Central bank sets requirements for housing loans

Eesti Pank is planning to introduce three limits on the issuing of housing loans by commercial banks at the start of 2015, as a precautionary measure to reduce the risks of a lending boom in the future.

The first limit is on LTV (loan-to-value), and states that the loan amount can only be up to 85% of the value of the collateral. If the loan is guaranteed by KredEx then the loan amount can be for up to 90% of the value of the collateral.

The second limit is on DSTI (debt service-to-income), and states that all the monthly loan and lease principal and interest payments of the borrower taken together may amount to only 50% of the borrower’s monthly net income. Net income is regular income that reaches the bank account after taxes have been deducted.

The third limit is that the maximum maturity of housing loans is to be 30 years.

Governor of Eesti Pank Ardo Hansson explained that the requirements for housing loans are a precautionary step by the central bank to contain the risk of a housing bubble in the future. “This reflects the lessons of the last lending boom, when tools like this could have slowed the rate of loan growth and softened the crisis that followed the boom.”

The requirements for housing loans will protect the Estonian financial system against the danger that competing banks may take on excessive risks when lending is growing fast, said Mr Hansson. “The experience from the lending boom is that limits on housing loans protect borrowers too, because they deter transactions in an overheated market that could cause problems for repayments if there is a downturn later.”

The internal rules of the commercial banks for issuing housing loans are mainly within the limits planned by the central bank, and the majority of loans are issued with remarkably conservative conditions, so the limits planned by Eesti Pank will not make the conditions for issuing housing loans tighter than they currently are.

Eesti Pank is planning to introduce the requirements for all the banks operating in Estonia, including branches of foreign banks in Estonia. The limits will apply to loans to households for buying, renovating or building housing in Estonia. The Estonian Financial Supervision Authority will supervise how the limits are met.

It is planned that the commercial banks will be permitted an exemption from the limits for up to 15% of the amount of housing loans issued in a month. The exemption is intended for borrowers who have very good ability to repay the loans or very good collateral for example.

Eesti Pank is planning to impose the limits on issuing housing loans from the start of 2015. The central bank will consult the commercial banks on how the technical details for how the limits will be calculated in November this year.


Read more from Bank of Estonia website

The Estonian financial sector as a whole is in good condition

The Estonian financial sector is in good condition and most of the risks to financial stability in the next half year are small. The assessment of financial stability shows how strong and reliable the banks are and how well they are able to cope in more difficult times.

The main risk is now of a deterioration in the external environment, which includes the conflict between Ukraine and Russia.A worsening of that environment could provoke a recession and damage the loan quality of the banks. Estonian financial stability is still vulnerable to a reassessment of the risks to the Nordic economies and banks by financial markets, which could increase the financing and liquidity risks of the banks here too. A slowdown in the growth in Estonian real estate prices has reduced the danger of excessive risks being taken in the housing loan market in the expectation of continuing rises in prices.

Economic growth in Estonia remained modest in the first half of this year, but it should speed up somewhat in the coming years. Negative developments in the external environment could still mean that growth ends up markedly weaker than forecast. The economy in the euro area has recovered more slowly than expected. The economic sanctions relating to the conflict between Russia and Ukraine have had an inhibitory effect on both trade and confidence, and this has added to the long-term problems caused by high unemployment and indebtedness in many euro area countries. The impact of the sanctions on the Estonian economy has not yet been large. A further widening of the conflict and additional sanctions could increase the risks to economic growth and financial stability.

Rises in real estate prices and growth in housing loans have continued in Sweden and the risks this poses to Estonian banks remain. The biggest bank groups in Sweden largely fund their activities with funds from the financial markets and if investors should reassess the risks to the banks, it could make the financing of bank groups much more difficult or expensive. On top of this, a fall in real estate prices could lead to lower economic activity levels because of a reduction in private consumption and investment. The Swedish financial supervisory authorities have said that Swedish banks need to increase their liquidity and capital buffers in order to bring down risks.

The good financial position of Estonian companies and households has let loan quality for the banks improve and this is expected to continue in the coming year. The improvement in the quality of the loan portfolio helped maintain the profitability of banks, and as a result the capitalisation of the banks rose. The impact of the Russian sanctions on the business sector as a whole is quite modest, even if some individual companies are affected a great deal, and so the credit risk to the banks is only limited. In any case, the banks operating in Estonia have only a small share of their assets in Russia.

