Look At Bank Regulatory And Supervisory Practices

Published Date: 02 Nov 2017

ASB-4811 International Banking

Submitted by

Nilesh Shinde - 500316762

Suhel Singh - 500313391

Qi Shao - 500325220

Jie Shen - 500325824

Yana Song - 500323310

Jinnan Su - 500325730

Bangor Business School, London Centre

15th March, 2013

Sr. no

Table of contents

Pg.no

1

Executive summary

2

2

Economic profile

3

3

Banking sector structure

6

4

Bank regulatory and supervisory practices

11

5

Financial inclusion and access

14

6

International finance

16

7

Political events/prospects

21

8

References

23

Executive summary

It has been pretty much established that Poland is a lucrative destination for foreign investment, hence the reason behind this committee and research. As far as the nation’s economic profile is concerned, there’s doesn’t appear to be any difference between opening a subsidiary of our own in Poland or acquiring a local bank. Moreover the nation’s economic plans and trends for the future suggest the nation is quite liberal towards foreign banks investing in their economy. as far the nation’s political profile is concerned the ruling party and its policies enjoy majority of support from the populations, very strongly favour liberal markets, political integration of the eurozone and liberal society with equal rights for all minorities and has not witnessed any major protests vital enough to be considered as a threat to the government or the society’s stability. Hence considering all these factors as far as political and social stability is concerned, Poland appears to be a lucrative destination for foreign banks. One of the most important features identified in the analysis for international finance is that the fluctuations of the balance of payment and its components are increasingly high since the recent financial crisis. The high fluctuation might reduce the volume of international trade. This could further reduce the income of Poland which consequently reduces the demand for financial services. However, the high fluctuation of balance of payment might increase of the local investors’ demand of asset management. Poland is in high profitability and the assets ratio is higher than UK closely to the level of the world. In general, the recommendation of this assignment is that there are lots of benefits to invest in this country. To facilitate easy access to finance the government of Poland have introduced National reform programme 2011-2015. This programme mainly aims at issues concerning small and medium enterprise. Through this programme the government stated the need to develop more competent financial institution, which also includes venture capital funds based on public-private capital. This reform programme also aims at reducing administrative barriers. A far as data analysis is concerned, it suggests foreign banks are favorable in Poland. These banks have increased the efficiency of the banking sector of Poland. In Poland, the restrictions on foreign bank entry are not very strict. Kinds of foreign entities including subsidiaries, branches, and joint ventures are allowed to entry into the banking sector. The foreign entities could penetrate into the banking sector of Poland through merger and acquisition as well. Moreover, the commercial banks should get license to engage into other business besides deposit taking. An unstable economic environment, especially an unstable foreign trade environment might trigger demand for foreign asset investment and hedging.

Thus considering the observations from all the above mentioned perspectives it is safe to declare that there remains little or no doubt on the suitability of Poland for investment in banking. Now as far as the question of deciding whether to open our own subsidiary or acquire a local bank is concerned, the political scenario, social stability, the country’s approach and dedication towards promoting liberal markets and foreign investment, the performance statistics and trends of the already existing foreign bank subsidiaries in the nation all these factors suggest towards opening our very own subsidiary in Poland as a safe haven and as logic suggests there are definite advantages to owning a subsidiary. One of the tax advantages is the right to file a consolidated tax return that can help the parent company offset losses in either the parent or acquired company by lowering the taxable monies. The parent has the means of providing buying power, research and development funds, marketing money and know-how, employees, technical expertise and other features the smaller company could not afford or accomplish alone. The parent can provide the monetary means and capability to jump start new companies and products. It is easier for a smaller subsidiary to form joint ventures and partnerships with other companies if it is not hindered by a larger corporate bureaucracy.

The only major con the committee came across against opening a subsidiary is the inflexible labor code and a complex tax system and corruption. But logic suggests these cons should not be beyond the managerial capacities of a bank of this size, experience and repute.

Thus after a detailed examination of this strategic move from all possible perspectives we could think off, this committee suggests to open a subsidiary of our own in Poland.

The feedback and critique of the firm is more than welcome.

