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«Organisation de Coopération et de Développement Économiques in co-operation with the Italian Treasury Eleventh Plenary Session of the OECD ...»

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Organisation for Economic Co-operation and Development

Organisation de Coopération et de Développement Économiques

in co-operation with the Italian Treasury

Eleventh Plenary Session of the OECD Advisory Group on

Privatisation (AGP)


Banks and Privatisation

The process of privatising banks in Poland: successes and failures of

a multitrack path

by Slawomir Lachowski

Rome, 18 and 19 September 1997




by Slawomir Lachowski**

1. Introduction Poland is one of the fastest growing post-socialist countries of Central and Eastern Europe. In 1990 the government initiated a radical economic reform programme pivoted on microeconomic liberalisation, macroeconomic stabilisation and institutional reconstruction.

Privatisation has become one of the important elements of the strategic economic policy measures, targeted at the gradual emergence of a capitalist market economy in the country. In the centrally planned economy, the banking sector was among those most vulnerable to the adverse effects of the attempts at practical implementation of the “socialist economy” dogma.

The monobank model, which dominated the Polish banking sector, totally ignored market mechanisms. Only state-owned and the co-operative forms of ownership were accepted and the actual status of the latter - given a whole series of restrictions on its scope and presence in the sector - was actually tantamount to state control. Changes required in the banking sector to subject it to the market-driven principles, called for both demonopolisation and a complete turnaround of its ownership structure. The privatisation programme designed for the banking sector was based on principles different than those applied to the other sectors of the economy, due to the specific and unique role of the financial system in the economy. One of its hallmarks was the plan to privatise all state-owned commercial banks on a case-by-case basis by selling part of their equity to a strategic investor and making the remainder available - in a public offer - to institutional and individual investors.

The main purpose of this paper is to present the strategy behind the privatisation of the Polish banking sector during the period of transition, discuss the experiences gained during the implementation of this process and review its effects. A number of different approaches to privatisation sales of banks are discussed in detail in the case studies on privatisations of Wielkopolski Bank Kredytowy S.A., Bank Gdañski S.A. and Bank Handlowy S.A. w Warszawie.

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2. The condition of the Polish banking sector at the outset of the period of transition Central planning and a massive state ownership were the main characteristics of the socialist economic system which dominated in the countries of Central and Eastern Europe. In the closing years of socialism, efforts were undertaken to modify the omnipresent command planning system in certain countries (Hungary, Poland) and replace it with a centrally planned investment processes. The advocates of these changes argued that the introduction of curtailed market economy would gradually result in the decentralisation of the current operations. Those reformers, however, shied away from attempting to privatise the state-owned enterprises, and the efforts to revamp the socialist economic system failed. The mixed system which was put into operation in Poland in the 1980s neither helped to improve economic efficiency, nor prevented the country’s continuous economic decline. With hindsight it was clear that such limited changes to the socialist economy were doomed to fail and in 1989, it became true with the disastrous downturn of the country’s economy and a profound macroeconomic disequilibrium, hyperinflation and substantial foreign debt.

Likewise, it should be noted that companion to the absolute supremacy of the state ownership and the existence of the central command planning system that pervaded the whole economy, was also the role of money in the socialist economy being reduced to that of a medium of exchange; the structure and modus operandi of the banking system were dwarfed accordingly.

The key characteristics of the socialist model of banking system can be summarised as:

• domination of a monobank system;

• absence of a clear deviding line between the banking system and the state budget;

• non-economic criteria driving lending decisions;

• total rationing of credit amounts.

The supremacy of the so called monobank was the main hallmark of the socialist version of the banking sector and was clearly visible in an extreme centralisation of the banking sector. The central bank served both as a direct lender and provider of essential everyday banking services to the public and to businesses. Given that the principle of one-bank one-account one-lender was translated into business practice, competition in the banking sector was wiped out altogether. Businesses and people alike were not offered any possibility to choose between banks and, moreover, were even administratively assigned to one branch.

The beginning of the 1980s was the heyday of the monobank’s supremacy in Poland and witnessed a strong expansion of its structure during this time period; the Bank’s supremacy was so pronounced that the whole Polish banking sector was reduced to the four financial


• Narodowy Bank Polski [NBP] – the National Bank of Poland – subordinate to the Ministry of Finance (the President of the NBP was at the same time deputy Minister of Finance), which fulfilled the function of a central bank and was the lender to the country’s economy and its overseer;

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• Bank Gospodarki Zywnosciowej which specialised in lending to the agricultural and agribusiness sectors and was also the organisational and financial centre for 1550 co-operative banks which in turn were both savings institutions and finance providers to private farmers and craftsmen;

• Bank Handlowy w Warszawie S.A. which was responsible for handling foreign settlements of the central government and acted as a dedicated bank to foreign trade enterprises and enjoyed exclusive rights for foreign business transactions;

• Bank Polska Kasa Opieki S.A. which specialised in handling foreign exchange transactions for the members of the public.

In the decadent days of the socialist era in Poland a number of efforts were undertaken to reform the banking system in Poland. They were part of a series of attempts to revamp the existing system and ensure an increase in its efficiency and the preservation of macroeconomic stability. When the economic collapse of the system as such was already imminent, a few institutional and functional modifications were effected.

