The global financial crisis and the turmoil in Russia seemed finally to be taking their toll on the banking sector in Estonia, as Eesti Pank, the Bank of Estonia, Oct. 6 announced a moratorium on the small ERA Pank.
ERA Pank stated in a letter it was having temporary problems with insolvency and was unable to satisfy the claims of its customers. It asked for the temporary suspension of its license.
The move came barely a week after the central bank assumed control of the troubled Forekspank and Eesti Investeerimispank, which had earlier announced their decision to merge.
The same day the central bank had announced it was revoking the license of EVEA Pank, which was forced to begin bankruptcy proceedings.
Panicked investors were reported to be queuing at automated teller machines at ERA Pank's headquarters in Tartu in a bid to withdraw their cash.
The panic started after revelations that ERA Pank sold its 36 percent holding in EVEA Pank, worth 50 million kroons ($3.8 million), to four companies allegedly existing only on paper.
Andrus Kuusmann, information department head at Eesti Pank, said the executor of the moratorium had demanded information from ERA Pank about the deal and would investigate whether the four companies had any connection with ERA Pank. The executor's report has to be completed by Oct. 15.
The moratorium on ERA Pank also placed in doubt the future of insurance company Polaris, of which the bank is a major owner.
Rumors also began flying that Uhispank, the second largest Estonian bank, was having liquidity problems, and there were reports of panic arising among its clients in Rakvere. The bank's Vice President Toivo Annus told the Baltic News Service (BNS) the bank's liquidity was as strong as ever.
Finance Ministry spokeswoman Aili Ohlau asserted that Hansapank and Uhispank were safe although if they were to go under, it would mean serious trouble for the Estonian government. Most of the government's money is kept in Uhispank.
Confidence in banks had already been heavily dented as a result of the collapse and subsequent bankruptcy of Maapank this summer.
Experts say the banking sector in Estonia is finally feeling the effects of the global financial crisis, which has been augmented by increasing competition among banks and the situation in Russia.
They remain confident that the economy will pull through, although they admit the sector has experienced serious problems which are bound to have an effect.
Forekspank and EVEA Pank were heavily oriented at the Russian market. Forekspank is estimated to have suffered a potential 100 million kroons loss in that country.
Andrus Viirg, head of the Estonian mission of the World Bank, said the situation in Russia had put oil on an already burning crisis, but the developments were the right developments as there needed to be consolidation and merging of financial markets.
Mart Toevere, head of investor relations at Hansapank, said the global financial crisis had made it difficult for even large banks to find foreign financing, small banks had to survive on local financing, then the Russian crisis hit and everything seemed to happen at once.
But he said the sector was also partly to blame for the situation as it had not taken a conservative approach and had not anticipated that such problems could arise.
Dimitri Demekas, of the IMF, said although what had happened was not a crisis, it was clearly serious trouble. The main causes of the present situation had been the extremely rapid expansion of the banking system, not only in terms of loans to customers but also into the stock exchange and equities.
"It is inevitable some banks will have difficulties after such a huge expansion. The situation in Russia certainly does not make things easier although the exposure of Estonian banks is very small," he added.
And Kuusmann added: "At this moment we don't see it as some kind of crisis. We see that there were some problems with the smaller banks, but we solved these problems. Our big banks are okay."
Eesti Pank issued a statement citing erroneous financial management decisions made amid tightening competition as the main reasons for the problems.
It said it had adopted several radical decisions to prevent possible instability in the Estonian banking sector and felt there was room for commercial banks of different sizes and profiles in Estonia.
"We firmly believe that only with coordinated actions it is possible to maintain both domestic and international confidence in the Estonian economic environment," the statement read.
The central banks actions have received the support of the government. Demekas said he was pleased with the way Eesti Pank had handled the situation.
The bank had taken a number of measures to strengthen the capital base of the system, which in the beginning provoked a lot of reaction. "People thought these measures were not necessary, but in retrospect they were absolutely correct, and with hindsight it is extremely good that the bank took these measures. It should make it possible for the system to pull through," Demekas added.
Meanwhile ERA Pank announced it had found an Estonian investor willing to support the bank with a substantial sum and documents had already been sent the central bank. This was confirmed by Kuusmann.
The name of the investor and the sum has not yet been disclosed although Andres Bergmann, chairman of ERA Pank board, on Oct. 7 said an investor had agreed to pay 80 million kroons into the bank's share capital.
Krediidipank, another small bank, also announced it was interested in merging with ERA Bank. The government expressed confidence in Krediidipank by announcing it would not withdraw 25 million kroons deposited there.
But others are less convinced that ERA Pank will be able to recover after the moratorium. Toevere said, "If something like this happens, what kind of trust would people have towards the bank? Banking is based on trust."
ERA Pank's assets stood at 700.9 million kroons at the end of August while it had a total of 438.8 million kroons worth of liabilities to clients.