Eesti Pank has updated the principles for defining banks as systemically important
As part of its macroprudential framework Eesti Pank defines each year which banks are important for the functioning of the Estonian financial system and decides how big the additional capital buffers should be that those banks must hold. Eesti Pank this year updated its principles for defining systemically important banks.
The framework needed to be extended because of structural changes at Luminor Bank at the start of 2019, when it brought its Latvian and Lithuanian branches under its head office in Estonia. The total assets of the Estonian banking sector grew substantially in consequence because of the positions abroad. This meant the assessment methodology that had been used so far did not adequately reflect the market share of the domestic business volumes of the banks, meaning the methodology had to be adjusted so that the definition of systemically important banks for Estonia took full account of the ability to finance the Estonian economy. The assessment framework was extended with two indicators for private sector domestic deposits and private sector domestic loans, which have a 50% weighting in the calculation of the total score.
The updated Eesti Pank methodology takes account of the importance of the systemically important banks for the operation of the banking sector and for the supply of financial services to the Estonian economy. The change in the methodology was a forward-looking one that reflects the continuing growth at smaller domestic banks that could increase their systemic importance in the Estonian banking market.
The changes to the framework did not cause any changes this year to the list of systemically important banks or to the buffer requirements set for them. There are four banks in Estonia defined as systemically important, of which Swedbank, SEB Pank and Luminor are required to hold an additional buffer of equity equivalent to 2% of risk assets, and LHV Pank is required to hold a buffer of 1%.
- Principles for identifying the systemically important credit institutions in Estonia and calibrating the buffer rates
- Identifying the systemically important credit institutions in Estonia and buffer rates in 2020 (November 2020)
Systemically important banks are those whose uninterrupted functioning is important for the domestic and European Union financial system and non-financial economy. The goal of identifying systemically important banks and requiring them to hold additional own funds is to increase the security of operation of systemically important market participants and through that of the whole system. The requirement also reduces the potential impact on the taxpayer of any such bank going bankrupt.
The definition of systemically important credit institutions is based on the guidelines of the European Banking Authority (EBA) of the European Union, which set 10 mandatory indicators that describe the importance of banks in four categories for size, importance to the national or European Union economy, complexity and cross-border activity, and interconnectedness with the financial system. The EBA has also agreed a list of indicators from which the designated authority of the member state can choose additional indicators if this is called for because of the nature of the structure of the national financial sector.
The values of the indicators and the weightings given to them are used to calculate an average score for each bank for its market share. Credit institutions that have an average market share of at least 3.5%, or 350 basis points, are classed as systemically important. The size of the buffer rate set for such banks by the designated authority depends on their score, but the maximum buffer rate that can be set is currently 2%.
Table. The core set of indicators for scoring systemic importance in the EBA methodology and the adjusted methodology
Weight - EBA methodology
Weight - adjusted methodology
Importance (including substitutability/financial system infrastructure)
Value of domestic payment transactions
Private sector deposits from depositors in the EU
Private sector loans to recipients in the EU
Value of OTC derivatives (notional)
Intra-financial system liabilities
Intra-financial system assets
Debt securities outstanding
Importance in the Estonian financial system
Private sector domestic deposits
Private sector domestic loans
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