1/2024 Competition between banks in the Estonian lending market
Occasional Papers of Eesti Pank 1/2024
Authors: Jana Kask, Timo Kosenko, Taavi Raudsaar
This paper analyses the functioning of competition between banks in the Estonian lending market. The nature of competition in the very small Estonian market is determined by an oligopoly market structure where a small number of large banks dominate. The past couple of decades have seen periods with greater and lesser competition, but competition in the lending market in Estonia could in general be considered weaker than that in most other advanced economies. This is indicated by loans being expensive over the long term while profitability in the banking sector remains consistently high. Borrowers encounter the weakness of competition most in the higher price of loans, though this has not restricted access to lending. The profitability of the banking sector is important for the supply of loans and for financial stability, but it is also important to avoid loans being so expensive that they make the economy less competitive and harm growth in it.
This occasional paper finds that ways of increasing competition in Estonia lie above all in making the supply of loans more effective. This analysis conducted jointly with Finantsinspektsioon concludes that it could and should be simpler and cheaper for borrowers to refinance their housing loans by transferring them to another bank. Borrowers should also be able to choose between different reference interest rates, and to change their decisions about the rate during the repayment period simply and cheaply. Lower transaction costs, more options for setting the price of loans, and increased information for borrowers would help the lending market function better and also encourage competition between the banks.
JEL classification: G21, D43, L11
DOI: 10.23656/24613800/012024/0208
The views expressed in this Occasional Paper are those of the authors and do not necessarily represent the official views of Eesti Pank
