shares with the data required for the setting of the price of the bank’s shares. Upon setting the price of the bank’s shares, a written notice shall be given to former shareholders of the bank in accordance with paragraph 5 of this Article.
7. Along with payment of the established price of shares for the shares being taken over, the former shareholders of a bank shall also be paid an interest in the amount specified in paragraph 1 of Article 6.210 of the Civil Code from the price of shares payable to them for the shares being taken over for a period from the entry into force of a resolution on the taking over of shares until settlement with the former shareholders. Settlement with the former shareholders of the bank who fail to notify of the accounts opened (held) with credit institutions shall be performed in accordance with the procedure laid down in Article 6.56 of the Civil Code.
 
CHAPTER FIVE
SOURCES OF FUNDING OF MEASURES TO ENHANCE FINANCIAL STABILITY
 
Article 9. Sources of Funding of Measures to Enhance Financial Stability
1. Measures to enhance financial stability may be implemented by using:
1) the funds of the state budget;
2) the funds of the Reserve (Stabilisation) Fund;
3) the funds borrowed on behalf of the State, also the Government securities (hereinafter referred to as “GS”) issued in accordance with the procedure laid down by legal acts;
4) the rights of claim held by the State under the payment obligations of the bank in respect of the State;
5) other sources of funding specified by legal acts.
2. In the event of using GS for implementation of measures to enhance financial stability, the characteristics of GS and the terms of their issuance, including negotiability, shall be stipulated by the Ministry of Finance representing the Government in accordance with the procedure laid down by the Law on State Debt.
3. A decision on borrowing on behalf of the State for the purposes specified in this Law without exceeding the limits and amounts stipulated by the Law of the Republic of Lithuania on the Approval of Financial Indicators of the State Budget and Municipal Budgets for the corresponding year shall be adopted by the Ministry of Finance representing the Government.
4. The GS referred to in paragraph 2 of this Article may, in accordance with the procedure laid down by the Government, be transferred to banks in payment for the assets of these banks.
 
Article 10. Discharge of Property Obligations Assumed by the Government
All possible financial resources of the State, including new property obligations assumed under the Law on State Debt, also proceeds from disposal of the assets redeemed from banks, proceeds from the sale of banks’ shares belonging to the State and acquired or taken over in accordance with the procedure laid down by this Law, the dividends received from the banks whose shares have been acquired or taken over by the State under this Law, also proceeds from disposal of the assets pledged to secure the charge of obligations arising upon the State fulfilling the guarantor’s obligations, shall be used to discharge all property obligations assumed by the Government under this Law
 
CHAPTER SIX
FINAL PROVISIONS
 
Article 11. Sale of a Bank’s Shares
A bank’s shares acquired or taken over by the State under this Law shall be sold without delay after the bank’s financial condition ceases to pose a threat to the stability and soundness of the banking system or at another time specified by the Government having regard to the situation in the financial sector of the Republic of Lithuania and global financial markets as well as other material circumstances in accordance with the procedure laid down by legal acts of the Republic of Lithuania.
 
Article 12. Information Protection
Any information provided by banks to the Government or to other persons authorised by it under this Law shall be considered confidential, unless a bank specifies otherwise when providing the information. The confidential information obtained may be used solely for the performance of the functions specified by this Law and may not be publicly announced, divulged or made otherwise accessible, except in the cases specified by in this Law.
 
Article 13. Notice of Claims Filed to Discharge Obligations
1. Banks must forthwith, in accordance with the procedure laid down by the Bank of Lithuania, give a notice to the Bank of Lithuania of the cases when the shareholders directly and/or indirectly controlling the activities of the banks or the undertakings under direct and/or indirect control of such shareholders (hereinafter referred to as the “controlling persons”) request (or the banks intend to perform) early repayment of funds to the controlling persons or discharge of other obligations in respect thereof, also of any other instructions given by the controlling persons which could pose a threat to the bank’s stability and sound operation and terminate the discharge of such obligations or instructions.
2. Where a bank does not receive, on the next working day following submission of a notice to the Bank of Lithuania, a written instruction of the Bank of Lithuania not to discharge the obligations or instructions indicated in the notice, it shall have the right to resume the discharge of the obligations or instructions indicated in the notice.
3. The Bank of Lithuania shall have the right to issue a written instruction to a bank not to discharge the obligations or instructions indicated in the notice, where there are the grounds stipulated in Article 67 of the Law on Banks.
 
Article 14. Scope of Other Laws of the Republic of Lithuania
1. A notice of the general meeting of shareholders of a bank whose agenda contains the issues relating to application of the measures to enhance financial stability shall be published not later than ten days prior to the date of the meeting, and the published draft agenda of the meeting shall not be subject to adjustment. In this case, the provisions of paragraphs 3 and 5 of Article 25, paragraph 3 of Article 26 of the Law on Companies shall not apply. Moreover, a representative of the Government or an institution authorised by it shall have the right to attend and speak at the general meeting of shareholders of the bank whose agenda contains an issue of the increase of the bank’s authorised capital by additional contributions of the State or other issues relating to application of the measures to enhance financial stability. This representative shall also hold the rights specified in paragraph 4 of Article 25 of the Law on Companies.
2. Where the State acquires newly issued shares of a bank, the provisions of paragraph 5 of Article 45, paragraph 2 of Article 50 of the Law on Companies shall not apply.
3. Where the State acquires the shares of a bank or takes them over for public needs, provisions of paragraphs 2-8 of Article 5, paragraph 1 of Article 23, Articles 24, 25 and paragraphs 4 and 8 of Article 41 of the Law on Banks shall not apply.
4. Where the State acquires a bank’s shares, the provisions of Chapter Four of the Law on Securities shall not apply.
5. Where funds are borrowed and/or State guarantees are granted under this Law, the provisions of paragraph 2 of Article 3, paragraphs 1 and 2 of Article 5, paragraphs 1 and 2 of Article 6 of the Law on State Debt shall not apply.
 
 
Article 15. Repeal of Laws
Upon entry into force of this Law, the following legal acts shall become invalid:
1) Law of the Republic of Lithuania on the Measures for Maintaining the Liquidity of Commercial Banks (official gazette Valstybės žinios, No 104-2326, 1995);
2) Law of the Republic of Lithuania on Issuance of Government Securities for Restructuring of Banks (official gazette Valstybės žinios, No 59-1406, 1996);
3) Law of the Republic of Lithuania Amending Article 2 of the Law on Issuance of Government Securities for Restructuring of Banks (official gazette Valstybės žinios, No 35-870, 1997);
4) Law of the Republic of Lithuania Amending Article 2 of the Law on Issuance of Government Securities for Restructuring of Banks (official gazette Valstybės žinios, No 61-1825, 2000).
 
Article 16. Proposals to the Government
The Government of the Republic of Lithuania or an institution authorised by it shall adopt the legal acts implementing this Law.
 
I promulgate this Law passed by the Seimas of the Republic of Lithuania.
 
 
 
 
 
 
 
 
 
PRESIDENT OF THE REPUBLIC                                          DALIA GRYBAUSKAITĖ
 
 
 
Translated by
 
Alina Kiudulaitė
alkiud@lrs.lt