Eesti Pank is cutting the capital buffer requirements for the banks by 110 million euros
Eesti Pank is reducing the systemic risk buffer for the commercial banks from 1% to 0%. This will free up 110 million euros for the banks, which they can use to cover possible loan losses or to make new loans.
“We have required the banks to build up buffers during the good times, and now it is the right time to use those buffers so that the banks can take a more flexible stance in the crisis”, said Deputy Governor of Eesti Pank Maive Rute.
She added that it is not reasonable for the banks to pay dividends out of profit during the state of emergency, as that would weaken their ability to manage potentially large loan losses. “I would like to give particular credit to Finantsinspektsioon here, as they have brought up the issue of dividend payments with banks”, she said.
The systemic risk buffer requirement is expected to be cut to zero from 1 May. The buffer requirement has applied to the banks since 2014.
Eesti Pank has so far kept the countercyclical capital buffer requirement at zero and does not expect to raise it during the next 12 months.
A further requirement, the systemically important institution buffer, applies to the four larger banks that operate in Estonia, Swedbank, SEB, Luminor and LHV, and that will be maintained by Eesti Pank. The Estonian banks can use all of the capital buffers they have built up to cover loan losses if they need to.
At the end of last year, the Estonian banks had a total of 4.5 billion euros of own funds. Different banks have different levels of capital, but the overall capitalisation of the Estonian banking sector is higher than in other countries in the European Union.
The capital requirements apply to the banks on three levels. The first is the minimum own funds and buffer requirements set by law, under which the banks must hold at least 1.8 billion euros of own funds. The second level is the additional buffers required by the central bank of around 420 million euros. When the systemic risk buffer requirement is cut to zero from May, the capital buffers required by the central bank will be a little over 300 million euros. The third level is individual capital requirements set for the banks by Finantsinspektsioon and the European Central Bank.
The biggest banks in Estonia are supervised by the European Central Bank, which last week allowed all the banks that it supervises to use all of their capital buffers in full. The banks do not need to worry about receiving negative supervisory assessments if they use their capital buffers. If the capital level of a bank falls below the levels set by the buffer requirements, the European Central Bank will ask the bank to submit a capital conservation plan, and will be flexible in assessing such plans.
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