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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