Legal framework of banking

The foundation for the effectiveness and reliability of the financial system is legislation that complies with internationally acknowledged rules and good practice, and which takes local needs into account. Creating a framework of activity for the banking sector is part of the central bank's duties in safeguarding financial stability. Eesti Pank issues directives regulating the banking system's operations.

Prudential ratios serve to enforce requirements concerning the size of a bank's capital buffers in order for the instruments of depositors and other creditors to remain unharmed even in cases of unpleasant surprises. The general principle is that the greater the risks a bank has taken, the bigger the buffers should be. The prudential ratios also determine the size of the client-related risks the bank may take on.

Among other things, the Credit Institutions Act requires that banks adhere to the following prudential ratios:

  Minimum amount of own funds;

  Capital adequacy;

  Risk exposure limits;

  Investment restrictions.

The principles for calculating the limits and requirements have been laid down in the following legal acts:

  The Credit Institutions Act

  Procedure for the application and calculation of prudential ratios of credit institutions and consolidation groups of credit institutions

Another of Eesti Pank's duties is to guarantee the smooth operation of settlement systems and participate in their development.. Therefore, the central bank also oversees the settlement systems and enforces regulations concerning the settlement of interbank transfers. For more information, see settlement system regulations.