March 1

Decree of the President of Eesti Pank (the Bank of Estonia)

On the Mandatory Restricted Reserve of Credit Institutions and on Evaluating Short-term Dealing Securities

The decree introduced additions to rules on drawing up credit institutions' annual reports. The additions concern the formation of the mandatory restricted reserve and the evaluation of short-term dealing securities.

Under Article 44 of the Law on Credit Institutions, a credit institution has to form reserves in order to cover possible losses. In accordance with Clause 12 of the Instructions on drawing up annual reports, established by the President of Eesti Pank decree of February 5, 1995, a credit institution must proceed from Section 2 of Article 336 of the Business Code in the formation of its mandatory restricted reserve, the size of which has to be defined by the statutes of the credit institution.

Since Article 336, Section 1 of the Business Code provides that the mandatory restricted reserve has to be set up of the annual net profit as well as other funds, the formation of the mandatory restricted reserve for the year 1995 is considered only advisable for credit institutions that already have a general-purpose reserve, unless it is stipulated by the credit institution's statutes.

Short-term (current) dealing securities that have been acquired with the purpose of reselling have to be entered in the books at their fair value, i.e. at the end of the reporting period these securities will be revalued according to their market price. The fair value of the short-term dealing securities is the sum for which they can be exchanged between an interested and knowledgeable seller and an interested and knowledgeable buyer in a deal where both sides aim at making a profit.

Until an official stock exchange begins to function in Estonia, securities quoted by credit institutions can be accepted as marketable. It is advisable to proceed from the minimum purchasing price or the average of the purchase quotations.

March 8

Decree of the President of Eesti Pank

On the Principles of Compiling Consolidated Reports of Credit Institutions

Proceeding from Section 6 of Article 99 of the Law on Credit Institutions and from Articles 51 and 52 of the same law, the decree laid down the principles of compiling consolidated reports.

Under Section 6 of Article 51 of the Law on Credit Institutions, credit institutions that are part of consolidated groups must compile and present to the Eesti Pank consolidated annual reports covering the activity of the entire group. The report consists of the consolidated balance sheet, consolidated profit report and a letter of explanation, and it has to give a correct and reliable overview of the assets and liabilities of all companies of the consolidated group, their financial situation, profits and losses, as if it were one company. For this purpose, uniform rules must be applied in valuating the assets and liabilities of the companies of the group, leaving claims and obligations between companies within the group as well as profits and losses of mutual deals out of the report.

The consolidated report together with the structure of the consolidated group will be drawn up by the parent company. A consolidated group includes, besides the parent company, also all its subsidiary companies and their subsidiaries regardless of where they are registered. Subsidiary companies that are not credit institutions but are involved in servicing or expanding the activities of credit institutions (leasing, factoring, information processing, etc.) are also subject to consolidation.

On the consent of the Eesti Pank it is allowed to leave out of the consolidated report such companies of the group:

In compiling the 1995 consolidated reports credit institutions are allowed to proceed from the above principles with their subsidiary companies, replacing the equity method by the full consolidation method and applying the equity method only for associated companies. Consolidation is based on the standards of the International Accounting Standard Committee (IASC).

Consolidated reporting on financial institutions and investment companies of mixed interests and their subunits does not mean that such separate companies and their subunits come under the supervision of Eesti Pank that only deals with credit institutions.

March 29

Decree of the President of Eesti Pank

On Establishing the Liquidity Requirements

Proceeding from the need to update the prudential ratios of credit institutions established by the Eesti Pank decree of December 12, 1995, the Eesti Pank as of May 1, 1996 set a new prudential ratio, liquidity II, at a minimum of 35%.

Liquidity II reflects the ratio of highly liquid assets (cash and assets that become cash within one month or which can be turned into cash within one month) and short-term obligations (which may or must be met within the term of one month) at a given moment in time. This prudential ratio is a part of the credit institutions' liquidity reports.

The new minimum limit is not comparable to the earlier one since the methodology of calculating it has been considerably improved.