The risks to financial stability in Estonia have increased slightly

  • The risks to financial stability in Estonia have increased slightly, though they remain small
  • Weak external demand and rapidly rising labour costs are hurting the ability of companies to repay loans
  • The credit and real estate boom in Sweden and Norway is increasing the risks to banks operating in Estonia
  • Steps have been taken in the Nordic countries to contain the boom, but they have not been sufficient in Sweden
  • Rapid growth in incomes and low interest rates on loans are boosting the rise in property prices
  • The countercyclical capital buffer will probably be 0% for the next half year

International financial markets have been affected by the continuation of very accommodative monetary policy and by the increased risks in emerging markets. Bond yields continued to fall at the start of the year and stock markets to climb. In the spring there was uncertainty because of Greece, as negotiations about the debt programme dragged on, and because of the expectation for further US monetary policy decisions. On top of this came the impact of the correction that started at the end of summer in the Chinese stock market. Falling prices spread to other large stock markets and also affected the price of shares listed on the Tallinn stock exchange.

Estonian economic growth slowed a little in the first half of 2015, to 2% over the year in the second quarter. The growth was largely based on rising private consumption, which was driven by increased employment and rapid wage rises. Higher incomes and low base interest rates back up the ability of households to pay their loans. Estonian exports were smaller in the first eight months of this year than at the same time last year, and the outlook for growth in Estonia’s main export partners has deteriorated. Labour costs have continued to rise for Estonian companies relatively rapidly, and this has reduced the profitability of those companies. The risk has increased that the profitability of Estonian companies will be reduced even further by weak foreign demand and rapidly rising labour costs. This could weaken the ability of companies to pay their loans and thus worsen the loan quality of banks.

Increased credit volumes and continuing rises in real estate prices in Sweden and Norway have increased the risks to financial stability for the whole economy. The Swedish banking groups that make up a large part of banking in Estonia get the majority of their funds using market-based financing. This makes them vulnerable to changes in the risk sentiment of financial markets. If financial markets were to reassess the risks to the Nordic economies and banks, it would increase the financing and liquidity risks of the banks operating in Estonia. If interest rates were to rise and loan servicing costs increase, or real estate prices to fall, the high indebtedness of Nordic households could lead them to consume less, and this would then affect the revenues of Nordic companies and their ability to repay their loans. As the Nordic countries are an important export market for Estonian companies, this would have an impact on growth in Estonia. To reduce such risks, it is important that macroprudential measures be taken, some having already been taken with a view to strengthening the banks. Sweden still needs to do more, particularly to contain the rise in property prices and indebtedness.

Rising incomes and low interest rates have increased the risk of the rise in Estonian real estate prices accelerating, and lending becoming concentrated in the real estate sector. Average prices for apartments have risen relatively fast, but the share of borrowing in financing for residential property purchases has not risen at the same time. There has been more activity in real estate development for both residential and commercial space, and the growth in loans to developers has become faster. For the sake of financial stability it is important that lenders and borrowers remember that the extremely low interest rates could rise and the cost of servicing loans could increase.

Low base interest rates and bond purchases by central banks have led bond yields to fall. This has made investors more interested in alternative assets. Increased appetite for risk has led asset prices to rise and has increased the risk that they may fall sharply. Low interest rates also affect the ability of financial institutions to earn income. This is reflected in a slight reduction in the net interest income earned by the banks operating in Estonia. More vulnerable to interest rates remaining low are life insurance companies, whose liabilities largely consist of insurance contracts with guaranteed interest rates. As life insurance is only a small part of the Estonian financial sector, and the insurers have sufficient buffers, the risk to Estonian financial stability from this vulnerability is modest.

As the macroprudential supervisor, Eesti Pank monitors and analyses the risks to the functioning of the financial system and where necessary takes measures to reduce such risks. One way Eesti Pank can reduce the risks from loan growth is by introducing a countercyclical capital buffer requirement. As loan growth is set to be in line with general economic developments for now and for the near term, the countercyclical capital buffer will probably be 0% for the next half year.

Source: Bank of Estonia

The use of bank cards increased by 6.5 pct over the year

Bank cards issued in Estonia are being used more and more, and in the third quarter an average of around 740,000 card payments were made each day at a total value of 12.6 million euros. The number of card payments made was 6.5% larger than in the same quarter of 2014, and the total value was up 8%. Wider use of bank cards in Estonia is encouraged by merchants making it ever easier to pay for purchases with cards. At the end of September 2015 there were 30,424 points of sale in Estonia that accepted cards, which is 2100 more than a year earlier.

The number of card payments made per person is large in Estonia, but the amount of the average payment is small. Estonia stands out in comparison to other European countries for its high number of card payments. Data for 2014 show that the most card payments per person were made in Sweden, where 270 payments per person per year were made, and Denmark where there were 269, followed by Finland on 244 and Estonia on 188. The average card payment in Estonia was the smallest in Europe at 17 euros, which indicates that bank cards are preferred in Estonia for small purchases. The average card payment was largest in Germany at 77 euros and in Luxembourg at 72 euros.

