All links with the Soviet budget and financial system were severed in 1991, and today Estonia has the strongest and most advanced banking system in the Baltic States. In January 1990 the Bank of Estonia was created, which merged two years later with the Estonian branch of Gosbank (the Soviet State Bank) to form the country's new central bank. In December 1988 the authorities established the first Estonian commercial bank, the Tartu Commercial Bank, and by September 1991 there were 20 commercial banks responsible for 27% of total credit extended by banks. The commercial banks include the Bank of Tallinn(1990), Estonian Commercial Bank of Industry (1991), Cand Bank of Estonia (1990), and South Estonian Development Bank. Savings banks include the Estonian Savings Bank, a bank with 432 branches.
Like those of other Eastern European countries, Estonia's banking sector has suffered from an excessive number of banks: there were 43 by the end of 1992. Consolidations took place in 1993, with the banks being merged in Eesti Uhispank (Estonian Unified Bank). As of 2001 there were 7 licensed commercial banks in Estonia. The merger agreement between the Union Bank of Estonia and the North Estonian Bank was signed in January1997. With combined assets of EEK 4.97 billion ($414 million), the merger pushes Union Bank of Estonia (the name of the new entity) from third to second place in terms of assets. Hansabank remains Estonia's largest bank, especially after its recent merger with Hoiupank (Saving Bank). In 1999, SwedBank bid successfully for a majority interest in Hansabank.
Since independence, Estonia's banks have played a major role in fostering a climate of economic stability. In 1997, they took the initiative in tightening credit in the wake of the Asian financial crisis. This action, which resulted in a rise in interest rates, checked fears of a too-rapid economic expansion, which would bring about inflation.The International Monetary Fund reports that in 2001, currency and demand deposits—an aggregate commonly known as M1—were equal to $1.4 billion. In that same year, M2—an aggregate equal to M1 plus savings deposits, small time deposits, and money market mutual funds—was $2.3 billion. The money market rate, the rate at which financial institutions lend to one another in the short term, was 4.92%.
There are two stock exchanges in Estonia: the Estonian Stock Exchange and the Tallinn Stock Exchange, inaugurated in May1996. As of early July 2001, the Tallinn exchange's list of stocks included Hansabank and Eesti Telekom, and bonds in the state-owned Compensation Fund, bringing its market capitalization to EEK 26 billion (US $1.5 billion).