Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
Central & eastern EuropeFebruary 17 2022

Poland's central bank governor takes aim at inflation

Adam Glapiński, the governor of Poland’s central bank, Narodowy Bank Polski, talks to The Banker about interest rate increases, foreign currency denominated mortgages and the sector’s exposure to transformation-related climate risks.
Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
Poland's central bank governor takes aim at inflation

Q: After successive increases to interest rates at the end of 2021 and early 2022, is the Polish economy well positioned to face any further tightening of monetary policy conditions in 2022?

A: To address the risk of inflation remaining above the Narodowy Bank Polski’s (NBP) target in the medium term, the Monetary Policy Council decided to withdraw some monetary accommodation by increasing interest rates in October, November and December 2021, and again in January 2022. The NBP is likely to raise rates further this year to curb inflation and anchor expectations, but at the same time to support the ongoing economic recovery from the Covid-19 pandemic. This means that, in future decisions on the scale and pace of monetary policy tightening, the important factor will be to ensure that the unemployment rate does not rise significantly and that further economic growth is not undermined. The central bank will also take into consideration the incoming economic data and the uncertainty about the evolution of the pandemic.

The important factor will be to ensure that the unemployment rate does not rise significantly and that further economic growth is not undermined

Q: Are Poland's banks on the right path to meet the introduction of the minimum requirement for own funds and eligible liabilities (MREL) targets in 2024?

A: Compliance with MREL requirements is certainly one of the important challenges for the Polish banking sector in the medium term. The requirement was designed with respect to large European banking groups which are active in debt markets. Contrary to this experience, in Poland the main source of funding are deposits and the loan-to-deposit ratio is well below 100%. For smaller banks, therefore, and those that have not yet attempted to issue debt especially on foreign markets, entering the debt market and competing for investors as newcomers is a serious and – let me say – costly challenge. Yet, meeting MREL requirements is surely worth all the effort and costs as it strongly supports stability of the system by facilitating smooth recovery and resolution procedures.

Although issuance of MREL eligible debt is still in its infancy, banks have secured handsome capital buffers in excess of minimal supervisory requirements and they operate with a low leverage ratio (8.5% on average). The pressure for debt instruments issuance would be thus lower. I would not point to any precise numbers – these are analysed by the Bank Guarantee Fund, which is the resolution authority in Poland – but the shortfall to cover the MREL requirements would not be as large as initially expected.

Q: In what ways has the risk profile presented by foreign currency denominated mortgages changed for Polish banks in recent times?

A: Foreign currency denominated mortgages were quite popular in the first decade of 2000s up to the global financial crisis [2007-2009], when the Polish zloty sharply depreciated. We saw the threats stemming from the fact that unhedged borrowers were exposed to currency risk, which ultimately could result in credit risk for banks. That is why the authorities issued recommendations and exerted moral suasion on banks to limit loans to high profile borrowers.

The outcome of these pre-emptive efforts was that credit risk did not materialise despite several episodes of zloty depreciation, especially vis-a-vis the Swiss franc. Non-performing loans are still low, as foreign currency borrowers are presenting on average better conditions than others.

Here the good story ends, however. Credit risk remains contained but legal risk has come into play in recent years. Borrowers are increasingly taking legal actions and questioning the so-called indexation clauses in their loan contracts. In response to this, banks have sped up provisioning, which has negatively impacted their net profits. What makes us a little bit optimistic about the whole issue, is a growing number of banks offering voluntary agreements to their borrowers, for which the NBP has advocated for years.

Q: To what extent are Polish banks exposed to transformation-related climate risks?

A: The main channels of climate change impact on the Polish financial sector stems from a transformation to a more sustainable and low-carbon economy. This is because transformation is likely to materialise to a great extent much earlier than it will take for the physical risks to materialise, as climate change and global warming are long-term processes.

Exposures to the transition risk has a direct and indirect nature. The direct nature refers to the size of the banks’ exposure to high greenhouse gas emitters. The indirect nature may additionally take into account the energy intensity of the economy and the macroeconomic effects of the transition. NBP has recently conducted a preliminary transformation risk assessment focusing on banks’ direct exposures to carbon-intensive entities and industries. Compared to other types of exposures, which can generate systemic risk, banks’ exposures to carbon intensive sectors in the banking sector as a whole can be considered relatively small, approximately 2% of the banking sector’s total assets.

Was this article helpful?

Thank you for your feedback!