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:

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

Deposits continue to grow rapidly

Moderate growth in the total volume of loans and leases to Estonian companies and households continued in August. The portfolio grew by 83 million euros from July, and its annual growth rate stood at 3.4%.

The annual growth in the portfolio of corporate loans and leases remained at 5%, the same level as in the previous month. The volume of new short-term and long-term corporate loans and leases in August remained close to the average for this year. Annual growth in the long-term loan and lease portfolio is driven mainly by the real estate sector, but loan growth in manufacturing and the primary sector of agriculture, hunting, forestry and fishing has also been relatively fast. Growth in the short-term loan and leasing portfolio has mainly been led by trade and manufacturing.

The volume of new loans to households remained at the same level in August as in earlier months. New housing loans of 70 million euros were taken out, which is about the same as in the preceding five months. The housing loan portfolio continued to grow moderately and year-on-year growth reached 2.2% in August.

Borrowing activity is aided by low interest rates. The average interest rate for housing loans issued in August remained at 2.5%, as it had been in July. The average interest rate for long-term loans taken by companies was affected by individual large transactions with low interest rates, meaning the average rate fell to 2.3%.

Loan quality remained essentially unchanged from previous months for the banks. The volume of loans overdue for more than 60 days increased slightly in August to make up 1.8% of the loan portfolio by the end of the month. The value of loans overdue by less than 60 days fell slightly at the same time.

Deposits continue to grow rapidly. Corporate deposits grew by 70 million euros over the month and their annual growth rate reached 10%. Household deposits shrank slightly in August because of seasonal factors, but annual growth remained at a rapid 8%. Deposits of the non-financial sector in August were slightly more than 9.5 billion euros.

Source: Bank of Estonia

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

Charts see here

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


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