Cabinet approves loan interest ceiling restriction proposal

The Cabinet has signed off on a draft law that sets a ceiling for the annual percentage rate on consumer loans.

Part of a package of legislation to address tactics from the instant loan subsector – sometimes seen as predatory. The law says that a loan agreement is null and void if the cost of the credit comes to more than three times the six-month average annual interest rate on consumer loans, as posted by the central bank.

As of this August, that triple rate is 102.17 percent.

Agreements would be automatically considered void if the rate is higher, and the consumer pays only the principal back by the original loan payment date.

Source: ERR News

Stricter capital requirements for banks as of August

The additional 2% systemic risk buffer requirement set by Eesti Pank for commercial banks will enter into force as of tomorrow, 1 August, increasing the requirement for common equity tier 1 for Estonian banks to 9%.

Eesti Pank considers the systemic risk buffer necessary to manage the banking risks of a small and open economy. The systemic risk buffer will not lead to any major changes for banks operating in Estonia as their capitalisation is higher than the requirement about to be enforced.

Common capital requirements have been applied to banks in the European Union since the start of 2014, but member states also have the right to set additional capital buffer requirements. In 1997-2013, the legal minimum capital requirement applied in Estonia was 2% higher. Eesti Pank’s view is that it is necessary to keep the higher requirement in Estonia, as the systemic risk in banking has not declined.

In case of an unexpected downturn in Estonian economy caused by external factors, it could very quickly lead to loan repayment problems in the private sector, which in turn could worsen the financial position of banks. Estonian economy is more volatile owing to the higher than average level of investments and the modest savings of Estonian households and companies, which are smaller than the average savings rate in Europe. There is also the risk from the high degree of concentration in banking, as a large part of the banks are exposed to risks from the same group of countries and economic sectors.

In addition to the systemic risk buffer, banks operating in Estonia have to hold a capital conservation buffer of 2.5%. If a bank fails to meet the capital buffer requirement, it will be restricted in paying out dividends and management bonuses.

Eesti Pank assesses the need for capital buffers for the banking sector at least twice a year as part of the Financial Stability Review, which is published in April and October.

An analysis of the need for a systemic risk buffer and its impact can be found on the Eesti Pank website.

Read more from Bank of Estonia website

The use of internet banking and ATMs has increased

In the second quarter of 2014, an average of 30 million domestic payments were made in Estonia each month with the total value of 13 billion euros. Compared to the same period a year earlier, the number of payments increased by 4%, while the value of payments contracted by 12%. The value of payments did not grow considerably across any method of payment; however, the value of telebank payment orders and payment orders on paper decreased significantly year-on-year. These two methods of payment have been on a downward path for years, but SEPA-related conditions, which entered into force in February, caused the recent sharp fall. The division of payments has remained quite stable over the past four years: more than 60% of domestic payments are made with a bank card, and the share of payments initiated in an internet bank hovers around 20%. At the same time, the majority of the value of payments goes through an internet bank – in the second half of 2014, a total of 75% of the value of payments came from internet banking payments. In the same period a year earlier, the share of internet bank payments in the total value of payments was 10% smaller.

As of February 2014, domestic interbank payments have been made through the pan-European STEP2 system run by EBA Clearing. A fifth of all domestic payment orders are made via STEP2. The payments made through STEP2 make up 26% of the value. Until February, domestic interbank payments were made using the ESTA retail payment system run by Eesti Pank and payments were sent from one bank to another ten times a day. In STEP2, interbank settlement takes place five times a day, which means that a payment from one bank can take three to five hours to reach another bank. If a payment needs to reach another bank on the same day it will need to be made by 15:00 or 16:30, depending on the bank. 80% of domestic payment orders are settled within one bank; these payments are usually settled immediately and around the clock.

In the second quarter of 2014, an average of 1.7 million cross-border payments were made each month with a total value of nearly 6 billion euros. The number of payments was almost the same as a year before, but the value had increased by 16%.

