How to Assist the Financial Market
The importance of the sector is declining and, as financiers argue, supporting it would benefit the entire economy
Credits for non-financial enterprises, constituting almost 67 per cent of GDP by the end of 2015, were worth just under 59 per cent by mid-2023. The value of household loans decreased from 36 per cent of GDP to 25 per cent during this period, dropping to pre-global financial crisis levels. The spending of Polish firms and consumers on insurance also decreased from nearly 3 per cent of GDP to 2.5 per cent (the ratio of insurance companies' total assets to GDP also declined). Pension fund assets fell from 7.9 per cent to 7.3 per cent, with occasional increases to over 9 per cent. The market capitalisation of domestic companies listed on the Warsaw Stock Exchange did not exceed 20 per cent by the end of 2022, compared to almost 30 per cent seven years earlier.
These declines signal a gradual reduction in the importance of the financial sector for the economy. This not only affects the ability to expand consumption but, more critically, impedes investment. While in the case of the former, the requirement that we spend only the money we already have does not pose a threat, in relation to expenditure on fixed assets, the slowdown means that we as an economy are losing money.
These declines cannot be solely attributed to the policies of the PiS government. They are also a consequence of high inflation in the last two years, which significantly increased the nominal value of gross domestic product, thereby affecting the ratios of other variables to GDP. In other words, the economy was advancing while finances lagged behind. Bankers and capital market representatives, especially, argue that without an increase in the scale of financing, it is difficult to boost the economy’s potential.
With a new leadership team in place, the question of how to get the financial market moving again arises. Financiers contend that satisfying different segments’ expectations would be good for the economy as a whole, in addition to helping those segments individually.
In late November, the first to put forward their demands were bankers, who account for over three-quarters of the total assets of the entire financial system. For a long time, people have been making comments about how the regulatory approach is too harsh, and it’s not only about banks.
Changes in Taxes, Contract Stability
Bankers advocate for the “rationalisation” of burdens on their sector. This primarily concerns the tax on financial institutions introduced in the early period of the PiS administration, mainly affecting the banking sector. The tax amounts to 0.44 per cent of assets (exemption applies to the first PLN 4 billion of the balance sheet, mainly benefiting cooperative banks and treasury bonds, and the central bank). Rationalisation would involve “changing the basis of calculation so that it is not essentially a tax on credit activity, meaning the penalisation of this activity”. According to Tadeusz Białek, the president of the Polish Bank Association, who presented the sector’s ideas for changes, taxation should be linked to the financial results of individual entities. If the calculation basis were to remain unchanged, some types of assets, such as those used for energy transformation, assets of mortgage banks, or foreign branches of Polish banks (subject to such taxes in the host countries), should be excluded. The proposal also revisits the suggestion, present in the earlier discussions when the bank tax was introduced, that it should contribute to the Bank Guarantee Fund rather than the budget. The Polish Bank Association would like half of the tax paid to go to this fund.
However, the most pressing short-term problem for the banking sector is foreign currency housing loans. Mortgages in Swiss francs, mainly granted before the global financial crisis, are still a significant burden. Around 140,000 clients who suffered from the strengthening of the franc against the zloty have filed lawsuits against banks, seeking annulment of the loans, permitted by the October 2019 ruling of the Court of Justice of the European Union. Banks are consistently losing these lawsuits, forcing them to create “reserves for legal risk”. The value of these reserves exceeded PLN 45 billion in mid-2023, roughly equivalent to one-fifth of the total equity of our banking sector. If banks have less capital, it means they have fewer opportunities to expand their lending activities.
The industry is also demanding that it be allowed to participate in work on regulations originating from the European Union
Recently, banks have shown an increased inclination to reach settlements with clients (dominated by a model in which loans are recalculated as if they were originally in zlotys). However, there are still far more lawsuits than cases in which clients have signed agreements. Therefore, among the “highest priority actions”, according to bankers, should be a “systemic solution to the problem of Swiss franc mortgages by sanctioning, by law, the settlement process”. Actions to “ensure legal certainty of loan agreements” and “ensure the fair and effective formulation of government positions expressed in proceedings before the CJEU” (in the past, government positions were based on a lawsuit by one of the deputy ministers against a bank) should also be taken.
