The scale of the turnaround is hard to overstate. In 1989 Polish banks were teetering on the brink of failure and possessed none of the practical knowledge necessary to operate in a free market. So how did Poland manage to bring stability and health to this crucial sector? The key factors, say experts, were measures that armed the banks with know-how and created a culture of responsibility and conservatism. By forcing banks to deal swiftly with demanding challenges, bringing in foreign expertise and capital, and establishing strict regulation, Poland’s banks became lean and disciplined.
It is important to note that Poland had begun introducing reforms into its banking system before 1989. As early as 1982 it had granted the National Bank of Poland – at that time the country’s only real bank or “monobank” – a degree of autonomy and allowed for the establishment of new banks. By the late 1980s, savings operations for private citizens were separated out of the NBP, a two-tier banking system was created, and nine state-owned commercial banks had been established along regional lines. So when Poland’s first non-communist government came to power in late 1989, some of the early work had already been done.
Still, transition brought with it an economic crisis. Non-performing loans soared to as much as 40% of some banks’ portfolios. In other post-Soviet bloc countries, governments allowed lenders to create “bad banks”, where NPLs were transferred and written off. Poland chose a different path, forcing banks to restructure their accounts.
“We were afraid that if we took away the bad loans, the banks would make the same mistakes again,” says Stefan Kawalec, who as deputy finance minister in 1991-1994 was responsible for the country’s banking market reform
The government also instituted a crucial reform allowing banks to exchange companies’ debt for equity. Instead of thousands of companies going bankrupt and banks writing off the losses, firms were allowed to restructure and get back on their feet. This, in turn, created value for the banks.
But the state imposed discipline as well – in return for being recapitalised by the state treasury, the banks had to restructure within 12 months. If they didn’t their debt could be sold in a public tender, with no minimum price. Rather than risk only receiving 10% or 15% of the value of their loans back in such a sale, the banks restructured quickly and opted to take equity stakes in firms at a value of say, 25% of the original loan. A 75% haircut was better than a 90% haircut, they reasoned.
The next challenge was to teach banks to operate in a market economy. From tellers to managers, bank staff had almost no experience in the typical operations of capitalist banks, especially risk-assessment. Under the communist system, lenders had served as glorified ATMs, doling out money to state-owned firms as directed by the government.
The finance ministry set to work finding foreign investors for the country’s nine state-owned regional banks. But those banks were themselves already deep in debt to foreign lenders, many of whom wanted to enter Poland’s attractive market through a cheap and easy debt-equity swap. The government resisted, knowing the banks needed fresh cash. It set the condition that foreign banks had to buy their way into the Polish market.
“We knew that the Polish market was very attractive,” says Mr Kawalec. “With a small amount of capital and know-how you had a chance to build a big market position.”
The plan worked – foreign banks injected capital into their new Polish subsidiaries and brought market expertise the sector so desperately needed. Later on, purely foreign banks were allowed to enter the market, bringing in new products and services and making the market much more competitive.
“The old dinosaurs had to evolve quickly,” says Marcin Piątkowski, senior economist for the World Bank in Poland.
The final piece of the puzzle was a strong regulatory environment. The NBP, which regulated the market until the Polish Financial Supervision Authority (KNF) was created in 2006, took a conservative approach, tending to err on the side of caution. The KNF has continued that tradition, discouraging banks from investing in the types of products that burnt so many fingers in 2007, and pressuring lenders to cut back on foreign-currency denominated loans before a surge in their popularity became a threat to the banking system.
The result has been the creation of a risk-averse, stable and healthy banking sector. The KNF recently conducted stress tests mirroring those of banks in the eurozone. All but two of Poland’s banks passed, and since then the pair that failed have increased their capital positions to satisfactory levels, the regulator says.
While foreign investors helped create the solid banking system of today, there are concerns over whether foreign banks now carry too much weight. Non-Polish institutions control about 70% of the Polish sector’s assets. Of Poland’s top 10 commercial banks, only two – Getin Noble Bank and state-controlled PKO BP – are controlled by Polish capital. The worry is that in an economic downturn elsewhere, foreign lenders could pull capital out of their Polish operations, creating a lending squeeze in Poland. That didn’t happen during the global economic crisis, but the fear remains.
Ironically, the success of Poland’s banking sector makes the country so attractive to foreign banks that any further plans to reduce the government’s stake in PKO BP below the current 31.4% are problematic.
“Everybody knows that if we privatize PKO BP now, it will land in foreign hands as well,” says Witold Orłowski, director of the Warsaw School of Technology Business School. “I would very much love to see PKO BP as a privately owned bank with a decision centre in Poland. For the time being, I don’t see a way to do it.”
Andrew Kureth, originally from the Detroit, has been living in Warsaw since 2001. Currently Editor at Poland Today, a Warsaw-based publication and events platform, he has been covering business, economics, politics and society in the country for more than 10 years. He graduated from Kenyon College in Ohio.