Keeping the closet closed
Does anybody know anything about Bank Gospodarki Zywnosciowej (BGZ), the silent cooperative bank? Nor are you likely to in the near future.
BGZ will stay as a sprawling, oftentimes financially troubled, oblique entity that few people know anything about including the individuals who deposit their money there thanks to the government's decision to keep the bank in "Polish hands." The Treasury Ministry announced last week that it would not look for a foreign strategic investor for either BGZ or Powszechna Kasa Oszczednosci Bank Panstwowy (PKO BP), as they wanted the banks to keep their Polish identity. Instead, they will be sold to, we assume, a domestic entity, and under what auspices is anybody's guess.
For BGZ and its depositors, this is a particularly bad decision. The reason is that privatization, particularly to a foreign entity, has a way of not only bringing in much-needed capital and expertise, but also flushing the skeletons out of a company's closet. The sale of strategic stakes helped to bring forward news of bad lending practices at a Bank Zachodni branch to dangerously low capital levels at Pekao, two of Poland's more important banks.
In the absence of an outright sale to a party not aligned with the government, the other best way to peer inside a bank, or any company, is to have it publicly listed. That forces, for example, an independent audit by an international accounting firm, an ideal way to gauge a financial institution's health. Since a transparent sale or listing does not seem to be in the cards for BGZ, the populace, depositors and most government officials could one day easily wake up to find the institution in the throes of a financial meltdown. It has happened before in many banks in many parts of the world, and taxpayers usually end up plugging the hole.
But Polish leaders aren't interested in BGZ's health or that of the banking system, it seems, as they are more concerned that BGZ keep its Polish identity. Unfortunately, both PKO and BGZ will likely also keep their Polish woes such as their relatively weak capital base and bloated operations, a holdover from communism. By deciding not to privatize these two banks to stronger foreign entities, the government is damning them to the purgatory of constant capital shortages and a lack of a clear-cut strategy in the world - not nation of banking. Granted, both banks could be publicly listed, which at least then would ideally make them beholden to the profit motive shareholders tend to demand. But after at least two years of significant foreign investment in the Polish banking sector and increasing competitiveness among well-run domestic institutions, what investor would be interested in buying shares in cloudy BGZ?
The worst part of the government's decision is that for the meantime it has virtually given BGZ's management carte blanche to continue business as usual. Whether their leadership is effective or futile, we the public and depositors most likely will never know.