ECONOMIC PROFILE

Poland was the only country in Europe which was able to escape recession in the 2008- 2009 economic downturn. This is largely attributed to the economic liberalization policy which was enacted in the early 90s and has managed to make it stand out among the European Union economies. The GDP per capita is at 20,100 dollars, which in comparison to other EU economies is below average. In terms of the of the GDP Power Purchasing Parity it currently stands at approximately 765 billion dollars, with a steady increase as compared to 2009 which was at 710 billion dollars. The official GDP exchange rate is at 530 billion dollars. After Poland’s EU membership in 2004 it got an opportunity to access EU structural funds and this has been a major factor in providing an impetus in the Polish economy as seen by the steady GDP real growth rate; in 2009 during the economic turmoil in many economies the growth rate stood at 1.6 percent and by 2011 the economy had increased in threefold to 3.8 percent growth rate. In terms of GDP in relation to composition by sector, the services lead with a percentage of 63 followed by the industry which has a GDP composition of 33 percent and agriculture is 4 percent in the GDP composition by sector.

The population of people living below the poverty line in Poland stands at 17 percent as par a 2003 estimate whereas the labor force in the country is at 18 million with services taking the 53 percent of the labor force; industry acquires a further 29 percent while agriculture has 17 percent of the labor force in Poland (Organisation for Economic Co-operation and Development 2010 p101). The employment rate has seen a slight increase in the past year standing at 12.4 percent which is 2 percent more than the average EU unemployment rate. The youths between 15 to 24 years are the major casualty of the unemployment; with them taking a total of 20 percent, the female gender being at 21 percent which is one percent more than their male counterpart (Țurlea, &Bogdanowicz, 2007 p77). Due to the global economic meltdown the inflation rate in Poland reached a new low of about 3 percent in 2009 but steadily rose to 4 percent by 2011. The lowest household income and consumption share stands at 3 percent while the highest stands at 27 percent with the distribution of the family income standing at 33 percent. The gross fixed investment of Poland stood at 21 percent of the GDP with the budget revenues hitting 92 billion dollars and the expenditures standing at 101 billion dollars by 2011. Taxes and other revenues are responsible for the 18 percent of the GDP in Poland (Organisation for Economic Co-operation and Development Staff 1998 p38).

In 2010 the public sector budget deficit rose to 7.8 percent of the GDP due to the weak revenues experienced then coupled with a rising demand to better healthcare and education funding in addition to the state pension system but this was reduced to a deficit of 2.9 percent of GDP by 2011 due to the measures taken once the PO/PSL coalition government came to power. The measures included shoring up the public finances by increasing the contributions made to the public pension scheme on the expenses of the private sector (private pension funds). The public debt stands at 57 percent from 55 percent in 2010 and 56 percent in 2011.The public debt is in reference to the government debt and includes all the debt instruments that are owned or issued by other entities in the government excluding the Polish treasury. The Central Bank discount rate stands at 4.5 percent with the commercial bank prime lending rate dropping steadily from 8.3 percent in 2010 to 8.2 in 2011 to 8.1 percent in 2012. The stock of money has increased to 120 billion dollars in 2011 and the stock of narrow money increasing too, to 168 billion dollars. As at 2012 the market value of publicly traded shares stood at 200 billion dollars.

The agricultural products produced include potatoes, fruits, vegetables, wheat, poultry, eggs, pork and dairy while in industries which has a production growth rate of 7 percent in 2012 concentrates in machine building beverages, coal mining, chemicals, food processing, glass textiles and iron and steel processing. The natural resources include oil and natural gas which the country produces and also exports with the proved reserves for oil being 93.8 million barrels and natural gas being 6.0 billion cubic meters’ (Landau, 1997 p41). The exports as per the 2011 budget stood at 197 million dollars with machinery and transport taking the biggest chunk of exported commodities at 38 percent and intermediate manufactured goods at 24 percent with manufactured goods at 17 percent and food and live animals at 8 percent. The major export partners include Germany, France, UK, Italy, Czech Republic, Netherlands and Russia. The imports are approximately 218 million dollars which is an increase from 174 million dollars in 2010. Some of the imported commodities include machinery and transport equipment, intermediate manufactured goods, chemicals, minerals, fuels, lubricants and other related materials (Bell, 2001 p89). The major import partners include Germany, Russia, Netherlands, Italy, China, France and Czech Republic. Electricity which is also produced in plenty has sufficient consumption at home and therefore some are exported to neighboring countries. The currency used in Poland is the zlotych which is 2.8 per US dollar.

