Poland goes the extra mile in banking stress tests

By bne IntelliNews October 27, 2014

Jan Cienski in Warsaw -

 

Central Europe's general economic health was confirmed by the round of EU banking stress tests, which showed that most of the region's larger financial institutions would survive a severe economic shock without spiralling into the kind of trouble that almost brought down the Irish and Spanish economies in the recent global economic crisis. However, regulators in Poland went the extra mile.

The European Banking Authority (EBA) ran stress tests on 123 banks in the EU and Norway, and found that 24 of them did not meet the minimum capital standards in the event of a massive economic crisis, with a total capital shortfall of €24.6bn. However, none of the tested institutions in Central Europe faced much of a problem.

Hungary's largest bank, OTP, easily passed the tests, with a capital adequacy ratio of 11.2% in the event of a significant downturn in 2016, above the minimum of 8%. Hungary's government has put its largely foreign-owned banking sector into turmoil thanks to schemes aimed at offering relief to millions of borrowers holding disastrous mortgages denominated in foreign currencies, largely Swiss francs.

Meanwhile, the Czech Republic's and Slovakia's banking systems are almost entirely foreign owned, -being largely in the hands of Italian and Austrian banks - so were not directly tested. However, the parents all passed the test.

The Eurozone groups that hold many of Poland's top lenders were also given a clean bill of health. Meanwhile, the country's largest bank, state-controlled PKO, also easily passed, with a capital adequacy ratio of 14.3% in the event of a sharp crisis.

Below the threshold

Yet regulators in Warsaw weren't content to see the list of banks tested limited to just the biggest fish. Going the extra mile, the Polish Financial Supervision Authority - the banking sector regulator known as KNF - carried out tests on several smaller lenders in conjunction with the EBA. 

KNF claims on its website that "full implementation of the ECB's methodology was KNF's own initiative that makes Poland unique among non-euro area member states. What's more, KNF was the only banking supervisor in the EU that had in its disposal inspection resources to carry out AQR on its own."

The regulator revealed that some smaller Polish banks were found to be just under the safety threshold. Getin Noble Bank, one of the most aggressive Polish lenders in Swiss francs before the crisis, had a Tier 1 capital adequacy ratio of 7.4% under crisis conditions. The KNF tests on 15 Polish banks also found that the Polish affiliate of France's BNP Paribas also fell slightly short of the parametres. 

That said, both banks have increased their capital since the end of 2013, and under current conditions their total shortfall comes to 4m zlotys, or less than €1m. "Polish banks passed the tests well," Andrej Jakubiak, the head of the KNF, told reporters on October 26.

The extra surveillance of banking risk in Poland reflects KNF's strict patrolling of the sector. The supervisor has been a generally solid regulator, acting to cool the ardour of banks to hand out loans in foreign currencies, with the rising value of the zloty making such deals attractive to borrowers ahead of the start of the crisis in 2008. That action is credited with helping to prevent Poland developing a forex problem of Hungarian dimensions.

More generally, banks in the region tend to be more conservative than their counterparts in Western Europe, engaging in the boring but predictable business of taking in deposits and granting loans, while steering clear of the risky financial instruments that have caused more sophisticated banks such trouble since the start of the US mortgage crisis seven years ago. 

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