In 2000 the International Monetary Fund (IMF) published a report based on an assessment of banking supervision in Estonia, in which it concluded that the country was either "compliant" or "largely compliant" with most of the Basel Core Principles (BCPs). It was found lacking in only three principles. For the principles covering asset quality and connected lending, the 2000 report rated Estonia as materially non-compliant, and on legal protection for supervisors, Estonia was rated as non compliant. A 2002 update by the IMF on its 2000 assessment notes that improvements were made to bring Estonia more in line with the BCPs. However, the financial supervisory body changed from the Bank of Estonia (BoE) to the Financial Supervision Authority (FSA) in 2002. The FSA is an independent agency which is responsible for banking, insurance, and securities market supervision in order to enhance the stability, reliability, transparency, and efficiency of the financial sector. Furthermore, a 2005 European Bank for Reconstruction and Development (EBRD) report indicated that Estonia's banking legislative framework is generally sound, with few shortcomings. The IMF's 2007 Article IV Consultation report on Estonia indicates that the country has strong banking sector indicators, with well capitalized and highly profitable banks and negligible amounts of non-performing loans. Apart from the EBRD assessment, which only assesses the legislative framework for banking supervision in Estonia, there is little information publicly available as to Estonia's actual implementation of the BCPs after the shift in supervisors.

General Overview

In 2000, the International Monetary Fund (IMF) published a report based on an assessment on banking supervision in Estonia, and concluded that the country was either "compliant" or "largely compliant" with most of the Basel Core Principles (BCPs). It was found lacking in only three principles. For the principles on asset quality and connected lending, the IMF 2000 report found Estonia to be materially non-compliant, and on legal protection for supervisors it was rated as non compliant. The IMF's 2002 update on its 2000 assessment notes that improvements were made to bring Estonia more in line with the BCPs. Furthermore, a 2005 European Bank for Reconstruction and Development (EBRD) report indicated that Estonia's banking legislative framework is generally sound, with few shortcomings.

According to the IMF 2000 ROSC report, the main laws that govern Banking Supervision in Estonia are the 2002 Financial Supervision Authority (FSA) Act, the 1999 Credit Institutions Act, the 1993 Law of the Bank of Estonia, the 1996 Statute of the Bank of Estonia, and the 1999 Money Laundering and Terrorist Financing Prevention Act. According to the IMF 2002 ROSC update, decree No. 9 by the Governor of the Bank of Estonia (BoE) on rules for loan classification and loan loss provisioning was enacted on July 1, 2000. Supervisors are now protected by the FSA Act and the State Liability Act implemented on January 1, 2002. On-site supervisors now have the right to demand explanations from management, staff, and the internal audit unit of credit institutions. Per a 2006 FSA Annual Report, amendments to the Credit Institutions Act and the FSA Act came into force on January 1, 2007, providing for capital requirements calculations within the Basel II framework.

As of January 1, 2002, the financial supervisory body changed from the BoE to the FSA, as stated in the European Bank for Reconstruction and Development (EBRD) 2005 Law in Transition report. The FSA is an independent agency which is responsible for banking, insurance, and securities market supervision in order to enhance the stability, reliability, transparency, and efficiency of the financial sector. The 2002 IMF ROSC update reports that the FSA has the power to review activities of parent companies and their affiliates, as well as revoke licenses granted to overseas branches of Estonian banks. Although the new supervisory system allows for better information sharing, and provides anti-money laundering (AML) guidelines for credit institutions as stated in the IMF 2002 ROSC report, there is still a lack of provisions in the Money Laundering and Terrorist Financing Prevention Act for information sharing with other agencies. Furthermore, apart from the EBRD assessment, which only assesses the legislative framework for banking supervision in Estonia, there is little information publicly available as to Estonia's actual implementation of the BCPs after the shift in supervisors. Memoranda of Understanding (MoU) have been concluded with the supervision authorities of Latvia, Lithuania, and Finland. Nevertheless there is a need for further information exchanges with foreign supervisors. According to the 2006 FSA Annual Report, the FSA was continuing its preparations for the application of the Basel II solvency framework.