The economy in Poland can improve tremendously in terms of performance if the country takes measures in addressing some of the deficiencies it has especially on the road and rail infrastructure and the overall business environment (Organisation for Economic Co-operation and Development 2008 p61). The commercial court has an inefficient system with an inflexible labor code coupled by a complex tax system and corruption that inhibits the private sector from performing to the full potential it has. However, with the new coalition government in place, there is hope as it has promised in ensuring there is a further reduction on the deficit while at the same time fulfilling the enactment of a more business friendly reforms to propel its economy.

Banking Sector Structure

Number of banks & concentration ratio

The transition of Poland brings a series of reformation to the banking industry, commercial banking has achieved great development and banking privatization has been basically completed, foreign capital in the bank capital already has an absolute advantage.

In 2002, Poland had 672 banks, of which 64 commercial Banks, 608 cooperative bank; Bank total assets of 476.861 billion zloty, more than 1993 increased by 4.7 times; the registered capital of 10.465 billion zloty. Commercial bank assets of 454.351 billion zloty, accounting for 95.3% of total assets, the registered capital of 10.004 billion zloty, accounting for 95.6% of the registered capital; Cooperative bank assets of 22.41 billion zloty, accounting for 4.7% of total assets, the registered capital of 461 million zloty, accounting for 4.4% of the registered capital. In the commercial bank, 17 Poland holding commercial banks, accounted for 26.6%; 47 foreign capital holding commercial banks, accounted for 73.4%; including 22 wholly foreign-funded banks (John P. B 2004).

Chart 1 presents the market share percentage of the top 10 Polish banking sector in 2009. With a concentration ratio CR5 of 44%, the competitive pressure of the Polish banking sector is still comparatively low level in Western standard. On the other hand, the service fees and commission revenue are remaining high. According to Eurostat (2012), over 44% of Poles still do not have their own a bank account. Therefore, Polish government should further liberalize the financial market to foreign banks, in order to attract foreign investment, improve the infrastructure and variegate the banking product lines.

C:\Users\LBBSStudent\AppData\Roaming\Tencent\Users\82061877\QQ\WinTemp\RichOle\[1Q2TPF3789E}YT427XQ5{V.jpg

Banking Sector Credit-to-GDP &Liquid Liabilities-to-GDP

Poland domestic credit provided by the banking sector includes all credit to various sectors on a gross basis, with the exception of credit to the central government, which is net. Chart 2 presents the percentages of five countries and world’s domestic credit provided by banking sector of GDP. The percentage in Poland is much lower than the world, it is around 50% during 2003 to 2012. Before 2005, United Kingdom’s domestic credit is lower than world’s, but after 2005, UK started to fall down and below the level of the world. However, Poland’s domestic credit rose slowly during 2003 to 2011. To compare with UK, Poland is relatively stable in this area. In this area, Poland’s condition is better for investors although its credit is much lower than the level of UK and World. Because a stable circumstance benefited for, that is easy for investors to estimate the profit and loss. In this part, Poland is more stable to for investors to develop.

Chart2: Domestic credit provided by banking sector (% of GDP)

Data from World Bank (2013)

Liquid liabilities(M3) are also known as broad money. They are the sum of currency and deposits in the central bank. It is used to reflect the important indicators of money supply. M3=M1+M2, M1include circulated currency, check deposit and transfer credit card deposit check deposit, it reflects the real purchasing power in the economy(The World Bank, 2013); M2 include M1+saving deposit+government bond, it not only reflect the real purchasing power, but also reflect the underlying purchasing power. Chart 3 presents the percentages of three countries and world’s Ratio of liquid liabilities to GDP. Although Poland's current liabilities fluctuated rising, compared with UK, US and World, Poland is still the lowest. Moreover, UK’s liabilities increase sharply during 1993 to 2009 from 59% to 181%. That is not a good phenomenon in the financial market.

C:\Users\LBBSStudent\Desktop\SLIDES\International Banking\essay\liquid liabilitities to GDP (2).png

Sources:World Bank (citing: International Financial Statistics (IFS) - International Monetary Fund (IMF)) (2013)

Foreign Bank Penetration

In 2009, there are 51characterised banks in Poland, 18 branches of foreign banks, 578 cooperative banks which a branch network and 1800 small credit unions. In 37 commercial banks, foreign owned banks had majority of market share, which the banking sector’s assets amount to nearly 72% (Back to Chart 1) (Michal,S. 2010). PKO Bank Polski is the biggest domestic owned bank in Poland, modern and safe institution entrusted by a few millions of clients. In 2009, PKO BP have13.4% market shares in the Poland banking sector. This shows that Polish government controls the mainly banking sector, and foreign banks penetrate to Poland is not obvious. There may some rules limits foreign investors to develop.

