Financial Stability Report December 2011
According to the Financial Stability Report. December 2011, the situation in the banking sector, which is the most important segment of the financial system, has improved since the July edition of the Report. The banking system has generated large earnings that are close to the record highs posted by non-bank financial institutions in the years preceding the global financial crisis. The situation of non-bank financial institutions has also improved and does not pose a threat to the financial system stability.
According to the NBP Report, the situation of Polish banks is sound, their potential loss-absorbing capacity remains high and the financial system is stable. Yet, the uncertainty about the outlook for the economic situation abroad is currently high and the consequences of negative scenarios for the developments in the euro area, if materialized, may be serious. This generates a significant risk that Polish banks will have to face, should negative developments occur. Therefore, the NBP presents recommendations in the Report whose implementation will contribute, in the NBP’s opinion, to further strengthening of Polish financial system resilience to negative shocks.
Banks should pursue a prudential dividend policy to have a sufficient buffer at their disposal to cover the cost of a potential economic slowdown. Increasing capital in Polish banks will enhance their credibility as independent entities. This would, in turn, help them raise funding from sources other than their parent banks, which would reduce the dependence of Polish banks on the shareholders’ financial situation. Banks should also focus on strengthening their liquidity buffers and raising long-term funding. The NBP also maintains the opinion that housing loans denominated in foreign currencies should be withdrawn from the banks’ offer and should become a niche product available only to clients who receive regular revenues in the currency of the loan
Financial Stability Report. December 2011 identifies the following risks to financial system stability and analyses its resilience to such turbulences.
The risk of economic slowdown
The Polish financial system operates in an increasingly stable environment. The direction in which the situation in the European Union and other highly developed countries will develop is highly uncertain largely due to the intensification of the debt crisis of the public sector in some euro area countries. This is the most important risk factor, both to the condition of Polish banks and the Polish economy as a whole.
In the Report, the NBP estimates the impact of a potentially strong economic slowdown on the situation of Polish banks, relying on macroeconomic shock analyses, namely stress tests. It is no coincidence that these analyses are called “shock” analyses as they analyse banks’ resilience to extreme, highly unlikely, yet still possible, macroeconomic scenarios. By no means, however, are they forecasts of the financial sector developments. The NBP has adopted very stringent assumptions for the stress tests. The shock scenario assumes a significant decline in Polish GDP growth resulting from a new economic slowdown in the developed countries. In addition, the scenario assumes the depreciation of the zloty and a strong increase in yields on domestic government bonds.
The results of the stress tests show that most domestic commercial banks have sufficient capital to absorb the effects of a strong economic slowdown. Even in such a situation, most banks would maintain their capacity to generate a positive operating result which would mitigate the negative impact of charges to provisions for impaired loans on the size of capitals. The scale of capital increases needed by banks, taking into account the more stringent capital requirements imposed by the decision of the Council of the European Union of 26 October 2011 (temporary increase of the minimum capital adequacy ratio to 9% of the core tier 1 capital), would be limited and would amount to less than PLN 6 billion, i.e. less than 6% of the current banking sector capital.
Risk of shortage of funding for banks
Negative developments in the developed countries could also affect Polish banks via the financing channel. Several domestic banks rely on direct financing from their parent banks. The risk that parent banks could suddenly withdraw such funding may be assessed as limited but cannot be ruled out altogether owing to these banks’ exposure to the risks related to the debt crisis in some euro area countries. Amidst growing risk aversion and the outflow of capital from the emerging markets, it may be difficult for some banks to roll over swaps intended to hedge the risk related to foreign currency loan portfolio and to roll over funding raised from the financial markets in another form. The NBP analysed resilience of the banking system to such disturbances by carrying out liquidity stress tests in which particularly stringent assumptions were adopted. An immediate loss of a vast part of funding was assumed, both as regards funding raised from parent banks and from the deposits of the domestic non-financial sector. The probability of such a scenario may be regarded as insignificant. The results of the stress tests show that even with such stringent assumptions, most banks would maintain liquidity. Some banks should, however, change their funding structure or increase the value of liquid assets to ensure sufficient resilience to liquidity shocks. It should be emphasised that up to date the Polish banking system has demonstrated a strong resilience to the market turmoil. Even after the collapse of Lehman Brothers and practically closing down of some segments of financial markets, Polish banks continued to be stable. The stability of the banking system was, at that time, also supported by the actions of the safety net institutions, the National Bank of Poland, in particular, which offered swap operations to banks, however, mainly by the measures taken by parent banks that provided additional funding to banks operating in Poland.
The risk of ownership changes
The Report identifies another risk which is related to the above-mentioned risks. Some strategic investors of Polish banks may make a decision to sell the banks. Such steps may result from a difficult financial situation of strategic investors and the fact that profitability of banks’ operations in Poland is high. In order to prevent potential ownership changes from undermining the stability of the Polish financial system it is important for the process to be carried out in an orderly way. Moreover, new bank owners should have adequate funding, expertise and reputation ensuring stable functioning of banks undergoing the takeover process.