Financial System Development in Poland 2010

Warsaw, 2012 Editors: Paweł Sobolewski Dobiesław Tymoczko

Authors: Katarzyna Bień Jolanta Fijałkowska Marzena Imielska Ewelina Jaskólska Piotr Kasprzak Paweł Kłosiewicz Michał Konopczak Sylwester Kozak Dariusz Lewandowski Krzysztof Maliszewski Rafał Nowak Dorota Okseniuk Aleksandra Paterek Aleksandra Pilecka Rafał Sieradzki Karol Siskind Paweł Sobolewski Andrzej Sowiński Mikołaj Stępniewski Michał Wiernicki Andrzej Wojciechowski

Design, cover photo: Oliwka s.c.

DTP: Print Office NBP

Published by: National Bank of Poland Education and Publishing Department 00-919 Warsaw, Świętokrzyska 11/21, Poland Phone 48 22 653 23 35 Fax 48 22 653 13 21 www.nbp.pl

Table of contents

Introduction ...... 5 1 . Financial system in Poland ...... 6 1.1. Evolution of the size and structure of the financial system in Poland ...... 6 1.2. Households and enterprises on the financial market in Poland ...... 14 1.2.1. Financial assets of households ...... 14 1.2.2. External sources of financing of Polish enterprises ...... 18 2 . Regulations of the financial system ...... 21 2.1. Changes in financial system regulations in Poland ...... 21 2.1.1. Regulations affecting the entire financial services sector ...... 23 2.1.2. Regulations regarding the banking services sector ...... 26 2.1.3. Regulations regarding non-bank financial institutions ...... 32 2.1.4. Regulations regarding the capital market ...... 33 2.2. Measures of the European Union regarding the regulation of the financial services sector ....34 2.2.1. Regulations affecting the entire financial services sector ...... 34 2.2.2. Regulations regarding the banking services sector ...... 39 2.2.3. Regulations regarding the capital market ...... 40 2.2.4. Planned measures of the European Union regarding regulation of the financial services sector ...... 42 3 . System infrastructure ...... 47 3.1. Regulatory and supervisory institutions ...... 47 3.2. Payment system ...... 47 3.2.1. Large-value interbank settlements ...... 47 3.2.2. Retail payment systems ...... 50 3.2.3. Financial intermediation agencies ...... 52 3.2.4. Cash back service ...... 53 3.3. Financial instruments market infrastructure ...... 53 3.4. European projects on the financial market infrastructure ...... 59 3.5. Market participant protection systems ...... 62 3.6. Institutions that enhance information transparency ...... 63 4 . Financial institutions ...... 65 4.1. Banks ...... 65 4.1.1. Evolution of the banking sector: size and structure ...... 66 4.1.2. Concentration and competition in the banking sector ...... 73 4.1.3. Changes in the structure of bank assets ...... 74 4.1.4. Changes in the structure of bank liabilities ...... 86 4.1.5. Changes in banks’ product offer ...... 92 4.1.6. Earnings of the banking sector ...... 93 4.2. Credit unions ...... 97 4.3. Non-bank institutions providing financial services ...... 100 4.3.1. Leasing ...... 100 4.3.2. Factoring ...... 105 4.3.3. Financial intermediation ...... 107 4.4. Private equity/venture capital sector ...... 110 4.5. Collective investment schemes ...... 114 4.5.1. Investment funds ...... 114

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 3 Wstęp

4.5.2. Open pension funds ...... 126 4.5.3. Occupational pension schemes and individual pension accounts ...... 138 4.6. Insurance companies ...... 143 4.6.1. The size and structure of the insurance sector ...... 143 4.6.2. Premium structure ...... 147 4.6.3. Assets and investment portfolio of insurance companies ...... 148 4.6.4. Financial results of the insurance sector ...... 150 4.6.5. Solvency and capital adequacy ...... 151 4.6.6. Selected technical ratios ...... 152 4.6.7. Product structure and distribution channels ...... 153 4.7. Entities conducting brokerage activities ...... 155 4.7.1. Conditions for the operation of entities conducting brokerage activities in the Polish market ...... 155 4.7.2. Brokerage services market ...... 156 4.7.3. Activities of brokerage entities in an organised market ...... 158 4.7.4. Financial results ...... 161 5 . Financial markets ...... 162 5.1. Money market ...... 162 5.1.1. Evolution of the money market: size and structure ...... 162 5.1.2. Short-term debt securities market ...... 163 5.1.2.1. Treasury bills ...... 163 5.1.2.2. NBP bills ...... 168 5.1.2.3. Short-term bank debt securities ...... 171 5.1.2.4. Short-term corporate bonds ...... 173 5.1.3. Deposit transactions market ...... 175 5.1.3.1. Unsecured deposits ...... 178 5.1.3.2. Secured deposits ...... 181 5.1.3.2.1. FX swaps ...... 182 5.1.3.2.2. Conditional transactions ...... 186 5.2. Capital market ...... 190 5.2.1. Evolution of the capital market: size and structure ...... 190 5.2.2. Long-term debt securities market ...... 192 5.2.2.1. Treasury bonds ...... 192 5.2.2.2. Municipal bonds ...... 203 5.2.2.3. Long-term debt instruments issued by banks ...... 208 5.2.2.3.1. Long-term bank debt securities ...... 208 5.2.2.3.2. Mortgage bonds ...... 211 5.2.2.4. Corporate bonds ...... 213 5.2.3. Equity market ...... 216 5.2.3.1. Shares traded in the WSE Main Market ...... 217 5.2.3.2. Other equities listed on the WSE Main Market – allotment certificates and subscription rights ...... 225 5.2.3.3. Equity market on the NewConnect platform ...... 226 5.3. Spot FX market ...... 229 5.4. Derivatives market ...... 238 5.4.1. Evolution of the derivatives market: size and structure ...... 239 5.4.2. OTC derivatives ...... 241 5.4.2.1. Interest rate derivatives ...... 243 5.4.2.2. FX derivatives ...... 248 5.4.3. Exchange-traded derivatives ...... 255 5.4.3.1. Equity derivatives ...... 256 5.4.3.2. FX derivatives ...... 260 Abbreviations used in the report ...... 264

4 National Bank of Poland Introduction

Introduction

The Financial System Development in Poland 2010 is a new edition of the report which describes changes in the financial system in a given year. This publication presents trends for and the barriers to the development of all financial institutions and financial markets operating in Poland in relation to changes in the architecture of the European financial system and an escalating debt crisis of some euro area countries. The analysis examines changes in infrastructure and regulations relating to the financial system as well as initiatives aimed at integrating the financial market in the European Union and enhancing its security. According to the assumed methodology, developments in the financial system in 2011 have not been included in this report, even if they were known to the authors at the time of writing.

Chapter 1 presents the evolution of the size and structure of the Polish financial system, pointing to the continuation of the trend of a slowly decreasing share of the banking sector in the Polish financial sector’s assets. In addition, this chapter analyses relations between changes in the domestic financial system and the structure of households’ financial assets and the external sources of financing for enterprises. Chapter 2 describes amendments to legal acts relating to the financial system, both at the national and European Union level. In addition, it presents the state of work of EU authorities on selected regulations. Chapter 3 describes the major changes to the financial system infrastructure.

Chapter 4 provides an analysis of developments in individual financial institution groups in 2010. To the extent possible, these developments have been presented against the trends observed in other countries of the region, and in selected euro area countries. As banks play a key role in the Polish financial system, the banking sector has been analysed in the first place. Changes in the structure of claims and liabilities of commercial banks, including those arising from their lending policies, have been analysed in detail. Subsequent sections analyse quasi-bank institutions and those which serve as intermediaries in the distribution of financial products. The next group of financial institutions analysed are investment and pension funds. This chapter also sets out the situation in the insurance sector and in the brokerage entities sector.

Chapter 5 presents underlying trends in financial markets, with particular regard to changes in liquidity resulting from global and local factors. The evolution of the money market and its individual segments (Treasury bills, NBP bills, short-term corporate and bank debt securities, and deposit transactions market) has been discussed in the first place, followed by analysis of the gradual reduction of NBP instruments under the “Confidence Package”. The subsequent part of the chapter describes developments in the capital market. The development of the government bond, municipal bond, long-term commercial bank debt instruments, and corporate bond markets has been analysed. A separate section of this chapter has been devoted to the stock market and the market of other equities. Chapter 5 also describes changes in the FX market and the evolution of the derivatives market in Poland, broken down by stock exchange and OTC instruments.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 5 Financial system in Poland

1 Financial system in Poland 1 1 .1 . Evolution of the size and structure of the financial system in Poland

The macroeconomic situation in Poland in 2010 offered favourable conditions for a stable development of the financial system. In the period under analysis, the Polish economy grew by 3.8% (as compared to 1.7% a year earlier), and it was one of the highest growth rates in the EU.1 Revenues of domestic enterprises increased, and their liquidity position also improved. After deep cuts in fixed investment in 2010 Q1, corporate investment activity started to recover in subsequent quarters, supported by improved corporate assessment of the economic outlook in Poland (mainly in the second half of the year). Banks completed the cycle of tightening their lending policies towards enterprises, initiated in 2008. In 2010, the financial standing of households improved (growth of disposable income, stabilisation of the unemployment rate), which contributed to maintaining a high growth rate of housing loans when banks simultaneously tightened their lending standards and eased lending terms. Furthermore, in the analysed period, a higher percentage of households reported savings and the financial assets of households also increased.

The development of the Polish financial system was also driven by smaller risk aversion in the global financial market and improved situation in the domestic money market, which allowed the NBP to gradually limit the use of instruments offered under the Confidence Package. The debt crisis of some euro area countries growing since 2010 Q2 resulted in temporary, large distortions in the global financial markets. Investors were concerned that the problems related to public debt management in some countries of the euro area may spread across the European banking sector and to other European Union member states. Actions taken by the European Union bodies and the IMF, as well as the unconventional monetary policy instruments applied by the ECB eased those concerns. Moreover, financial market participants making investment decisions were more driven by local factors than in 2008–2009. In this context, the sound foundations of economic development in Poland, the stable zloty exchange rate, and, as compared to some euro area countries, a high rate of return on government bonds in relation to credit risk in Poland were conducive to the inflow of foreign investors to the domestic capital market.

As a result, in 2010 the importance of the financial system in the Polish economy continued to increase. At the end of 2010, the value of assets of institutions comprising the Polish financial system was PLN 1,665 billion (11.6% more than in 2009). The financial system assets to GDP ratio increased by 6.6 percentage points as compared to 2009 and amounted to 117.6%. It confirms that the Polish economy – similar to the economies of other Central and Eastern European countries – was still characterised by a relatively low level of financial intermediation2 (Table 1.1.1).

The level of the stock market capitalisation increased significantly together with the size of the domestic Treasury bonds market, where the exposure of non-residents grew considerably. Their increased activity was also observed in the financial markets of instruments denominated in PLN. Similar trends – a gradual increase of the stock market capitalisation since 2008 and growth of the outstanding public sector debt securities – were observed in the global financial system (Figure 1.1.1). However, the Polish financial system was characterised by a much higher growth dynamics of the banking sector’s assets and, like in other countries of the region, marginal use of bank assets securitization. It follows from the fact that Polish banks focus on providing traditional banking services, primarily taking deposits and lending to non-financial clients.

1 Faster economic growth was registered by Sweden (5.6%) and Slovakia (4.0%). 2 The level of financial intermediation is measured by the financial system assets to GDP ratio.

6 National Bank of Poland Financial system in Poland

Table 1.1.1. Assets of the financial system as percentage of GDP in selected Central and Eastern European countries and the euro area in 2007−2010 (%)

2007 2008 2009 2010 Poland 103.1 110.3 111.0 117.6 Czech Republic 134.3 137.3 138.4 136.0 Hungary 141.4 152.3 165.0 162.0 Euro area – 461.2 481.7 493.6 1

Notes: 1. The data for the euro area refer to 15 countries in 2008 and 16 countries in 2009 and 2010. The data are not comparable to the data published in earlier versions of the document due to the change of the data source, and inclusion of the assets of the money market funds in the financial system assets. 2. The drop in Czech financial system assets to GDP ratio in 2010 may to some extent be the result of the lack of data on some non- -banking financial institutions. Source: For the euro area: ECB Statistical Data Warehouse; for other countries – data provided by national central banks and the Central Statistical Office (GUS).

Figure 1.1.1. Global financial sector assets, 1990−2010

USD trillion 220 212 202 201 200 179 180 175 54 65 48 160 155 55 34 140 45 53 52 120 114 49 49 100 42 36 35 80 72 32 37 41 24 28 30 60 54 17 25 15 11 14 14 15 16 16 40 11 16 11 9 13 6 20 2 3 40 43 45 47 49 22 24 31 38 0 1990 1995 2000 2005 2006 2007 2008 2009 2010

Unsecuritised loans Securitised loans Debt securities of public sector Debt securities of other sectors Equity market

Source: McKinsey Global Institute, Mapping Global Capital Markets, 2011.

The analysis of financial institutions and financial markets of various countries against the level of their economic development suggests that some segments of the financial system in Poland, including the banking sector, are relatively poorly developed (Figure 1.1.2). At the same time, the recent financial crisis has shown that the banking sector in some countries was too large and inadequate for the needs of the real economy. The Polish financial system is also characterised by a relatively low level of the stock market capitalisation and the low value of outstanding private sector debt securities. Research shows, nevertheless, that the structure of the domestic financial system (the ratio of the size of the banking sector to the size of the stock market and the non- -Treasury debt securities) does not significantly diverge from the optimal structure for the current level of economic development of Poland, defined on the basis of data on financial development in 25 OECD countries.3

In 2010, the number of commercial banks4 operating in the Polish market increased by three entities. As at the end of 2010, there were 70 commercial banks in Poland, including 21 branches of credit institutions. The number of credit unions (SKOK) decreased by three entities, and insurance companies by two entities. The number of cooperative banks and pension fund management

3 A. Demirgüç-Kunt, E. Feyen, R. Levine, Optimal Financial Structures and Development, The evolving importance of banks and markets, 2011, summary available at http://siteresources.worldbank.org/INTFR/Resources/ DemirgucFeyenLevine060311.pdf. 4 Commercial banks shall mean herein domestic banks operating as public limited companies or state owned banks, and branches of credit institutions within the meaning of the Banking Law Act of 29 August 1997 (consolidated text: Dz.U. of 2002, No 72, item 665, as amended).

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 7 Financial system in Poland

companies managing open pension funds did not change. The year 2010 saw a further increase in the number of investment funds and in the number of brokerage entities (Table 1.1.2). In addition, in 2010, Polish financial supervision authorities received further notifications about the intention of foreign entities to conduct business activity in the territory of Poland.

1 Figure 1.1.2. Financial system development depending on the level of GDP per capita 2007 % of GDP 2000 2010 130 120 110 100 90 80 70 60 50 40 30 20

Segments of the ﬁnancial sector 10 0 7.5 8 8.5 9 9.5 10 Logarithm of GDP per capita (in PPP)

Banking sector Banking sector – actual values in Poland Equity market Equity market – actual values in Poland Debt securities of public sector Debt securities of public sector – actual values in Poland Debt securities of other sectors Debt securities of other sectors – actual values in Poland Insurance sector Insurance sector – actual values in Poland

Note: The values of the regression function presented below were estimated for panel data which included the information on the financial systems of 209 countries in 1991−2009. The following development measures of the individual sectors of the financial system were used: − banking sector – loans to non-public sector to GDP (for Poland – banking sector loans and advances to the non-financial sector in domestic and foreign currency), − equity market – equity market capitalisation to GDP, − insurance market – non-life and life insurance premium to GDP, − public sector debt securities – outstanding value of general government debt securities to GDP, − debt securities of other sectors – outstanding value of debt securities of financial institutions and enterprises to GDP. More in: T. Beck, A. Demirgüç-Kunt: Financial Institutions and Markets across Countries and over Time: Data and Analysis, World Bank Policy Research Working Paper No 4943, May 2009. The regression function was estimated using the method Fixed Effects GLS in relation to the banking sector and equity market, and the method Random Effects GLS in relation to debt securities of the public sector, other sectors, and the insurance sector. The model was selected on the basis of the Hausmann test (compare M. Verbeek: A Guide to Modern Econometrics, John Wiley & Sons, 2004, pp. 351–352). Source: NBP calculations based on data of the International Monetary Fund (World Economic Outlook, 10/2010), the World Bank (Financial Structure Dataset, 11/2010) as well as the NBP.

In the analysed period, the value of assets of all types of financial institutions increased (Table 1.1.3).5 The growth rate of the value of assets of the financial system as a whole was 11.6%, almost double the rate observed a year before (Table 1.1.4). In 2010, the increase in the value of banking sector assets accounted for 57% of the growth of assets of the financial system, the increase of the value of assets of non-banking financial institutions, mainly investment funds and open pension funds, accounted for 43% of this growth.

The share of the banking sector in the assets of the Polish financial system continued to decrease. In the period under analysis, there was an increase in the share of non-banking financial institutions in the total assets of the financial sector. In 2004–2010, the share of those institutions in the assets of the financial sector increased from 25.9% to 30.4% (Figure 1.1.3 and 1.1.4).

5 The decrease in the value of assets of brokerage entities follows by the narrowing of this category of financial institutions in 2010 to include only brokerage houses (banks pursuing brokerage activity were not accounted for in the category). In 2010, the assets of brokerage houses increased by PLN 0.9 billion in comparison with 2009.

8 National Bank of Poland Financial system in Poland

Table 1.1.2. The number of financial institutions in Poland, 2004−20101

2004 2005 2006 2007 2008 2009 2010 Commercial banks2 57 61 63 64 70 67 70 Cooperative banks 596 588 584 581 579 576 576 Credit unions 83 76 70 67 62 62 59 Insurance companies3 69 68 65 67 66 65 63 Investment funds (investment fund management 154 190 241 277 319 369 417 1 companies)4 (20) (23) (26) (33) (39) (43) (50) Open pension funds (pension fund management 15 15 15 15 14 14 14 companies) Brokerage entities5 40 42 47 53 58 59 64

1 The table presents the number of institutions (except for brokerage entities) the assets of which were taken into account in Table 1.1.4. The table does not include foreign entities, which may pursue cross-border activity (without their legal and organisational presence in Poland), branches of insurance companies from EU member states and from the European Economic Area (EEA), and branches of foreign investment companies. 2 Banks that conduct operating activity. The number of commercial banks in given years also includes branches of credit institutions. In 2004, there were three, in 2005 – seven, in 2006 – twelve, in 2007 – fourteen, in 2008 and 2009 – eighteen, and in 2010 – twenty- one branches of credit institutions. 3 Entities conducting operating activity. The number of insurance companies includes also the main branches of foreign insurance companies (entities from countries other than EU Member States and EEA countries). In 2010, there were three, and in 2004–2009 one main branch of a foreign insurance company. At the end of 2010, there were no main branches of foreign insurance companies. 4 Up to and including 2007, the number of established investment funds and investment fund management companies (TFI) (pursuant to a decision by the PFSA), since 2008 the number of entities registered in the Investment Fund Register held by the Regional Court in Warsaw. 5 The number of brokerage entities includes brokerage houses and banks pursuing brokerage activity. Source: NBP, UKNF, KSKOK.

Table 1.1.3. Assets of financial institutions in Poland, 2004−2010 (PLN billion)

2004 2005 2006 2007 2008 2009 2010 Commercial and cooperative banks 538.5 586.4 681.8 792.8 1,039.1 1,059.6 1,158.5 Credit unions 4.2 5.3 6.0 7.3 9.4 11.6 14.1 Insurance companies 77.9 89.6 108.6 126.9 137.9 139.0 145.1 Investment funds 37.6 61.6 99.2 133.8 73.9 93.4 116.5 Open pension funds 62.6 86.1 116.6 140.0 138.3 178.6 221.3 Brokerage entities1 5.5 6.9 10.8 11.8 8.6 9.9 9.2 Total 726.3 835.9 1,023.0 1,212.6 1,407.2 1,492.1 1,664.7

1 Up to and including 2009, the assets of brokerage entities include the assets of brokerage houses and offices. In 2010, the assets of brokerage entities include exclusively the assets of brokerage houses due to the lifting of the obligation to financially separate the brokerage activity of banks. Source: NBP, Office of the Polish Financial Supervision Authority, Analizy Online, KSKOK.

Table 1.1.4. Growth in assets of financial institutions in Poland, 2007−2010 (y/y, %)

2007 2008 2009 2010 Commercial and cooperative banks 16.3 31.1 2.0 9.3 Credit unions 21.7 28.8 23.4 21.6 Insurance companies 16.9 8.7 0.8 4.4 Investment funds 34.9 -44.8 26.4 24.7 Open pension funds 20.1 -1.2 29.1 23.9 Brokerage entities 9.3 -27.1 15.1 -7.11 Total 18.5 16.0 6.0 11.6

1 The decrease in the value of assets of brokerage entities results from the narrowing of this category of financial institutions in 2010 to include only brokerage houses (banks pursuing brokerage activity were not accounted for in the category). In 2010, the assets of brokerage houses increased by PLN 10.3 billion in comparison with 2009. Source: NBP, Office of the Polish Financial Supervision Authority, Analizy Online, KSKOK.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 9 Financial system in Poland

In 2010, the increase in assets of pension funds was driven by an inflow of new premiums and the increase in valuation of their investment portfolio. The increase in the value of assets of investment funds resulted from a large net inflow (PLN 12.3 billion) of funds to those institutions, and from a rise of prices of financial instruments held in their portfolios.

1 Figure 1.1.3. Asset structure of the Polish financial system, 2004−2010 % 100

0 2004 2005 2006 2007 2008 2009 2010

Banks Credit unions Insurance companies Brokerage entities Investment funds Open pension funds

Source: NBP, Office of the Polish Financial Supervision Authority, Analizy Online, KSKOK.

Figure 1.1.4. Share of individual financial institutions in the asset structure of the Polish financial system in 2009 and 2010

A. 2009 B. 2010

71.0% 69.6%

0.8% 0.8% 8.7% 9.3%

6.3% 7.0% 0.7% 12.0% 0.6% 13.3% Banks Credit unions Insurance companies Investment funds Open pension funds Brokerage entities

Source: NBP, Office of the Polish Financial Supervision Authority, Analizy Online, KSKOK.

