Interview: Zdzisław Sokal, President of the Bank Guarantee Fund
Zdzisław Sokal is the President of the Bank Guarantee Fund (BGF) and an adviser to the President of the Republic of Poland. He also serves as a member of the Polish Financial Supervision Authority. In this interview with GlobalCapital, he discusses the role of the BGF and the challenges facing the Polish banking sector today.
: Can you provide a brief overview of the history of the Bank Guarantee Fund (BGF) and its main role today in supporting the stability of the banking sector in Poland?
Since the creation of the BGF in 1995, its primary objective has been to implement measures necessary to safeguard the stability of the domestic financial system. In particular, it is responsible for ensuring that the mandatory deposit protection scheme functions efficiently and is able to provide financial assistance and support when it is called upon to do so.
The most active period in the Fund’s history was in the early years of its operations when many banking entities, particularly those in the co-operative sector, were in a very difficult economic and financial situation. Most loans granted by the Fund between 1997 and 2003 were earmarked to support the banks’ own restructuring initiatives, with the balance used for the acquisition of shares in banks that were in danger of insolvency. The last of these loans was disbursed in 2010.
In addition, between 1995 and 2001 the Fund paid compensation to the guaranteed depositors of 89 co-operative and five commercial banks.
In 2015, after a period of 13 years in which there had been no bankruptcies in the Polish banking industry, the Wolomin-based Cooperative Bank of Crafts and Agriculture (SK Bank) failed.
In total, between 1995 and 2015, the Fund paid compensation amounting to Z2.85bn to approximately 350,000 eligible bank depositors. Moreover, its Assistance Fund granted loans to 44 commercial banks and 57 co-operative banks, amounting to Z3.79bn.
The financial assistance granted by the Fund since its establishment more than 20 years ago has produced tangible results and strengthened confidence in the banking sector. It has also contributed to the stability of the Polish financial services industry and ensured that uninterrupted access to banking services has been maintained.
It should be noted that since 2001 the BGF has also been providing assistance to solvent banks from the Cooperative Banks’ Restructuring Fund. These loans are extended to cover expenses related to the merger of co-operative banks, to acquire shares of affiliated banks, and — more recently — to assist co-operative banks in the creation of an institutional protection scheme (IPS).
Since 2013, the BGF has been guaranteeing deposits in credit unions and supporting their restructuring. So far, the Fund has supported the three commercial banks in taking over four credit unions that were in the process of restructuring. In addition, the Fund is currently paying out seven failed credit unions.
The Fund’s role will be expanded after October 9, when it will assume responsibility for carrying out resolution proceedings using tools such as purchase and assumption, bridge bank, bail-in and asset separation.
The process of resolution is aimed at maintaining financial stability, in particular through the protection of confidence in the financial sector and ensuring market discipline. It is also designed to limit the exposure of public funds to the financial sector, to ensure that banks continue to carry out their critical functions, to protect depositors and investors covered by the compensation system, and to safeguard resources entrusted to banks by their customers.
The Fund co-operates with the National Bank of Poland, the Ministry of Finance and the Polish Financial Supervision Authority (KNF) to create a network of financial security. The CEO of the Fund is a member of the Financial Stability Committee.
: You mentioned the failure of SK Bank last year. What was the background to this, and how costly was the bankruptcy to the rest of the Polish banking sector?
The Cooperative Bank of Crafts and Agriculture in Wolomin (SK Bank) was suspended on November 23, 2015. Compensation paid to the guaranteed depositors of the bank was funded by the banks and amounted to Z2.03bn.
However, neither the suspension of SK Bank’s operations by the Polish Financial Supervision Authority (KNF) nor the bank’s bankruptcy resulted in a loss of confidence in the banking sector in Poland. This was at least in part to the swift and efficient disbursement of compensation to guaranteed depositors by the BGF.
: According to the IMF, “while the Polish banking sector is still generally healthy, bank profitability has recently declined, reflecting narrowing interest margins and other costs on banks.” But it adds that based on a number of financial soundness indicators the Polish banking sector continues to perform well. “Banks are well-capitalised and the ratio of non-performing loans to gross loans, though still elevated, compares well within the region,” notes the IMF. Is this a fair summary of the overall performance of the Polish banking sector?
