Impact of the recent crises on the Polish financial system and the response of the National Bank of Poland

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1 Impact of the recent crises on the Polish financial system and the response of the National Bank of Poland Zbigniew Hockuba Member of the Board National Bank of Poland Emerging Economies in the International Financial System The Way Forward Cusco, July 13, 2009

2 Little direct impact of the crisis on the Polish economy... Relatively strong GDP growth so far (6.7% in 2007 and 4.9% in 2008) and an above-zero forecast for Relatively balanced economy CA deficit of 4.3% (4-quarter average) financed safely by FDI s, loans from mother companies and trade credit Relatively good shape of the banking system Capital adequacy ratio about 11% low ratio of financial assets to GDP (roughly 1,04 in Poland compared to CEE average of 1,23 and 4,36 in the euro area); no securitization; no exposure to high-risk assets connected to the sub-prime sector 2

3 Economic situation in Poland better than in other countries of the region GDP growth rate % Q1 2009f EU BG CZ HU PL RO SK Source: Eurostat 3

4 Polish banks entered the global financial crisis in a good shape Capital adequacy ROA % 10 9 % Source: NBP 2008 profits retained by most banks

5 ...but the global crises brought challenges The ratio of FX-denomintated loans to total loans 45% 40% 35% 30% 25% 20% Households Corporates 15% 10% 5% 0% Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 May-09 Strong appreciation of the zloty spurred FX-denominated lending 5

6 Challenges: higher risk aversion and lower market liquidity 3M depo-ois spread FX swap margins basis points basis points. Poland Euro area US EUR/PLN CHF/PLN via EUR/PLN and EUR/CHF

7 NBP provided adequate help to the banking sector In October 08 the NBP implemented a package of measures designed to address problems in the interbank market. The mains aims included: Conducting full-allotment refinancing operations in zlotys for maturities up to 6 months (even though the banking sector as a whole has surplus liquidity). Conducting FX swaps in USD, EUR and CHF to enable banks to obtain funds in foreign currencies. Broadening the range of collateral accepted by the NBP to make it easier for banks to refinance. 7

8 The NBP responded also by cutting interest rates (from 6% to 3.5% ) Interest rate cuts together with longer-term refinancing operations conducted as part of the "Confidence Package" contributed to the fall of 3M interbank rates indexing the cost of credit in the economy. 8 7 % WIBOR 3M Policy rate POLONIA 0 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 8

9 Foreign parent companies provided funding to their Polish subsidiaries Foreign banks own 70% of the Polish banking sector. The ratings of Polish banks were downgraded as a result of the negative assessment of the parent entities and the market assessment of risk related to investment in Polish banks rose. The turmoil on the international markets led to a reduction in mutual limits for interbank operations on the Polish market which significantly decreased the liquidity of the interbank market. Nevertheless, parent companies provided large scale funding to their Polish subsidiaries. Despite the losses recorded by many foreign parent entities, most Polish banks decided to retain 2008 profits in capital. Some banks also received subordinated loans from parent entities. 9

10 Lessons learned and the way forward The financial crisis draws attention to the risks inherent in FX lending and more importantly to the build up of currency mismatches on banks' balance sheets. In Poland such mismatches were hedged with the resort to off-balance sheet instruments (e.g. FX swaps), but when the market dried up, the NBP had to step in. The crisis has tested the viability of both fixed and floating exchange rate regimes. Floating exchange provided considerable relief for the Polish economy as an automatic stabiliser in good times, it limited the purchasing power of foreign currencies through appreciation, probably slowing down the growth in asset prices; in bad times, it renders Polish exports more attractive through depreciation and thus provides the much-needed stimulus to the economy. 10