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Additional safety net for Estonian financial system - International Law Office

International Law Office

Banking - Estonia

Additional safety net for Estonian financial system

February 11 2011


In the middle of the financial crisis the Estonian government made a principled decision to provide existing financial regulation with an ultima ratio (last resort) option of nationalising credit institutions (ie, banks) in order to secure the stability of the financial system and avoid chaos. On January 1 2011 the amendments to the Credit Initiations Act entered into force, setting forth the respective legal framework.

The amendments enable the state to nationalise a shareholding in a credit institution if the Financial Supervision Authority has reasonably found that the major credit institution cannot be saved through regular mechanisms found in the 'supervisory toolbox'. To be more specific, the nationalisation process may be commenced if:

  • a credit institution fails to comply with a substantial part of the existing standards;
  • shareholders refuse to cooperate with state institutions; and
  • other financial authority administrative measures do not serve the purpose.

Pursuant to the amendments, the Ministry of Finance would initiate the nationalisation process. Before commencing the process, the ministry would be obliged to consult with the Bank of Estonia (the Central Bank) and the Financial Supervision Authority. At the final stage the government would decide on the fair price payable to shareholders for their shareholding subject to nationalisation.

Nationalisation is an emergency last resort for distressing the financial system; it is hoped that it will remain in the supervisory toolbox as a tool that will never need to be used. However, the option of nationalisation at least provides the Estonian financial system with an additional safety net.

For further information on this topic please contact Priit Pahapill at Luiga Mody Hääl Borenius by telephone (+372 665 1888), fax (+372 665 1899) or email (priit.pahapill@lmh.ee).


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