A tenth of cross-border payments are made using STEP2, but these payments make up a fifth of the total value of payments. Cross-border payments made through STEP2 are most often sent to Finland, Germany and Latvia (17%, 16% and 10% of the volume of all cross-border payments, respectively). The most money was also received through the system from these countries.

As at 30 June, banks have issued 1.8 million bank cards, 1.5 million of which are in active use. A few years ago, people tended to use bank cards for cash withdrawal rather than for paying at points of sale. By now, the situation has reversed. Card payments amount to approximately 340 million euros per month, while an average of 316 million euros of cash are withdrawn from ATMs. In the second quarter, people used ATMs to deposit an average of 144 million euros per month, which is 17% more than a year earlier. This increase could be explained partly by the fact that cash payments in bank offices (including depositing and withdrawing cash) have become more expensive and thus, people use more ATMs. The average amount of a card payment has been around 17 euros for more than five years. The average amount withdrawn from an ATM at once is 93 euros and the average amount deposited using an ATM is 364 euros. Both figures are nearly a tenth larger than they were a year ago.

Source: Bank of Estonia

Author: Tiina Soosalu, Payment and Settlement Systems Department of Eesti Pank

The volume of loans and leases increased by 2.8 pct year-on-year

The volume of loans and leases granted to companies and households continued to grow at a subdued pace in June, similarly to previous months. Compared to June 2013, the portfolio increased by 2.8%; its value was 15.1 billion euros.

The annual growth of the portfolio of loans and leases granted to companies was positive in almost all sectors, reaching 4.3% in June. The volume of short-term corporate loans and leases remained at a level similar to previous months, but the volume of loans and leases related to long-term loans (mainly for fixed asset investments) decreased to 170 million euros in June, while in May, the figure had been more than 230 million euros. Companies in the agricultural and industrial sector took out fewer long-term loans than in previous months.

In June, the volume of new loans issued to households remained at the level of earlier months. New housing loans totalled to 66 million euros, which is approximately the same as in the previous three months. The housing loan portfolio continued to increase slowly, with its annual growth reaching 1.7% in June.

Loan interest rates did not change considerably in June. The average interest rate on long-term corporate loans issued in June was 3.2%, while the interest rate on housing loans was 2.5%.

The loan quality of the banks continues to improve. The percentage of loans overdue by more than 60 days fell from 1.8% in May to 1.7% in June.

The total deposits of companies and households at the end of June stood at 9.3 billion euros. Compared to last month, in June the stock of non-financial corporate deposits decreased by 33 million euros and the annual growth of deposits fell to 6.8%. The volume of deposits contracted due to a decrease in corporate deposits – the volume of corporate deposits was almost 100 million euros smaller in June than in the previous month.

Banks earned 113 million euros in net profit in the second quarter. Nearly a third of it came from dividends paid out by subsidiaries. Without it, the amount of profit was similar to that earned in earlier quarters. The profitability of banks has been supported by a decrease in administrative expenses and a reduction of previously made write-downs for loan losses, but on the other hand, the net interest income of banks declined in the second quarter.

Source: Bank of Estonia

Author: Jaak Tõrs, Head of the Financial Stability Department of Eesti Pank

Companies’ increased foreign borrowing led to greater indebtedness in 1Q

The debt liabilities of Estonian companies (loans and issued debt securities) grew by 1.4% in the first quarter compared to last year. Over the quarter, total corporate debt increased by 444 million euros, which is one of the largest quarterly growths of the past years. The majority of the growth was caused by an increase in foreign borrowing; a significant part of the latter was made up of the issue of new bonds in the infrastructure sector. The share of foreign debt liabilities in total corporate debt increased somewhat and reached 37% by the end of the quarter.

Corporate leverage remained unchanged in the first quarter, as both equity and debt continued to grow. The debt-to-GDP ratio, which had been decreasing for a year, went up slightly over the quarter – from 85% to 87%.

