Slower growth in real estate prices has reduced the risks to financial stability



  • The risks to financial stability in Estonia in the near future are small
  • The ability of households to repay their loans remains good and is supported by rapid growth in incomes
  • The ability of companies to repay loans may deteriorate in future if profitability continues to decline
  • The rapid growth in loans and real estate prices in Sweden has not been reduced despite the efforts of the authorities
  • Rising real estate prices in Sweden pose risks to the Estonian economy and the banks operating here
  • The capital buffers of the banks may change as it is planned to require the commercial banks to hold systemic buffers of 1% rather than 2% from August
  • It is planned to apply an additional systemically important bank buffer of 2% to Swedbank and SEB

The risks to Estonian financial stability in the near future are small. Although there is a lot of uncertainty coming from the external environment, the risks to the functioning of the financial sector are reduced by the financial buffers of companies, the relatively good finances of households, and the high levels of own funds in the banking sector.

The international financial environment became less confident at the start of 2016. The uncertainty about the outlook for global growth led to falls on international securities markets. The banking sector in the European Union is facing a large share of bad loans, weak economic growth and low monetary policy interest rates. The risks are made worse by the large debts of many European countries and by the possibility that the United Kingdom might leave the European Union.

Estonian economic growth in 2015 was the slowest of the past six years. Growth mainly slowed because of the economies of several neighbouring countries were weak and there were fewer export opportunities. The acceleration of Estonian economic growth will depend a lot on how the  target markets for exports perform. Despite the slower growth, the ability of Estonian companies and households to repay their loans remains good. For households this was supported by faster growth in incomes while indebtedness remained at the same level. The profitability of companies was reduced by weak foreign demand and rapidly rising labour costs. If profitability continues to decline, the ability of companies to repay their loans may deteriorate in future, and this could worsen the loan quality of the banks.

Although Sweden has taken measures to reduce the risks related to rising real estate prices, rapid growth continued in loans collateralised by real estate and in real estate prices. The high debt level of Swedish households poses the danger that a fall in real estate prices or an increase in loan servicing costs could reduce household consumption. This would affect economic development in the Nordic and Baltic region and lower demand for the output of Estonian companies. It could also increase the liquidity risks of banks operating in Estonia and the risk to the financing of the economy, as the liquidity management of the biggest banks in Estonia is tightly integrated with their parent groups.

Real estate prices rose more slowly in Estonia in 2015 but low interest rates and relatively fast wage growth mean that the risk of excessive growth in real estate prices and in lending remains. To reduce the risk of a credit boom in the future, Eesti Pank took precautionary steps last year by introducing limits on the issuing of housing loans. Eesti Pank stands ready to tighten the current requirements in future and to restrict the use of exceptions if there is a significant decline in the down payments of borrowers and if risks should increase.

To ensure the functioning of the financial system, Eesti Pank has introduced additional capital buffer requirements for the banks. Since 2014 they have been subject to a systemic risk buffer of 2%. The buffer is intended to increase the resilience of the banks so that they could cope with a sharp drop in the economy, and to reduce the risks that come from the concentration of the structure of the banking sector. Eesti Pank plans to change the principles behind the systemic risk buffer from August this year. All the banks operating in Estonia will have to hold a systemic risk buffer of 1%, rather than the current 2%, to mitigate the risks of a sudden economic downturn, which arise from Estonia having a small and open economy. The two systemically important banks, Swedbank AS and AS SEB Pank, will have to hold an additional buffer of 2% to hedge against the risks that come from the concentration of the banking sector. After the change, the two biggest banks operating in Estonia will have a total capital requirement of 13.5%, and all the other banks will have a requirement of 11.5%.