Who controls the cash?
Most banking observers agree that the inflow of foreign capital into the sector has led to improvements and growth. But the question now at the fore of political and economic circles is when does foreign involvement become too much of a good thing.
The question has arisen in the wake of the recent sales of a majority stake of the country's second largest bank, Bank Pekao, to UniCredito Italiano and German insurer Allianz and an 80% stake in Bank Zachodni to Aillied Irish Bank (AIB). This means foreign participation in the banking sector, already at 51% will now jump to 57%. This is one of the highest rates in Europe and a level that worries politicians of all stripes.
"Of course this participation is too high," said Adam Biela, an economic specialist with Solidarity Election Action (AWS). "It's a very worrisome ratio."
"Poland is the only country with such a high participation of foreign capital in the banking sector," added Wieslaw Kaczmarek, a deputy from the opposition Democratic Left Alliance (SLD) and a former privatization minister.
The growing unease over the level of foreign control of the banking sector may be a case of crying that the horse is gone with the barn door almost shut. Privatization of the banking sector is largely complete. But two big sales remain: those of the country's largest retail bank, Powszechna Kasa Oszczednosci Bank Panstwowy (PKO BP) and agricultural institution Bank Gospodarki Zywnosciowej (BGZ).
There is mounting pressure for the eventual privatization of PKO BP, which may not occur until 2001, to be to a Polish institution or through the stock exchange. Deputies from SLD, the Peasants Party (PSL) and AWS have developed three independent draft resolutions demanding a delay for further banking privatizations.
In addition, shortly before Pekao and Zachodni were sold, three former finance ministers sent a letter to Finance Minister Leszek Balcerowicz with the same request - suspend privatizations. Warsaw Stock Exchange (WSE) head Wieslaw Rozlucki also questioned the form privatization has taken and the dominance of foreign capital. "We are already controlled by foreign capital," Kaczmarek said. "By German capital, to be specific."
Who's what?
Economists have generally scoffed at such fears, saying they are unfounded given the lack of capital that was available to the banking sector and the modernization that needed to occur. "I don't understand this," said Cezary Jozefiak, an economist and a member of the Monetary Policy Council (RPP). "To me, it's nothing but stereotypes."
Economists also point out that it's not clear what a foreign investor really is. Even the National Bank of Poland (NBP) does not apply one definition of what constitutes a foreign bank. Instead, it uses several terms: banks with major participation of foreign capital that include branches of foreign banks; joint-stock companies wholly owned by foreign capital; joint-stock companies with majority foreign shareholders; and joint-stock companies indirectly controlled by foreign capital.
With these definitions in mind, foreign participation in the banking sector at the end of the first quarter of 1999 was 51.9% of the banks' own capital. Now it is up to about 57%. Politicians protest that this is out of line with levels in other countries.
Kaczmarek said that with the exception of the United Kingdom, there is no country within the European Union (EU) where foreign capital participation exceeds 20%, while the European average is 12%.
"Look what such countries like Finland, Spain and Portugal did before they joined the European Union," Kaczmarek said. "They consolidated their banking sectors. And our state treasury makes it more fragmented."
Bankers themselves have tended to take a more balanced position and have tried to weigh both pros and cons. At the start of the country's economic transformation there wasn't much choice but to bring in foreign capital because banks lacked experience, know-how, technology and capital, said Slawomir Lachowski, deputy president of PKO BP. That's why Polish banks needed sectoral, strategic investors, he added.
After 10 years, though, the situation has changed dramatically. The banking sector has seen quick growth not only in terms of the number of bank accounts, deposits and credits, but also in terms of accessibility and quality of service. The number of branches nationwide increased to 3,176 at the end of 1997 from 1,765 at the end of 1993. From 1995 to 1997, banks doubled the number of current accounts, which exceeded 7 million by the end of 1998. Between 1991 and 1997, the amount of bank deposits from households increased from $12.2 billion to $31.3 billion, while the amount of credits to households increased from $680 million to $5.6 billion.
Poles, who lived in a cash-based society at the start of the 1990s, currently use 3.5 million payment cards and an approximately equal number of ATM cards. The number of ATMs increased from 105 in 1993 to over 4,000 by the end of June this year. And the emergence of modern retail banks like Bank Handlowy's Handlobank and BIG Bank Gdanski's Millennium has forced others to adapt new technologies and improve customer service. "So maybe there is not such a need anymore?" Lachowski said. "Part of the Polish banking sector should and could be controlled by Polish capital."
Fixing a level
The question remains, though, as to what the appropriate level of foreign and Polish investment should be.
