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The Warsaw Voice » Business » January 9, 2008
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The Nervous System of the Economy
January 9, 2008   
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Jan Krzysztof Bielecki, president of Bank Pekao SA, former prime minister and one of the architects of Polish banking system reform, talks to Michał Jeziorski.

Until 1989 the banking system in Poland was part of a centrally controlled economy. Interest rates were set by the government, along with banks' strategies and credit operations. A reform of the banking system was one of the most important parts of Polish economic reform. A single bank system was transformed into a free market one. How has the banking system in Poland changed since then?

The Polish experience has demonstrated that a healthy banking system is fundamental to the transformation process. A good banking sector has enabled the effective reconstruction of the economy. This was the main conclusion of the European Bank for Reconstruction and Development when it analyzed in detail the economic development of 27 former Eastern Bloc countries, from Russia and Kazakhstan to Hungary and Poland. Understanding the significance of the financial sector's transformation is the key to understanding economic changes in postcommunist countries. Without it, nothing could have been done. The case of Czechoslovakia-later the Czech Republic and Slovakia-is a good example. There, at the beginning of the transformation process, the role of the banking sector was under-appreciated and only its crisis in 1995 accelerated changes in this sector. In Poland, we didn't have such a crisis because at the beginning of the economic transformation we made some resolute decisions. We chose privatization and commercialization of the banking sector, which provided the economy with a healthy nervous system and helped it develop in a stable way.

It's worth stressing that the banking system in Poland emerged from practically nothing. This began with spinning off eight commercial banks from the National Bank of Poland. Later we found a foreign partner bank for each of them, in order to help the newly created institution learn the basic elements of the art of bank management in free market conditions. The results turned out very positive.

From such a partnership, the Allied Irish Bank, which remains the main shareholder of Bank Zachodni WBK, emerged. Such partnerships allowed for a fast transfer of new technology. Later, during the 1990s, we privatized the sector with a range of methods.

Looking at banking sector analyses by independent experts, you notice that the issue of consolidation of the banking market is gaining in importance. Is the concentration level still low, and is the related consolidation process inevitable?

This process is absolutely natural and continues not only in Poland. New entities enter the Polish market and nearly every day you hear that more are planning to launch operations. The consolidation process has continued since the early 1990s, when banks for various reasons were taken over by stronger entities. That happened, for example, when BIG Bank merged with Bank Gdański to form Bank Millennium, with Banco Comercial Portugues and Eureko insurance group as the main shareholders. Recently Bank BISE merged with Germany's Bank DnB Nord Polska.

Our bank is involved in the biggest such project. The process of integration of Bank Pekao SA and BPH SA, both members of the UniCredit Group, is underway. In this way, a regional leader in the financial market will be created.

This all reflects the principle that along with the changes on the market, its main players are changing. This is a beautiful aspect of the market economy, the fact that no one plans this and no one centrally controls this. The increasingly free flow of capital, goods and people results in an expanding market and emergence of bigger and bigger players. The market keeps developing and globalizing, and the transactions are increasingly bigger. And that raises expectations in relation to banks, and only the strongest ones can meet them. In addition, consolidation allows economies of scale, which leads to cost reduction.

Among several dozen commercial banks in Poland, the biggest group is formed by banks that are mostly or wholly privately owned. Some of the biggest international financial institutions took part in their privatization. As a result, foreign investors have large stakes in Polish banks, up to 70 percent. Some say this is a negative development. But could the situation have developed differently?

Of course, everything could have been different, but we have only one history. However, if we had not allowed international players onto the Polish banking market, we would have experienced a crisis resembling the one in Russia. There, the process of privatization of the banking sector was much delayed, with the strong role played by the state continuing for a long time. As a result, in 1998 the entire sector lacked money for investment and almost all of its 1,200 banks found themselves in serious financial trouble.

Real life is the best test of our decisions. And it has proved beyond any doubt that privatization with the participation of foreign capital was a high stakes move, but one worth making. After the collapse of the communist system, Poland lacked capital, institutions adjusted to free market operations, specialists and knowledge of modern bank management. The success of Polish banking sector privatization can to a large extent be attributed to foreign investors.

Apart from the large commercial banks, Poland has many small cooperative banks-584 at present. What is the reason for that and what role do these banks play?

First, you should remember that at the beginning of the transformation, there were 1,600 of them. In this group, the consolidation process was the strongest. As a result, groups of cooperative banks have been formed, and they required changes in methods of management. Banks stopped treating clients who were also their shareholders in a special way. Cooperative banks to a large extent have been commercialized and today many of them play a very useful role in two significant areas.

First, they open accounts and provide financial services for Polish farms that, due to the European Union subsidies they received, were forced to start using banking services. Second, cooperative banks are increasingly efficient in financing small and medium-sized business. In small localities, they play an important role. But when a cooperative bank wants to enter deeper waters, it has to be prepared to face competition from big universal commercial banks.

Can it be said that today the banking system in Poland does not differ from that in highly developed countries?

When I look at some countries of the "old" European Union, I am convinced that the system in Poland is very well developed, and even ahead of them in many respects. It is absolutely extraordinary that Poles have moved from one banking system to another overnight. They shifted from individual "under-the-mattress-or-in-the-sock" banking to electronic banking. This has led to a peculiar situation where millions of people have no idea what checks are and have never used them, but nearly all of them know and use internet banking. In many Western societies, people still widely use checkbooks and other traditional forms of payment. In Poland, people have moved straight from "mattress" money to virtual money.

Also, Polish investors are seeking increasingly advanced forms of investment. That is provided by, for example, the emergence of private banking. The structure of wealth among Poles has changed and the market had to respond to that. The private banking group currently numbers some 50,000 clients and it will keep growing.

In this context, it is worth noting that Poles are increasingly fond of investment funds. In the past, practically all the savings in Poland were kept in bank accounts, while now more than 50 percent are investment products.
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