There are also issues concerning zloty-denominated mortgages, where until recently, WIBOR-based variable rates were the norm (WIBOR will be replaced by the WIRON rate, which is tied to the interest on overnight interbank deposits and those accepted from large clients, as announced in the indicator reform that took place in the spring of 2022). Therefore, banks aim to “continue supporting the credibility and indisputability of reference indicators, especially WIBOR, and further support the reform of indicators following global practice of replacing -IBOR indicators with RFR-type indicators (risk-free rate)”. There are more sector demands, such as a comprehensive housing policy, including creating a new model for financing home purchases (including saving for this purpose, similar to German building societies), education, and involving the sector in the implementation of the National Reconstruction Plan (bankers hope to unlock funds previously blocked by the European Union).
Climate and the EU
“We are eagerly awaiting the opportunity to cooperate with the government. Not only on matters crucial to the financial market but, above all, in socially important areas where insurers can support the state. This includes climate protection, investment, and stimulating economic development, as well as protecting those with claims”, declares Jan Grzegorz Prądzyński, President of the Polish Chamber of Insurance.
At the top of his list is the need to regulate the activities of claims’ agencies. “This legislation is crucial primarily for those with claims. The Polish Chamber of Insurance has been calling for years to eliminate the risk that they will lose benefits in the event of the bankruptcy of claims agencies or the misappropriation of funds by these companies. Unfortunately, such cases do occur. It is important to supervise claims agencies, ensure transparency in their activities, limit their remuneration, and introduce the obligation to transfer compensation directly to the account of the affected party, not the claims agency”, explains the head of the insurers’z organisation.
The segment also supports changes in the tax on financial institutions. “The financial sector in Poland bears one of the highest taxes on assets in Europe. Insurers additionally pay the highest percentage among all institutions covered by this tax”, emphasises Prądzyński. Unlike banks, insurance companies do not benefit from exclusion regarding treasury bonds, a significant component of their balance sheet. “Therefore, we propose levelling the financial burdens for banks and insurers”, argues the chamber’s head.
The industry is also demanding that it be allowed to participate in work on regulations originating from the European Union. One example is the Retail Investment Strategy (RIS). The RIS is intended to encourage individual clients to invest. Unfortunately, the proposal does not take into account the specifics of less developed markets, where operating costs for insurance are significantly higher and, above all, where different distribution models exist. The RIS, for instance, envisages a prohibition on commission payments in the distribution of savings and investment products, according to the head of the Polish Chamber of Insurance. Another EU-related issue concerns regulations on mandatory restructuring in the insurance sector.
An important issue is the ESG (Environmental, Social, and Governance). Insurers hope for a “strengthening of public-private partnerships in the areas of climate protection and energy transformation”. They would like to be involved in creating a risk management plan for issues such as drought. They also hope that the government will play the role of the “last resort insurer” and have a dedicated reserve for situations involving large-scale catastrophic events. This leads to another demand: increasing the prevalence of state-subsidised agricultural insurance, even in high-risk areas.
“We are facing the implementation of key initiatives that will impact the operations of banks, insurance companies, and private equity funds: the SFDR regulation (Sustainable Finance Disclosure Regulation – a directive on the disclosure of information related to sustainable development in the financial services sector), CSDDD, and ESG Ratings (assessment of the efficiency of management and risk in the environmental, social, and corporate governance areas)”, says Joanna Ałasa, a member of the board of the recently established Sustainable Investment Forum. “These regulations, along with our domestic initiatives, such as efforts to make Poland a regional centre for green finance, require close cooperation between the government, the business community, academia, and social organisations”, she argues.
Trust in the Market
“The key challenge in the coming years will be building the scale of the Polish capital market, including the scale of the investment fund sector”, believes Małgorzata Rusewicz, president of the Chamber of Asset Managers and Funds, as well as the Chamber of Pension Fund Societies.
“The new government should, above all, restore confidence in the pension system and create stable frameworks for its continued functioning. On the one hand, this means a thoughtful approach to Open Pension Funds, and on the other hand, not violating the principles of Employee Capital Plans, including auto-enrolment. A serious discussion and changes are needed in the incentive system for long-term investing. I mean, among other things, abandoning the Belka tax on all investments in long-term products, i.e., over 5 years, but also offsetting the reduction in the attractiveness of the Individual Retirement Security Account after the introduction of the 12 per cent PIT rate. Still relevant is the thorough streamlining and modernisation of the Polish Investment Fund market, for example, by making some processes electronic, even using AI algorithms, which will reduce the overall operating costs of the funds”, says Małgorzata Rusewicz. ©Ⓟ
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