How does the global financial market crisis affect the European economy and Estonia?
The financial crisis, which originated in the USA in 2007 and has also spread to Europe, is affecting the general economic growth in the EU. The recent forecasts of the European Commission expect this year’s euro-area growth rate to be 1.3%, which is 0.4 pp less than stated in the spring forecast. Economic growth is likely to remain below expectations in 2009 as well. The scope and duration of the financial crisis is largely dependent on the recovery of inter-bank trust and the write-off of possible losses.
Due to the financial crisis, interbank lending in international markets has become more expensive and complicated with interest rates (incl the EURIBOR) on the rise in the entire world. As a result, the interest rates of Estonian bank customers are likely to increase as well, since the price of the funds borrowed from the market is growing also for the Scandinavian and European banks operating in Estonia, and a majority of the loans issued in Estonia are tied to the EURIBOR. Moreover, growing insecurities may cause the lending policy of the banks operating here to become more cautious, which means the credit growth rate would decline faster than expected both this year and in 2009. However, there is no threat of a sharp decline in lending – good business projects will find financing. Another by-effect of the more sluggish global economic growth is that demand will drop and our exporters will face stiffer competition.
Are the Estonian financial system and banks sound and reliable?
Yes, they are. The financial position of the Estonian banking system is strong; the equity capital of banks is substantial and their profitability good. Compared to many other banks in the world, the functioning of the Scandinavian banks has been affected by the financial crisis to a less serious extent. The capital adequacy (which is an indicator of solvency) of Estonian banks is 18%, which exceeds the mandatory minimum value of the EU by more than twice. The rate of the reserve requirement (i.e., the size of the banks’ obligatory reserve) applied in Estonia is 15% of the total liabilities of a bank. This is considerably higher than the respective euro area indicator (2%).
Eesti Pank’s analyses confirm that the capital and liquidity reserve of banks is sufficient to cope with market risks and slowing economic growth. The analyses of Riksbank, the Swedish central bank, affirmed on its behalf the strong financial standing of the Swedish banks having their subsidiaries and branches in Estonia.
What is happening on the stock exchange? Why are they no longer as effective as before?
The events in the financial markets affect investors’ opinions of one or another listed company, including the banks’ revenue forecast and the company’s general development. This is why investors have become very insecure regarding the near future and share prices are fickle throughout the world. There is no doubt it takes some time for the markets to settle and no company is able to control the daily development of its share prices. However, the short-time fluctuation of share prices should not be over-dramatised, since this may not have a substantial impact on the general share price changes in the long run.
Which measures has Eesti Pank taken to maintain the reliability of the banking system?
Together with the government and the Financial Supervision Authority, Eesti Pank watches over the smooth functioning of the financial intermediation system, i.e., financial stability, and ensures the soundness and reliability of the Estonian banking and financial system. In addition, Eesti Pank, the Ministry of Finance and the Financial Supervision Authority have signed a specific cooperation memorandum to manage financial crises and laid down the basis for joint action in the event of financial crises.
Eesti Pank took a number of measures to increase the capital and liquidity buffers of banks already in 2006, when the central bank raised the banks’ reserve requirement, i.e., their mandatory liquidity buffer, to 15% of all their liabilities. Eesti Pank also increased the risk weights attributed to housing loans when calculating capital adequacy, due to which in 2007 the amount of banks’ mandatory minimum capital rose by approximately a tenth. The average capital adequacy of the banking system is currently 18%.
The cooperation of Estonia and Eesti Pank with other EU Member States and especially our neighbouring countries plays a very important role. EU Member States have agreed on a framework for the supervision of cross-border financial institutions and on general principles of guaranteeing financial stability. In the Nordic-Baltic region, where the same banking groups operate in several countries, there is strong cooperation in place between the governments and supervisory authorities and it is considered one of the most advanced in Europe.
The steps taken by several EU Member States in recent months have proved that the existing framework allows for a rapid and relevant reaction to complications surfacing in the banking system. Inter-bank cooperation in ensuring the liquidity of banks and supporting financial stability deserves a special mention. The governments and central banks of the Member States are prepared to ensure the smooth functioning and reliability of the financial system.
How are deposits guaranteed? Are all deposits guaranteed?
Depositors do not need to worry. According to Eesti Pank’s analyses, the financial standing of the Estonian banking sector is strong and banks have sufficient buffers. The central bank of Sweden has provided a similar positive assessment to the financial position of the larger Swedish banks having subsidiaries or branches in Estonia.
According to the Guarantee Fund Act, the deposits of private persons and non-financial companies are guaranteed, irrespective of the deposit type (incl. demand, saving, time and other deposits). Deposits as well as investments are compensated for to the extent of 90% but not more than in the amount of 313,000 kroons per depositor in any one credit institution. The limit applies to credit institutions operating in Estonia, including foreign-owned subsidiaries, and complies with the respective EU directive.
The deposits of depositors of foreign-owned bank branches in Estonia are guaranteed according to the guarantee scheme of the credit institution’s home country at least to the same extent than the deposits in credit institutions registered in Estonia. For further information, see the home page of the Guarantee Fund www.tf.ee.
How has the financial crisis affected Swedish banks?
Like many households, banks need to borrow money in different ways and for different durations in order to make necessary payments and ensure they would be able to meet the credit demand of households and enterprises.
Similarly to other banks in the world, banks in Sweden have also been affected by the fact that it has become more difficult to borrow from international markets. Financial institutions and investors who normally lend money in the international markets have become more insecure and therefore prefer to invest in secured securities. This has made it more expensive for banks to borrow money, since the number of those who are willing to lend is diminishing throughout the world. But none of the Swedish banks have had such liquidity problems as banks in other countries have encountered.
Source: press release of central bank of Estonia as of Oct.2, 2008
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