The average interest margin for housing loans rose in May

The total volume of loans and leases to Estonian companies and households was 3.2% larger in May than a year earlier. The financing portfolio increased by 103 million euros during the month to 15.5 billion euros with around 70% of the monthly increase coming from corporate debt liabilities.

The volume of loans and leases to companies continued to grow stably in May. The total volume of loans and leases to companies grew by 3% over the year and some 759 million euros in new loans and leases were given to companies during the month, about the same amount as a year ago. New long-term loans worth 179 million euros were granted, most of them to companies in trade, real estate or manufacturing.

Annual growth in the volume of housing loans picked up in May to 3.6%. An average of 80 million euros has been issued each month over the past three months, which is around one fifth more than in the same period last year. There was also an increase in other household loans and leases issued in the first half of this year, mainly because of car leases, which have been increasing in volume since December last year and are around 20% up over the year. At the same time there was a fall of about the same amount in the volume of car leases issued to companies.

The average interest margin for housing loans issued by the banks rose. EURIBOR, which is the base interest rate for a majority of housing loans, fell in the first half of this year, but the average interest rate on housing loans rose at the same time. This reflects the efforts of the banks to maintain profitability when interest rates are low. The average interest rate for housing loans issued in May rose to 2.3% and the average interest rate for long-term loans taken by companies was 2.5%.

The share of overdue loans in the loan portfolio remains small. The share of loans overdue by more than 60 days in the loan portfolio increased slightly to 1.6% in May with increases in overdue loans to companies in agriculture, trade and manufacturing.

The deposits of companies and households continued to grow rapidly. The annual growth in the deposits of companies accelerated to 9%, while household deposits grew by an annual 8%. Total deposits stood at 10.1 billion euros at the end of May.

 

Source: Mari Tamm, Economist at Eesti Pank

First municipal bank founded in Estonia since reindependence

Eesti Ühistupank (Estonian Cooperative Bank) was established on Tuesday by 119 individuals and 334 corporations.

This is the first cooperative bank in Estonia since the country regained its independence in 1991.

Taavi Aas, acting mayor of Tallinn and member of the bank’s board, said the aim is to launch a universal quality bank with a wide base of investors, which focuses on serving Estonian people and companies.

Mae Hansen, the chairman of the board, added that the cooperative bank makes decisions with local development in mind and it helps to diversify the situation in Estonian loan market.

“Almost 90 percent of the market is dominated by four banks and these are all based on Nordic capital,” Hansen told ERR. “Imagine the situation if the next financial crisis is to take place in the Nordic countries. It will have a tremendous effect on our market. That’s why we need to diversify, and having a cooperative bank, which is based on local capital, is of great help here,” she explained.

The cooperative bank is the initiative of the City of Tallinn, but includes founding members from all over the country. Tallinn City Council allocated 5 million euros of city funds to the establishment of the bank last week. The Reform Party faction of the city council called the allotment a waste of tax payers’ money.

Once the bank gets an approval from the Financial Supervision Authority, it will start handing out loans to private persons and companies, as well as agricultural, energy and housing societies. The bank should open its doors next fall.

The CEO of the new cooperative bank is Ülle Mathiesen.

Source: ERR News

Governer speeks about the work of Eesti Pank

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

Governor of Eesti Pank about the euro-area economy

In 2014 the economy of the euro area as a whole grew, but the situation varied a lot between different countries and overall growth was slower than had been forecast, said Ardo Hansson, Governor of Eesti Pank in his speech to the Estonian Parliament on May 26, 2015. Data from the start of this year suggest that economic activity in the euro area is staging a modest recovery.

The competitiveness of the euro area has improved during the recovery from the crisis, but again the situation varies between countries. There are countries that have successfully introduced reforms, but there are also those where reforms have stopped or even gone into reverse.

  • Here I must emphasise that long-term economic growth can only be built on reforms that raise economic competitiveness.
  • The central banks of the euro area are able to offer support to economies in the short term, but there is a price to this, and such support can only be for a limited time. Central banks are not omnipotent and the responsibility for making reforms and explaining the need for reforms must fall squarely on the shoulders of governments and parliaments.

