Can the problems in the banking sector slow the Polish economy’s convergence process? Report from the 168th mBank-CASE Seminar

This seminar was devoted to the threats to the Polish banking sector and how they affect the economy. It began with the presentation of an analysis by Stefan Kawalec, president of the advisory firm Capital Strategy. Professor Eugeniusz Gatnar, chairman of the Department of Economic and Financial Analysis at the University of Economics in Katowice; Professor Leszek Pawłowicz, director of the Gdańsk Banking Academy; and Krzysztof Pietraszkiewicz, president of the Polish Bank Association, were invited to comment.

Dr. Ewa Balcerowicz opened the meeting by pointing out that the 168th mBank-CASE Seminar is the first meeting in this series in 2021; the seminars have been held for 30 years and were one of the first projects run by the CASE Foundation, which is celebrating its 30th anniversary this year.

Stefan Kawalec presented the report titled Banks and Investments: Threats to the Further Development of the Polish Economy, which he wrote with Katarzyna Błażuk. He began by stating that the accumulation of negative factors affecting the banking sector threatens to halt the process, uninterrupted since 1992, of narrowing the gap in living standards between Poland and the West through faster economic growth than in developed countries. Here credit allocation efficiency, which is experiencing problems, is of key significance. Banks’ financing of companies and projects with low or negative efficiency indicators may lead to economic stagnation or a decline in GDP.

Mr. Kawalec mentioned the dangerous factors that have emerged or intensified during the pandemic: the drop in banks’ return on equity, legal risk associated with foreign currency-denominated mortgage loans and the prospect of loan losses caused by the administrative lockdown of the economy. The author also pointed out the paradoxical situation that has existed since mid-2020. Government assistance and credit repayment moratoria have meant that after the most difficult second quarter (when Polish GDP fell 8.2% from a year earlier), the indicator of Polish companies’ current liquidity was higher than in 2018 or 2019! But this high financial liquidity doesn’t prove that companies have good prospects. Credit losses as a result of the pandemic still have not appeared, but everyone expects them, and we can anticipate the bankruptcy of many Polish companies. A significant danger is also hidden behind the doubling (compared with 2021) of the share in the banking sector of institutions controlled by the states. It is reasonable to fear that sooner or later political criteria will begin to influence lending decisions in state-owned banks. Finally, the economy is threatened by the crowding out of bank financing by government subsidies during the pandemic, a tendency not seen in most EU states. There the main instrument of financial assistance was state guarantees for bank loans, while in Poland it was subsidies as part of the so-called Financial Shield from the Polish Development Fund.

In concluding his presentation, Mr. Kawalec stated that to avoid the worst-case scenario, concrete actions are needed, in particular:

Prof. Eugeniusz Gatnar delivered the first comments. He finds Mr. Kawalec’s assessment excessively pessimistic. Of course, there are specific threats, such as growth in loan-loss provisions, limits on lending, growth in forced savings by households and businesses, a change in the maturity profile of deposits to the disadvantage of long-term deposits. But Polish banks aren’t in bad shape: the sector ended 2020 with a profit of PLN 7.7 billion. Banks’ capitalization has grown by PLN 60 billion since October, and the WIG-Banks Index has risen by 13.5%. Of course, there is a risk related to Swiss franc-denominated loans, but lenders have sufficient excess capital to absorb potential losses.

Professor Gatnar agreed with Mr. Kawalec on the need to review the structure of the bank tax, but disagreed that the high share of state ownership in the sector poses a threat. And he asked the question: “Why is there still no capital in Poland after 30 years of transformation? Why does only the state have capital? Is that how it was supposed to be?” He also pointed out that state-controlled banks don’t have worse results than other lenders, and the most recent takeovers of privately held banks by the State Treasury weren’t nationalizations, but happened via market transactions. Finally, Professor Gatnar addressed the question of low interest rates. We have a problem with inflation in Poland, the highest in Europe, but the banks can optimize their income. Unfortunately, we have to get used to low interest rates, because they’ll be with us for a long time.

