During the state budget talks, the heads of Estonia’s largest banks met with Prime Minister Kaja Kallas (Reform), reaching an agreement whereby they will pay much higher dividends in the coming years.
Asked by ERR if the banks will now have to reduce their equity and what role the Financial Supervisory Authority might play in that process, head of the authority Kilvar Kessler, said that for legal reasons, he is not able to comment on specific banks or circumstances at this stage.
More generally, capital requirements for all credit institutions in the European Union are governed by a single regulation, which sets out how much capital a bank has to have and to what quality, in order to protect the interests and rights of depositors as well as maintain the bank’s solvency.
“Under certain conditions, these buffers also include profits, accumulated profits or even projected profits,” Kessler said.
If these buffers are to be reduced on an exceptional basis, it will be up to the financial supervisor to decide whether, and under what conditions, to allow banks to do so.
Kessler pointed out that Estonian banks are supervised not only by the Financial Supervision Authority, but also by the European Central Bank. In individual cases, the first step is to clarify the circumstances in conjunction with the banks, which involves the size and quality of the buffers being assessed. Only then can it be determined whether a decision to reduce these buffers needs to be made or not.
“Certainly, there have to be decisions from shareholders and owners, but whether a decision is also needed from the supervisors at all remains an open question at this point in time, because the supervisor has to clarify the facts through dialogue with the parties involved,” Kessler said.
In other words, banks first need to state how much they wish to reduce their equity and what their buffers are. This then has to be analyzed by the Financial Supervision Authority and the European Central Bank. The overall economic environment, the growth or contraction of the bank’s loan portfolio and its quality, along with several other factors, are taken into account in the analysis.
It may also transpire that, depending on the specific circumstances, that supervisory decisions are not required and that a decision made by shareholders to distribute dividends or profits is deemed sufficient.
Kessler said it is too soon to talk about specific procedures, as the facts on the ground are still being established and the buffers will be reviewed on a bank-by-bank basis. This type of procedure is not a public one.
The processes also depend on the size of the bank. Swedbank, SEB, LHV and Luminor will be subject to a decision by the European Central Bank’s Joint Supervisory Board, of which Kessler is a member. In the case of smaller banks such as Coop Bank, the decision is taken independently by the Estonian Financial Supervision Authority.
“The focus of the supervisors is that a bank maintains stability and solvency, that it has sufficient buffers to be able to perform its functions, to protect depositors, to lend and that financial stability is ensured. That is the aim of the supervisors. The banks’ aim is, on the one hand, to provide services to their customers and, on the other, to keep their owners happy. We can have some slightly contradictory view, but not always,” said Kessler, adding that is usually possible to find a balance.
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