Amendment to the financial provisions of the Organic Law by the law of 3 April 2009
Question discussed at the 2009 general meeting
One of the features of a central bank is the existence of rules governing the distribution of income which must guarantee that the surplus of its income in relation to its expenditure accrues to the State in its capacity as sovereign State. The bulk of a central bank’s income results from the carrying out of monopolistic activities granted by the State, especially with regard to the issue of banknotes. As a result, the central bank generates income by creating non-remunerated liabilities as the counterpart to which it holds profit-earning assets.
Under the previous arrangement, this distribution was governed by the so-called 3 p.c. rule, with the State receiving a priority share of profits – of approximately one fifth – while at the same time being entitled to one fifth of the profits appropriated to the reserves in the event of the distribution of the reserve fund. The aim of this arrangement was to ensure that the surplus of the National Bank’s income in relation to its expenditure, including the formation of reserves and the remuneration of shareholders, accrues to the sovereign State.
In view of the sharp growth in the circulation of banknotes and of the guarantee given by the State to the Bank for its lending and operations aimed at promoting financial stability, these distribution rules were no longer suited to their purpose.
The government therefore proposed to amend them and replace them with simpler and more transparent distribution rules. The law of 3 April 2009 no longer provides for the allocation to the State of a share of income prior to the determination of the result. Where a profit is generated, the Bank retains the amount required to form reserves and to pay its shareholders. The balance accrues to the sovereign State.
The most important provisions of the law of 3 April 2009 are as follows:
- The so-called 3 p.c. rule provided for in Article 29 of the Organic Law of the Bank is repealed. The balance of the yearly profit is henceforth allocated to the State, after formation of the necessary reserves and remuneration of shareholders.
- The Bank will henceforth be able to create available reserves to be used for offsetting losses or making up the amount to be distributed. The existing reserve fund will be retained in full.
- In order to protect shareholders, a lower legal limit is provided for the dividend: at least half of the net income of an earmarked portfolio will be distributed by means of a second dividend. The portfolio in question includes the assets which form the counterpart to all of the previously reserved profits (reserve fund and available reserves).
The aim of these new rules is therefore to ensure, in a more straightforward and efficient manner, (1) that the Bank has complete independence regarding the formation of the reserves which it deems necessary, (2) that the share of income exceeding expenditure, including the formation of reserves and the remuneration of shareholders, accrues to the State in its capacity as the sovereign State and (3) that a clear and appropriate criterion is used to determine the minimum share of annual profits which must be distributed as remuneration for shareholders.
The right of all shareholders to the remuneration on their invested capital is preserved. Both the capital and the reserve fund remain intact. For the future, the law does not limit either the growth in the reserves, nor that of dividends. It will be the task of the Council of Regency to establish, entirely independently, the Bank’s reserve policy and, as in the past, to define a dividend policy – taking into consideration the lower limit set by the law in favour of shareholders – and to publish this policy. In doing this, the Council of Regency will have to ensure that the financial interests of the Bank, of its shareholders and of the sovereign State are considered in a balanced way, as stated in the Explanatory Memorandum, page 7, second paragraph, in fine, to which reference should be made for further information.
The law of 3 April 2009 amending the financial provisions of the Organic Law was not to be submitted for approval by the Bank’s General Meeting of Shareholders.
Any amendment to the Bank’s Organic Law is a matter for Parliament, and the Organic Law expressly provides that it is the Council of Regency which amends the Statutes with a view to bringing them into line with the provisions of the Organic Law as well as with international obligations which are binding on Belgium.