Eesti Pank asks the Riigikogu for a decision on increasing its reserves
- The central bank finds that reserves could be increased gradually to 500 million euros
- Eesti Pank’s fixed capital and reserve capital are both currently 100 million euros and the bank has total capital buffers of 451 million euros
- Recent risk assessments reveal that if a set of very bad circumstances were to coincide, up to 500 million euros in capital could be needed
- More reserve capital will give the bank a stronger capital structure
- The central bank plans to almost triple its total capital over the long term to 1.2 billion euros
- Eesti Pank’s capital buffers are amongst the smallest of any central bank in the euro area measured against participation in the capital of the European Central Bank
Governor of Eesti Pank Ardo Hansson sent a proposal to leaders of the Riigikogu requesting a decision on whether Eesti Pank can increase its reserve capital.
The capital buffers of Eesti Pank are made up of fixed capital, reserve capital and other capital buffers. If there is the same amount of reserve capital as of fixed capital, then by law the Riigikogu must decide whether Eesti Pank should continue to increase its reserve capital.
Eesti Pank has 100 million euros in fixed capital and in spring 2015 the distribution of profits decided by the Supervisory Board saw the reserve capital increase to the same amount. The central bank has built up other capital buffers of 251 million euros so that the total capital buffers held by the bank are 451 million euros.
“Recent risk assessments reveal that if a set of very bad circumstances were to coincide, up to 500 million euros in capital could be needed. This makes it reasonable to increase the reserve capital to that amount, because by law the reserve capital is intended to cover losses”, explained Mr Hansson.
He said that the structure of the capital of the central bank would become stronger if the Riigikogu allowed Eesti Pank to increase its reserve capital. "Unlike for other capital buffers, there are restrictions in the law on what we can use the reserve capital for. So increased reserve capital means that there is a more secure base for Eesti Pank’s capital overall".
The Eesti Pank Supervisory Board has approved the request that the Governor sent to the Riigikogu.
If the Riigikogu decides that the reserve capital of the central bank should be increased, Eesti Pank plans to do it gradually from profits earned in the years ahead. The Eesti Pank Supervisory Board decides each year how much of the profit from the previous year should go to the capital buffers of the central bank and how much to funding the state budget.
Since Estonia joined the euro in 2011, the Supervisory Board has set a long-term goal for the central bank to increase its capital buffers to the average level of the central banks of the euro area, in proportion to the size of the subscription of the central banks to the European Central Bank. This means Eesti Pank needs to have twice or three times as much total capital as it has had before now, and it should hold around 1.2 billion euros. By law it is the Eesti Pank Supervisory Board that decides how much of the annual profit should go to the capital buffers of the central bank and how much to funding the state budget.
The Eesti Pank Supervisory Board has decided that the capital buffers of the central bank need to be increased over the long term because Eesti Pank faces significantly larger financial risks as a central bank of the euro area. The profit or loss that the central banks of the euro area earn from a lot of activities is shared between them in proportion to the size of the participation of each central bank in the European Central Bank, a proportion that is called the capital key. The capital key for Eesti Pank is 0.274%.
As the income and liabilities from joint activities are divided amongst the euro-area central banks using the capital key, the Supervisory Board of Eesti Pank has decided that the bank needs to hold capital buffers that correspond to the capital key proportion of the average of all the central banks in the euro area. However, the capital buffers of Eesti Pank are currently among the smallest in the euro area measured against the capital key, and so the Supervisory Board has set the goal of increasing the capital over the long term.
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