Of what use is the central bank?
There is no doubt that many people wonder about the exact roles of the National Bank of Poland and its governor Leszek Balcerowicz. The government, of course, would reply that the role of the NBP appears to be to negate its policies and block economic growth. For our commercial banks, the answer may well be that the role is to ensure, by introducing ever more ridiculous and restrictive credit risk-assessment guidelines, that they cannot lend to anyone.
First, a bit of history. Way back when (prior to the banking reforms of 1988), there was the central bank, PKO, Bank Handlowy for international trade, and a large number of co-operative banks. In 1988, the commercial operations of the central bank were hived down to nine commercial banks. Despite the fact that the intention was to create competition, these nine banks were organised on regional lines, such that WBK covered the west and southwest, Bank Śląski covered Silesia, and so forth. Great idea, but it did no-thing to foster local competition. As we know, these banks have now been sold to foreign owners, such as Allied Irish Banks and ING.
There was no question that the central bank should have reduced its headcount at its main office on ul. Świętokrzyska, as the legions of officials who used to decide how many paper clips a branch manager was allowed to order each year became more and more bored having nothing left to do. And what does a civil servant do when he is bored? He creates rules and regulations to make everyone else's life miserable, even if he has no knowledge or competence in a particular area.
I am convinced that the former paper-clip allocation department has now been transformed into the banking sector's risk analysis and control directorate. Every year the commercial banks, which are supposed to be run along commercial lines by experienced executives under the control and direction of their western shareholders, face ever-growing barriers in being able to lend money to anyone.
It is right and proper that the central bank should set liquidity and capital-sufficiency standards for commercial banks and monitor their financial probity on a regular basis. However, decisions on how to lend, to whom to lend, the conditions under which to lend and when to create reserves against bad debts are ones that belong to the banks themselves. It then comes down to the internal and external auditors to ensure that bank procedures comply with group policy and that the bank's balance sheet fairly reflects its financial standing in accordance with generally accepted guidelines as suggested by the World Bank, the International Monetary Fund and other clever people.
Telling banks how to evaluate their loan portfolios down to the last degree smacks of control freakery on a level of which even that ultimate control freak, Tony Blair, would be proud.
The latest example of such interference is telling banks exactly what can be treated as security for a loan and what cannot. It now transpires that the banks cannot accept trade debtors as first-class security unless a debtor has agreed in advance and in writing that the specific balances can be the subject of a legal charge in favour of the bank.
Surely, the central bank should have been awake when the new corporate legislation was being drafted and should have pressured the government and parliament to ensure that a floating charge was legally enforceable against third parties (i.e., that a bank could directly demand from defaulting borrowers customer payment of balances otherwise due to the borrower). Telling banks that they cannot treat debtors as security on a loan using whatever discount factor the bank itself may choose to apply is heading in exactly the opposite direction of where the economy should be going.
Other idiotic edicts seek to reduce credit-risk analysis to the review of key ratios. Although these are helpful, they cannot be cast in stone, and they cannot replace a banker's "nose for a good deal," nor can they replace critical judgement. If the banks are to compete, they must all be allowed to formulate their own risk-assessment policies. The role of the central bank is not to tell banks how to manage their risk, but to ensure that banking failure does not negatively affect the general economy. As all of you western business leaders out there know, in the West you can put a banking proposal to 10 different institutions, some of which will turn down the deal, some of which will offer exorbitant interest rates and some of which will be genuinely interested. Our central bank is acting as if the assessment of loan risk were something which could be reduced to a few key statistics.
Of course, a cynic would ask why, if these individuals who make the rules at the central bank are so clever, they have not been snapped up by AIB and ING to work in their own splendid head offices in Dublin and Amsterdam, building risk-assessment models.
The real answer may be that the former paper-clip administrators are locked in a fierce battle to return the nine ugly sisters back into the fold. Step one is the elimination of their ability to make loans. The next steps are logical, except for the fact that in a short space of time businesses here will start using the facilities of foreign banks not through their Polish subsidiaries, but through their head offices, where credit assessment will be carried out in accordance with rational, internally set guidelines instead of those of a paper-clip controller.