Leading Competitors & Risk

In Poland, the biggest leading competitor for the English foreign banks is the local bank—PKO BP (PKO BANK POLSKI). Officers' interests in the Company at 31-Dec-2009: 3,283 shares; Major shareholders in the company at 31-Dec-2009: State Treasury 512,406,927 shares (40.99%); Bank GospodarstwaKrajowego 128,102,731 shares (10.25%). (Thomson One Banker, 2009) PKO operations comprise cash deposit, accounts maintaining, loans issuing, cash advancing, bank guarantees, settlement of cash transactions and so on. Moreover, PKO is also engage in brokerage activities via its brokerage house, to supply various services like, factoring, leasing, investment funds, profession financial services, online banking etc. However, Poland banking sector is still existing risk. In the following chart 4, since Dec.2008, NPLs in total loans from 4.5% jumped to 6.8%, totally increased 2.3%. These numbers are given by some poor credit company’s loans. The most serious is darning Dec 2008 to Sep 2009, NPLs grew dramatically 70%. A mass of NPLs due to zloty appreciated immediately and family of NPLs rose by more than 50%.

Chart 4: Non-performing loans since 2006C:\Users\LBBSStudent\Desktop\SLIDES\International Banking\essay\chart4.png

Profitability& Asset Quality

"Banks in Poland have a ‘comfortable situation in these market conditions’ as they have a capital surplus, with their combined solvency ratio at 13 present, or more than the required 8 present", WojciechKwasniak, head of the banking regulator, said.(Marta.W, 2012) Poland’s economy is the only one avoid a recession in the EU. The biggest polish bank PKO’s total profit increase by 37% to 1.57 billion zlotys ($5 billion), bring the main source of benefit for Polish banking institution.

The bank's capital-to-assets ratio is the ratio of bank's capital and reserves to total assets. (Assets ratio= Capital / Reserves) Capital and reserves includes funds come from all the depositors, retained income, common reserve funds, special reserves, reserves and valuation adjustments. (World Bank, 2013) Chart 5 shows that UK’s assets ratio is much lower than the level of the World and Poland during 2003 to 2010. There are two reasons lead to this result, one is English have less tier one capital (Paid-in equity and common stock) and more subordinated bond. If these company or investors’ fund maintain in the minimize level then they could declared bankrupt and don’t have to repay. However, this situation is relatively rare in the Poland because this county’s assets ratio is higher than UK.

Chart 5: Bank Capital to Assets Ratio (%) Data from World Bank (2013)C:\Users\LBBSStudent\Desktop\SLIDES\International Banking\essay\chart5.png

Thus summarizing Poland totally has 672 banks and with a concentration ratio CR5 of 44%, the competitive pressure of the Polish banking sector is still comparatively low level in Western standard. However, polish banking sector credit-to-GDP and Liquid Liabilities-to-GDP is relatively lower than UK and the level of the world. Moreover this part also shows how many foreign banks in Poland and also introduces the leading competitors & risk of the PKO BP.

Bank regulatory and supervisory practices

Bank regulatory and supervisory practices in Poland

Investing in Poland, it is critically important to take bank supervision system into consideration since supervision on bank can efficiently prevent financial frauds and thus protect investors. Besides, supervision on bank can ensure the efficiency of bank operation and sustainable development of bank. (kuppens et al.(2003)) Therefore, to better analyze the investing environment in Poland, in this session we will first compare bank supervisory practices between Poland and UK. Then, specifically analyze the bank supervisory system in Poland. Finally, we will provide some recommendations for UK banks to invest in Poland.