In 2010, the participation units of funds which pursued a safe investment policy, i.e. money market funds and bond funds, elicited large interest. Households were encouraged to invest savings in the funds by the relatively high rates of return the funds posted in 2009, and by decreases in interest rates for term deposits introduced by banks in 2010. In the period under analysis, banks reduced price competition for household deposits – intensified since the end of 2008 – and focused on promoting savings accounts. Average interest rate for new term deposits in banks stood at a level below the average WIBOR 3M rate. As a result, there was a slowdown in the growth rate of household deposits as compared to the previous period, and the ratio of assets of investment funds to this category of deposits increased (Figure 1.1.5).

10 National Bank of Poland Financial system in Poland

Figure 1.1.5. Assets of investment funds as percentage of bank deposits from households, 2004−2010

% 60 51.3 50 41.8 40 1 28.2 30 28.2 22.5 24.8 18.1 20

10 2004 2005 2006 2007 2008 2009 2010

Source: NBP, Analizy Online.

In 2010, both in Poland and in the majority of other countries of the region the banking sector continued to play the major role in the financial systems of those countries, although the Polish financial system could be considered as the least bank-oriented among the financial systems of the Central and Eastern European countries (Figure 1.1.6). However, a relatively low level of development of the banking sector was visible across all the countries of the region as compared to the euro area countries (Table 1.1.5).

Figure 1.1.6. Composition of financial systems in Central and Eastern European countries at the end of 2010, by value of assets

% 100 4.7 2.5 8.7 13.4 6.8 90 5.3 8.5 8.9 7.0 80 5.5 8.8 8.8 70 60 50 40 84.3 79.0 76.9 70.8 30 20 10 0 Czech Republic Hungary Poland Slovakia

Credit institutions Insurance companies Investment funds Pension funds

Source: For Slovakia: for data concerning credit institutions and investment funds – website of the central bank of Slovakia http://www.nbs.sk, for data concerning insurance companies and pension funds – ECB Statistical Data Warehouse; for other countries – data provided by national central banks.

The domestic banking sector saw a continuation of the trend to concentrate activity in the segment of loans to households, and particularly housing loans, typical also for other European countries. At the same time, there was a further decline in the share of loans to enterprises in the portfolio of loans to the non-financial sector. That may be due to both a higher profitability of risk- adjusted products offered to households, easier creditworthiness assessment of mass products such as retail loans, as well as increased availability of alternative forms of financing business activity, among others the development of leasing, factoring and debt securities markets.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 11 Financial system in Poland

Table 1.1.5. Banking sector (commercial and cooperative banks) development levels in selected Central and Eastern European countries and in the euro area, 2008−2010 (%)

Assets/GDP Loans1/GDP Deposits2/GDP Country 2008 2009 2010 2008 2009 2010 2008 2009 2010 Poland 81.5 78.9 81.8 46.5 46.7 49.2 38.7 41.7 43.6 Czech Republic3 109.1 112.9 114.2 52.2 53.9 54.7 59.1 63.9 65.8 1 Hungary 109.1 111.3 103.7 54.2 52.5 52.0 35.5 36.5 34.8 Euro area4 333.3 334.6 338.6 116.6 119.1 120.5 79.9 84.8 85.4

1 Loans and advances from the banking sector for the non-financial sector in domestic and foreign currency. 2 Deposits to the banking sector from the non-financial sector in domestic and foreign currency. 3 The data also include loans to non-banking financial institutions and deposits of those entities. 4 Assets, loans and deposits of the credit institutions sector. The data for the euro area refer to 15 countries in 2008 and 16 countries in 2009 and 2010. The data are not fully comparable with the data published in earlier versions of the document due to the change of the source and scope of data. Source: For the euro area: ECB Statistical Data Warehouse; for other countries – data provided by national central banks and GUS.

Table 1.1.6 Selected figures related to the stock market in selected Central and Eastern European countries and in the euro area, 2008−20101

Stock market capitalisation2 Stock market capitalisation to GDP (%) Country (EUR billion) 2008 2009 2010 2008 2009 2010 Poland 64.4 103.1 138.3 21.1 31.5 38.7 Czech Republic 29.6 31.3 31.9 20.0 22.8 22.0 Hungary 13.3 20.9 20.6 12.6 22.5 21.0 Euro area3 3,696.1 4,794.7 4,998.6 40.2 53.6 54.5 Number of listed companies Liquidity ratio4 (%) (including new companies)5 2008 2009 2010 2008 2009 2010 Poland 61.8 41.7 43.1 458 (94) 486 (39) 585 (120) Czech Republic 84.8 42.4 33.3 29 (2) 25 (0) 27 (2) Hungary 157.2 89.5 96.8 43 (4) 46 (4) 52 (6) Euro area3 244.9 102.7 116.0 6,800 6,955 6,809

1 All the values given here also include alternative trading systems, if such platforms were run by the operator of a given stock exchange. It applies to the following markets: Austria (Dritter Markt), Cyprus (Emerging Companies Cyprus), Greece (Alternative Market), Spain (MAB Expansión) Ireland (ESM), Luxembourg (Euro MTF), NySE Euronext (Alternext), Poland (NewConnect), Slovakia (Bratislava Stock Exchange). 2 In the case of Poland, capitalisation applies to domestic companies, and in the case of other countries – to domestic companies and those foreign companies which are listed exclusively on a given market. 3 Indices calculated for the euro area for 2008 include the following stock exchanges: Athens Exchange, Borsa Italiana, Deutsche Börse, NySE Euronext (the European part), Irish Stock Exchange, Ljubljana Stock Exchange, Luxembourg Stock Exchange, NASDAQ OMX Helsinki, Spanish Exchanges (BME), Wiener Börse, Cyprus Stock Exchange and Malta Stock Exchange. Indices calculated for the euro area for 2009 and 2010 also comprise the Bratislava Stock Exchange. In the case of the number of listed companies, the number of new companies was not identified separately. 4 The ratio of net turnover value to stock market capitalisation (domestic companies). 5 Includes domestic and foreign companies. Source: For Poland – data provided by the WSE and GUS, for other countries – FESE and Eurostat, for Finland – NASDAQ OMX Helsinki, for Italy – Borsa Italiana data.

The capitalisation of stock markets in Central and Eastern European countries was lower than the capitalisation of the majority of corresponding markets in the euro area.6 However, the Polish stock market remained the largest market of the region in 2010 (both in terms of capitalisation and

6 At the end of 2010, capitalisation of stock exchanges (domestic companies) in Warsaw, Prague and Budapest was higher than the capitalisation of stock exchanges in Bratislava, Ljubljana, Nicosia and Valletta. The capitalisation of the Warsaw stock exchange (domestic companies) was also higher than that of the stock exchanges in Dublin, Athens, Luxembourg and Vienna.

12 National Bank of Poland Financial system in Poland

the number of listed companies). The capitalisation of domestic companies7 increased by 29.3% in 2010, compared to a 57.6% increase in 2009 and a 47.4% drop in 2008.8 The capitalisation to GDP ratio increased by 7.2 percentage points. Thirty four new domestic and foreign companies conducted IPOs in the regulated market (compared to 13 in the previous year), and 86 IPOs on the non-regulated NewConnect market (26 in 2009). The value of new issues of those companies9 amounted to PLN 1.5 billion (as compared to PLN 7.1 billion in the previous year). The trends on the developed stock markets were conducive to increases in stock prices on the WSE. In 2010, the WIG broad market index grew by 18.8% as compared to a 46.9% increase in 2009 and a 51.1% fall 1 in 2008. The liquidity of the Polish stock market was still low. Basic indices describing the development level of stock markets in the countries in question are presented in Table 1.1.6.

In 2010, the money bills market became the largest segment of the short-term debt securities market. The significant increase of value of these instruments resulted from the growing excess liquidity in the domestic banking sector. At the same time, the strategy of extending maturity dates of public debt, consistently pursued by the Ministry of Finance, resulted in a significant reduction of the scale of issue of Treasury bills and in an increase in the outstanding value of Treasury bonds (Table 1.1.7).

The Treasury bond market remained the dominant segment of the debt securities market in 2010. The high rate of return on government bonds in relation to credit risk in Poland, as compared to some euro area countries, contributed to the continued growth of foreign investors’ exposure in this market. The turnover in the Treasury bonds secondary market remained at a historically high level. Other capital market segments, particularly municipal bond and corporate bond market, grew faster than in previous years.

Table 1.1.7. Outstanding value of individual instruments of money and capital markets as of year-end, 2007−2010 (PLN billion)

2007 2008 2009 2010 Treasury bills 22.6 50.4 47.5 28.0 NBP bills 7.8 10.2 41.0 74.6 Short-term bank debt securities 2.9 2.1 3.0 2.6 Short-term corporate bonds 10.6 11.6 6.2 11.7 Marketable Treasury bonds 350.9 360.8 405.4 471.3 BGK bonds for the National Road Fund (KFD) – – 7.9 13.9 Long-term corporate bonds 15.8 16.0 15.5 19.9 Municipal bonds 4.1 4.5 6.9 10.9 Long-term bank debt securities1 6.1 6.6 5.5 5.2 Mortgage bonds 2.4 2.9 3.0 2.5 NBP bonds 7.8 7.8 0.0 0.0

1 The data include only bonds and bank securities, denominated in PLN and in foreign currency, issued by banks operating in Poland. European Investment Bank bonds and bonds issued by EU credit institutions have been also traded in the domestic market. Note: Due to the adjustments made, the data may differ from the data presented in previous versions of the document. Source: NBP.

In the analysed period, the domestic money market saw a decrease in counterparty credit risk aversion reflected e.g. in the margin decrease in the unsecured interbank deposit market. As compared to 2009, the activity of banks in the unsecured interbank deposit market was slightly lower, whereas the liquidity of the FX swap market and conditional transactions market increased considerably. In such conditions, domestic banks systematically decreased the use of instruments

7 Capitalisation includes companies listed on the main WSE market and on the NewConnect market. 8 For capitalisation calculated in PLN. 9 The value of new issues pertains to domestic and foreign companies which conducted IPOs in the main WSE market and on the NewConnect market.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 13 Financial system in Poland

introduced by the NBP under the Confidence Package. This led the central bank to gradually withdraw from conducting these operations.

Turnover increase was also observed in the spot transactions and FX forward transactions market, as well as in the OTC interest rate derivatives market (Table 1.1.8). However, as in previous years, the majority of PLN exchange transactions and OTC foreign exchange derivatives operations were concluded in the offshore market (with no resident participation). As in previous years, the 1 activity of investors in the exchange-traded derivatives market was concentrated in the segment of WIG20 index futures.

Table 1.1.8. Average daily net turnover on the domestic financial market, 2007−2010 (PLN million)

2007 2008 2009 2010 Shares 948.3 658.1 679.8 924.6 Treasury bonds 20,820.6 17,155.1 13,827.8 23,923.6 Treasury bills 402.3 1,244.5 2,454.7 2,110.3 Interbank deposits 11,483.8 10,263.5 7,259.9 7,025.4 FX swap transactions 12,447.7 10,709.2 9,385.6 10,855.2 Spot FX market 4,040.2 4,236.4 3,906.6 4,280.0 Forwards 1,633.4 1,493.6 1,222.4 1,318.1 CIRS transactions 73.4 117.1 156.3 154.4 Currency options 1,225.2 1,833.0 579.5 341.7 FRA 6,047.5 7,625.9 2,399.4 3,504.9 IRS 1,795.7 1,827.0 682.5 1,353.0 OIS 2,376.1 1,912.5 868.2 963.7 WIG20 futures contracts 1,343.3 1,198.7 995.1 1,319.6

Notes: 1. Average daily net turnover means the value of the transaction (transactions calculated individually). In the case of fx swap market transactions, turnover value was calculated for only one currency of the transaction. 2. For Treasury bills and bonds, the value of conditional transactions (repo and sell-buy-back) was calculated according to the initial exchange value. For fx swap transactions, the net transaction value was calculated according to the initial exchange value. 3. For the following markets: fx swap, foreign exchange, forward transactions, FX options and interest rate derivatives, the values represent the value of exchange transaction involving PLN or PLN-denominated instruments. The influence of Money Market Dealers population changes was eliminated. 4. The turnover in stocks includes the value of session and package transactions. 5. The turnover in WIG20 futures contracts was calculated according to settlement values, taking into account session and package transactions. 6. The turnover in the foreign exchange market includes only domestic transactions. It does not include offshore market transactions. 7. Turnover in the interest rate derivatives markets refers to domestic money market rates instruments. Source: NBP study based on data provided by the WSE, the Ministry of Finance and the NBP.

1 .2 . Households and enterprises on the financial market in Poland

The financial system facilitates flow of capital between entities with surpluses and entities which indicate their need of funds. The circulation of funds in the financial system may take place via banks or via the financial market, where businesses issue equities (stocks or bonds). Investors, including households, may acquire equities either directly in the financial market or via financial institutions (e.g. investment funds, pension funds).

1.2.1. Financial assets of households

The amount of household savings and the willingness to make savings are related to the economic situation of society. The decisions of households concerning financial investments are influenced, inter alia, by the level of interest rates, trends in the capital market, knowledge about

14 National Bank of Poland Financial system in Poland

the financial market and familiarity with products offered by financial institutions and financial intermediaries.

Public sentiment surveys conducted in the Polish market10 indicate that at the end of 2010 only 29.6% of respondents said they made savings, and 16.3% claimed they have the ability to make savings within a year (the ratio similar to the one observed in the previous year). The surveys also demonstrate the cyclic nature of public expectations concerning the generation of own financial resources and making savings. These expectations are influenced, inter alia, by changes 1 in disposable income of households (Figure 1.2.1).

In 2010, the value of households’ financial assets11 increased by 13.1% as compared to 2009 and amounted to PLN 966.1 billion at the end of December 2010. The value of assets to GDP stood at 68.3%, which represents an increase by 4.7 p.p. as compared to the previous period (Figure 1.2.2). The growth of the assets was influenced mainly by changes in the value of bank deposits and funds accumulated in open pension funds. The value of investment fund units also increased considerably. The last two of the mentioned categories of financial assets of households saw the highest upward trend.

Figure 1.2.1. Public sentiment survey on savings, and dynamics of disposable income, 2003−2010

% of positive responses dynamics 35 120

30 115

25 110

20 105

15 100

10 95 III III IV III III IV III III IV III III IV III III IV III III IV III III IV III III IV 2003 2004 2005 2006 2007 2008 2009 2010

Do you think that you will manage to save some money in the coming 12 months? – left-hand scale Do you have any savings now? – left-hand scale Growth rate of quarterly real disposable income of households (y/y) – right-hand scale Note: Quarterly values are the arithmetic means of monthly data. Quarterly amounts of disposable income were deflated by the quarterly CPI. Quarterly dynamics is calculated with reference to the same quarter of the previous year. Source: The calculations based on data provided by Ipsos and GUS.

Bank deposits remained the main item of households’ financial assets (Figure 1.2.3). At the end of 2010, the value of deposits rose up to PLN 425.9 billion, as compared to PLN 387.6 billion at the end of 2009. Compared the previous period, the growth rate of household deposits decelerated. The slowdown was mainly driven by the lower attractiveness of this category of capital investment resulting from the decrease in their interest rates and a related relocation of funds by households, mainly to investment funds. In 2010, banks limited their price competition for household deposits, which had intensified since 2008.

10 Public mood surveys conducted by Ipsos. 11 The financial assets of households herein include the following items: deposits at banks and credit unions, investment fund units (equal to amounts of net assets of investment funds except for the assets of funds which are known to be addressed to corporate entities only), unit-linked assets and life insurance savings premiums, funds on accounts in open pension funds, Treasury securities, stocks quoted on the WSE, cash in circulation excluding vault cash and non-Treasury debt securities.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 15 Financial system in Poland

Figure 1.2.2. Financial assets of households, 2003−2010

PLN billion % 1,000 70 900 63 800 68.3 56 60.0 62.8 63.6 700 57.9 49 51.8 600 47.5 47.0 42 1 500 744.9 35 400 675.8 28 598.9 599.8 300 507.4 21 423.1 200 355.5 372.1 14 100 178.6 221.3 7 44.8 62.6 86.1 116.6 140.0 138.3 0 0 2003 2004 2005 2006 2007 2008 2009 2010

Financial assets of households (without deposits on accounts at open pension funds) – left-hand scale Deposits on accounts at open pension funds – left-hand scale Ratio of ﬁnancial assets of households to GDP – right-hand scale

Note: Due to the change of sources, data for 2007–2009 may differ from the data presented in previous versions of the document Source: NBP estimates based on data provided by GUS, KSKOK, Office of the Polish Financial Supervision Authority, Analizy Online, NBP.

Figure 1.2.3. Structure of household financial assets, 2003−2010, as at period-ends

PLN billion 1,000 900 800 700 600 500 400 300 200 100 0 2003 2004 2005 2006 2007 2008 2009 2010

Bank deposits Deposits at credit unions Units of investment funds Unit-linked assets and life insurance saving premiums Funds in accounts at open pension funds Treasury securities Stocks quoted on the WSE Cash in circulation (excluding bank vault cash) Non-Treasury securities

Note: Due to the change of sources, data for 2007–2009 may differ from the data presented in previous versions of the document. Source: NBP estimates based on data provided by GUS, KSKOK, Office of the Polish Financial Supervision Authority, Analizy Online, NBP.

Funds deposited in accounts at open pension funds remained the second important item of household financial assets. However, they are of different nature than other types of capital investment: they are mandatory, which determines a constant inflow of funds. Moreover, it is not possible to pay out capital gathered in open pension funds before the retirement date. At the end of 2010, the value of those funds amounted to PLN 221.3 billion (with a 22.9% share in financial assets of households), a PLN 42.7 billion increase since the end of 2009. This asset category grew on the back of the inflow of premiums transferred by the Social Insurance Institution (ZUS) (adjusted by applicable fees) and the valuation of investment portfolios of pension funds.

Similar to the previous years, the third item among household assets – in terms of the value – was cash in circulation (excluding bank vault cash). As at the end of 2009, it amounted to PLN 92.7 billion, a slight increase compared to the end of 2009.

16 National Bank of Poland Financial system in Poland

Figure 1.2.1. Structure and changes (y/y) in selected items of household financial assets, 2007−2010, as at period-ends

2007 2008 2009 2010 Share in total assets of households (%) Bank deposits 36.2 45.6 45.4 44.1 Funds in accounts at open pension funds 18.9 18.7 20.9 22.9 Units of investment funds 14.8 6.9 7.3 7.8 1 Unit-linked assets and life insurance saving premiums 8.5 9.2 8.0 7.7 Stocks quoted on the WSE 8.3 3.8 4.9 5.3 Treasury securities 1.4 1.8 1.5 1.0 Non-treasury securities 0.5 0.4 0.3 0.2 Deposits at credit unions 0.9 1.2 1.3 1.3 Cash in circulation (excluding vault cash) 10.4 12.3 10.5 9.6 Increase in household assets (y/y, %) Total financial assets 18.9 -0.1 15.8 13.1 Bank deposits 12.7 26.0 15.1 9.9 Funds on accounts at open pension funds 20.1 -1.2 29.1 23.9 Unit s of investment funds 34.0 -53.3 22.5 20.8 Unit-linked assets and life insurance saving premiums 18.9 7.5 0.2 9.1 Stocks quoted on the WSE 33.7 -54.1 48.1 22.6 Treasury securities -16.8 26.3 -7.2 -19.5 Non-treasury securities 29.6 -8.6 -9.4 -17.2 Deposits at credit unions 20.7 28.3 26.0 20.2 Cash in circulation (excluding. bank vault cash) 12.2 17.7 -1.1 3.3

Units of investment funds were another item among household assets in 2010. As at the end of the year, the value of units held by households (excluding units acquired by insurance companies in connection with the conclusion by natural persons of life insurance agreements with an insurance capital fund) amounted to PLN 75.5 billion, a significant increase compared to the value at the end of 2009 (up 20.8%). The rise in value of this portion of household assets was mainly due to much larger inflows than redemptions of units (Figure 1.2.4) and to the first (in two years) increase of the number of these financial instruments purchasers. Throughout the year, the investment funds attracted net PLN 12.3 billion (as compared to PLN 3.4 billion in the previous year), mostly from households. Households were purchasing mainly participation units of funds which pursued a safe investment policy, i.e. money market funds and bond funds. Households were encouraged by the relatively high rates of return the funds earned in 2009, and by decreases in interest rates on term deposits introduced by banks in 2010.

Also, the value of household investments in life insurance products with unit-linked funds rose considerably in 2010; from PLN 68.0 billion at the end of 2009 to PLN 74.1 billion at the end of 2010. Due to improved situation in the domestic capital market, household exposure in the stock market of companies listed on the WSE increased from PLN 41.7 billion at the end of 2009 to PLN 51.1 billion at the end of 2010.12 The increase resulted mainly from the growing prices of stock held by households.

12 The direct exposure of households in the domestic stock market is significantly smaller than indirect exposure. Based on available data, it might be estimated that approximately PLN 110 billion worth of household savings were invested on the WSE via open pension funds, investment funds, and unit-linked assets.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 17 Financial system in Poland

Figure 1.2.4. Net inflow of funds to investment funds and the change in the value of household bank deposits in PLN, 2007−2010

PLN billion 20 15 10 5 1 0 -5 -10 -15 I III V VII IX XI I III V VII IX XI I III V VII IX XI I III V VII IX XI 2007 2008 2009 2010

Inﬂow of funds to investment funds Change in the value of households’ deposits (banking sector) Source: NBP calculations based on data provided by Analizy Online and NBP.

In 2010, the value of Treasury bonds in the portfolio of households fell from PLN 12.5 billion to PLN 10.1 billion. Household investments in non-Treasury debt securities were of marginal importance.

Deposits in credit unions rose from PLN 10.8 billion as at the end of 2009 to PLN 13.0 billion as at the end of 2010, and they remained of minor importance in the structure of the financial assets of households. The high growth rate of deposits (over 20%) resulted from the attractive product offer of the unions.

