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Government grasps regulatory power

Concerns are growing over the creation of a new unified financial industry regulator that will reduce the independent overseeing powers of the central bank and its chief. By Jan Cienski in Warsaw.
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Bucking advice from the IMF, the European Central Bank, the National Bank of Poland and a host of economists, Poland is launching a unified financial industry regulator this month that will oversee its securities, insurance and banking sectors. The creation of the Financial Oversight Commission was a part of the electoral programme of the ruling conservative Law and Justice party, which argued that it would be more efficient to unify all regulators, a step taken by many countries, including the UK.

According to Cezary Mech, the architect of the legislation creating the commission, a unified commission is needed because: “There is a trend to centralise regulatory authorities because financial products are increasingly linked.”

Government complaints about the banking system include allegations that banking costs in Poland are higher than in many other European countries. According to a report prepared by consultants CapGemini, Poland has the second highest level of banking services costs in the world as a percentage of gross domestic product. However, it also said that more expensive banking services are a hallmark of developing economies and tend to get cheaper as financial systems mature.

Poland’s existing regulatory bodies are well regarded by the industry and by outside observers. The new commission varies from many similar unified agencies in other countries in that it will not act under the umbrella of the central bank.

There is some concern that Poland’s financial market is not as developed and as intertwined as in more developed economies, making it less pressing to unify the regulatory authorities.

The government does not buy that line of reasoning, however. “Poland should be proud that it took the step of unifying regulators, which was prompted by the consolidation of the market, making supervision more efficient,” says Artur Zawisza, the head of a parliamentary investigative commission, which was set up to probe the past 17 years of Polish banking.

Fear of attack

Leszek Balcerowicz, the central bank president, fears the probe could turn into an attack on him and on the record of the national bank. The most serious complaint about the new institution is that it is aimed at reducing the power of the central bank, which under the leadership of Mr Balcerowicz, the architect of Poland’s 1989 economic reforms, has proved to be a thorn in the government’s side.

The IMF and Mr Balcerowicz are worried that the new institution will be more open to political pressure than the central bank, which until now has taken the lead in regulating banks. Of the commission’s seven members, six will be chosen by the prime minister or the president, with only the central bank president remaining beyond direct political control.

Christoph Rosenberg, senior regional representative at the IMF, says that the legislation creating the new authority is “weak”, and that he is concerned that it does not follow best practices in minimising the possibility of political interference.

There is little doubt that prime minister Jaroslaw Kaczynski’s government is mightily frustrated with the central bank and particularly with Mr Balcerowicz.

In a recent opinion piece written for the Fakt newspaper, Mr Kaczynski said the loud domestic and foreign opposition to changes in the regulatory structure were a defensive reaction by threatened special interest groups.

Rushed legislation

Work on creating the commission accelerated this spring, when the central bank refused to go along with the government’s opposition to a merger of two Polish banks – BPH and Pekao SA – owned by Italian financial group UniCredit. In the end, the legislation was rushed through parliament with little scope for debate or amendment, despite the negotiated end of the dispute with UniCredit.

“I think the reason for the liquidation of the independent supervision of the banking industry was that the current banking supervisory commission did not bend to the government’s will,” says Mr Balcerowicz.

Mr Balcerowicz is also an extremely unpopular figure for many Law and Justice party members and is particularly disliked by the two populist parties, which form part of the governing coalition: Self-Defence and the League of Polish Families. Many of those parties’ voters are in small towns and villages that have not done well out of the economic transformation unleashed by Mr Balcerowicz 17 years ago.

He is also blamed for selling off many of Poland’s state-owned assets too cheaply to foreigners, depriving the country of its industrial and financial crown jewels.

Although Mr Balcerowicz is widely admired abroad, he is fairly caustic and does not suffer fools gladly, which has made him a somewhat problematic spokesman for economic liberalism and turned him into an easy target for political forces that oppose the country’s direction.

“Balcerowicz must go!” has long been a slogan of the rural and left-wing populists of Self-Defence, and creating a new financial industry regulator is a way of taking him down a peg.

As well as personal animus, the government wants to reduce the central bank’s powers in keeping with its wider policy of centralising as much authority and power as possible with the government and with the Law and Justice party. Mr Kaczynski has already led attacks against the independence of the civil service, placed party loyalists in senior posts at many state-owned companies and taken control of the public media.

“They are attacking not a living person but a symbol of the transformation,” says Mr Balcerowicz. “Some people think that the mere fact of being elected confers the highest authority, but I would argue that the essence of a western state is the division of power and adherence to the rule of law.”

The new commission began work on September 19. Initially, it will take over regulation of the insurance and securities sectors, with banking coming under its purview by next year. However, as soon as the commission’s chief is named, he or she will replace Mr Balcerowicz as the head of the current banking supervisory commission, which acts as part of the central bank.

Talent drain

In addition to worries about excessive political interference at the new commission, there are fears that creating a new agency could drain talent from the central bank, something already supported by apocryphal evidence of senior bank employees looking for private sector jobs. This is happening at a time when Polish banks are striving to meet the new Basel II capital standards. The central bank is also grappling with the rapid expansion of consumer lending in Poland, much of it denominated in Swiss francs.

Mr Balcerowicz worries that creating a new regulatory structure could undercut the hard-won gains of 17 years of economic reforms, which, although not without flaws and controversy, have left Poland enormously wealthier than in 1989, with a well-functioning banking system and a strong and stable currency.

“Poland’s transformation was a great success as far as money is concerned,” he says. “We began with hyperinflation and an inconvertible currency and now we have money of the highest quality, and that is because of an independent central bank.”

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Read more about:  Central & Eastern Europe , Poland