CHRONICLE OF MONETARY POLICY OF 1999
JUNE–SEPTEMBER

2 June

A three-day seminar of the central banks of the Baltic countries began in Vilnius. The panel discussion this time focussed on European integration.

3 June

The Board of the Estonian Banking Association appointed the former legal adviser Katrin Talihärm to the post of Managing Director. She took office on 2 August.

7 June

The Tartu City Court declared ERA Pank bankrupt.

8 June

Riigikogu (the Parliament) approved the appointment of Kalle Jürgenson as a substitute member of the Board of Eesti Pank because one of the regular members, Mihkel Pärnoja, became Minister of Economy.

15 June

Decrees of the Governor of Eesti Pank
On the Procedure for Calculating and Meeting the Reserve Requirement

Due to the necessity to improve the recompense principles for monies kept on the settlement accounts at Eesti Pank and proceeding from the Decision of the Board of Eesti Pank from 20 May 1999 On Payments for the Credit Institutions' Funds Kept on Current Accounts at Eesti Pank as well as based on the Article 11, Section 1, Clause 2 of the Central Bank Act it was decided to establish the Procedure for Calculating and Meeting the Reserve Requirement in the changed wording (see below).

The minimum daily balance of credit institutions' clearing accounts opened at Eesti Pank was set at 40% of the total reserve requirement and as one part of the reserve requirement EEK cash up to 20% of the total reserve requirement is also calculated.

The Decree of the Governor of Eesti Pank from 30 October 1997 On Setting Additional Liquidity Requirements on Credit Institutions (see Eesti Pank Bulletin (EPB) No 7, 1997, p 3) was changed by establishing specifications of the additional liquidity requirement calculation basis and the rules of calculating interests to sums included in additional liquidity requirement.

The following Decrees of the Governor of Eesti Pank were revoked:

On Procedure for Calculating and Meeting the Reserve Requirement and On Establishment of Limits for Meeting the Reserve Requirement, both from 12 June 1996 (see EPB No 5, 1996, pp 6-7).

On Amendments in the Procedures of Calculating and Meeting the Reserve Requirement, from 14 March of 1997 (see EPB No 3, 1997, p 3).

On Changing the Limits on Meeting the Reserve Requirement and On Partial Changes in the Decree of the Governor of Eesti Pank from 12 June 1996, On the Procedure for Calculating and Meeting the Reserve Requirement, both from 7 May 1997(see EPB No 4, 1997, p 3).

On Changing the Limits on Meeting the Reserve Requirement, from 30 October 1997 (see EPB No 7, 1997, pp 3-4).

Clause 1 of the Decree On Changing the Procedure for Calculating and Meeting the Reserve Requirement and the Decree On Changing the Limits on Meeting the Reserve Requirement, both from 17 June 1998(see EPB No 4, 1998, pp 5-6).

This Decree took effect from 1 July 1999.

PROCEDURE FOR CALCULATING AND MEETING THE RESERVE REQUIREMENT

1. Credit institutions:

1.1 Have to calculate the total reserve requirement basis in accordance with Clause 1 of the Board of Eesti Pank Decision No 7-2 of 15 June 1998 "Changing the Total Reserve Requirement Calculation Basis". Accounts payable to non-resident credit institutions exceeding the claims to non-resident credit institutions are to be calculated among the total reserve requirement basis. Accounts payable to resident credit institutions are not to be calculated among the total reserve requirement basis. Of off-balance sheet commitments, financial guarantees to financing institutions and non-resident credit institutions are to be calculated among the total reserve requirement basis.

1.2 Have to calculate the total reserve requirement of the next month on the basis of the balance sheet averages of the ends of three ten-day periods, ie of the end of the previous month and of the 10th and 20th day of the current month.

1.3 Have to submit to Eesti Pank balance sheets as of the 10th and 20th day in accordance with the form established by the Decree of the Governor of Eesti Pank No 2 of 31 January 1997 "Reports of Credit institutions" by the next but one banking day at the latest after the reporting day.

The report "Reserve Requirement Calculation" has to be submitted together with the balance sheet as of the 20th day. If a reporting day (the 10th or the 20th day) coincides with a holiday (a weekend, public or bank holiday), the reports have to be presented as of the day preceding the holiday.

1.4 Have to calculate as a part of the reserve requirement EEK cash, the proportion of which in the total reserve requirement is established by an Eesti Pank Governor's decree.

2. The total reserve requirement for the next month shall be valid starting from the first banking day of each month.

3. The balance of the settlement account of a credit institution should not fall below the minimum reserve requirement with Eesti Pank in any banking day, excluding the case stipulated in Clause 8 of the present procedure.

4. The minimum reserve requirement with Eesti Pank is the total reserve requirement of which the EEK cash in the permitted amount has been subtracted.

5. Eesti Pank pays interests to a credit institution on the amounts kept with Eesti Pank for meeting the minimum reserve requirement. These interests are paid on the part of the settlement account average balance, which does not exceed the minimum reserve requirement valid in the reporting month. The settlement account average balance of the reporting month is calculated on the basis of the daily balances of the settlement account (including non-banking days). Eesti Pank pays standing deposit facility interests on the part of the settlement account average balance, which exceeded the minimum reserve requirement with Eesti Pank.

6. The interest is calculated as a monthly interest for 30 days. The calculated interest is rounded up to the whole sents, whereas no rounding up is used in interim calculations. Eesti Pank pays the interest on the first banking day of the next month.

7. The interest rates payable by Eesti Pank for the reserve requirement and for the standing deposit facility shall be established by an Eesti Pank Governor's decree.

8. A credit institution, which has signed a contract with Eesti Pank on meeting the reserve requirement, has to meet the minimum reserve requirement as the average of the reporting month.

9. A minimum daily balance rate of the settlement account with Eesti Pank is established for credit institutions which have signed a contract with Eesti Pank on meeting the minimum reserve requirement. The rate is fixed with an Eesti Pank Governor's decree.

