Wednesday, January 2, 2013

My paper on PKO BP's anti-cyclical role during the global crisis

The World Bank has just published its first edition of the "Global Financial Development Report".

It includes my box on PKO BP's very positive role during the 2008-2011 global crisis (Chapter 4) based on a background paper.

In a nutshell, I argue the following:

The case of Poland’s PKO BP suggests that domestically owned banks can play a useful counter-cyclical role during crises by supporting lending to the economy, becoming de facto “creditors of last resort”. This is largely because they are less subject to exogenous shocks, are more often funded in the domestic markets, and are more inclined to react to changing credit market conditions based on domestic fundamentals alone. They are also insulated from exogenous decisions of foreign parent banks affecting lending policies of their domestic subsidiaries.

State ownership has further enhanced PKO BP’s ability to withstand the crisis by imposing on the bank a conservative lending and funding culture, enhancing the bank’s ability to attract deposits during the crisis thanks to the implicit State guarantee, and by participating in the crucial capital increase.

PKO BP story also highlights the benefits of Poland’s diversified bank ownership structure, with foreign banks playing a very positive role in supporting financial deepening (World Bank, 2009), especially during good times, and domestically owned and state-controlled banks taking the lead on lending during times of external turbulence.

However, the case of PKO BP suggests that for the state-controlled banks to be successful, they need to be commercially-oriented, open to free market competition, and focused on “utility banking”. They also need to be transparent, professionally managed, ideally by managers chosen through a meritocratic selection process, and subject to hard budget constraints.

All of these keys conditions can be at least partly achieved by taking state banks public and listing them on a stock exchange. This not only forces these banks to adopt international accounting and reporting standards, but—thanks to a watchful eye of domestic and international shareholders—also helps impose market discipline, ensure compliance with best global practices of corporate governance, strengthen commercial orientation and sustain high quality of lending, including by mitigating political pressures. Without such market pressures, the key conditions for success are not always easy for state-owned banks to adhere to. A well embedded culture of transparency, accountability and strong business ethics is also useful, although policy recommendations on how to achieve it are not straightforward.

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