Suomen Pankki seminar in Helsinki, 31.03.2014

1. Estonian financial sector –
recent developments and the changing role
of Eesti Pank
Madis Müller
31 March 2014

2. Size of the Estonian financial sector
Banks play a major role in financial intermediation
2
107%
8%
13% 10%
3% 1%
0%
20%
40%
60%
80%
100%
120%
140%
160%
banks (incl.
branches)
insurance
companies
investment
funds' assets
(incl. pension
funds)
stock market debt securities
market
investment
services
providers
%ofGDP
31.12.2007 31.12.2008 31.12.2009 31.12.2010 31.12.2011 31.12.2012 31.12.2013

3. Financial deepening has not always been a
linear process during the last two decades
3
0
5
10
15
20
25
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
EURbillion
Banking sector total assets and nominal GDP
banking sector total assets nominal GDP

4. The banking sector is dominated by
Nordic banks
4
49%
41%
21%
20%
11%
15%
12%
10%
1%
3%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2008 2013
Banks' market shares by total assets
Swedbank SEB Nordea (branch) Danske (branch)
DNB other foreign banks domestic banks

5. Credit growth, the real estate market, indebtedness
and the financial situation of corporates and
households
5

6. Growth in the credit stock is slowing
Mortgage volumes are gradually picking up
-15%
-10%
-5%
0%
5%
10%
15%
2009 2010 2011 2012 2013 2014
Annual credit growth
total corporates mortgages other household loans
6

7. The growth of housing loans has been supported
by the recovery of activity in the real estate market
Annual growth of 15% in transactions and 16% in prices in the last 12 months
0
200
400
600
800
1000
1200
1400
1600
1800
0
200
400
600
800
1000
1200
1400
1600
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Data: Land Board
Number of transactions for apartments in Tallinn and median price
number of transactions(l.s) median price (EUR/m2, r.s)
7

8. The affordability of residential real estate has
remained relatively good due to wage growth
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
0
200
400
600
800
1,000
1,200
1,400
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Real estate affordability
price/gross wage (right scale) median price (EUR/m2) gross wage (EUR)
8

9. The low Euribor means that loan interest rates
are at historically low levels
0%
1%
2%
3%
4%
5%
6%
7%
8%
2007 2008 2009 2010 2011 2012 2013 2014
Interest rates
long term loans to enterprises mortgages EURIBOR 6m
9

10. The share of housing loans with LTV of over
100% has declined to 11% by value and 8% by
number of loans
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
11/2012
12/2012
01/2013
02/2013
03/2013
04/2013
05/2013
06/2013
07/2013
08/2013
09/2013
10/2013
11/2013
12/2013
01/2014
Structure of housing loan stock by LTV
up to 50% 50-80% 80-100% over 100%
10

11. The financial position of households is
improving
Note: The model for estimating equity owned by households changed in 2008. Dashed line shows what household net financial
assets would have been before 2008 if the current method had been in use.
-15
-10
-5
0
5
10
15
20
25
2005 2006 2007 2008 2009 2010 2011 2012 III kv
2013
EURbillion
Household financial assets and liabilities
other accounts receivable/payable loans
other accounts receivable/payable insurance technical reserves
shares and other equity net financial assets
Q3
11

12. Low levels of borrowing activity meant that
corporate debt liabilities did not increase
much in 2013
The structure of debt liabilities did not change much in 2013
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 III
kv
Funding structure of the corporate sector (stock)
foreign bonds other foreign loans
intra-group foreign loans domestic bonds
loans from domestic NFCs and households domestic bank loans, leases and factoring
Q3
12

13. Corporate sector indebtedness and
leverage are decreasing
-20%
-10%
0%
10%
20%
30%
40%
50%
0%
20%
40%
60%
80%
100%
120%
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
%ofGDP
Private sector indebtedness
households
enterprises
annual growth of private sector debt (r.s)
20%
30%
40%
50%
60%
70%
80%
0
5
10
15
20
25
30
35
2004
2007
2010
2013
EURbillion
Corporate sector equity and debt
equity domestic borrowing
foreign borrowing debto-to-equity
13

14. The financing position of companies is good
and does not greatly restrict their business
operations and investments
Factors: increased current internal resources and buffers, their increased
ability to borrow and the low base interest rates on bank loans.
0
10
20
30
40
50
60
70
80
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
%ofrespondents
Impact of the financial situation on investments
stimulating hindering
Source: Estonian Institute of Economic Research
14

15. Banking sector soundness:
credit quality, profitability, capital adequacy, funding
15

16. The quality of the banks’ credit portfolio has
continuously improved
NPL ratio was 1.9% in January
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2007 2008 2009 2010 2011 2012 2013 2014
EURmillion
Loans overdue
10-30 days 30-60 days over 60 days >60 days, % (right scale)
16