Bank supervision system in Poland and UK

The economy in UK and Poland is in different development stage which results in different bank supervisory environment. UK, as a highly developed country has relatively strict laws and regulations, perfect operating mechanism, sound financial markets and financial institutions, and the effective financial management department. Apparently, the financial institutional arrangement, technology in UK is more scientific, rigorous and pragmatic to better monitor and deal with systemic financial risk. Besides, the bank supervisory practice in UK can better corporate with other macroeconomic policy. While economy in Poland is in transition, it is facing financial reforms and it has established basically sound bank supervision system and regulations. The competition among banks is intense in Poland. It has 49 commercial banks, of which 39 are foreign owned, 4 have majority public interest, and 6 are domestically owned. (Report from IMF,2012) Respond to the financial crisis, a new banking supervisory system is established in Poland. Starting from 2008,Polish Financial Supervision Commission takes charge of banking supervision and has successfully manage the responsibilities which are transferred from Commission for Banking Supervision. Based on the data from Miklaszewska(2012), Poland was the only EU country with positive GDP growth (1¾ percent) in 2009 and it managed to keep in positive GDP growth and credit growth throughout the crisis.

Therefore, it is necessary to understand the specific bank supervision environment in Poland and strengthen its advantages while eliminate its defects.

Preconditions for bank supervision in Poland

Conditions for efficient bank supervision are well established in Poland. For example, thanks to the sustainable macroeconomic policies, the macroeconomic imbalances are limited in Poland: the growth in credit and demand growth is relatively moderate, the inflation level is controlled, the current account and fiscal deficits remained at comfortable levels. Furthermore, the appropriate fiscal policies such as restoring capital-adequacy ratios to pre-crisis level, recommendations that banks retain 2008 profits have contributed much to stimulate the economy. Additionally, the illiquid banks can get the collateralized short-term loans from National Bank of Poland provide collateralized within three months to recover its profits.

Enhancement of Bank supervisory practice in Poland

As we stated before, banking in Poland is open to outside while the data indicates that banking in Poland is less affected by the recent financial crisis. Apparently, the prudential regulations to control and monitor the banking activities in Poland are basically consistent with Basel Core Principles.

First, to further enhance banking supervision, the minimum capital adequacy ratio for international bank is set as 8% by Basel I which is released by Basel Committee on banking supervision. Based on it, the capital adequacy ratio in Poland is maintained at 14 percent which is higher than required.

Besides, due to the development of globalization and technology innovations, Basel II is initially published and it is intended to integrate capital standards with national regulations through setting minimum capital requirements of financial institutions to ensure institution liquidity in 2004. Three pillars are introduced. The pillar one encourages banks to develop their risk management systems and compute more precisely to set minimum capital requirement. Pillar two advocates the communication between banks and their supervisor to accommodate the evolving business practices. And the pillar three emphasize on the disclosure of information to minimize the market risk. Based on pillar 1, the credit risk is strictly controlled following the requirement of Basel II. KNF has tightened lending standards especially the mortgage lending and consumer credit. According to pillar 2, Polish Financial Supervision Commission (KNF) requires bank to raise additional capital to respond to the complex business transactions. Meanwhile, thorough onsite verification is implemented to ensure the compliance.

Additionally, Basel III is published since Basel II turns out to be an inadequate regulatory regime and has large responsibility for the bank systemic failures in the crisis. In this crisis, most banking crisis are caused by credit default swaps, mortgage-backed security markets and similar high-leverage derivatives. (Masera, 2010) Therefore, Basel III focus on bank capital adequacy, stress testing and market liquidity risk. It introduces a non-risk-based leverage ratio to contain build up of excessive leverage during credit growth. Accordingly, the market risk in Poland is controlled in line with the requirements of Basel. For example, to examine the ability of the bank to respond to the unexpected change in interest rate, banks are required to do the stress tests. If the bank loss more than 20% of its own funds, it will be required to increase capital by KNF. Apart from that, banks in Poland is good at monitor its short term and long term liquidity through a rigorous framework. And the indicator used by most banks is the liquidity coverage ratio which required under Basel III.

Challenges of Bank supervision in Poland

Despite the previous advantages in Poland, the bank supervisory system in Poland still faces many challenges. For instance, Polish Financial Supervision Commission (KNF) is newly established and has limited legal rights to enforce banks to follow the prudential standards; More legal and policies should be set to protect the interest of persons designated by the KNF to act as trustees or receivers in bank rehabilitation procedures.KNG relies too much on the onsite verification which increase the supervision cycle and may delay the time to recognize the weakness of banks.

