Chairman of the board at the Financial Supervision Authority (FI) Kilvar Kessler said that the Estonian financial market needs customer-centric banking and larger competition between quality service providers.
Presenting FI's annual report to the Riigikogu on Thursday, Kessler stated that in order to identify and manage risks, banks have an obligation to know their customers.
Kessler said the Inspectorate dealt with cases last year, where a bank would close a customer's account, explaining it to the client as a request from an inspection.
"Customers might have the impression, that the dear credit institution does not want to close an account, but the inspection is making them. That is just false: every provider manages their own risk, designs their own operations. Laws and instructions set restrictions according to the amount of risk in the respective business. The riskier the business, the greater the responsibilities. The Financial Inspection Authority investigates compliance with those standards," he said.
Kessler said closing an account should be the last move and before doing so, the bank should consider other options. "It is a possible move, because there are clients who refuse to give necessary information to the bank or deal with illegal acts.
"Mechanistic communication with customers is the second, perhaps most critical, bottleneck. I know from personal experience that most conflicts can be resolved with proper communication. Listening to a person and explaining the decisions and situation."
He noted Estonian market leaders have been able to be picky with customers and form their product due to the lack of competition in Estonia. This has created unmet demands, not only with money launderers left out to dry, but also given ideas of untapped business opportunities. "Consumer credit is a good example and the keyword - growth."
Last year, the inspection saw a rapid increase among small market players. "For example, one bank focused on the provision of credit for consumers was able to grow their portfolio from €232 million to €347 million in a year. They filled a niche, not only in Estonia, but the region in general," Kessler said.
He said the growth of small market participants increases competition, but the ability to handle increased risks has to be wondered.
"It's clear that bankers do not grow on trees in Estonia and Soviet power has caused a disruption in generational financing. During the time of the euro, I have argued that it is not reasonable to ask for 30 years of experience from a bank manager," Kessler noted.
Recession will cause potential credit risk for banks
Kessler, said some businesses and business models do not function during a recession. If those enterprises have borrowed money from a bank, that means the bank now has a higher chance of credit risk.
"Loans are given at the expense of depositors, who have trusted the banks with their money. The larger the reserves of the bank are, the larger sums of credit risk they can carry, without actually putting depositors' funds in jeopardy," Kessler said.
It is for this reason the inspectorate took steps to manage the stability of banks. For that, they worked on suspending the distribution of banks' profits, which the European Commission decided at the end of March.
The inspectorate also worked on establishing payment moratoriums.
"The framework accepted by the Financial Inspection Authority on April 20 established our banks into a so-called private moratorium that entered into force on April 27. To this moment, payment holidays have been implemented for 5 percent of private loan portfolios and for 21 percent of company portfolios," Kessler concluded.
Editor: Kristjan Kallaste