The situation in the Polish banking sector is stable. Despite the introduction of the new tax on certain financial institutions, banks have still been able to generate profits in the first half of 2016, which were close to the profits they reported in the same period in 2015.
In addition, Polish commercial banks have adapted well to the low interest rates environment. Even though interest rates were cut in the fourth quarter of 2014 and the first quarter of 2015, interest income increased.
It is true that there has been a slight decline in bank profitability recently, which was related to factors beyond the control of the banks themselves. These included reduced interest rates, the need to cover the costs of the bankruptcy of SK Bank, contributions made to the Support Fund for Borrowers, which provides relief to troubled mortgage borrowers, and the introduction of the new bank tax. However, despite all these negative factors, the profitability of the Polish banking sector remains higher than the EU average.
: On the subject of the bank tax, the IMF warns that this could “reduce bank profitability by 18%, significantly contributing to a total decline in profitability of 30% relative to 2015. Moreover… credit growth at end-2016 may contract by between three and four percentage points relative to a projection without the bank asset tax. In turn, the effect of the bank asset tax on the economy would be significant. Staff estimates suggest that the bank tax alone could reduce GDP growth by up to 0.4 percentage points by end-2016.” Are these projections in line with yours?
The introduction of the tax in Poland on certain financial institutions, commonly referred to as the bank tax, is not unusual in a European context. There is a similar tax in many countries, such as France and the UK, which — just like in Poland — has had no adverse impact on the stability of the banking sector or the economy.
: Are there any signs that the bank tax is reducing the appetite of Polish banks to lend?
Data on the banking sector show that the tax has not had a significant impact on lending. The lower growth in household lending observed in the first half of 2016 was the result of the unpegging of the Swiss franc by the Swiss National Bank at the beginning of 2015. If we strip out the impact of changes in the value of foreign currency housing loans arising from significant exchange rate fluctuations, especially in the first quarter of 2015, growth in household loans in the first half of 2016 was even stronger than it was in the same period in the previous year.
As to the low growth of corporate loans, it should be emphasised that this stems from a reduction in demand rather than a reluctance among banks to lend. According to the NBP’s publication on the situation in the credit market in the third quarter of 2016, this is chiefly a reflection of reduced demand from large enterprises.
: What about other measures of efficiency such as return on assets (ROA) and return on equity (ROE) in the banking sector?
ROA and ROE have declined. Although they are no longer in double digits, they are still reasonably high at 8% or 9%.
: What is the latest news on the Swiss franc mortgage conversion? What impact has the Swiss franc mortgage problem had on the Polish banking sector?
No decisions have been taken yet as to the final solution to the issue of loans denominated in Swiss francs. Experts and politicians are working in parallel on different bills. The latest of these, which was released in August, is the President’s initiative.
This bill mandates the return of the spread by banks if it was higher than permissible. In addition, it stipulates that this spread is refundable only on loans of up to Z350,000. There is no provision for the mandatory conversion of Swiss franc-denominated loans.
Estimates of the costs to the banks vary. The President’s team put them at Z4bn, while according to the NBP they could reach Z8bn. The Polish Banking Association, meanwhile, estimates that the cost will be between Z7bn and Z14bn. It should be noted that in principle the latest proposal has been welcomed by the NBP.
Other recommendations encourage banks to develop customised solutions and agreements with individual customers. This would be based on the Polish authorities increasing the risk weights for foreign currency to 120% from their current level of 100%. The draft regulation on this issue is also the subject of a public consultation based on the solutions provided for in Regulation No. 575/2013 of the European Parliament and of the Council of June 26, 2013.
I welcome this change in approach to the Swiss franc conversion issue. Encouraging conversion through the application of economic pressure rather than legal coercion is a good way to move forward.
Also in August, NBP President and Chairman of the Financial Stability Committee, Adam Glapiński, established a working group to develop solutions to the issue of foreign currency loans, members of which include representatives of the National Bank of Poland, the Polish Financial Supervision Authority (KNF), the Bank Guarantee Fund and the Ministry of Finance.