Eesti Pank 30.12.2013
The new single capital adequacy requirement of 8% will start to apply for commercial banks in the European Union from the beginning of 2014. In consequence the decree of the Governor of Eesti Pank requiring banks operating in Estonia to have a minimum capital level of 10% will cease to apply after more than fifteen years.
Member states of the European Union can apply additional capital requirements to banks to guard against risks to financial stability. For this purpose, the Riigikogu is discussing amendments to the Credit Institutions Act, which, as drafted, give Eesti Pank the right to set additional capital requirements.
Governor of Eesti Pank Ardo Hansson explained that for now this is a technical change. “The capital levels of Estonian commercial banks are currently significantly higher than 10%. An additional requirement of 2% is needed in Estonia on top of the 8% minimum to create a systemic risk buffer in order to preserve the resilience of the Estonian banking sector”.
Since 1997 the capital adequacy requirement for banks in Estonia has been 10%, as Estonian experience has shown that because the economy is small and open, an economic decline can lead to repayment problems in the private sector, meaning the financial position of banks can worsen very rapidly. “There are specific features in the structure of the economy which mean that a systemic risk is posed by rapidly arising problems with loan servicing. For this reason it is necessary to set additional capital requirements for banks in order to maintain the minimum capital requirement at ten percent”, Hansson said.
The legal framework for the new European single capital adequacy requirement allows countries to set counter-cyclical buffers for commercial banks, as well as systemic risk buffers, if these are needed to counter risks caused by excessively fast loan growth. Eesti Pank does not currently consider it appropriate to set any counter-cyclical buffers.
Eesti Pank will assess the need for additional capital requirements as part of the twice-yearly Financial Stability Review produced by the central bank. The Financial Stability Review of October 2013 can be found on the Eesti Pank website. [eestipank.ee]
Capital requirements for banks will be lowered temporarily in Estonia in the new year (1)