The quality of the loan portfolio of the banks continued to improve

Loans and leases were issued to Estonian companies and households moderately in February, which is common at the start of the year. The financing portfolio grew by relatively little over the month, and stood at 15.3 billion euros at the end of February.

The annual growth in the corporate loan and lease portfolio was 3.3% in February. The 704 million euros of new loans and leases to companies was around one tenth more than was issued in February last year. Financing in recent months has mainly been for companies in real estate, manufacturing and trade. Some 70% of the total value of long-term loans issued in February went to companies in these sectors.

The volume of new housing loans issued during the month was about the same as a year earlier. The annual growth in the portfolio was 2.9% in the first two months of the year. The volume of other household loans has remained the same for a long time now at 1.4 billion euros.

Average interest rates on loans have been affected in the second half of last year and the start of this by the decline in the 6-month EURIBOR, which is the base interest rate for most loans. The average interest rate for housing loans issued in February fell to 2.2%, while the average interest rate for corporate loans has remained at 2.5% in recent months.

The quality of the loan portfolio continued to improve in February. Loans overdue by more than 60 days were lower in volume than in January, accounting for 1.6% of the loan portfolio at the end of the month. The quality of loans to trading companies has declined slightly in recent months, though this has been offset by an improvement in the quality of other loans.

The annual growth of household and corporate deposits was 5.5% in February, similar to what it had been in the previous month.The growth in deposits was mainly driven by an increase in household deposits. There was little change in the volume of corporate deposits in February and annual growth in them remained at 2% for the second consecutive month. Non-resident deposits increased modestly in February and they remained at 21% of the total of corporate and household deposits.

Source: Bank of Estonia
Author: Mari Tamm, Financial Sector Policy Division of Eesti Pank

The Supervisory Board of thecental bank discussed the profit distribution

At the regular meeting of the Supervisory Board of Eesti Pank on Tuesday, the board confirmed the current strategy for profit distribution, whereby the central bank gives the state between 0 and 25% of its profit from the previous year.

The Supervisory Board will start to discuss the distribution of Eesti Pank’s profit for 2014 at the next meeting on 28 April.

The Supervisory Board decided that the relative level of Eesti Pank’s capital should increase to the average level of the central banks of the euro area, as the balance of risks to the capital of the Eurosystem as a whole is considered when joint monetary policy decisions are made. This means it is necessary to raise the level of capital by about a billion euros to 1.3 billion.

The ratio of Eesti Pank’s increased capital to the risk assets used for monetary policy is one of the lowest of any of the central banks of the euro area.

Since 1992 Eesti Pank has allocated a total of 129 million euros to the state budget.

Source: Bank of Estonia

A book about Estonian currency EEK

This book is different from most similar ones as it tells a story that has finished. It is very rare in monetary and economic policy to find stories with a clear beginning and end, but the story of the Estonian currency board is one such, as it started with a monetary reform on 20 June 1992 and ended on 1 January 2011 when Estonia joined the euro area.

Such a framework provides a unique opportunity to describe a clearly defined stage in the modern history of the economy. Although this book tells the story of Estonia, it also gives a picture of the age as a whole, because although Estonia is small and exceptional in some ways, most of the major events of the last decade of the 20th century and the early years of the 21st appear here in one way or another.

This is particularly true of the main processes of the period in Central and Eastern Europe as the economy changed from a command economy to a market economy. There was, and still is to some extent, a mix of very different economic policy choices. Looking back more than twenty years later we can say that there was no single and only route through these processes and towards the living standards of the ‘old’ member states of the European Union. There were better and worse choices in the short term but no one country from Central and Eastern Europe stood out as much more successful than the others.

This period is made more interesting by its coincidence with changes in the global economy. Globalisation became a torrent, the role of emerging markets increased, financial markets were liberated, and information and communications technology advanced. With the great changes came great crises, in the form of the Great Recession and the subsequent European debt crisis. The changes they caused have not yet ended and they will be considered in greater depth in the future.