Those who support the idea of a foreign presence in the banking sector argue that Poland, while starting its economic transformation, had no other choice but to go for foreign capital. They add that consolidation within the sector won't change this need.
"You won't make one rich guy out of two poor ones," said Krzysztof Borusowski, of the Adam Smith Research Centre. "And to make such a consolidation effective we would need one commercial bank."
Borusowski added that there was no comparison between the Polish banking sector and those of Portugal or Spain. "They chose their way of economic development some 50 years ago," said Borusowski, "while we honorably rejected the Marshall Plan. To reject foreign capital now would be the same."
Foreign capital is crucial in terms of economic growth, he added, if Poland is to catch up with at least those countries within the EU who are considered "the poorest."
"To sustain high economic growth we need at least $10 billion of direct foreign investment per year, for the next 10 years," he said. Foreign banking capital means not only direct investments, but also more capital for other sectors of the economy, he said.
Opponents disagree, adding that foreign capital can actually be an obstacle to national economic policy. "Banks act in the interests of their shareholders," Kaczmarek said. "Now, the question is whether the economic strategy of the Polish government is in line with these shareholders."
AWS's Biela added that banks controlled by globalized centers located far from Poland won't be interested in participation in any local restructuring or local development programs. "Why should they care if they might not even know where Hrubieszow is or Legnica?" Biela said.
Others, like Leszek Pawlowicz, a director of the Gdansk Banking Academy, counter that this is exactly the point - with banks independent from government, there is little danger that the government will be able to force banks to finance government projects that make little or no economic sense. So if a project is profitable, banks would be more than willing to finance that, Pawlowicz said.
The RPP's Jozefiak added that it's not the banks' responsibility to implement a government's economic policy, but rather a matter for the government. "Banks are there to make money," Jozefiak said.
Part of the fear of foreign capital in the banking sector is related not only to national policy but also to the danger of capital outflows from Poland, due to money transfers to foreign parent companies. "But it's not a matter of ownership structure, it's a matter of regulations," Borusowski said.
In this regard, the government does have control and has a number of institutions through which to exercise it. These include the NBP's banking supervision arm, the WSE, the Securities and Exchange Commission (KPWiG) and tax offices. If the government wants complete control over banks, it should keep them state-owned, Pawlowicz added. Once you decided to privatize you have to realize you give up control," he said. "You just have to accept everything that happens next."
The question has arisen in the wake of the recent sales of a majority stake of the country's second largest bank, Bank Pekao, to UniCredito Italiano and German insurer Allianz and an 80% stake in Bank Zachodni to Aillied Irish Bank (AIB). This means foreign participation in the banking sector, already at 51% will now jump to 57%. This is one of the highest rates in Europe and a level that worries politicians of all stripes.
"Of course this participation is too high," said Adam Biela, an economic specialist with Solidarity Election Action (AWS). "It's a very worrisome ratio."
"Poland is the only country with such a high participation of foreign capital in the banking sector," added Wieslaw Kaczmarek, a deputy from the opposition Democratic Left Alliance (SLD) and a former privatization minister.
The growing unease over the level of foreign control of the banking sector may be a case of crying that the horse is gone with the barn door almost shut. Privatization of the banking sector is largely complete. But two big sales remain: those of the country's largest retail bank, Powszechna Kasa Oszczednosci Bank Panstwowy (PKO BP) and agricultural institution Bank Gospodarki Zywnosciowej (BGZ).
There is mounting pressure for the eventual privatization of PKO BP, which may not occur until 2001, to be to a Polish institution or through the stock exchange. Deputies from SLD, the Peasants Party (PSL) and AWS have developed three independent draft resolutions demanding a delay for further banking privatizations.
In addition, shortly before Pekao and Zachodni were sold, three former finance ministers sent a letter to Finance Minister Leszek Balcerowicz with the same request - suspend privatizations. Warsaw Stock Exchange (WSE) head Wieslaw Rozlucki also questioned the form privatization has taken and the dominance of foreign capital. "We are already controlled by foreign capital," Kaczmarek said. "By German capital, to be specific."
Who's what?
Economists have generally scoffed at such fears, saying they are unfounded given the lack of capital that was available to the banking sector and the modernization that needed to occur. "I don't understand this," said Cezary Jozefiak, an economist and a member of the Monetary Policy Council (RPP). "To me, it's nothing but stereotypes."