* * * * *

On Establishing Interest Rates for the Reserves and Standing Deposit Facility

Due to the necessity to improve the recompense principles for monies kept on the settlement accounts at Eesti Pank and proceeding from the Decision of the Board of Eesti Pank from 20 May 1999 to recompense for monies kept by credit institutions on the settlement account at Eesti Pank as well as based on the Article 11, Section 1, Clause 2 of the Central Bank Act it was decided to establish the deposit interest rate of the European Central Bank valid on the last banking day of the reporting month as an interest rate payable to credit institutions for the reserves kept at Eesti Pank and an interest rate for the standing deposit facility and a fine with an interest rate of 20% a year (0.056% a day).

The following Decrees of the Governor of Eesti Pank were revoked: On the Establishment of Interest Rates, from 12 June 1996(see EPB No 5, 1996, p 8); On Changing the Interest Rates, from 30 October 1997(see EPB No 7,1997, p 4); On Changing the Interest Rate, from 24 December 1998(see EPB No 7, 1998, p 10).

The Decree took effect from 1 July 1999.

* * * * *

Riigikogu (the Parliament) approved the 1998 Financial Report of Eesti Pank.

16 June

A round-table meeting took place at the museum of Eesti Pank to discuss the problems of Y2K in Estonian banking. The meeting was organised jointly by Eesti Pank, the Estonian Banking Association and commercial banks.

18 June

The reception of the Governor of Eesti Pank in the Maardu manor on the occasion of the seventh Anniversary of the reintroduction of the Estonian kroon featured the unveiling of a memorial to Hermann Jensen von Bohn who had financed the printing of the first full-length Estonian-language Bible 260 years ago.

22 June

Decisions of the Board of Eesti Pank
On Freeing a Member of the Executive Management of His Duties and Appointing a New Member

In accordance with Clause 3, Section 2 of Article 9 of the Central Bank Act and Clause 4.2 of the Statutes of Eesti Pank and taking into consideration that the labour contract between Eesti Pank and Aare Järvan had been suspended from 1 July 1998, the Board decided to free Aare Järvan of the duties of the Member of the Executive Management retroactively from 1 July 1998. From 22 June 1999 the new Member of the Executive Management is Märten Ross, Head of the Central Bank Policy Department.

* * * * *

On Revoking the Decisions of the Board of Eesti Pank on Introducing Prudential Ratios

In view of the need to bring the prudential ratios of credit institutions, including the legal acts of Eesti Pank concerning capital and reserves, into line with the provisions of the new Credit Institutions Act, and in accordance with Clause 1, Section 2 of Article 9 of the Central Bank Act and Section 3 of Article 71 of the Credit Institutions Act, the Board of Eesti Pank declared null and void the following Decisions: On Capital and Reserves of Credit Institutions, from 2 September 1994 (see EPB No 7, 1994, p 5); On Prudential Ratios of Credit Institutions, from 5 December 1995 (see EPB No 1, 1996, p 5); On Equity of Credit Institutions, from 13 February 1996 (see EPB No 2, 1996, pp 3-4).

The Decision took effect from 1 July 1999.

* * * * *

On Writing off Non-Performing Loans

In view of the need to bring the evaluation of the assets (including loans) of credit institutions into line with the provisions of the new Credit Institutions Act and in accordance with Clause 1, Section 2 of Article 9 of the Central Bank Act, the Board of Eesti Pank declared null and void its Decision from 21 December 1993 On Writing off Hopeless Loans (see EPB, 4th quarter of 1993, p 14).

The Decision took effect from the moment of signing.

* * * * *

On the Procedure of Issuing Licences to Credit Institutions

In view of the need to bring applying for and issuing of banking licences into line with the new Credit Institutions Act and in accordance with Clause 1, Section 2 of Article 9 of the Central Bank Act and Section 7 of Article 13 of the Credit Institutions Act, the Board of Eesti Pank decided that the decision of granting or refusing a licence to a credit institution will be made by the Board of Eesti Pank on the suggestion of Eesti Pank's Banking Supervision Department. The Governor of Eesti Pank was entrusted with introducing the procedure of issuing and applying for a licence by credit institutions and branches of foreign credit institutions and the list of documents to be submitted.

The Decision revoked the earlier Decisions of the Board of Eesti Pank from 7 March 1995 On the Procedure of Establishing and Licensing Credit Institutions and On the Procedure of Establishing and Licensing Branches or Subsidiaries of Foreign Credit Institutions (seeEPB No 3, 1995, p 3) andfrom 13 February 1996 On Changes in the Procedure of Establishing and Licensing Branches or Subsidiaries of Foreign Credit Institutions (see EPB No 2, 1996, p 3).The abolition of the above Decisions took effectafter the Decree of the Governor of Eesti Pank On the Procedure of Applying for and Granting of the License to Credit Institutions and Branches of Foreign Credit Institutions and the List of Documents Submitted on Applying for the Credit Institution Licence had been enforced as provided by the legal act.

* * * * *

Decree of the Governor of Eesti Pank
On Reporting by Credit Institutions

Proceeding from Article 91 of the Credit Institutions Act and in view of the need to update the legislation concerning credit institutions, the Decree amended Appendices 1 and 6 of the Decree on reports by credit institutions, from 31 January 1997 (about the Decree see EPB No 2, 1997, pp 5-6).

Proceeding from Article 91 of the Credit Institutions Act, the following Decrees of the Governor of Eesti Pank were enacted: On Supplementary Statistical Reporting by Credit Institutions, from 1 April 1997 (see EPB No 3, 1997, p 4); On Payment Statistics Reporting by Credit Institutions, from 16 June 1998 (see EPB No 4, 1998, p 5); On Foreign Currency Purchase and Sale Report, from 17 August 1998 (see EPB No 5, 1998, p 5); On Credit Institutions' Reporting on Off-Balance Sheet Transactions, from 24 December 1998 (see EPB No 7, 1998, p 9); On Declaring Null and Void the Report Form "Off-Balance Sheet Liabilities" and Its Electronic Format, from 30 December 1998 (see EPB No 7, 1998, p 11). In the appendices concerning the electronic format of the reports required by the above Decrees the wording "Eesti Pank Clearing Division" was replaced with "Eesti Pank Clearing and Settlement Department". Also, the structure of the message described in Appendix 2 of the Decree of the Governor of Eesti Pank On Foreign Currency Purchase and Sale Report, from 17 August 1998, was adjusted.

The Decree took effect on 9 July 1999.

