THE BANKING SYSTEM

The reform of the Estonian banking system began with the establishment of the Bank of Estonia as the central bank by the Decision of the Supreme Council of Estonian Soviet Socialist Republic of December 15, 1990. This also marked the start of decentralising the banking system and in a short time a number of new commercial banks were founded. Tartu Commercial Bank was the first commercial bank established in the former Soviet Union. By 1992, the number of commercial banks had reached 40. In the same year, a banking crisis evolved in Estonia, which led to the bankruptcy of the largest commercial bank at that time, Tartu Commercial Bank. In addition two other major banks (Union Baltic Bank and North-Estonian Bank) ran into difficulties and, as a result, were bailed out by the Government and merged. While in the case of Tartu Commercial Bank the reason behind bankruptcy was mainly poor lending practices and lack of regulatory control, the other banks had frozen assets in Russian Vnesheconombank, totalling some US$ 30 million. In order to cover the shortfall in the balance sheet of the newly merged bank, the government issued EEK 300 million worth of bonds. In general, the crisis was solved without major harm being done to the financial system. Shortly after the crisis, the Bank of Estonia considerably tightened its regulatory requirements and supervision over commercial banks. The crisis provided an opportunity to the new privately owned commercial banks, particularly Hansabank.

A period of further consolidation followed. Largely because of the Bank of Estonia's tight requirements, but also because of strong competition, many smaller banks started to merge and the number of commercial banks gradually decreased. In 1994, the last large "old" commercial bank - Estonian Social Bank - was reorganised and closed after it ran into liquidity problems after the withdrawal of State Budget Funds.

At the end of June 1997, the Estonian banking system consisted of the Bank of Estonia, 13 local commercial banks, the Estonian Investment Bank (an investment bank jointly established by the Nordic Investment Bank, EBRD and the Bank of Estonia) and the Tallinn branch of Finland's Merita Bank. The market is dominated by five local commercial banks - Hansabank, Hoiupank, the Bank of Tallinn, the Estonian Union Bank ("Ühispank) and Foreksbank.

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