Last autumn, Estonian banks had large stock portfolios, which made up a big part of each bank's revenues. The decrease in the prices of the shares on the stock exchange caused a decrease in the revenues earned from the stock portfolios, which was followed by lower profits in the banking sector and decreasing prices of the banks' shares.
As banking shares make up most of the stock exchange capitalization, the effect on the stock exchange was enormous. The comedown spiral had begun.
"This was followed by a situation where Maapank was in bankruptcy, Hoiupank had to merge, declaring big losses, and none of the other banks escaped from big share portfolio losses," said Roosipuu. The ratings of the banks were lowered accordingly.
In earlier times, the banks used to refinance syndicated loans with new and larger ones. Today, they face a problem where loans have to be repaid and money has to be taken back from the market. Banks are in a state where they are unable to give loans. This means that companies whose financial indicators are good are not able to receive loans and are forced to decrease their sales. The losses of the profitable companies may in its turn bring on a crisis in the economy.
"Stock exchange is risky and every kind of fluctuation leads to a comedown spiral," explains Roosipuu. The banks should disclaim from stock investments, one of the sources of revenue, where high risks are taken.
"A countryman would not have put his savings in a stock exchange. He received interests from the deposits, not the interests of the stock exchange. His deposits had smaller interest rates and were less risky," said Roosipuu referring to the cheated clients of the bankrupt Maapank.
In happier economic times, stock exchange investments by a banking group indicated positive trends. Now that lending depends so much on the fluctuations of the stock exchange, Roosipuu believes it would be better if banks were separated from investment banking services.
"It was wise to take higher risks during the start-up of the banks," he said. "But today, they should be more stable and not influenced by the falls of the stock exchange. They should not take risks coming from the investment banking activities," said Roosipuu.
In an interview given to the Estonian daily Sonumileht, Roosipuu drew a parallel between the stock exchange crisis in the United States that set off the Great Depression in the 1930s and the Estonian stock exchange today.
After the financial crisis in America, a Glass Steagal order banned the banks from buying and selling securities, arranging issues and investing in shares. The Estonian stock exchange has fallen by 80 percent since last autumn and Talinvest has proposed the central bank use similar methods to change things here.
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