1.2.2. External sources of financing of Polish enterprises

In 2010, the revenues of domestic enterprises increased, and their liquidity position improved. It was partially related to the more favourable economic situation of Poland’s main trading partners, which facilitated export growth. The improvement observed by exporters was also positively influenced by the high exchange rates of EUR and USD to PLN.13 Revenues from total corporate activity grew faster (by 5% in nominal terms) than operating costs (by 4.6%), which had a positive impact on their net financial profit.14

In 2010, in spite of the growing utilisation of production capacity, the value of gross fixed capital investment was by 1.2% lower than in the previous year. After the deep fall in 2010 Q1, corporate investment activity started to recover in the subsequent quarters, supported by an improved corporate assessment of economic outlook in Poland (mainly in the second half of the year). Furthermore, some enterprises decided to continue investments launched in previous years. Growing fixed investments were partially financed by external sources, fuelled by the improving availability of loans, a continuation of the upward trend of stock prices on the WSE since 2009 Q1, and high demand for equity on the domestic capital market.

Compared to 2009, businesses considerably reduced the use of long-term bank loans for funding their activity. As at the end of 2010, corporate debt due to investment loans and real estate loans amounted to PLN 107.9 billion and was by 1.1 billion lower than in the previous year. It was due to the fact that some businesses with financial surpluses decided to repay early their bank debts. At the same time, however, in 2010 the value of all new bank loans for enterprises was PLN 103.6 billion, more by PLN 16.2 billion than in 2009. Increased corporate demand for loans mainly resulted from financing needs for inventories and working capital. Moreover, some

13 Information on the condition of the enterprise sector, including the economic climate in 2010 Q4 and forecasts for 2011 Q1, Warsaw, NBP, p. 16. 14 Financial results of non-financial enterprises in 2010, Warsaw 2011, Central Statistical Office.

18 National Bank of Poland Financial system in Poland

businesses indicated the need for bank loans to restructure their debt.15 NBP survey data show that less than 20% of businesses which applied for loans in 2010 intended to use the obtained funds for investments.16

Leasing was an important non-banking external source of financing (Figure 1.2.5). The value of assets leased in 2010 was PLN 27.3 billion, an increase of PLN 4.3 billion on the previous year. Due to the continued drop in corporate investments, the growth in the value of new leasing contracts may be generally explained by the increased demand for passenger vehicles with type 1 approval for goods vehicles. That in turn was related to the announced entry in force in early 2011 of implementation of less favourable regulations concerning VAT deductions from the purchase of such vehicles. Financing of tangible fixed assets by means of leasing is of significant importance in the SME sector, where many business entities with short credit history face difficulties in accessing alternative external financing sources, such as loans or issuing debt securities. In the case of such entities, increased demand for leasing could also have been caused by its greater availability as compared to e.g. bank loans (in 2010, banks tightened their lending policy towards SME).

Figure 1.2.5. Selected external sources of financing of Polish enterprises, 2007−2010

PLN billion 35 32.6 33.1 30 27.3 25 23.0 20 14.6 15 13.8

10 8.0 7.6 7.8 5.6 5 2.8 2.4 0.7 1.4 0 2007 2008 2009 2010

Long-term bond issues on the domestic market Long-term bond issues on foreign markets Stock issues on the WSE Leasing Source: NBP study based on data from the National Depository for Securities, Fitch Polska and NBP.

In 2010, the value of issues of new shares, traded in the WSE markets was PLN 5.6 billion (PLN 9.0 billion less than in the previous year). Such a considerable drop in the value of issues of these instruments resulted mainly from the base effect. In 2009, the value of shares issued by two companies exceeded PLN 5 billion, which had a significant impact on the funds raised by entities in the organised market. Altogether, 112 companies conducted IPOs in 2010 in the main WSE market and in the alternative trading system NewConnect; over 2/3 of them traded their stock in the alternative trading system. Even small entities and companies with short business record could raise capital on NewConnect due to relatively low issue costs, lower information requirements and fees charged on the issuer for quotations of its shares as compared to the main WSE market.17

In 2010 companies raised PLN 7.8 billion by issuing long-term bonds in the domestic financial market (an increase of PLN 5.5 billion compared to 2009). The demand for the bonds by, inter alia, investment funds and pension funds facilitated placing the bonds in the market. Institutional investors were mainly interested in bonds issued by large companies with sound financial position. The acquisition of corporate bonds allowed them to earn higher rates of return than return on investments in Treasury bonds. Furthermore, the access to financing through issuing bonds was facilitated by introducing in 2009 Catalyst – the platform for trading debt instruments. Investors who purchased bonds on the Catalyst platform accepted lower margins due to lower liquidity risk

15 For more information, see Senior loan officer opinion survey on bank lending practices and credit conditions 2nd quarter 2010 and subsequent editions, NBP, Warsaw 2010 and 2011. 16 Information on the condition of the enterprise sector, including the economic climate in 2010 Q4 and forecasts for 2011 Q1 (and earlier editions), Warsaw, NBP, p. 38. 17 For more information on the NewConnect market, see Chapter 5.2.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 19 Financial system in Poland

of those bonds as compared to bonds traded in the OTC market. The value of corporate bonds issued in 2010 and traded on Catalyst was PLN 2.3 billion.

Low interest rates on foreign financial markets encouraged some businesses to raise funds by issuing long-term bonds outside Poland. In 2010, Polish companies conducted several such issues in foreign markets, with a total value of PLN 1.4 billion. The bonds were often purchased by entities that belonged to the issuer’s capital group. However, bond issues in foreign markets still 1 had a small share in the financing structure of domestic companies.

20 National Bank of Poland Regulations of the financial system

2 Regulations of the financial system

The development of the financial system depends not only on economic conditions, but also on regulations concerning financial institutions and markets. Along with the most important amendments introduced to those regulations into Polish law in 2010, this chapter also presents changes in European law. Measures taken in the European Union, aimed at creating a single 2 European financial market and ensuring its stable functioning, set the course for future changes in regulations regarding the financial system in Poland. The EU Member States are obliged to ensure compliance of national regulations with the requirements of EU law. Therefore, a number of amendments to binding Polish law arise from the entry into force of regulations of the Council and the European Parliament or the European Commission, or from the implementation of EU directives.

2 .1 . Changes in financial system regulations in Poland

The most significant amendments introduced into national legislation in 2010 that had an impact on the sector of financial services as a whole include:

– adoption of the Act on the Recapitalisation of Certain Financial Institutions;1

– adoption of the Act on Granting Access to Business Information and the Exchange of Economic Data;2

– adoption of the Act amending the Banking Law Act, the Act on Insurance Activity, the Act on Investment Funds, the Act on Trading in Financial Instruments and the Act on Financial Market Supervision;3

– amendment to the Act on State Treasury Support to Financial Institutions;4

– adoption of the Regulation of the Minister of Finance regarding fees payable to the Polish Financial Supervision Authority by supervised entities operating in the capital market.5

The following amendments to banking sector legislation were of greatest relevance:

– two amendments to the Act on the Bank Guarantee Fund;6

– amendment to the Public Finance Act7 (applying to the banking sector);

1 Act of 12 February 2010 on the Recapitalisation of Certain Financial Institutions (Dz.U. of 2010, No 40, item 226). The provisions of this act came into force on 16 March 2010. 2 Act of 9 April 2010 on Granting Access to Business Information and the Exchange of Economic Data (Dz.U. of 2010, No 81, item 530). The provisions of this act came into force on 14 June 2010. 3 Act of 25 June 2010 amending the Banking Law Act, the Act on Insurance Activity Act, the Act on Investment Funds, the Act on Trading in Financial Instruments and the Act on Financial Market Supervision (Dz.U. of 2010, No 126, item 853). The provisions of this act came into force on 14 August 2010. 4 Act of 19 November 2009 amending the Act on State Treasury Support to Financial Institutions (Dz.U. of 2010, No 3, item 12). The provisions of this act came into force on 13 January 2010. 5 Regulation of the Minister of Finance of 16 March 2010 regarding fees payable to the Polish Financial Supervision Authority by supervised entities operating in the capital market (Dz.U. of 2010, No 57, item 364). The provisions of this regulation came into force on 24 April 2010. 6 Act of 10 June 2010 amending the Act on the Bank Guarantee Fund (Dz.U. of 2010, No 140, item 943) and Act of 16 December 2010 amending the Act on the Bank Guarantee Fund and certain other Acts (Dz.U. of 2010, No 257, item 1724). The relevant provisions came into force on 1 October 2010 and on 30 December 2010. 7 Act of 16 December 2010 amending the Public Finance Act and certain other Acts (Dz.U. of 2010, No 257, item 1726). This act will come into force on 1 May 2011.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 21 Regulations of the financial system

– adoption of the Regulation of the Minister of Finance on special accounting principles of banks;8

– amendment to the Regulation of the Minister of Finance on the rules for creating provisions for risk related to bank activities;9

– adoption of resolutions and recommendations of the Polish Financial Supervision Authority regarding the banking sector;

– adoption of resolutions of the NBP Management Board concerning operations with the central bank.

In 2010, several significant amendments were introduced into legislation regulating the 2 activities of non-bank financial institutions. The following amendments are particularly noteworthy:

– amendment to the Road Transport Act10 (applying to insurance companies);

– amendment to the Act on Investment Funds;11

– amendment to the Act on Legal Persons’ Income Tax12 (applying to collective investment schemes).

In 2010, legislation concerning the capital market was also amended. The following legal acts were adopted:

– amendment to the Act on Public Offering, Conditions Governing the Introduction of Financial Instruments to Organised Trading, and on Public Companies;13

– Regulation of the Minister of Finance regarding the scope, mode and form as well as dates of providing information by investment firms, banks referred to in Article 70 (2) of the Act on Trading in Financial Instruments, and custodian banks;14

– Regulation of the Minister of Finance regarding detailed conditions of the market of official stock exchange listing and issuers of securities admitted to trading in that market;15

– implementing regulations to the Public Finance Act16 (applying to the Treasury bond market).

8 Regulation of the Minister of Finance of 1 October 2010 on special accounting principles of banks. It came into force on 30 October 2010 and applies to the financial statements drawn up for the financial year starting in 2010. 9 Regulation of the Minister of Finance of 30 August 2010 amending the Regulation on the rules for creating provisions for risk related to bank activities (Dz.U. of 2010, No 164, item 1111). The provisions of this regulation came into force on 22 September 2010. 10 Act of 12 February 2010 amending the Road Transport Act and Certain Other Acts (Dz.U. of 2010, No 43, item 246). This act came into force on 3 April 2010. 11 Act of 9 April 2010 amending the Act on Investment Funds (Dz.U. of 2010, No 106, item 670). The act came into force on 17 July 2010. 12 Act of 25 November 2010 amending the Act on Natural Persons’ Income Tax, the Act on Legal Persons’ Income Tax and the Act on Lump-sum Income Tax on Certain Revenue Derived by Natural Persons (Dz.U. of 2010, No 226, item 1478). This act came into force on 1 January 2011. 13 Act of 22 July 2010 amending the Act on Public Offering, Conditions Governing the Introduction of Financial Instruments to Organised Trading, and on Public Companies (Dz.U. of 2010, No 167, item 1129). This act came into force on 25 September 2010. 14 Regulation of the Minister of Finance of 5 February 2010 regarding the scope, mode and form as well as dates of providing information by investment companies, banks referred to in Article 70.2 of the Act on trading in financial instruments, and custodian banks (Dz.U. of 2010, No 25, item 129). The provisions of this regulation came into force on 4 March 2010 and first apply to information provided for reporting periods in 2010 whose disclosure date occurs after the date of the Regulation coming into force. 15 Regulation of the Minister of Finance of 12 May 2010 regarding detailed conditions of the market of official stock exchange listing and issuers of securities admitted to trading in that market (Dz.U. of 2010, No 84, item 547). The provisions of this regulation came into force on 18 May 2010. 16 Public Finance Act of 27 August 2009 (Dz.U. of 2009, No 157, item 1240, as amended).

22 National Bank of Poland Regulations of the financial system

2.1.1. Regulations affecting the entire financial services sector

Act on the Recapitalisation of Certain Financial Institutions

The adoption of the Act on the Recapitalisation of Certain Financial Institutions was aimed at creating a legal basis for the State Treasury to recapitalise financial institutions which are at risk of losing liquidity or becoming insolvent. The Act introduced two methods of recapitalisation of financial institutions:

– the State Treasury granting guarantees of increasing the capital of financial institutions,

– the right of the State Treasury to perform a compulsory acquisition of a financial institution. The new provisions allow domestic banks and insurance companies to obtain State Treasury 2 guarantees when increasing their own capital under recovery proceedings. As a result, such financial institutions will be able to increase their share capital through the issue of shares, bonds or bank securities (in the case of banks) without the risk that such securities are not taken up by new investors or existing shareholders. A guarantee of the State Treasury may be obtained only on condition that the recovery programme is accepted by the Polish Financial Supervision Authority (PFSA). In accordance with the provisions of the Act, the guarantee will be granted by the Minister of Finance at the request of a financial institution in the form of an agreement, after having consulted the PFSA and the President of the NBP and, in the case of banks, also of the Bank Guarantee Fund (BGF).

The second recapitalisation method involves the State Treasury acquiring a financial institution by means of a compulsory buyout of shares from its existing shareholders. Such a compulsory acquisition will be possible in the case where a financial institution is at risk of losing its solvency or in the case of the financial institution’s serious infringement of the terms and conditions of the State Treasury guarantee agreement referred to in the previous paragraph. Only if statutory conditions specified in Article 14 (1) and Article 9 (2) are met, the Council of Ministers will be able to acquire the financial institution on behalf of the State Treasury by means of an administrative decision. Such a decision will be taken at the request of the Minister of Finance after having consulted the President of the NBP and the Chairperson of the PFSA and, in the case of banks, the BGF.

Amendment to the Act on State Treasury Support to Financial Institutions

The provisions introduced in 2010 extended until 30 December 2010 the possibility of the State Treasury providing support to financial institutions with liquidity difficulties. In the light of previously applicable measures, such support could be provided only until the end of 2009.17 Since the Act came into force (i.e. since 13 March 2009), none of the eligible entities have requested such support.

Act on Granting Access to Business Information and the Exchange of Economic Data

The new Act on Granting Access to Business Information and the Exchange of Economic Data came into force on 14 June 2010. In the opinion of entrepreneurs and economic information bureaus, the previously applicable Act of 14 February 200318 did not perform its intended role. The main problems in the functioning of the business information market in Poland include the limited exchange of information between various entities collecting data on the liabilities of debtors, an insufficiently broad catalogue of entities authorised to provide business information, a closed catalogue of legal titles to provide information on liabilities, and the inability to process archived data.19 Due to the necessity of introducing a large number of amendments to regulations

17 Article 20 (1) by the Act of 12 February 2009 on State Treasury Support to Financial Institutions (Dz.U. of 2009, No 39, item 308). 18 Act of 14 February 2003 on Granting Access to Business Information (Dz.U. of 2003, No 50, item 424). 19 An assessment of the effects of regulating problems on the business information market is attached to the explanatory note to the draft Act on Granting Access to Business Information (Parliament print No 1997, 6th term of office of the Sejm), www.sejm.gov.pl.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 23 Regulations of the financial system

relating to these matters, the Ministry of the Economy took the decision to prepare a new draft Act20 which would streamline the flow of information on unreliable business entities.

The new provisions facilitate the exchange of information between credit information bureaus (BIKs)21 and economic information bureaus. The Act changed Article 105 of the Banking Law Act in that respect. Credit information bureaus may provide bank data to economic information bureaus on condition that they have the authorisation of a bank’s client to provide such information. In line with the new provisions, the mode of providing data will be specified in an agreement concluded by and between an economic information bureau and a credit information bureau. The Act in question introduced an open catalogue of legal titles to provide information to economic information bureaus, which enables banks to provide them with information concerning 2 agreements relating to the performance of banking activities (e.g. carrying out banking monetary settlements, granting and confirming guarantees and sureties), not only with respect to consumer loan agreements.

A significant amendment to the new Act enables banks and credit unions to store reports from economic information bureaus in order to assess the creditworthiness of their clients. According to the previously applicable provisions of the Act of 14 February 2003, banks were not allowed to store reports from economic information bureaus due to the obligation to delete them within 90 days of their receipt.

The adopted Act no longer applies an enumeration of creditors authorised to cooperate with bureaus with respect to the possibility of providing business information on consumers. Thus, entities which were previously excluded, such as local government units and so-called secondary creditors (such as factoring firms and securitisation funds) were given the opportunity to provide information on their debtors to economic information bureaus.

Other changes effected by the new Act applied to the following:

– clarifying that a debtor may be reported to an economic information bureau only if the amount of the liability exceeds PLN 200 and it has been due for more than 60 days;

– allowing investment funds to provide data concerning their members to economic information bureaus;

– allowing economic information bureaus to process archival data;

– enabling the exchange of information between economic information bureaus and similar institutions operating in EU Member States.

The Act amending the Banking Law Act, the Act on Insurance Activity, the Act on Investment Funds, the Act on Trading in Financial Instruments and the Act on Financial Market Supervision

The changes introduced by this Act were necessitated by the alignment of Polish law with EU requirements.22 The main objective of the new regulations was the unification of supervision principles relating to the acquisition of so-called qualifying holdings in financial institutions (banks, insurance companies, reinsurance companies, brokerage houses, investment fund management companies). In line with the new measures, an investor who intends to directly or

20 The explanatory note to the draft Act on the Disclosure of Economic Information (Parliament print No 1997, 6th term of office of the Sejm), www.sejm.gov.pl. 21 Credit information bureaus are institutions created pursuant to Article 105.4 of the Banking Law Act of 29 August 1997 (consolidated text: Dz.U. of 2002, No 72, item 665, as amended). Pursuant to this paragraph, banks and associations of banks may jointly establish institutions authorised to collect, process and provide other banks with information, in derogation of bank secrecy laws. 22 Directive 2007/44/EC of the European Parliament and of the Council amending Council Directive 92/49/EEC and Directives 2002/83/EC, 2004/39/EC, 2005/68/EC and 2006/48/EC as regards procedural rules and evaluation criteria for the prudential assessment of acquisitions and increase of holdings in the financial sector (EU Official Journal L 247 of 2007, p. 1).

24 National Bank of Poland Regulations of the financial system

indirectly acquire23 shares or rights attached to shares of a financial institution in the number enabling it to hold at least, respectively, 10%, 20%, one third and 50% of the total number of votes at a general meeting of shareholders or of the share capital will be obliged to notify the PFSA. This obligation also applies to investors intending to purchase shares of a parent entity24 of a financial institution in the number enabling it to hold the majority of the total number of shares at a general meeting of shareholders of that entity. Moreover, as part of the consolidation of supervision principles related to the purchase of qualifying holdings in financial institutions, the Banking Law Act now provides the PFSA with the right to object to the acquisition of a qualifying holding in a bank, as opposed to the previously binding requirement to seek permission from the PFSA for such an acquisition. Another important amendment set forth in this Act is the introduction of a closed catalogue 2 of assessment criteria regarding a potential purchaser, on the basis of which the PFSA may object to the acquisition of a qualifying holding in a financial institution. They include:

– a potential purchaser’s guarantee that the exercise of its rights and obligations performed in a manner adequately safeguarding the interests of clients of the financial institution,

– the guarantee that persons responsible for managing the operations of the financial institution with respect to managing the affairs of that institution will take into account the due protection of the interests of its clients,

– a good financial standing, including the impact of the implementation of investment plans on the future financial standing of the potential purchaser,

– ensuring that the financial institution fulfills prudential requirements resulting from provisions of law,

– ensuring that the structure of the group whose part the financial institution will become is expedient for the exercise of efficient supervision and the effective exchange of information between competent financial supervisory authorities,

– the source of funds which are to be used for acquiring shares (verification if the acquisition of shares is not connected with money laundering or financing terrorism).

The Act in question sets forth the maximum period during which the PFSA is obliged to evaluate the potential purchaser of a qualifying holding in the financial institution. In accordance with the new provisions, that period encompasses 60 days, as counted from the day of the receipt of notification as well as all required information and documents. This period may be suspended once for the period of 20 or 30 working days if the PFSA needs to obtain additional information. In order to reduce the risk of uncertainty of the potential purchaser of the financial institution, the implemented measures will enable the PFSA to issue a decision on the lack of grounds for objecting to the transaction. This rule will make it possible to acquire shares in the financial institution before the lapse of the maximum 60-day period.

23 Indirect acquisition of shares in a financial institution shall be understood as legal actions and occurrences which lead to a change of the entity actually deciding on the manner of exercising corporate rights attached to shares of the financial institution but which do not lead to a change of the shareholder. Cf. M. Spyra, Pośrednie nabycie akcji banku. Komentarz praktyczny, ABC nr 70122, Lex 2010. 24 Pursuant to Article 4 subparagraph 14 of the Act of 29 July 2005 on Public Offering, Conditions Governing the Introduction of Financial Instruments to Organised Trading, and on Public Companies (consolidated text: Dz.U. of 2009, No 185, item 1439, as amended), an entity is a parent entity if: – it holds, directly or indirectly through other entities, a majority of votes in the governing bodies of another entity, including under an agreement with other parties; or – it is entitled to appoint or remove from office the majority of members of the management or supervisory bodies of another entity; or – where more than half of the members of the management board of another entity are at the same time members of the management board, commercial proxies or executive officers of the given entity or another subsidiary thereto.

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Regulation of the Minister of Finance regarding fees payable to the Polish Financial Supervision Authority by supervised entities operating on the capital market

A new Regulation setting forth detailed principles for calculating and paying fees payable by entities supervised by the PFSA and operating in the capital market came into force on 24 April 2010. The adoption of the new legal act was connected with amendments to Acts regulating the functioning of the capital market coming into force in 2009.25 These amendments introduced new types of fees (e.g. fee for a PFSA permit to operate a settlement or clearing house) and abolished certain types of fees (e.g. fee for approval by the National Depository for Securities (KDPW)) to entrust the performance of certain activities to another entity).

2 2.1.2. Regulations regarding the banking services sector Two amendments to the Act on the Bank Guarantee Fund

Two amendments to the Act on the Bank Guarantee Fund were adopted in 2010. The first amendment of 10 June 2010 amended the principles for remunerating members of the Fund’s Council. In accordance with the new regulations, remuneration for participation in a meeting of the BGF Council was replaced with a monthly remuneration consisting of a fixed part and a variable part. These measures made the amount of the variable part conditional on the presence of the member of the Council at its meetings and on the frequency of the meetings in a given month.

