In a recent interview for NTV, I mentioned that the European Commission gave 11 EU countries, including Poland two months to implement the directive related to Bail-In. It’s about the so-called “Restructuring and orderly bank liquidation”. Whether the Polish government will adapt to the directive is not known yet. Probably under the threat of huge penalties, changes will be introduced, which we should undoubtedly monitor.
As a reminder: A bank deposit is a monetary amount that an individual client or company entrusts to the bank for a certain period of time – indefinite (savings account) or marked (term deposit).
To clarify the situation, I will describe to you what changes are enforced by the said directive:
a) If the solvency ratio in any of the banks falls below the safe threshold, the bank will have to present a recovery program approved most probably by the PFSA or the NBP. The supervisor or institution will adopt a plan or order changes in the bank’s asset structure. This may be, for example, selling some loans to other institutions or getting rid of a certain group of assets to increase the capital base. Another way to raise capital may be, for example, issuing shares, that is, depleting the capital of existing shareholders.
b) If the solutions do not bring the expected results, the supervisory authorities may dismiss the management board or the supervisory board, and then go to the so-called restructuring. A threatened institution will be divided into parts. Some assets may be taken over by other banks or by government institutions. Probably the point is to transfer potential losses to the shoulders of society (nationalization of bad debts), while the valuable part will be taken over by a stronger institution increasing its market share.
c) If the restructuring still does not bring the expected results, the failing bank will be able to take over part of the bank deposits, but only above the equivalent of PLN 100,000. EUR. The central bank will not be able to provide a failing aid institution on preferential terms.
If, despite all measures, there are not enough funds to pay out guaranteed deposits (up to EUR 100,000), a one-time fee of not more than the equivalent of a 3-year premium will be imposed on financial institutions operating under the Bank Guarantee Fund. Thus, we come to a situation in which conservative and safe institutions have to shed on saving institutions that act much more risky.
d) Capital transfers
After the introduction of the Directive, the KNF will practically lose the ability to block transfers of capital from Polish banks to parent companies threatened with bankruptcy. For the time being, Polish banks are in good shape, which is absolutely impossible to say about their foreign owners.
Below is a table of Polish banks and their foreign owners. Institutions with the highest risk level have been marked in red.
Although the condition of Pekao, BZWBK, Millenium or BPH is relatively good, according to the new legislation, each of these banks will be able to be drained in a short time in cash in the name of rescuing the central. The KNF will not have the tools to block such a transfer for as long as Polish banks meet the capital requirements.
Generally, if you are wondering if you have invested your money in a good place, read the article from a few months ago
e) Protection of the European Central Bank
Until now, when banks from the south of Europe had a liquidity problem, they took a loan from the central bank or resold it at nominal value worthless assets (unpayable loans or junk bonds). Thanks to this, the ECB took over the liabilities of commercial banks, which in turn gave a clear signal – run a risky policy, because we will save you anyway. The current changes are intended to clear the situation. On the other hand, the condition of the ECB may be so bad that it is unable to take on more toxic assets.
f) Handing over the remnants of sovereignty to Brussels.
Until recently, the KNF was supervising the national banking system. Although you can fault him with many mistakes, our system is really in a good condition compared to other countries. By agreeing to the introduction of the directive, we supervise our banking system in the hands of institutions that are absolutely unable to raise the level of security. It’s all about increasing the level of centralization when making key decisions.
The introduction of a directive that the European Commission so strongly pushes for has nothing to do with raising security in the banking system, at least not in Poland. It allows for quick draining of domestic banks from capital, as long as it does not allow the collapse of any of the major financial institutions.
It is also a serious problem to hand over banking supervision to corrupt bureaucrats in Brussels
Under the new law, if a local bank gets into problems, EU supervision may dismiss the management board and order the sale of valuable assets to another banking group, which in turn will increase consolidation in the system. Fewer banks with a large share at the same time significantly increase systemic risk. As for the structure of the banking system in Europe, unfortunately we are heading in the direction set by the USA, where the 5 largest banks have an 80% market share.
Finally, I want to refer to the guarantee of 100,000 euros alone. Suppose a medium-sized bank in the south of Europe collapses. His management has a choice: put up a Polish branch for sale or drain him from cash. He chooses the second option because there is fear in the markets and each bank holds cash fearing escalation of its own problems.
The Polish bank deprived of capital ceases to meet the requirements set by the EU and must present a recovery plan at an express pace.
To collect capital, it issues part of the assets for sale and raises the interest rate on deposits
Information about its problems gets through to the market, which translates into a panic escape of deposits. The bank is on the verge of bankruptcy. The branches are temporarily closed. The Management Board is dismissed and replaced by technocrats from the EU. Other deposits are frozen. Nobody mentions bankruptcy, we have a restructuring process. The profitable part of the bank is sold for the price of a large capital group. The bank’s capital is not enough to cover all deposits.
The question is whether the bank’s remnants will be sold to an institution with a 100% state treasury that will cover losses / deposits (up to EUR 100,000), or similarly like in Cyprus, the government unilaterally withdraws from the guarantee of any deposits? Eventually, the law is increasingly changing in Europe in such a way that it applies with a retrospective date.
I have repeated it many times and will do it once again. In a situation in which deposits pay virtually nothing, there is absolutely no point in holding more funds in banks than necessary for current expenses. This is particularly important in a situation where the new legislation allows us to transfer the problems of Western banks to our market.