In an analysis of the competition situation in banking by the Bank of Estonia, to which the Financial Supervision Authority also contributed, it is concluded that eliminating or significantly reducing the early termination fee for loan agreements would primarily make transferring a loan agreement to another bank faster and more efficient.

Under the current system, this fee can only be avoided if the early repayment of the existing mortgage is planned three months in advance, but this makes refinancing the loan very cumbersome.

This is also the suggestion with the most significant financial impact. Additionally, the analysis suggests that when transferring a mortgage to another bank, the bank itself, instead of a real estate agency, could assess the property serving as loan collateral, and the obligation to visit a notary could also be eliminated. A similar approach is used in both Finland and Sweden.

The second group of suggestions concerns the formation of loan prices, and according to the analysis, there should be more options available. Namely, a large part of banks typically only offer loans linked to the six-month Euribor, but the Bank of Estonia and the FSA suggest that banks should be obliged to offer clients loans linked to both shorter and longer Euribor periods, as well as loans with a fixed interest rate for several years.

For example, if a person has an existing mortgage of €100,000, the costs of transferring such a loan to another bank could reach up to €3,000. If all the proposals of the central bank and financial supervision were implemented, the fee for transferring a mortgage to another bank could significantly decrease, and the transfer would become faster and less cumbersome.

Müller: Banking could emulate the telecom market

"The competition in the Estonian mobile telephony market became stronger when operator switching was made easy for people. We could take the same direction in banking," said President of the Bank of Estonia Madis Müller. "Then it would be less cumbersome and less costly for people to move their loan to another bank, and banks would have a greater interest in making better offers to people."

Thus, competition among banks should not only be for the sake of acquiring new clients but also for retaining existing ones.

"We see from the Finnish example that this can make even a relatively small loan market work much better," Müller added.

Siim Tammer, member of the board of the Financial Supervision Authority, said the authority supports initiatives that simplify the refinancing of home loans.

"Specifically, we would highlight the aspect concerning property valuation. The property valuation service is a considerable cost in refinancing home loans, and banks should consider solutions where clients are not always directed to real estate agencies. Banks can be more flexible in such situations and conduct the valuation themselves. This would make refinancing a home loan cheaper for the client," Tammer said.

According to Tammer, several other proposals, if utilized, would require changes to the law.

"Initial discussions on eliminating notary fees and exempting from state duties in the refinancing of home loans have already taken place between the Ministry of Justice and the Ministry of Finance. Both the current situation and that changes require a broader public discussion on whether to reduce the role of notaries in refinancing home loans or not are mutually understood," Tammer stated.

In addition to cooperation with the Ministry of Justice and the Ministry of Finance, the Bank of Estonia and the Financial Supervision Authority plan to discuss the proposals in more detail with banks and the Estonian Banking Association to find the best possible compromise between the costs of financing the economy and financial stability.

Estonian banks' more profitable than those in other countries

The Bank of Estonia acknowledges in its analysis that competition among banks has not deteriorated in recent years, but the profitability of banking and loan prices have generally been higher than in many other developed countries, indicating weaker competition in Estonia.

In its analysis of banking competition, the Bank of Estonia thoroughly assessed factors affecting the competitive situation. Some factors, such as the small size of the Estonian market, cannot be changed. Although banking sector profits are large compared to other sectors of the Estonian economy, the potential customer base is relatively small, making it unlikely that large foreign banks would be interested in entering the Estonian market. Therefore, the central bank considers it very likely that only a few large banks will continue to dominate the Estonian market in the future.

Despite the small number of banks, the availability of loans has been relatively good in Estonia. According to the analysis, this is indicated by both long-term survey data and a loan growth rate significantly faster than the euro area average. From the perspective of sustainable economic development, the availability of financing is more important than the lowest possible loan price.

However, the analysis finds that loan offerings could be sustainable at slightly lower profitability, and a lower loan price would support the competitiveness of the non-financial sector.

The Bank of Estonia considers it important for the sustainable development of the Estonian economy that banks, as the lifeblood of the economy, are viable.

Therefore, it is crucial for the loan prices offered to individuals and businesses that loan margins are sustainable and profitability is sufficient for banks to manage loan losses, attract additional capital, and offer loans even in tougher times.

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