The Estonian real estate market has started to stabilise. The growth in the average price of housing slowed in the second quarter and the number of transactions fell. Although wages are rising more slowly, real estate prices may start to rise too quickly if demand is boosted as interest rates remain low and incomes rise.

To reduce the risk of lending booms in the future, Eesti Pank plans to impose three limits for banks on new housing loans as a preventative measure. These are a limit on the loan-to-value (LTV) ratio of new housing loansl, a limit on the debt service-to-income (DSTI) ratio, and a limit on the maximum maturity of loans. The levels planned for the limits are based on the current conditions for housing loans issued by banks so the requirements set by Eesti Pank will not make the conditions for issuing housing loans tighter than they currently are. The purpose of the requirements is to ensure that the conditions on housing loans from the banks take sufficient account of possible risks. If the risks around housing loans increased, Eesti Pank would be able to set stricter requirements.

Source: Bank of Estonia

Average e-invoice standing order payment is 36.50 eur

An average of one million domestic payments were made in Estonia each day in the third quarter with a value of 410 million euros, which is about the same as in previous quarters. An average of 54,000 e-invoice standing order payments a day were made in the quarter with a total value of around two million euros. The average e-invoice standing order payment was for €36.50. E-invoice standing order payments accounted for 5.5% of the domestic payments in the third quarter, and for 0.5% of the value of payments. E-invoice standing orders are now being used for 97% of the payments earlier made by direct debit and the changeover to the new system has gone smoothly. The transition to SEPA led to the introduction of the e-invoice standing order in the Estonian payment market in the second half of last year as the banks replaced the direct debit services they had been using until then with a new service based on e-invoice standing orders.

The transition to SEPA led to other changes as well, which are still in the process of being adopted. The change to the SEPA requirements will be completed by 1 February 2015. Until then it is possible to enter account numbers and submit payments in the old format, and banks are providing the services to help private clients and companies to make payments.

From 1 February it will only be possible for clients, whether corporate or private clients, to make payments using the international bank account number, or IBAN. This means companies need to make sure that they are using the 20-digit IBAN on their invoices, websites and other forms.

It is very important for account numbers to be entered accurately, as banks cannot check that account numbers and the names of the holders match when they initiate interbank payments. Because of the SEPA regulations, the payment can only be initiated using the uniquely identifying IBAN of the payment recipient.

Companies need to finish updating their systems by February next year so that they can only make payment transfers in the new format. After that banks may no longer provide a conversion service and if the system updates are not made, the company accountants will have to enter all payments one by one through the internet bank. More information about this can be found directly from the bank holding the account.

Source: Statistics Estonia

Author: Teet Puusepp, Eesti Pank Payment and Settlement Systems Department

Corporate borrowing has increased somewhat

Corporate debt was 3.3% larger at the end of the second quarter than it was a year earlier. Both domestic and foreign debt liabilities increased by about the same amount and long-term debt liabilities for financing investment increased the most. Corporate debt has not changed much in relation to GDP in recent quarters, as debt liabilities and nominal GDP have grown at similar rates.

Corporate equity grew more slowly in response to lower profitability. The rapid fall of recent years in the ratio of debt to equity, which shows corporate financial leverage, came to a stop. The debt burden and financial leverage of the Estonian corporate sector have fallen a relatively long way in recent years compared to those in other European Union countries, and both indicators are lower than the EU average.

Household financial assets and incomes are continuing to grow faster than debt liabilities. Although the slower growth in the economy and in incomes has led growth in household financial assets to slow too, it remained quite fast and stood at 7% year-on-year at the end of the second quarter. Within that, household deposits and cash increased by some 8%. The growth in household debt liabilities has gradually accelerated, but it still remains slow and stood at 1.5% at the end of the second quarter.

Moderate borrowing and determined saving by households meant that the Estonian economy as a whole was a net lender in the second quarter of 2014. This means that more funds were invested abroad or returned there than were taken in from abroad.