The second amendment to the Act on the Bank Guarantee Fund, dated 16 December 2010, was of much greater relevance to the domestic financial market. It was aimed at fully adapting Polish law to the provisions of European law.26 The most significant changes consisted in:

– raising deposit guarantees from the PLN equivalent of EUR 50,000 to the PLN equivalent of EUR 100,000,

– shortening the period for paying out guaranteed funds to 20 working days,

– obliging banks to draw up and maintain an up-to-date list of depositors,

– shortening the period within which the PFSA is obliged to take a decision on the suspension of a bank’s operations if for reasons directly related to the bank’s financial standing the bank fails to fulfil its commitments with respect to paying out guaranteed funds.

The above mentioned amendment to the Act also changed the principles according to which the NBP may extend a loan to the BGF. The provisions of Article 16a (6) of the Act specify that such a loan will be possible if the BGF exhausts the assets held in its dedicated funds, allocated to the payout of guaranteed deposits and if the stability of the domestic financial system is at risk. Similarly as in the case of the previously applicable regulations, such a loan may be provided to the BGF on condition that appropriate collateral for the NBP is established.

Amendment to the Public Finance Act

The amendments to the Public Finance Act were aimed at decreasing the level of public debt and the costs of debt repayment by using the financial assets of entities of the public finance sector in managing the liquidity of the State budget. As a result, the Act includes an obligation of depositing free financial resources of certain entities of the public finance sector27 in the form of

25 Act of 4 September 2008 amending the Act on Trading in Financial Instruments and Certain Other Acts (Dz.U. of 2009, No 165, item 1316), Act of 4 September 2008 amending the Act on Public Offering, Conditions Governing the Introduction of Financial Instruments to Organised Trading, and on Public Companies, and amending Certain Other Acts (Dz.U. of 2008, No 231, item 1547) and Act of 4 September 2008 amending the Act on Investment Funds, the Banking Law Act and the Act on Financial Market Supervision (Dz.U. of 2008, No 231, item 1546). 26 Directive 2009/14/EC of the European Parliament and of the Council of 11 March 2009 amending Directive 94/19/EC on deposit-guarantee schemes as regards the coverage level and the payout delay (EU Official Journal L 68 of 2009, p. 3). 27 Pursuant to Article 48 (2) of the Public Finance Act of 27 August 2009 (Dz.U. of 2009, No 157, item 1240, as amended), these include: executive agencies, the National Health Fund, as well as state or local government legal persons established on the basis of separate Acts in order to carry out public tasks, excluding enterprises, research institutes, banks and commercial companies.

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a deposit with the Minister of Finance. These financial resources may be deposited on condition that a given entity opens an account at Bank Gospodarstwa Krajowego (BGK). This solution will contribute to transferring to BGK certain financial resources held by entities of the public finance sector at other domestic banks.

Regulation of the Minister of Finance on special accounting principles of banks

The Regulation of the Minister of Finance on special accounting principles of banks, applicable since 30 October 2010, implements new measures introduced by the Act on Trading in Financial Instruments in 2009. The Act repeals the obligation providing for a financial separation of brokerage activities carried out by a bank, the requirement to establish separate share capital for such activities, to keep separate accounting books and draw up separate financial statements. The provisions of the Regulation were supplemented accordingly with relevant accounting 2 principles, pertaining to:

– presenting operations related to the bank and the brokerage house in the accounting books;

– presenting and valuing financial assets and liabilities of banks, including financial instruments acquired for a bank and on its own account and held in the securities accounts of clients by the brokerage house,

– recording and valuing financial instruments of clients.

Another important amendment to this Regulation is the extension of the scope of additional information relating to significant events from previous years which were presented in the financial statements for a given period (i.a. the type of errors made and the amount of correction).

In order to achieve greater comparability of financial statements of banks, the Regulation introduces principles applied by the International Accounting Standards (IAS).28 A new category “financial assets and liabilities at fair value through profit or loss”, including “financial assets and liabilities held for trading” was introduced. The definition of financial assets and liabilities, as well as their classification were adapted to the requirements of IAS 39. The obligation to disclose information concerning fixed assets held for sale and the requirement of valuation and disclosure in the financial statement of the value of shares held for sale in subsidiaries were also introduced. In addition, the new provisions make it possible to reclassify financial assets from the category of “financial assets and liabilities at fair value through profit or loss” to other categories of assets.29 The measures will first apply to financial statements drawn up for the financial year starting in 2010.

Amendment to the Regulation of the Minister of Finance on the rules for creating provisions for risk related to bank activities

The amendments to this Regulation were primarily aimed at creating conditions encouraging banks to increase their involvement in crediting projects implemented with the use of EU funds. To this end, the catalogue of eligible collateral for exposures which allow for a decrease in base for establishing specific provisions was extended to include reguarantees and resureties of BGK granted within the framework of implementing government programmes30 or sureties of a surety fund. The regulation defines a surety fund as a legal person which does not act in order to achieve profit or

28 Commission Regulation (EC) No 1126/2008 of 3 November 2008 adopting certain international accounting standards in accordance with Regulation (EC) No 1606/2002 of the European Parliament and of the Council (EU Official Journal L 320 of 2008, p. 1). 29 Pursuant to § 32 (2) of the Regulation of the Minister of Finance of 1 October 2010 on special accounting principles of banks (Dz.U. of 2010, No 191, item 1279), the reclassification may be performed only under special circumstances which shall be understood as one-time, extraordinary occurrences which are very unlikely to happen again in the nearest future. 30 Pursuant to Article 34a.1 of the Act of 8 May 1997 on Sureties and Guarantees Granted by the State Treasury and by Certain Legal Persons (consolidated text: Dz.U. of 2003, No 174, item 1689, as amended), such programmes encompass projects implemented with the use of European Union funds, including infrastructural funds and funds connected with development of the sector of small and medium-sized enterprises (including funds implemented with the use of public funds).

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allocates its profit to statutory objectives aimed at creating beneficial conditions for the development of entrepreneurship, whose operations consist in granting guarantees or sureties for liabilities of microentrepreneurs, small or medium-sized companies, as well as public benefit organisations.

Resolutions and recommendations of the Polish Financial Supervision Authority regarding the banking sector

In 2010, the PFSA, acting on the basis of statutory delegations included in the Banking Law, adopted the following legal acts:

– Resolution on the scope and detailed rules for determination of capital requirements for individual types of risk;31 2 – Resolution on other items of a bank’s balance sheet included in Tier 1 capital, their amount, scope and conditions of inclusion in a bank’s Tier 1 capital.32

The functioning of the banking sector in Poland is affected not only by generally applicable legal acts but also by non-binding recommendations of the PFSA. In 2010, the PFSA adopted three recommendations:

– Recommendation T concerning best practices in managing the credit risk related to retail exposures;33

– Recommendation I concerning the management of currency risk at banks and rules of execution of transactions carrying currency risk;34

– amendment to Recommendation A concerning the management of the risk associated with entering into derivatives transactions by banks.35

Resolution of the Polish Financial Supervision Authority on the scope and detailed rules for determination of capital requirements for individual types of risk

The 2010 Resolution of the PFSA on the scope and detailed rules for determination of capital requirements for individual types of risk replaced the previous resolution36 concerning these matters. The measures adopted in the new resolution were a consequence of adapting domestic regulations with the requirements of CRD II37 as well as, inter alia, planned amendments to that

31 Resolution No 76/2010 of the Polish Financial Supervision Authority on the scope and detailed rules for determination of capital requirements for individual types of risk (Official Journal of the PFSA of 2010, No 2, item 11, as amended). The Resolution came into force on 10 March 2010. 32 Resolution No 434/2010 of the Polish Financial Supervision Authority of 20 December 2010 on other items of a bank’s balance sheet included in Tier 1 capital, their amount, scope and conditions of inclusion in a bank’s Tier 1 capital (Official Journal of the PFSA of 2011, No 1, item 1). The Resolution came into force on 31 December 2010. 33 Resolution No 52/2010 of the Polish Financial Supervision Authority of 23 February 2010 on the issue of Recommendation T concerning best practices in managing the credit risk related to retail exposures (Official Journal of the PFSA of 2010, No 2, item 12). 34 Resolution No 53/2010 of the Polish Financial Supervision Authority of 23 February 2010 on the amendment to Recommendation I concerning the management of currency risk at banks and rules of execution of transactions carrying currency risk (Official Journal of the PFSA of 2010, No 2, item 13). 35 Resolution No 134/2010 of the Polish Financial Supervision Authority of 5 May 2010 on the amendment to Recommendation A concerning management of the risk associated with entering into derivatives transactions by banks (Official Journal of the PFSA of 2010, No 3, item 20). 36 Resolution No 380/2008 of the Polish Financial Supervision Authority of 17 December 2008 on the scope and detailed rules for determination of capital requirements for individual types of risk and the detailed principles to be applied in determining those requirements, including but not limited to, the scope and conditions of applying statistical methods and the scope of information attached to applications for authorisation to apply them, principles and conditions of taking account of contracts on debt assignment, subparticipation, credit derivatives and contracts other than those on debt assignment, and subparticipation, in calculating the capital requirements, terms and conditions, scope and manner of making use of the ratings assigned by external credit assessment institutions and the export credit agencies, manner and specific principles for calculation of the capital adequacy ratio of a bank, the scope and manner of taking account of banks conducting their activities in groups in calculating their capital requirements as well as establishing additional items of bank balance sheets included in bank regulatory own funds in the capital adequacy account, the amount thereof and the conditions to be used in calculating them (Official Journal of the PFSA of 2008, No 8, item 34, as amended). 37 Directive 2009/111/EC of the European Parliament and of the Council of 16 September 2009 amending Directives 2006/48/EC, 2006/49/EC and 2007/64/EC as regards banks affiliated to central institutions, certain own funds items, large exposures, supervisory arrangements, and crisis management (EU Official Journal L 320 of 2009, p. 97).

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Directive. For instance, Article 14 includes the planned amendment to Article 152 of Directive 2006/48/EC extending until 31 December 2011 the transition period during which banks applying advanced methods for determining the capital requirements for credit and operational risk (IRB,38 AMA39) are required to maintain regulatory capital at a level no lower than 80% of the comparative total capital requirement calculated in accordance with the principles of the Basel I Accord.

Other changes were only of organisational character. They consisted in specifying the provisions concerning the privileged treatment of exposures to the governments and central banks of countries belonging to the European Economic Area (i.e. a possibility of assigning to those exposures until 31 December 2012 the risk weight of 0% when calculating the capital requirements for credit risk with the use of the standardised approach).

Resolution of the Polish Financial Supervision Authority on other items of a bank’s 2 balance sheet included in Tier 1 capital, their amount, scope and conditions of inclusion in a bank’s Tier 1 capital

This Resolution came into force on 31 December 2009 and repealed the provisions of the Resolution of the PFSA of 14 October 2009.40 The necessity of adopting a new resolution concerning banks’ core funds resulted from the need to adapt Polish law to the provisions of CRD II. This EU legal act limited the scope of financial instruments which may be included in credit institutions’ own funds. As a consequence, pursuant to the new Resolution of the PFSA, from 31 December 2010 banks cannot include financial resources raised from new issues of convertible bonds and long-term bonds in their Tier 1 capital. Article 2 of the Resolution provides that financial resources raised from the issuance of long-term bonds and already recognised as Tier 1 capital pursuant to a decision of the PFSA (given in accordance with the resolution of the PFSA of 14 October 2009) can be included in Tier 1 capital in amounts no higher than:

– 35% of total Tier 1 capital – from 31 December 2010 to 31 December 2020;

– 20% of total Tier 1 capital – from 1 January 2021 to 31 December 2030;

– 10% of total Tier 1 capital – from 1 January 2031 to 31 December 2040.

Amendments to Resolutions of the Polish Financial Supervision Authority related to the banking sector

In 2010, the PFSA also adopted the following legal acts:

– Resolution No 367/2010 of the PFSA of 12 October 2010 amending Resolution No 381/2008 of the PFSA of 17 December 2008;41

– Resolution No 368/2010 of the PFSA of 12 October 2010 amending Resolution No 385/2008 of the PFSA of 17 December 2008.42

38 IRB (Internal Ratings Based (Approach)) – a method of determining credit risk in which banks use their own estimations of the probability that the debtor will not pay back the liability to the bank. 39 AMA (Advanced Measurement Approach) – a method of advanced measurement of operational risk. 40 Resolution No 314/2009 of the Polish Financial Supervision Authority of 14 October 2009 on other items of a bank’s balance sheet included in Tier 1 capital, their amount, scope and conditions of inclusion in a bank’s Tier 1 capital (Official Journal of the PFSA of 2009, No 1, item 8). 41 Resolution No 367/2010 of the Polish Financial Supervision Authority of 12 October 2010 amending Resolution No 381/2008 of the PFSA of 17 December 2008 on other deductions from original own funds, their value, scope and conditions for a deduction of these items from the bank’s original own funds, other bank’s balance sheet items that are included into the bank’s supplementary own funds, their, scope, and conditions of their inclusion in the bank’s supplementary own funds, reductions of supplementary own funds, their value, scope and conditions for a deduction of such items from the banks’ supplementary own funds; and the scope and method of including banks’ activities in holdings when calculating own funds (Official Journal of the PFSA of 2010, No 8, item 36). This Resolution came into force on 31 December 2010. 42 Resolution No 368/2010 Polish Financial Supervision Authority of 12 October 2010 amending Resolution No 385/2008 of the Polish Financial Supervision Authority on detailed principles and methods of publication of qualitative and quantitative information on capital adequacy by banks and the scope of published information (Official Journal of the PFSA of 2010, No 8, item 37). The Resolution came into force on 31 December 2010.

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Resolution No 367/2010 of the PFSA increased the number of items reducing Tier 1 capital, the number of items included in supplementary own funds and provided a precise specification of items included in a bank’s regulatory capital account. These changes were a consequence of adapting domestic regulations to the provisions of CRD II. Resolution No 368/2010 of the PFSA extended the scope of disclosed information on the application of the Value at Risk method in calculating capital requirements and on the use of Advanced Measurement Approaches (AMA) in calculating the capital requirements for operational risk. Moreover, banks which apply the AMA to calculate the capital requirements for operational risk will be obliged to disclose information not only on relevant insurance policies, but also on other risk transfer mechanisms.

Recommendation T introducing best practices in managing credit risk related to 2 exposures to households In response to the rapid growth of lending to retail clients, the PFSA took actions aimed at limiting the excessive indebtedness of households and improving credit risk management at banks. As a result of these actions, Recommendation T was adopted on 23 February 2010. The recommendations contained in the document set forth the principles of analysis of creditworthiness of clients, the relation of collateral to debt for retail loans, including loans indexed to changes in FX rates, and introduce limits of the level of general debt in relation to the borrower’s income. According to the guidelines of the PFSA, the loan repayment burden on income should not exceed the level of 50% of net income in the case of borrowers with income not exceeding the average level in the economy. With respect to other borrowers, this threshold should not exceed 65% of net income.

A significant element of the Recommendation is the instruction that banks also take into consideration debt limits of credit cards and limits of revolving credit facilities, even if they are not fully used, when calculating the client’s creditworthiness. Recommendation T also introduced guidelines for banks concerning the verification of the value of the potential borrower’s income, monitoring of the timeliness of the client’s debt repayment and the use of databases containing information on the borrower’s debt level and the history of repayment of their liabilities.

Recommendation I concerning the management of currency risk at banks and rules of execution of transactions carrying currency risk

This Recommendation replaced the previous Recommendation I issued by the Commission for Banking Supervision in 2002. The recommendations, which entered into force on 1 July 2010, were aimed at streamlining foreign exchange risk management at banks. The PFSA guidelines extended the process of currency risk management by requiring banks to examine the impact of changes in FX rates on the counterparty’s credit risk. In order to enhance the protection of the client’s interests, it is recommended that banks inform the client on potential liabilities towards the bank which may arise as a result of a significant change in the FX rate, and present a simulation of the effect of various changes in the FX rate on the result of the transaction before closing a transaction exposed to currency risk. The Recommendation also prescribes that banks offer clients primarily simple currency derivatives such as forward transactions and options. Moreover, before concluding a transaction, banks should try to identify the character of the client’s activities, its awareness of credit risk and the need to secure against that risk.

Recommendation A on the management of risk related to derivatives transactions executed by banks

The adoption of Recommendation A by the PFSA was aimed at improving the quality of risk management associated with banks concluding derivative transactions or transactions with embedded derivatives, as well as at defining the principles for concluding such transactions by banks. The recommendations, which came into force on 1 August 2010, concern the monitoring and control of risk (in particular, counterparty credit risk), the documentation and exchange of information with clients, as well as the introduction of procedures making it possible to streamline the information flow between the bank’s units responsible for risk management. Recommendation A also specifies that banks should examine whether clients conclude

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transactions involving derivatives for speculative purposes or in order to hedge against risk related to their economic activities. Banks should also monitor whether such risk-hedging transactions involving derivatives lead to heightened risk in situations of adverse market parameters. Moreover, the Recommendation contains instructions according to which banks should conduct simulations of the valuation of the counterparty’s exposures related to currency derivatives, including the hedged position.

Resolutions of the Management Board of the National Bank of Poland concerning operations with the central bank

In 2010, the Management Board of the NBP, acting on the basis of statutory delegations included in Article 17 (4) point 9, Article 44 (2) of the Act on the NBP43 and in Article 109 (1) point 2 of the Banking Law Act, adopted the following legal acts: 2

– a resolution on the types of bills of exchange accepted by the National Bank of Poland for discount and the principles and procedures of discount;44

– a resolution on the introduction of “The Regulations on Bank Refinancing with Lombard Loans and the Intraday Credit Facility by the National Bank of Poland”;45

– a resolution on the criteria for participation by domestic banks, branches of foreign banks and branches of credit institutions in open market operations carried out by the National Bank of Poland.46

Resolution of the Management Board of the NBP on the types of bills of exchange accepted by the National Bank of Poland for discount and the principles and procedures of discount

The resolution came into force on 15 March 2010 and established the legal measures that enable the NBP, in a situation of adverse market conditions, to counteract the reduction of banks’ lending to enterprises. The resolution provides that entities entitled to use the bill discount facility include domestic banks, branches of foreign banks and branches of credit institutions. The bill discount facility may be used on condition of maintaining a current account with the NBP and concluding an agreement with the NBP on granting a bill discount facility. In accordance with the adopted regulations, the NBP may accept for discount promissory notes of enterprises issued by banks with maturity dates not exceeding one year after their issue date, and meeting the general requirements specified in the Act on Bills of Exchange Law.47

Resolution of the Management Board of the NBP on the adoption of “The Regulations on Bank Refinancing with Lombard Loans and the Intraday Credit Facility by the National Bank of Poland”

This resolution combined two separate resolutions of the Management Board of the NBP48 which regulate the refinancing of banks with Lombard loans and the intraday credit facility. The main change consisted in extending the list of securities accepted by the NBP as

43 Act of 29 August 1997 on the National Bank of Poland (consolidated text: Dz.U. of 2005, No 1, item 2, as amended). 44 Resolution No 9/2010 of the Management Board of the National Bank of Poland of 4 March 2010 on the types of bills of exchange accepted by the National Bank of Poland for discount and the principles and procedures of discount (Official Journal of the NBP of 2010, No 3, item 3). The Resolution came into force on 15 March 2010. 45 Resolution No 7/2010 of the Management Board of the National Bank of Poland of 4 March 2010 on the introduction of “The Regulations on Bank Refinancing with Lombard Loans and the Intraday Credit Facility by the National Bank of Poland” (Official Journal of the NBP of 2010, No 4, item 4). The Resolution came into force on 15 April 2010. 46 Resolution No 56/2010 of the Management Board of the National Bank of Poland of 21 October 2010 on the criteria for participation by domestic banks, branches of foreign banks and branches of credit institutions in open market operations carried out by the National Bank of Poland (Official Journal of the NBP of 2010, No 14, item 15). The Resolution came into force on 1 November 2010. 47 Act on Bills of Exchange Act of 28 April 1936 (Dz.U. of 1936, No 37, item 282, as amended). 48 Resolution No 4/2008 of the Management Board of the NBP on the Adoption of “The Regulations On Bank Refinancing with Lombard Loans by the National Bank of Poland” (Official Journal of the NBP of 2008, No 3, item 3, as amended) and Resolution No 5/2008 of the Management Board of the NBP of 1 February 2008 on the introduction of “The Regulations On Bank Refinancing with the Intraday Credit Facility by the National Bank of Poland” (Official Journal of the NBP of 2008, No 3, item 4, as amended).

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 31 Regulations of the financial system

collateral for intraday loans by debt securities of issuers other than the State Treasury and the NBP, registered with the National Depository for Securities. Other changes in the resolution were of a clarifying nature.

Resolution on the criteria for participation by domestic banks, branches of foreign banks and branches of credit institutions in open market operations carried out by the National Bank of Poland

This resolution came into force on 1 November 2010. It specifies the conditions and criteria for banks enabling them to participate in open market operations. The previous rules of participation in such operations were regulated in the Resolution of the Management Board of the NBP of 9 December 200549 which was not published in the Official Journal of the NBP. Pursuant 2 to the new resolution, basic operations will be available to all banks which participate in the SORBNET system and have accounts in the Securities Register maintained at the NBP or are direct participants of the National Depository for Securities.50 Banks which fulfil the function of Monetary Market Dealers in a given calendar year are admitted to fine-tuning operations. In accordance with the resolution of the Management Board in question, in justified cases the NBP may grant its consent to carry out fine-tuning operations with other banks.

2.1.3. Regulations regarding non-bank financial institutions

Insurance companies

The most important change introduced in 2010 in insurance market regulations was the amendment to the Road Transport Act. It required insurance companies to decrease the premium for compulsory third party liability insurance of owners of motor vehicles by no less than 95% in the case of vehicles temporarily withdrawn from use.

Collective investment schemes

Changes introduced in 2010 in the Act on Investment Funds were aimed at extending the range of information media with the use of which an open investment fund can confirm the sale or purchase of participation units by a participant in the fund. The new regulations allow clients of investment funds to receive confirmations also with the use of a non-paper information medium (e.g. by electronic mail). In order to receive confirmations in non-paper form, written consent of the fund participant is required.

Amendment to the Act on Legal Persons’ Income Tax (applying to collective investment schemes)

Another important change introduced in 2010 and relating to collective investment schemes is the amendment to the Act on Legal Persons‘ Income Tax.51 In the light of previously applicable regulations, domestic investment funds and domestic entities offering pension programmes would be exempt from paying the corporate income tax. In accordance with the new regulations, foreign investment funds and foreign entities offering pension programmes are also exempt from this tax with respect to revenues related to collecting savings for the purpose of pensions. The introduction of this measure was prompted by the need of adapting Polish regulations to European law.