There was an increase in the value of cash transactions at ATMs in the third quarter, as an average of around 111,000 withdrawals were made each day for a total value of 11.2 million euros, making the average withdrawal 101 euros. Cash was paid in on average around 14,900 times a day for a total value of 5.9 million euros, and the average amount paid in was 396 euros. The sums paid in and withdrawn were both around 4% larger than a year earlier.

There were 810 ATMs in Estonia at the end of September, of which 552 were able to handle cash transactions and also allow payments to be made. Of those 810 ATMs, 97% can be used with cards of different banks, but only for withdrawals. In the past six years the number of ATMs has been reduced by 207, but the number of ATMs which can only accept cash transactions has increased. In the third quarter alone, 31 ATMs were added where cash can be paid into accounts, and at the end of September there were a total of 169 such machines.

There were 642 ATMs per million residents of Estonia at the end of 2014, which is close to the average for the European Union. The largest number of ATMs per million residents in the European Union is in France, where there are 1736, and Portugal, where there are 1516. The lowest numbers are in Sweden, where there are 333 ATMs per million residents, and Finland with 405. The number of ATMs has fallen in recent years in most countries.

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

Read more from Bank of Estonia website here

The loan and lease portfolio grows stably

The loan and lease portfolio to Estonian companies and households was 3.7% larger at the end of September than a year earlier, having grown at about the same rate as in recent months. The total volume of loans and leases increased during the month by 66 million euros to 15.9 billion euros.

The portfolio of loans and leases to companies grew by 3.4% over the year. The fastest growth was in loans and leases to companies in trade, electrical energy and water supply, and industry. In contrast, the portfolio of loans to companies in agriculture and transport and storage was smaller than it was a year before.

An active market for residential property saw the portfolio of housing loans increase by 3.9% over the year, which is a similar rate to that of recent months. Around 81 million euros of new housing loans were issued, which is about the same amount as in previous months. The annual growth in car leases to households increased to 13.5%, though the volume of car leases to companies has declined. The total value of car leases issued to companies and households in September was 5% higher than at the same time a year ago.

The share of loans in the portfolio that were long-term overdue fell to 1.6% in September. This share had increased slightly in the preceding months, but in September it started to come back down. Part of the reduction was due to write-offs of problem loans.

Large demand in the residential property market allowed the banks to raise their interest margins on housing loans. The average interest margin on corporate loans is more volatile than that on housing loans, but in recent months it has generally been falling. The average interest rate for housing loans granted in September was 2.3%, and the average rate for long-term corporate loans was 2.4%.

Corporate and household deposits continued to grow rapidly in September, and were 8.9% larger than a year previously. Deposits grew by 68 million euros over the month to 10.4 billion euros, with 58 million euros of the monthly growth coming from increased corporate deposits.

The net profit earned by the banks during the quarter was at a similar level to that earned in previous quarters. The banks earned 77.6 million euros in net profit in the third quarter of 2015, which is 3% less than in the third quarter of last year. Profits fell in the third quarter as loans were written down, and net profit would have been 5% more than a year before without that effect.

Source: Bank of Estonia

Author: Mari Tamm, Economist at Eesti Pank

Household financial assets are growing faster than debt liabilities

Corporate debt liabilities increased in the second quarter by 2.7% over the year. The growth was driven by an increase in borrowing from abroad. The share of loans taken from abroad and debt issued there increased slightly, and made up 37% of the total corporate debt liabilities by the end of the quarter.

Corporate equity shrank even further in the second quarter. Weaker foreign demand and rising labour costs meant that corporate profits continued to fall, which resulted in equity being 3% smaller than last year. The rise in debt liabilities at the same time led corporate leverage to increase. However, the capital buffers of Estonian companies remain relatively large thanks to the reinvested profits of earlier years and leverage is less than the average in the European Union.

Household financial savings have increased faster than debt liabilities in recent years. Debt liabilities increased by 4.7% over the year, which was a little faster than the growth in nominal GDP, and household debt remains at around 40% of GDP. Cash and deposits held by households increased almost twice as fast as debt liabilities, increasing by around 9% over the year. Debt liabilities are some 24% larger than deposits, but the gap has come down steadily since 2009.

Estonian residents invested more resources abroad in the second quarter than they took from there. In most of the recent quarters, the Estonian economy has been a net lender, as domestic saving has been higher than investment.

Source: Bank of Estonia

Author: Jana Kask, Head of the Financial Stability Department of Eesti Pank

Governor of Eesti Pank praises Swedbank’s new cash service

Governor of Eesti Pank Ardo Hansson said that the decision by Swedbank to provide a permanent cash withdrawal facility in rural areas will improve access to cash in the smallest places in Estonia.

“Access to cash has been a major sore point for people in rural areas, and the new service that has been set up by Swedbank with local authorities and companies is a welcome relief to that. This multilateral cooperation that has allowed this new service to be set up must be acknowledged, and it is an example of a flexible solution that will improve access to cash”, he said.