According to a 2007 U.S. Department of Commerce (DoC) Country Commercial Guide Report, Estonia's financial sector is modern and efficient. Fourteen banks operate in Estonia, including branches of seven foreign banks, and the internet banking system is highly advanced. Per a 2007 IMF Article IV Consultation report, the minimum capital adequacy ratio in Estonia is above the EU level at 10 percent, and the reserve requirement is 15 percent. The legal, regulatory, and accounting systems are also transparent and consistent with international standards, and the Security Market Law complies with EU requirements, according to the 2007 U.S. DoC report.

The Principles

1. (1) Clear responsibilities and objectives for each supervisory agency.

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According to the IMF's 2000 ROSC, Estonia is "compliant" with this principle, and no further corrective action is required. Since January 1, 2002, as stated in the European Bank for Reconstruction and Development (EBRD) 2005 Law in Transition report, the financial supervisory body in Estonia changed from the Bank of Estonia (BoE) to the Financial Supervision Authority (FSA). The FSA is an independent agency which is responsible for banking, insurance, and securities market supervision in order to enhance the stability, reliability, transparency, and efficiency of the financial sector. Apart from the EBRD assessment, which only assesses the legislative framework for banking supervision in Estonia, there is little information publicly available as to Estonia's actual implementation of the BCPs after the shift in supervisors.

1.(2) Operational independence and adequate resources.

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In its 2000 ROSC, the IMF rated Estonia as "largely compliant" with this principle, citing the lack of training of supervisors. According to the 2005 EBRD report, legislation in Estonia has a high level of compliance regarding operational independence and legal protection from liability suits. However, there is insufficient publicly available information on Estonia's compliance with this principle due to the change in supervisory body in 2002.

1.(3) A suitable legal framework for authorization and ongoing supervision.

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According to the IMF 2000 ROSC, Estonia is "compliant" with this principle, and no further corrective action is required. However, there is insufficient publicly available information on Estonia's compliance with this principle due to the change in supervisory body in 2002.

1.(4) A suitable legal framework to address compliance with laws as well as safety and soundness concerns.

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According to the IMF 2000 ROSC, Estonia is "compliant" with this principle, and no further corrective action is required. However, there is insufficient publicly available information on Estonia's compliance with this principle due to the change in supervisory body in 2002.

1.(5) Legal protection for supervisors.

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In its 2000 ROSC, the IMF rated Estonia as "noncompliant" with this principle, citing the lack of legal protection for supervisors. According to the IMF 2002 ROSC update, however, supervisors are now protected by the FSA Act and the State Liability Act, implemented on January 1, 2002. Nevertheless, there is insufficient publicly available information on Estonia's compliance with this principle due to the change in supervisory body in 2002.

1.(6) Arrangement for sharing of information between supervisors and protection of confidentiality of shared information.

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In its 2000 ROSC, the IMF rated Estonia as "largely compliant" with this principle, citing a lack of MoUs with Securities Inspectorate. According to the IMF 2002 ROSC update, the dual supervisory system allows for better information sharing, and MoUs have been concluded with supervision authorities of Latvia, Lithuania, and Finland. However, there is insufficient publicly available information on Estonia's compliance with this principle due to the change in supervisory body in 2002.

2. Clearly defined permissible activities for banks and control of the use of the word 'bank'.

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According to the IMF 2000 ROSC, Estonia is "compliant" with this principle, and no further corrective action is required. However, there is insufficient publicly available information on Estonia's compliance with this principle due to the change in supervisory body in 2002.

3. Criteria for structure, directors, operating plan, controls, financial condition and capital base.

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According to the IMF 2000 ROSC, Estonia is "compliant" with this principle, and no further corrective action is required. However, there is insufficient publicly available information on Estonia's compliance with this principle due to the change in supervisory body in 2002.

4. Authority to review and reject transfer of ownership.

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According to the IMF 2000 ROSC, Estonia is "compliant" with this principle, and no further corrective action is required. However, there is insufficient publicly available information on Estonia's compliance with this principle due to the change in supervisory body in 2002.

5. Authority to review major acquisitions and investments.

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According to the IMF 2000 ROSC, Estonia is "compliant" with this principle, and no further corrective action is required. According to the 2005 EBRD report, however, Estonian law does not request prior supervisory approval for major acquisitions. Nonetheless, there is insufficient publicly available information on Estonia's compliance with this principle due to the change in supervisory body in 2002.