Financial account statistics can be found on the Eesti Pank website:  http://statistika.eestipank.ee/?lng=en#treeMenu/FINANTSKONTO

Source: Bank of Estonia

Author: Taavi Raudsaar, Financial Sector Policy Division of Eesti Pank

87,000 Estonians had a long-term debt last month

According to Krediidiinfo AS, around 87,000 Estonians had a long-term debt last month, that is, they have been unable to clear the outstanding balance within the last 12 months. Household Finance and Consumption Survey indicates that many adults lack basic financial skills.

Alar Jäger, Krediidiinfo’s Deputy Director, told ERR radio news that the majority of the outstanding debts are small, a few thousand euros in average, although he knows of more severe cases where debtors have lost their homes.

Triin Messimas from the Estonian Banking Association said that the basic mistake that people make in the day-to-day running of their financial affairs is not planning ahead. She named little income and difficulties in covering even daily expenses at the end of the month as the main excuses people usually make for not saving up.

At the same time, most people agree that they should budget and save. “The problem is that they have the relevant knowledge, but no habits or experience to go with it,” she said.

Although last PISA test showed that Estonian pupils have good financial literacy skills, there will always be people out there whose attitudes no amount of lessons or campaigns can change, Jäger said.

“We have observed those processes in the European countries and it is unfortunately the case that about 2 to 3 percent of all people are unable to adequately assess their financial commitments,” he said. This means that many people, when they reach adulthood, take on financial obligations that they are unable to fulfill.

Source: ERR News

IMF discussed economic growth and risk

The Annual Meetings of the International Monetary Fund discussed measures that could help support a recovery in growth in the global economy and resilience against risks. An important point for Estonia in the longer term was that growth is likely to be slower in Russia.

Discussions in the IMF’s International Monetary and Financial Committee focused on global growth, which has been poorer than expected, and on ways it can be accelerated and strengthened. In spring most of the recommendations were for short-term monetary and fiscal policy support, but now there were louder calls to adopt economic policies that would have a long-term effect. All countries, including those in the euro area, need to carry out structural reforms in order to strengthen growth, and infrastructure investment needs to be increased in many countries.

“Countries that have carried out important reforms have clearly benefited from them. In the euro area these were particularly the countries that were deeper in the crisis”, said the Governor of Eesti Pank, Ardo Hansson. “Structural reforms are especially important right now as favourable conditions have been created for an economic recovery by short-term monetary policy measures. However, relying only on short-term stimulation could lead to new risks arising, particularly in the financial sector.”

The IMF’s International Monetary and Financial Committee also noted an increase in risks and considered that low interest rates are creating challenges and that risk-taking has increased in financial markets. The main risks to the euro area were identified as slow growth over a long period and inflation, and the impact of geopolitical tensions.

An important topic for Estonia during bilateral talks at the Annual Meetings was the conflict between Ukraine and Russia. Ardo Hansson said that the impact the conflict has had on several economies, including Estonia’s, has so far been modest. Despite this, long-term consequences should be considered, as the economic relations between Russia and the advanced economies will probably not recover in the same form as before.

The Annual Meetings of the members of the IMF and the World Bank are held twice a year. The autumn Annual Meetings were held this year on 10–12 October in Washington, DC. Estonia was represented in the Annual Meetings by Governor Ardo Hansson and Deputy Governor Madis Müller from Eesti Pank and by Vice Chancellor of the Ministry of Finance, Märten Ross.

Source: Bank of Estonia

Availability of banking services in Estonia

Interpellations raised by members of the Riigikogu concerning the accessibility of banking services

  1. Why has Eesti Pank not set minimum requirements for the provision of cash and payment services in a decree alongside the technical requirements, in the context of the Emergency Act?
  2. What solutions has Eesti Pank discussed for ensuring the equal accessibility of cash and payment services across Estonia?

The principal position of Eesti Pank

Banking services are important and they need to be accessible to people and companies across Estonia. It is reasonable for services to be provided efficiently and flexibly.

Answer by Governor of Eesti Pank Ardo Hansson to the Riigikogu, 22 September 2014

I understand that people are worried about the accessibility of banking services across Estonia. Eesti Pank does not prefer any one means of payment over any other. Cash is an official means of payment and so Eesti Pank believes that it should be available through flexible solutions everywhere in Estonia.

