Expert: Many loose ends in new savings and loan association draft bill

General meeting of the now-defunct Estonia Savings and Loan Association.
General meeting of the now-defunct Estonia Savings and Loan Association. Source: ERR

A draft bill that is nearing completion at the ministry of finance to exert tighter control over the activities of savings and lending associations (credit cooperatives, CC) includes a proposal to insure the deposits of persons who invest in these institutions. It is still unclear how this system could work, but a draft bill could be ready for review already in November.

While there has been talk for years about strengthening oversight of the Estonian Union of Credit Cooperatives (EUCC; in Estonian: Eesti Hoiu-laenuühistute Liit), a Thursday morning press statement from the ministry reveals something new. Annely Akkermann, the incoming minister of finance, said that credit cooperatives may be eligible for the state deposit insurance in the future.

The notice explains plainly that under the forthcoming draft the protection of the Guarantee Fund (Tagatisfond) will be extended to the deposits of savings and loan associations. "Just as it applies to bank deposits today," the ministry of finance reported in a press statement. There is no further information about this upcoming change.

The purpose of the Guarantee Fund is to make sure that people holding money in Estonian credit institutions do not have to worry about losing their money, usually up to €100,000. The goal is to keep the financial sector stable by preventing bank runs and giving bank customers peace of mind. Credit institutions contribute to the fund, which is viewed as their insurance.

It is unclear how savings and loan associations (credit cooperatives or CC), which are not financial institutions, could benefit from the Guarantee Fund.

Thomas Auväärt, an expert in financial services at the ministry of finance, who is working on the bill, said that there are many unresolved issues.

He said that larger credit cooperatives may become cooperative banks, which means they would have to apply for a banking license, become subject to bank-specific supervision, and join a guarantee fund. For example, it has been suggested in the past that the limits for a large credit cooperative could be five million euros of capital or a total 3,000 members.

Regarding smaller credit cooperatives, the situation is more complicated. Auväärt suggested that a sub-fund could be set up within the guarantee fund, to which smaller credit cooperatives would contribute.

The depositors would be repaid from this sub-fund if, for instance, a few credit cooperatives went bankrupt, as recently happened with Erial and Eesti Arengente.

If the sub-fund is insufficiently funded, money could be borrowed from either the Guarantee Fund or the state. Auväärt explained that the debt would be repaid in the future through the credit cooperatives' ongoing contributions. However, it is unclear whether other CCs would still be interested in running and clearing other debts if the Guarantee Fund is significantly depleted.

Nevertheless, if the assets invested in CCs were guaranteed, investors might be more interested in them. Auväärt said that the additional control duties resulting from stricter regulation should mitigate these risks and prevent pyramid schemes from becoming commonplace in the industry.

Increasing rules and the requirement to pay contributions, for example, will incur additional costs for credit cooperatives. It's unclear whether the smaller ones would be willing or able to take on this task.

The finance ministry is expected to release a draft proposal to tighten regulation of CC activities in November.

Auväärt remains optimistic that the draft can be coordinated this year, approved by the government, and sent to parliament early next year. The proposal could be approved by the Riigikogu as early as February, before the elections.

Prior to viewing the draft, the Estonian Financial Supervision and Resolution Authority (Finantsinspektsioon) and the Guarantee Fund declined to comment on the ministry's plan to place credit cooperative depositors under the protection of the the fund.


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Editor: Kristina Kersa

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