6. Minimum capital adequacy requirements (meet Basle Capital Accord for internationally active banks).

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According to the IMF 2000 ROSC, Estonia is "compliant" with this principle, and no further corrective action is required. Per a 2006 FSA Annual Report, amendments to the Credit Institutions Act and the FSA Act came into force on January 1, 2007, providing for capital requirements calculations within the Basel II framework. However, there is insufficient publicly available information on Estonia's compliance with this principle due to the change in supervisory body in 2002.

7. A method exists for the evaluation of procedures related to loans, investments and portfolio management.

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According to the IMF 2000 ROSC, Estonia is "compliant" with this principle, and no further corrective action is required. However, there is insufficient publicly available information on Estonia's compliance with this principle due to the change in supervisory body in 2002.

8. Policies, practices and procedures for evaluating the quality of assets and the adequacy of loan loss provisions and reserves.

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In its 2000 ROSC, the IMF rated Estonia as "materially noncompliant" with this principle, citing the lack of a decree on loan classification and loan-loss provisioning. According to the IMF 2002 ROSC, however, Decree No. 9 by the Governor of the BoE on rules for loan classification and loan loss provisioning was enacted on July 1, 2000. Nevertheless, there is insufficient publicly available information on Estonia's compliance with this principle due to the change in supervisory body in 2002.

9. Prudential limits and management information system on concentration of exposure.

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According to the IMF 2000 ROSC, Estonia is "compliant" with this principle, and no further corrective action is required. However, there is insufficient publicly available information on Estonia's compliance with this principle due to the change in supervisory body in 2002.

10. Arm's length rule and monitoring for connected lending.

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According to the IMF 2000 ROSC, Estonia is "compliant" with this principle. On January 1, 2002, relevant provisions to the Credit Institutions Act were extended to managers of shareholders and to companies in which managers hold a qualifying interest according to the IMF 2002 ROSC. However, there is insufficient publicly available information on Estonia's compliance with this principle due to the change in supervisory body in 2002.

11. Policies and procedures for country risk and transfer risk.

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In its 2000 ROSC, the IMF rated Estonia as "materially noncompliant" with this principle, citing the lack of capital adequacy regulations to cover country risk and transfer risk. According to the IMF 2002 ROSC, however, country risk is now covered by capital adequacy regulations that are based on relevant provisions of the Credit Institutions Act. Furthermore, both country and transfer risks are dealt with in Public Disclosure Reports, and banks must classify their assets and liabilities according to country identification numbers. The new capital adequacy and risk concentration calculation guidelines were introduced on July 1, 2002. However, there is insufficient publicly available information on Estonia's compliance with this principle due to the change in supervisory body in 2002.

12. Measuring and monitoring market risk. Limit and/or specific capital charge on market risk exposure.

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In its 2000 ROSC, the IMF rated Estonia as "compliant" with this principle, but advised the FSA to seek external support when assessing risk models. Since the IMF 2002 ROSC, supervisors have received training, and a special provision was introduced to cover commodities and commodities derivatives as part of the capital adequacy framework. Nevertheless, there is insufficient publicly available information on Estonia's compliance with this principle due to the change in supervisory body in 2002.

13. Comprehensive risk management processes.

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In its 2000 ROSC, the IMF rated Estonia as "largely compliant" with this principle, citing a lack of explanations on operational risk and information-sharing systems on fraud between banks. According to the IMF 2006 Article IV Consultation report, published in 2007, the process of bank supervision and risk management has encountered difficulties due to Estonia's close integration with Nordic countries and the openness of its capital account. Therefore, the IMF recommends cooperation with Swedish financial supervisors. However, there is insufficient publicly available information on Estonia's compliance with this principle due to the change in supervisory body in 2002.

14. Adequate internal controls.

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According to the IMF 2000 ROSC, Estonia is "compliant" with this principle, and no further corrective action is required. However, there is insufficient publicly available information on Estonia's compliance with this principle due to the change in supervisory body in 2002.