49 Resolution No 67/2005 of the Management Board of the National Bank of Poland of 9 December 2005 on the criteria for participation by domestic banks, branches of foreign banks and branches of credit institutions in open market operations carried out by the National Bank of Poland (amended by Resolution No 48/2008). 50 This applies to situations in which the operation concerns securities registered with the National Depository for Securities. 51 The inconsistency of Polish regulations with the provisions of the Treaty establishing the European Community applying to the principle of free movement of capital was pointed out by the European Commission in the so-called letter of formal notice – infringement No 2006/21093. See: justification to the draft Act amending the Act on Natural Persons’ Income Tax, the Act on Legal Persons’ Income Tax and the Act on Lump-sum Income Tax on Certain Revenue Derived by Natural Persons (Parliamentary print No 3500, 6th term of office of the Sejm), www.sejm.gov.pl.

32 National Bank of Poland Regulations of the financial system

2.1.4. Regulations regarding the capital market

Amendment to the Act on Public Offering, Conditions Governing the Introduction of Financial Instruments to Organised Trading, and on Public Companies

This amendment was aimed at the proper implementation into Polish law of the provisions of the Directive of the European Parliament and of the Council on the prospectus to be published when securities are offered to the public or admitted to trading.52 The previous regulations requiring an issuer with its registered office in an EU Member State to translate the prospectus into Polish were inconsistent with European law. Therefore, the Act in question introduces the possibility of selecting the language (Polish or English) in which the prospectus is to be published. 2 Regulation of the Minister of Finance regarding the scope, mode and form as well as dates of providing information by investment firms, banks referred to in Article 70 (2) of the Act on trading in financial instruments, and custodian banks

The regulation in question superseded previous regulations on the subject.53 The main changes in the new legal act relate to banks and investment companies submitting to the PFSA reports concerning transactions concluded on their own account or on the account of a third party with respect to financial instruments admitted to trading in a regulated market. Moreover, the scope of information submitted by brokerage houses to the PFSA was extended to include reports concerning compliance with capital adequacy standards.

Regulation of the Minister of Finance regarding the detailed conditions of the market of official stock exchange listing and issuers of securities admitted to trading in that market

The regulation came into force on 18 May 2010. As compared with the previously applicable regulations,54 the catalogue of securities to which simplified requirements of admission to trading in the market of official listing apply was extended by bonds issued by BGK on behalf of the National Road Fund. Moreover, the newly introduced measures enable the management board of the company managing the market of official listings to transfer securities which ceased to meet conditions for admission to trading in that market to an alternative trading system managed by that company. Such a transfer is contingent upon consent granted by the issuer of such securities.

Implementing regulations to the Public Finance Act (applying to the Treasury bond market)

Five regulations of the Minister of Finance to the Public Finance Act applying to the Treasury bond market were adopted in 2010. As compared with the previously applicable regulations relating to the matter, the most important changes were introduced in the Regulation of the Minister of Finance on the conditions of issuing Treasury bonds entitling to certain non-pecuniary benefits55 and the Regulation of the Minister of Finance on the conditions of issuing Treasury bonds offered in wholesale.56

The first of the Regulations in question enables the issuance in foreign markets of Treasury bonds entitling to acquire shares in companies partially owned by the State Treasury. Therefore,

52 Directive 2003/71/EC of the European Parliament and of the Council of 4 November 2003 on the prospectus to be published when securities are offered to the public or admitted to trading and amending Directive 2001/34/EC (EU Official Journal L 345 of 2003, p. 64). 53 Regulation of the Minister of Finance of 14 April 2006 regarding the scope, mode and form as well as dates of providing information by certain entities pursuing brokerage activities and maintaining securities accounts (Dz.U. of 2006, No 68, item 486). 54 Regulation of the Minister of Finance of 14 October 2005 regarding detailed conditions of the market of official stock exchange listing and issuers of securities admitted to trading in that market (Dz.U. of 2005, No 206, item 1712). 55 Regulation of the Minister of Finance of 28 December 2010 on the conditions of issuing Treasury bonds entitling to certain non-pecuniary benefits (Dz.U. of 2010, No 258, item 1756). The provisions of this regulation came into force on 1 January 2011. 56 Regulation of the Minister of Finance of 20 December 2010 on the conditions of issuing Treasury bonds offered in wholesale (Dz.U. of 2010, No 250, item 1680). The provisions of this regulation came into force on 1 January 2011.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 33 Regulations of the financial system

such bonds can also be denominated in currencies of OECD member countries. The second Regulation enables market participants to make so-called non-competitive bids (bids for the purchase of bonds of a given maturity, without specifying a price). The aim of this measure is to allow less experienced entities, lacking sufficient knowledge of the functioning of financial markets, to pay the price of securities on the basis of competitive bids made by other market participants. Moreover, the Regulation introduced two types of sale auctions:

– a multiple price auction in which each participant of the auction whose bids have been accepted are obliged to pay for purchased bonds the amount being the product of their quantity, clean price and indexation coefficient, increased by the value of accrued interest,

– a single price auction in which all participants of the auction whose bids have been 2 accepted are obliged to pay for purchased bonds the amount being the product of their quantity, minimum sale price and indexation coefficient, increased by the value of accrued interest.

2 .2 .Measures of the European Union regarding the regulation of the financial services sector

Initiatives regarding the regulation of the financial sector undertaken in 2010 at EU level were to a large extent a consequence of the implementation of decisions taken by ministers of finance and presidents of central banks of the G-20 concerning structural reforms in the financial sector. Such reforms are to contribute to strengthening the regulation of the financial sector, improving the quality of supervision of financial institutions, improving the protection of consumers and investors and creating appropriate crisis management mechanisms with respect to the controlled resolution of financial institutions. Apart from activities related to implementing those four objectives, work continued on deepening the integration of the financial services sector. The package of legal acts establishing new EU institutions responsible for macro- and micro-prudential supervision, as well as the amendments of Directives regarding capital requirements of credit institutions and investment companies can be considered the most important regulations adopted in 2010.57

This section describes EU legal acts involving financial services (Regulations which apply directly in all EU Member States, and Directives which are binding for countries as regards their objective) which were adopted in 2010. Item 2.2.4. describes communications and a Green Paper of the European Commission which are not binding but are frequently an indication of future regulatory actions at EU level.

2.2.1. Regulations affecting the entire financial services sector

Regulations establishing a new architecture of financial supervision in the EU

In November 2010, the Council and the Parliament of the EU adopted a set of Regulations regarding a new architecture of supervision of the financial sector in the EU.58 These regulations were prepared on the basis of recommendations included in the report of a European Commission-

57 Directive 2009/111/EC of the European Parliament and of the Council of 16 September 2009 amending Directives 2006/48/EC, 2006/49/EC and 2007/64/EC as regards banks affiliated to central institutions, certain own funds items, large exposures, supervisory arrangements, and crisis management (EU Official Journal L 302 of 2009, p. 97). 58 Regulation (EU) No 1092/2010 of the European Parliament and of the Council of 24 November 2010 on European Union macro-prudential oversight of the financial system and establishing a European Systemic Risk Board (EU Official Journal L 331 of 2010, p. 1); Regulation (EU) No 093/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Banking Authority), amending Decision No 716/2009/EC and repealing Commission Decision 2009/78/EC (EU Official Journal L 331 of 2010, p. 12); Regulation (EU) No 1095/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Securities and Markets Authority), amending Decision No 716/2009/EC and repealing Commission Decision 2009/77/EC (EU Official Journal L 331 of 2010, p. 84); Regulation (EU) No 1094/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Insurance and Occupational Pensions Authority), amending Decision No 716/2009/EC and repealing Commission Decision 2009/79/EC (EU Official Journal L 331 of 2010, p. 48); Council Regulation (EU) No 1096/2010 of 17 November 2010 conferring specific tasks upon the European Central Bank concerning the functioning of the European Systemic Risk Board (EU Official Journal L 331 of 2010, p. 162).

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appointed group of experts chaired by Jacques de Larosière.59 The diagnosis presented in the report pointed out that current rules relating to European financial supervision, based mainly on domestic supervision structures, appeared to be inadequate to the level of integration of financial markets in the EU and the large number of entities carrying out cross-border operations. Moreover, the experience of the recent global crisis confirmed that safeguarding the stability of particular financial institutions is not sufficient for maintaining overall financial stability. The report indicated the need to establish a body concerned with mitigating risk within the European financial system. Therefore, the authors of the report recommended that a new system of financial supervision in the EU be established and include: macro-prudential supervision − focused on limiting risks to the whole financial system, and micro-prudential supervision − focused on ensuring stable functioning of individual financial institutions. 2 This concept was reflected in the above mentioned set of Regulations pursuant to which the European System of Financial Supervision (ESFS) is to be established as of 1 January 2011. Macro- prudential supervision in the EU was entrusted to a newly established institution − the European Systemic Risk Board (ESRB), whereas the newly established European Supervisory Authorities (ESA) will be responsible for micro-prudential supervision of individual financial institutions.

The ESRB is responsible for mitigating systemic risk to financial stability in the EU and preventing the materialisation of that risk. For this purpose, the ESRB collects and analyses information which is significant from the perspective of financial stability of the EU in order to identify and assess systemic risk resulting from interconnections between financial institutions as well as markets and macroeconomic and structural conditions, including those related to financial innovation. If such risks are considered material, the ESRB may issue warnings or recommendations specifying necessary remedial actions. The list of addressees of warnings and recommendations is broad. They may be directed to the EU as a whole, to one or more Member States or to national supervisory authorities and to the European Supervisory Authorities. The addressees are obliged to inform the Board on compliance with its recommendations or provide a relevant justification if indicated actions are not taken. Considering the potential reaction of financial markets to issued warnings and recommendations, the ESRB will decide in each case whether they are to be announced to the public. The ESRB may also issue confidential warnings addressed to the Council of the EU when it determines that an emergency situation may arise, which could seriously jeopardise the stability of the whole or part of the EU financial system.

The ESRB is an independent body which acts in close cooperation with the European Central Bank (ECB) which provides the Board with analytical, statistical, administrative and logistical support. The President of the ECB is the Chair of the ESRB.60 A considerable role in the functioning of the ESRB is also played by central banks of the EU Member States, as they carry out tasks involving financial stability and have relevant specialist expertise. The General Board of the ESRB is its decision-making body. Its meetings are prepared by the Steering Committee, which also supports the decision-making process of the ESRB and monitors progress of conducted tasks. In addition, two committees: the Advisory Technical Committee and the Advisory Scientific Committee provide the ESRB’s General Council with advice and support. Members of the General Council with voting rights include: the President and the Vice-President of the ECB, the Governors of the national central banks of the EU, the Chairpersons of the European Supervisory Authorities, a member of the European Commission, the Chair and two Vice-Chairs of the Advisory Scientific Committee and the Chair of the Advisory Technical Committee.

59 The High-Level Group on Financial Supervision in the EU was appointed on 8 November 2008. Its objective was to analyse the system of supervision of European financial institutions and to formulate recommendations on improving the effectiveness of that system. The group comprised: Jacques de Larosière (chairman), Leszek Balcerowicz, Otmar Issing, Rainer Masera, Callum McCarthy, Lars Nyberg, José Perez and Onno Ruding. The results of the group’s work and its recommendations were presented in a report published on 25 February 2009. 60 The President of the ECB chairs the ESRB for the period of 5 years from the Regulation on establishing the ESRB coming into force, and the principles of electing the Chair for following terms of office will be determined by the European Parliament and the Council as part of the review of the Regulation by 17 December 2013.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 35 Regulations of the financial system

The Regulation establishing the ESRB specifies that the Board closely cooperates with all institutions of the European System of Financial Supervision and coordinates its activities with international financial institutions, in particular with the International Monetary Fund and the Financial Stability Board,61 as well as competent authorities of third countries.

Figure 2.2.1. New architecture of financial supervision in the EU

EUROPEAN SYSTEM OF FINANCIAL SUPERVISION 2 Macro-prudential supervision Micro-prudential supervision European Systemic European Banking Risk Board (ESRB) Authority (EBA)

European Securities and Markets Authority (ESMA)

cooperation of the European Joint Committee European Insurance and

Supervisory Authorities Occupational Pensions Authority (EIOPA)

Central banks European of the EU National supervisory bodies Central Bank Member States

Source: NBP.

As part of the micro-prudential pillar of the European Financial Supervision System, three new European Supervisory Authorities were created i.e. the European Banking Authority (EBA), the European Securities and Markets Authority (ESMA) and the European Insurance and Occupational Pensions Authority (EIOPA).62 The European Supervisory Authorities are EU institutions with legal personality, as well as administrative and financial independence. The main decision-making body of each Authority is the Board of Supervisors, which consists of the heads of national competent authorities supervising a given sector of the financial market.

The European Supervisory Authorities do not exercise direct supervision over the day-to-day activities of financial institutions − this task remains within the scope of responsibility of national supervisory authorities. The ESAs are responsible for enhancing the quality and consistency of supervision principles of national authorities, strengthening the oversight of cross-border financial groups and preparing a single rulebook applicable to financial institutions. The detailed tasks of the ESAs include:

– developing guidelines and recommendations in order to establish consistent principles of micro-prudential supervision addressed to competent supervisory authorities in the EU Member States or financial institutions;

61 The Financial Stability Board (FSB) is an international institution established in order to strengthen the cooperation between authorities responsible for the financial stability in the G-20 countries and international institutions, such as: the Bank for International Settlements (BIS), the European Central Bank, the International Monetary Fund, the Organisation for Economic Co-operation and Development (OECD). The FSB coordinates work in the field of identifying risks to the financial system at global level, prepares recommendations concerning regulatory measures and monitors the process of implementing recommendations of the G-20 regarding the reform of regulations of the financial sector. The FSB operates at the Bank for International Settlements in Basel. 62 The European Supervisory Authorities have superseded three existing sectoral committees functioning as advisory bodies of the European Commission: the Committee of European Banking Supervisors (CEBS), the Committee of European Securities Regulators (CESR) and the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS), often also referred to as the “Level 3 committees” of the Lamfalussy Process. Their main task consisted in the convergence of supervisory practices by issuing non-binding guidelines and recommendations.

36 National Bank of Poland Regulations of the financial system

– developing draft technical standards in order to ensure the harmonisation of regulations in fields specified in legislative acts;

– contributing to consistent application of legally binding EU acts;

– conducting mediation and settling disagreements between national supervisory authorities and ensuring the coherent functioning of supervisory colleges;63

– collecting information on financial institutions in the EU;

– monitoring and evaluating developments in financial markets falling within competences of the Authorities; – preparing, initiating and coordinating (in cooperation with the ESRB) stress tests in order 2 to evaluate the resilience of European financial institutions to adverse changes in financial markets and in the macroeconomic environment;

– developing methods for the orderly resolution of failing financial institutions, in particular those which may generate systemic risk.

The ESAs may exercise significant powers with respect to issuing decisions addressed to individual financial institutions, requiring them to apply binding EU laws, including the cessation of any practice that threatens financial stability. They are empowered to do so only if competent national authorities do not ensure that a financial institution meets requirements established in legal acts of the EU. The European Supervisory Authorities should cooperate closely with the ESRB by, inter alia, ensuring appropriate follow-up to warnings and recommendations issued by the ESRB. The ESAs may also temporarily prohibit or restrict certain types of financial activities that threaten the orderly functioning of markets or the stability of the EU financial system as a whole, as well as issue warnings if a certain type of activity generates systemic risk. Moreover, in the case of a threat arising from a crisis, the ESAs will actively facilitate and, if necessary, coordinate all actions taken by competent national authorities. The Regulations establishing the European Supervisory Authorities also stipulate that they will develop criteria for the identification and measurement of systemic risk generated by financial institutions.

Each European Supervisory Authority is responsible for a selected sector of the financial market. The European Banking Authority, located in London, carries out the above-mentioned tasks with respect to activities conducted by credit institutions and financial conglomerates, investment companies, payment institutions and electronic money institutions within the scope in which such institutions are subject to legal acts specified by the Regulation on establishing the EBA.64 Moreover, the European Banking Authority is to contribute to strengthening the protection of depositors and investors and strengthening the European system of national deposit guarantee schemes.

The European Securities and Markets Authority, located in Paris, supports national authorities in supervising activities of firms providing investment services and collective investment undertakings, marketing their units or shares, within the scope in which such institutions are

63 Supervisory colleges include supervisors from the country in which the parent entity of a cross-border financial group has its registered office and from host countries where subsidiaries of the group operate. Colleges may take joint decisions on risk assessment and additional capital requirements for the group. 64 These acts include: Directive 2006/48/EC of the European Parliament and of the Council of 14 June 2006 relating to the taking up and pursuit of the business of credit institutions (EU Official Journal L 177 of 2006, p. 1), Directive 2006/49/EC of the European Parliament and of the Council of 14 June 2006 on the capital adequacy of investment firms and credit institutions (EU Official Journal L 177 of 2006, p. 201), Directive 2002/87/EC of the European Parliament and of the Council of 16 December 2002 on the supplementary supervision of credit institutions, insurance undertakings and investment firms in a financial conglomerate (EU Official Journal L 35 of 2002, p. 1), Directive 94/19/EC of the European Parliament and of the Council of 30 May 1994 on deposit-guarantee schemes (EU Official Journal L 135 of 1994, p. 5) and Regulation (EC) No 1781/2006 of the European Parliament and of the Council of 15 November 2006 on information on the payer accompanying transfers of funds (EU Official Journal L 345 of 2006, p. 1).

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subject to legal acts specified by the Regulation on establishing the ESMA.65 Moreover, the ESMA may take relevant actions with respect to take-over bids, clearing and settlement and derivatives issues. In addition, the Authority is to contribute to strengthening national investor compensation schemes in the EU by ensuring that such schemes are adequately funded and principles of protecting investors are harmonised within the entire European Union.

The European Insurance and Occupational Pensions Authority, located in Frankfurt, carries out the above mentioned tasks with respect to activities conducted by insurance undertakings, reinsurance undertakings, institutions for occupational retirement provision and insurance intermediaries, within the scope in which such institutions are subject to legal acts specified by the Regulation on establishing the EIOPA.66 Moreover, it is specified that the EIOPA is to strengthen 2 the protection of policyholders, pension-scheme members and beneficiaries, as well as to participate in analyses related to establishing a European network of national insurance guarantee programmes which would be adequately funded and harmonised.

In order to ensure cross-sectoral consistency of work of the European Supervisory Authorities, they are to closely cooperate in the Joint Committee of the European Supervisory Authorities and develop joint positions in relevant cases. The Joint Committee of the European Supervisory Authorities coordinates supervisory activities of the ESAs involving the functioning of financial conglomerates and other cross-sectoral matters such as e.g. accounting, auditing and the prevention of money laundering.

Directive amending directives in respect of powers of the European Supervisory Authorities (the “Omnibus” Directive)

The objective of the Directive67 is to amend the provisions of applicable Directives in the fields covered by activities of the three European Supervisory Authorities established in November 2010. These include Directives on the taking up and pursuit of the business of credit institutions,68 capital adequacy,69 financial conglomerates,70 markets in financial instruments,71 undertakings for collective investment in transferable securities.72 The amendments to these directives relate to the following:

65 These acts include: Directive 97/9/EC of the European Parliament and of the Council of 3 March 1997 on investor- compensation schemes (EU Official Journal L 84 of 1997, p. 22), Directive 98/26/EC of the European Parliament and of the Council of 19 May 1998 on settlement finality in payment and securities settlement systems (EU Official Journal L 166 of 1998, p. 45), Directive 2001/34/EC of the European Parliament and of the Council of 28 May 2001 on the admission of securities to official stock exchange listing (EU Official Journal L 184 of 2004, p. 1), Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments (EU Official Journal L 145 of 2004, p. 1) and Commission Directive 2006/73/EC of 10 August 2006 implementing Directive 2004/39/EC of the European Parliament and of the Council as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive (EU Official Journal L 241 of 2006, p. 26). 66 These acts include: Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II) (EU Official Journal L 335 of 2006, p. 1), Directive 2002/92/EC of the European Parliament and of the Council of 9 December 2002 on insurance intermediation (EU Official Journal L 9 of 2003, p. 3) and Directive 2003/41/EC of the European Parliament and of the Council of 3 June 2003 on the activities and supervision of institutions for occupational retirement provision (EU Official Journal L 235 of 2003, p. 10). 67 Directive 2010/78/EU of the European Parliament and of the Council of 24 November 2010 amending Directives 98/26/EC, 2002/87/EC, 2003/6/EC, 2003/41/EC, 2003/71/EC, 2004/39/EC, 2004/109/EC, 2005/60/EC, 2006/48/EC, 2006/49/EC and 2009/65/EC in respect of the powers of the European Supervisory Authority (European Banking Authority), the European Supervisory Authority (European Insurance and Occupational Pensions Authority) and the European Supervisory Authority (European Securities and Markets Authority) (EU Official Journal L 331 of 2010, p. 120). 68 Directive 2006/48/EC of the European Parliament and of the Council of 14 June 2006 relating to the taking up and pursuit of the business of credit institutions (EU Official Journal L 177 of 2006, p. 1). 69 Directive 2006/49/EC of the European Parliament and of the Council of 14 June 2006 on the capital adequacy of investment firms and credit institutions (EU Official Journal L 177 of 2006, p. 201). 70 Directive 2002/87/EC of the European Parliament and of the Council of 16 December 2002 on the supplementary supervision of credit institutions, insurance undertakings and investment firms in a financial conglomerate (EU Official Journal L 35 of 2003, p. 1). 71 Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments (EU Official Journal L 145 of 2004, p. 1). 72 Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) (EU Official Journal L 302 of 2009, p. 32).

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– specifying fields in which the ESAs are empowered to develop draft technical standards, as well as the procedure for their adoption,

– providing for the possibility of conducting binding mediation by the ESAs of disputes between the home supervisory authority of a financial group and the host supervisory authority of subsidiaries of the group in fields where sectoral legislation provides for certain forms of unbinding mediation, and

– introducing formal and editing corrections necessary for the Directives to function in the context of establishing the new ESAs, including e.g. changes of names of Level 3 committees to the names of the new Authorities, and elimination of legal obstacles preventing the fulfilment of obligations regarding the sharing of information. 2 The Directive should be implemented to national legislation by 31 December 2011.

