Meeting of the Supervisory Board of Eesti Pank

At the regular meeting of the Eesti Pank Supervisory Board on Tuesday, Governor of the central bank Madis Müller explained that extraordinary windfall taxation of banks could make the depositing and borrowing conditions for bank clients less favourable.

Governor of Eesti Pank Madis Müller said that it is worth considering what Estonian society wants above all from the banking sector. "If the goal is to provide banking services to Estonian borrowers and savers under the best possible conditions, meaning with higher interest rates for deposits and lower ones for loans, additional extraordinary taxation of the banks would go against that goal".

Mr Müller said the role of the banking sector in society is to issue loans and provide a secure place to keep savings. For them to perform this function reliably and consistently, the banks need to retain a sufficient part of the profits that they earn during the good times. "If we do not allow the banks to earn profit and so strengthen their capital, it may be harder for them to cope with problem loans in more difficult times, and in that case the recovery of the economy will be hindered as the banks will not be able to issue enough new loans. The outlook for profits for the banks in Estonia is currently good, so that we might ask whether stronger competition could lead them to raise their deposit interest rates more and cut their loan margins".

Interest rates on deposits have risen markedly more slowly than those on loans as the banking sector in Estonia currently has sufficient deposits to cover the demand for loans in Estonia. Some rise in the rate on term deposits is already apparent together with a small fall in loan margins, but Mr Müller argued that the profitability of the banks right now means that more could be done.

"A large amount of the money in the banks is currently simply held at current accounts. We as bank clients could be more demanding by moving our available cash into term deposits and looking at different banks' interest offerings. We should be equally careful when taking out a new loan or refinancing an old one. More demanding clients lead to lower prices for services", he noted.

Mr Müller said that it could be worth considering whether a larger than regular contribution to the Guarantee Fund should be made by the banks, at a time when they are earning larger profits, to finance the deposit guarantee in advance. Doing so would reinforce the readiness of the Estonian state to cope in the face of any future banking crisis that could happen.

He also raised a question whether Estonia needs to continue with the special tax regime that takes income tax of only 14% from the banks and other companies that pay out regular dividends. As the tax rate on dividends for local investors is ultimately still 20%, the special rate is essentially a tax break that only benefits foreign investors who receive dividends. Having incentive for paying out regular dividends, the banks also face the risk that if their profits are smaller in one year, they may be inclined to pay out excessively large dividends instead of strengthening their capital. Mr Müller said it is worth considering whether that income tax break has adequately served its purpose.

Chair of the Eesti Pank Supervisory Board Mart Laar agreed that it was important to discuss this topic. He also noted that the Supervisory Board has no role by law in setting policy, but only supervises whether the central bank is carrying out its duties.

The banks operating in Estonia earned profit of 490 million euros in 2022, which is some 20% more than in the previous year and brought their profits back up to their pre-pandemic levels. The biggest contributor was the increase in interest income. The profits of the banks have been in the range of 280-660 million euros in previous years.

Other agenda items at the meeting saw the Supervisory Board decide to continue with the same profit distribution strategy for the central bank in 2023. Under this strategy, the central bank pays up to one quarter of its profit to the state and puts the remainder into the central bank reserves.

Madis Müller also gave the Board the regular review of the state of the economy in the euro area. The Supervisory Board confirmed the report of the internal audit on its work last year and extended its work plan for this year. The Board also held the first reading of the central bank's annual report for last year and the report of the activities of the Supervisory Board in 2022.

The next meeting of the Eesti Pank Supervisory Board will be on 21 March.

For further information:
Viljar Rääsk

Head of Communications
Eesti Pank
5275 055
Email: [email protected]

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