In conclusion, during the financial reform period, banking in Poland will have much more potential developments thanks to its open-policy. But meanwhile, the deficits of supervision system still exist as the newly established supervisory system as well as the supervisory institution is vulnerable in Poland and they are lack of executive power. Thus, Poland needs to consolidate the existing success in bank regulation and continuously perfect its banking supervision system. Despite that, bank supervision system in Poland has been enhanced rapidly and goes to mature which can definitely enhances the ability of bank to respond to sudden changes and ultimately ensure the sustainable development of banking. Therefore, we strongly believe that Poland worth the investment from UK international bank.

Financial inclusion and access

The ability of an individual, household or a group to access the financial services at affordable costs can be referred as financial inclusion.(anon, 2013) Mostly the people who are not able to access the basic financial services are regarded as financially excluded. The financial exclusion can take place during economic downturn as well. If the financial system is functioning well in the economy of any country then it serves many purposes of majority of the population by serving easy credit facilities, credit payment, risk management and wide range of needs. Inclusive financial system is likely to benefit poor and economically backward people in the country. But if the financial system is non-inclusive then the poor people have to rely solely on their limited income and they don’t have easy access to financial services in the country. This leads to slow economic growth of the nation and income inequality.

The financial inclusion in any nation can be measured from the use of formal accounts by the people and formal credit. Formal accounts and formal credit are the main indicators of financial inclusion. The data from these indicators help to gather information about how the people save, spend, borrow or make payments. The financial inclusion in Poland can be shown from the following explanation. (Klapper and Kunt, 2012, p.8)

Poland is considered as high income nation. The gross net income per capita is 12,440 US$. The population of the country is 38.2 million. According to the data of World bank in 2011, 70% of the population above the age group of 15 have account at a formal financial institution. 13% of the population above the age group of 15 used accounts to receive government payments. 10% of the population above age group of 15 borrowed loan from the formal financial institution.

The formal account of female population in the nation was as high as 68%. 7% of the population used accounts to receive remittance. 13% of the population borrowed loans from family or friends. 18% of the population did savings in the formal financial institution.

The usage of debit card is done by 37% of the population and usage of credit card is done by 18% of the population. 42% of the population used their formal account to receive wages. (Worldbank, 2013)

By dividing the data on the basis of gender it is found that, approximately 72% of the female adults and 68% of male adults have an account at a formal financial institution and by categorizing the data on the basis of education it is found that, 34.7% of adults with a primary education or less have a formal account, whereas 81.4% of adults with secondary education or more have a formal account at financial institution. This difference is quite vast on the basis of education.

There is not a huge difference in the data on the basis of rural or urban areas. It is found that, 69% of the population living in the rural areas, have a formal account whereas 72.4% of adults living in urban area have formal accounts.

The main mode of deposit for the majority of the population is Bank teller machines and ATM machines. It is found that approximately 60% of the population use ATM to withdraw money. For depositing money 42.5% of the population use bank teller and approximately 28% of the population use bank teller for withdrawal.

The usage of mobile for payment purposes is very low. It is observed that only 1.8% of the adults use mobile phone to pay bills. It is also observed that only 0.7% population use mobile to send money and 0.9 population use mobile to receive money.(World bank, 2012)

In Poland, bank loans are considered as primary source of finance for small and medium enterprises. The volume of loans in 2010, was 1.8% of country’s GDP as compared to European union average of 5.65%. It was considered lowest. The interest rate on the loan below 1 million euro was 6.4% above the European union average of 5.05%. The successful loan application by small and medium enterprises was 85.4% in 2010, which was less as compared to 91.9% in 2007.(Anon, 2013)

It was observed that, private credit lending was deteriorated due to financial crisis. After the financial crisis, 28% of the small and medium enterprise owners observed lack of willingness of the banks to issue loan and about 25% of the enterprise owners were refused loan.

To facilitate easy access to finance the government of Poland have introduced National reform programme 2011-2015. This programme mainly aims at issues concerning small and medium enterprise. Through this programme the government stated the need to develop more competent financial institution, which also includes venture capital funds based on public-private capital. This reform programme also aims at reducing administrative barriers.

