] eesti pank decided to convert foreign currency at a rate of eight estonian kroon to one deutsche mark. [ 18 ] this way, seigniorage revenue would accrue to estonia, but the supply of base money was exogenously determined by the monetary policy decisions of the bundesbank and capital inflows. broader monetary aggregates expanded at a different rate through the private creation of money in the estonian banking system. initially, reserve backing was facilitated by the restitution of pre - war gold. in principle, prices, wages, cash, and deposits of households and firms were converted at a rate of 10 roubles to one kroon ; less favourable conversion rates applied to larger deposits and deposits held by non - residents. [ 20 ] initially, the exchange rate was set at an undervalued level. [ 21 ] the kroon floated freely against other currencies. estonia was not the only country that opted for a currency board arrangement to stabilise the monetary system. several other transition countries like bulgaria and lithuania followed a similar path later on. a currency board is the most radical way of tying one ’ s hands and importing credibility from abroad. in this sense, foreign institutions “ lent stability ” to the transition economies. [ 22 ] credibility is key to addressing an inherent time inconsistency as generating inflationary surprises can have positive output effects. monetary policy may also fall under fiscal dominance. covering fiscal expenditure – directly or indirectly – through monetary expansion may always seem an easier route to take than raising taxes or cutting spending. monetary policy may also fall under financial dominance if distressed financial institutions – unless supported by the central bank – have to be restructured or wound down. pressure on the central bank to supply favourable loans was indeed acute in the transition economies. a two - tiered banking system with a central bank and commercial banks had only just emerged out of the monobank system under central planning. the transition to a modern banking system in estonia started with a banking crisis : out of the 40 commercial banks that were active in estonia in 1992, only 22 remained in operation in early 1993 as the central bank tightened capital and liquidity requirements. [ 23 ] lending to the real economy declined sharply. non - performing loans, reflecting the restructuring of the real economy, increased but remained below 10 %. [ 24 ] the share of non - performing loans was lower than in other transition economies due to relatively strict requirements to write off non -

andreas dombret : the situation in the german banking sector – challenges in striking a balance between weak profitability and the lowinterest - rate environment speech by dr andreas dombret, member of the executive board of the deutsche bundesbank, at the press conference to unveil the deutsche bundesbank ’ s financial stability review, frankfurt am main, 25 november 2015. * 1. * * banking supervision : successful first year in the ssm ladies and gentlemen before i delve into the risk situation in the german banking sector, i would briefly like to look back with you on year one of european banking supervision. on 4 november 2014, the ecb assumed direct responsibility for supervising the largest 120 or so banks in the euro area. those included 21 german institutions, although the number has risen to 22 in the meantime. given the sheer scale of the project and the very short time available for preparation, many were doubtful about whether european banking supervision could actually work. my answer after one year of the single supervisory mechanism ( ssm ) is : yes, it is working, and i am confident it will continue to meet the high expectations placed in it. cooperation between the ecb and the national supervisors is running pretty smoothly, and we are indeed observing a gradual europeanisation of banking supervision. so i ’ m satisfied with the first year of european banking supervision. there are a few points we can improve on. these include, for instance, decision - making structures and processes. in this regard, i believe that an adequate distinction is still not being made between important processes and routine decisions ; having said that, however, my comments are by no means intended to imply criticism. of course, european banking supervision has heralded a lot of changes, especially for the major banks. communication with banking supervisors is increasingly taking place in english, cross - border peer comparisons between banks are growing more important, and the supervisory approach has taken on a more quantitative slant on the whole. these factors all entail more work for the banks, of course ; but the banks, too, ultimately stand to benefit from improved supervision and a europe - wide level playing field. looking to the future, another topic that ’ s on the table right now is a european deposit guarantee scheme ; indeed, the european commission presented a plan only yesterday. i take quite a critical view indeed of this project because i don ’ t believe that the groundwork has been laid for such a scheme yet. we have a common currency and a