EXPLANATIONS TO THE DECREES OF THE GOVERNOR OF EESTI PANK

Decree of the Governor of Eesti Pank
On the Acquisition of the Qualifying Holding in a Bank

The Decree (see pp 6-10) endorsed "The Guidelines for the Submission of Data and Documents Applying for the Permission to Acquire the Qualifying Holding in a Bank" and "The List of Data and Documents to be Submitted when Applying for the Permission to Acquire the Qualifying Holding in a Bank".

Major shareholders play a decisive role in guaranteeing the stable development of a credit institution. The firm and reliable management of the owners have to be guaranteed at all times.

According to the European Union 2nd Banking Directive, the supervisory authorities have to have adequate information on the major shareholders of credit institutions when a credit institution begins its activities as well as during the whole period of its existence. The supervisory authorities also have to get information on the exact structure of the owners of the banks as well as all the persons who can have a significant impact on the management and development of the bank as a whole, that is, the persons who have acquired a qualifying holding in the bank indirectly or through significant connections. The actual holding of a shareholder has to be calculated in accordance with the procedure of calculating the voting rights and the definition of a controlling business entity as laid down in Article 10 of the Credit Institutions Act.

The Credit Institutions Act defines the term of qualifying holding and the conditions of acquiring a qualifying holding, which according to the internationally accepted practice, are applied during the founding of a credit institution as well as during its subsequent work. Under the Credit Institutions Act the present order sets down the procedure and requirements on documents to be submitted while applying for permission to acquire a qualifying holding in a credit institution from the Banking Supervision Department of Eesti Pank.

In order to evaluate the correspondence of the applicant to the requirements of the Credit Institutions Act, the Banking Supervision Department will thoroughly examine the data and the documents submitted as well as other information available from public sources or sent over by other supervisory authorities. The Banking Supervision Department will proceed from the principles of openness and equal treatment in its work and will judge every applicant individually, depending on the person.

The Banking Supervision Department will proceed from the principle of proportion in giving its evaluation, that is, the greater the holding the applicant wishes to acquire the higher the demands set on the applicant.

The supervisory authorities will evaluate the applicant's potential impact on depositors, his or her reliability and business contacts, including the shareholder's notable links with other persons according to the provisions of Section 4, Article 7 of the Credit Institutions Act. Also, the applicant's ability to guarantee the secure and reliable management of a bank is evaluated.

If the applicant is a legal entity, the reliability of its top management, the ownership structure and its transparency is evaluated, as well as the sphere of activity of the company, its other business interests and its position on the banking market. The other business activity of the legal entity applying for a qualifying holding in a bank must not lead to a conflict of interest with the credit institution.

Special attention will be focussed on the accounting reports and the financial situation of the legal entity applying to acquire a qualifying holding in a credit institution. The insecure financial situation of a major shareholder can have a negative impact also on the solvency of the credit institution in question. The major shareholder's potential of making additional investments into the credit institution is also evaluated, as well as its previous business activity and reputation based on it and legal proceedings related with the previous business activity. In case the applicant is a company holding a state licence, the evaluation of the respective state supervisory authorities on the previous business activity of the applicant is also taken into account, including administrative punishments applied on the company.

In case the acquisition of a qualifying holding leads to the credit institution becoming a subsidiary of another legal entity (part of a concern), the Banking Supervision Department has to evaluate whether the risks connected with the activities of the other businesses of the concern pose a threat to the interests of the bank's depositors. Membership in a concern and the relations between the credit institution and other entities must not obstruct carrying out adequate supervision. The structure of the concern must be suitable for banking activities and allow effective supervision.

If the applicant is a private individual, his or her prior business activities are evaluated as well as his or her business contacts and their transparency, his or her other business interests and possible conflict of interests. An important criterion is also the business reputation of a major shareholder because a connection of a person with a bad reputation with the credit institution can reduce the confidence of the public in the bank in question.

