Estonian banking regulation as a “world of ‘dead letters’” – the interplay of Europeanization process and national idiosyncrasies

Depolitization of public finances, majority foreign ownership of the banking industry and transition economy elements, accompanied by re-occurring banking crises in the 1990s have posed significant challenges for the regulatory framework in Estonia. Furthermore, the EU accession anchored the legislative development to external institutions and actors. Although banking regulation has been exemplary on paper, there have been significant weaknesses in implementation due to both internal incapacities and inadequacy of the formal EU law based regulatory principles for addressing the cross-border banking issues (accountability and responsibility for stability). Consequently, the established institutional setting in Estonia has not been able to address the division of two main functions of the banking sector between domestic and external actors: the functioning and safe payment systems by domestic actors and the financing of productive investments by external actors through foreign investments.