This book concentrates on the changes of 1990–2010 looking through the prism of monetary policy, which in Estonia’s case meant the monetary policy based on the fixed exchange rate. As a broader perspective is needed, the book covers the modern history of Estonia’s economy in a wider sense, at least where it concerns the general logic of development, the essential features of economic policy and the main macroeconomic indicators such as GDP growth, inflation and employment or unemployment.

The small size of the country sets its own limits. A country the size of Estonia is not able to have a fully free choice among all the possible doctrines of monetary policy and so this is a study of a small and open economy in transition, where the distinctive feature of Estonia, the currency board arrangement, takes centre stage and the story unfolds in several acts with two crises in the Asian and Russian crisis and the later Great Recession.

Another distinctive feature is that the policy-makers and the people of Estonia travelled a path in twenty years that normally takes many times longer, starting from essentially zero with hyperinflation and an economy collapsing out of the break-up of the Soviet Union, and finally arriving at accession to the European Union and the euro area. This required a new financial system to be built and to evolve, and needed new markets to be created such as the securities market and the credit market. Furthermore, the global crisis required a section of the road to be travelled twice for the pre-crisis level of wealth to be regained, and so it is clear that this was an exciting and challenging time.

Ardo Hansson, Governor of Eesti Pank

Read more from Bank of Estonia website

Eesti Pank has set three requirements for issuing housing loans

Three requirements for commercial banks issuing housing loans start to apply from this week. They are a precautionary measure by Eesti Pank to reduce the risks of a lending bubble inflating in the future.

Governor of Eesti Pank Ardo Hansson explained that the move by the central bank will help contain the risk of a housing bubble in the future. “These requirements will not have any noticeable effect on the loan market at the moment as we have introduced them at a level that is close to where the banks are currently lending. The requirements will start to have an effect when competing banks look to take on excessive risks when lending is growing fast”.

Mr Hansson noted that the requirements will also protect borrowers by helping them avoid making commitments in an overheated market that they could struggle to meet if the economy later turned downwards.

The first limit is that the amount lent can only be up to 85% of the collateral, which is the housing property being purchased. If the loan is guaranteed by KredEx then it can be for up to 90% of the value of the collateral.

The second limit is that all the monthly loan and lease payments of the borrower taken together may amount to only 50% of the borrower’s net income. Net income is regular income that reaches the bank account after taxes have been deducted.

The third limit is that the maximum length of housing loans is 30 years.

The requirements for housing loans have been set close to the current lending standards of the banks, meaning they will not have any significant impact on the conditions currently available in the Estonian housing loan market. The banks are permitted an exemption from the limits for up to 15% of the amount of housing loans issued in a quarter, which will allow them flexibility in making decisions about loans. The exemption is intended for borrowers who have very good ability to repay the loans or very good collateral for example.

Eesti Pank is applying the limits for all the banks operating in Estonia, including branches of foreign banks operating in Estonia. The limits will apply to loans to private people in Estonia for buying, renovating or building housing. The Financial Supervision Authority will supervise how the limits are met.

Eesti Pank got advice on its plan for the requirements for housing loans from the Ministry of Finance, the Financial Supervision Authority and the commercial banks.

Eesti Pank has published background analysis on its website explaining the aims of the requirements and describing them in more detail.


Source: Eesti Pank

Household deposits grow strongly

The portfolio of loans and leases to Estonian companies and households was largely unchanged in the first month of 2015 at 15.2 billion euros. The classification of clients for statistical purposes was adjusted in January, as it had been in December, and this affected the way the loan portfolio is divided between client sectors and operating sectors. Fewer new loans were issued as well, as is usually the case at the start of the year. The loan and lease portfolio increased in size by 2.7% in the year to January.

New loans and leases worth 678 million euros were issued to companies in January, which was the about the same amount as a year earlier. There were slightly fewer new short-term loans than a year earlier but around one quarter more long-term loans. The largest volumes of long-term loans issued in January went to real estate companies.

