In Estonia, the recession and high interest rates have made it harder for households and companies to repay their loans, however, Eesti Pank ensures that the share of bad loans has been smaller than in previous recessions. Few loans have become overdue by more than 60 days they currently make up 0.3% of the loan portfolio, whereas, in the crisis of 2008-2009, they peaked at 7.5%.

There are several reasons why bad loans have been only a small problem for the banks in Estonia. Companies have been helped in coping with the increased costs of their loans by the earlier good years and the buffers they have accumulated. The capacity of households to service their debt has also been helped by low unemployment, while wages have continued to rise.

The banks in Estonia have lent substantially more to the real estate sector in relative terms than banks in other countries in the EU. Real estate firms are generally considered to be riskier than the average because they use more borrowed money to support their activities. Estonian firms have coped well with higher interest rates and other expenses because the return on real estate investment has been high enough to pass some of the increased costs on to their clients.

However, the level of problem loans may rise shortly despite the expected recovery in the economy. Difficulties in repaying loans can be a serious worry for the individual households or businesses concerned, but Eesti Pank remains positive because of the buffers accumulated earlier. Decisive for the ability of people to pay their loans will be whether their incomes are maintained, which means whether unemployment remains low.

The banks in Estonia are still exposed to the risks coming from the performance of the Swedish economy, as ties are very close both economically and financially. The risks to the banking sector in Sweden have been increased by the downturn in the economy and the higher cost of funding, as these may increase the loan losses of the banks. Reduced demand from Sweden has already weakened the ability of Estonian exporters to pay their loans. Although the funding of the banks in Estonia is much less reliant on Swedish parent banks than it was 15 years ago during the global financial crisis, the parent banks still affect the subsidiaries to a large extent.

The capital buffers of the banking sector in Estonia are being reduced as banks are planning to pay larger amounts out in dividends. High interest rates led to record profits for the Estonian banking sector last year, and the banks plan to pay a large part of that out to their owners together with the profits built up in earlier years. Generous dividend payments reduce the capital buffers of the banks, and that means that they will have fewer funds available to cover loan losses in a crisis.

Even so, the central bank still considers that the capital buffers of the banks in Estonia are sufficient for the near future. This has been helped by the earlier decision of Eesti Pank to raise the countercyclical capital buffer requirement for the banks to 1.5% from December 2023.