Economic policy statement of Eesti Pank



Deposit growth makes banks in Estonia less dependent on financial markets

The main threat to Estonia’s financial sector stability and economic developments still lies in the euro area debt crisis. Tensions in international financial markets eased slightly in the first months of this year, mostly owing to the provision of long-term loans by the Eurosystem. Nevertheless, fundamental problems that have aggravated the crisis and disruptions in financial markets have not disappeared anywhere. Several euro area countries are struggling with an excessive fiscal deficit and a high debt burden. Some weaknesses in the European banking system and the unfavourable economic growth outlook show that the European financial system is still vulnerable and the debt crisis goes on. Thus, euro area governments must proceed with reforms and budget balancing needed to solve the crisis, since the long-term loans provided to banks by the Eurosystem are just one-off measures.

The Eurosystem’s steps taken to improve the liquidity of banks have not resulted in rapid money supply growth. Euro area inflationary expectations have remained at the target level of 2%. Slow economic expansion does not favour price growth, so inflation should abate in 2012. In Estonia, recent months’ inflationary pressures have been caused by energy prices in the global market rather than by domestic factors. Excluding energy, inflation in Estonia has eased compared to last autumn. At the same time, it is important that energy price growth be not used as a justification for raising other prices.

Though Estonia’s GDP shrank by 0.2%, quarter-on-quarter, in the last quarter of 2011, the latest statistics show that the situation is improving. According to Eesti Pank’s autumn forecast, the economy will grow 1.9% this year. In addition to income growth, the loan repayment ability of Estonia’s companies and households is supported by smaller loan commitments and increased financial assets. If we look at the growth in real income, the low level of interest rates and stable real estate market developments, the real sector can be expected to borrow even more actively, but uncertainty regarding the future due to the volatile external environment has so far inhibited credit growth.

Risks to the stability of Estonia’s financial system have decreased somewhat over the past half a year. This is confirmed by the increase in liquid assets on banks’ balance sheets. The financing of banks in Estonia is becoming less and less dependent on parent banks’ funding, that is, on developments in international financial markets, since deposits are growing.

For the Estonian banking sector, it is very important that Nordic banks maintain the trust of financial markets. This has been ensured by the good capitalisation of banks, the relatively strong macroeconomic environment and the fiscal stance of Nordic countries. Against the backdrop of slowing economic growth, credibility will be supported by the 10% capital adequacy requirement that larger Swedish banks will have to meet as from 2013. Banks in Estonia have had to meet this requirement since autumn 1997, and their capital buffers are currently even larger than the norm.