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The Independence of the Central Banks and their Integration in the European System of Central Banks

In addition to the criteria for economic convergence the Maastricht Treaty also stipulates that each member state shall ensure that its national legislation, including the statutes of its national central bank, is compatible with the Treaty and the statutes of the European System of Central Banks, ESCB, and the European Central Bank, ECB.

"Compatibility" means that the Treaty does not require harmonisation and that national particularities may continue to exist. However, the requirement of compatibility has called for the adaptation of national legislation in all member states which have adopted the euro, and in Sweden and Greece. The United Kingdom is subject to a special exemption and is therefore under no obligation to adapt its national legislation.

The requirements for legal convergence have been specified by the European Monetary Institute, EMI, in annual reports, most recently the Convergence Report of March 1998. As for legal convergence a distinction is made between the independence of the central banks and their legal integration in the ESCB. The deadline for compliance with the independence criterion was at the establishment of the ECB, while the deadline for compliance with the legal integration criterion was 1 January 1999 for the member states which have adopted the single currency, the euro.

Independence of the central banks
This requirement entails independence of the political system, including Community institutions and the governments of the member states, in the central banks' conduct of monetary policy.

The EMI has prepared a list of characteristic features of central-bank independence distinguising between institutional, personal and financial independence.

• Institutional independence is expressly referred to in the Maastricht Treaty as the independence of all external bodies, including Community institutions and the governments of the member states. National legislation stipulating that a third party may instruct the central bank or must be consulted prior to important central-bank decisions can therefore not be maintained.
• Personal independence concerns security of tenure for members of the ESCB's decision-making bodies. The statute of the ESCB stipulates a minimum term of office for central-bank governors of five years. A central-bank governor may be dismissed only on the grounds stated in the statute. This protection also includes dismissal of other members of decision-making bodies of the central banks if such bodies are involved in ESCB-related tasks.
• Financial independence ensures that the central banks are able to avail itself of the appropriate means to carry out their ESCB-related tasks properly.

Legal integration in the ESCB
Legal integration comprises adaptation of national legislation to enable the central banks to execute their tasks in accordance with the ECB's guidelines and instructions. This is a prerequisite for the effective functioning of the integrated system of central banks.

In the Convergence Report of March 1998 the EMI states relevant provisions in the statutes of the national central banks and other legislation which must typically be assessed in relation to legal integration in the ESCB. Such provisions in the statutes are in particular related to objectives and tasks, monetary policy instruments and financial issues such as auditing, accounts, capital subscriptions, transfer of official foreign-reserve assets and monetary income. Other relevant statutory provisions are typically provisions regulating the exchange-rate policy which will be conducted at Community level on participation in the third stage.

Assessment of Danmarks Nationalbank in the convergence reports
Although Denmark does not participate in the third stage of EMU Danmarks Nationalbank must comply with the independence criterion. In their convergence reports from March 1998 the EMI and the European Commission found that the Danish central bank statutes are compatible with the requirement for independence as stipulated in the Maastricht Treaty. The requirements for legal integration do not apply to the Nationalbank due to Denmark's non-participation in the single currency.

The Statutory Basis for the Financial Sector

Amendment of the EC directives on the taking up and pursuit of the business of credit institutions, on a solvency ratio for credit institutions and on the capital adequacy of investment firms and credit institutions
On 22 June 1998 the EU member states adopted a collective package of three directives amending the above directives. The new rules contain provisions on e.g. the capital of the over-the-counter financial contracts of credit institutions. In addition, the rules extend the existing transition scheme allowing member states to stipulate more lenient capital requirements for lending by credit institutions for office and commercial properties. Furthermore, the rules introduce the use of internal risk management models to calculate the market risks associated with holdings of raw materials and raw materials-related financial contracts.

EC directive on settlement finality in payment and securities settlement systems ("the finality directive")
Already in October 1997 the EU member states reached agreement in principle on this directive, which was adopted finally on 19 May 1998. The objectives of the directive include reduction of the systemic risk inherent in payment and securities settlement systems and it ensures among other things smooth and proper functioning of the TARGET payment system. The number of cross-border payment transactions is growing every year, with an inherent growing risk of legal problems if senders and recipients of payments are subject to different insolvency proceedings rules. The directive provides for a transfer order to be recognised as final in all EU member states if given before insolvency proceedings are initiated against the sender. At the same time, the directive provides for it to be possible to choose within a payment system which member state's legal system shall be applied to the payments.

