Former finance ministers 'sit on fence' regarding banks' huge profits
Following the disclosure of the banks' enormous profits last year, former finance ministers from parties in the power coalition did not rush to call for state intervention. Maris Lauri (Reform), Sven Sester (Isamaa) and Ivari Padar (SDE) advocate giving the banks time to correct their actions.
"As a right-wing politician, I have always believed that the less government intervention, the better, and the fewer differences, particularly sector specific differences, the better," Sester told ERR on Friday.
However, he said that we would have to wait and see what happens in the banking and financial markets over the next few months: "If bank earnings are derived from their efficiency and ability to manage their cash flows effectively, then this is one side of the equation. The other side of the coin is when bank profits begin to rise artificially, as a result of central banks raising interest rates, rather than because banks are becoming more efficient. Of course, we'll have to wait and see how the banks react in the short term in that case," Sester said, adding that we now have to see whether banks will begin to raise deposit rates in order to retain their clients and borrowers by reducing their interest margins.
Lauri agreed, saying that in a market economy, the government should not dictate how much profit a company can earn, particularly in a competitive industry. "Yes, [banks'] profits are undeniably high, and these practices are usually considered as unfair and dishonest by public, but I also believe that big companies, including banks, understand that, and if they want to be successful and have a good reputation, they must reconsider their own actions in a new, more responsible light now," Lauri said.
"I think banks are aware that lending and deposit rates must move in tandem; if lending rates increase, deposit rates must also increase."
"If that does not happen, the real question is, whether there are any other banks that understand that," Lauri said, adding that if there is sufficient competition, such situations should be resolved.
"This is certainly a situation where the state can evaluate whether competition is adequate, and if it is not, it should intervene. This is generally true for all businesses," the previous minister stated.
"When the private sector cannot handle the situation and competition cannot be assured, monopolies emerge."
However, Lauri said that when the state begins to intervene in one industry, there is a fear that this might expand to other sectors. "If there are processes that society dislikes, then solutions must be discovered so that these businesses can grow in the way intended by society. I think we have enough banks with the courage to raise deposit rates adequately, so that deposits are appealing and profits are smart, moderate and socially acceptable," Lauri said.
Padar said that the news of record profits for banks in the context of steeply rising interest rates sounds "terrifying."
"Unquestionably, banks will have to reconsider how to cope with such a transitional situation in a prudent manner, i.e., how to respond as swiftly as possible by reducing lending margins and increasing deposit rates."
"However, it is also clear that it is not worth stirring society over this issue at this time. The banks themselves must make the decisions that the public can respect", Padar emphasized.
He said that the situation should be analyzed to see how Estonian law permits to respond.
"There is now a clear competition among banks: whereas previously there were no domestic banks, there is now competition, and I am hopeful that this will clarify who cares about their consumers and who does not, both in terms of deposit rates and lending margins."
Padar continued, "However, all other options must be considered and one place where this could be done today is the governing council of the Estonian Bank (Eesti Pank)."
"What must undertake a quick assessment of whether the state should intervene more forcefully in the future. Having seen the financial sector in Estonia over the years, I expect the banks will recognize their role in society and act accordingly," he said.
This week, it was reported that the overall profit of Estonian banks for the previous year was €566 million; across the Baltics, Swedbank's earnings climbed by 25 percent, SEB's by 17 percent, LHV's by 26 percent, Coop Bank's by 51 percent and Luminor's by 66 percent.
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Editor: Kristina Kersa