Central Bank of Estonia keeps countercyclical capital buffer at 1.5% amid prolonged rapid lending growth

The Central Bank of Estonia published the key findings of its Financial Stability Review, assessing the financial sector as generally sound while flagging that sustained fast credit growth could allow risks to accumulate. It therefore deems it necessary to keep banks’ countercyclical capital buffer rate at 1.5% so they remain able to lend even if the economy turns down. Loan repayment performance by households and companies has remained solid, supported by improving corporate results, rising incomes and moderate unemployment, as well as earlier-built buffers and lower Euribor following European Central Bank rate cuts. At the same time, the economic recovery has encouraged borrowing and pushed up indebtedness, with particularly strong growth in lending to real estate and construction companies and year-on-year housing loan growth of more than 10%; the central bank notes that real estate company loans are among the largest components of corporate lending and are taking a larger share, increasing banks’ vulnerability to real estate market problems. Risk is also influenced by very rapid lending growth in Latvia and Lithuania, which together account for about a quarter of Estonian banking groups’ total loan portfolios, while prolonged credit expansion has led banks to rely more on international bond markets alongside deposits, exposing funding costs and availability to market volatility and potential geopolitical or broader crisis shocks. The full Financial Stability Review is expected to be published on the central bank’s website soon.