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The Warsaw Voice » Special Sections » June 30, 2011
Safe and Sound
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Polish Financial Sector Safe and Sound
June 30, 2011   
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Wojciech Kwaśniak, former general inspector of banking supervision and now adviser to the president of the National Bank of Poland, talks to Andrzej Ratajczyk.


The Polish financial system showed itself to be safe and stable during the latest crisis. What factors do you think contributed to this?
As I see it, several factors came into play, the result of our extensive experience from the tough road of 20 years of economic transition. This transition involved an extremely deep restructuring of the entire Polish financial sector, and the banking sector in particular as its dominating part. These factors meant that the Polish banking sector entered the crisis in a fundamentally different condition than other banking systems. The period of economic transition enabled all the players on our banking market to gain experience that led them to a banking model based on relatively conservative and traditional standards of operation. This was banking based on high and real capital that could serve as a source for covering losses from banking operations. Other pillars included a stable bank ownership structure and a good level of liquidity, which together with the low ratio of banking assets to GDP and little involvement in financing the real estate market, constituted a good foundation for the sector’s stability. As soon as the global crisis began, we saw two areas of its influence on the Polish banking market, i.e. in the realm of trust and the realm of macroeconomics. Since both the banking system and the economy in a broad sense were based on much healthier foundations than in many other countries, anti-crisis measures were easier to implement. This is why the Polish banking sector today is a good mark of our country in the world and the most convincing proof of the Polish success in economic transition.

What role did the central bank play in stabilizing the financial sector?
The National Bank of Poland (NBP) played a key role during those years of building the healthy foundations of our financial market. This applies to measures aimed at maintaining the value of the Polish currency but also the efficient payment system, effective banking supervision, advanced market analysis and building an effective system of deposit guarantees. During the latest crisis, the NBP’s activities were concerned in particular with giving banks access to liquidity, including liquidity in foreign currency, as part of a “confidence package.” They also involved publishing information of importance to financial markets in periodical reports on the stability of the banking system, and effective cooperation with the Ministry of Finance and the Commission for Banking Supervision as part of the Financial Stability Committee.

What is the condition of Poland’s financial sector today? Is it still different from that in most developed countries whose systems were seriously affected by the crisis?
Even though the business cycle prospects in the global economy are still highly uncertain, and trust in many global financial institutions has not been restored to the pre-crisis level, the situation in the Polish financial sector shows high stability. The financial results for 2010 were better than a year earlier, and in the case of banks both safety and effectiveness indices are high. It is true that banks’ loan-granting operations are still limited due to the uncertainty surrounding future economic prospects, but this is a natural state in this situation. It is also natural that the quality of the existing loan portfolio, especially in the retail segment, has deteriorated, but I don’t think this is a level that could jeopardize the system’s stability.

During the crisis we observed attempts around the world to restore financial market stability by means of rescue packages and new legal regulations. What do you think of these measures?
Undoubtedly, due to its character, the present crisis is special in that it encompasses the most developed economies and global financial markets. As part of efforts to restore stability to the markets, some unprecedented measures toward financial institutions were taken in many countries, by both governments and central banks. At different stages, attempts were made to coordinate these measures at the international level, to various effect. As a result, on one hand we have those rescue packages, whose first stage is based on protecting financial markets and key financial institutions from collapse, while on the other there has been a wave of demands for a new regulatory architecture for financial markets. The fundamental issue when developing the rescue packages has been the detailed terms on which financial institutions can access the available funding. In this, the natural problem has emerged of deciding between the interests of taxpayers as the ultimate suppliers of that funding and the commercial interests of financial institutions and their owners, where some temptation of abuse could be involved. Therefore I think that when restructuring financial institutions, public authorities and the whole market should be convinced that the state supports the stability of the financial system as a superior good and that it is saving the money people have deposited with banks. On the other hand, this is not about leaving the impression that the state is rescuing the owners of financial institutions, their managers or their continued independent existence at the expense of the public. This should be happening because it is always the financial institution, its managers and owners who are primarily responsible for solving their problems and suffering the consequences of their own poor management. Has this always been the case? One can have doubts in some cases. Furthermore, the scope of public support in selected cases became a source of a spontaneous threat to the public finances of those countries. On the other hand, the crisis and the growing market discipline of financial markets served even more strongly than before to highlight the dangers linked with the state of public finances in some countries and the dangers to the stability of financial institutions strongly involved in those countries’ markets.