Regulations on accounting standards

In 2010, the European Commission adopted several Regulations implementing amendments to EU-endorsed International Accounting Standards and International Financial Reporting Standards (IFRS). The most important Regulation,73 concerning International Accounting Standard 24 and International Financial Reporting Standard 8, introduced a new wording of the provisions on disclosing information on related parties. The most important changes in those standards included the exemption of entities controlled by the state from publishing certain information on transactions with related parties (other entities controlled by the state) and modification of the definition of a related party so that it is symmetrical (in the old wording of the standard, this was not the case in certain situations), as well as adding certain entities to the group of related parties.

2.2.2. Regulations regarding the banking services sector

Directive amending Directives 2006/48/EC and 2006/49/EC in the scope of capital requirements pertaining to the trading portfolio and resecuritisation and supervisory review of remuneration policy (CRD III)

The objective of the Directive known as CRD III74 is to change the provisions of the Capital Requirements Directives of 2006 related to regulatory capital, risk management and remuneration policy in financial institutions. In the opinion of the European Commission, certain inadequacies and deficiencies in these regulations contributed to disturbances in financial markets in the years 2007–2008. Internal models applied by banks to estimate capital requirements for market risk linked with the trading portfolio of banks systematically underestimated the amount of potential losses in extreme conditions. This underestimation led to understating regulatory requirements and cyclical volatility of banks’ capital as the market environment deteriorated. Therefore, the Directive introduces a requirement of separate estimation of potential losses during a protracted period of adverse market conditions, thus increasing the resilience of models under stress conditions and limiting the potential pro-cyclicality of those models.

The CRD also introduces amendments relating to capital requirements regarding positions in securities resulting from resecuritisation.75 In line with the new regulations, banks will be obliged to have larger financial resources for covering potential losses arising from investment in

73 Commission Regulation (EU) No 632/2010 of 19 July 2010 amending Regulation (EC) No 1126/2008 adopting certain international accounting standards in accordance with Regulation (EC) No 1606/2002 of the European Parliament and of the Council as regards International Accounting Standards (IAS) 24 and International Financial Reporting Standards (IFRS) 8 (EU Official Journal L 186 of 2010, p. 1). 74 Directive 2010/76/EU of the European Parliament and of the Council of 24 November 2010 amending Directives 2006/48/EC and 2006/49/EC as regards capital requirements for the trading book and for re-securitisations, and the supervisory review of remuneration policies (EU Official Journal L 329 of 2010, p. 3). 75 Resecuritisation means securitisation in the case of which issued debt securities secured with the pool of underlying exposures are divided into tranches with various credit risk allocation, and at least one underlying exposure consists of securities resulting from securitisation.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 39 Regulations of the financial system

debt securities issued in the process of resecuritisation. Banks will also be obliged to provide the supervisory authority with more detailed information on securitisation exposures.

A new matter covered by the Capital Requirements Directive is the remuneration policy in credit institutions and investment firms. The new provisions apply to the remuneration for categories of staff, including senior management, employees who take decisions affecting the risk profile of the institutions and all staff whose total remuneration is comparable with remuneration of the above-mentioned categories of employees. The amended directive includes provisions specifying that variable components of remuneration should be aligned with the long-term interests of the credit institution. In order to minimise incentives to excessive risk-taking, variable remuneration components should constitute a balanced proportion of total remuneration. The 2 amended Directive also stipulates that a substantial portion of the variable remuneration component (at least 40% of that remuneration and, in the case of particularly high amounts – 60%) should be deferred over a period from three to five years. Moreover, a substantial portion of the variable remuneration component should include shares of the given institution or instruments of a similar character.

The Directive requires credit institutions and investment firms to publish annual information on policies and practices regarding remuneration for employees whose activities materially affect the risk profile of such institutions. This information should include data concerning, among other things, the adopted remuneration scheme, criteria for awarding variable remuneration components and the aggregate amount of payment to employees to whom the provisions of the Directive apply, divided into non-variable and variable remuneration.

The Directive should be implemented in national law by the end of 2010. In Poland, this will require an amendment of, inter alia, the Banking Law Act and the Act on Trading in Financial Instruments.

2.2.3. Regulations regarding the capital market

Directive amending Directive 2003/71/EC on the prospectus

The objective of the Directive76 is the liberalisation of regulations regarding the requirement of publication of prospectuses by European companies issuing securities. As a consequence of the amendment of the Directive, certain issues of securities (of small enterprises, pre-emptive issues of shares) will be subject to less complex disclosure obligations. This applies, inter alia, to the obligation of publication of the prospectus; this obligation will not apply to offers of securities whose total value is lower than EUR 5 million euros (the previous threshold was EUR 2.5 million). This exemption will also apply to offers directed to less than 150 persons other than qualified investors as defined in the MiFID Directive (previously: fewer than 100 persons) and offers of securities whose denomination per unit amounts to at least EUR 100,000. Moreover, the Directive stipulates that a “proportionate disclosure regime” shall apply to pre-emptive issues and offers of sale of shares in small and medium enterprises.

EU Member States should implement the legal standards specified in the Directive by 1 July 2012. In Poland, this will involve amending the Act of 29 July 2005 on Public Offering, Conditions Governing the Introduction of Financial Instruments to Organised Trading, and on Public Companies.

76 Directive 2010/73/EU of the European Parliament and of the Council of 24 November 2010 amending Directives 2003/71/EC on the prospectus to be published when securities are offered to the public or admitted to trading and 2004/109/EC on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading in a regulated market (EU Official Journal L 327 of 2010, p. 1).

40 National Bank of Poland Regulations of the financial system

Regulation implementing the UCITS Directive as regards Key Investor Information

The Commission Regulation77 is an implementing act to Directive 2009/65/EC (UCITS),78 which stipulates that detailed requirements regarding the form and content of the document defined as Key Investor Information (KII) for investors purchasing participation units in investment funds would be specified in implementing acts. The Regulation specifies that Key Investor Information, intended to replace the summary of the prospectus, must include a description of investment objectives and policy, the risk and reward profile, information on charges payable by fund participants and past performance of funds calculated and presented in accordance with specified harmonised rules, as well as practical information, including how to obtain further information on the fund, a copy of the prospectus and the latest annual financial statements. It is 2 also required that a UCTIS fund be clearly identified with respect to its type (e.g. equity fund, bond fund, balanced fund, money market fund) and the name of the company which manages the fund must be indicated. Key Investor Information should be written in clear and understandable language and its length should not exceed two A4 pages. The Regulation stipulates that the managing company or investment firm ensures a review of Key Investor Information at least every 12 months. The Regulation comes into force on 30 July 2011.

Regulation implementing the Directive as regards the form and content of the standard notification letter and UCITS attestation

The Regulation79 is an implementing act to Directive 2009/65/EC (UCITS), which provided the Commission with implementing powers to specify and harmonise certain aspects of the new procedure for notification of marketing of units of UCITS funds in a host Member State. The Regulation defines the form and content of a standard notification applied by a UCTIS fund and the form and content of an attestation applied by competent authorities of the Member States in order to confirm that the UCTIS fund fulfils conditions specified in Directive 2009/65/EC. The Member States will be able to submit the notification in writing and the attestation by electronic means. The Regulation comes into force on 30 July 2011.

Directive implementing the UCITS Directive as regards organisational requirements, conflicts of interest, conduct of business, risk management, hub and spoke fund models, as well as the notification procedure

The Directive,80 which is another implementing act to the UCITS Directive, applies to companies which manage UCITS funds. The Directive specifies detailed requirements regarding the organisation of management companies, including internal control mechanisms, accounting and record-keeping; identifying and preventing conflicts of interest between the management company and the UCITS fund. Moreover, the Directive includes provisions concerning the establishment, implementation and maintenance of an appropriate and documented risk management policy and main elements of the agreement between the UCITS fund and the management company. EU Member States should implement the provisions of the Directive in their legal order no later than by 30 June 2011.

77 Commission Regulation (EU) No 583/2010 of 1 July 2010 implementing Directive 2009/65/EC of the European Parliament and of the Council as regards key investor information and conditions to be met when providing key investor information or the prospectus in a durable medium other than paper or by means of a website (EU Official Journal L 176 of 2010, p. 1). 78 Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) (EU Official Journal L 302 of 2009, p. 32), called the “UCITS IV Directive”, is discussed in the publication Financial System Development in Poland 2009, Warsaw 2011, NBP, pp. 31–32. 79 Commission Regulation (EU) No 584/2010 of 1 July 2010 implementing Directive 2009/65/EC of the European Parliament and of the Council as regards the form and content of the standard notification letter and UCITS attestation, the use of electronic communication between competent authorities for the purpose of notification, and procedures for on-the-spot verifications and investigations and the exchange of information between competent authorities (EU Official Journal L 176 of 2010, p. 16). 80 Commission Directive 2010/43/EU of 1 July 2010 implementing Directive 2009/65/EC of the European Parliament and of the Council as regards organisational requirements, conflicts of interest, conduct of business, risk management and content of the agreement between a depositary and a management company (EU Official Journal L 176 of 2010, p. 42).

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 41 Regulations of the financial system

2.2.4. Planned measures of the European Union regarding regulation of the financial services sector

In 2010, the European Commission published legislative proposals relating to a number of aspects of functioning of the financial services sector, which will be subject to further work in the Council of the EU and the European Parliament. One of these proposals concerns amending the Directive on deposit guarantee schemes.81 The European Commission suggests, inter alia, simplifying and harmonising certain rules, especially with respect to the scope of guarantees and arrangements regarding the payout of guaranteed funds, further shortening of the term of the payout of guaranteed funds to depositors, and harmonising regulations regarding the funding of deposit guarantee schemes in the EU Member States.

2 The European Commission also suggested amending the Directive on investor compensation schemes.82 According to the proposed changes, all services and investment activities covered by the MiFID Directive will be subject to an investor compensation scheme. The scope of compensations for investors arising from the bankruptcy of an investment firm involving the return of due financial instruments is expected to be extended, so that they encompass failure of a third party custodian. It is also expected that level of compensation will be increased to the amount of EUR 50,000 and the basic principles for the funding of investor compensation schemes will be determined.

Another legislative proposal of the European Commission applied to the Regulation on over- the-counter (OTC) derivatives, central counterparties and data repositories, known as the European Market Infrastructure Regulation (EMIR).83 The draft Regulation includes measures such as:

– the obligation of clearing of all standardised OTC derivatives through a central counterparty (CCP), including certain exemptions from that obligation with respect to the subject and object of exemption;

– the obligation of submitting information on all OTC derivatives transactions to data repositories;

– requirements regarding the mitigation of operational and credit risk of the counterparty arising from OTC derivatives transactions which are not be qualified for mandatory CCP settlement;

– requirements regarding minimum capital, risk management and collateral with regard to CCPs.

The Commission also published a proposal regarding a Regulation on short selling and certain aspects of credit default swaps.84 The draft Regulation introduces requirements regarding informing on material net short positions in the market of shares, Treasury bonds of EU Member States and Credit Default Swaps (CDS) on such bonds. In order to enhance the transparency of the market, it is proposed to mark short sale orders of securities executed in organised trading venues. According to the proposal, in the case of adverse circumstances which could significantly threaten financial stability, competent supervisory authorities of the Member States would have powers to temporarily impose limits on the short sale of securities and CDS transactions. In such a situation, the ESMA would have a coordinative role in order to ensure consistency of actions taken in individual countries.

81 Proposal for a Directive of the European Parliament and of the Council on deposit guarantee schemes (recast), COM(2010)368 final, Brussels, 15 July 2010, European Commission. 82 Proposal for a Directive of the European Parliament and of the Council amending Directive 97/9/EC of the European Parliament and of the Council on investor-compensation schemes, COM (2010)371 final, Brussels, 12 July 2010, European Commission. 83 Proposal for a Regulation of the European Parliament and of the Council on OTC derivatives, central counterparties and trade repositories, COM (2010)484 final, Brussels, 15 September 2010, European Commission. 84 Credit Default Swap (CDS) – a credit derivative whose issuer undertakes to pay the purchaser an amount of compensation specified in the agreement if a credit event relating to a third party (a reference entity) occurs, in return for premiums. Credit events may include: bankruptcy of the reference entity, change of credit standing of that entity specified in the agreement or change of rating of a specific debt security.

42 National Bank of Poland Regulations of the financial system

The Commission also adopted a proposal amending the Regulation on credit rating agencies of 2009.85 According to the proposal, the ESMA will take responsibility for the registration of credit rating agencies based in the EU and for their ongoing supervision. The competences of the ESMA will also include the certification of credit rating agencies based in third countries and conducting business in the EU.

Below, several Communications and a Green Paper published by the European Commission in 2010 are described; they commonly indicate future regulatory actions at EU level.

Communication on bank resolution funds

The objective of the Communication86 is to present the opinion and plans of the European Commission regarding the establishment of resolution funds,87 funded by a levy on banks, which 2 should facilitate the resolution of insolvent banks. According to the arrangements made at the G-20 summit in September 2009, the establishment of resolution funds and strengthening macro- and micro-prudential supervision should prevent the use of taxpayers’ money to cover losses recorded by banks.

In certain EU Member States, resolution funds have been already established or their establishment is planned in order to increase the stability of the local banking system. In the view of the European Commission, uncoordinated actions taken in this respect by particular Member States may lead to competition distortions between banking markets and an overlapping of levies in the case of banking groups operating in a number of EU Member States. Therefore, the Commission believes that a harmonised network of national resolution funds should be created with the use of a coordinated set of mechanisms and tools which would contribute to the resolution of banks at risk of bankruptcy.

According to the proposals put forward by the Communication, resolution funds should be funded by regular levies paid by financial institutions. The Commission has not decided yet what the basis for calculating the levy should be; three options are taken into consideration: banks’ assets, banks’ liabilities and profits or bonuses paid to employees. The Communication provides examples of measures which would be financed by resolution funds:

– provision of capital to a bridge bank which would be responsible for maintaining continuous access to insured deposits or maintaining basic bank functions throughout a limited period, with a perspective of selling it to private sector entities when market conditions stabilise;

– financing a full or partial transfer of assets and/or liabilities;

– financing a “good bank”/ “bad bank” split.

According to the Commission, the management of bank resolution funds should be entrusted to authorities that would be responsible for resolving financial institutions and which would act as independent executive bodies. Functional independence would ensure that the funds were strictly reserved to pay for resolution measures.

The measures described above would constitute the first step towards creating an integrated EU mechanism for crisis management. The European Commission will present its opinion on the target size of funds following an impact assessment of the proposed regulations. The Commission plans to adopt legislative proposals regarding resolution funds and crisis management in early 2011.

85 Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EC) No 1060/2009 on credit rating agencies, COM(2010) 289 final, Brussels, 2 June 2010. 86 Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the European Central Bank – Bank resolution funds, Brussels 2010, European Commission, COM(2010) 254. 87 In the Polish version of the Communication, the term “fundusze naprawcze” is used; however, it appears that the correct translation of the English name resolution fund is “fundusz restrukturyzacyjny”.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 43 Regulations of the financial system

Communication on an EU framework for crisis management in the financial sector

The Communication of the European Commission88 presents plans to create an EU action programme in the field of crisis management in the financial sector. This programme is aimed at providing competent national authorities with efficient tools and powers, harmonised at EU level, which would enable them to take prompt action in the case of a crisis situation regarding financial institutions, and at minimising the need of expending public resources for their support. The proposals put forward in the Communication will apply in the case of insolvency of credit institutions and those investment firms whose bankruptcy would pose a threat to the stability of the whole financial system. According to the Communication, the set of those tools and powers 2 would include: • Preparatory and preventative measures. According to the proposal of the Commission, credit institutions and investment firms would be required to prepare recovery plans setting out measures which they intend to take in order to solve potential liquidity problems, increase their capital or mitigate risk, as well as to prepare internal resolution plans. Other preventive measures indicated in the Communication include reinforced supervision of high risk profile institutions and the introduction of regulations regarding liquidity management at the level of banking groups.

• Early intervention measures. The Commission suggests extending and clarifying the powers of supervisory authorities to take decisions on prohibiting the payment of dividends, requiring the replacement of managers or directors, requiring the sale of assets or requiring a bank to divest itself a certain type of activities, requiring the implementation of a resolution plan in the case of problems (based on the recovery plan), as well as imposing special administration.

• Resolution measures. They include actions taken by national authorities of the financial safety net in order to reduce the impact of difficulties of large financial institutions on the stability of the whole sector and to facilitate a potential orderly liquidation of such institutions in full or in part, such as: selling the whole credit institution or parts of its business to one or more purchasers without the consent of shareholders of that institution, transferring the whole or parts of the business of a failing credit institution to a bridge bank, transferring non-performing assets to a separate vehicle. The Commission suggests that legal measures which would be applied to financial institutions at risk of bankruptcy should not be rigidly defined due to various legal measures relating to bankruptcy proceedings existing in individual EU Member States.

In the view of the Commission, the costs of resolution should principally be covered by the shareholders and creditors of entities at risk of bankruptcy. Nevertheless, since this may appear insufficient in most cases, mechanisms of financing such proceedings should be put in place. According to the Communication Bank Resolution Funds of 26 May 2010, the Commission intends to propose the establishment of a system of national resolution funds. In the view of the European Commission, it is necessary to coordinate the principles of functioning of such funds − they would be financed ex-ante and would receive levies from financial institutions which obtained a licence in a given Member State, including branches of those institutions established in other Member States.

In the opinion of the Commission, it is necessary to ensure the broadest possible coordination and cooperation between supervisory authorities of EU Member States in order to minimise the negative effects of bankruptcy of a cross-border bank. The European Commission suggests establishing resolution colleges around the core of the existing supervisory colleges. In the Communication, the Commission states that financial group level resolution authorities should

88 Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee, the Committee of the Regions and the European Central Bank – An EU framework for crisis management in the financial sector, Brussels 2010, European Commission, COM(2010) 579.

44 National Bank of Poland Regulations of the financial system

have the power to take decisions whether it is appropriate to carry out resolution applying to the whole group. As powers relating to resolution are applied to separate legal entities and the competence for resolution would remain national, a group resolution scheme would not be binding. National authorities that disagreed with the scheme would be able to take independent action if they deem it necessary to ensure the stability of the national financial system. Moreover, the Commission suggests that the new European Supervisory Authorities, especially the EBA, play a coordinating and supporting role in crisis situations.

In the Communication, the European Commission announced that it was working on a legislative proposal regarding crisis management. In addition, the Commission is to analyse the need for further harmonisation of bank insolvency regimes, with the possible aim of resolving and liquidating banks under the same procedural and substantive provisions of insolvency rules. 2 Communication on taxation of the financial sector

The Communication89 presents initial proposals of the European Commission regarding taxation of financial institutions in the EU. In the view of the Commission, introducing such taxation is justified by three arguments: the need to reduce the harmful effects of excessive risk-taking by the financial sector, the need to compensate the support provided to that sector by certain countries during the recent financial crisis and the financial sector making a more fair and significant contribution to government finances. It is stated in the Communication that actions related to the taxation of financial institutions should be taken in a coordinated manner, as the existing differences between national solutions, in addition to different taxation bases, may encourage tax arbitrage. The emergence of uncoordinated national solutions may also lead to double taxation of financial institution and fragmentation of the financial sector.

The Communication provides an overview of two potential types of taxes on financial institutions. The first is a financial transactions tax (FTT) which would be collected on selected types of transactions. The Commission does not specify the range of such transactions but it suggests that it should be broad and encompass the purchase or sale of equities, bonds, currencies or derivatives, or it should be limited e.g. to currency transactions. In the view of the Commission, such tax would be successful if it were applied globally in all financial centres (this would prevent relocation of trading activities). The Communication also includes arguments against introducing such a tax. It is pointed out that most revenue from that tax would be collected in a relatively limited number of countries in which trading in financial instruments is concentrated. Moreover, the Commission states that cost of the tax burden would probably be transferred to clients of financial institutions, which would entail, inter alia, an increase of the cost of capital for enterprises.

The second type of tax described in the Communication is a financial activities tax (FAT), proposed by the International Monetary Fund.90 In its broadest form (which is subject to analysis by the Commission), the taxable basis would consist of profit and wages in financial institutions. Other possible variants include the taxation of profit and wages over a certain pre-defined level and the taxation of excess profit on high-risk activities. In the opinion of the Commission, the geographic distribution of revenues from that tax would reflect the current development of the financial sector in the EU. Such revenue would not be as concentrated as in the case of the financial transactions tax because remuneration and profit in financial institutions are spread relatively evenly. Therefore, in the view of the Commission, the financial activities tax would be a more appropriate measure for achieving budgetary revenue in a number of EU Member States. The Communication also states that it is necessary to carry out a detailed analysis of the impact of the introduction of the financial activities tax on competition and to examine whether that impact may be offset by possible disincentives for companies to relocate their business.

89 Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions – Taxation of the financial sector. Brussels 2010, European Commission, COM(2010) 549. 90 Financial Sector Taxation: The IMF’s Report to the G-20 (2010), Washington 2010, International Monetary Fund.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 45 Regulations of the financial system

The European Commission announced that it would conduct a comprehensive impact assessment of both above mentioned solutions concerning the taxation of financial institutions, and submit legislative proposals in 2011.

Green Paper on corporate governance in financial institutions

The Green Paper91 is a consultation document of the European Commission which outlines the concept and meaning of corporate governance in financial institutions. The document indicates deficiencies regarding corporate governance which contributed to excessive risk-taking by those institutions, as well as possible measures aimed at improving corporate governance practices.

In the view of the European Commission, the recent financial crisis revealed the lack of 2 effectiveness of the existing corporate governance principles in the financial sector.92 To explain this situation, the Commission cites, among others, too much scope for interpretation of corporate governance principles, the lack of a clear allocation of roles and responsibilities in implementing those principles both within financial institutions and in relations with the supervisory authority, as well as the non-binding nature of the principles and, as a consequence, the absence of effective sanctions for violating them.