Economists also point out that it's not clear what a foreign investor really is. Even the National Bank of Poland (NBP) does not apply one definition of what constitutes a foreign bank. Instead, it uses several terms: banks with major participation of foreign capital that include branches of foreign banks; joint-stock companies wholly owned by foreign capital; joint-stock companies with majority foreign shareholders; and joint-stock companies indirectly controlled by foreign capital.
With these definitions in mind, foreign participation in the banking sector at the end of the first quarter of 1999 was 51.9% of the banks' own capital. Now it is up to about 57%. Politicians protest that this is out of line with levels in other countries.
Kaczmarek said that with the exception of the United Kingdom, there is no country within the European Union (EU) where foreign capital participation exceeds 20%, while the European average is 12%.
"Look what such countries like Finland, Spain and Portugal did before they joined the European Union," Kaczmarek said. "They consolidated their banking sectors. And our state treasury makes it more fragmented."
Bankers themselves have tended to take a more balanced position and have tried to weigh both pros and cons. At the start of the country's economic transformation there wasn't much choice but to bring in foreign capital because banks lacked experience, know-how, technology and capital, said Slawomir Lachowski, deputy president of PKO BP. That's why Polish banks needed sectoral, strategic investors, he added.
After 10 years, though, the situation has changed dramatically. The banking sector has seen quick growth not only in terms of the number of bank accounts, deposits and credits, but also in terms of accessibility and quality of service. The number of branches nationwide increased to 3,176 at the end of 1997 from 1,765 at the end of 1993. From 1995 to 1997, banks doubled the number of current accounts, which exceeded 7 million by the end of 1998. Between 1991 and 1997, the amount of bank deposits from households increased from $12.2 billion to $31.3 billion, while the amount of credits to households increased from $680 million to $5.6 billion.
Poles, who lived in a cash-based society at the start of the 1990s, currently use 3.5 million payment cards and an approximately equal number of ATM cards. The number of ATMs increased from 105 in 1993 to over 4,000 by the end of June this year. And the emergence of modern retail banks like Bank Handlowy's Handlobank and BIG Bank Gdanski's Millennium has forced others to adapt new technologies and improve customer service. "So maybe there is not such a need anymore?" Lachowski said. "Part of the Polish banking sector should and could be controlled by Polish capital."
Fixing a level
The question remains, though, as to what the appropriate level of foreign and Polish investment should be.
Those who support the idea of a foreign presence in the banking sector argue that Poland, while starting its economic transformation, had no other choice but to go for foreign capital. They add that consolidation within the sector won't change this need.
"You won't make one rich guy out of two poor ones," said Krzysztof Borusowski, of the Adam Smith Research Centre. "And to make such a consolidation effective we would need one commercial bank."
Borusowski added that there was no comparison between the Polish banking sector and those of Portugal or Spain. "They chose their way of economic development some 50 years ago," said Borusowski, "while we honorably rejected the Marshall Plan. To reject foreign capital now would be the same."
Foreign capital is crucial in terms of economic growth, he added, if Poland is to catch up with at least those countries within the EU who are considered "the poorest."
"To sustain high economic growth we need at least $10 billion of direct foreign investment per year, for the next 10 years," he said. Foreign banking capital means not only direct investments, but also more capital for other sectors of the economy, he said.
Opponents disagree, adding that foreign capital can actually be an obstacle to national economic policy. "Banks act in the interests of their shareholders," Kaczmarek said. "Now, the question is whether the economic strategy of the Polish government is in line with these shareholders."
AWS's Biela added that banks controlled by globalized centers located far from Poland won't be interested in participation in any local restructuring or local development programs. "Why should they care if they might not even know where Hrubieszow is or Legnica?" Biela said.
Others, like Leszek Pawlowicz, a director of the Gdansk Banking Academy, counter that this is exactly the point - with banks independent from government, there is little danger that the government will be able to force banks to finance government projects that make little or no economic sense. So if a project is profitable, banks would be more than willing to finance that, Pawlowicz said.
The RPP's Jozefiak added that it's not the banks' responsibility to implement a government's economic policy, but rather a matter for the government. "Banks are there to make money," Jozefiak said.
Part of the fear of foreign capital in the banking sector is related not only to national policy but also to the danger of capital outflows from Poland, due to money transfers to foreign parent companies. "But it's not a matter of ownership structure, it's a matter of regulations," Borusowski said.
In this regard, the government does have control and has a number of institutions through which to exercise it. These include the NBP's banking supervision arm, the WSE, the Securities and Exchange Commission (KPWiG) and tax offices. If the government wants complete control over banks, it should keep them state-owned, Pawlowicz added. Once you decided to privatize you have to realize you give up control," he said. "You just have to accept everything that happens next."
