LHV raised €35 million through subordinated bonds with 10.5 percent interest, while Bigbank raised €5 million at an interest of 8 percent. Inbank is planning to raise at least €6 million through its subordinated bonds issue sporting a quarterly interest rate of 9 percent. All with a redemption period of ten years.

One reason banks are issuing bonds is their ability to raise money over longer periods of time than through deposits, with redemption periods potentially stretching into decades.

Toomas Arak, head of financial markets for Swedbank, said that both outside and equity capital is made up of different layers that have their own price and importance. "Because subordinated bonds can be counted as part of equity capital, the locals banks are taking the opportunity. Until now, subordinated bonds have had a period of ten years, while investors should keep in mind that the bank has the right to recall the bonds early, and so far the banks here have done so after five years," he said.

Arak added that because private and public sector financing has largely been loan-centered, bonds are a good way to raise outside capital.

Endriko Võrklaev, fund manager for SEB Varahaldus, said that the interest rates of bonds and deposits do not quite compare because they can sport very different levels of risk.

"The same issuer can raise money with bonds of different rank and risk level – for example, the same bank can raise money with senior bonds with an interest rate of 6 percent and with subordinated bonds with an interest rate of 10 percent. The so-called senior bonds of a higher rank are less risky from the investor's point of view, because in case of problems, such claims are among the first to be satisfied. On the other hand, in the case of subordinated bonds, such claims are among the last to be satisfied," said Võrklaev and emphasized that a higher interest rate also comes with a higher risk.

Arak said that investors tend to pick bonds because they are usually a lower-risk instrument compared to shares. "In the case of our local bank bonds, the investor should consider that they are subordinated bonds, which are somewhat riskier than a normal bond, as other lenders have priority over subordinated bondholders in the bankruptcy process."

Bank deposits also yield fixed income and while the return on investment is lower, so is the risk of losing the money.

Võrklaev said that if, for example, in the case of shares, the dividends to be paid are not fixed for the future, then in the case of bonds, the cash flow is clearer.

"In a situation where we have a ten-year stock market rally behind us and global stocks have already become relatively expensive, an annual interest rate of 8-10 percent sounds attractive. However, the risk level of high-interest subordinated bonds should not be equated with deposits. In order for the investor to lose money with subordinated bonds, the bank that issued them doesn't even have to go bankrupt – it is enough if the quality of the loan portfolio significantly deteriorates during an economic crisis and the FSA forces the bank to partially or completely cancel such bonds. This may not be a likely scenario in the current circumstances, but an investor in subordinated bonds must take this risk into account," said Võrklaev, adding that long terms must also be taken into account, i.e. if the investor needs to realize the bond before the maturity date, he depends on whether and at what price someone agrees to buy his bond on the stock exchange.

He said that as with all investments, it is not a good idea to keep all of one's eggs in the same basket as only investing in local banks' subordinated bonds open the investor up to the same risks.

"Should our business environment deteriorate, or should the area experience a geopolitical crisis, it may affect all local financial institutions. Subordinated bonds could be a good way to complement an investment portfolio, while investing in them should be done with moderation," Võrklaev said.

Toomas Arak said that it is not possible to directly compare the price of instruments of different capital layers, i.e. whether subordinated bonds are favorable for the bank or not.

"If a bank uses depositors' money, capital contributed by owners, subordinated and other level bonds to finance itself, then they all have a different price, but the characteristics are also different, they cannot be compared only by price," he said.

Võrklaev noted that one of the reasons for raising money with subordinated bonds is the capital requirements applicable to banks – when lending out money, the bank must use a tenth of its own money, and it can raise the rest as deposits from customers. It is equity capital that a bank can raise by issuing shares or subordinated bonds. "From the bank's point of view, 10 percent interest may seem expensive compared to deposits, but compared to investors' income expectations from shares, 10 percent may again be favorable."

"For the bank, the price of the capital to be raised as a whole is important – if a small part of the capital is raised with expensive bonds and the larger part with cheaper deposits, the weighted average price of the capital will still be suitably low for the bank," said Võrklaev.

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