In the Green Paper, the Commission presents proposed changes regarding the scope of responsibility of boards of directors93 in financial institutions. In the view of the European Commission, the failure to identify and understand by boards of directors the risk to which financial institutions were exposed constituted one of the reasons for the crisis. Therefore, in the opinion of the Commission, the tasks and obligations of the board of directors with respect to risk supervision should be strengthened. In particular, it is called for strengthening the independence and authority of the risk management function in financial institutions. With respect to the role of financial supervisory authorities, the Commission suggests e.g. requiring such authorities to verify the correct functioning and effectiveness of the board of directors regarding risk management. Moreover, the Commission considers the possibility of increasing shareholder engagement in corporate governance issues.

On the basis of answers received from interested parties, the European Commission will determine whether the enhancement of corporate governance principles requires actions taken at European level.

91 Green paper – Corporate governance in financial institutions and remuneration policies Brussels 2010, European Commission, COM(2010) 284. 92 They include: Principles of Corporate Governance, Paris 2004, Organisation for Economic Co-operation and Development; Enhancing Corporate Governance for Banking Organisations, Basel 2006, Basel Committee on Banking Supervision; Directive 2006/46/EC of the European Parliament and of the Council of 14 June 2006 amending Directives on the annual accounts (EU Official Journal L 224 of 2006, p. 1). 93 The Green Paper refers to the Anglo-Saxon model in which a company’s Board of Directors fulfils both the executive and supervisory functions.

46 National Bank of Poland System infrastructure

3 System infrastructure

The infrastructure of the financial system consists of institutions and systems which facilitate execution of payments, organise trading in financial instruments and facilitate clearing and settlement of transactions. Systems that ensure the protection of market participants and institutions that enhance information transparency are important elements as well. An important role is also played by the entities which regulate and supervise the operation of the financial system. This chapter presents the most important changes concerning the Polish financial market 3 infrastructure in 2010 as well as projects and work directions related to the development of domestic and European financial market infrastructure.

3 .1 . Regulatory and supervisory institutions

In 2010, the operation of the financial system in Poland was regulated and supervised by the following institutions: Ministry of Finance (MF), Polish Financial Supervision Authority (PFSA) and the National Bank of Poland (NBP).

The Council for Financial Market Development (Rada Rozwoju Rynku Finansowego – RRRF), set up by the Minister of Finance in 2006, continued its activities also in 2010. The Council gives opinions and advice on matters related to the development and regulations of the Polish financial market. In March 2010, a working group on financing the costs of financial market supervision was established within the Council, and in October 2010 a task force for amendments to the Act on Bonds was set up.

3 .2 . Payment system

Two payment systems in the Polish zloty, SORBNET and ELIXIR, and three payment systems in euro, TARGET2-NBP, SORBNET-EURO and EuroELIXIR, operated in the Polish market in 2010. During that period, an increase was registered in the value and number of orders executed in all of these systems.

3.2.1. Large-value interbank settlements

SORBNET System

As at the end of 2010, the following entities participated in the SORBNET system used for settlement of large-value payments in zloty: 54 banks, the NBP, the National Depository for Securities (Krajowy Depozyt Papierów Wartościowych – KDPW) and the National Clearing House (Krajowa Izba Rozliczeniowa – KIR). In 2010, the value of transactions settled in this system significantly increased, by 27.2% compared to 2009 (Figure 3.1). It resulted from the growth in offshore trading in zloty-denominated instruments as well as in turnover in the domestic financial market. The number of orders processed in SORBNET rose by 20.1% compared to 2009. In 2010, 8,465 orders were settled on average per day and an average order value amounted to PLN 24.3 million. The turnover structure by types of operations was dominated by settlements resulting from customer orders, mainly interbank ones (Figure 3.2). The share of customer orders, higher than in

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 47 System infrastructure

2009, was mainly the result of increased non-residents’ activity in the zloty markets. The growth of operations due to purchase or buyout of securities from the NBP resulted from an increased scale of NBP money market bills issue arising from excess liquidity growth in the banking sector.1

Figure 3.1. Quarterly gross turnover and the number of orders processed in the SORBNET system, 2007−2010

PLN trillion thousand 16 800 14.4 14 13.0 13.4 700 12.1 12 11.4 11.5 600 10.7 10.7 9.8 9.7 10.4 9.8 10.4 10.1 10.5 10 9.4 500 8 400 6 300 4 200 2 100 3 0 0 I II III IV I II III IV I II III IV I II III IV 2007 2008 2009 2010

Quarterly gross turnover – left-hand scale Quarterly number of orders – right-hand scale Source: NBP.

In January 2010, the NBP decided to start work related to the development and launch of SORBNET2 – a new version of the SORBNET system which has operated since 1996. SORBNET2 is to operate on a new technological platform. Adaptation to the requirements of that system will facilitate preparation for compliance with the technical requirements of TARGET2 (T2) for banks which now are not participants in SORBNET-EURO and TARGET2-NBP (T2-NBP) and will enable future participation of the zloty and the NBP in other global systems of settlement of financial transactions (CLS2, TARGET2-Securities). SORBNET2 is scheduled for launch in 2013 Q1.

Figure 3.2. Share of main types of operations in the gross turnover structure in the SORBNET system in Q4 of 2009 and 2010

A. 2009 B. 2010

52.1% 55.0% 15.5% 12.1%

13.6% 12.8%

3.0% 5.2% 1.5% 6.0% 2.2% 8.4% 1.9% 10.7%

Customer orders Operations on the interbank market Use of credit extended by the NBP Orders placed by KDPW Purchase/buyout of securities from the NBP Orders placed by KIR Other

Source: NBP.

1 For more information see Chapter 5.1.2.2. 2 Continuous Linked Settlement, a system, operated by CLS Bank International and CLS Services Ltd., used for settlement of transactions concluded in the global foreign exchange market.

48 National Bank of Poland System infrastructure

TARGET2-NBP

As at the end of 2010, the NBP, 8 banks and KIR were participants in T2-NBP, which is a Polish component of T2 system used for settlement of large value payments in euro. In 2010, turnover in this system rose by 53.9% compared to 2009 due to a significant increase in cross-border transactions – they accounted for over 96% of the total turnover and number of orders (Figure 3.3). In 2010, 1,454 orders were executed on average per day and an average order value amounted to EUR 638.2 thousand.3

Figure 3.3. Quarterly gross turnover in the TARGET2-NBP system, 2008−20101

EUR billion 80 74.3 70 63.2 60 50.0 51.9 50 44.3 45.6 37.5 41.4 40 35.1 33.4 3 30 20 14.7 10 0 II III IV I II III IV I II III IV 2008 2009 2010

Domestic transactions Cross-border transactions sent Cross-border transactions received

1 TARGET2-NBP has been operating since 19 May 2008. Source: NBP.

In 2010, banks continued to migrate from SORBNET-EURO to the T2 system. As a result, another 4 banks became direct participants in T2-NBP, operated by the NBP on the SSP platform.4 Thus, the group of domestic T2 participants expanded to 10 entities. The next deadlines for the migration of banks from SORBNET-EURO to T2 platform are scheduled for 6 June 2011 and 21 November 2011, when the migration process ends, SORBNET-EURO will be closed and banks will no longer be able to benefit from intermediation of the NBP in accessing the T2 system (through the SORBNET-EURO system). Banks will be able to settle in euro directly on the SSP platform (via T2-NBP) or through another bank that is a direct participant in the T2 system.

SORBNET-EURO

At the end of 2010, participants in SORBNET-EURO, the system used for settlement of large- value cross-border and domestic payments in euro, included: 24 banks, the NBP and KDPW. In 2010, turnover in this system grew by 22.4% compared to the previous year (Figure 3.4). Higher turnover growth than in 2009 was a consequence of an increase in the value of orders, both domestic and cross border orders. In 2010, the average daily number of orders amounted to 882 and the average order amount stood at approx. EUR 501.2 thousand. Cross-border orders prevailed as they accounted for 62% of the value of turnover and 93% of the number of orders.

Work on the implementation of the SORBNET-EURO 2012 project, under which NBP-PHA system is to be launched, was underway in 2010. NBP-PHA functions will be limited compared to SORBNET-EURO. NBP-PHA is to execute NBP’s own settlements as well as NBP customers made in the T2 system as well as other operations with banks regarded as optional for settlement on the SSP platform (operations associated with intraday credit in euro, and after Poland’s accession to

3 The presented data include transactions of banks which are direct participants in T2 system (4 banks till 5 December 2010 and 8 banks since 6 December 2010) and do not include orders put by the NBP (these orders are executed in SORBNET-EURO and are shown in its turnover). 4 Single Shared Platform, a common platform to which settlements from domestic real time gross settlement systems (RTGS) have been transferred within T2 system implementation.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 49 System infrastructure

the euro area – also deposit and credit operations of the central bank, operations associated with maintaining required reserves as well as cash providing to banks). However, it will not be possible to keep settlement accounts of banks and external systems as well as to intermediate in euro settlements or in accessing the T2 system. The new system is to start operating after the closure of the SORBNET-EURO system, which is scheduled for 21 November 2011.5

Figure 3.4. Quarterly gross turnover in the SORBNET-EURO system, 2007−20101

EUR billion 35 32.8 30 27.9 28.6 25.6 25.4 23.6 24.7 25 22.6 23.3 21.1 21.0 20.8 20 16.2 15 10.3 11.2 10 9.4

3 5 0 I II III IV I II III IV I II III IV I II III IV 2007 2008 2009 2010

Domestic transactions Cross-border transactions sent Cross-border transactions received

1 Intraday credit value is excluded. Source: NBP.

3.2.2. Retail payment systems

ELIXIR

Interbank settlements in zloty resulting from customer orders and conducted through the National Clearing House are executed in the ELIXIR system. As at the end of 2010, 52 banks and the NBP were direct participants in the exchange of payment orders in that system. The total number of transactions settled through the National Clearing House in 2010 increased by 8.0% as compared to 2009, and their turnover – by 7.9% (Figure 3.5). In 2010, 5.2 million orders were settled on average per day and an average value of a single order amounted to PLN 2 508.

Figure 3.5. Quarterly gross turnover and quarterly number of orders in the ELIXIR system, 2007−2010

PLN billion million 1,000 926 400 830 838 751 813 849 800 769 764 780 761 777 320 698 711 726 718 652 600 240

400 160

200 80

0 0 I II III IV I II III IV I II III IV I II III IV 2007 2008 2009 2010 Value of quarterly gross turnover – left-hand scale Quarterly number of orders – right-hand scale

Source: NBP.

5 Originally, the closure of SORBNET-EURO and launch of NBP-PHA had been scheduled for 1 January 2012.

50 National Bank of Poland System infrastructure

EuroELIXIR

At the end of 2010, 26 banks and the NBP were participants in the exchange of payment orders in the EuroELIXIR system that is dedicated to settlement of domestic and cross-border retail payments in euro. Turnover in that system increased by 48.7% in 2010 as compared to 2009 (Figure 3.6); 24,000 orders were executed on average per day, and an average value of a single order amounted to EUR 5,036. Cross-border orders had the highest share both in terms of turnover and the number of orders – 87.2% of the turnover and 94.3% of the number of orders.

Servicing of pan-European credit transfer (SEPA Credit Transfer, SCT) in the EuroELIXIR system started in January 2008. A rapid growth in SCT transactions processed via EuroELIXIR continued in 2010 (Figure 3.7). At the same time, the share of SCT transactions in the total number of payments settled via this system increased from 57% in December 2009 to 70% in December 2010. Cross-border payments had a dominant share in the total number of SCT orders (nearly 97% in December 2010). 3 Figure 3.6. Quarterly gross turnover in the EuroELIXIR system, 2007−2010

EUR billion 10 9.6 9 8.4 8 7.3 7 6.1 6.1 6 5.5 5.0 5.1 4.9 5 4.6 4.0 4 2.7 2.9 3.0 3 2.2 2.4 2 1 0 I II III IV I II III IV I II III IV I II III IV 2007 2008 2009 2010

Domestic transactions Cross-border transactions sent Cross-border transactions received

Source: NBP.

Figure 3.7. Quarterly number of SCT transactions processed in the EuroELIXIR system, 2008−2010

thousand 1,400 1,262 1,200 1,104 1,000 932 742 800 706 600 562 424 400 332 235 200 136 149 66 0 I II III IV I II III IV I II III IV 2008 2009 2010 Domestic transactions Cross-border transactions sent Cross-border transactions received

Source: KIR.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 51 System infrastructure

In 2009, the National Clearing House initiated activities aiming to integrate the EuroELIXIR system into the network of the EACHA6 clearing houses. EACHA is developing a payment settlement model within SEPA based on connectivity and operational cooperation between national clearing and settlement mechanisms (CSM) with final settlement on the SSP platform of the T2 system. This concept is an alternative to the centralised system operated by EBA Clearing where payment settlement is processed in STEP2 which is a retail payment system of pan-European clearing house status (pan-European automated clearing house, PE-ACH). At the end of 2010, nine European clearing institutions exchanged payments in EACHA.

In 2010, KIR and Equens, a Dutch-German clearing house, signed an agreement on the direct exchange of SEPA credit transfers in accordance with EACHA standards. Direct exchange of payments between banks that participate in the settlement systems operated by both houses started in November 2010. Thus, participants in EuroELIXIR can now use the channel of settlement of SEPA instruments, which is an alternative to the STEP2 system. The agreement with Equens provides access to banks with registered offices not only in the Netherlands and Germany but also in Italy and Greece due to Equens’ relations with clearing houses in those countries. In 2010, KIR 3 was also holding talks on the exchange of payments with VocaLink, a British clearing house. These negotiations were to be finalised in 2011 Q1.7

3.2.3. Financial intermediation agencies

In 2010, a further increase was observed in the value and number of transactions carried out by financial intermediation agencies (Figure 3.8). The number of entities accepting payments to bank accounts (including natural persons who conduct business activities) increased. At the end of the year, it amounted to 235 compared to 217 at the end of 2009. The number of points of sale grew to 14.8 thousand from 13.9 thousand in the previous year. An average value of a single transaction carried out by financial intermediation agencies has not changed significantly and amounted to PLN 135.

The cash payments market is highly concentrated. In 2010, the four largest operators generated 53% of the value of all payments made via financial intermediation agencies. Their share in the number of transactions amounted to 59%.

Figure 3.8. Value and number of transactions executed by financial intermediation agencies, 2005−2010

PLN billion million 10 64.2 70 58.1 56 8 50.2 8.7 46.8 7.8 6 39.3 42 6.3 31.9 5.6 4 28 4.2 3.7 2 14

0 0 2005 2006 2007 2008 2009 2010

Value of transactions – left-hand scale Number of transactions – right-hand scale

Notes: the growth in the value and number of transactions made via financial intermediation agencies observed in 2009 and 2010 partially results from the increase in the number of entities submitting data to the NBP. Source: NBP.

6 EACHA (European Automated Clearing House Association) associates 22 clearing houses from 20 European countries (KIR is also a member of EACHA). This association provides a forum for cooperation and information exchange between clearing houses; it is also involved in the elaboration of common standards for settlement of payments within the Single Euro Payments Area (SEPA). 7 KIR website: http://www.kir.com.pl/.

52 National Bank of Poland System infrastructure

Activities of financial intermediation agencies in Poland are not supervised by any institution. A Directive on payment services in the internal market (Payment Services Directive – PSD) was adopted in 2007.8 It specifies a list of payment services and defines a new category of such services providers called payment institutions (financial intermediation agencies are equivalent of such a provider in the Polish market). Under the provisions of this Directive, Member States are obliged to establish authorities competent for granting permits and supervising payment institutions. The Directive was to be transposed into national legislation by 1 November 2009. Legislative work on implementing the PSD into the Polish legal system continued in 2010. An Act on payment services was drafted9 – it specified the principles for conducting a business in payment services as well as the rules of establishing and organising such a business and conducting supervision over it. Under the draft Act, operating a business by domestic payment institutions will require a permit from the Polish Financial Supervision Authority which will be the authority supervising such businesses. The draft Act also mentions a possibility of payment services to be provided by “payment service offices” if an average value of transactions carried out throughout a year does not exceed EUR 0.5 million per month. Such a provider could conduct the business after registration by the PFSA in the national register of payment institutions and other providers. 3

3.2.4. Cash back service

Cash back is a service that enables customers to take out small amounts of money (up to PLN 200) when paying for shopping with a payment card at points of sale. Cash back is therefore a supplement to an ATM network and facilitates access to cash for customers. In 2010 Q4, cash back transactions accounted for only 0.2% of the number and 0.06% of the value of payments made at ATMs, but in recent years increasing demand for this service has been observed (Figure 3.9). As at the end of December 2010, cash back service was offered by 25 thousand points of sale. The average value of a single transaction amounted to PLN 112.8 in 2010 Q4.

Figure 3.9. Quarterly value and number of cash back transactions, 2008−2010

PLN million thousand 40 400 38.4 35 33.6 350 29.8 30 300 26.4 25 23.0 250 19.9 20 18.6 200 15.4 15 12.9 150 10.1 10 8.6 100 6.3 5 50 0 0 I II III IV I II III IV I II III IV 2008 2009 2010 Quarterly value of transactions – left-hand scale Quarterly number of transactions – right-hand scale Source: NBP.

3 .3 . Financial instruments market infrastructure

The financial instruments market infrastructure consists of institutions that organise the trading in financial instruments and entities which settle the transactions. In Poland, financial instruments are traded in: the markets organised by the Warsaw Stock Exchange (WSE), the markets organised by the BondSpot company and on the Warsaw Commodity Exchange (WCE).

8 Directive 2007/64/EC of the European Parliament and of the Council of 13 November 2007 on payment services in the internal market (EU Official Journal L 319, 05/12/2007, p. 1) 9 Draft Act of the Minister of Finance of 6 December 2010 on payment services available on the Ministry of Finance website: http://www.mf.gov.pl/_files_/instytucje_finansowe/uslugi_platnicze/projekt_ustawy_ o_uslugach_ platniczych_z_dnia_6_grudnia_2010r.pdf.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 53 System infrastructure

The clearing and settlement infrastructure is composed of the Securities Register (Rejestr Papierów Wartościowych – RPW – the SKARBNET and SEBOP systems) that services Treasury bill and NBP money market bill transactions, the National Depository for Securities system, servicing the market of Treasury bonds and financial instruments available in the markets organised by the Warsaw Stock Exchange and BondSpot, as well as the PRT Clearing House (Izba Rozrachunkowa Polskiego Rynku Terminowego) (formerly the Warsaw Commodity Exchange Clearing House).

Warsaw Stock Exchange

Markets operated by the Warsaw Stock Exchange

In 2010, the following markets of financial instruments were operated by the WSE:

• Main Market (the regulated stock exchange market) with the following financial instruments traded there: equities, pre-emptive rights, allotment certificates, investment certificates, structured instruments, options, futures contracts, index participation units, Treasury bonds, and exchange-traded fund units.

3 • NewConnect (an alternative trading system – ATS) market on which equities, allotment certificates and pre-emptive rights were traded.

• retail segment of the Catalyst platform which is a debt instruments market10 consisting of two trading platforms (regulated market and ATS) where Treasury, municipal, corporate and bank bonds as well as mortgage bonds were traded.

In July 2010, the Warsaw Stock Exchange signed a cooperation agreement with NySE- Euronext to strengthen the position of the WSE in the region and facilitate access to instruments listed on the WSE for users of the SFTI platform (Secure Financial Transaction Infrastructure), which is a single point of access to markets operated by NySE-Euronext group, as well as to some other American and European trading platforms. The agreement also provides for the replacement of the currently used WARSET transaction system with the Universal Trading System Platform (UTP) developed by the NySE-Euronext. The new system will enable faster processing of orders and will offer its users a wider choice of features (including new types of orders).

In May 2010, the corporate governance rules of the WSE Main Market (Best Practices of WSE Listed Companies) were amended. The amendment covers adding provisions on, among others, web publishing by the listed companies, their remuneration policy, the recommendation relating to the distribution of equity nominal value and possibility to participate in the general meetings of shareholders via electronic means. However, the Recommendation on the existence of an audit committee within a supervisory board was removed.11 The amended corporate governance rules came into force on 1 July 2010.

Since July 2010, new short selling rules have been applied in the Main Market of the WSE, and first ETF units reflecting the WIG20 index movements have been traded since September. In December 2010, the composition of a new WIGdiv index was announced. It consists of 30 companies of the WIG20, mWIG40 and sWIG80 of the highest dividend rates and is published since January 2011.

In April 2010, the NewConnect market launched a new segment NC Lead, designed for the largest companies with high growth potential, and publication of Life Science Index, which covers health care companies, started in September 2010. Since the beginning of 2010, the issuers of shares listed on NewConnect have been obliged to publish, together with the annual report, a descriptive report on the application of corporate governance principles – Code of Best Practice for Companies Listed on the NewConnect Market. Also Authorised Advisors are obliged to include information on the application of the principles contained in Code of Best Practice for Authorised Advisers on the NewConnect Market document in their annual reports.

10 Catalyst trading system is operated by the WSE (retail customers) and BondSpot (wholesale clients). 11 Resolution No 17/1249/2010 of the Supervisory Board of the Warsaw Stock Exchange of 19 May 2010 on the amendment of Best Practices of WSE Listed Companies.

54 National Bank of Poland System infrastructure

Privatisation of the WSE

The Ministry of the State Treasury started to develop a new concept of privatisation of the WSE in December 2009. This concept assumed transfer of shares via a public offering in two stages: sale of the majority stake in 2010 Q4 and then sale of the remaining shares in the next three to five years.12 In July 2010, the Ministry selected WSE privatisation coordinators and in October 2010 the issue prospectus was approved by the PFSA. On 9 November, the WSE was floated on its own floor. The value of the WSE public offering amounted to PLN 1.2 billion. As a result of this initial public offering (IPO), the State Treasury’s share in the WSE share capital decreased from 98.8% to 35%. At the same time, the WSE Articles of Association was amended by restricting the right to vote at the Annual General Meeting (AGM) vested in the remaining shareholders. According to the amendment, a shareholder other than the State Treasury may not exercise more than 10% of the total number of votes during the AGM. Moreover, stocks held by the Treasury and other entities that had been WSE shareholders before the IPO have been preferred in terms of voting rights – two votes per each share during the AGM. As a result, the Treasury still holds the majority (51.48%) of votes during the AGM. 3 Markets organised by BondSpot

In 2010, BondSpot operated the following financial instruments trading platforms:

• Treasury BondSpot Poland13 which is an electronic trading platform where Treasury bills and bonds were traded. It is a part of the Treasury Securities Dealers system operated by the Minister of Finance;

• Regulated Market, where shares were listed as well as debt instruments (Treasury, municipal, corporate and bank bonds as well as mortgage bonds) quoted within the wholesale segment of the Catalyst platform organised as a regulated market;

• the Catalyst platform wholesale segment organised as an ATS, where corporate and bank bonds are quoted.