Decree of the Governor of Eesti Pank
On The Procedure of Submission of the Information on the Conformity of Persons Specified in the Credit Institutions Act and the Declaration of Their Financial Interests

The Decree (see pp 10-13) endorsed "The Procedure of Submission of Corroborating Information and Documents on the Reliability, Suitability and Conformity of Executives of Credit Institutions and the Head of the Internal Control Department or the Chairman (Members) of the Internal Audit Committee and of the Declaration of Financial Interests and Conflicts of Interests of the Executives of Credit institutions".

According to internationally accepted principles, the firm and reliable management of a credit institution as a business entity engaged in attracting deposits from the public has to be guaranteed at all times. The responsibility for the activities of a credit institution lies first and foremost with its supervisory board and management board as provided by the Credit Institutions Act.

According to the principles of supervision worked out by the Basel Banking Supervisory Committee, the evaluation of the competence, knowledge and experience of the management is one of the main aspects while issuing a licence to a credit institution. The supervisory authorities must have enough information about the managers of the credit institution so that to evaluate their banking and other business experience personal suitability and the necessary qualifications both individually as well as collectively.

Eesti Pank issues a licence to a credit institution in accordance with Clause 3, Section 1 of Article 14 of the Credit Institutions Act if the candidates for top managers, head of the internal control department and chairman of the internal audit committee of the credit institution being founded meet the requirements set by the law. The same principles are provided in Article 20 of the Credit Institutions Act concerning the application procedure for establishing a subsidiary or a branch of a foreign credit institution.

The activities of a credit institution must at all times meet the conditions and requirements under which the licence was issued. Thus, the supervisory authorities have to check and evaluate the reliability, suitability and correspondence to the requirements of the law of the persons specified by the Credit Institutions Act prior to issuing the licence as well as during the activities of the credit institution.

Only such persons who can guarantee the sound and reliable management of the credit institution can be appointed or elected to the executive positions or other positions specified by the law, that is, persons who have the qualifications and diligence that correspond to their responsibilities and who are trustworthy. The requirements set on the persons specified by the Credit Institutions Act depend on the concrete position of the person or his or her range of responsibilities.

Proceeding from international practice and the provisions of the law, the evaluation of the persons specified is based on their

competence judged by:
the existence of an education required by the job, in-service training, profession or qualification;
prior work experience, including managerial experience and the efficiency of this activity;
the correspondence of the above to the requirements set on the given position;
diligence judged by:
the correctness and results of the previous job;
the ability to manage one's own property and non-property affairs;
reliability judged by:
prior activities in business and the business reputation acquired through this;
legal disputes related to prior activities;
punishments and application of any other forms of legal coercion;
earlier unusual business transactions.

While judging the reliability, punishments and other cases of legal coercion and analysing the earlier activities of the persons specified by the Credit Institutions Act the supervisory authorities will take into account the nature of the breach of law, intention and frequency, the severity of the punishment and the time that has lapsed since the breach of law. Special attention is paid on violations committed with the aim of personal material gain.

Securing the sound and reliable management of a credit institution is the obligation of its management and supervisory bodies. Therefore, the competent organs and structural divisions of the credit institution have to constantly follow and at certain intervals evaluate the correspondence to the requirements of the Credit Institutions Act of the managers of the credit institution, head of the internal control department (chairman of the internal audit committee), members of the supervisory board and management board of the credit institution's parent company and companies belonging to the same consolidated group, as well as the management and organisational structure of the credit institution and the companies belonging to the same consolidated group.

The current procedure also provides for gathering and preserving information at the credit institution on the reliability, suitability and conformity with legal requirements of the persons specified by the Credit Institutions Act, as well as information on the economic interests and conflict of interests of the managers of the credit institution.

In accordance with international practice, Eesti Pank considers it advisable that every credit institution creates a system of supervision and evaluation that would guarantee the observance of the provisions set down by the Credit Institutions Act. This has to guarantee that besides other information a credit institution also has information on the ability of the persons specified by the Credit Institutions Act to manage their property and personal affairs, the record of their punishments and other forms of legal coercion applied to them, as well as business activities that could adversely affect fulfilling their professional responsibilities.