Eesti Pank is requiring banks to hold larger capital buffers because of the rapid growth in credit
Eesti Pank is raising the countercyclical capital buffer rate for the banks from 1% to 1.5%, as the growth in lending this year has been notably faster than the long-term growth in the economy. The higher level of the capital buffer will help to reduce the risks arising from the fast growth in the loan portfolios of the banks, and will ensure that the banks are able to continue funding the Estonian economy. The higher rate of the capital buffer requirement will start to apply from 1 December 2023.
Growth in lending this year has been substantially faster than the eight-year average of nominal growth in the economy, which includes the effect of inflation, and it is forecast that next year it will overtake the rate of growth in the economy for the current year. This means that companies and people will have to cope with larger debt levels in the coming years. Higher debt levels mean that a deterioration in the economic climate could make problems with loan repayments worse. A higher countercyclical capital buffer will help ensure that the banks have enough capital reserves to cover any possible loan losses, and so ensure that they can keep funding the Estonian economy.
Eesti Pank considers that there is no risk that the small rise in the countercyclical capital buffer rate will have a significant negative impact on access to loans, or will raise loan interest rates for businesses and households. The capital buffers of the banks are currently at a good level, the banks are profitable, and the requirement will only come in after a year, giving the banks sufficient time if they need to accumulate additional capital.
Eesti Pank will assess the state of the loan market again in six months, and is ready to cancel the rise in the buffer if the growth in lending has clearly slowed and a deterioration in the economic or financial climate means that capital requirements are starting to restrict lending excessively.
The Financial Stability Review published by Eesti Pank in November finds that the risks to the financial sector have increased a little. One risk is the rapid growth in credit. The yearly rate of growth in the total debt of companies and households increased to 9% by the end of the second quarter of 2022, which is substantially faster than the long-term nominal growth of 6-7% in the economy. The rate of growth accelerated further in the third quarter, and yearly growth in housing loans and corporate loans was over 12% at the end of September. Borrowing was less active in October than in the preceding months, but the loan portfolio of the banks still continued to grow steadily.
Eesti Pank assesses the risks to the functioning of the Estonian financial sector constantly, and can take steps to minimise those risks if needed. The results of its analysis are published twice a year by Eesti Pank in the Financial Stability Review.