Poland’s central bank feels it is under siege. A four-pronged political attack by the country’s government threatens the stability of the banking sector and may leave the economy struggling against higher inflation and slower growth, according to Jerzy Pruski, deputy governor of the National Bank of Poland (NBP).
He has several complaints. First, the government has shown willingness to meddle in bank mergers, an area designated as the responsibility of the central bank. Second, its coalition partner, the Self-Defence party, has proposed adding to the NBP’s inflation mandate equally-weighted goals related to unemployment and growth. The third move is the launch of an inquiry into the central bank’s involvement in past bank ownership; and the fourth is a bid to unite financial regulation in a new body which would curtail the NBP’s role in bank governance.
“All of them are acting against the role played by the central bank. Each is very serious, but the combination of them could create a serious challenge to the central bank in Poland,” Pruski says in an interview with Emerging Markets.
intervention
The governing Law & Justice party of prime minister Kazimierz Marcinkiewicz has promised outspokenly to defend Polish jobs and the economy, in defiance of the central bank, the European Union or anyone else who might stand in their way. Tensions between Poland’s financial authorities erupted when the government intervened in a merger between two lenders, previously approved by the NBP-linked regulator.
When Italian financial conglomerate UniCredito sought to merge its Polish unit Bank Pekao and BPH (Poland’s second- and third-largest banks respectively) as part of its takeover of German bank HVB, cutting jobs in the process, the government cried foul. The deal breached a clause in the 1999 pact to privatize the lender, the authorities claimed, despite the fact that the relevant EU authorities as well as the national Banking Supervisory Commission had given it a green light. The government stood firm. In moves widely seen as efforts to pressure central bank governor Leszek Balcerowicz, who also chairs the bank regulator, the Polish parliament called for an investigation into all banking mergers since 1991 and then proposed a new regulator. The reformed body would be chaired by a government appointee.
European Central Bank (ECB) president Jean-Claude Trichet, renowned for his reluctance to get involved in politics, pointedly defended the independence of the Polish bank over the inquiry. The ECB began legal action over the interference in the merger. A new twist was added when the Self-Defence party of former pig farmer Andrzej Lepper joined the governing coalition, proposing an alteration to the mandate of the central bank from the inflation targeting system endorsed by the EU to a broader remit, including responsibility for fostering growth and employment.
Ultimately, a compromise deal brokered between UniCredito and the government was announced on April 5. Under the terms, the company will dispose of 200 of BPH’s 466 branches and offer some protection to employees, resolving the dispute. The threats to the central bank, however, remain.
valid concerns
The government’s actions have raised concerns in financial circles, both international and domestic. The fact that they could put limits on the capacity of banks to restructure “could have raised an issue about the intervention of the government,” says Xavier Got, an analyst at Standard & Poor’s, who notes that the case is a “very good illustration that it is not easy to predict how things will go in such countries because there can be uncertainties”.
Warsaw-based banking analyst Andrzej Powierza of PKO, Poland’s biggest bank, agrees: “I don’t like the action which the government has taken. The risk is that the new government is determined to show that it is defending Polish interests,” he says.
not black and white
Nevertheless, some say the case is not so black and white. A senior banking executive in Poland notes that the new regulatory structure will resemble Britain’s Financial Services Authority, which is independent of the Bank of England. If the new body is a step towards the possibility of creating genuine financial conglomerates, offering a wide range of services, it could be a positive development. Moreover, the Polish rules are sufficiently strong and well enough defined, making the status of their enforcer of little significance, he adds.
The central bank argues that EU countries, such as the Czech Republic, Slovakia, the Netherlands, Ireland and Spain are all consolidating financial regulation inside the central bank. It has been reluctant, however, to appeal to its allies in Frankfurt and Brussels, presumably for fear of facing accusations that it is unpatriotic.
Pruski also distances himself from the prospect of legal action to defend the NBP’s integrity: “We can provide our analysis, we can analyse the proposed changes indicating their inconsistency with legal regulations and economic rules,” he says, when asked about what options the bank has.
the battle continues
The battle is far from over and, as well as being a test for the government and NBP, will present a serious challenge to the fortitude of Jose Barroso’s European Commission in Brussels. The EU, now more than ever, is finding it difficult to garner the necessary support from its 25 member nations to enforce financial rules. This Polish government has already extracted concessions on tax and pension accounting, and seems determined to get its way again.