The financial assets of households are still increasing at a faster pace than debt liabilities. Compared to last year, households’ financial assets increased almost 10% in the first quarter, while the growth of debt liabilities picked up speed and reached 1.2%. The indebtedness of households as a ratio to GDP remained at 41%.

The Estonian economy as a whole was a net borrower in the first quarter. This means that more funds were taken in from abroad than invested there. A negative balance is quite typical of the first quarter, but larger than usual corporate foreign borrowing also had a considerable impact.

Source: Bank of Estonia

Author:  Jana Kask, Deputy Head of the Financial Stability Department of Eesti Pank

Interview with governor of central bank of Estonia

Interview with Ardo Hansson, Governor of Eesti Pank and Member of the Governing Council of the ECB, conducted by Stefan Riecher and Jeff Black on 16 July 2014 in Frankfurt

On latest ECB stimulus package:

“One of the features of this set of instruments is that they are planned in a sequenced fashion. Some of the elements kicked in immediately. Others, for example, the targeted long-term loans are announced but to be implemented over two years. The first implementation will be in September, that’s when you have more detailed information about the initial take-up and it will take some time to feed in into the indicators. So I think unless something really unexpected happens that puts us on a different inflation projectory than the idea of doing something more at this stage shouldn’t be part of our baseline assumption. You need to think about contingencies and be prepared. But there’s really enough to deal with the long-term loans now and get them running and I don’t think we should, after having just announced such a substantial package, already be thinking about any next steps. Let’s take the time to get this up and running first.”

“Those measures should be enough related to our baseline scenario but, of course, there’s always possibilities to evolve a little bit more in one direction or another. So in the end you can’t rule out that things will evolve a little bit different than the baseline. But in our baseline assumptions, considering our forecasts, we think the package is pretty substantial and it is appropriate.”

On targeted longer-term refinancing operations:

“The final aim is to have an impact on prices but one of the transmission channels is the credit channel. I’m reasonably optimistic it is going to work but it hasn’t been tried so there’s maybe a bit more uncertainty than with other things that have been tried before. We don’t know much about the detailed impact as we might have known with some other instruments.”

“Had nothing else changed in the recent period, with only this instrument implemented, the effectiveness could be quite limited. But if you think about other factors, the global recovery, that might create some underlying support for investment demand. Maybe we do see a level of capacity utilization in certain sectors a little bit higher now and there’s more fundamental support for greater investment.”

“Some of my concerns were that the targeted long-term loans are operationally somewhat complex. That’s one of the reasons why you have this window of several months between the announcement and the implementation. A bunch of details have to be sorted out. There are legal acts that have to be adopted to apply this instrument. The preparations are underway and we’ll manage but it requires very detailed definitions of certain variables, of monitoring, of performances. It is operationally complex but it is doable.”

“One worry was about how you shouldn’t discourage banks from writing off bad loans if necessary. You don’t want to have a measure that looks like credit provision is declining if a bank is writing off a bad loan. Then you are penalizing them for actually doing the right thing. You want them to report accurately but you don’t want this scheme to be inducing to defer necessary write-offs to show higher lending. All these things are now being taken care off.”

“We don’t want these loans to be used for mortgages, for government bonds, for financial-sector lending. We can’t really prevent carry trades over the first two-year period but banks have to pay back the money if they don’t use it in a way intended. There’s an upfront measure related to your balance sheet and then there’s the targeted component. Without that initial part, take-up would take an awful long time, if it was all based on net increase in lending, then the volumes involved initially would rather be small.”

“You’re getting long-term money and lock it in. For somebody looking for term financing, comparing this to an option with a variable it’s obviously a bit more attractive. It’s about what kind of trend a specific bank expects.”

On further interest-rate cuts:

“You can’t rule out that there’s a little more you can do. So is it really true that you’re at the floor? Not technically. But for all practical purposes you’re very close. So at that point, it’s almost semantic how you characterize that. When you’re used to 25 basis point changes, 10 basis point changes, going forward you’re not talking about big additional things. We’re in the margin of error.”

