Polish Banking During Capitalist Transition

As communist countries transitioned to capitalism, numerous existing institutions lost their relevance and countries found themselves short of the institutions crucial to developing successful capitalist economies. One of these were banking institutions. Banks are important to raising and intermediating the money required by new and existing industries alike. Poland had some banks before 1989 but they bore little resemblance to the sort of banks found in capitalist economies. The latter were fashioned from the obsolete banks over a period of less than twenty years.

National Bank of Poland

During the communist era, Polish banking was consolidated under the Narodowy Bank Polski, or the National Bank of Poland. It acted as the country’s central bank but also made loans to certain industries which were, like it, state-owned. Besides it was the Bank Gospodarki Żywnościowej (Bank BGŻ), which acted as the central bank for a system of 1,600 rural cooperative banks. Another pre-1989 bank was Bank Polska Kasa Opieki (Pekao), a bank offering foreign currency accounts and facilitating remittances, largely targeting emigrant Poles. There was also Bank Handlowy w Warszawie, a trade finance bank. Yet, these latter three banks were, in practice, controlled by the National Bank of Poland.

The National Bank of Poland was in turn controlled by the Polish Ministry of Finance with the role of President of the NBP and Undersecretary of State in the Finance Ministry fused together. Banks in a communist economy had no initiative to shape the provision of credit themselves; they acted merely as a regulating body to keep other industries in compliance with the plans set out for them. The bank’s monetary and lending policies were determined for it by the government until the central bank was given some independence with the Banking Act of 1982.

At the time when the Polish economy was transitioning away from communism, the banking system suffered from a number of handicaps. For one, capital was very limited. This reduced the amount of credit that could be lent by banks. There was also the issue of a large amount of nonperforming loans held by banks. The legal system was not well set up to recover on these loans. The banks also struggled with poor accounting, technology, and limited ranks of trained staff. Taking technology as an example, even placing a telephone call between Polish towns was not straightforward at the time. So, connecting banks’ computers over the early internet looked a long way off and payments had to be settled by mail.

The challenges went on. The legacy banks’ branch networks were very underdeveloped for the sort of capitalist economy Poland was about to embrace. The banks had a limited footprint. Even in 1990, there were still just thirty bank branches in Warsaw, serving a city of 1.8 million people, a rate of bank branches per capita perhaps one-tenth that of Western cities. The Polish economy was also plagued by high inflation; inflation accelerated from 60% in 1988 to 251% in 1989. The impact on banks was multi-faceted. For one, in the 1980s especially, many ordinary people had adopted the habit of hoarding foreign currency notes at home rather than trust Polish banks.

New Banks

The number of Polish banks increased in the 1980s but these remained state-owned. In 1988, a new bank, PKO BP, was split off from the National Bank of Poland. It was a state-owned bank that took household deposits and invested them into loans for public housing projects. Other ‘specialist’ banks like this were formed or separated from the National Bank of Poland’s control during the 1980s. The Banking Act of 1982 permitted the creation of private banks in the country but initially there were few eager entrepreneurs.

A non-communist government was formed in September 1989. The pace of change picked up from here. New reforms in 1989 broke up the National Bank of Poland further; four hundred branches were spun off into nine new regional banks. These new banks each inherited some of the National Bank of Poland’s loans and though each of these remained state-owned, to encourage some competition, they were given old NBP branches outside their home markets, so that their clientele could overlap. Still, these new banks were largely formed along regional lines and they lacked scale; their capitalization and operational capacity amounted to surprisingly little.

Yet, the market would surely develop further and the number of new ventures increased. There were forty-five new banks licensed in 1990 and twenty-two began operating that year. Only 400,000 złoty ($61,500) in capital was needed to start a licensed bank that year. Even after raising licensing standards, seventeen new licenses were issued in 1991 and thirty-two banks launched that year. Yet, the limitations of the 1980s remained into the early 1990s. The limited capital of the banks restricted their lending. So, many banks held safer government securities rather than make riskier private loans. Inflation, already very high, worsened further, reaching 586% in 1990 and real GDP declined, a recession that continued into 1991.

Difficult Early Years

Whatever its later successes, Poland was a troubled market for bankers in the early 1990s. Firstly, the regulatory system was inadequate for a private banking system; moral hazard, not an insignificant risk considering many banks benefited from an implicit state guarantee, and corruption were persistent problems too. The National Bank of Poland became a conventional central bank, taking on a monetary and regulatory role; yet, it was only able to compel banks to properly provision for loan losses starting from March 1992. Building a more resilient financial system became an objective of only increasing focus over time and the licensing standard for new banks was also raised once more.