25 June

Estonia joined the international anti-money laundering convention.

28 June

Riigikogu passed a law on the 1999 austerity budget, which cut the income and expenditures of the state budget by 893,000 kroons. The income and expenditures of the Pension Fund and the Health Insurance Fund were also adjusted.

* * * * *

Decree of the Governor of Eesti Pank
On Issuing a One-kroon Commemorative Coin

In accordance with Article 2 of the Currency Law and the Decision of the Board of Eesti Pank from 4 March 1999, a new commemorative one-kroon coin was put into circulation, to mark the 130th Anniversary of the first all-Estonian Song Festival. The obverse of the coin carries the image of the Song Festival Grounds; the reverse bears the year, a swallow and the text "Eesti Vabariik". In a postcard-format package the coin can be viewed from both sides. Mati Karmin has designed the coin and the package. By its technical parameters the coin is identical with the current one-kroon coin in circulation (metal - Cu89Al5Zn5Sn1, diameter - 23.25 mm, weight - 5.0 grams, edge interrupted mill). The coin has been minted at the Lithuanian Mint. The package associated with the Estonian Song Festivals has been made by the Lithuanian central bank.

The second Decree set the price of the commemorative coin sold at the museum of Eesti Pank at 25 kroons.

6 July

Decrees of the Governor of Eesti Pank
On Prudential Ratios of Credit Institutions

In view of the need to bring the prudential ratios of the credit institutions into line with the provisions of the new Credit Institutions Act and under Section 3 of Article 71 of the same act, the Decree endorsed the Instructions on Calculating Prudential Ratios of Credit Institutions and the Procedure of Reporting, as specified in the appendices of the Decree: the rules of calculating the capital adequacy of credit institutions and the procedure of reporting on the solo and consolidated basis (Appendix 1); the rules of calculating the investments of credit institutions and the procedure of reporting on the solo and consolidated basis (Appendix 2); the instructions on calculating the risk concentration of credit institutions and the rules of reporting on a solo and consolidated basis (Appendix 3); the instructions on calculating the liquidity of credit institutions and the rules of reporting (Appendix 4) and the electronic format of reporting (Appendix 5). The reports will be submitted to the Banking Statistics and Analysis Department of Eesti Pank and the right to explain them lies with the Banking Supervision Department.

The enforcement of the Decree revoked the Decree of the Governor of Eesti Pank from 30 June 1998 On Prudential Ratios of Credit Institutions (see EPB No 4, 1998, p 8) and the Decree from 18 December 1998 On Changing the Decree of the Governor of Eesti Pank from 30 June 1998 on the Prudential Ratios of Credit Institutions (see EPB No 7, 1998, p 9).

* * * * *

On the Procedure of Applying for and Granting of the Licence to Credit Institutions and Branches of Foreign Credit Institutions and the List of Documents Submitted on Applying for the Credit Institution Licence

In accordance with Section 7 of Article 13 of the Credit Institutions Act and pursuant to Decision of the Board of Eesti Pank of 22 June 1999 On the Procedure of Issuing Licences to Credit Institutions was approved the Procedure of Applying for and Granting of the Licence to Credit Institutions and Branches of Foreign Credit Institutions and the List of Documents Submitted on Applying for the Credit Institution Licence (see below).

THE PROCEDURE OF APPLYING FOR AND GRANTING OF THE LICENCE TO CREDIT INSTITUTIONS AND BRANCHES OF FOREIGN CREDIT INSTITUTIONS

Section 1
General Provisions

1. Herewith the procedure of applying for the licence of a credit institution, including a subsidiary of a foreign credit institution and branch of a foreign credit institution (hereinafter referred to as the credit institution licence), is set forth, establishing the procedure of supervising the observance of the conditions required for the foundation of a credit institution and granting of the licence.

2. The credit institution licence is a state operating licence granting the person specified therein the right to perform transactions and operations listed in Article 6, Section 1 of the Credit Institutions Act. The credit institution licence is issued for the performance of all transactions and operations listed in Article 6, Section 1 of the Credit Institutions Act unless otherwise provided by law.

3. The credit institution licence is applied for a commercial undertaking and a branch of a foreign credit institution the principal and constant activity of which is involving of money deposits or other repayable funds from the public and granting loans from their own funds or providing of any other financing.

4. The Board of Eesti Pank, upon the proposition of the Banking Supervision Department of Eesti Pank, shall resolve on granting the licence or refusal to grant the credit institution licence.

Section 2
Applying for Credit Institution Licence

5. The application for the credit institution licence shall be submitted to the Banking Supervision Department in writing.

6. Persons willing to found a credit institution or a foreign credit institution willing to found its branch in Estonia shall apply for the credit institution licence prior to submitting the application to the Commercial Register.

7. Founders of a credit institution jointly or a representative (representatives) acting on their behalf by a notarised power of attorney, or the manager of the branch of a foreign credit institution or a representative (representatives) of a foreign credit institution acting by a notarised power of attorney (hereinafter the licence applicant) shall submit the application for the credit institution licence. If a branch has several managers, such several managers shall sign the application if they are entitled to represent the branch only jointly.

8. The licence applicant shall submit the credit licence application personally, submitting at the same time the documents specified in Appendix No 2 to this Decree "The List of Documents Submitted on Applying for the Credit Institution Licence".

9. The person appointed by the manager of the Banking Supervision Department (hereinafter the certificate drafter) shall draft a certificate on the receipt of the documents in the presence of the licence applicant in which the following data shall be entered:

9.1. date of drafting the certificate;

9.2. the name of the certificate drafter and names and positions of the persons who are present at the certificate drafting (details of the power of attorney or any other document certifying the powers);

9.3. the heading, date of drafting and number of pages of the documents accepted;

9.4. the number of copies of the certificate and names of the persons at whose disposal the copies are placed;

9.5. signatures of the certificate drafter and persons present at the certificate drafting.

10. If the licence applicant fails to submit the documents specified in Appendix No 2 to this Decree "The List of Documents Submitted on Applying for the Credit Institution Licence", or the submitted documents are inadequately executed, the Banking Supervision Department shall, within at least one month upon the day following the date of drafting the certificate specified in Clause 9 of this Procedure, request the licence applicant in writing to submit additional documents.