Monetary policy in the euro area had an eventful 2014. Inflation in the euro area was falling last year and the expectations for inflation among market participants were on the downside, which led the central banks of the euro area to maintain their accommodative stance on monetary policy. The accommodative monetary policy has three main elements:

  • The Governing Council of the European Central Bank took the decision to cut the interest rates at which commercial banks can borrow from the euro-area central banks to their lowest levels ever under monetary union.
  • Targeted long-term loans were offered to the commercial banks in the euro area. It is important that low interest rates be passed on to the real economy and that good business projects be able to get funding from banks on reasonable terms.
  • Purchases of assets held by the private sector started and large-scale purchases of sovereign bonds were started in March this year.
  • It is no secret that I am no supporter of the plan to purchase government bonds. Although the first small signs of success are apparent, we must still remain vigilant about the accompanying risks. Above all there is the moral hazard that would emerge were some government to lose its appetite for reform. The falls in interest rates provoked by the massive purchases of bonds will lower interest rates temporarily on government borrowing and this must not be used as an argument for pushing vital but painful reforms to some point far off in the future. Interest rates are only favourable for a short time and will support governments while they are making changes. If governments were to ignore the budget rules agreed in Europe and were to start to increase their debts further, the measures taken by central banks would be of very little help.

The other main task occupying central banks alongside monetary policy last year was the launch of single banking supervision. Starting supervision and carrying out a thorough and comprehensive assessment of the assets of European banks needed a lot of work from central banks and financial supervision authorities. The successful conclusion of this work let us say with confidence that the biggest and most significant banks in a range of countries in Europe are now assessed and supervised on the same terms. In Estonia, Swedbank and SEB Pank have come under single supervision.

Source: Speech of the Governor of Eesti Pank to the Riigikogu at the presentation of Eesti Pank’s Annual Report 2014

Steady growth in the loan and lease portfolio

The total volume of loans and leases issued to Estonian companies and households by banks operating in Estonia was 3% larger in April than a year earlier. The financing portfolio increased by 71 million euros during the month to 15.4 billion euros, with around half of the monthly growth in the stock of loans and leases coming from corporate debt liabilities.

Companies took out about the same amount in loans and leases during the month as they did in the previous year. Some 769 million euros in new loans and leases were given to companies in April. The amount issued in long-term loans was smaller in April than it had been in the preceding months. As in earlier months, the majority of long-term loans issued in April went to real estate companies. Agriculture companies have also taken somewhat more  in long-term loans in the past two months.

Annual growth in the volume of housing loans increased in April to 3.4%. Around 82 million euros of new housing loans were issued, which is about the same amount as in autumn last year. The volume of other household loans and leases has also been growing faster in recent months. New sales of car leases to households have been around 40% higher in the last two months than the average for last year, which has partly been because of changes that were introduced last year to the taxation of company cars. Fewer car leases have been issued to companies this year than last year.

The interest rates on loans issued by banks have remained the same for several months. The average interest rate for long-term loans taken by companies was 2.6% in April, and the average rate for housing loans was 2.2%.

The share of loans overdue by more than 60 days in the loan portfolio stood at 1.5% in April, the same level as in the previous month. There was no change in the coverage of loans overdue by more than 60 days  by provisions, and coverage was 80% at the end of April.

The deposits of Estonian companies and households grew by 7.8% over the year to April. Total deposits increased by 51 million euros during the month to 10 billion euros. The growth came mainly from household deposits, which were up 8.1% over the year in April, while corporate deposits grew only a little during the month, adding 3 million euros.

Source: Bank of Estonia

Central bank has allocated 25 pct of its profit to the state budget

The Supervisory Board of Eesti Pank decided on Tuesday, May 5 2015 to transfer one quarter, or 4.3 million, of the 17 million euros it made in profit last year to the state budget. The remaining three quarters of last year’s profit will go to strengthen the capital of the bank.

Chairman of the Supervisory Board Mart Laar said that the amount of capital that can be transferred is limited because Eesti Pank has relatively little capital compared to that held by the other central banks of the euro area.

“It is the policy of the Supervisory Board that the central bank should have sufficient reserves so that if there is any problem Eesti Pank can cope without any help from the state. Central banks normally face losses when economies in general are in difficulties. Increasing the reserves reduces the chances of an additional burden needing to be placed on the state budget in an economic crisis”, he explained.

The ratio of Eesti Pank’s increased capital to the assets used for monetary policy is 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 and the European Central Bank all taken together is considered when joint monetary policy decisions are made.

For this reason the Supervisory Board set a long-term goal in 2012 of increasing Eesti Pank’s capital ratio to the average level of the central banks of the euro area. This means it is necessary to raise the level of capital by about a billion euros to 1.3 billion.

Last year, Eesti Pank received 16.7 million euros in income from the joint monetary policy and currency issuance activities of the Eurosystem, which contains the national central banks of the euro area and the European Central Bank. In 2013 income from this source was 42.2 million euros. Earnings from investment activities were 12 million euros last year, and 3.7 million in the previous year. Eesti Pank’s operating expenses fell last year to 17 million euros from the 17.4 million of a year before.

