Estonian financial sector –
recent developments and the changing role
of Eesti Pank
Madis Müller
31 March 2014
Size of the Estonian financial sector
Banks play a major role in financial intermediation
2
107%
8%
13% 10%
3% 1%
0%
20%
4...
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...
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%...
Credit growth, the real estate market, indebtedness
and the financial situation of corporates and
households
5
Growth in the credit stock is slowing
Mortgage volumes are gradually picking up
-15%
-10%
-5%
0%
5%
10%
15%
2009 2010 2011...
The growth of housing loans has been supported
by the recovery of activity in the real estate market
Annual growth of 15% ...
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...
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 20...
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%...
The financial position of households is
improving
Note: The model for estimating equity owned by households changed in 200...
Low levels of borrowing activity meant that
corporate debt liabilities did not increase
much in 2013
The structure of debt...
Corporate sector indebtedness and
leverage are decreasing
-20%
-10%
0%
10%
20%
30%
40%
50%
0%
20%
40%
60%
80%
100%
120%
20...
The financing position of companies is good
and does not greatly restrict their business
operations and investments
Factor...
Banking sector soundness:
credit quality, profitability, capital adequacy, funding
15
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%...
Banking sector profitability has remained high
The negative impact of low interest rates on income has
abated and net inte...
The banking sector’s capitalisation has mainly
improved through capital increases at the
expense of unallocated profit fro...
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 201...
Due to relatively strong deposit growth and
moderate loan demand, the loan to deposit ratio
has declined to 103%
0%
20%
40...
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
...
Macro-prudential supervision and the SSM
22
Macro-prudential supervision
Institutional set-up
• Amendments to the Eesti Pank Act (draft in Riigikogu)
– Eesti Pank is ...
Macro-prudential supervision
Analysis and Assessment
• Biannual Financial Stability Review
• Identification and publicatio...
Macro-prudential supervision
Instruments (1)
Systemic Risk Buffer (2% of risk-weighted assets)
• Implementation
– Intentio...
Macro-prudential supervision
Instruments (2)
• Capital Conservation Buffer (2.5% of risk-weighted assets)
– Implementation...
Single Supervisory Mechanism (SSM) and Estonia
Supervision of Nordic subsidiaries within the SSM
ECB’s supervisory
functio...
Challenges in merging together existing
Nordic-Baltic cooperation
and launching the SSM
• Smooth cooperation is needed bet...
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Madis Müller. Estonian financial sector – recent developments and the changing role of Eesti Pank

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Suomen Pankki seminar in Helsinki, 31.03.2014

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

  1. 1. Estonian financial sector – recent developments and the changing role of Eesti Pank Madis Müller 31 March 2014
  2. 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. 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. 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. 5. Credit growth, the real estate market, indebtedness and the financial situation of corporates and households 5
  6. 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. 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. 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. 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. 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. 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. 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. 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. 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. 15. Banking sector soundness: credit quality, profitability, capital adequacy, funding 15
  16. 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. 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. 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. 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. 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. 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. 22. Macro-prudential supervision and the SSM 22
  23. 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. 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. 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. 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. 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. 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

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