The Eesti Pank Act has given us a wide range of responsibilities, said Ardo Hansson, Governor of Eesti Pank in his speech to the Estonian Parliament on May 26, 2015. Our first responsibility is to keep inflation low and stable, setting a joint monetary policy together with the other central banks of the euro area and implementing it in Estonia. Secondly we must keep the financial system here stable, as strong and functioning banks are vital for economic growth.
On top of this we supply the country with high-quality cash, produce timely and authoritative statistics, manage and invest the state foreign reserves, and act as advisor to the government. Last year we succeeded in all of this.
Last year the previous Riigikogu issued the central bank with a clearer mandate than ever before for macroprudential supervision in Estonia, and we have started to act on this mandate. Macroprudential supervision aims to increase the resilience of the banks and the rest of the financial system to systemic problems and to restrain the accumulation of major risks.
- The first measure introduced by Eesti Pank was the requirement for commercial banks to hold a 2% systemic risk buffer. The systemic risk buffer is needed to manage the banking risks that are specific to a small and open economy. The introduction of the buffer did not imply any major changes for the banks operating in Estonia, as their capitalisation levels were already above that required. The measure was a precautionary step by the central bank to guard against possible risks in the future.
- The second step was taken three months ago when requirements for housing loans were applied to the commercial banks by the central bank with the aim of pre-empting possible credit booms in the future. The requirements do not have any noticeable effect on the loan market as things stand, as the banks are in any case currently acting conservatively. Both of these measures are precautionary steps taken against any significant future increase in the risks in the real estate market should competing banks start to take on excessive risk.
The crisis management measures taken by the central banks of the euro area in recent years have been successful, but they have come at a price. Both the balance sheets of the central banks and the associated risks have increased many times over in consequence. However, the ratio of Eesti Pank’s increased equity to the assets used for monetary policy remains one of the lowest of any of the central banks of the euro area. The comparison with the other central banks of the euro area is important, as the balance of risks to capital of the central banks of the euro area as a whole is considered when joint monetary policy decisions are made.
This makes it very important that the Supervisory Board of Eesti Pank decided to transfer three quarters of the 17 million euros that the bank made in profit last year to strengthening the capital of Eesti Pank. One quarter of last year’s profit, or 4.3 million euros went to the state budget, and since 1992 Eesti Pank has allocated a total of 133 million euros to the state budget.
It may be asked what exactly the central bank’s reserves are for, given that the Riigikogu bears the responsibility of last resort for capitalising Eesti Pank? History has shown that central banks fall into difficulties at times when there is a general economic or financial crisis. I want to make every effort to see that Eesti Pank has no need to come to the Riigikogu asking for capital at a time of such crisis. It is to avoid precisely this that the central bank builds up reserves and I am glad that the Eesti Pank Supervisory Board shares this opinion.
For the central bank to be financially independent, it needs to maintain and invest its assets. The current situation in the financial markets, where interest rates on sovereign bonds have fallen to very low levels, poses new challenges for the central bank as a long-term conservative investor. Eesti Pank has reacted to changes in the operating environment and has spread its risks by adding further asset classes to the investment portfolio and investing money in the sovereign bond markets of more countries than before.
- Eesti Pank’s return on its investment was several times higher in 2014 than the target set at the start of the year, and reached 22.8 million euros. Falling interest rates throughout the year made investments in bonds profitable and the increasing share portfolio of Eesti Pank meant that we earned significant income from investments in shares.
As well as earning income, Eesti Pank is careful to keep control over its spending and to use its money efficiently. For this reason we have put the Maardu manor site up for sale, as we do not need it in carrying out the main functions of a central bank. We would have done this earlier, but first it was necessary to complete the process of registering the manor house and the land it stands on.
It is worth noting under cost efficiencies that Eesti Pank has added technical support for the Fiscal Council to its list of responsibilities together with the macroprudential supervision and increased requirements for compiling financial statistics. Despite this, the number of people employed at the bank is roughly the same as a year ago, and Eesti Pank remains the smallest central bank by staff size in the European Union. Eesti Pank’s operating expenses fell last year to 17 million euros from the 17.4 million of a year before.
Although the central bank’s duty is to keep inflation low and not to chase every possible source of higher revenues, it is good to be able to note that we ended last year comfortably in profit.
Source: Speech of the Governor of Eesti Pank to the Riigikogu at the presentation of Eesti Pank’s Annual Report 2014
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