CHRONICLE OF MONETARY POLICY OF 1998
JUNE AND JULY

1 JUNE

Decree of the President of Eesti Pank (Bank of Estonia)
On Extending the Test Period of Credit Institutions' Capital Adequacy Reports

In order to improve the quality of the capital adequacy reporting, the Decree extended the test period set by the 1 April 1998 Decree of the President of Eesti Pank (see Eesti Pank Bulletin No 3, 1998, p 3) until 30 June 1998. The deadline for submitting the reports was extended accordingly.

4 JUNE

In the framework of the security conference of the central banks of the European Union (EU) held from 2 to 4 June in Helsinki and Tallinn, Eesti Pank was visited by the security chiefs of the central banks of the EU countries and several international financial organizations.

7 JUNE

The Board of Eesti Maapank (Land Bank of Estonia) settled to call the extraordinary general meeting of the bank's shareholders for 18 June to decide the termination of activities of the bank.

8 JUNE

Decision of the Board of Eesti Pank
On Partial Suspension of the License of Eesti Maapank

Proceeding from Article 17 of the Credit Institutions Act and Article 9, Section 3 of the Law on the Central Bank, and in order to equally guarantee the interests of the creditors and depositors of Eesti Maapank, the Board of Eesti Pank decided to partially suspend the license of Eesti Maapank from 8 July 1998.

The action followed Maapank's failure to meet the prudential ratios (the bank's equity was below the required minimum, the reserve requirement had not been met since the beginning of April and the bank had repeatedly used its reserve requirement, violated the daily minimum level of the settlement account and was unable to meet the additional liquidity requirement). On 26 May, Eesti Pank Banking Supervision obliged Maapank to meet prudential ratios by 5 June 1998 the latest. However, the owners of Maapank were unable to raise the necessary funds.

10 JUNE

Riigikogu (the Parliament) of the Republic of Estonia approved the 1997 Annual Report of Eesti Pank. The balance sheet of Eesti Pank stood at EEK 12,037,078,384.70 on 31 December, having increased by 33% over the year.

15 JUNE

Decisions of the Board of Eesti Pank
On Relieving the Head of the Eesti Pank Banking Supervision from Her Duties

Proceeding from Article 9, Section 2, Clauses 3 and 4 of the Law on the Central Bank, the Board of Eesti Pank relieved Pilvia Nirgi from her duties as Head of the Banking Supervision and Member of the Executive Management of Eesti Pank as of 12 May 1998.

* * *

On Changes in the Reserve Requirement Calculation Basis of Credit Institutions

In order to improve the efficiency of the reserve requirement as an important means of monetary policy and to strengthen the liquidity buffer of the Estonian monetary system, and in accordance with Article 9, Section 2, Clause 1 of the Law on the Central Bank, Article 36, Section 2 and Article 38, Section 3 of the Credit Institutions Act, the Board of Eesti Pank made amendments in Clause 2 of its Decision from 7 May 1996 On the Credit Institutions' Reserve Requirement (see Eesti Pank Bulletin No 5, 1996, p 5).

Under the new wording of Clause 2, among the reserve requirement calculation basis have to be included all demand, time and savings deposits of the credit institutions' customers, securities and other similar liabilities as well as off-balance sheet liabilities. The reserve requirement calculation basis excludes liabilities to Eesti Pank, the government's loan funds and foreign assistance funds. Liabilities to other credit institutions and off-balance sheet liabilities will be included in the reserve requirement calculation basis according to the procedures specified by the President of Eesti Pank.

The Decision also changed the Decision of the Board of Eesti Pank from 15 April 1997 On Changing the Capital Adequacy Ratio (see Eesti Pank Bulletin No 3, p 4) so that from 19 June 1998, cash may not account for more than 2% of the reserve requirement calculation basis.

The President of Eesti Pank was asked to make the necessary changes in the procedures for calculating and meeting the reserve requirement of credit institutions.

* * *

On Issuing A Commemorative Coin

To mark the 80th anniversary of Eesti Pank and the introduction of the European common currency the euro, and in accordance with Article 2 of the Currency Law and Article 9, Section 2, Clause 9 of the Law on the Central Bank, it was decided to issue 5,000 gold coins with the diameter of 13.92 millimetres and the weight of 1.73 grams. The nominal value of the coin will be fixed at the 1 January 1999 exchange rate of the euro against the Estonian kroon. A closed contest will be held for the best design of the coin.

16 JUNE

Decree of the President of Eesti Pank
On Payment Statistics Reporting by Credit Institutions

Proceeding from Article 52 of the Credit Institutions Act and in connection with the end of the test period of payment statistics reporting (see Eesti Pank Bulletin No 8, 1997, p 4 and No 1, 1998, p 6), the Decree endorsed from 1 July 1998 the Payments Report (excluding card payments), the Card Transactions Report, the Card Report and the Automated Teller Machines' and Points of Sales' Report. The terms used in payment statistics were specified as well.