11. The term specified in Article 14, Section 2 and Article 21, Section 8 of the Credit Institutions Act shall start on the day following the day of receipt of the additional documents submitted pursuant to the written request specified in Clause 10 of this Procedure. If the Banking Supervision Department fails to make a written request, the term specified in the Act shall start on the day following the date of drafting the certificate specified in Clause 9 of this Procedure.

12. The Banking Supervision Department is entitled to request for additional documents and information to specify and examine the submitted documents, certificates and technical means to be examined.

Section 3
Supervision of the Observance of the Conditions of Granting the Credit Institution Licence

13. The basis for granting the licence to a credit institution or refusal to grant the licence shall be the application submitted by the licence applicant with all documents appended thereto, additionally submitted documents, certificates and information, and certificates prepared by the Banking Supervision Department on the on-site inspection of the credit institution or branch of a foreign credit institution under foundation.

Part 1
Inspection of the Observance of Material Conditions

14. The Banking Supervision Department shall inspect the compliance of the rooms, technical means and systems of the credit institution under foundation with the requirements of providing services to clients and safety requirements in the course of an on-site inspection. The Banking Supervision Department may involve experts in the on-site inspection who have the knowledge and expertise required for the inspection and who have given their consent to conduct the inspection.

15. The licence applicant shall be notified of the on-site inspection of the rooms, technical means and systems at least seven calendar days in advance. In order to determine the extent of the inspection of technical means and rooms, a preliminary examination may be performed in the presence of the person authorised by the licence applicant.

16. Inspection shall be performed in the presence of the competent representative designated by the licence applicant who shall provide explanations to the inspector required to perform his task.

17. The inspector shall prepare a Report on the results of the inspection where the date of inspection, names of the inspected rooms, technical means and systems and results of the inspection shall be fixed. One copy of the Report shall be given to the licence applicant who shall receive the document against signature.

18. The following general requirements shall apply to the rooms, technical means and systems of a credit institution or branch of a foreign credit institution under foundation:

18.1. automated data processing system to be used and other technical means shall create sufficient conditions and possibilities for the performance by the credit institution or branch of a foreign credit institution under foundation of transactions and operations specified in Article 6, Section 1 of the Credit Institutions Act;

18.2. automated data processing system and communication system shall enable preparation and submitting of reports in electronic way in the formats set forth by Eesti Pank and comply with the safety requirements established by Eesti Pank in respect of data communication;

18.3. technical means, vaults and safety systems shall comply with the requirements provided in the legislation;

18.4. on arranging the information technology the requirements set forth by Eesti Pank shall be observed;

18.5. conditions of cash handling shall comply with the requirements of providing services to clients and safety requirements as well as requirements established by Eesti Pank.

19. Agreements signed for the acquisition (use) of the systems and means specified in Clause 18 may include a suspension clause pursuant to which the rights and obligations set forth by the agreement shall arise upon granting of the licence to the credit institution by Eesti Pank.

20. A credit institution under foundation shall open an account with Eesti Pank pursuant to the procedure established by Eesti Pank. Monetary contributions for the share or stock capital shall be paid to the account opened with Eesti Pank in the name of the credit institution by the due date set forth by the Banking Supervision Department prior to resolving by Eesti Pank on granting the licence.

Part 2
Evaluation of the Business Plan and Description of Organisation Structure

21. The Banking Supervision Department shall analyse the business plan and description of the organisation structure in detail and content in order to evaluate the compliance of the business plan of the credit institution under foundation with the Credit Institutions Act and requirements of this Procedure as well as realisability thereof.

22. The following shall be analysed for the evaluation of the realisability of the business plan:

22.1. strategy of the credit institution under foundation;

22.2. compliance of the organisation structure with the planned operations and nature of offered products;

22.3. prerequisites used on preparing financial estimates;

22.4. other aspects of the business plan that may considerably affect realisability thereof.

Part 3
Establishment of Trustworthiness, Suitability and Compliance with the Requirements of the Credit Institutions Act of Shareholders with Qualifying Holdings and Managers of Credit Institutions as well as Other Persons Specified in the Credit Institutions Act

23. The ability of shareholders with qualifying holdings to ensure stable and reliable management of a credit institution and transparency of their business relations and owners' structure shall be established pursuant to respective provisions of the Credit Institutions Act and the procedure provided by Eesti Pank.

24. The trustworthiness, suitability and compliance with the requirements of the Credit Institutions Act of managers, head of the internal audit department (chairman of the auditing committee) of a credit institution, manager (managers) of the branch of a foreign credit institution shall be established pursuant to respective provisions of the Credit Institutions Act and the procedure provided by Eesti Pank.

Section 4
Granting of Licence to Credit Institutions

25. The Banking Supervision Department shall examine all the documents, certificates and information submitted by the licence applicant and the certificates drafted by the Banking Supervision Department pursuant to this Procedure and evaluate these as a whole.

26. As a result of evaluation of the documents, certificates etc, the Banking Supervision Department shall prepare a motivated opinion and submit the proposition to the Board of Eesti Pank either to grant the licence or refuse to grant the licence. The proposition of the Banking Supervision Department shall not be binding for the Board of Eesti Pank.

27. The Board of Eesti Pank shall notify the licence applicant of the resolution on granting the licence or refusal to grant the licence in writing within the terms specified in Article 14, Section 2 and Article 21, Section 8 of the Credit Institutions Act.

28. The resolution on granting the licence or refusal to grant the licence shall be mailed to the licence applicant by registered mail unless it was previously agreed upon that the respective resolution would be handed to the licence applicant personally against signature.

29. On the basis of the Decision of the Board of Eesti Pank the Banking Supervision Department shall execute the licence on the safety-base form in A4 format, and it shall have the following details:

29.1. registration number and date of issue of the licence;

29.2. business name, location and address of the credit institution that was granted the licence;

29.3. allowed transactions and operations listed in Article 6, Section 1, Clauses 1-15 of the Credit Institutions Act;

29.4. number and date of the Decision of the Board of Eesti Pank on the basis of which the licence was granted;

29.5. signature of the Head of the Banking Supervision Department.

30. The Banking Supervision Department shall issue the licence after the licence applicants have presented a receipt on payment of the state fee pursuant to Article 183, Section 4 of the State Fees Act to the Banking Supervision Department.