Professor Leszek Pawłowicz congratulated Mr. Kawalec on the report. He noted that while he agreed with the report’s theses, he would like to look at the banking sector from the perspective of 30 years of transformation of the Polish economy. And he recognized three questions as strategically important. The first is the efficiency of capital allocation mechanisms. “All of economic history has shown that the more of the market mechanism, and the less central planning, the better,” he said. “The efficiency of capital allocation mechanisms is connected with an economy’s credibility for private capital. Thus, if I had to respond to Professor Gatnar’s question of why there’s so little private capital in the banking sector, I’d say that Poland’s investment attractiveness is too low in relation to the risk created by its institutional solutions.” Capital allocation in Poland still happens mainly via banks; the capital market remains poorly developed. “If I wanted to assess the credibility and efficiency of the capital allocation mechanism," he continued, “for me the first benchmark is the degree of nationalization of the economy. In a market-driven sector, such a measure could be for example the loan portfolios of state-controlled banks as a percentage of total corporate lending.” He also mentioned another important measure of efficiency in public spending: is private capital also engaged in the investment? Unfortunately, he said, the situation is not good.

The second question is the growth of monopolization in the banking sector that we have been observing. Low interest rates will kill off the small banks for which interest income is the main source of profits – i.e. they will provide a strong impetus for further monopolization in the sector.

The third question is the credibility of the institutional order. This is about the institutions that make up the financial safety net: the National Bank of Poland, the Finance Ministry, the Financial Supervision Authority and the Bank Guarantee Fund (BFG). Professor Pawłowicz’s assessment is that these institutions haven’t been very visible for several years, and this is occurring in a situation of disturbing processes of nationalization and monopolization. Furthermore, there are also institutions that are obviously causing harm; he named the UOKiK antitrust authority and the courts, including the Supreme Court.

The issue is not limited to the question of the Swiss franc borrowers. Here Professor Pawłowicz referred to an important trend whose origin reaches back to 1993 and the European Commission directive on consumer protection. A broad range of tools and institutions were created. But when acting in defense of consumers, it’s necessary to ensure the decisions made in favor of one consumer are not de facto executed at the expense of other consumers, and don’t bring with them new tax burdens. In particular, protection of borrowers cannot be conducted in a way that threatens the stability of the banking system. As an example of a harmful comment, he cited the words of the head of UOKiK that banks don’t deserve anything in exchange for making capital available. If this is actually put into practice, there will be no mortgage lending, and no real estate market.

Summing up, Professor Pawłowicz added a conclusion to Mr. Kawalec’s recommendations: it’s time to prepare a report on decisions and mechanisms that are abusive for economic development. We need to protect the common good that market mechanisms are. Without them, there will be neither economic growth nor efficient capital allocation.

Krzysztof Pietraszkiewicz began his presentation by stating that since as early as 2018, i.e. before the pandemic, the banking industry has been signaling a gradual but systematic decline in lenders’ ability to 1) finance the development of Poland’s economy and 2) carry out a cleanup on their own if severe problems occur. The reasons are the cumulation of several factors: changes in regulations; exceptionally high (compared to other countries) fiscal burdens on banks; the introduction of a high bank tax which doesn’t help the sector’s stability and crowds out lending to companies; the introduction of additional contributions to the BFG, which – similarly to the bank tax – are not treated as a business expense. Compared with other sectors, Poland’s banks are more efficient and keep costs under control, but regular reductions in costs don’t translate into an improvement in efficiency, because of the aforementioned worsening of the regulatory environment. The arrival of the pandemic caused additional problems: financing of companies by banks fell significantly (by 25-30%), and financing of agriculture by even more. According to Mr. Pietraszkiewicz, regulatory errors are clearly responsible for some of the decline in lending. So, for example, in the case of loans for farmers, the law doesn’t allow the means of production to be used as collateral. What’s more, a significant portion of so-called disaster loans for farmers, granted based on a special understanding between local banks and the government, were based on NBP interest rates. As a result of the drop in rates almost to zero, it’s essential to change the parameters of those loans, but the Agriculture Ministry doesn’t consent – so half of Poland’s cooperative banks fell into financial difficulties in 2020. Another example is the application of the bank tax to issues of covered bonds, which has ruled out the chance for building up in Poland the long-term liabilities that are needed to finance development projects.

Commenting on the problem of the Swiss franc loans, the Polish Bank Association president stated that they must be seen from two perspectives. The first concerns resolution of specific disputes between borrowers and banks (here settlements are necessary); the second concerns the consequences of Supreme Court decisions for conducting banking in Poland and financial institutions’ ability to finance anything. The narrative that’s present in the public sphere that the borrowers are “the victims of fraud by the banks” is very harmful, and the resolution of the problem of Swiss franc loans from 2006-2008 cannot threaten the stability of the banking sector.


Prepared by Ewa Balcerowicz