Financial Regulation in Estonia

Regulation of the banking industry in Estonia is theoretically significant in many respects. There is no clear straightforward model that would explain the evolution of the banking legislation, as all theoretical concepts are applicable for understanding the dynamics at certain periods in the regulatory development trajectory. This is witnessed in the interplay of domestic features and external factors. Both the need to build up the institutional framework for private finance and address re-occurring crises anchored the banking regulation and supervision to the EU and other international principles and practices. Estonia has been “accused” of meticulous punctuality in applying the EU regulations, in some cases directly copying from external legal sources, and setting even stricter requirements than the EU would dictate. This, however, has created a paradox of exemplary compliance with the EU standards in terms of its extensiveness, but meager effectiveness in addressing real-life developments. The paper shows the pragmatic approach to establishing regulatory and supervisory framework in the 1990s in the context of crises, internationalization of banking, and also EU accession aspirations, while 2000s mark gradual outsourcing of oversight and embedded formalism in terms of deepening reliance on external normative standards with insignificant economic substance, given the local circumstances.