TALLINN, Oct. 31 (Xinhua) -- The biggest risk to banking in Estonia continues to come from the Nordic countries despite of the strong financial position of the Estonian banking sector, the Bank of Estonia said on Wednesday.
The financial position of the Estonian banking sector is strong. The level of own funds of the banks is high, the quality of the loan portfolio of the banks is very good, and loan losses are small, the Estonian central bank said in a press release.
The biggest risk to banking in Estonia continues to come from the Nordic countries. The sources of risk there are the high indebtedness of households and high dependence of banks on market-based financing large debt of households. If developments were to turn bad, the ability of Estonia to export could be reduced and the funding conditions for Estonian companies could be tightened, it added.
The departure of some foreign banks has reduced the relations between the Estonian banking sector and the Nordic countries, but this brings a new danger to financial stability in Estonia, it noted.
The role of Nordic parent banks in funding the banks will decline in future and they will start more and more to access funding from international financial markets. The banks operating in Estonia largely fund themselves with client deposits and loans from their parent banks, but financial markets are a more volatile source of funding, said the press release.
The overall trustworthiness of the Estonian financial sector, which has been shaken of late by the money laundering scandal, will also become more important, said the press release.
However, the impact of the money laundering scandal on the Estonian financial sector overall remains small, as Danske Bank, which has been in the centre of the suspicions of money laundering, has ended its business with non-residents in Estonia, while small Estonian bank Versobank AS was closed in March over failures to remedy regulatory breaches in areas such as money laundering after a request from the Estonian Financial Supervision Authority, it added.
The major share of the funding for the Estonian banking sector comes from resident client deposits, and the share of non-resident deposits has fallen over the years and is now only 7 percent, while companies from outside the European Union are now less than 1 percent of all clients, according to the Bank of Estonia.
Another risk to financial stability alongside the risk from the Nordic countries is the rapid growth in the real estate and construction sector in Estonia, as it is sucking in labour, investment and funding, said the press release.