On 13 May the
International Monetary fund issued a 61-page staff report on Estonia 23 April 2013 . The section of the report that deals most
directly with the banking sector is reproduced below verbatim, with emphasis as
per the original.
POLICY
CHALLENGES
[...]
B. Advancing Financial
Sector Robustness
21. Estonia’s mostly
Swedish-owned financial sector has continued to strengthen. Extensive bank
write-downs have cut NPLs in half from their peak in mid-2010 to about 3
percent in January 2013 (Figure 9). As the economy continues to improve and
with it the quality of loans, NPLs are expected to continue declining albeit at
a slower pace. Despite the write-offs, banks have remained well-capitalized,
liquid, and profitable. Recovery of assets previously recorded as losses and
lower provisioning requirements associated with the improving economy and asset
quality have boosted profits and helped replenish banks’ capital in 2012. The
capital adequacy ratio has risen to about 19½ percent in January 2013, far
exceeding current international norms. Meanwhile, bank funding has also
improved with a declining share of foreign funding and rapidly growing domestic
deposits, which has resulted in a record low loan-to-deposit ratio.
22. Risks to the
financial sector remain but are mitigated by strengthening balance sheets. On the domestic side,
the main source of risk stems from (flexible rate) mortgage loans—typically
tied to the six-month Euribor—of which about 18 percent currently have negative
equity. On the external side, Estonian subsidiaries receive significant funding
from Swedish parent-banks which in turn rely on potentially volatile short-term
wholesale markets, and are exposed to risks stemming from elevated household
debt and house price-to-income ratio. These risks appear manageable nonetheless. At
present markets expect stable interest rates, allaying interest rate risks that
could diminish households’ ability to service their loans. Also, in Estonia,
lower private debt, improving real estate prices, higher employment, and low
interest rates have strengthened the ability of the private sector to service
its debt. On the external side, parent-banks appear to be sound and the Swedish
housing market has been gradually cooling. Moreover, parent funding of Estonian
subsidiaries has been stable reflecting a strategic commitment to, and highly
profitable investments in Estonia. Finally, Estonia’s financial exposure to EU
distressed countries is limited.
23. Recent stress tests
suggest that banks are reasonably well positioned to cope with risks. In an adverse scenario
seeking to replicate the 2008 events, the Eesti Pank’s (Estonia’s central bank)
bottom-up stress tests from Fall 2012 show that NPLs would rise significantly
and peak at 6.5 percent at end-2013. However, the required increase in
provisioning could be absorbed by bank profits. In addition, banks have
substantial prudential buffers (tier 1 capital is about 13½ percent) as well as access to the ECB’s
liquidity facilities. Capital adequacy would remain well above statutory
minimums. These test results hinge however on
unchanged foreign funding (notably, parent banks maintaining their Estonian
exposure) as well as on the presumption that profits are not repatriated to
parent banks. These assumptions are consistent with the experience following
the global financial crisis.
24. Strengthening Estonia’s
macro-prudential policies would help reduce risks further. The EU’s CRD IV capital and
liquidity requirements have been designed to enhance financial stability in an
increasingly challenging EU environment. Although the EU directive allows
gradual adjustment, early adoption of these requirements—in tandem with parent
banks—would enhance Estonia’s financial sector’s standing without unduly
constraining banks’ margins or credit growth. This is because banks already
broadly meet these requirements. Similarly, in view of the prevalence of
short-term variable interest rate-linked mortgages, adopting formal caps on
loan-to-value and loan-to-income ratios—consistent with Estonia’s current
banking sector practices—can cement stability and reduce risk exposure. Also,
Eesti Pank’s macro-prudential authority and existing tri-lateral (Eesti Pank,
MoF, and FSA) forums can be further clarified and strengthened—in line with the
European Systemic Risk Board’s recommendations—to enhance the monitoring of
systemic risks and limit potential fallout.
25. Looking forward, deeper
cross-border prudential arrangements would help underpin financial stability in
Estonia. Over a
number of years, Estonia and other Baltic nations have, together with their
Nordic counterparts, developed an effective regional supervision framework
supported by cooperation agreements and the establishment of the Nordic-Baltic
Stability Group and Macroprudential Forum. Their ongoing work has appropriately
focused on establishing a burden-sharing mechanism, a common database for
financial groups, and preparing for cross-border simulation exercises. In
conjunction with EU-level initiatives, these efforts should move ahead by
implementing key elements of the framework, notably defining criteria for
burden sharing.
The EU
banking union can further enhance Estonia’s financial stability (Box 5). The banking union can
bolster financial soundness throughout the EU, including by introducing uniform
prudential oversight standards and burden sharing mechanisms to respond to
financial shocks. In this regard, the single
supervisory mechanism (SSM) will place Estonia’s two largest banks under the
direct supervision of the ECB. Additional efforts are, however, needed to
clarify the role and powers of the Estonian authorities in this context,
including in supervisory colleges and with regard to the exchange of
confidential information.
