On Thursday, 1 October 1998, Eesti Pank applied decisive
measures in order to guarantee stable and smooth operation of
the banking sector.
Despite of the substantially changed economic environment,
the capitalisation of the banking system in general has
considerably strengthened. Nevertheless, Eesti Pank has taken
special care to avoid the possibility of a systemic crisis.
The aim of the central bank is to protect the interests of
all credit institutions' depositors and to maintain
domestic and international confidence in the Estonian
economic and monetary policy. When finding the solutions,
Eesti Pank worked in close co-operation with the Government
of the Republic of Estonia and informed international
financial institutions.
In order to avoid problems, Eesti Pank took the decision
to actively participate in the merger process of Eesti
Forekspank and Estonian Investment Bank by temporarily
acquiring a majority stake in both banks in order to achieve
the capital adequacy of the merged bank of at least 14%.
Regardless of a temporary lack of capital of Eesti
Forekspank, both banks together have a significantly positive
net worth and potential future value. In addition, these
banks are able to effectively re-organise their activities
and continue their operations as a merged credit institution.
The future activities of this bank will have the financial
and moral support of Eesti Pank as the biggest share-holder.
The entire future development will take place under the
careful oversight of the state. At the same time, Eesti Pank
will shortly start negotiations for finding a strategic
foreign investor for the merged bank to whom the entire
holding of Eesti Pank will be sold by the end of 1999 at the
latest.
At the same time, Eesti Pank decided to begin bankruptcy
proceedings against EVEA Pank. Unlike the other two banks
mentioned above, an analysis of EVEA Pank operations showed
that re-capitalisation would not guarantee a positive future
scenario. EVEA Pank has a negative net worth today and thus,
is significantly under-capitalised. In addition, the
operational results of the bank have been constantly
deteriorating.
Under those circumstances Eesti Pank found it
indispensable to terminate the operation of EVEA Pank from
Friday, 2 October. The deposit compensation mechanism set in
the Deposit Insurance Fund Act guaranteeing compensation up
to 20 thousand Estonian kroons, will be fully applied to the
depositors.
In the opinion of Eesti Pank, certain problems in Eesti
Forekspank and EVEA Pank were caused by the co-effect of
different factors. Decisive were, first and foremost,
erroneous financial and management decisions made in the
tightening competition. Also, one cannot underestimate
psychological and emotional factors.
The global and domestic economic environment,
significantly different from the earlier periods together
with the pressures on the financial markets and shift of
clients into bigger banks, made the situation in the above
banks more and more complicated. This was boosted by
management mistakes of earlier periods caused by
over-optimism and certain reflections of the events in Russia
the impact of which in a normal situation would have been
modest.
One of the factors was also a certain decrease of
confidence in the above banks over the recent month. Rumours
on the market, often untrue, were amplified and emotions
began to overrule. Consistent outflow of money began.
The above said lead to the steep deterioration of the
situation in the two commercial banks and to the need for
decisive action by the state. Eesti Pank is convinced that
the solution of all problematic issues in a decisive,
transparent and least expense way to the society, will
strengthen the monetary and banking system as a whole and,
more broadly, the Estonian economy.