The housing loan and lease portfolio was 2.9% larger in January than a year ago. The 51 million euros of new housing loans was 14% more than was issued a year earlier. The total value of other household loans was not very different from what it was a year ago.

The average interest rate on housing loans issued in January did not reflect the fall in the six-month EURIBOR, which is the base interest rate for most housing loans. The average mortgage interest rate rose because the average marginal was raised. The average interest rate on new long-term corporate loans was 2.5% in January.

Loans overdue by more than 60 days were at around the same volume in January as in the previous month, accounting for 1.7% of the loan portfolio. A certain deterioration in the quality of loans to the retail and wholesale sector and to the primary sector of agriculture, hunting, forestry and fishing has been noticeable in recent months. This has been offset by an improvement in the quality of other loans.

The deposits of Estonian companies and households grew by 5.6% over the year to January. Growth in deposits was restrained by a reduction in corporate deposits, which have more variable growth patterns. Household deposits again grew fast, at a rate of 8.3% over the year to January. Non-resident deposits have also grown in recent months and they stood at 2.6 billion euros at the end of January, or 21% of the total of corporate and household deposits.

Source: Bank of Estonia

Author: Mari Tamm, Financial Sector Policy Division of Eesti Pank

The need for corporate credit increased somewhat in 2014

The ability of companies to finance their own activities remains relatively good. This is because of the buffers that have been built up, relatively good access to bank lending, and the very low base interest rates. However, reduced profits last year meant that the financing position of companies worsened to an extent. The situation is somewhat more complicated for smaller companies as their options for financing are more limited and their loans are generally more expensive than those of large companies.

Estonian companies have a larger need for external capital, which is also seen in an increase in their debt liabilities. The increased need for external capital comes mainly because of the decline in profitability, which has reduced the internal resources available to companies for financing operations. At the same time, companies in some sectors have increased their investments in fixed assets and inventories, pushing up corporate debt liabilities to 17.7 billion euros at the end of the third quarter of 2014, which was 11% more than a year earlier*.

Household finances improved in 2014. Household purchasing power and capacity for saving increased as incomes rose and inflation fell. Not all the additional financial resources were directed to consumption, and so household deposits grew by over 8% during 2014 to 5.4 billion euros. This growth once again came mainly from large deposits, but there was also an increase in the number of households with deposits.

Household borrowing is growing at a moderate speed. Higher incomes and the improved financial situation of borrowers have helped boost borrowing activity. Demand has increased most noticeably for housing loans but also to a lesser degree for other loans. The annual growth in the housing loan portfolio of banks operating in Estonia accelerated to reach 2.8% at the end of 2014, while growth in the portfolio of other household loans remained below 1%. The use of consumer loans and instalment credit from sources other than banks has also increased.

The capacity for lending of the banks operating in Estonia remains good. This is aided again by high levels of capitalisation and profitability and by favourable financing conditions. Interest rates on loans to companies and households fell in 2014 as base interest rates and, to a lesser extent, interest margins declined, but the deterioration in the outlook for the economy led some banks to tighten their credit standards.

The main risk for the financing of companies and households remains the danger of the general economic environment worsening. This would hurt the capacity of the banks to lend and their risk assessments, and it would reduce the ability of companies and households to finance their activities.

* These statistics are affected significantly by the reclassification of companies between institutional sectors at the end of 2013, without which the increase would have been a little below 8%.

Source: Bank of Estonia

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

First bitcoin ATM in Baltics opens in Tallinn

The first bitcoin ATM in the Baltics is now available to cryptocurrency users in the Estonian capital.

The ATM allows users to exchange euros into bitcoins, a virtual peer-to-peer currency, and transfer the sum into user’s digital wallet. The euro to bitcoin exchange rate is dependent on the current market price.

According to the company responsible for the ATM, there are currently about 13 bitcoin ATMs in Finland, and around 300 in the world.

The bitcoin ATM is open on weekdays from 10:00 to 19:00 and is located at the Spotex currency exchange in Tartu street, Tallinn.

Source: ERR via Estonian Review


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