26. This will nonetheless entail
coordinating Estonia’s long-standing arrangements with the Nordic authorities
and the EU banking union. The option to join the banking union, changes proposed in the voting
rights at the EBA, and other measures to ensure an EU-wide approach to
financial stability in the banking union, have helped assuage non-euro area
countries’ misgivings about the SSM. Still, as the SSM and other elements of
the banking union go forward, it is essential not to disrupt existing home-host
prudential arrangements and safeguard supervisory coordination. This will
entail spelling out a common agreement for bank resolution and burden sharing
for financial groups—including for those groups spanning the euro and non-euro
area jurisdictions—with a view of minimizing the risk of an abrupt contraction
in the exposure in host countries.
27. Financial stability can also be
supported by further efforts to improve bankruptcy procedures. With the adoption of the
reorganization act for household restructuring in April 2011, continued efforts
are needed to limit bankruptcy losses and enhance asset recovery by
facilitating out-of-court debt restructuring, reducing the cost and ensuring
the timely application for, and prompt resolution of bankruptcy procedures.
28. The authorities emphasized their
commitment to maintain a strong financial system in the face of an evolving
financial architecture. They agreed that enhancing current macro-prudential policies as
advised by staff would strengthen Estonia’s financial system. The authorities
confirmed that these policies should not pose undue burden on banks or on
credit to the economy. But they stressed that under the SSM, their
implementation would require coordination with the ECB. In this regard, the authorities
explained that once CRD IV was finalized, they would reform the Credit
Institution Act to clarify the central bank’s role in setting macro measures
and further tri-partite collaboration. Regarding bankruptcy reforms, they
stressed that it was early to assess the new household restructuring law but
planned to increase resources available to bankruptcy courts
29. In
welcoming the EU banking union, the authorities underscored the importance of
preserving the Nordic-Baltic working arrangements. In this regard, they highlighted
the need to continue clarifying the role of these arrangements within the
banking union and avoid disrupting long-standing close collaboration with their
Nordic colleagues.
The IMF clearly
regards the EU banking union as a positive development for Estonia
One institution
that has consistently spoken out about the dangers of the banking union – as
proposed – is the Czech National Bank (Česká národní banka). The CNB sees a danger that with the EU
banking union as presently envisaged the Czech Republic, which has a liquid and
well-capitalized banking system, might be forced to bailout much larger EU
nations such as Spain, Italy, and Portugal.
CNB board member Lubomír
Lízal, in an extemporaneous video
interview published on 12 April, mentioned some of his concerns regarding
the proposed banking union, but more recently the governor of the CNB himself,
Miroslav Singer, wrote an editorial for FT explaining the CNB’s
viewpoint on the proposals for a banking union.
Because the editorial by Singer is succinct highly readable, it is
reproduced here in its entirety from the website of the CNB:
Opinion: Hurdles remain high for banking union
Miroslav Singer (Financial Times (ft.com), 9.5.2013)
The proposed European banking union, which would place eurozone banks
under the supervision of the European Central Bank, strives to address some of
the institutional deficiencies of the eurozone.
This monetary zone features at least the same – and probably a higher –
level of national diversity as the US US
Yet it is clear that fiscal transfers of a comparable magnitude to the US
The banking union is, therefore, essentially an attempt to build
transfer channels that are capable of breaking the harmful relationship between
the financial sector and sovereign debt, and acceptable to warier member
states, particularly Germany
To be successful, the union needs to consist of three elements.
First, there must be common supervision to prevent slippage of quality
due to national complacencies and/or interests.
Second, risk must be shared – in the form of quasi-fiscal transfer
channels, the European Stability Mechanism and potential sharing of national
guarantee funds.
Finally, there has to be a common approach to resolving bank collapses
and their related costs.
It is worth noting that while common rules are presented as something
that is necessary for a banking union, they are in fact necessary for greater
unity – in other words, for a common EU market.
Alongside the acceptance of such a scheme, however, there are two
obvious problems with the creation of this union within the current eurozone.
The first is how to ensure banking systems are well capitalised across
all the eurozone countries. The straightforward solution would be to pool the
resources of the northern nations and the ECB. I suspect that was the initial
plan, but the clear reluctance of the countries in the north to play along is
making this very difficult to achieve.
The second is how to achieve supervision that is of a high enough
standard to guarantee that transfers through these newly created quasi-fiscal
channels do not trouble the northern member states, rather than creating a
fully fledged federal tax system for the eurozone.
While the first problem is hampering the establishment of the banking
union, the second needs to be solved if the union is to be sustainable over the
long term. I have my doubts about whether a solution can be found to the second
problem, as it may require supervision of a standard that has never before been
attained.
Hopefully, however, other measures to reduce banking risks, such as
stronger buffers, can remedy this situation.
Ultimately, there are three main points to consider.
First, the banking union will benefit mainly the eurozone. The Bulgarian
lev or Swedish krona currency zones, for example, do not need it, as they exist
within the borders of single nation states.
