This document summarizes the key points from the Financial Stability Review. It notes that while economic activity has reduced uncertainty in international markets, recovery has been slower in some eurozone countries due to high debt and weak banking sectors. A high household debt burden and rapidly rising real estate prices pose major risks to stability in Sweden and Norway. Estonian companies have not been affected by the economic slowdown, but risks remain from a weak eurozone economy and potential fall in Nordic real estate prices. Maintaining a 10% minimum capital requirement is important for the resilience of Estonia's banking sector.

1. Financial Stability Review
23/10/2013
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2. Key points
2 2

3. Increased economic activity has reduced
uncertainty in the international financial
environment
Economies are recovering more slowly in some euro area countries and the risks are
compounded by high debt levels and weak banking sectors
Source: EcoWin
3

4. Money market rates have remained low in
the current monetary policy environment
Source: EcoWin
4

5. The strong confidence shown by the markets
thus far has given Nordic bank groups good
access to financing and stable prices
The large share of funding coming from the markets creates a vulnerability in the financing
of Swedish banks
Source: Bloomberg
5

6. A high debt burden among households
and rapid growth in real estate prices have
emerged as the major risks to financial
stability in Sweden and Norway
A fall in real estate prices could cause a recession and hinder banks in accessing
funding from financial markets
Sources: Valueguard, Norwegian Association of Real Estate Agents, Eesti Pank calculations
6

7. The slowdown in the economy has not
affected the solvency of Estonian companies
Sources: Krediidiinfo, Eesti Pank
7

8. The risks to the solvency of households
have been reduced by the low level of
EURIBOR and by favourable
developments in the labour market
Sources: Statistics Estonia, Eesti Pank
8

9. Real estate prices have risen faster than
nominal GDP
Sources: Statistics Estonia, Estonian Land Board
9

10. Growth in housing loans has remained modest
Bank lending standards have not changed
10

11. The margins on housing loans have not
changed
11

12. Growth in deposits has made the financing of
the loan portfolio more balanced
The loans-to-deposit ratio fell to 109%
12

13. Capitalisation of banks has improved as
profitability is good
The quality of capital is high and leverage low
13

14. Main risks and consequences
14

15. Most of the risks to financial stability in
Estonia are small
15

16. The recession in the euro area weakened the
asset quality of euro area banks significantly
16

17. The Nordic financial sector is considered
secure but risks have increased in the real
estate market
17

18. The banks operating in Estonia need to
continue to be careful in issuing real
estate loans
18

19. Main risks affecting Estonian financial
stability
Weak economies in Europe damaging the quality of bank assets
A sharp fall in Nordic real estate prices following on from the rapid growth that could
pose a threat to economies and bank groups in the area
A spiral effect created by rapid rises in real estate prices and wages, in which banks,
borrowers and savers start to act ever more riskily
Small risk
Large risk
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20. For the Estonian banking sector to maintain
its resilience it is important to keep the
minimum capital requirement at 10%
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21. Planned changes to the capital
requirements from 2014
Until 31/12/2013
From 2014
10%
8%
Systemic risk buffer
-
2%*
Counter-cyclical buffer
-
0%*
10%
10%*
Minimum capital adequacy requirement
Total capital requirements
* Proposed requirement
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