17 JUNE

Eesti Pank made public the Supplementary Memorandum of Economic Policies of the Estonian Government and the central bank until the end of 1998. Besides the general evaluation of the country's economic situation the Memorandum also defines the economic policy priorities for 1998.

The Memorandum is based on a strong fiscal policy. The general government surplus is projected at 2.5% of the gross domestic product (GDP) and the Stabilization Reserve Fund is planned to increase to EEK 2.8 billion by the end of the year. By 1 January 1999, the Government will formalize the legal status of the Fund and the procedures for making contributions to the Fund from the budget surpluses of the subsequent years. The 1999 state budget will be presented on the basis of the consolidated central government, including all extrabudgetary funds and utilization of foreign loans.

In monetary and banking policy, the banking supervision will proceed from the principles of consolidation from the second half of 1998. From 1 July, the consolidated capital adequacy regulation which includes an allowance for market risk will be introduced. It is in compliance with the EU Capital Adequacy Directive. Uniform six-category loan classification procedures will be implemented for all banks, the requirements regulating risk concentration, investments and liquidity will be improved. The calculating basis of the reserve requirement will be expanded to guarantees given to other financial institutions. From October, new requirements will be introduced for commercial banks aimed at more extensive public dissemination of financial information.

The Memorandum was designed in close co-operation with the International Monetary Fund (IMF).

* * *

Riigikogu approved the report on fulfilling the 1997 state budget; the income amounted to EEK thousand 13,966,021 and spending to EEK thousand 12,573,339.9.

Riigikogu also passed the supplementary budget for 1998 in which income and spending are balanced at EEK 314,213,000.

* * *

Decrees of the President of Eesti Pank
On Changes in the Procedure for Calculating and Meeting the Reserve Requirement

Proceeding from the need to improve the efficiency of the reserve requirement and from the decisions of the Board of Eesti Pank On the Credit Institutions' Reserve Requirement (from 7 May 1996; see Eesti Pank Bulletin No 5, 1996, p 6), On Changing the Capital Adequacy Ratio (from 15 April 1997; see Eesti Pank Bulletin No 3, 1997, p 4) and On Changes in the Reserve Requirement Calculation Basis of Credit Institutions (from 15 June, 1998; see p 4) the Decree based on Article 52 of the Credit Institutions Act improves the structure of the basis for calculating the reserve requirement.

Clause 1 of the Decree of the President of Eesti Pank from 7 May 1997 On Partial Changes in the Decree of the President of Eesti Pank from 12 June 1996, On the Procedure for Calculating and Meeting the Reserve Requirement (see Eesti Pank Bulletin No 4, 1997, p 3) was reworded as follows:
To calculate the total reserve requirement calculation basis in accordance with Clause 1 of the Board of Eesti Pank Decision No 7-2 from 15 June 1998. The amounts payable to non-resident credit institutions exceeding the claims on non-resident credit institutions are to be calculated among the total reserve requirement basis. The amounts payable to resident credit institutions are not to be calculated among the total reserve requirement basis. Of the off-balance sheet liabilities the financial guarantees to financial institutions and non-resident credit institutions are to be calculated among the total reserve requirement basis.

The electronic format of the reserve requirement report endorsed under the 7 May 1997 Decree was invalidated together with the instructions on filling in the report, and a new format was introduced. The credit institutions will have to use the new reserve requirement reporting format from 20 July 1998.

Under the Decree, the credit institutions will also have to provide data on financial guarantees issued to financial institutions and non-resident credit institutions every ten days as required by the Eesti Pank Banking Statistics and Analysis Department.

The Decree took effect from 1 July 1998.

* * *

On Changing the Limits for Meeting the Reserve Requirement

Due to the declining demand for cash, as well as the need to increase the liquidity buffers of the accounting system and to reduce the security risks involved in cash storage, the Decree determined that from 19 June 1998, EEK cash up to 20% of the total reserve requirement is to be calculated as a part of credit institutions' reserve requirement.

The Decree was based on the decisions of the Board of Eesti Pank On the Credit Institutions' Reserve Requirement (from 7 May 1996; see Eesti Pank Bulletin No 5, 1996, p 6), On Changing the Capital Adequacy Ratio (from 15 April 1997; see Eesti Pank Bulletin No 3, 1997, p 4), and On Changes in the Reserve Requirement Calculation Basis of Credit Institutions (from 15 June 1998, see p 4), as well as the Decree of the President of Eesti Pank On the Procedure for Calculating and Meeting the Reserve Requirement (from 12 June 1996; see Eesti Pank Bulletin No 5, 1996, p 7) and the amendments made in it subsequently.

The Decree also invalidated Clause 1 of the Decree of the President of Eesti Pank from 7 May 1997 On Changing the Limits on Meeting the Reserve Requirement which allowed to calculate up to 30% of EEK cash as a part of credit institutions' reserve requirement (see Eesti Pank Bulletin No 4, 1997, p 3).

18 JUNE

At the proposal of the President of the Republic of Estonia, Riigikogu decided to appoint Mart Sõrg as Chairman of the Board of Eesti Pank. Prior to his appointment, M. Sõrg had been a Member of the Board. He is Vice-Dean of the Faculty of Economic and Business Administration of University of Tartu and ordinary professor of money and banking.