International Finance

Trade Balance and IMF Position

The current account mainly measures the capability of one country to earn revenues from international trade. Usually, the current account reflects the amount of which the export exceeds the import. Figure 1 plots the current account and financial account of Poland from 2000 to 2012 based on data from National Bank of Poland (2012). In Figure 1, the left axis plots the evolution of the current account for Poland. From 2000, Poland continues get a negative current account. This balance of current account slightly reduced in the initial two years of the first decades of 21stcentury. However, this international trade deficit enlarged since 2004. Poland has an international trade deficit of 936 EUR Million by the end of 2012. From 2000 to 2012, the balance of trade for Poland is on average negative, about -553.21 EUR Million per year. In the October of 2012, it reaches a positive peak point of 609 EUR Million. The largest deficit of Poland occurred in 2008 when the global financial crisis gave its hardest strike. It could be observed that the current account dropped significantly in the financial crisis. The financial account somehow increased a little bit in the financial crisis with large fluctuation rate. This suggests that the financial asset in Poland is somehow attractive to the foreign investors even in the financial crisis. The Poland’s Flexible Credit Line is $33.8 billion which was renewed at January 18, 2013 (IMF, 2013). Another feature of the current account of Poland is that the fluctuation of the current account balance seems increases in the recent years. This increasing of current account happened even before the financial crisis because in the quarters around 2006, the account balance began to show an intensively fluctuation.

Figure 1 Current and Financial Account of Poland

Data Source: World Bank (2013)

Figure 2 gives a pattern of current account of UK based on the annual data. It could be found that the current account showed roughly similar patterns as that of Poland. The current account balances were increase to huge deficit situation in the recent years. The recent financial crisis made the variance of the current account balance larger. The similar patterns of current account might imply some connections of the international activities of these two countries. These two countries might share some similar foreign and domestic markets. These two countries could be imitated international trading partners. These implications on one hand indicate that the situations relevant to international trade activities might be similar. Therefore, the financial demand resulting from the international trade business might be similar. On the other hand, one could not diversify the risks through international banking investment.

Figure 2 Current Account of UK

Data Source: World Bank (2013)

Financial Account

The right axis is for labeling the financial account. The financial account roughly showed an opposite direction in the first half of the 12 years data. Before the financial crisis, the current account and financial account moves to different directions which reflect the closely relationship between the financial account and current account. That is, the deficits of current account are usually financed by the surplus of the financial account. In the most recent years, it could be found that the current account and financial account somehow exhibited a lead and lag patterns. Moreover, the fluctuation of the financial account showed a significant variance around the financial crisis as well. In general, this large fluctuation might fade with the elapse of the recent financial crisis.

Figure 3 plots the overall payment for Poland. The overall balance of payment pattern is consistent with the previous analysis in the sense that the fluctuation of the overall balance shows two distinction periods. In the first period before the financial crisis, the level of the overall balance is mildly around zero level. However, the balance of the payment began to fluctuation extensively in the recent years since the recent financial crisis. The deficit of the overall balance of payment reached to a high deficit in the first quarter of 2009. However, the balance recovered and shot to a very high level in the other direction. In 2011, the fluctuations were still very large. The overall balance bounced from high negative level to high positive level within a year.

Figure 3 Overall Balance of Payment for Poland

Data Source: World Bank

Foreign Investment and Some Analyses

Figure 4 plots the flows of foreign investment of Poland. It could be found that the foreign investment of Poland declined significantly since the financial crisis. It recovered a little since 2011, which indicates optimistic judgment of the investors towards the economy of Poland.

Figure 4 Foreign Investment Flows of Poland

Data Source: OECD

The unstable balance of payment might be harmful for the international trade under the condition of fluctuation exchange rate. Currently, Poland is using Polish Zloty. The high volatility of balance of payment would induce large fluctuation of the foreign exchange rate. This high volatility of foreign exchange rate might result to consequences. Firstly, the foreign trade of Poland might shrink because of high exchange risks. This in fact is somehow implied by the increasing current account deficit and hoarding up financial account. This might reduce the income of the customs and therefore reduce the financial demand. This might be a potential risks for the investment decision. Secondly, the profit of subsidiary bank generated might suffer the foreign exchange risks too.

Nevertheless, the recent high fluctuations of the balance of payment might not be necessarily a bad indicator for investment decision. The increasing of financial account might increase the demand for foreign asset management. As mentioned above, foreign banks are favorable in Poland. These banks have increased the efficiency of the banking sector of Poland. In Poland, the restrictions on foreign bank entry are not very strict. Kinds of foreign entities including subsidiaries, branches, and joint ventures are allowed to entry into the banking sector. The foreign entities could penetrate into the banking sector of Poland through merger and acquisition as well. Moreover, the commercial banks should get license to engage into other business besides deposit taking. An unstable economic environment, especially an unstable foreign trade environment might trigger demand for foreign asset investment and hedging.

