Central Bank of Estonia maintains 1.5% countercyclical capital buffer as financial stability review highlights geopolitical and commercial real estate risks

The Central Bank of Estonia published its latest financial stability review, finding that the ability of households and companies to repay loans has been hurt by the recent series of crises but remains generally good. Looking ahead, it identifies geopolitical developments, particularly Russia’s war in Ukraine and rising international trade tensions, as the largest risks to growth and to banks’ access to foreign funding, and it is maintaining the countercyclical capital buffer at 1.5%. Deepening trade tensions are seen as increasing the likelihood of another recession that could weaken debt-servicing capacity, even though non-performing loans remain historically low. Export-oriented manufacturing would be affected first by potential tariffs or supply chain disruptions, while broader economic and political uncertainty could also curb investment and consumption. On the banking side, reliance on funding beyond local deposits rose to 33% in 2024 from 22% in 2022, raising the risk that geopolitical stress could constrain foreign funding and, in turn, lending, although bank bond issuance has remained successful. Falling Euribor has reduced loan repayments and, alongside recovering activity, lifted loan demand; business borrowing has been driven by real estate companies, which account for a comparatively large share of bank loan portfolios, and growing office supply could translate into higher vacancy rates and losses if growth slows. The central bank also notes that Estonia’s systemic risk buffer requirements are slightly above the European Union average, which it considers appropriate given the economy’s small size and openness.