Proposal for amendment of the EC directive in the field of undertakings for collective investment in transferable securities (UCITS)
On 17 July 1998 the European Commission submitted two separate directive proposals to amend the current directive from 1985. These proposals include such issues as approval, supervision, investment policy and transparency provisions for UCITS offering their shares for sale to the public and whose only objective is to invest in securities. The Commission's first proposal focuses on the product offered. The primary objective is to extend the scope of the directive to include other collective investment institutions. These are institutions investing in other liquid financial assets than securities, e.g. money-market instruments, bank deposits and standardised futures and options. The second proposal focuses on the provider. The primary objective is to introduce actual regulation of the administration companies of such institutions in order to e.g. safeguard the right of free establishment in other member states (the EU passport). The proposal also contains draft provisions on the issue of simplified prospectuses.

The fundamental philosophy behind the European Commission's proposals, including extension of the scope of the activities of administration companies, will lead to an improved market structure subject to greater competition. However, it must be ensured that there will be no confusion between the capital management activities of the administration company and the activities of the bank undertaking the task to hold the UCITS' securities (the depositary). Finally, other revisions of the directive should be made with due consideration of the requirement to protect investors and to strengthen the transparency of the market.

Proposal for an EC directive on access to take up and pursue the business of electronic credit institution and the supervision of such institutions
On 21 September 1998 the European Commission submitted a directive proposal in this area. It is primarily directed at issuers of electronic money. The proposal envisages that electronic money may in future be issued by other parties besides credit institutions. All issuers will be designated credit institutions. This entails that they will be subject to financial supervision and to the rules on the "EU passport", i.e. the free right of establishment, free exchange of services and mutual recognition of supervision. They will also be subject to the provisions regulating the ECB's right to collect statistics and - in respect of institutions in the euro area - to the ECB's minimum reserve requirements. The Commission's proposal also sets the stage for issuers of electronic money to be subject to simple and more lenient capital requirements, but to more restrictive placement rules, than credit institutions. The background is the different balance-sheet structure, where liabilities consist of unredeemed electronic money. Very liquid placement of assets is an equivalent requirement. Finally, the European Commission's proposal comprises requirements of the management, business procedures, etc. of issuers, who will furthermore be subject to the EU money-laundering directive. According to the proposal a member state may impose more lenient requirements on small national systems. Such systems will not be subject to the rules on the EU passport. Cf. also the account on p. 64.

Proposal for an EC directive on ensuring minimum effective taxation of income from savings within the Community
The European Commission submitted its proposal on 20 May 1998. The objective is to ensure minimum effective taxation of income from savings within the Community. The proposal is based on the co-existence model, which entails that a member state may choose either to withhold at source tax of 20 per cent on such payments to non-residents (within the EU) or to report such income to the tax authorities in the relevant member state. The proposal solely comprises the income of individuals resident in another member state.

Amendment of regulations concerning transaction parties and confidentiality
With effect from 1 January 1999 the special transaction-party concept in financial legislation is extended and specified via harmonised statutory amendments concerning banks, mortgage-credit institutes, institutional investors, investment companies, investment associations and specialpurpose associations. These amendments implement a number of recommendations from a 1996 report on confidentiality and the concept of transaction parties in financial supervision legislation. The amendments concern primarily senior officers of business enterprises. Members of boards of directors, directors and other senior officers of financial institutions are now given the status of transaction parties with the resulting access to submit complaints concerning an injunction or enforcement notice from the Danish Financial Supervisory Authority to the person in question. On the other hand, under this amendment the customers of financial institutions are not given the status of transaction parties, since the decisions of the Financial Supervisory Authority are not directed at such customers. The amendments also specify the confidentiality provisions concerning the Danish Financial Supervisory Authority, including communication of confidential information to the Securities Market Council, the Auditors of Public Accounts and the AuditorGeneral. Under these amendments the confidentiality of the Financial Supervisory Authority does not lapse when consent is given by the person protected by the confidentiality.

The Whitsun package of economic measures
The Whitsun package amends a number of taxation laws and harmonises certain investment rules for institutional investors. The Real-Interest Tax Act is replaced by a new Act on Taxation of Yields on Pension Savings providing for significantly altered taxation principles. First and foremost, the previous realisation principle applied to the valuation of the taxation basis of institutional investors is replaced by valuation at market prices (the stockpiling principle). In addition, the variable real-interest-tax rate is replaced by a fixed capital-yield tax of 26 per cent. The ceiling for equity investments is raised to 50 per cent and an equity yield tax of 5 per cent is introduced, cf. p. 23 and p. 61ff.

