Banking Reform in Estonia

​Introduction
The Estonian banking sector has undergone a profound restructuring and transformation process during the last few years of economic reform. Estonia leads the way in the number of banking sector bankruptcies throughout Eastern Europe and in the rapidity with which the monetary authorities have addressed the growing problems of the banking sector. An analysis of the adaptation of the Estonian banking industry also offers a window onto the banking world in the CIS, whose banking sector was a part of the Soviet banking system in the same way as that of Estonia.

The reform of the Estonian banking sector started in 1989 under Soviet rule and banking legislation. Tartu Commercial Bank in Estonia was the first commercial bank established in the Soviet Union within the framework of the 1989 banking legislation. Since the Estonian declaration of independence in August 1991, the banking sector has undergone profound structural and operational changes. Perhaps ironically, Tartu Commercial Bank was the first Estonian bank to go bankrupt at the end of 1992.

The aim of this article is to discuss developments in the Estonian banking sector against background of transformation from the Soviet past to the turbulent economic environment of today. The article starts with an account of the main legal and institutional developments in the banking sector since 1988 and aims to identify the causes of the financial problems encounted by the banks. It will proceed to analyze the activities of the banks during the past 3 years of economic transformation. Some key issues influencing the banking sector, such as the problem of bad debts, will also be discussed. Finally, the paper will touch upon foreign investment in the banking sector.



Reprint in PDF format 2002.
Uudelleenjulkaistu pdf-muodossa 2002.