First, a bit of history. Way back when (prior to the banking reforms of 1988), there was the central bank, PKO, Bank Handlowy for international trade, and a large number of co-operative banks. In 1988, the commercial operations of the central bank were hived down to nine commercial banks. Despite the fact that the intention was to create competition, these nine banks were organised on regional lines, such that WBK covered the west and southwest, Bank Śląski covered Silesia, and so forth. Great idea, but it did no-thing to foster local competition. As we know, these banks have now been sold to foreign owners, such as Allied Irish Banks and ING.
There was no question that the central bank should have reduced its headcount at its main office on ul. Świętokrzyska, as the legions of officials who used to decide how many paper clips a branch manager was allowed to order each year became more and more bored having nothing left to do. And what does a civil servant do when he is bored? He creates rules and regulations to make everyone else's life miserable, even if he has no knowledge or competence in a particular area.
I am convinced that the former paper-clip allocation department has now been transformed into the banking sector's risk analysis and control directorate. Every year the commercial banks, which are supposed to be run along commercial lines by experienced executives under the control and direction of their western shareholders, face ever-growing barriers in being able to lend money to anyone.
It is right and proper that the central bank should set liquidity and capital-sufficiency standards for commercial banks and monitor their financial probity on a regular basis. However, decisions on how to lend, to whom to lend, the conditions under which to lend and when to create reserves against bad debts are ones that belong to the banks themselves. It then comes down to the internal and external auditors to ensure that bank procedures comply with group policy and that the bank's balance sheet fairly reflects its financial standing in accordance with generally accepted guidelines as suggested by the World Bank, the International Monetary Fund and other clever people.
Telling banks how to evaluate their loan portfolios down to the last degree smacks of control freakery on a level of which even that ultimate control freak, Tony Blair, would be proud.
The latest example of such interference is telling banks exactly what can be treated as security for a loan and what cannot. It now transpires that the banks cannot accept trade debtors as first-class security unless a debtor has agreed in advance and in writing that the specific balances can be the subject of a legal charge in favour of the bank.
Surely, the central bank should have been awake when the new corporate legislation was being drafted and should have pressured the government and parliament to ensure that a floating charge was legally enforceable against third parties (i.e., that a bank could directly demand from defaulting borrowers customer payment of balances otherwise due to the borrower). Telling banks that they cannot treat debtors as security on a loan using whatever discount factor the bank itself may choose to apply is heading in exactly the opposite direction of where the economy should be going.
Other idiotic edicts seek to reduce credit-risk analysis to the review of key ratios. Although these are helpful, they cannot be cast in stone, and they cannot replace a banker's "nose for a good deal," nor can they replace critical judgement. If the banks are to compete, they must all be allowed to formulate their own risk-assessment policies. The role of the central bank is not to tell banks how to manage their risk, but to ensure that banking failure does not negatively affect the general economy. As all of you western business leaders out there know, in the West you can put a banking proposal to 10 different institutions, some of which will turn down the deal, some of which will offer exorbitant interest rates and some of which will be genuinely interested. Our central bank is acting as if the assessment of loan risk were something which could be reduced to a few key statistics.
Of course, a cynic would ask why, if these individuals who make the rules at the central bank are so clever, they have not been snapped up by AIB and ING to work in their own splendid head offices in Dublin and Amsterdam, building risk-assessment models.
The real answer may be that the former paper-clip administrators are locked in a fierce battle to return the nine ugly sisters back into the fold. Step one is the elimination of their ability to make loans. The next steps are logical, except for the fact that in a short space of time businesses here will start using the facilities of foreign banks not through their Polish subsidiaries, but through their head offices, where credit assessment will be carried out in accordance with rational, internally set guidelines instead of those of a paper-clip controller.