Eesti Pank works every day to supply Estonian companies and people with cash. We provide a flexible cash service to the commercial banks, giving cash out and taking it in every working day, and in exceptional circumstances we can be even more flexible. Our aim in this is to make sure that cash can circulate smoothly and without interruption and we also manage the state’s cash reserves and test the quality of the cash in Estonia every day. Tomorrow Eesti Pank will release ten-euro notes of the second series into circulation, and these are more secure and longer-lasting than the notes of the first series, with better security features. As Governor of Eesti Pank I can confirm that cash is not going anywhere. I personally like to use cash and I am proud of the quality of the euro cash used in Estonia.

Access to cash is important, and it is a complicated issue that doesn’t have a quick and easy solution. This is why it needs to be discussed, and Eesti Pank is very pleased that we could be part of the working group set up by Minister of Economic Affairs and Infrastructure Urve Palo to look for solutions.

Eesti Pank believes that the issue of access to banking services across Estonia should not be handled under the Emergency Act, but this does not mean that it should be ignored. I will now answer questions about the Emergency Act first, and then questions about access to banking services.

Coming to the first question of the interpellation, as Governor of Eesti Pank I have set minimum requirements for the provision of cash and payment services in case of emergency. The Decree requires that the four largest banks in Estonia restore their normal services to 70% of their normal operational level within 12 hours in the event of an emergency.How the banks restore their services is up to them, but they must describe their recovery plan to Eesti Pank, who then passes the information on to the Ministry of the Interior.

As I understand it, the purpose of the Emergency Act is to see that vital services are restored in the event of an emergency. It is not intended to cover cases where some people do not have day to day access to some important services. Neither is it intended for the purpose of guiding trends in urbanisation and marginalisation. That is an issue for regional policy, not one that requires solving under emergency powers.

Regional policy lies within the domain of the Riigikogu, the government and local authorities. That said, cash circulation is an issue of importance for Eesti Pank, and we wish to be fully engaged in setting policy for cash circulation. This brings me on to the second question in the interpellation, and the position of Eesti Pank on the accessibility of cash and payment services across Estonia.

Eesti Pank’s goals for cash are to supply the commercial banks with sufficient cash resources and to ensure the quality of the cash. The commercial banks distribute the cash among the people and companies of Estonia, in the same way that it is done around the world. Eesti Pank is not aware of any country anywhere where the central bank is responsible for operating the cash network serving people and companies directly. It would require massive investment and fixed costs for Eesti Pank and the outcome would most likely be unwieldy and unclear for the public in their use of money. The commercial banks are much better able to do this and do it more efficiently. However, Eesti Pank is responsible for managing cash circulation, and we consider it important to engage in looking for ways of making sure services can be accessed across Estonia.

Access to banking services is a problem globally, this is not an issue that is unique to Estonia. A parliamentary commission in Australia looked into the matter ten years ago, and similar questions have been discussed in Canada and Sweden and other countries.

The trend is for the number of bank branch offices and cash machines to be cut, and this is happening everywhere in the world in response to advances in technology, trends in demography and changes in consumer preferences. To some degree this is a natural evolution against which it would be pointless to stand. Equally it creates problems of access to banking services, and such problems need to be resolved. Problems may arise particularly for the elderly or for people with impaired mobility, but they may also arise for small businesses or for those who live in the countryside or who do not use the internet. Services should not be provided exclusively to people who use the internet regularly, or only those who live in Tallinn or Tartu.

The advances in technology have led electronic payments and internet banking to become very popular, and this has reduced the need for cash and the need for people to actually go into a bank branch. This has been driven by both supply and demand. Surveys in Estonia show that bank cards are ever more popular as a means of payment, while internet banking is increasingly used for banking transactions, and this trend shows no sign of abating. This means that preferences of consumers themselves are changing, and bank customers need less and less to visit their local bank or to use cash. This is an inevitable consequence of technological progress, and it must be borne in mind throughout this debate.

Demographic changes specifically means urbanisation, and urbanisation is happening here in Estonia too, amplifying the effect of developments in technology. It is inevitable that the decline in customer numbers will be reflected in falling demand, and that falling demand will lead to reduced supply. This applies equally to all forms of service provision, not just banking services. Swedbank has released detailed data to explain why they are closing branches, and they show that the branches being closed were used by only 13% of the clients registered there prior to closure, and that the number of cash transactions in those branches has halved in five years.