On the timing of interest-rate increases:

“That’s not an immediate risk, we’ll have to deal with that when it arises. Every policy creates an exit issue at some point in time, but I don’t think we’re there yet.”

“There’s no single trigger. It’s a lot of factors you run through, trying to come up with a medium-term assessment. The baseline scenario foresees that inflation will remain relatively subdued for some time. If you’re to be surprised on the upside, if suddenly that were to change, it’s a contingency and you reassess the situation. But right now we don’t see that as likely for some time.”

On asset purchases:

“Technical work on asset purchases is advancing but there has been no decision. There is readiness if inflation stays too long for too long to use unconventional means but the idea now is to explore if and how you develop new tools, expand the toolbox. The tools are not sitting there already but it’s worth developing them. Then there’s the other question on if and when to implement them.”

“We haven’t set a firm deadline on an ABS program to say by date X it all has to be done and ready. I suppose if the contingency materializes over the space of a certain period of time, then maybe. But this is nothing that develops overnight.”

“Certainly, for example in the U.S., this market is more developed because there is this element of government behind it. You don’t want such purchases when you’re the only player in the market. There has to be a sharing arrangement but I think to the extent that you can develop new sources of non-bank financing it could be useful. It’s is a longer-term program but if you can get such an ABS plan going through regulatory reform, legal reform, and so on, and it has a more diversified non-bank focus, then it’s probably good for a lot of reasons. But that element alone takes time and it’s not going to help with immediate issues. It’s more of a medium-term plan somewhere down the road.”

“Of course, if you start somewhere, the trade-off is that an ABS program is going to be rather small. You may have some kind of an impact on credit allocation to certain types of firms versus others but the quantitative impact on demand is probably not going to be that large. It may be good in a very long term because you can get a market going and people gain confidence, they start issuing these securities. But that’s a very gradual process. To build up the volumes to reasonable levels, that takes some time. It’s probably not going to have much of a quantitative impact but it might help you in the more distant future.”

“If you want to have more of an impact you’ve got to be thinking about a broader set of asset classes, broader-based asset purchases. There’s work on the way on that as well but in a European context it’s very tricky to design these rules, what types of things to buy, and how much. Some of these markets are not so liquid as others. There are a lot of little issues. Some governments have issued many bonds but they are not highly traded. There’s a lot of these operational details that have to be worked through. You have to think about the effectiveness and the impact and all of that takes a lot of preparation. It’s worth preparing, it’s worth having more tools, but I don’t think Quantitative Easing is a tool that’s needed right now.”

“It would have to be a serious contingency that you see a scenario that has materially changed. If you were to see that then I think you consider it but I would say let’s focus on getting these existing, newly announced measures going. The other possible options are out there as contingencies. You certainly would want to see some real kind of sluggishness in demand, something like we saw in 2008. You’d wanna see really a much more material risk of scenarios which take you away from your target.”

On the risk of bubbles:

“I think it’s helpful when we’re reminded of those risks. Probably in other jurisdictions you see a little bit more of that because they just happen to be a bit more advanced, we are at a different point in the cycle. There the risks may be much more immediate. In Europe, there are certain jurisdictions where those risks might be real.”

“We have to think about those risks, and it’s helpful to think that when we implement certain policies there is no free lunch, and we have to be much more forceful and take this issue of macroprudential policies much more seriously. Probably a year ago I would have thought it was going to be an awful long time before we even get to the point where that even becomes an issue. But now, some asset prices are certainly high. You don’t see a euro-area wide impact on the typical financial-stability risk, property prices. But there’s a trade off: the longer you are in a low-interest-rate environment, you start getting financial stability risk. But whether at a European level or a local level, someone has to actually go beyond the rhetoric of just mentioning this, and actually combine these issues of relatively accommodative monetary policy and maybe some countermeasures to deal with financial stability risks. In other jurisdictions maybe this debate is more advanced because objective reality is already making it an issue.”