Amendment of the Act on Danish Commercial Banks and Savings Banks, etc.
This statutory amendment entered into force on 1 January 1999, improving inter alia the statutory basis for management of banking crises. For example, a proposal was adopted which facilitates and speeds up the decision-making process regarding reconstruction, etc., including via enforced redemption of minority shareholders. In addition, certain management provisions and provisions regarding limitation of voting rights for savings banks which are limited-liability companies were amended to provide for the merger of Realkredit Danmark, a member-based mortgage-credit institute, and BG Bank, a limited-liability savings bank. Furthermore, a number of provisions regarding the structure of groups were specified so that such provisions are now to a great extent harmonised in financial legislation.

Amendment of the Securities Trading Act (price manipulation and provision of margin)
This statutory amendment entered into force on 1 January 1999 and specifies the provisions of the Act in a number of areas, including as regards price manipulation. Price manipulation is now assessed according to an action's potential effect on the market price, irrespective of its actual effect on the price. This statutory amendment also introduces provisions on margin in accordance with the netting rules. This gives Danish banks an opportunity to connect to international payment and settlement systems. The division of competence between the Securities Market Council and the Financial Supervisory Authority was also specified in more detail.

Amendment of the Act on Investment Companies
This statutory amendment entered into force on 1 January 1999 and limits investment companies' access to ownership of real property. At the same time, investment companies and banks are granted the exclusive right to conduct certain foreign-exchange spot transactions on behalf of customers, for investment purposes.

Act on a Guarantee Fund for Depositors and Investors
This Act entered into force on 15 October 1998 to implement the EC directive on investor guarantee schemes. This Act provides for overall regulation of guarantee schemes for depositors and investors. Both investors and depositors are now protected against losses by means of a common fund with separate departments for banks, mortgage-credit institutes and investment companies. The provisions on deposits of the previous Deposit Guarantee Fund were retained unchanged. The fund also ensures compensation for investors in investment companies and mortgage-credit institutes, etc. in the event of non-reimbursement of funds. In addition, the fund covers investor losses due to an institution's inability to return to the investor securities held, administered or managed by the institution. The fund may also participate in the liquidation of crisis-stricken institutions covered by the guarantee scheme.

Amendment of the Mortgage Credit Act
This statutory amendment entered into force on 1 January 1999 and simplifies a number of lending provisions, including for maximum maturity, repayment profile and loan ceilings.

The amendment specifies the regulations concerning the compulsory winding-up of mortgage-credit institutes in order to e.g. facilitate the international credit rating of Danish mortgage-credit bonds.

Amendment of the Act on Investment Associations and Special-Purpose Associations and new Regulation (transfer of investment departments and provisions concerning use of derivatives)
This statutory amendment entered into force on 1 January 1999 and provides for transfer of a separate department from one association to another association as a separate department without being subject to the split and merger provisions of the Act. Furthermore, in a regulation, which entered into force on 2 December 1998 the Danish Financial Supervisory Authority specified the regulations concerning use of derivatives by investment associations and special-purpose associations.

Proposal for amendment of the Payment Card Act (Section 20)
This bill provides for amendment of the special provision of Section 20 of the Act, which limits card issuers' access to charge fees from card recipients. In the first instance the amendment concerns card recipients wishing to effect payments using payment cards on the Internet, etc. The remarks on the bill provide for abolition in the longer term of Section 20 on the condition of real competition on the market for payment cards, cf. p. 77.

Amendment of the Capital Gains Act, the Tax Administration Act and the Tax Enforcement Act (provisions in banks and mortgage-credit institutes, etc.)
This statutory amendment, which has not yet entered into force, will provide a clear statutory basis for deduction by banks and mortgage-credit institutes of losses on loans and guarantees, etc. This amendment to a large extent represents a codification of current practice, so that banks and mortgage-credit institutes may now deduct accounting provisions on the compilation of taxable income. The supervisory authority, usually the Financial Supervisory Authority, will oversee that provisions are made in accordance with accounting regulations. The EU will be notified of this amendment before it enters into force, in accordance with the provisions in the EC Treaty on aid granted by states.