Mart Võrklaev: Estonia needs a savings and loan associations reform

Minister of Finance Mart Võrklaev (Reform).
Minister of Finance Mart Võrklaev (Reform). Source: Ken Mürk/ERR

Estonia's current savings and loan regulation is outdated and in need of changes, with problems only set to deepen over time. There is no proper supervision of savings and loan associations and people's money is not sufficiently protected, Minister of Finance Mart Võrklaev writes.

We remember well the insolvencies of savings and loan associations Erial and Eesti-Arengu Hoiu-laenuühistu from recent years that caused hundreds of people to lose their savings overnight. Situations like these need to be avoided in the future.

For this purpose, we have decided to lay down more stringent rules for savings and loan associations and have sent a corresponding bill out for approval. Savings and loan associations that wish to continue raising deposits will have to register as banks or association banks from 2029.

The current Savings and Loan Associations Act has been in effect since 1999 and was last amended in 2010. The number of savings and loan associations' members and assets has grown by many times since. While such associations only had around €2 million in deposits from members in late 2010, this has grown to €91 million now.

These figures also suggest that more and more people entrust savings and loans associations with their money with little heed to whether it is protected. People fail to realize that a savings and loan association is not a bank, is not subject to financial supervision and lacks guarantee fund protection. In other words, if such an association declares itself insolvent, people have no guarantee they will see their deposits returned. Banks in Estonia are subject to deposit guarantee requirements, meaning that depositors are guaranteed 100 percent of their deposits up to a limit of €100,000.

Members of savings and loan associations have written to the Ministry of Finance, saying that the associations are not releasing enough information and that they fear they might not see their money again.

The original idea of savings and loan associations was for people active in the same area or profession to handle the exchange of finances more quickly and cheaply. Mutual trust based on social control, in other words, knowing one another's background, used to be key. Today, many associations do not display any joint activity, their members ordinary depositors who are not associated in any other way.

This leaves both members and the state "in the dark" to a certain degree as there is insufficient information on what is going on inside savings and loan associations. While statistics on balance and profit does reach the Bank of Estonia, it is not enough to precent potential misuse of depositors' money.

The amendments will enter into force in three stages over five years to give market participants enough of a transitionary period.

It will no longer be possible to register new savings and loan associations starting from 2024, with an association bank remaining the only such output. Deposit interest rate advertising will be banned and members will be able to access more information about their balance and loans.

The second-stage changes aimed at increasing transparency will be applied on January 1, 2025. Members will be given broader powers to call a general meeting and order special audits. Regular contact between members will be encouraged and lending to certain third persons, including board members or persons associated with them, credit and financing institutions, limited.

The third and final stage will introduce changes that force savings and loan associations to secure a banking or association banking license by late 2028. Therefore, associations have until 2027 to decide whether to file for a banking license from the FSA. Those that decide not to will have to wrap up recent activity.

Those that do not seek or are refused a banking license can continue in the form of a commercial association (that cannot involve deposits). Such organizations can still offer payment services and consumer loans.

There is no reason to believe the changes will do away with cooperative activity in Estonia. On the contrary, it will become more transparent and protective of depositors.

Estonia's current savings and loan associations regulation is among the more liberal. Most European countries rather use the association banks model, which is the case in Lithuania, Finland, Ireland and Germany.


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Editor: Marcus Turovski

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