Due to its social costs, however, a crisis gives rise to strong political demands for new regulation of financial markets so as to guard them against another crisis in future. Also now, we are observing extensive regulatory work in many areas of the financial market. Unquestionably, this is often deeply justified in essence, but on the other hand it carries its own costs, or even threats to the pace and ultimate cost of overcoming the crisis. Another issue is the additional problem of risks that could emerge in connection with “regulatory inflation.” I personally think that in a crisis the priority should be efficient operation within the conditions created by existing, rather flexible financial regulations, while any changes introduced should be limited to essential change, including periodic ones such as the level of protection of bank deposits. Because, the priority is to restore the stability of and confidence in financial institutions so that they can continue to supply the economy with funding. Certainly some of the changes being discussed can be introduced over the longer term as well as post-crisis.

There are discussions in Europe today about the European Union’s new financial supervision. How will the supervision system change as a result of the new regulations?
With the start of this year, a new supervisory architecture was introduced in the EU, based on the recommendations of experts who earlier prepared the “de Larosiere Report.” The report presented a systemic identification of the risks affecting the common European market and, in its recommendations, highlighted the role of central banks in maintaining market stability. The adopted measures referring to the European supervisory architecture are a compromise due to the provisions of the treaty establishing the European community and the interests of institutions responsible for supervising financial markets at the national level. The result is a European-level sector-based supervision of financial institutions operating across borders, that is, supervisory bodies overseeing banking, insurance and the capital market. In cooperation with national supervisory bodies, these institutions are responsible for supervising particular groups of financial institutions, for technical standards and also, when needed, for resolving disputes between supervisory bodies. At the same time, a special body affiliated with the European Central Bank (ECB) has been established, comprising the governors of central banks and called the European Systemic Risk Board (ESRB). This body is responsible for identifying and limiting systemic risks that affect financial markets. The work of these bodies and the practices they develop in mutual cooperation will enable the effectiveness of the adopted system to be assessed in future, but I think their establishment should be taken into account during reviews of national financial security networks.

What do these changes imply for central banks, including the NBP?
Much more than previously, these changes increase the role of central banks beyond their traditional roles, including those related to acting as a “lender of last resort.” First and foremost, the changes make central banks responsible for analyzing and identifying systemic risks with regard to the entire market, including the entire financial system, so as to avoid macroeconomic costs of the crisis for the economy. This means much stronger links—than were practiced before—between monetary stability and the finance system’s stability on one hand and macroeconomic stability on the other, due to existing mutual correlations. It also means the need to create a system of much more advanced and independent analyses and well developed international cooperation not only in identifying risks but also in finding ways of reducing them. The NBP is widely respected, both for the quality of its analyses and reports and for its international activity. The appointment of the NBP’s president to the ESRB Steering Committee will have an additional impact on what happens in the aforementioned areas. Also in Poland, the new European measures cause a need to analyze the existing national financial security network, including the central bank’s role within it.

As in many other countries, there have been attempts in Poland to impose new taxes on banks. What consequences could a bank tax have on the stability of Poland’s financial sector?
Discussing this issue, we need to take into account the difference between our position and that of other markets. Unlike taxpayers in other countries, Polish taxpayers have not been burdened with a single zloty of aid to save banks from bankruptcy; just the opposite, even in these tough times, both banks and other financial institutions have been making a profit, generally speaking. Moreover, banks in Poland have long been paying a special fee to the Bank Guarantee Fund, which would not only facilitate the restructuring of banks but also increases the capitalization of the fund itself. Other countries are only planning to establish such funds, and the level of capitalization of their deposit guarantee funds compared to total deposits is much lower than in Poland. There are also other factors involved, related to the extent to which the economy is credited by banks, the fiscal approach to reserves set aside by banks for their debts at risk and to a number of other issues involved in banking operations that are important for the costs of such operations, the pace of development and the competitive edge. Any adopted measures should take all these factors into consideration. However, the final impact on the banking system’s stability can only be assessed after we know what the final decisions are, both regarding the rate of this tax and how it will be calculated.

The views and opinions expressed in this interview are strictly those of Wojciech Kwaśniak acting in a personal capacity and do not necessarily reflect the official views of the institution in which he is employed.
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