Eesti Pank specified its macroprudential policy principles
Changes to the Eesti Pank Act came into force on 19 May 2014 giving the central bank a clearer mandate than before to act as a macroprudential authority in Estonia. Due to its renewed duties Eesti Pank has drawn up a framework that specifies the objectives of macroprudential policy and the role and principles of central bank’s work in macroprudential policy.
Macroprudential policy covers systemic risk analysis and assessment and the deployment of measures to help ensure support financial stability. Financial stability is complex and there may be various forms of systemic risk threatening it. For the sake of clarity and transparency in the decisions of Eesti Pank on macroprudential policy, the ultimate objective of financial stability has been associated with intermediate objectives (for example to mitigate excessive credit growth, and to lower liquidity risk and funding risk in the financial system, among others). In addition it has been shown more clearly what measures Eesti Pank can take in order to strengthen the resilience of financial system and reduce the build-up of imbalances.
Eesti Pank can use several macroprudential measures. Some of them, for example capital buffer requirements, are based on European Union regulations and have been harmonised in the union. Other measures are guided by the Credit Institutions Act and include, for example, requirements for issuing loans. In addition Eesti Pank can take measures with indirect influence, for example give advice to market participants and also give its opinions and recommendations on measures that fall within the remit of other institutions.
Effective macroprudential policy is built on good cooperation, both domestic (between central bank, the Financial Supervision Authority, the Ministry of Finance, and other institutions) as well as international.
Among the macroprudential measures Eesti Pank has so far introduced a 2% systemic risk buffer for the commercial banks to strengthen the resilience of banks to possible shocks in the banking sector. Three requirements for mortgage loans issued by banks took effect in March this year as a preventive step to lower loan boom risk in the future (see table). Starting from autumn 2015 Eesti Pank will be making decisions in every quarter on the rate of countercyclical buffer.
Table. The instruments used by Eesti Pank for macroprudential supervision
Systemic risk buffer
1 August 2014
Limits for mortgages**
1 March 2015
debt service-to-income (DSTI)
* Eesti Pank will apply the framework for assessing and calculating of the countercyclical buffer and take a decision on the rate for it in autumn 2015.
** The limits may be breached by 15% of the volume of mortgages issued each quarter.*** Up to 90% for loans guaranteed by KredEx.