Polski Instytut Bankowości

Banking & Finance

Central bank reports on stability of financial sector

Warsaw, Poland October 23, 2008

The current situation of Poland's financial institutions is good but the global crisis increases the risk for maintaining stability in the future, the central bank said in report on financial system stability.

OVERVIEW OF FINANCIAL STABILITY

The main source of risk short-term is reduced to liquidity on the domestic interbank market, the report leads. A decline in counterparty trust amongst banks was imported from abroad and can, in cases, focus on Polish banks with heavy market financing needs or on banks whose foreign parent has experienced problems, irrespective of the financial condition of the local banks. Another effect could be difficulty by some banks in securing positions from market risk in light of reduced credit limits and limited turnover for derivatives.

The chief mid-term threat comes from reduced economic growth rates. Credit risks, increasingly visible on balance sheets, could rise. The "first symptoms" of rising risk to credit portfolios are "visible."

MARKET AND ECONOMIC CONDITIONS

Despite the global slowdown, "the Polish economy continued to develop at a relatively fast rate and the labour market situation continued to improve."

"The main risk factors for the situation of financial institutions are: any eventual strong effects of the economic slowdown in the euro-zone on the Polish economy and any carry-over of turbulence on financial markets to the Polish market."

BANKING SECTOR STABILITY

"The situation for the banking sector in the first half of 2008 was good." The scale of activity and financial results rose at "a fast pace." Credit quality improved. The implementation of Basel II operating risk acknowledgements cut solvency in January 2008 and average solvency proceeded to stabilise at a level lower than in 2007. "Further expansion of banks will require capital increase."

"Prospects for the coming period are less favourable than at the last edition of the report."

"Symptoms have arisen, still insignificant, of a rising pressure on the cost of credit risk" and uncertainty is rising as to how the ongoing crisis will effect the Polish economy and Polish credit risk.

Short-term top challenges for banks: securing financing; covering open currency positions in operations with foreign players; facing off risk of lapses in market financing and increased competition on the retail deposit market.

CREDIT RISK

Uncertainty concerning the effect of turbulence in the global economy on economic conditions in Poland means that the "mid-term perspectives for credit repayments are worse than at the last edition of the report."

MARKET RISK

"Bank exposure to market risk remains minimal. Limitations placed on counterparty credit deals amongst financial institutions can complicate market risk management and increase cost of same."

LIQUIDITY RISK

The risk that short-term financing might not be renewed at some small and medium sized banks known for wholesale financing is listed tops.

(PAP Market Insider)