page 1page 2page 3page 4page 5page 6page 7page 8page 9page 10page 11page 12TITLE:BANK PRIVATIZATION IN POLAND:CAN THE COMMERCIAL BANKSSOLVE THE FINANCIAL CRISIS?AUTHOR: John P. BoninWesleyan UniversityTHE NATIONAL COUNCILFOR SOVIET AND EAST EUROPEANRESEARCH1755Massachusetts Avenue, N.W.Washington, D.C. 20036PROJECT INFORMATION:.CONTRACTOR:Wesleyan UniversityPRINCIPAL INVESTIGATOR:Johm P. BoninCOUNCIL CONTRACT NUMBER:807-07DATE:September 8, 1993COPYRIGHT INFORMATIONIndividual researchers retain the copyright on work products derived from research funded byCouncil Contract. The Council and the U.S. Government have the right to duplicate written reportsand other materials submitted under Council Contract and to distribute such copies within theCouncil and U.S. Government for their own use, and to draw upon such reports and materials fortheir own studies; but the Council and U.S. Government do not have the right to distribute, ormake such reports and materials available, outside the Council or U.S. Government without thewritten consent of the authors, except as may be required under the provisions of the Freedom ofInformation Act 5 U.S.C. 552, or other applicable law.The work leading to this report was supported by contract funds provided by the National Council forSoviet and East European Research. The analysis and interpretations contained in the report are thoseoftheauthor.August 1993BANKPRIVATIZATIONIN POLAND:CAN THE COMMERCIAL BANKS SOLVE THE FINANCIAL CRISIS?John P. BoninDepartment of EconomicsWesleyan UniversityMiddletown, CT 06459Contract #807-07I wish to thank without implicating in any way the people in Poland who gave generously oftheir time and information. The names of those whom I interviewed are listed in theAppendix. All errors of fact and interpretation are my sole responsibility.AbstractUnique among Central East European (CEE) countries, Poland's multi-pronged attackon its financial crisis consists of a bank-led, bad-loan, workout program including funds forbank recapitalization and a three-year strategy for privatizing its state-owned commercialbanks. The Polish commercial banking sector is made up primarily of nine regionally baseduniversal banks. Of these, the two banks considered to have the healthiest portfolios and themost qualified management, Wielkopolski Bank Kredytowy S.A.(WBK) and Bank SlaskiS.A. w Katowicach, are being privatized in 1993. The other seven will participate in the1993 recapitalization scheme which is jointly financed by fiscal budgetary outlays and thezloty stabilization fund. All banks must satisfy full provisioning regulations by the end of theyear; they must have worked out their bad loans by March 1994.The bank-led Polish bad-loan workout program is biased toward debt/equity swapsand loan write-downs accompanied by recapitalization for large debtors and towardliquidation and asset sell-off for small debtors. The tight timetable for completion ofworkouts creates a situation in which the commercial banks are likely to take substantialequity positions in their large clients and, in so doing, increase their risk exposure. Swappingbad debt at face value for bad equity does not leave a bank in an attractive shape for newinvestors. Moreover, the Polish experience with privatization is not encouraging. Neither ofthe two "healthy" banks were able to entice a foreign commercial bank to inject additionalequity. Rather the European Bank for Reconstruction and Development (EBRD) agreed tosubscribe the full issue of new shares and become a temporary (five-year) holding companywith an ownership stake of approximately 30% which is also the target residual share to beleft with the Treasury. Bank employees and private investors (in two tranches, large andsmall) hold the remaining shares. Technical assistance is being provided by Western twinbanks but the responsibility for monitoring proper governance and promoting furtherprivatization lies jointly with the EBRD and the state.Debt/equity swaps leading to partial bank ownership of companies also strains scarcemanagerial resources as bank executives sit on company boards to protect the bank'sinvestments. Whether the Polish banking system has both the financial resources and skilledpersonnel to support this ambitious program is questionable. The privatization of WBK doesseem to have awakened the stock exchange which is now the deepest and most vibrant inCEE. However, unless Polish banks can attract the capital and expertise of the illusivestrategic foreign commercial bank partner, the bank privatization program will not give birthto healthy private commercial banks with the proper governance structure within its allottedtime frame.In February 1989, nine state-owned commercial banks were created as regionalclusters from the branches of the National Bank of Poland (NBP).1From inception, thesenine banks were granted universal charters. During 1990 when the zloty/dollar rate wasfixed, commercial banks made large profits by purchasing dollars for their current businesstransactions at the fixed rate despite significant appreciation in the real effective zloty/dollarexchange. These profits augmented the capital base of the banks at a time when overdueloans had not yet become a serious problem. By the end of 1991, the share of bad loans inthe commercial banks' portfolios had risen dramatically. Poland's response to its financialcrisis was to design a bank-led, bad-loan, workout program which included funds for bankrecapitalization and also to develop a three-year strategy for privatizing its state-ownedcommercial banks.Bank recapitalization and the problem of bad loans were dealt with in twoparliamentary acts dated December 1992 and March 1993, respectively. The latter actrequires the banks to "clean-up" their portfolios and work out problem loans by March1994.2Workout can take one of four forms: conciliation (including debt/equity swaps andloan write-downs), bankruptcy, liquidation, or sale of claims. Due to its relatively weakpriority position in bankruptcy proceedings (the fifth creditor behind taxes and wages),abank is likely to favor either liquidation (in which the priority list of creditors isdiscretionary) or a debt/equity swap vs. the initiation of bankruptcy proceedings.3The1Much of the background information to follow and the data on the Banking system istaken from Pawel Wyczanski,Polish Banking System : 1990-92,forthcoming, the FriedrichEberet Foundation. I am extremely grateful to Dr.