He added that the new Swedbank service is an example of the bank adapting to circumstances where clients no longer need to deal with a member of bank staff to use the majority of bank services, but they still need the simplest possible permanent access to cash.

“I am very pleased that solutions like this, which have already been successfully employed in other countries, are now reaching the people of Estonia too,” said Mr Hansson. “I hope that in the future we will see cash services being supplied even more through local businesses, and that these services will reach as many people as possible in rural areas”.

In September last year Mr Hansson answered an interpellation by members of the Riigikogu about the accessibility of banking services in Estonia, in which he raised the point that flexible solutions have been used in other countries to supply cash to rural areas. One example he gave was the cashback system in shops, where people paying for their food in shops by card 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.

Other solutions Mr Hansson named at the time included state service points; state tenders for service providers; requirements, or best practice guidelines that are generally adhered to, for the closure of bank branches, especially in rural areas; joint work by local governments and banks to train people; and joint work by local governments and banks to provide cash. The full text of Ardo Hansson’s answers can be found on the Eesti Pank website.

Source: Bank of Estonia

Businesses need to be ready for the new 20-euro banknotes

On 25 November, the central banks of the euro area, including Eesti Pank, will release a new €20 banknote into circulation with a new design and security features. So that the new note can enter smoothly into circulation, it is important for companies to update their cash handling equipment in good time, and to know about the new features of the notes.

The most eye-catching change to the twenty-euro notes of the new series is a completely new security feature, a transparent portrait window on the right of the note on the hologrammic strip. Looking at the note against the light reveals a portrait of Europa in the window. The other security features – the watermark portrait of Europa and the hologrammic strip, the emerald green number, and the short raised lines on the edge of the note – are like those on the five and ten-euro notes of the new series.

Paying with the new banknotes will be simple and straightforward a long as merchants update their cash-handling equipment and authentication devices. To do this they will need to contact their equipment suppliers.

“All retailers have to accept circulating banknotes that are legal tender. If the cash authentication device is broken or needs updating, it is still possible to check the authenticity of notes using the feel, look, tilt method”, said Rait Roosve, Head of the Cash and Infrastructure Department at Eesti Pank.

Eesti Pank is organising training events about the new banknotes for cash handlers in Tallinn, Tartu, Pärnu and Narva in October and November. Details of the training events and registration information can be found in Estonian on the Eesti Pank website.

More detailed materials on the security features of the banknotes, with pictures and videos can be found on the website

In addition to this, the European Central Bank will send all cash handlers in Estonia a booklet on the new twenty-euro note in October. The booklet can also be ordered from Eesti Pank (, 6680 719).

The European Central Bank has published a list of devices that can authenticate the banknotes of the new series, including the twenty-euro note, on its website (

Source: Bank of Estonia

Asset purchases by central banks will make borrowing cheaper

Responding to questions in the Riigikogu on Sept.21, 2015 about the asset purchase programme of the euro-area central banks, Governor of Eesti Pank Ardo Hansson said that the asset purchases will make borrowing cheaper for Estonian companies and households too.

Mr Hansson explained to the Riigikogu that the central banks of the euro area are buying bonds from the market to encourage the investors selling the bonds to invest their money elsewhere. The revival in the economy provoked by this will lead inflation to climb gradually towards the common target of the euro-area central banks of keeping inflation rates below, but close to, 2% over the medium term.

At the decision of the Governing Council of the European Central Bank, the central banks of the euro area are buying some 50 billion euros of private-sector bonds each month, of which Eesti Pank’s share is around 120 million euros. They are only buying from the secondary market and generally buy sovereign bonds from their own country. As the Estonian government has not issued any bonds, Eesti Pank has decided to buy bonds of European institutions like the European Financial Stability Fund and the European Investment Bank from the secondary market.

Eesti Pank requested exceptional permission from the European Central Bank to buy bonds from Elering, a state-owned company, and has bought a total of 30 million euros of such bonds since June. Mr Hansson also noted that Elering is not getting any direct benefit from the purchases by Eesti Pank as the central bank is only allowed to buy the bonds from the secondary market.

Mr Hansson stressed in his answer that central banks can only use monetary policy to offer short-term easing to the economy, and that it cannot create long-term economic growth. “Monetary policy is no substitute for the structural reforms needed to boost competitiveness and keep state finances in order.”

He said that there is no need to issue additional bonds to fund the state budget, given the cyclical position of the Estonian economy. “The Estonian economy is currently in a position where the government should be looking to start making savings rather than to borrow to cover additional costs.”

In the longer-term, said Mr Hansson, Estonia will need to face up to various problems. “In planning our finances, we should remember that the Estonian population is ageing quite quickly, which means that there will be fewer workers and more people needing care. The subsidies from the European Union will also start to decline as the income level of the state rises. One of Estonia’s advantages has been the low level of government debt and it would not be sensible to increase that debt when financial pressures may be just around the corner,” he added.

Source: Bank of Estonia


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