17. Banking sector profitability has remained high
The negative impact of low interest rates on income has
abated and net interest income started to increase in
the second half of 2013
-200
-150
-100
-50
0
50
100
150
200
2008 2009 2010 2011 2012 2013
EURmillion
Banking sector quarterly net profit and loan losses
loan losses (net)
net profit/loss
net profit without extraordinary financial income and dividends from subsidiaries
309
424
17

18. The banking sector’s capitalisation has mainly
improved through capital increases at the
expense of unallocated profit from previous periods
All the banks have a Tier 1 ratio above 10%
0%
5%
10%
15%
20%
25%
30%
2008 2009 2010 2011 2012 2013
Banking sector capitalisation
Tier 1 ratio capital adequacy regulatory minimum for capital adequacy
18

19. The banks’ funding structure has become
more deposit based
20%
30%
40%
50%
60%
70%
80%
90%
0
5
10
15
20
2008 2009 2010 2011 2012 2013 2014
EURbillion
Structure of banks' liabilities
issued securities (left scale)
funds from parent banks (left scale)
non-residents' deposits (left scale)
residents' deposits (left scale)
share of deposits in total external funds (right scale)
19

20. Due to relatively strong deposit growth and
moderate loan demand, the loan to deposit ratio
has declined to 103%
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
200%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Loan to deposit ratio
20

21. Even with modest turnover, stock prices have
surpassed the high of 2011
100
200
300
400
500
600
700
800
900
1000
1100
0
1
2
3
4
5
6
7
8
9
10
2007 2008 2009 2010 2011 2012 2013 2014
points
EURmillion
Average daily turnover on the Tallinn
Stock Exchange and OMXT index
average daily turnover OMX Tallinn (right scale)
21

22. Macro-prudential supervision and the SSM
22

23. Macro-prudential supervision
Institutional set-up
• Amendments to the Eesti Pank Act (draft in Riigikogu)
– Eesti Pank is the macro-prudential authority
– Responsibilities of Eesti Pank in macro-prudential supervision
specified
• Amendments to the Credit Institutions Act (draft in Riigikogu)
– Macro-prudential instruments as specified in the CRDIV
– Eesti Pank’s power to implement macro-prudential
instruments to regulate lending (LTV, LTI/DSTI, etc)
• Domestic cooperation with the EFSA and the Ministry of Finance
• Cross-border cooperation: ESRB, NBMF, ECB/SSM
23

24. Macro-prudential supervision
Analysis and Assessment
• Biannual Financial Stability Review
• Identification and publication of the main risks to financial
stability
• Assessment of the need to use macro-prudential
instruments, determining the appropriate levels
24

25. Macro-prudential supervision
Instruments (1)
Systemic Risk Buffer (2% of risk-weighted assets)
• Implementation
– Intention to implement after the legislation is adopted
– Subject to notification procedures with the EU authorities
• Reasoning
– Structural vulnerabilities of the economy and the financial sector
– Avoids lowering the capital adequacy requirement from 10% to 8%
Until 31/12/2014 From 2014
Minimum capital adequacy requirement 10% 8%
Systemic risk buffer - 2%
Countercyclical capital buffer - 0%
Total capital requirements 10% 10%
25

26. Macro-prudential supervision
Instruments (2)
• Capital Conservation Buffer (2.5% of risk-weighted assets)
– Implementation: no transitional period
• Countercyclical Capital Buffer (0% of risk weighted assets)
– Implementation of the framework in autumn 2014
– Framework will be based on the Credit Institutions Act
and the upcoming ESRB Recommendation
– Alternative buffer guide for Estonia and sets of other
indicators
• LTV, LTI/DSTI - work in progress
26

27. Single Supervisory Mechanism (SSM) and Estonia
Supervision of Nordic subsidiaries within the SSM
ECB’s supervisory
functions
Financial
Supervisory
Authority
Swedbank AS
SEB AS
DnB
Supervisory Colleges
ECB, EBA, SE, NO …
EE, LV, LT supervisors
Eesti Pank
JST
27

28. Challenges in merging together existing
Nordic-Baltic cooperation
and launching the SSM
• Smooth cooperation is needed between the SSM and the colleges
– The Nordic and Baltic supervisory authorities should have an
active role together with the ECB in the supervisory college work
• The use of macro-prudential tools is still a new area for all
authorities
– Need for exchange of information and cooperation between
Nordic and Baltic authorities
• Nordic and Baltic crisis management and resolution arrangements
need to be renewed
– Cooperation will also need to be established with the SRM
• Participation of non-euro member states in the SSM
– Even within the closely integrated Nordic-Baltic region differences
in supervisory practices remain
28