THE LIST OF DOCUMENTS SUBMITTED ON APPLYING FOR THE CREDIT INSTITUTION LICENCE

The following documents shall be submitted on applying for the licence of a credit institution:

1. On founding a credit institution:

1.1. Written licence application specifying the business name, location and address, numbers of communication means of the credit institution under foundation, contact person designated by the founders and contact information. The founders or their representative acting on their behalf shall sign the application by a notarised power of attorney. If the application is signed by the representative acting on behalf of the founders, the document certifying the powers of the representative shall be appended to the application.

1.2. Notarised Foundation Agreement of the credit institution complying with the conditions provided by law.

1.3. Articles of Association of the credit institution executed and approved pursuant to the procedure provided by law.

1.4. Business Plan including inter alia:

1.4.1. general information on the credit institution under foundation (data on the founders and share capital);

1.4.2. review of the strategy and market share where the operations are planned;

1.4.3. exact description of the intended activity, specifying services and products offered and characteristics of clients planned including the description of competition conditions of the respective market;

1.4.4. estimated balance sheet, estimated profit and cash flow and other financial ratios for the first three years of operations, including the description of prerequisites that served as a basis for their preparation;

1.4.5. review of credit and investment policy;

1.4.6. review of general principles of risk management and risk management strategy.

1.5. Description of the organisation structure including inter alia:

1.5.1. list of personnel;

1.5.2. description of the management scheme;

1.5.3. rules of activities of the Management Board;

1.5.4. general principles and competence of the loan committee;

1.5.5. general principles and competence of other committees and structural units formed for managing.

1.6. Draft of accounting internal procedure rules.

1.7. Application on opening of an account with Eesti Pank.

1.8. Review of the information system to be implemented including inter alia:

1.8.1. detailed description of the information system to be implemented;

1.8.2. schedule of elaboration of policies, organisation structure and procedures set forth in "The Requirements on the Arrangement of Information Technology in Credit Institutions" approved by the Decree of Eesti Pank of 3 October 1997 No 23;

1.8.3. notarised copies of the agreements signed on the acquisition of information systems by the founders of the credit institution.

1.9. Documents certifying the legal basis of use of rooms (notarised copies of sale agreements, lease agreements, etc).

1.10. Documents certifying the trustworthiness, suitability and compliance with the requirements of the Credit Institutions Act of managers of the credit institution and the manager of the internal audit department of the credit institution pursuant to the requirements set forth by Eesti Pank.

1.11. List of shareholders including the number of shares acquired by each shareholder and number of votes of each shareholder as well as the amount of contribution paid.

1.12. Documents certifying the financial standing for the last three years of a shareholder who is a natural person and whose share exceeds the share capital or stock capital or number of votes of the credit institution by 2 per cent -- a copy of the income declaration verified by the Taxation Board, full list of real estate, buildings as movable and securities the shareholder owns.

1.13. The following documents on a legal person who is a shareholder and whose share exceeds the share capital or stock capital or number of votes of the credit institution by 5 per cent:

1.13.1. current Articles of Association;

1.13.2. copy of the current part B card of the Commercial Register, or excerpt of a respective foreign register, or notarised copy of the registration certificate;

1.13.3. financial reports for the last three years including the auditor's statement;

1.13.4. list of shareholders or stockholders including information on their share in the capital of the commercial undertaking;

1.13.5. on acquisition of shares of the commercial undertaking which is a member of a group, the description of the structure of the group including the amount of the share of the commercial undertakings which are members of such group and financial statements of the group for the last three years including the auditor's statement.

1.14. The auditor's name, personal identification code and place of residence, auditor's written consent on his or her appointment the auditor of the credit institution, data to the fact that he or she is entered in the auditors' list.

1.15. Document indicating that the credit institution under foundation has assumed an irrevocable obligation to make a single payment specified in Article 21, Section 1 of the Deposit Guarantee Fund Act.

1.16. Document certifying the existence of funds required for the payment of the share capital - statements of accounts, account balance statements and other documents of Estonian credit institutions or credit institutions of member-states of the Organisation for Economic Cooperation and Development.

1.17. Draft of the statute of the internal audit department.

1.18. Drafts of internal rules and procedure rules pursuant to the requirements of Article 63 of the Credit Institutions Act.

1.19. Documents in respect of the shareholders with qualifying holdings pursuant to the requirements established by Eesti Pank.

1.20. Confirmation by members of the Management Board of the credit institution under foundation in respect of the accuracy and completeness of the data contained in the documents submitted, signed by all members of the Management Board of the credit institution under foundation or manager (managers) of the branch of a foreign credit institution under foundation.

2. On applying for the licence of a cooperative bank, the following documents shall be submitted beside the documents listed in Clause 1:

2.1. Minutes of the Foundation Agreement including the list of members who attended the meeting. Procedure of activity of the auditing committee approved by the foundation meeting of the cooperative bank.

2.2. Documents on members of the cooperative bank in compliance with Clauses 1.11, 1.12 and 1.13 of this List.

2.3. Documents certifying the trustworthiness, suitability and compliance with the requirements of the Credit Institutions Act of the chairman and members of the auditing committee pursuant to the requirements of Eesti Pank.

2.4. Documents certifying the existence of the stock capital pursuant to Clause 1.16 of this List.

3. On founding a branch of a foreign credit institution:

3.1. Written licence application of a branch of a foreign credit institution (hereinafter branch under foundation) specifying the business name, location, address, numbers of communication means of the foreign credit institution, business name, location and address, numbers of communication means of the branch under foundation, personal and contact information of the manager (managers) of the branch under foundation or representative designated by the manager of the branch under foundation. The manager (managers) of the branch under foundation or representative acting on behalf of the foreign credit institution or manager of the branch under foundation shall sign the application. The application shall be supplemented with the power of attorney certifying the powers of the manager (managers) of the branch, or copy of the resolution on the appointment of the manager (managers), or any other document certifying the powers of the representative acting on behalf of the foreign credit institution.

3.2. Business plan of the branch under foundation in compliance with Clause 1.4 of this List.

3.3. Description of the organisation of the branch under foundation in compliance with Clause 1.5 of this List and description of the relationship of the founding credit institution and branch under foundation.

