Bigbank Estonia CEO Jonna Pechter's Comment on Today's Eesti Pank Proposals Regarding Home Loan Regulation
From today's press conference of the Bank of Estonia, the thought that resonated was that the competitive situation in Estonia's banking sector is fine and our market really doesn't have room for many more banks, because otherwise the profitability of banks could decline and that would make the market less attractive for bank owners. At the same time, only 5 of the 14 banks operating in Estonia have concentrated 90% of the market share in their hands, while the remaining nine banks share the remaining 10% of the market.
Bank of Estonia president Madis Müller very rightly pointed out that competition in the banking sector is most influenced by whether there are banks on the market that want to change the balance of the banking market. Without a doubt, I can say that Bigbank is one of those banks that is ready to make very good offers and provide home loans as well as business loans on competitive terms, as well as pay worthy interest on deposits. Our goal is to offer the best customer service in the market and significantly increase our market share. If Bigbank's market share in business loans is growing rapidly, then in home loans it is much more difficult today to reach customer awareness and recommend them to take our offering more than from a couple of larger banks.
Why? Because the advertising law does not allow home loan benefits to be highlighted, to introduce one's product and explain it to the client. Large banks don't have this problem because they can display all product terms and benefits in detail on their website and internet banking, and naturally they have no interest in encouraging their customers to compare offers. Bigbank can certainly do this too, but on our website unfortunately hundreds of thousands of people are not yet paying their daily bills. As a small bank, to increase market share we must reach more customers with our offer than existing ones do. However, if Bigbank introduced a home loan with a special schedule on the market, which allows customers to pay only interest payments at the beginning of the loan period, then the opportunities to introduce the new solution were very limited.
The Bank of Estonia pointed out that large banks have quite small interest costs, which unfortunately have not been passed on to clients in the form of lower interest rates. Neither the state nor the central bank can or should demand that commercial banks lower loan interest rates or earn less profit. This can be done by competition, which works well in a free market. The legislator can only create equal opportunities for all banks – not only factually equal, but also substantially equal – so that each bank can present the benefits of their services to all customers, show the total cost of credit in a comparable manner, and explain more complex services better. After all, it is the customer who makes the final decision by choosing the best offer. In addition, all banks advise customers on responsible lending and are able to make customers think about various aspects that also make the lending decision better thought through.
So in summary, the five proposals presented by the Bank of Estonia to improve home loan terms for customers and increase competition between banks are all good and deserve rapid implementation, but this is only half, perhaps even less than half of the calculation. Without making changes to the advertising law, the actual competitive picture will not increase from the consumer's perspective. Reducing the technical cost of refinancing transactions for borrowers increases consumers' willingness to change, but the real market bottleneck in our opinion is in the restrictions on advertising home loan terms.
Bigbank also supports a significant reduction in loan advertising restrictions under the advertising law. It is important for the legislator to protect consumers so they do not perceive borrowing as a way to allow themselves a lifestyle beyond their means and in any case make responsible borrowing decisions. Therefore, loan advertising must in any case be responsible and certain restrictions are justified there. However, the actual solution to the problem of taking on excessive financial obligations for both individuals and banks and other credit providers is not strict advertising restrictions, but the fastest possible launch of a positive credit register currently being worked on as a legislative initiative. Obtaining a complete overview of a client's obligations helps to make responsible borrowing decisions and protects precisely that group of customers who, in desperation, hide their obligations from the lender and thus make their situation even more complicated. It is understood that the corresponding bill should be ready by the autumn of this year.
A home loan as a real estate-secured and notarially executed financial product is significantly safer and more regulated than ordinary consumer credit products and therefore its advertising could be allowed. In connection with the removal of advertising restrictions for home loans just coming into force in Latvia, we are today in a situation where in all neighboring countries (Latvia, Lithuania, Finland, Sweden) the legislator has enforced a situation that allows banks, unlike Estonia, to advertise the exact terms of their home loan offers. In Estonia today, however, credit institutions are prohibited from advertising home loans in a way that would allow them to clearly present the offered interest rate, the size of the bank margin, or other contract terms more favorable than competitors. This, however, does not promote transparency in the housing loan market or competition between credit providers.