The net income for 2014 was reduced by general risk provisions of 7.7 million euros to cover risks. In the past three years Eesti Pank has built up risk provisions of 26 million euros in total. Risk provisions are the first line of defence against losses on top of the reserves already held at the central bank.

Since 1992 Eesti Pank has allocated a total of 133 million euros to the state budget.

Risks to Eesti Pank in monetary policy
The risks to Eesti Pank under the currency board came from the investments of the central bank and from the banking system. When Eesti Pank became a euro area central bank, it also took on the risks of the euro area as a whole, which are mainly related to monetary policy operations.

The Eurosystem is made up of the central banks of the euro area countries and the European Central Bank. The Eurosystem divides the income and costs of the single monetary policy, so that the income earned from monetary policy loans to euro area banks is divided among the central banks to match their participation in the Eurosystem, and the same is done with risks. Eesti Pank’s participation in the Eurosystem at the end of 2014 was 0.28 percent, which is the basis for the distribution of the previous year’s income and expenses. From 2015, Eesti Pank’s participation is 0.27 percent.

The Eurosystem held 513 billion euros in monetary policy loans to commercial banks and 339 billion euros of securities held for monetary policy purposes as at 24 April.

Hedging of monetary policy risks
To hedge against the risks of the monetary policy loans, the central banks of the Eurosystem have the right of claim against banks that have taken loans. The content of the collateral is the equity of the bank that has taken the loan. The euro area central banks only give out loans if collateral is provided, meaning that if the bank cannot pay back its loan to the central banks, then the central banks can instead take the collateral. If even this is not enough, the credit risks for the central banks are reduced by the national authorities and their desire to recapitalise their insolvent banks.

The Securities Market Programme (SMP) is backed by the promises of governments to meet all their obligations in full, meaning that if governments fail to meet their obligations fully or partially, including their obligations to the central banks of the euro area, then the euro area central banks suffer the loss.

The capital of central banks and its importance
In this case, the capital of Eesti Pank and the other central banks is meant in the wider sense of the part of the reserves and capital that the bank can use to cover losses.

The level of capital of the central bank is important because a central bank that has little or negative capital can cause two sorts of public concern. The first is the question of the central bank’s independence, if the bank needs to ask the government for additional capital. The second is the question of how much the central bank really wants to meet its inflation targets, which will then cause increased public expectations of inflation. The result of both these concerns is a loss of trust and of public faith that the central bank will be able to keep inflation under control successfully.

Source: Eesti Pank

Estonians make an average 169 card payments per year

An average of more than one million domestic payments were made each day in Estonia in the first quarter of 2015, with a total turnover of 371 million euros. The number of payments was 5% higher than in the first quarter of last year, but the turnover was 14% smaller. Bank cards were used for 63% of all the payments but as cards are used for the smallest payments, card payments provided only 3% of the turnover of all domestic payments.

The main use of bank cards in Estonia is for making payments, for which they are used around 634,000 times a day, while they are used around one seventh as often for cash withdrawals, around 95,000 times a day. This is the opposite to how things were at the start of the 2000s when cards were mainly used for withdrawing cash and rarely for making payments.

There were up to 3000 withdrawals of cash in foreign countries each day, accounting for 3% of all withdrawals. Larger amounts are taken out in each transaction in foreign cash machines, and the sum averaged 163 euros in the first quarter, while an average of 93 euros per transaction was withdrawn in Estonia.

Bank cards issued in Estonia were used in 184 countries in the first quarter of 20151. A daily average of around 36,000 card payments were made outside Estonia, which was equal to 5% of all the card payments using cards issued in Estonia. Cards were used for payments most in Finland, Sweden, Latvia, Russia and the United Kingdom. The individual payments outside Estonia are for larger amounts, averaging 34 euros, while the average in Estonia was 15 euros.

Residents of Estonia are among the most active users of card payments in the euro area. Card payments are made most per person in Finland, where 225 payments per person per year are made, followed by the Netherlands on 170 and Estonia on 169. Latvian residents in contrast average only 75 card payments per person per year.

Estonian residents made an average of close to 16,000 internet purchases per day in the first quarter of 2015, with a total value of around 847,000 euros. Interest in making purchases over the internet has increased rapidly among Estonian residents. The number of transactions was one quarter larger than in the same period of the previous year, and double the number of two years ago. More and more purchases are being paid for using debit cards that can function like credit cards. Such cards were used for 61% of all e-commerce card transactions in the first quarter. Estonian residents buy most from internet shops in the United Kingdom, while Estonian shopping sites are only the fifth most popular. Internet purchases in Estonia are paid for more by bank link rather than by card and some 41,000 purchases per day were made using a bank link in the first quarter.

Source: Bank of Estonia

Author: Tiina Soosalu, Eesti Pank Payment and Settlement Systems Department

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