Riigikogu made amendments in the Law on the Central Bank so that in case no Chairman of the Board of Eesti Pank has been appointed, the board meetings will be chaired by Member of the Board elected from among the members present. Under the second amendment, the mandate of the 1993 Board of Eesti Pank will be extended by three months if no new board has been appointed by the time the mandate of the old board expires.

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The extraordinary general meeting of the shareholders of Eesti Maapank decided in favour of voluntary liquidation of the bank.

28 JUNE

As the assets of Eesti Maapank (Land Bank of Estonia) were inadequate to meet the claims of the creditors in full, which is the mandatory requirement for voluntary liquidation, the Board of Eesti Pank decided to reject the application of the extraordinary general meeting of the Maapank shareholders for voluntary liquidation and launch the bankruptcy proceedings against Eesti Maapank. The Decision of the Board was based on Article 9, Section 3 of the Law on the Central Bank and Article 77, Sections 1 and 4, Article 79, Article 80, Sections 1 and 3 and Article 81, Sections 1 and 2 of the Credit Institutions Act.

In accordance with the Credit Institutions Act the license of Eesti Maapank was revoked as of 29 June 1998.

To safeguard the interests of the Maapank depositors, Eesti Pank proposed the Government to apply the principles of the Deposit Insurance Fund Act although this act only takes effect from 1 October 1998 (see Eesti Pank Bulletin No 3, 1998, p 3).

29 JUNE

Riigikogu decided to allow the Government to use up to EEK 266 million from the Stabilization Reserve Fund for guarantee the compensating the deposits of private individuals and companies as well as local governments in the failed Eesti Maapank. The money has to be repaid to the Fund in seven years' time. Another EEK 100 million from the supplementary budget was allocated to the Government Reserve Fund for compensating the deposits lost in Maapank.

30 JUNE

Decree of the President of Eesti Pank
On Prudential Ratios of Credit Institutions

Proceeding from the need to improve the methodology of calculating the prudential ratios of the credit institutions and in accordance with Articles 36 and 52 of the Credit Institutions Act, the Decree endorsed from 1 July 1998 the new rules for capital adequacy reporting and the reporting procedures on the solo and consolidated basis (Appendix 1 of the Decree), the rules for investment reporting and reporting procedures on the solo and consolidated basis (Appendix 2), the rules for the credit institutions' risk concentration reporting and the reporting procedures on the solo and consolidated basis (Appendix 3), and the rules for the liquidity reporting and the reporting procedures (Appendix 4). The electronic format of the reports was also specified.

The Decree also invalidated the earlier decrees of the President of Eesti Pank On the Credit Institutions' Prudential Ratios (from 12 December 1995), On Establishing the Liquidity Requirements (from 29 March 1996, see Eesti Pank Bulletin No 3, 1996, p 5), On Changes in the Reporting of the Credit Institutions' Own Funds and Capital Adequacy (from 4 July 1997; see Eesti Pank Bulletin No 5, 1997, p 3). The Decree of the President of Eesti Pank On the Prudential Ratios of Credit Institutions (from 24 April 1997; see Eesti Pank Bulletin No 3, 1997, p 5) was also invalidated, with the exception of Clause 1.

The endorsement of the Decree means that the EU Capital Adequacy Directive regarding the market risks of the credit institutions' trading portfolios will be fully implemented. When considering the open foreign exchange positions (the difference of assets and liabilities) the positions of the German mark and the Estonian kroon will be regarded as one joint position. A limit of volume will be applied to the DEM/EEK joint position - the open position should not exceed 15% of credit institution's net own funds.

1 JULY

The City Court of Tallinn launched bankruptcy proceeding against Eesti Maapank.

* * *

In view of the fact that the Deposit Insurance Fund Act cannot be applied in the course of the bankruptcy proceeding of Eesti Maapank because it does not take effect before 1 October 1998, and acknowledging that the principles of the Act should be observed, the Board of Eesti Pank decided to allocate an additional EEK 60 million into the state budget for compensating the deposits lost in Maapank. The money was taken from the 1997 profit of Eesti Pank.

12 JULY

Shareholders of Hansapank and Eesti Hoiupank (Estonian Savings Bank) at their general meetings approved the merger agreement signed between the two banks on 11 June.

13 JULY

Eesti Pank gave its consent to the merger of Hansapank and Eesti Hoiupank as well as Eesti Ühispank (Union Bank of Estonia) and Tallinna Pank.

24 JULY

Decree of the President of Eesti Pank
On Invalidating the Decree of the President of Eesti Pank from 26 February 1996

Proceeding from Article 52, Section 1 of the Credit Institutions Act and in connection with the endorsement of payment statistics reporting, the Decree invalidated from 1 August 1998 the Decree of the President of Eesti Pank On Reports on the Cash Turnover of Estonian Kroons in the Credit Institutions (from 26 February 1996; see Eesti Pank Bulletin No 2, 1996, p 4).