The larger commercial banks in Estonia now provide services more efficiently, and one consequence has been the closure of branches and cash machines in rural areas. A comparison with Sweden can be useful here, as that is where the parent banks of our largest banks are based. At the end of 2013 there were 1655 bank branches in Sweden, and a little over half of them were cash-free, which is more than twice the proportion in Estonia, where only 23% are cash-free.

At the start of June I wrote to the leaders of the local government in Läänemaa that Eesti Pank finds that having a single network of cash machines for all the banks would not improve access to banking services in rural areas. This is because it would not be possible for any commercial bank to differentiate its services from those of other banks by offering higher quality if there were a single network. Furthermore, a single network dilutes the responsibility of each individual bank, making it harder for clients or the public to affect the decisions taken by the banks. Cost efficiency will probably become even more important, meaning there are no grounds to expect that access to cash services in rural areas will improve.

I do not conclude that the commercial banks ought to maintain an unnecessarily large network of branch offices and cash machines. There is no real difference here whether such a network is supported by the clients of the banks or by the Estonian taxpayer, in any case it is an unreasonably expensive solution.

That said, the commercial banks do need to explain their vision for access to banking services more clearly than they have done so far, and they should themselves arrive at a solution that is acceptable to society.

In short, the position of Eesti Pank is that the guiding principle for the provision of cash and banking services across Estonia is that it should make economic sense. At the same time, every person in Estonia must have access to banking services, and so we must find alternative flexible solutions in Estonia.

The next question is how those flexible solutions should be supplied. Although this topic is under discussion in the Minister’s working group, I can suggest some options drawn from the experience of other countries, which the banks and the government may want to consider during their discussions on the accessibility of banking services:

  • A cashback system in shops– when paying for their food in shops by card, people can add some extra to the total amount paid and then get that in cash from the shop. For this to work, the commercial banks need to allow shopkeepers to offer this service without charging them any percentage of the cash that is withdrawn. The banks would gain by having a more efficient cash network, shopkeepers would gain additional clients in their shops, and those clients would benefit by being able to withdraw cash more conveniently and securely.
  • State service points– offices providing a wide range of services from the state, the banks and other enterprises, all in one place. This would allow people in rural areas to make payments at regular intervals, and get cash, medicines, letters and newspapers and other services. Cash and medicines would probably need to be ordered in advance, but this would bring the services closer to people. This would make more sense for the state and for companies than maintaining separate offices, each dedicated to only one service.
  • A state tender for services– the state can use a joint tender run by the central government, a state company or local government for provision of banking services in rural areas. The Swedish post and telecoms operator PTS used this approach by running a state tender in 2008 at the request of the government to supply 15 local authorities and 73 districts around the country with cash.
  • Requirements, or best practice guidelines that are generally adhered to, for the closure of bank branches, especially in rural areas– Canada has requirements for closing local bank branches and the banking association in Australia has set out the best practice for closing branches there.
  • Joint work by local governments and banks to train people– this is where banks offer regular training in the use of internet banks in the style of the Vaata Maailma project that ran earlier. Local authorities help in deciding who needs training and bring together everyone interested, and the banks provide the people, computers and knowledge for the courses.
  • Joint work by local governments and banks to provide cash– the commercial banks help local authorities provide cash and payment services to people who have impaired mobility or difficulty using a computer. This could be particularly useful in helping elderly people or people with impaired mobility or vision. Local authorities can establish who in their area has such difficulties and then they can provide help by delivering cash to homes or help with paying electricity bills and so on.

The experiences of other countries can’t simply be copied straight across here, but it is worth discussing them to see whether we could use them in some way to provide cash and payment services to people all across Estonia. I am certain that the commercial banks in particular, though also the state, should be able to provide better solutions than has been the case so far, and I would invite the banks, state institutions and local authorities to take an active role in the discussions about access to banking services. Eesti Pank is of course ready to join the discussion and I do not believe that any solution should be ruled out. Thank you for your attention and I am quite happy to answer any questions you may have.

Source: Bank of Estonia


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