"In order to avoid problems, Eesti Pank took the decision to actively participate in the merger process of Eesti Forekspank and Eesti Investeerimispank," said Eesti Pank officials, in a statement released Oct. 1.
The board of Eesti Pank decided to purchase a majority share in both banks, a move that could possibly have prevented a bankruptcy at Foreksbank and maintained stability in the banking sector.
"This seemed to be the best solution from the point of view of maintaining domestic competition," said Kaia Kull, Eesti Pank spokeswoman.
Eesti Pank purchased 50.24 percent of Investeerimispank shares that were being held by Forekspank at the price of 135 million kroons ($9.6 million). Eesti Pank also purchased 12 million shares of Forekspank for 120 million kroons. Once the ink dries on the merger deal, Eesti Pank will own more than 50 percent of the newly created institution. Eesti Pank also agreed to guarantee 100 million kroons of Forekspank loans.
The bank that rises out of this rubble will still be the third largest in Estonia. Before the merger, Forekspank was the third largest and Investeerimispank the fourth. Hansapank is the largest and Uhispank is the second.
"It will still be a significant factor in the market," said Kull.
On the same day, Eesti Pank also forced EVEA Pank to begin bankruptcy proceedings (see related story), but Forekspank was in better financial shape compared to EVEA, said Kull.
"The situation at the bank was not serious enough to warrant this," said Kull.
But some observers of the banking industry still worry about Forekspank's financial situation and whether Eesti Pank's decision was the correct one.
"It's very difficult to tell right now whether the Bank of Estonia [Eesti Pank] did the right thing from the point of view of the taxpayers by going into Forekspank, as it's hard to foresee a bright future for it," said Erkii Raasuke, financial director of Hansapank, in an interview with Baltic News Service(BNS).
Though officials at Eesti Pank are not saying exactly why they decided to become involved in the merger, some people speculated that Forekspank had a larger percentage of non-performing loans than was previously thought.
"In general, we feel that the bank section is well regulated," one economic advisor said, but added that there is a "lot higher level of non-performing loans in the loan portfolio."
In a statement released by Eesti Pank, officials cited "erroneous financial and management decisions made amidst tightening competition."
Bank officials did not attribute the move to events in Russia. In recent months, many Estonian businesses have been laying off workers and revising their forecasts in light of the financial crisis that hit that country in August. Two weeks ago, the government said that they would consider sharing the loan risk of banks, which were worried about non-payment of loans.
Eesti Pank's plan for the newly merged bank is to find a strategic investor by the end of 1999 to buy out its shares. According to Kull, the management for the merged bank has not been decided, but BNS quoted Eesti Pank Vice President Helo Meigas saying that Gunnar Kraft, the current head of the Investeerimispank council, will be chosen to head the institution. So far, no one from Forekspank has been nominated to positions of executive management.
One financial observer predicted that there would be only six banks left in Estonia by the end of the year. The latest move by Eesti Pank brings the number doing business in Estonia down to seven.