3.4. Documents certifying the trustworthiness, suitability and compliance with the requirements of the Credit Institutions Act of the manager (managers) of the branch under foundation pursuant to the requirements established by Eesti Pank.

3.5. Information and documents on shareholders who have qualifying holdings in the founding credit institution pursuant to the provisions of Article 30, Section 2 of the Credit Institutions Act and Clause 1.19 of this List.

3.6. Annual Report of the founding credit institution for the last financial year.

3.7. Documents provided in Article 386, Section 2 Clauses 1, 3, 4 and 5 of the Commercial Code.

3.8. Documents provided by the banking supervision authority of the host country of the founding credit institution:

3.8.1. consent on the foundation of a branch in Estonia;

3.8.2. confirmation to the fact that the founding credit institution holds a current licence;

3.8.3. information on the amount of the shareholders' equity of the founding credit institution and adequacy of the capital;

3.8.4. information on the deposit guarantee system of the host country of the founding credit institution.

4. If the documents specified in this List are not in the Estonian language, the documents shall be submitted to the Banking Supervision Department with a notarised translation into Estonian.

9 July

Decree of the Governor of Eesti Pank
On the Procedure on Internal Security Measures of Credit Institutions for the Prevention of Money Laundering and a List of Suspicious and Unusual Transactions

Proceeding from Section 3 of Article 13, and Section 5 of Article 15 of the Money Laundering Prevention Act the Decree endorsed two documents: "Procedure of Application of Internal Security Measures of Credit Institutions for the Prevention of Money Laundering" and "A List Specifying Suspicious and Unusual Transactions and Operations" (see below).

Credit institutions shall make their internal procedure rules comply with the requirements stipulated by 1 September 1999.

The Decree of the Governor of Eesti Pank from 3 May 1996 On Due Diligence and Procedure Requirements of Credit Institutions on Applying the Provisions of Chapter 7 of the Credit Institutions Act (see EPB No 4, 1996, pp 3-5) was revoked.

PROCEDURE OF APPLICATION OF INTERNAL SECURITY MEASURES OF CREDIT INSTITUTIONS FOR THE PREVENTION OF MONEY LAUNDERING

Section 1
General Provisions

1. A credit institution shall form required structural units and establish required and sufficient procedure rules to implement the requirements arising from the Money Laundering Prevention Act and implementation acts thereof for actions taken in case of suspicion of money laundering within the credit institution as well as within the entire consolidated group thereof.

Section 2
Internal Procedure Rules Established by Credit Institutions

2. Respective internal procedure rules shall inter alias provide for:

2.1. the identification procedure pursuant to the provisions of Chapter 2 of the Money Laundering Prevention Act and the procedure of general identification of clients pursuant to Clauses 1 and 2 of Article 89 of the Credit Institutions Act and the requirements stipulated in Section 3 of this Procedure;

2.2. the procedure for and form of preservation of the identification data;

2.3. the procedure for preservation and use of data and documents, related to suspicious and unusual transactions or operations, the characteristic features of which indicate money laundering. The above-specified data and documents shall be preserved using methods that enable the preservation and secrecy of such data and documents and provide for prompt use thereof by competent officials;

2.4. the rules on forwarding of information and movement of documents within a credit institution in case money laundering are suspected;

2.5. instructions for disclosure of suspicious and unusual transactions and operations;

2.6. sufficient rights and obligations required for the efficient performance of duties of the contact person stipulated in Article 13, Section 1 of the Money Laundering Prevention Act;

2.7. the rights stipulated in Article 17 of the Money Laundering Prevention Act specified separately;

2.8. requirements that a credit institution considers necessary to secure efficient actions on the prevention of money laundering pursuant to the Money Laundering Prevention Act and implementation acts thereof;

2.9. the procedure for regular training in the prevention of money laundering for employees engaged in providing services to clients and servicing their accounts and transactions and for instructing new employees, independent of their position in the credit institution structure.

Section 3
Identification of Individuals and Government Agencies, State Agencies Administrated by Government Agencies and Local Government Agencies

3. In addition to the identification requirements provided for in the Money Laundering Prevention Act, a credit institution shall, upon entering into a contractual relationship for the first time, identify each individual or agency that is or has applied to the credit institution with the aim of becoming a client of the credit institution. The identification pursuant to Article 89, Section 1 of the Money Laundering Prevention Act shall be performed considering the following:

3.1. in the case of natural persons, the identification of an individual shall be performed only on the basis of a valid identification document. In the case of a foreign natural person, a reliable document shall be used for his or her identification, preferably a valid passport;

3.2. on identifying legal persons, the business name, location and address, registry code of the legal person, or registry code of the non-profit association or foundation, or a respective state registry code of a foreign country, register entry date, and the natural person or persons who performs or perform transactions on behalf of the legal person and who are identified on the basis of the documents specified in Clause 3.1;

3.3. the identification process of government agencies, state agencies administrated by government agencies and local government agencies is similarly based on the requirements stipulated in Clause 3.2 as far as this is applicable depending on the character of activities of such agencies;

3.4. depending on certain specific features of operations of a credit institution, a client may be identified, as an exception, without meeting him or her in person, through a third party like insurance agents, securities brokers, etc. In such case, on identifying the client through a third party, all the data specified in Clause 2 shall be established that comply with the information contained in the documents and data provided in Clauses 3.1 and 3.2 of this Procedure. If the person who is willing to become a client of a credit institution does not act in his or her own name, the person in whose name he or she is acting shall also be identified. The obligation of identifying the client shall always rest with the credit institution.

4. The results of the identification shall be fixed in writing or electronically and preserved pursuant to the provisions set forth by the internal procedure rules specified in Clause 2.

A LIST SPECIFYING SUSPICIOUS AND UNUSUAL TRANSACTIONS AND OPERATIONS

Section 1
Criteria for Deciding, Whether Transactions or Operations are Suspicious or Unusual

1. A credit institution shall evaluate the content and objective of the client's transactions and operations on the basis of general working experience in order to establish a possible connection to money laundering. To decide whether a transaction or operation is suspicious or unusual, the credit institution shall pay special attention to:

1.1. the content and extent of the economic activity of the client and good knowledge thereof (due diligence);

1.2. the clarifying of the background of transactions and operations that have the features stipulated in Article 6 of the Money Laundering Prevention Act.

