Page 33 - Central & Southeast Outlook 2020

5.2 ​Finance - Estonia
Estonia’s banking sector found itself in the global spotlight in 2019 over allegations of mass-scale money laundering raised against the Estonian branches of Danske Bank and Swedbank. The aftermath of the allegations is likely to reverberate throughout 2020.
Danske Bank, which was accused of handling even up to €200bn of possibly illicit money flows between 2007 and 2015, has since closed its operations in Estonia.
Meanwhile, Swedbank is being probed by authorities in the US, Sweden, and the Baltic states over handling billions of euros’ worth of suspicious transactions, including from non-resident clients based in Russia. The shady transactions flowed between 2010 and 2016, it was alleged.
The Danske Bank and Swedbank cases are likely to spur reforms in the Eurozone, of which Estonia has been a member since 2011, to tighten control of money flows into the EU. Specifically for Estonia, those cases mean tarnished reputation that Tallinn will - or at least should - be keen to amend in 2020.
Still, the latest financial stability review from Eesti Pank indicated in November that risks to the financial sector are small. “The probability has increased though of the cooling economy making it harder for businesses to make their loan payments,” the central bank said, however.
The slowdown in economic growth could impact the Estonian real estate sector. “The share of loans to the real estate sector that turned bad in the last economic crisis was double that in other sectors. The risk may be amplified because real estate loans are such a large part of the loan portfolio of the banks”, according to Eesti Pank.
Another risk is that of spillover of economic slowdown in sweden, as Swedish banks are major lenders in Estonia. Still another is Estonians, who have enjoyed a rapid wage growth in recent years, borrowing too much to be be able to repay comfortably once slowdown hits.
Eesti Pank is maintaining the countercyclical buffer requirement for the banks at 0% as the debt to income of the non-financial sector has not increased. The central bank forecasts that the rate of growth of bank loans should be similar to the nominal rate of GDP growth in the coming years, and no developments or trends in bank behaviour are in view that would amplify lending activity.
The capitalisation of the banks operating in Estonia has remained strong, underpinned by the capital buffer requirements introduced by Eesti Pank. Banks operating in Estonia have to hold a systemic risk buffer of 1% to mitigate the risks of a sudden slowdown in the economy. The three systemically important banks, Swedbank, SEB, and Luminor have to hold a further buffer of 2% to hedge against the risks that come from the concentration of the banking sector.
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