As Hedge Against Potential Downturn, Banks Subject to Additional 'Systemic Buffer'
An additional capital requirement goes into effect for Estonian commercial banks tomorrow to ward off systemic risk from a possible downturn.
The central bank established the additional 2 percent systemic buffer requirement to prevent banks from suffering in case the private sector has trouble paying back loans during a recession.
The requirement brings Estonia's capital buffers for Common Equity Tier 1 to a total of 9 percent - 4.5 percentage points of which is the base requirement, and 2.5 points being a capital conservation buffer established in May.
Europe switched over to a unified capital requirement for banks in 2014, but member states can establish additional requirements if necessary.
That's because the Estonian economy is considered a small and open economy that is more vulnerable than most, due to the higher than average reliance on foreign investment and the modest level of household and corporate savings (lower than the European average), the central bank said.
A further factor is the fact that the banking sector is concentrated in the hands of only a few players with similar profiles.
Failure to stick to the requirement will cut into dividends and management bonuses.
Still, the change doesn't mean any actual changes for Estonian banks as their level of capitalization exceeds the requirement.