2. Such transactions and operations of clients shall be considered suspicious that lack a definite economic or legal justification and differ from ordinary economic activity of clients and in case of which the credit institution has a reason to suspect the illicit origin of the assets that are objects of such transactions.

3. A credit institution shall independently decide whether a transaction or operation differs from ordinary on the basis of the entire data available on such transaction or operation. The credit institution shall be aware that damage may be caused to its client in case of groundless suspicions.

Section 2
A List Specifying Suspicious and Unusual Transactions and Operations

4. Such transactions and operations described in a list below, or similar transactions and operations related thereto, or transactions linked to each other, shall be considered suspicious and unusual which the credit institution has previously evaluated on the basis of the criteria specified in Clause 1, 2 and 3 of Section 1 of this List:

4.1. depositing of an extraordinarily big amount by the client who usually uses cheques and other similar instruments in business activities of the client;

4.2. a considerable increase of cash payments to the client's account without any obvious reason, especially if the amounts paid to the accounts are deposited in the account for a short period of time or the next beneficiary of the transfer of such amounts cannot be linked to the ordinary activities of the client;

4.3. numerous accounts of the client that individually are small and inconsiderable as to their amount, but which when summarised form the amount stipulated in Article 6 of the Money Laundering Prevention Act;

4.4. cash transactions of legal persons, depositing as well as cash withdrawal, although normal activities provide for non-cash transactions;

4.5. constant cash payments to the client's account in order to make money transfers and pay invoices or for other financial instruments;

4.6. clients' transactions with the aim to exchange large amounts of notes of small denomination for notes of bigger denomination;

4.7. consistent exchange of cash for foreign currency;

4.8. depositing transactions in case of which counterfeit money or any other similar forged instruments are discovered;

4.9. big depositing transactions performed through ATMs;

4.10. circulation of the client's funds (money) between various banks and offices without any economic grounds;

4.11. investment transactions of the client in foreign currency or securities, while the sources of the foreign currency or securities are unknown or do not comply with the potentials of the client or usual economic operations of the client;

4.12. trading in securities without understandable reason or in unusual situation;

4.13. payments made by a big number of persons to the same account without providing sufficient payment details;

4.14. payments to the client's account that are received from accounts with banks or finance institutions of foreign countries where evidently active drug trading is performed;

4.15. routine or frequent payment to the client's account (or from the account) exceeding the threshold amount stipulated in Article 6 of the Money Laundering Prevention Act from countries (or to the countries) where evidently active drug trading is performed;

4.16. frequent transactions in traveller's checks without obvious economic or legal justification;

4.17. unexpected repayment of a problematic or bad loan;

4.18. suggestion to lend against such securities the sources of which is unclear or unknown;

4.19. investments in the objects or instruments that have no logical connection to the previous business activity of the client;

4.20. turnover of the client's account is out of the proportion to its ordinary economic activity;

4.21. short-term deposits of a client who is a foreign resident if upon the expiry of the deposit term the money is withdrawn from the account;

4.22. a deposit transaction made from a foreign country to the account of a local client if this is followed by withdrawal of the funds from the account.

16 July

Regulations of the Governor of Eesti Pank
On Processing 50- and 25kroon Banknotes

In view of the potential increase in the demand for cash at the end of 1999, the Cash Department of Eesti Pank will process 50- and 25kroon banknotes without destroying the worn-out banknotes up to the end of 1999.

6 August

A two-day international seminar on economic modelling began at Eesti Pank. The seminar was attended by economists from the central banks of the Czech Republic, Estonia, Poland and Slovenia, representatives of the European Commission and the London National Institute of Economic and Social Research (NIESR). The seminar marked the beginning of a long-term project called "Modelling the Accession Countries".

31 August

The European Central Bank revealed the survey "Payment Systems in Countries That Have Applied for Membership of the European Union" (Blue Book) that was compiled in cooperation with the central banks of Bulgaria, the Czech Republic, Cyprus, Estonia, Latvia, Lithuania, Poland, Romania, Slovakia, Slovenia and Hungary. The survey is also available on Internet, at www.ecb.int.

* * * * *

Business journalists of the Baltic countries visited Eesti Pank during the press tour of Hansapank.

2 September

Decision of the Board of Eesti Pank
On Appointing the Auditor of the Bank

Under Clause 7, Section 2 of Article 9 of the Central Bank Act, the Board of Eesti Pank decided to propose Riigikogu to appoint auditors of PriceWaterhouseCoopers Urmas Kaarlep and Gordon Latimir to carry out the 1999 auditing of Eesti Pank.

9 September

Eesti Pank issued a survey of the analysis of the cash demand at the turn of the year at its Web site (www.ee/epbe). It is estimated that the growth of cash demand at the turn of the year should not exceed 130 million kroons in one day and 350 million kroons during the ten-day period. Although at the international scale the cash reserves of Eesti Pank are relatively high, the destruction of worn-out high denomination banknotes has been halted since March and the central bank has ordered an additional delivery of 100- and 500kroon banknotes. These measures are meant to secure more than two times backing for the cash in circulation.

10 September

Decree of the Governor of Eesti Pank
On Approving the Rules on Fixing Daily Exchange Rates of the Estonian Kroon

On the basis of Section 5 of Article 15 of the Central Bank Act, the Decree approved of the annexed Rules on Fixing Daily Exchange Rates of the Estonian Kroon. The Financial Markets Department of Eesti Pank will determine by 12 am (Estonian time) each banking day the daily exchange rate between the Estonian kroon and foreign currencies based on the market rates between the German mark and foreign currencies established in the world exchange markets. The Public Relations Department and Clearing and Settlement Department will communicate the daily exchange rate between the Estonian kroon and foreign currencies to credit institutions and the press beginning from 13.00 of the same day.

The Decree of the Governor of Eesti Pank from 30 January 1997 On Establishing the Exchange Rates of the Estonian Kroon (see EPB No 2, 1997, pp 4-5)was declared null and void.

RULES ON FIXING DAILY EXCHANGE RATES OF THE ESTONIAN KROON

These rules determine the procedure to fix daily exchange rates of the Estonian kroon and the list of currencies to which the daily exchange rate is fixed.