15. Strict "know-your-customer" rules and high ethical and professional standards.

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In its 2000 ROSC, the IMF rated Estonia as "largely compliant" with this principle, citing the lack of provisions in the Money Laundering and Terrorist Financing Prevention Act for information sharing with other agencies. According to the IMF 2002 ROSC, the new supervisory system allows for better information sharing, and provides anti-money laundering (AML) guidelines for credit institutions. Nevertheless, there is insufficient publicly available information on Estonia's compliance with this principle due to the change in supervisory body in 2002.

16. Effective supervisory system consisting of on-site and off-site supervision.

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According to the IMF 2000 ROSC, Estonia is "compliant" with this principle, and no further corrective action is required. However, there is insufficient publicly available information on Estonia's compliance with this principle due to the change in supervisory body in 2002.

17. Regular contact with bank management and understanding of bank's operations.

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According to the IMF 2000 ROSC, Estonia is "compliant" with this principle. In its 2002 ROSC, the IMF recommended that credit institution managers inform the FSA of any material changes in their organization. Nevertheless, there is insufficient publicly available information on Estonia's compliance with this principle due to the change in supervisory body in 2002.

18. Analytical reports and statistical returns on solo and consolidated basis.

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In its 2000 ROSC, the IMF rated Estonia as "largely compliant" with this principle, citing the lack of a decree on reporting rules for loan classification. According to the IMF 2002 ROSC, however, Decree No. 9 by the Governor of the BoE on rules for loan classification and loan-loss provisioning was enacted on July 1, 2000. However, there is insufficient publicly available information on Estonia's compliance with this principle due to the change in supervisory body in 2002.

19. Independent validation of supervisory information through on-site examination or external auditors.

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According to the IMF 2000 ROSC, Estonia is "compliant" with this principle. In its 2002 ROSC, the IMF noted that on-site supervisors have the right to demand explanations from management, staff, and the internal audit unit of credit institutions. Nevertheless, there is insufficient publicly available information on Estonia's compliance with this principle due to the change in supervisory body in 2002.

20. Ability to supervise on a consolidated basis.

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In its 2000 ROSC, the IMF rated Estonia as "largely compliant" with this principle, citing the FSA's inability to review the activities of parent companies and their affiliates. However this shortcoming has been addressed since the IMF 2002 ROSC. Nevertheless, there is insufficient publicly available information on Estonia's compliance with this principle due to the change in supervisory body in 2002.

21. Consistent accounting policies and practices that provide a true and fair view of the financial condition of the bank.

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According to the IMF 2000 ROSC, Estonia is "compliant" with this principle, and no further corrective action is required. However, there is insufficient publicly available information on Estonia's compliance with this principle due to the change in supervisory body in 2002.

22. Adequate supervisory measures to ensure timely corrective action.

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According to the IMF 2000 ROSC, Estonia is "compliant" with this principle, and no further corrective action is required. However, there is insufficient publicly available information on Estonia's compliance with this principle due to the change in supervisory body in 2002.

23. Banking supervisors must practice global consolidated supervision over their internationally-active banking organizations.

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In its 2000 ROSC, the IMF rated Estonia as "largely compliant" with this principle, citing the FSA's inability to revoke licenses granted to overseas branches of Estonian banks. However this shortcoming has been addressed since the IMF 2002 ROSC. Nevertheless, there is insufficient publicly available information on Estonia's compliance with this principle due to the change in supervisory body in 2002.

24. International exchange of information with other supervisors.

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According to the IMF 2000 ROSC, Estonia is "largely compliant" with this principle. In its 2002 ROSC, the IMF notes that host-country supervision principles have been established, and are regulated in MoUs with Latvia, Lithuania, and Finland. As noted in the 2005 FSA report, cooperation and the exchange of information with foreign financial supervision agencies in the framework of banking supervision is crucial. The FSA is actively involved in the work of the Committee of European Banking Supervisors (CEBS), which aims to implement the new capital adequacy framework in EU Member States. Nevertheless, there is insufficient publicly available information on Estonia's compliance with this principle due to the change in supervisory body in 2002.

25. Supervision of local operation of foreign banks and information sharing with home country supervisors.

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According to the IMF 2000 ROSC, Estonia is "compliant" with this principle, and no further corrective action is required. However, there is insufficient publicly available information on Estonia's compliance with this principle due to the change in supervisory body in 2002.