Monetary and financial system

​Since 2011, Estonia has been a member of the euro zone. Before that, the Estonian kroon was the local currency. Estonia joined the euro zone at a time when things were complicated in both the European and world economies. The reason was a wish to decrease risks that had been hindering the growth of Estonian companies and investment. One must not forget that, although there was a local currency in Estonia, its exchange rate was fixed to the euro, so one can claim that Estonia was basically a member of the euro zone from its creation, but couldn’t participate in decisions that affected the euro zone.

The Bank of Estonia founded in 1919 operates as Estonia's central bank. The bank did not exist during the years of the Soviet occupation (1940-41, 1944 - 1989). The Bank of Estonia was restored in 1990. Since 2011, when the euro was adopted in Estonia, Eesti Pank (the Estonian central bank) has been a member of the system of European central banks. Initially the Bank of Estonia carried out supervision of commercial banks also but now the task belongs to the responsibilities of the Financial Supervision Authority.

The Financial Supervision Authority was established at the Bank of Estonia in 2002 and it carries out supervision of all Estonian financial institutions, i.e. banks, insurance companies, investment and pension funds and the securities market.

Seven registered banks and eleven branch offices of foreign banks operate in Estonia. Also, four life insurance companies and nine indemnity insurance companies are registered here, as well as one branch office of a foreign life insurance company, four branch offices of a foreign indemnity insurance company, 16 fund managers, 23 mandatory pension funds and 13 voluntary pension funds. Also several investment funds are registered in Estonia, as well as insurance middlemen, investment unions and countless other entities that provide international financial services. A stock market, with the official name NASDAQ OMX, operates in Tallinn. It is a part of one of the biggest stock conglomerates in the world, called the NASDAQ OMX Group.

Estonian kroon and euro
Until 2011 the Estonian monetary unit was kroon, which was adopted after the monetary reform of 20 June 1992. The official rate was 1 Deutsche Mark (DEM) = 8 kroons (EEK). The Soviet roubles were exchanged into kroon at a rate of 1 kroon = 10 roubles. When the Deutsche Mark was replaced by euro, the Estonian kroon was pegged to euro at a rate of 1 EUR = 15.6466 EEK. From 1 January 2011 the official currency in Estonia is euro. The conversion to the euro followed the existing exchange rate. So, during the modern history of the Estonian kroon, its exchange rate has never been changed.

​Estonia's own monetary system was based on the Monetary Committee, meaning that, for every kroon in circulation, in Eesti Pank there was foreign currency (e.g. euros and dollars) or gold in the same value. The system of the Monetary Committee was chosen to lessen the influence that speculation in foreign currency would have on the Estonian economy and to assure the stability of the monetary system.

​For Estonians, introducing their own money was a step on the road to Estonian independence and sovereignty, and because of that giving up the kroon was painful to many. Before adopting the euro, the percentage of its supporters was only slightly over 50%, but then it grew. There were many reasons to switch to the euro. Firstly, Estonia had promised to enter the euro zone when joining the European Union in 2004. Secondly, because of the fixed exchange rate of the kroon, the euro was basically already in use in Estonia. Thirdly, at the end of 2008 and the beginning of 2009, and at times even before, the outside world had little trust in the Estonian kroon. Although Estonia switched to the euro at the existing exchange rate, it was still sometimes thought that Estonia would devalue its currency to solve its economic problems, and that this would make the life of Estonian entrepreneurs very hard. The fact that most loans in Estonia were in euros was also considered a big risk.

​The biggest change in the adoption of the euro was in price numbers – these suddenly became a lot smaller – but the large proportion of coins in circulation was also something that required getting used to. Adoption of the euro meant that the costs of borrowers, travelers and companies became a bit smaller because they didn’t have to exchange kroons for euros, or euros, earned through exports, for kroons. Interest rates fell to some extent, too. In addition, it was clear that prices increased in some cases, especially after the official price control ended in the middle of 2011: many merchants and service establishments tried to make prices “more attractive” by rounding them up.

Financial sector
The Estonian financial sector is quite bank-centred – the majority of insurance, leasing and investment companies and funds belong to banks. Most of the banks in their turn are owned by foreign capital, which is largely of Scandinavian origin (Swedish, Finnish and Danish). Foreign capital dominates also in insurance, either through direct or indirect holdings.

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