The principal changes were implemented at the beginning of 1989, when a two-tier banking system was introduced. This new stratification of the system was meant to increase the role of the NBP in shaping the monetary policy and to concomitantly limit its functions to those of a central bank, an issuing bank and a bankers’ bank. It required that the NBP’s role of the country’s central bank be organisationally made distinct from lending and serving everyday financial needs of the public and business. In 1987 the Powszechna Kasa Oszczêdnosci Bank Pañstwowy and two years later nine commercial banks, established on the basis of 430 of its branch offices, were carved out from the NBP. Although the regulatory framework was changed in 1982 and since then both domestic and foreign persons had been allowed to set up new banks, before the end of 1989 only two new banks came into being: Bank Rozwoju Exportu S.A. (with shareholdings acquired by the Ministry of Foreign Trade, Ministry of Finance and a few foreign trade enterprises) and Lódzki Bank Rozwoju S.A., established by state-owned enterprises and individuals.

In theory lending decisions with respect to enterprise financing were expected to be based on the principle of creditworthiness. Therefore, decisions to lend and offer everyday financing to businesses were subordinated to the commercial criteria. In case of borrowers’ default, banks were obliged to refuse further financing and demand immediate repayment of outstanding debt.

If such steps had been taken bankruptcy or liquidation of such distressed enterprises might have ensued. However, business practice was indeed different and showed that reliance on the magic of capitalist economic concepts in a socialist environment could not ensure any improvements in the efficiency of the system as such. Thus enterprises facing bank instigated action were as a rule aided by the State and supported by either direct subsidies or rescued on the grounds of eligibility to one of a range of many financial reliefs available; or, alternatively, were acquired by another state-owned enterprise. Bankruptcy and liquidation were still just catchwords in the book on the theory of “market socialism” (L.Balcerowicz, 1989). Without a genuine commercialisation of banks any attempts to subject lending to the market mechanisms were doomed to fail. A bank which is not a truly commercial institution is vulnerable to external pressures (central and local government agencies acting on behalf of the enterprises as well as other political organisations meddling in their business). Absent are also internal incentives to comply with the rigorous prudential provisions - this in turn is mainly due to the

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lack of commercial rules to assess the effectiveness of operations and stems from the fact that bankruptcy was only a remote, and indeed even theoretical, possibility.

For want of competition in the banking sector and owing to the lack of commercially viable principles to direct the bank’s operations, the banking system was capable of performing reasonably well only with respect to handling cash and non-cash settlements, whereas in other key areas, where it was supposed to exert its influence, it was malfunctioning. Thus it failed to ensure a rational allocation of capital, stability of the purchasing power of money and the rate of foreign exchange alike, and, furthermore, was incapable of properly handling its function of an intermediary in the process of financial assets transformation. The situation of the banking system at the outset of the transformation processes, launched in the post-socialist countries of Eastern and Central Europe, is aptly summarised by L.Balcerowicz and A.Gelb (1995) “But nowhere was the legacy of the destruction of state capitalism so distinctly perceived as in the financial sector. Banking systems may have even been “deep” (as measured by the ratio of balances to outputs) but financial flows were merely passively adjusted to decisions related to real economy. There was no experience of indirect, market-based monetary policy. Payment systems were primitive. Passive, monopolistic state banks lacked the capability to evaluate creditworthiness and risk was socialised”.

3. The main guidelines of a banking sector development model for the period of transition The vision of an open and competitive market for financial services permeated the ideas of all contributors to the discussion of the target model of the financial sector in Poland. Given the sector’s pivotal importance to the success of system transformations afoot in the country’s economy - especially affecting the key areas of restructuring of accumulated bad debts and support for the growth of solvent enterprises - restructuring of the banking sector became one of the key objectives of Poland’s economic policy. The core assumption underlying the modernisation processes was that the principal constituent part of the banking sector model should be a universal bank, trading as a joint stock company, and legally structured in such a manner so as to enable it to provide an unlimited scope of services and endow it with a freedom of operations in the financial markets.1 The new banking law provisions enacted in Poland were meant to facilitate the development of the banking system and bring it in line with the system of universal banking operating in the European Union. The model of banking sector development adopted in Poland provides for a legal possibility of combining the banks’ deposit-taking and lending business with their presence in the market for insurance, and permits activities in the securities markets as well. In terms of the banks’ ownership structure, it was assumed that the majority of bank shareholdings would be held by foreign and domestic persons, independent of the State Treasury.

Steps were taken to restore the functioning of capital markets in recognition of their importance and role in ensuring an optimum mechanism of capital allocation, emergence of effective corporate governance and monitoring of enterprises’ activities. In this context, the legal and institutional infrastructure for the capital market was, virtually overnight, created from scratch.

Therefore following the enactment of the Act on Public Trading of Securities and Trust Funds in 1990 pursuant to its provisions the Securities Commission and the Warsaw Stock Exchange were established soon thereafter. The capital markets have thus become an important constituent part of the target model of the financial system.

Cf., Rozwój i modernizacja systemu bankowego w Polsce. NBP, Warsaw 1990.

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4. Strategy of the banking sector privatisation in Poland The progress and success of the economic transformations in post-socialist countries depends


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