Yet, weaknesses remained. Conducting various basic activities was a struggle. It could take a month for a bank check to clear, for instance, and ATMs were unknown objects. Businesses and consumers were slow to adopt new financial products, like credit cards. Yet, the business opportunities that already existed tested banks’ capacities. To close the gap, banks rushed to train new staff. Understanding financial statements and determining credit risks were new requirements of bank employees.

The persistent problem of nonperforming loans only got worse with the recession of the early-1990s when many state-owned enterprises found themselves unable to repay debts. These troubled loans were often very large. Overall, the number of non-performing loan borrowers served by Polish banks increased from 548 to 4,448 between 1990 and 1992. Nonperforming loans as a percentage of total loans reached 31% in 1993.

Despite all of this, the benefits of change were being realized. While the entire industry was still largely state-owned, the banks began to compete with one another. Banks began to advertise their services to raise deposits and make loans. Also, interest rates on bank products became more competitive. Deposit rates were a seemingly attractive 20% per month in early 1990, though this must be understood in the context of a country with over 500% annual inflation. Amidst this competition for deposits, the average spread earned by banks between the rate at which they borrowed and the rate at which they lent fell from 17% in 1990 to 3.7% in 1992. Further supporting growth, banks opened new branches and trained staff. The long lines to conduct basic banking business gradually became a thing of the past.

Privatization

The state-owned banking system on the eve of privatization was comprised of nine regional banks and a few ‘specialist’ banks. The largest of the regional banks in 1996, when privatization had already begun, was Powszechny Bank Gospodarczy with a little over nine billion złoty in assets. The largest bank overall was the public housing ‘specialist’ bank PKO BP, which had a national footprint, in contrast to almost all of the other banks that were only regional. It had nearly thirty-six billion złoty in assets in 1996

Years after the breakup of the National Bank of Poland, at least some of the successor banks remained state-owned. They were gradually privatized and listed on the Warsaw Stock Exchange, starting with Wielkopolski Bank Kredytowy of Poznań and Bank Śląski of Katowice in 1993 and 1994 respectively. Two more of these banks were privatized in 1995. Among the other banks, Bank Rozwoju Eksportu, the country’s export bank helping Polish industry by providing financing for exporters, was privatized in 1992. Despite this, two-thirds of the Polish banking system remained state-owned in 1996.

Supplementing the state-owned banks, several private banks were founded and thus the number of banks in the country, excluding cooperating credit organizations, reached seventy-five by 1990. Adding to the private capital of the banking industry, foreign banks bought stakes in Polish banks or established their own new subsidiaries in the country. ING came to own 51% of Bank Śląski for example. Many other foreign banks, like Deutsche Bank and Societe Generale, established offices in the country. By 1999, the majority of Polish banks were controlled by foreign investors and this portion kept growing.

Improving Conditions

That said, the health and capital sufficiency of Polish banks remained doubtful. Efforts were undertaken to resolve this. To solve the problem of bank liabilities and equity capital, a ‘Bank Guarantee Fund’, creating a form of deposit insurance, was legislated into existence in December 1994. Further, an ‘Enterprise and Bank Restructuring Program’ was launched to address bad loans. Under this program, banks were recapitalized with new capital such that bank capital across Polish commercial banks grew 162% from 3.13 billion złoty in 1992 to 8.22 billion złoty in 1996. However, to receive this money, banks were required to implement various improvements to their business practices.

With some help from an improving economy, nonperforming loans fell from 31% to 21.2% between 1993 and 1995. GDP growth had reached 7% in 1995 and remained at a robust 6% rate in 1996. By 1995, provisioning for loan losses by banks had substantially improved. In 1998, a new law affecting loan security and mortgages became effective.

Another trend underway was consolidation as a few banks failed and some merged with their peers. Among the most notable mergers, the government amalgamated Pekao with three regional banks in 1996. By 2004, there were 57 banks and 595 cooperatives in the Polish banking industry, down from approximately 82 and 1,612 respectively in 1994. After years of foreign investment and listings of banks on the stock exchange, only 20.5% of Poland’s banking system remained state-owned by 2004.

Historical and Modern Logo of Bank Pekao

Lesson

It is not that Poland lacked a history of banking in the decades before 1989 but banks fulfilled a different role in communist economies as compared to capitalist ones. Communist banks helped ensure firms kept to government plans or were agents in certain economic transactions with the rest of the world. Beyond that, they had limited responsibilities and had little independent authority. In capitalist economies, banks intermediate capital in vaster quantities and actually make their own decisions in providing credit. Substantial change was needed to convert the former sort of banking industry into the latter.

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