Second, the combined resources of all the EU countries outside the
eurozone will not be sufficient to restore the euro area financial system to
health.
Third, for the Czech National Bank, one special feature of our banking
system is that while it is restricted to the country’s borders, it is solvent
and liquid, and a provider of credit to the eurozone banking system.
Consequently, the Czech National Bank will do its best to support the
creation of the banking union while working to eliminate the risk of being
pulled into the transfer channels via non-market price transactions and risk
sharing.
Our well-capitalised and liquid banks should not be used to fund their
parent or sister institutions at rates below the market rate for such funds or
assets in a situation where group interests prevail over the interests of
subsidiaries in the decision making.
We are not needed in – and do not intend to become a party to –
quasi-fiscal transfers, even in crisis situations. In particular, we do not
wish to become a party to any common funds or any loan-sharing scheme between
deposit guarantee funds or anything with similar redistributive effects.
We are also keen to retain our own domestic controls and regulations as
well as the current balance of power in the European Banking Authority. I
cannot help but wonder whether the failure of advocates of the banking union to
respect the similar positions of many non-eurozone countries are complicating
its creation. These negotiations are difficult enough in the eurozone countries
alone.
For us, joining the Single Supervisory Mechanism (SSM) would involve a
loss of supervisory powers. We see no reason to cede such powers, not least
because the Czech National Bank has a strong track record on supervising the
domestic financial market, and has been able to maintain good working relations
with the relevant Czech supervisory bodies.
What is more, some key pillars of the SSM have not even been drafted
yet. We do not feel able to draw any conclusions about the quality of SSM
supervision until the system has been up and running for a while.
Ultimately, it is a case of wait and see. We wish the eurozone every
success in creating the banking union, but it would be better for us to see how
the creation of the SSM works in practice.
Sources:
Republic of
Estonia: 2013 Article IV Consultation (2013-05-13)
Video: CNB
board member issues warning on common bank resolution (2013-04-12)
Editorial on website of CNB: Opinion:
Hurdles remain high for banking union (2013-05-09)
In earlier news, on
11 May the Bank of Estonia (Eesti Pank) published on its website an
announcement reminding businesses in Estonia
The central bank
noted that since the introduction of the new €5 note into circulation at the
beginning of May there had been cases of stores refusing to accept it, and of
banknote verification machines rejecting it.
The announcement went on to explain in detail the security features of
the new banknote, and how the banknote can be easily verified by hand.
The central bank
suggested that readers view on itse website various videos produced by the ECB
that introduce and explain the new €5 banknote, and noted that the Bank of
Estonia had been carrying out a series of training sessions for cash handlers
throughout Estonia to familiarize them with the features of the new banknote.
ECB video on the new €5
banknote, in English: “The Euro: Our Money”
ECB video on the new €5
banknote, in Estonian: “Euro, meie raha”
It has been widely noted
that the new €5 banknote is the first euro banknote to carry Cyrillic
writing. On the obverse it carries the
word “ЕВРО” (i.e., euro), and
the abbreviation “ЕЦБ” (i.e., ECB). What
has been less noticed is the fact that the Cyrillic word “ЕВРО” is the upper-case
form of the word “евро” (pronounced “evro”) rather
than of the word “еуро” (pronounced “euro”).
At present there is no member country of the Eurozone in
which Cyrillic is used as an official alphabet except by an ethnic
minority. In 2007 Bulgaria joined the
European Union but not the Eurozone (EMU), as it continues to use its own
currency, the Bulgarian lev (BGN).
It is planned, however, that Bulgaria will eventually enter the EMU and
replace the lev with the euro. It
is with Bulgaria in mind, then, that the ECB has for the first time printed
banknotes containing Cyrillic letters.
But why do the Cyrillic letters on the new banknote
spell out something that is pronounced “evro” instead of “euro”?
In fact as a rule the
name of the EMU’s currency is written and pronounced as “evro” (or in Cyrillic
“евро”) in those Slavic countries that, perhaps under Byzantine Greek
influence, pronounce the name of Europe as “Evropa”. Hence the form “evro” (евро) is used
officially by the central banks of Slovenia, Bosnia and Herzegovina (when
writing in Serbian), Serbia, Macedonia, Bulgaria, Moldova (Russian-speaking
part), Transnistria, Ukraine, and Russia, while the form “euro” is used by the
central banks of Montenegro, Bosnia and Herzegovina (when writing in Croatian
and Bosnian), Croatia, the Czech Republic, Slovakia, Poland, and Belarus.
At the time that Bulgaria Bulgaria Bulgaria
Sources:
Bank of Estonia press release: Kaupmehed
peavad uut 5-eurost vastu võtma (2013-05-11)
Wikipedia: Bulgaria and the euro
(retrieved 2013-05-18)
ECB video on new €5 banknote – English version: The
Euro: Our Money (2013-04-30)
ECB video on new €5 banknote – Estonian version: Euro,
meie raha