POLITICAL EVENTS/PROSPECTS

In the political system of Poland the Prime Minister is the head of the government of a multi-party system and the President is the head of the state. The political framework is parliamentary representative democratic republic whereas that of UK is constitutional monarchy where Monarch is the head of the state and the Prime Minister is the head of the government. The current president of Poland is Bronislaw Komorowski and the current prime minister is Donald Tusk who is also the only polish prime minister in the history of Poland to be democratically re-elected for a consecutive term.

The last elections in Poland took place in Oct. 2011. The PO (The liberal conservative civic platform) was the victor with 39.18% of vote while the PSL (the moderate polish people’s party) formed the junior coalition. Overall, very little changed after the elections as compared to the previous years with the right wing still dominating and the left wing representation of the parliament still being very weak. Also considering the economic liberal demands of the the strongest of the non-ruling parties the SLD it can only be classified as limited left.

The two coalition partners are both in favour of political intergration. The senior partner of the coalition has been firing on all guns to enhance and speed up rapid entry into the eurozone and thus boost the nation’s economy at the highest pace. The party is strongly in favor of free market economics. The junior coalition partner on the other hand is a little conservative when it comes to free market solutions and more or less claims to represent the voice of the local farmers. The former governing party the PiS has its doubts about the benefits of further political integration into the Eurozone and thought it would weaken the nation’s political strength in the EU. The party was a strong follower of the doctrine of the Roman Catholic church and thus in a way popped moves towards liberal markets and society. Thus with the new government the nation’s approach has shifted tremendously towards free market economics and thus provides and incentive to foreign investors and banks to invest in the same especially those from the EU. The electoral committees on the socio-economic left scale favour strengthening of the EU and as far as domestic matters are concerned they advocate separation of the church and equal rights for all minorities. The nation recently elected its first Gay MP and The first transgender MP hence showing their intentions towards boosting a liberal society and equal rights for all minorities and under -represented groups of population. These incidents in recent past project a healthy and stable social and political profile of the nation as well as healthy indicator for foreign investors. The ruling party also stresses on the need of using diversified sources of energy hence emphasizing on not just rapid development but also a sustainable one which should be another indicator of the long term stability of the nation in coming years. The junior coalition party is also a strong supporter of women’s rights and homosexuality. The SLD leadership is also pretty much tied to a big business pro-capitalist agenda hence making it very much obvious that both the parties more than agree on the agenda of a free market economics and EU strengthening hence as stated earlier a positive indicator for foreign banks to invest in the nation.

Now let us consider if any major protests or political events have taken place since the last elections. The only noticeable protest was that by 50000 demonstrators in Oct. 2012. The protests were lead by the opposition party which is conservative on the issues of gay rights and abortion. They also stated they would try and unseat the prime minister in coming months. But considering the majority of support the PM holds this looks like an exercise from the political theater than a realistic objective. However as far as the government’s policies towards liberal markets, foreign investors’ or banks’ entry is concerned there hasn’t been any significant protest or disturbance anywhere in the nation. The fact that Donald Tusk is the only PM in the history of the nation to be elected democratically for a consecutive term in itself tell us the majority of the support he holds in the nation, amongst the public and the same goes for the ruling party’s policies as well. Also whereas the former government’s tenure was charred by protest about scandals, corruption, crisis in health service and education, the current government hasn’t witnessed any major protest on any of these issues till now showing the support and faith the people of the nation have in them. PM Tusk is credited by majority of the poles for bringing political stability and boosting a liberal society. Poland, the biggest economy in eastern Europe, is experiencing a period of peace and prosperity unusual for a country with such a turbulent history. Also PM Tusk displays majestic confidence in his party’s actions and recently said: "We don’t want to impress anyone with some sort of reformist zeal. We are deeply convinced that we know what we are doing and we don’t need to make any demonstrations." Although schools of thought say the government still has a vast work to do to impress the polish population upto levels of satisfaction that the nation is progressing on all fronts but yeah as far as the indicators and their policies suggest the nation looks to be headed in the right direction and at a better pace than under the former government. The people are showing more trust, the government is showing more incentive towards boosting liberal market as well as society.