On macroprudential tools:

“Macroprudential tools are work in progress. Part of it is happening at the ESRB. Countries are already notifying the ECB of certain macroprudential measures at a local level. In Estonia, we set the systemic risk buffer at 2 percent. Given that these risks are probably growing, it’s maybe more important to develop the capacity, these instruments. It’s good to have this double system where the country or the ECB can initiate action or overrule. As a central bank, we’d like to think we have less inaction bias. But in most countries, as the government has quite a bit of a role, and for example in an election period you can have quite a bit of inaction bias. So to have an institution that can say, you’re being too slow, and you should be more front loaded with you adjustment, that’s a very good thing. Maybe that also shows how hard it is to forecast these turnarounds. A year ago I would said it would be quite a long time before it ever becomes an issue, because everything is so subdued, and now we find it is at least being raised as an issue. But a central bank has to start from its mandate, and we have to pursue the policies that we are pursuing, but then the macroprudential authorities have to be more vigilant.”

On sanctions against Russia and their impact:

“It’s a very fluid situation, obviously we’ve run scenarios on different possibilities but since the range of possible outcomes is so broad, if something where to happen it would all depend very much on specifics. Maybe the prime impact is on confidence in general. If there’s an enterprise thinking of investing in Estonia, people might have a bit more of a wait and see attitude. But in terms of trade flows we haven’t seen anything substantial yet. Obviously that situation can change. In our own economy, Russia is ten percent of our exports, but a lot of it is not high value.”

On Estonia:

“As for the latest GDP contraction, the baseline we see is that there are quite a lot of one-off factors at play. We used to have the highest inflation rate in the euro area, now we basically have negative domestic inflation. There are a lot of specific factors. We had a liberalization of power prices last year, power prices increased by almost 30 percent in 2013, now they are declining by about 13 percent. We built a power cable to Finland, and it’s cheaper to buy electricity from there. A positive supply shock. This is temporary, though, and once these one-off factors work out, we’re probably going to have inflation that is somewhat higher than the average in the euro area.”

“On the GDP side there were one-off factors that are beginning to wash out. The whole economy is a bit less balanced than it used to be. A year ago we were sitting with budget deficit of 0.2, we had a current account deficit of about 1 percent of GDP, the loan deposit ratio was about 100, everything was extremely balanced. Now we are starting to see that balance fraying a bit. Wages are growing faster than productivity, and a robust increase in property prices and a little bit of widening of the current account deficit. There’s a bit of an incipient imbalance building up, which could be a problem if it continues. However, we have lately seen a bit of a correction in the property sector and wage growth has started to come down. There’s chances of a smooth correction but it’s not guaranteed. We have this legacy of having a boom and we’re trying to work out of it, so we’d like credit growth to pick up very very gradually and not get back into a boom situation.”

“We draw some consolation from the fact that the property price increases aren’t being driven by bank credit. We’re at a very different point in the cycle from many of the euro-area countries. We are trying to use the macroprudential instruments when required, we’re trying to develop the loan-to-value ratios to have them as an option to consider. We could always be a bit of a pilot for these instruments.”

Published in: Bloomberg News
Reproduction is permitted provided that the source is acknowledged.

Published date:
Published in:
Bloomberg News
Source: Bank of Estonia

Estonia joins the EU-wide insolvency registry

The European Commission launched a EU-wide interconnection of national insolvency registers, linking databases from Estonia, the Czech Republic, Germany, Netherlands, Austria, Romania and Slovenia, with others set to join at a later stage.

The database will be serve businesses, creditors and investors, who want to make checks before deciding to invest.

Alar Jäger, the deputy head of Krediidiinfo, an Estonian financial information company, said the definition of insolvency varies across the union, and the register could be a step towards aligning rules practices and definitions.

He said Estonian companies giving out credit to EU partners, such as asking for payment of goods and services after delivery, will benefit. Those type of companies make up 91 percent of businesses in Estonia.

Source: ERR News


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