E-Banking: Risk Management Practices of the Estonian Banks

During the last years the development of e-banking in Estonia has been very significant. According to the report of the World Economic Forum, the Estonian IT-development has been substantial. The success of e-banking in Estonia can be compared to the corresponding success of the Nordic countries. According to the Deutsche Bank Research, around 70-80% of the Internet users in Estonia use Internet banking and in this respect, Estonia could be compared to Finland, Norway and Iceland. Despite of certain benefits, e-banking has turned out a great risk, as bank clients are expecting e-banking services to be available 24 hours a day and seven days a week. The major risks associated with e-banking are strategic, operational, legal and reputational. Security is considered the central operational risk of e-banking. Some of the specific problems cut across risk categories, e.g. breach of security allowing unauthorised access to customer information can be classified as an operational risk, but such an event also exposes the bank to legal risk and reputational risk. Customer education on security risks and precautions can play an important role for consumer protection and for limiting reputational risk. In Estonia, all commercial banks which are engaged in e-banking activities have published on their websites recommendations to potential customers on how to increase the security while making transactions in electronic environment. The Estonian Financial Supervision Authority responsible for the banking supervision has disseminated on its website a special brochure to e-banking customers on how to use the Internet bank safely. At the international level the Basel Committee on Banking Supervision (BCBS) has elaborated risk management principles for e-banking. These risk management principles fall into three broad, and often overlapping, categories: Board and Management Oversight, Security Controls and Legal and Reputational Risk Management. The research question of this paper is whether these risk management principles are implemented at the Estonian banks. In order to assess the risk management practices of the Estonian banks in the field of e-banking as well as their conformity to the BCBS guidelines, the author has prepared a questionnaire and circulated it to all banks. According to the results of the survey, the Estonian banks generally comply with all BCBS guidelines in the field of e-banking risk management.