Eesti Pank profits grew last year to 34.1 million euros

Eesti Pank's net profit grew last year to 34.1 million euros from the 22.7 million of 2011.

Audited figures show that Eesti Pank had total net income of 50.3 million euros in 2012, up from the 42 million in net income a year earlier.

The net income for 2012 was reduced by general risk provisions of 11.5 million euros, made for the first time to cover risks. Risk provisions are the first line of defence against losses on top of the reserves already held at the central bank.

“Euro area central banks, including Eesti Pank, have together taken large but considered risks during the resolution of the crisis. It is sensible to hedge the increased risks by putting some of our earned income aside as a provision”, said the Governor of Eesti Pank Ardo Hansson.

Last year, Eesti Pank received 51.6 million euros in income from the joint monetary policy and currency issuance activities of the Eurosystem, which is the combined form of the national central banks of the euro area and the European Central Bank. In 2011 income from this source was 20.2 million euros. Earnings from investment activities were 8.1 million euros last year, and 14.7 million in the previous year. Eesti Pank started investing in shares in May 2012 in order to diversify risks, and by the end of the year the share portfolio had grown to 15 million euros. The central bank earned a further 0.4 million euros from the sale of numismatic products in 2012, having earned 2.1 million in 2011.

Eesti Pank's operating expenses fell last year to 16.2 million euros from the 19.4 million of 2011. If the costs of cash and the one-off costs of the changeover to the euro are excluded, then expenses increased by one percent in 2012. Staff costs increased by two percent to 7.9 million euros while administrative costs fell by three percent to 5.2 million euros.

The Supervisory Board of Eesti Pank will start to discuss the distribution of profits at its meeting of 7 May. Last year the Supervisory Board set a long-term goal of increasing the reserves to 3.5 times their level at the time, meaning an increase of around one billion euros to 1.3 billion euros.

The Supervisory Board decided that the relative level of the Eesti Pank reserves should increase to the average level of the central banks of the euro area, as the balance of risks to reserves of the Eurosystem as a whole is considered when monetary policy decisions are made.

Since 1992 Eesti Pank has allocated a total of 115 million euros to the state budget.


Risks to Eesti Pank in monetary policy

The risks to Eesti Pank under the currency board came from the investments of the central bank and from the banking system. When Eesti Pank became a euro area central bank, it also took on the risks of the euro area as a whole, which are mainly related to monetary policy operations.

The Eurosystem is made up of the central banks of the euro area countries and the European Central Bank. The Eurosystem divides the income and costs of the single monetary policy so that the income earned from monetary policy loans to euro area banks is divided among the central banks to match their participation in the Eurosystem, and the same is done with risks. Eesti Pank's participation in the Eurosystem is 0.26 percent.

The Eurosystem's monetary policy operations currently fall into two groups, monetary policy loans to commercial banks, which stood at 1.14 trillion euros at the start of March, and the Securities Markets Programme, SMP, which stood at 0.2 trillion euros.

Hedging of monetary policy risks

To hedge against the risks of the monetary policy loans, the central banks of the Eurosystem have the right of claim against banks that have taken loans. The content of the collateral is the equity of the bank that has taken the loan. The euro area central banks only give out loans if collateral is provided, meaning that if the bank cannot pay back its loan to the central banks, then the central banks can instead take the collateral. If even this is not enough, the credit risks for the central banks is reduced by the national authorities and their desire to recapitalise their insolvent banks.

The SMP is backed by the promises of governments to meet all their obligations in full, meaning that if governments fail to meet their obligations fully or partially, including their obligations to the central banks of the euro area, then the euro area central banks suffer the loss.

It became possible to make provisions for risks when the financial accounting principles of the European System of Central Banks were changed in 2012 to allow the national central banks to make provisions for risk. Prior to this the only central banks that were able to make such provisions were those of countries that made specific allowance for this in their national law.