The Financial Stability Report – July 2010
Publication date: 30-07-2010
The National Bank of Poland publishes the “Financial Stability Report” twice a year. The July edition is based on data available up to 18 June 2010 and presents the latest assessment of risks to the stability of the Polish financial system.
The rate of economic growth, which was slower than in the past, contributed to the decrease in the earnings of banks and investment fund management companies in comparison with the pre-crisis period. The deterioration in the net profit of banks largely resulted from the materialisation of credit risk accumulated on their balance sheets in the times of favourable economic conditions. However, already in the first quarter of 2010, the banking sector posted higher earnings than a year earlier. As a result of capital increase and a rise of the capital adequacy ratios, banks’ loss absorption capacity increased. According to the NBP’s assessment, the current situation of the banking sector has improved since the publication of the last “Financial Stability Report” in December 2009.
Macroeconomic developments remain one of the major risk factors for financial system stability. Although trends in the world economy point to a continuation of economic recovery, an intensification of disturbances in the second quarter of 2010, triggered by concerns over insolvency of some euro area countries, led to an increase in uncertainty over future economic climate. Hence, the risk of the deterioration in the conditions in which Poland’s financial system operates has increased. On this account, although banks’ loss absorption capacity rose, it cannot be said that risk for their stable functioning substantially decreased.
Economic developments, in line with the central path assumed for the June projection of the NBP, will pose no threats to the stable functioning of the financial system within the projection horizon. Macro stress test performed by the NBP indicate that even in the case of substantially slower economic growth, the banking sector would remain stable. The majority of banks would maintain the capacity to generate a net operating income that would limit the negative impact of the potential provisions for impaired loans on the level of capital. The firm majority of banks hold sufficient capital to absorb the adverse effects of a strong slowdown in economic growth on their revenues and costs. The situation of the sector of non-bank financial institutions also poses no significant threats to financial system stability. The sector may be assessed as remaining resilient to potential deterioration of operating conditions.
If macroeconomic risk does not materialise and economic growth accelerates, excessive lending growth may become a risk factor in the longer term. This may lead to the re-accumulation of credit risk on banks’ balance sheets, which would increase their sensitivity to negative shocks.
The proposed restructuring of the global regulatory architecture, including among others, liquidity requirements currently under consideration, will also impact the conditions in which banks will operate in the future. The adjustment processes could imply the need to substantially reconfigure banks’ balance sheets in Poland. The increase of the share of long-term stable funding sources would lower banks’ sensitivity to liquidity shocks, however, at the same time it would considerably increase their operating costs.