Failures in the financial system may occur unexpectedly and rapidly pass on to other markets and market participants. Financial crises can have great costs for society and so it is important that authorities prepare well for such eventualities.
Crisis management in Eesti Pank is based on three pillars:
1) Ensuring sufficient liquidity for the Estonian banking system, by providing exceptional liquidity loans to banks, where necessary
2) Developing the Estonian crisis management framework together with the Estonian Financial Supervision Authority and the Ministry of Finance
3) Working with international partners to prevent and resolve crises
The roles of Eesti Pank, the Estonian Financial Supervision Authority and the Ministry of Finance and the foundation for their joint operation are laid out in a Memorandum of Understanding on the management of financial crises. The memorandum emphasises the primary responsibility of bank owners and management boards for securing the financial soundness of the bank and bearing the costs arising from crises.
The Estonian financial system is closely integrated with international financial markets, and so international cooperation in the management of financial crises plays a very important role. In 2011, the Nordic-Baltic Stability Group was set up by the central banks, financial supervision authorities and ministries of finance of the Nordic and Baltic countries to work on preventing and resolving financial crises, and Eesti Pank is represented in the group. Eesti Pank has also signed multilateral agreements with institutions responsible for the financial stability in EU countries and the Nordic-Baltic region, and a Memorandum of Understanding with the central banks of Denmark, Finland, Iceland, Latvia, Lithuania, Norway and Sweden.
Another crucial component of the Estonian crisis management system is the deposit guarantee scheme. This protects the funds of small depositors and thus increases trust and stability in the financial sector. The deposit guarantee scheme is run by the Estonian Guarantee Fund and the Deputy Governor of Eesti Pank sits on the Guarantee Fund’s nine-member Supervisory Board.