The focus of today’s sitting was on the annual reports of Eesti Pank (Bank of Estonia) and the Financial Supervision Authority.
The Chairman of the Management Board of the Financial Supervision Authority Kilvar Kessler presented the 2020 Annual Report of the Authority.
Kessler highlighted that while the Authority focused on the mitigation of the corona crisis last year, its attention would in the near future shift to digitalisation and the related risks, as well as to green consideration. In addition, Kessler reminded the plenary that there had been talk for seven years now about giving the Authority the right to impose administrative penalties instead of initiating misdemeanour proceedings, and that financial disputes could in the future be resolved by a financial ombudsman employed at the Authority.
The 2020 corona crisis made the Authority focus on two main risks. The first risk, which could manifest quickly, was the operational risk.
Kessler said that the Estonian financial sector had managed the operational risk during the crisis in an excellent way. The preconditions for this had also been excellent because the Authority has for years persisted in its demand that the major market participants had to have recovery plans in place and test these, and has also consistently carried out the relevant checks. “To all intents and purposes, the reality of the corona virus gave us an immediate proof that the earlier requirements made total sense.”
Kessler named credit risk as the second key risk. “Here, the possible negative development was that people and businesses would no longer be able to honour their loan obligations and banks would experience massive credit losses. A major credit loss could in certain cases mean insolvency for the bank and loss of funds for depositors to an extent not guaranteed by the Guarantee Fund. But by hitting the Guarantee Fund, this would also considerably increase the state debt burden and eventually hit the pockets of the tax payers.”
He explained that one of the classical balancing factors of the credit risk is the existence of sufficient capital buffers in banks. “In the Estonian banks, the crucial capital buffer comes from accumulated profits. This is why we think it made sense to freeze the existing profit buffers in the beginning of 2020 as the corona crisis deepened, to safeguard the capability of the banks to shoulder credit losses.” Additionally, the Authority launched a relevant discussion with colleagues in Frankfurt and Stockholm, because this is where the partner supervision authorities of our largest banks are located. “This later resulted in a European Union level agreement not to make profit payments from banks since the 2020 corona crisis.”
Honouring of loan obligations also received attention. “On the one hand, we were preparing an environment that would allow borrowers who have run into trouble to temporarily postpone the fulfilling of their obligations. On the other hand, we peppered this with incentives and alleviation measures for the banks, so that they would keep allowing this postponement of obligations. Kessler added that most EU financial supervision authorities had similar ideas and plans, which gave rise to a common framework for implementing payment moratoriums. Based on this, the Estonian banks agreed on a private moratorium in spring 2020, respecting the common terms set by the financial supervision. “We complemented this by setting the market and the debtors a direction in the shape of a restructuring memorandum, where we explained the good and the bad practices in loan restructuring,” Kessler said.
During the debate, Erki Savisaar (Centre Party) and Ivari Padar (Social Democratic Party) took the floor.
The President of Eesti Pank Madis Müller presented the 2020 Annual Report of Eesti Pank.
Müller explained that the keywords of last year for Eesti Pank were support for the economy, forecasting the economic impacts of the crisis, and advising policy shapers. A further important task was ensuring the smooth functioning of the vital services, payments, and cash circulation, which is also in the remit of Eesti Pank.
It is important to use financial policy shaping to prevent market uncertainties from escalating into a full-blown financial crisis with destructive results. Our first priority in the crisis situation is to keep loan money affordable to avoid putting extra burden on businesses and households, as well as the government. “For this purpose, we decided in the Governing Council of the European Central Bank to extend the purchase of bonds by the Central Bank, further increasing its flexibility in the conditions of the crisis, and responding to the developments in financial markets and economy,” Müller said.
Müller described one of the main tasks of Eesti Pank as assessing the economic situation and advising policy shapers. “When advising the government, the main advice of Eesti Pank in alleviating the crisis was to make state aid targeted, quick and temporary, and directed at the hardest hit fields. In the near future, in our role as an advisor in economic policy, we plan to analyse how the Estonian economy could recover from the crisis stronger than ever,” Müller explained.
“Last year, we supported the financial standing of Estonia with an exceptionally large portion of the Eesti Pank profits. Instead of the customary one quarter, we allocated three quarters of the unpaid profits from 2019 into the State Budget, i.e. a total of EUR 19 million. First time since Estonia’s accession, we gave our agreement together with the other countries to support the lending capacity of the International Monetary Fund (IMF) when needed, because the demand for IMF aid loans skyrocketed. Under the Estonian law, Estonia is represented by Eesti Pank in the IMF. This credit line worth EUR 160 million is only a backup solution for IMF, existing for a period of three to four years.”
Based on the spring economic forecast of the European Central Bank, a four percentage increase in the euro zone is expected this year; this is not yet enough to take us to the pre-crisis level, but the outlook has definitely turned more positive.
“In March we predicted a 2.7 percentage economic growth for the Estonian economy this year. The data we received at the start of this week on the first quarter show that the economic growth is rapid and mostly due to the improved economic situation and not just the low comparison basis from last year. More recent figures show that the economic volume in Estonia has already surpassed the pre-crisis level of the fourth quarter of 2019, as well as the forecast level from before the crisis. The new Eesti Pank forecast is published this month and will probably show even more optimism.”
Concerning possible risks in the financial sector, Müller said that it was impossible to ignore businesses that are not properly regulated and have been left without government supervision; this mostly concerns service providers dealing with virtual currencies who were already mentioned in the previous report, but also savings and loan associations. Hopefully draft legislation that clarifies the frameworks for both fields will soon reach the Riigikogu.
Müller also described the general situation of the financial field in Estonia. He expressed his concern about the state budget strategy in its current form because public finances do not seem to be following a sustainable path. “The large gap between revenues and expenses persists even after the economy has already recovered from the crisis. For example, the 2023 budget strategy still includes a planned deficit of over EUR 1 billion. In other words, the Estonian government plans to take out loans that exceed 3 percent of the GDP at a time when the economy is already back on the pre-crisis growth path. This would very abruptly increase the national debt burden in a very short time, and only a part of this is linked to the cost of the crisis. The strategy does not include reaching a budget balance even by 2025,” Müller said.
He underlined that compared to other European countries, we made it out of the crisis with much less damage. “And yet we plan to take our economy back on a more sustainable path less quickly that the majority of other countries. For us to be able to maintain our country also without constantly increasing our debt burden after the economy has recovered could be an objective that determines all our choices in the Estonian public finance sector,” Müller suggested. He warned that it was impossible to live beyond our means for long. “And the current crisis is sure not to remain the last. In the next crisis, we will again need buffers. This is why I would like to wrap up my presentation with wise words from our ancestors – prepare your sleigh in summer and your cart in winter,” Müller concluded.
During the debate, Maria Jufereva-Skuratovski (Centre Party), Riina Sikkut (Social Democratic Party), and Aivar Sõerd (Estonian Reform Party) took the floor.
Photos: (Author: Erik Peinar, Chancellery of the Riigikogu).
The video recording of the sitting will be available on the Riigikogu YouTube channel.
(Please note that the recording will be uploaded with a delay.)
Your feedback is important. Please share it with us!