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The shock caused by the COVID-19 pandemic does not put Poland’s financial stability at risk, although the risk remains elevated

Date: 03-12-2020

The shock caused by the COVID-19 poses no risk to financial stability in Poland. The resilience of the domestic banking sector is specifically supported by: (1) the absence of financial and macroeconomic imbalances before the pandemic outbreak, (2) the strong capacity to absorb losses, manifesting itself in high levels and high quality of capital in the banking sector and also (3) support measures taken by public institutions.

Financial Stability Report, December 2020

However, the risk remains elevated. Particular attention should be paid to the phenomena listed below.

  1. Provisions for credit losses associated with the effects of the COVID-19 pandemic will be the major reason for a substantial decline in earnings in the banking sector. However, following the absorption of credit losses most banks will continue to hold an excess of capital over the regulatory requirements.
  2. Legal risk associated with FX housing loans is on the rise. The increasing number of borrowers who have filed lawsuits and the rising percentage of court rulings against banks make it necessary to create additional provisions, which as a consequence negatively affect banks’ earnings and their further growth.
  3. The profitability of the banking sector continues to decline, and the pandemic has intensified the process. This reduces the banking sector’s capacity to strengthen its capital base from retained profits.
  4. The difficult situation of certain financial institutions persists. The capital shortfalls they experienced in the past may grow further as a consequence of the fallout from the pandemic.
  5. The sovereign-bank nexus is gaining in importance as a result of the banking sector’s increased exposure to Treasury bonds or bonds guaranteed by the State Treasury.
  6. Concerns over a credit crunch are yet to be confirmed. However, uncertainty about the lending policy of banks in the future remains.

According to the opinion of Narodowy Bank Polski, the implementation of the following recommendations will be conducive to maintaining the stability of the domestic financial system.

  1. Credit institutions, insurance companies and investment fund management companies should continue to maintain a conservative dividend policy until all the effects of the pandemic are taken into account.
  2. Banks and audit firms should develop consistent and adequate methods of reporting credit losses and provisions for credit risk associated with FX housing loans.
  3. Entities with low capital ratios and reduced profitability should be more actively taking measures aimed at rectifying their situation.
  4. Banks and borrowers should seek to settle disputes out of court in cases on FX housing loans.
  5. At a time when the conditions in which banks operate are worsening, consideration should be given to temporarily cutting contributions to the deposit guarantee fund.
  6. Investment fund management companies should match the components of investment fund portfolios with the frequency at which participation units are redeemed in a better way.
  7. Insurance companies should factor in the risk associated with the double use of capital and with the high share of expected profits in future premiums in own funds.
  8. Life insurers should limit offering unit-linked insurance where its cover component has been reduced.

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