1. Fixing of Daily Exchange Rates of the Estonian Kroon

1.1 The Financial Markets Department (hereinafter referred to as the FMD) will fix, make available to all subunits of Eesti Pank and keep the rates of the Estonian kroon (hereinafter referred to as the rates) to the foreign currencies listed in these rules. The rates to the listed foreign currencies are available in the public database accessible to all subunits of Eesti Pank.

1.2 In compliance with the internal procedure the FMD official will fix the exchange rates at 12 am each banking day. The listed exchange rates will be based on the exchange rates communicated by the Reuters.

1.3 The rates will be saved in the FMD public database, will be checked by the FMD official and they will be available to all subunits of Eesti Pank by 13.00.

2. The List of Currencies to Which the Daily Exchange Rate of the Estonian Kroon will be Fixed
Foreign currency Symbol
Australian dollar AUD
Austrian schilling ATS
Belgian franc BEF
Belarus rouble BYR
British pound GBP
Canadian dollar CAD
Czech koruna CZK
Danish krone DKK
Dutch guilder NLG
European Union euro EUR
Finnish markka FIM
French franc FRF
German mark DEM
Gold (EEK/oz) XAU
Greek drachma GRD
Hong Kong dollar HKD
Hungarian forint HUF
IMF Special Drawing Rights SDR
Irish punt IEP
Italian lira ITL
Japanese yen JPY
Kazakh tenge KZT
Latvian lat LVL
Lithuanian lit LTL
Moldovan lei MDL
New Zealand dollar NZD
Norwegian krone NOK
Polish zloty PLN
Portuguese escudo PTE
Russian rouble RUB
Singapore dollar SGD
Slovenian tolar SIT
Spanish peseta ESP
Swedish krona SEK
Swiss franc CHF
Ukrainian hryvnia UAH
US dollar USD
Uzbek sum UZS

* * * * *

International experts found the most transparent central banks in Central and Eastern Europe to be those of the Czech Republic, Estonia and Lithuania. The above central banks were also rated higher than a number of West-European central banks for publishing the decisions of the bank, informing the general public and spreading information about banking supervision. The most transparent central bank was considered to be the Bank of England.

16 September

Eesti Pank inaugurated its training and management centre in Kuressaare. From 17 to 18 September the 10th planning seminar of the bank was held there.

23 September

Decisions of the Board of Eesti Pank
On Issuing a Licence to AS Preatoni Pank (Preatoni Bank Ltd)

The opinion of the Banking Supervision Department of Eesti Pank, based on the documents and information submitted by the founders of AS Preatoni Pank, made it clear that:

Proceeding from the above, Section 2 of Article 14 of the Credit Institutions Act, Section 3 of Article 9 and Section 1 of Article 18 of the Central Bank Act, and on the basis of Clause 1 of the Decision of the Board of Eesti Pank from 22 June 1999 On the Procedure of Issuing Licences to Credit Institutions, the Board of Eesti Pank decided to issue a banking licence to AS Preatoni Pank. The licence will be drawn up and issued by the Banking Supervision Department in accordance with the relevant legal procedures.

* * * * *

On the Profit Distribution Strategy of Eesti Pank

Having studied the stability of the Estonian monetary system, the reserve requirements of the central bank, the current principles of capital distribution and the analysis of the proposed future strategies,

keeping in mind that the principles of profit distribution of Eesti Pank must also in the future support the main objectives of the monetary policy and that the profit distribution should not led to the weakening of the stability of the monetary system,

considering that before Estonia's joining of the European Monetary Union the stability of the central bank's capital and liabilities-free reserves against the major economic indicators is particularly important for maintaining the stability of the monetary system,

taking into account the internationally accepted good practices in implementing monetary policy and the principles applied in the European Union for guaranteeing the financial stability of central banks,

considering that in the further replenishment of the reserves of Eesti Pank transfers to the special reserve will gain a more important role,

proceeding from Article 30 of the Central Bank Act and the profit distribution principles laid down in the Statute of Eesti Pank (see EPB No 7, 1996, pp 3-8), as well as Clause 1, Section 2 of Article 9 of the Central Bank Act, the Board of Eesti Pank decided:

1. to deem it appropriate to use as the basic economic indicators for determining the profit distribution strategy of Eesti Pank in the next three years the ratio of Eesti Pank's liabilities-free foreign exchange reserves to the gross domestic product (GDP) and to the broader monetary aggregate M2;

2. to strive for such a profit distribution approach during this period that would bring the ratio of the foreign exchange reserve to the GDP above 2% and the ratio of the foreign exchange reserve to broader monetary aggregate above 5% by the year 2003, making transfers to the state budget in the amount of up to 25% of the profit, in accordance with Section 5 of Article 30 of the Central Bank Act;

3. to evaluate the suitability of the strategy described in Clauses 1 and 2, as well as the suitability and size of the indicators in the second quarter of the year 2000 during the discussion of the 1999 profit distribution. The evaluation should be reviewed annually.

See also Eesti PankProfit Distribution Strategyin this issue of the Bulletin, pp 26-30.

* * * * *

Decree of the Governor of Eesti Pank
On Amendments in the Preamble of the Decree of the Governor of Eesti Pank from 24 March 1999

The Decree brought the references and wording in the preamble of the Decree, which concerned checking the solvency and loan collateral of local governments before granting loans or acquiring financial claims, into line with the respective provisions of the new Credit Institutions Act. (The contents of the 24 March Decree, which was not changed, has been discussed in EPB No 2, 1999, pp 6-7).

30 September

An international conference dedicated to the Y2K problem was held in Tallinn. In connection with the conference, Vahur Kraft, the Governor of Eesti Pank issued a statement announcing that all information technology measures planned for achieving year 2000 readiness have been completed and the compatibility of the critical systems was achieved by mid-1999. The Banking Supervision Department has carried out on-site inspection of the Y2K projects of all the Estonian banks. In the third quarter special attention will be devoted to the plans for maintaining uninterrupted work and the ability of the banks to cope with the possible increase in cash demand at the turn of the year. Analyses have shown that cash reserves and their planned use will guarantee satisfying the potentially higher cash demand.