The Catalyst debt instruments trading platform comprises four markets organised by the BondSpot and the WSE. Two retail segments operated by the WSE (as a regulated market and ATS) and a wholesale segment run by BondSpot (as a regulated market) were launched in 2009. The wholesale segment operated by BondSpot in the ATS formula was launched on 11 January 2010. Specific Catalyst market segments are different regarding the criteria of admission into trading and the scope of disclosure requirements that have to be implemented by issuers (more stringent requirements are imposed on issued admitted into trading in a regulated market), trading rules are also different. Bonds may be entered onto Catalyst also by obtaining authorisation for the issue without trading. As a result of the authorisation, certain (simplified) disclosure requirements are imposed on the issuer, so it may be beneficial for marketing purposes, increase issuer credibility and its brand awareness in the financial market.

In 2010, 31 entities (32 in 2009), including 15 foreign financial institutions, were participants of Treasury BondSpot Poland platform. In the Institutional Segment, where institutional investors as well as market makers may be involved14, one institutional investor was active. As at the end of 2010, 1915 and 11 entities, respectively, were participants in the Regulated Market and ATS.

12 Preparation of the WSE Privatisation Strategy, 18 February 2010, communication available on the Ministry of the State Treasury website: http://msp.gov.pl/portal/pl/29/8977/Prace_nad_Strategia_Prywatyzacji_GPW_w_ Warszawie_ SA.html. 13 Before 4 January 2010, the Treasury BondSpot Poland operated under the name of MTS Poland. More about changes in MTS-CeTo company (currently BondSpot) in: Rozwój systemu finansowego w Polsce w 2009 r., Warszawa, 2011, Narodowy Bank Polski, chapter 3. 14 Entities authorised to conclude transactions in the market by setting bid and ask prices and accepting such prices. 15 One of them did not start operations in 2010.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 55 System infrastructure

Warsaw Commodity Exchange

In 2010, currency futures contracts and options on these contracts as well as interest rate futures and Treasury bond futures were traded on the Warsaw Commodity Exchange. The legal grounds for trading on the Warsaw Commodity Exchange remained unclear.16

In November 2009, the WCE established Polski Rynek Terminowy SA (PRT), the company aiming to organise trading in some instruments listed on the WCE as well as in commodity instruments. In 2010, PRT was unauthorised to operate a regulated market. After obtaining a PFSA license, PRT will organise trading in currency futures contracts and options on these contracts, 1M and 3M interest rate futures – which have so far been listed on the WCE – as well as commodity futures contracts.17

Securities Register

As at the end of 2010, Treasury bill deposit accounts in the Securities Register operated by the NBP were kept for 52 banks, the Bank Guarantee Fund (Bankowy Fundusz Gwarancyjny – BFG) 3 and KDPW, while 49 banks and BFG were involved in NBP money market bill trading. The year 2010 saw a significant increase in the value of NBP money market bill transactions (Table 3.1). It resulted from the increase in the scale of issue of these instruments due to increased excess liquidity in the domestic banking sector.

Table 3.1. Number and value of Treasury bill and NBP money market bill transactions registered in the Securities Register, 2007−2010

Number of transactions (thousands) Value of transactions (PLN billion) 2007 2008 2009 2010 2007 2008 2009 2010 Treasury bills 12.6 13.4 15.9 14.0 180.8 613.6 1,114.3 915.2 NBP money market bills 1.5 0.9 0.6 0.4 1,106.2 645.4 1,745.3 3,996.1

Notes: 1. The number of transactions for the secondary market. 2. The value of transactions includes the primary and secondary markets, and in 2009 and 2010 includes also repurchase auctions of Treasury bills. Source: NBP.

National Depository for Securities

Operating activity

As at the end of 2010, the status of a direct participant in the National Depository for Securities was vested in 72 entities (71 in 2009) and the number of issuers registered by KDPW totalled 730 (684 domestic issuers and 46 foreign issuers) compared with 583 in 2009. In 2010, the value of operations recorded in the KDPW significantly increased, which was primarily associated with higher activity of investors in the domestic equity and Treasury bond markets than in 2009 (Figure 3.10).

In 2010, the KDPW established three new operational links with foreign central securities depositories i.e.: Bulgarian, Lithuanian and Canadian ones. At the end of 2010, KDPW had 16 connections with foreign depositories (7 direct links and 9 indirect links implemented with the participation of two international central securities depositories i.e. Clearstream Banking Luxembourg or Euroclear Bank, and a custodian bank).

16 The Polish Financial Supervision Authority website: http://www.knf.gov.pl/o_nas/ostrzezenia_ publiczne/index. html. 17 Warsaw Commodity Exchange website: http://www.wgt.com.pl/index.php?option=com_ content&view=categ ory&layout=blog&id=14&Itemid=51.

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Figure 3.10. Value of operations recorded in the National Depository for Securities, 2003−2010

PLN billion 9,000 8,607.4 8,000 7,503.3 7,000 6,446.1 6,352.6 6,000 5,154.2 5,000 4,207.5 4,000 3,000 1,984.9 2,020.8 2,000 1,000 0 2003 2004 2005 2006 2007 2008 2009 2010 Source: National Depository for Securities.

Development 3 One of the tasks defined in the KDPW development strategy18 adopted in 2009 was to establish a clearing house with a status of central counterparty (CCP). The first stage was to establish a KDPW subsidiary that could be a settlement guarantor whose only task would be to support with its own equity a guarantee system for the settlement of transactions concluded in the regulated market. Carving out the clearing house from the KDPW was scheduled at a later date.

In April 2010, the KDPW established KDPW_Clearpool S.A. to guarantee settlement of transactions concluded in the regulated market. A guarantee agreement between the KDPW and KDPW_Clearpool came into force on 31 May 2010. Since that day KDPW has been authorised to use the funds from KDPW_Clearpool equity (PLN 60 million) if the funds collected under the guarantee system for the settlement of transactions concluded in the regulated market are insufficient to settle a given transaction (Flowchart 3.1). The introduction of the new entity to guarantee transaction settlement was also associated with defining a maximum level of additional payments to the settlement fund for clearing members (110% of basic contributions), which will allow them to better assess the risk associated with potential liabilities arising from participation in this fund.

Further plans of the KDPW include increasing KDPW_Clearpool share capital, transforming it into a clearing house and the devolution of tasks relating to clearing of transactions. According to the plan, the establishment of the clearing house was scheduled for the first half of 2011 to clear transactions concluded in the organised market and from 2012 – in the OTC derivatives market.19 In this context, work was underway at the KDPW in 2010 to develop infrastructure and tools enabling clearing of transactions concluded in the OTC market.20 However, to create the clearing house with CCP status on the Polish market, it is necessary to amend law in order to introduce legal structures of novation and (or) open-offer into the Polish legal system.21 Those structures make it possible for CCP to become, in legal sense, party to the transaction for each seller and buyer being a clearing member, and underpin the functioning of CCPs operating in the European market.

18 More about KDPW Strategy 2010–2013 in: Rozwój systemu finansowego w Polsce w 2009 r., Warszawa 2011, Narodowy Bank Polski, chapter 3. 19 Over-the-counter transactions are concluded outside the organised market. According to the plan, FRA, IRS, OIS and repo transactions will be cleared by CCP first and then also FX forwards, CIRS transactions, currency options, interest rate options and credit derivatives. National Depository for Securities, OTC derivatives clearing by KDPW_CCP – a Project overview, Warsaw, November 2010. 20 Under the auspices of the Polish Bank Association an Integrated Security System project (Zintegrowany System Zabezpieczeń) was developed in 2010. Implementation of the project was intended to result in establishment of the central counterparty clearing house for OTC derivatives and repo transactions. 21 Due to the structure of novation, an original agreement between the buyer and the seller expires and is replaced by two new contracts – between the CCP and the buyer, and between the CCP and the seller. When open-offer is applied, the CCP becomes a party to transaction automatically and immediately when the buyer and seller have agreed on the transaction’s terms and conditions (no contractual relationship arises between the buyer and the seller).

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 57 System infrastructure

In 2010, the KDPW was also involved in preparation to integrate with TARGET2-Securities system (T2S). Unilateral Undertaking was signed by the KDPW in February 201022 thus entering into the framework agreement on participation in T2S (T2S Memorandum of Understanding23). KDPW became one of 29 European central securities depositories declaring willingness to join the system. By signing this agreement, KDPW committed itself, among others, to carry out the impact assessment of T2S on its internal systems and processes and provide a description of the anticipated course of adjustment to T2S requirements. The KDPW representatives were invited to participate in the development of T2S platform at the European level. At national level, in March 2010, T2S National Users Group was appointed to constitute a forum for consultations on the functioning of T2S. Its members are representatives of the banking sector, the sector of brokerage houses, the KDPW and the NBP. Representatives of the WSE, the Ministry of Finance, the PFSA and other persons accepted by the Group Chairman may also attend meetings of this body as observers. Four meetings of this group were held in 2010.

3 Flowchart 3.1. Sequence of the use of funds in case of KDPW clearing member’s insolvency after 31 May 2010

Insolvent clearing member’s receivables

Hedging deposits of an insolvent clearing member (futures market)

An insolvent clearing member’s basic contributions to the settlement fund

Other clearing member’s basic contributions

50% of maximum additional payments of other clearing members1

PLN 20 million from KDPW_Clearpool’s funds

50% of maximum additional 2 payments of other clearing members1 KDPW_Clearpool’s funds

1 Additional sum paid to the settlement fund by a given clearing member cannot exceed 110% of its basic contribution. 2 At the last stage, it is possible to use funds from the second instalment of additional payments and/or, depending on the decision of KDPW Management Board, remaining KDPW_Clearpool funds. Source: National Depository for Securities.

During 2010, the KDPW was also involved in the implementation of risk management system based on SPAN methodology (Standard Portfolio Analysis of Risk), development of on-request securities lending, introduction of a settlement agent for servicing foreign clearing members, work on short selling and the offer of corporate actions processing, as well as implementation of hold- release mechanism.24 In addition, the KDPW was preparing to transfer the settlement in euro directly to the T2 (the KDPW is to become a direct participant in the T2 system in November 2011).

22 Text of this agreement is available on the European Central Bank website: http://www.ecb.int/paym/t2s/pdf/ kdpw_signing_MoU.pdf. 23 Text of this agreement is available on the European Central Bank website: http://www.ecb.int/paym/t2s/pdf/ T2S_MoU.pdf. 24 It is an instrument enabling the earliest compilation of settlement instructions. It allows to use one instruction for compilation and final settlement and separates the processes of compiling and verifying the availability of cash and securities required for settlement. Compiled transactions are put in ‘hold’ or ‘release’ status.

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Operations of the KDPW and the course of Polish financial market development in the nearest future may be affected by the European Commission adoption of the European Market Infrastructure Regulation (EMIR) being consulted in 2010.25 It is likely to introduce in the European market an obligation to clear standardised OTC derivatives contracts by CCPs and the requirements for the operation of CCPs. As a result of recommendations pertaining to the transfer of OTC derivatives clearing to CCPs, foreign clearing houses already offer such services (Table 3.2).

Table 3.2. Central counterparties clearing OTC derivatives contracts

IRS CDS Equity-linked FX derivatives transactions transactions derivatives CME Clearing (USA) P P P BM&FBovespa (Brazil) P P P Eurex Clearing AG (Germany) P P NYSE Liffe Bclear (UK) P Ice Clear Europe (UK) P 3 Ice Trust (USA) P LCH.Clearnet (UK) P LCH. Clearnet SA (France) P International Derivatives Clearinghouse (USA) P

Note: IRS – interest rate swap, CDS – credit default swap, FX – foreign exchange. Source: Compiled from Global Financial Stability Report. Meeting new challenges to stability and building a safer system, Washington DC, 2010, International Monetary Fund, p. 94 and websites of clearing houses.

There is still no clearing house having the CCP status on the Polish market, and derivatives are traded mainly in the OTC market. The KDPW capital group should take appropriate adaptation measures for the KDPW subsidiary to be authorised as a CCP according to the proposed provisions of EMIR. Only such an authorisation will enable clearing of derivatives transactions considered as CCP eligible. The lack of the aforementioned authorisation would generate the risk that clearing of such transactions will be taken over by foreign entities that already have the CCP status. As a result, Polish supervisory authorities would lose the possibility of exercising direct oversight over the process of derivatives clearing.

3 .4 . European projects on the financial market infrastructure

In 2010, the European market witnessed the implementation of projects and development of solutions that have or will have an impact on the functioning of the Polish financial market infrastructure. They concern the payment system (SEPA), as well as clearing and settlement of transactions in financial instruments (T2S and Collateral Central Bank Management projects).

Single Euro Payments Area project − SEPA

SEPA on the European market

SEPA (Single Euro Payments Area) is a project within which in 32 European countries (27 European Union countries, Iceland, Lichtenstein, Norway, Switzerland and Monaco) three pan- European payment instruments: SEPA Credit Transfer (SCT), SEPA Direct Debit (SDD) and SEPA Cards Framework (SCF) are developed. On 28 January 2008, SEPA Credit Transfer was implemented and SEPA Direct Debit was implemented on 2 November 2009. In 2009, the Regulation on cross-

25 Proposal for a Regulation of the European Parliament and of the Council on OTC derivatives, central counterparties and trade repositories, COM(2010) 484 final, Brussels, 15 September 2010, European Commission.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 59 System infrastructure

border payments was adopted26 which imposed the obligation for payment service providers of euro area Member States to have reachability to the SEPA Direct Debit from 1 November 2010.27 In 2010, the banking sector continued work on adjustment to the SCT and SDD servicing requirements as well as implementation of SEPA standard for credit cards and their servicing. Moreover, the European Payments Council (EPC), coordinator of the SEPA project, analysed opportunities for SEPA products to be implemented in mobile payments (SEPA for Mobile) and possible decrease in costs of cash payments processing (SEPA for Cash).

Originally, the end of migration to SEPA instruments, understood as the ultimate replacement of the national payment instruments with corresponding SEPA products was planned by the EPC for the end of 2010.28 However, the deadline was not met. The use of SEPA instruments within the euro area, although steadily increasing, is still not common. In December 2010, payments matching the SCT standard accounted for only 13.9% of all credit transfers made in the euro area29 (6.2% in December 2009). The share of payments matching the SDD standard in all direct debits amounted to only 0.08%. 3 As a result of the slow progress of the project implementation, a discussion on the more rapid implementation of SEPA products was initiated in 2009 among the entities involved. In September 2009, the European Commission adopted a communication presenting a roadmap of SEPA completion30 which, among others, set deadlines for migration to SCT and SDD. In December 2009, the Economic and Financial Affairs Council (ECOFIN) obliged the Commission to analyse, in cooperation with the ECB and other stakeholders, the validity of setting the deadline for a final migration to SEPA instruments at the level of the Community regulation.31 As a result, in December 2010, the European Commission submitted the draft Regulation establishing the dates of European banking sector migration to SCT and SDD standards.32 The European Commission proposed that after the entry into force of this Regulation, transitional periods will be applied: the annual adjustment to the SCT standard and two years to adjust to the SDD standard. The draft Regulation also provides for a possibility of longer transition periods for instruments of a small market share, as well as in the case of non-euro area Member States.

Adapting to SEPA standards for payment cards, which was supposed to be completed in 2010, runs in a different way than in the case of SCT and SDD. The EPC-prepared SEPA Cards Framework document sets the course of actions for adjustment and determines effects to be achieved to enable consumers to use payments cards in the EU in a safe and effective manner. A key technological requirement is the migration from magnetic stripe cards to chip cards matching EMV standard (Europay MasterCard Visa). The migration process in the EU Member States is advanced. In 2010 Q4, 81% of payment cards, 90% of point of sale (POS) terminals and 96% of ATMs complied with this standard33 in 27 EU Member States.

The first meeting of the SEPA Council, formed on the initiative of the ECB and the European Commission, took place in June 2010. The members of SEPA Council are representatives of 10 institutions operating on the European payment services market and of four euro area central banks. Its mission is to strengthen the integration of payment services market, including monitoring the implementation of the SEPA project.

26 Regulation of the European Parliament and of the Council (EC) No 924/2009 of 16 September 2009 on cross- border payments within the Community and repealing Regulation (EC) No 2560/2001 (EU Official Journal L 226 of 2009, p. 11). 27 This requirement will apply to payment services providers from other EU Member States as of 1 November 2014 (if the provider supports at the same time domestic direct debit in euro). 28 EPC Roadmap 2004-2010, European Payments Council, EPC website: http://www.europeanpaymentscouncil.eu/. 29 European Central Bank website: http://www.ecb.europa.eu/paym/sepa/html/index.en.html. 30 Communication from the Commission. Completing SEPA: a Roadmap for 2009-2012, COM(2009) 471, Brussels, 10.9.2009, Commission of the European Communities. 31 Council conclusions on SEPA, Brussels, 2 December 2009, Council of the European Union. 32 Proposal for a Regulation of the European Parliament and of the Council establishing technical requirements for credit transfers and direct debits in euros and amending Regulation (EC) No 924/2009, COM(2010) 775 final, Brussels, 16. December 2010, European Commission. 33 The European Central Bank website: http://www.ecb.europa.eu/paym/sepa/html/index.en.html.

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SEPA implementation in Poland

In 2010, 25 banks and the NBP were participants in the SEPA Credit Transfer Scheme. Two Polish banks were participants in the SEPA Core Direct Debit Scheme, and one bank was involved in SEPA Business to Business Direct Debit Scheme.34 The deadline for SEPA Direct Debit launch in the Polish market is yet to be set. Lack of demand for this instrument among customers of Polish banks was one of the main reasons for that. The other reason was that the Directive on payment services in the internal market (PSD) was not implemented into Polish law. The deadline for implementation of the PSD into national law was scheduled for 1 November 2009. As at the end of 2010, the Directive was implemented by all EU Member States except Poland. As a result, on 30 September 2010 the European Commission filed a lawsuit against Poland with the Court of Justice of the EU for failing to implement that Directive.

SEPA-compliant international card schemes are used in the Polish market, whereas there are no local cards and systems (covering only the territory of Poland). Therefore, implementation of the SEPA framework for payment cards is focused on the use of EMV chip card standard. In 2010, the number of cards with an embedded microchip nearly doubled in the Polish market (Table 3.3). The share of such cards in the number of payment cards in circulation stood at 50% at the end of 2010, compared 3 with 24% a year earlier. Also, the value of transactions made with such cards increased significantly.

In February 2010, the Management Board of the Polish Bank Association adopted a new National SEPA Implementation and Migration Plan35 which replaced the document prepared in 2007. Modification of the implementation plan was necessary due to the entry into force in 2009 of the European regulations on SEPA (PSD and the Regulation on cross-border payments). The plan was supplemented by two important elements: schedule of implementation of specific SEPA instruments and the migration of credit transfers in euro to the SCT standard (two scenarios were presented, where the migration deadlines are set before and after Poland’s accession to the euro area). SEPA evolution towards online and mobile payments was also taken account of.

Table 3.3. Number of payment cards in circulation and the value of card transactions in Poland, 2007−2010

2007 2008 2009 2010 Number of payment cards in circulation (in thousands) 26,496.2 30,275.5 33,401.2 31,983.8 – including cards with at least microchip embedded 1,990.5 4,895.3 8,037.2 15,840.9 – share (%) 7.5 16.2 24.1 49.5 Value of card transactions (PLN billion) 265.2 304.3 330.5 353.8 – including cards with at least microchip embedded 17.5 33.5 66.6 130.6 – share (%) 6.6 11.0 20.2 36.9

Note: The data include: magnetic stripe cards, cards with magnetic stripe and microchip, cards with microchip and virtual cards (used to make payments on the Internet or other payments made without the physical presentation of the card). Source: NBP.

TARGET2-Securities

In 2010, work was underway on the launch of the T2S platform that will enable settlement of euro-denominated securities transactions in central bank money.36 During the period analysed, technical documentation of the project was accepted and Guideline on TARGET2-Securities, a document setting out the rules on the governance of the T2S Programme, was published.

34 The European Payments Council website: http://epc.cbnet.info/content/adherence_database. The business component of SEPA Direct Debit Scheme may only be used by enterprises. It is characterised by, among others, no possibility of authorised payment return, obligation to verify each order by the payer’s bank as well as shortened time for unauthorised payment return. 35 National SEPA Implementation and Migration Plan (Krajowy Plan Implementacji i Migracji SEPA): http://www. sepapolska.pl/aktualnosci/rewizja_krajowego_planu_implementacji_i_migracji.html. 36 Settlement in central bank money means that the transfer of funds related to the transaction takes place in the books of the central bank. The T2S project assumes that settlement in central bank money will be also possible in currencies other than the euro.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 61 System infrastructure

Preparation of a draft agreement was also started on making available by non-euro area central banks of national currencies for cash settlement in T2S. Moreover, work was underway by the Advisory Group and T2S Sub-groups as well as CSD Contact Group (composed of representatives of central securities depositories, which signed the agreement on participation in T2S project) and National User Groups.

The structure of fees to be charged for the services provided on the T2S platform was approved in November 2010. The ECB Governing Council decided that, for the period from September 2014 to December 2018, the delivery versus payment (DvP) price for T2S will be set at EUR 0.15 per instruction.37 The price of most of the remaining tariff items was determined as a percentage of a fee charged for a DvP instruction. The ECB assumes that the costs of the system development will be recovered within seven years of its full operation.

In July 2009 the ECB and euro area central banks together with 27 central securities depositories signed the T2S Memorandum of Understanding – framework agreement on participation in T2S. This Memorandum formalises the signatory contribution to the project 3 implementation and defines the initial principles on which the depositories will conclude individual agreements on the use of the T2S platform. In September 2009, the Norwegian central securities depository signed the Memorandum, and two other entities, i.e. the Polish central securities depository (KDPW) and the Hungarian central securities depository signed the Memorandum in February 2010 and June 2010, respectively.

The signing of the final agreement on participation in T2S (T2S Framework Agreement) between central securities depositories and the Eurosystem is expected in 2011 Q3. Construction of the T2S system will last until December 2013, then tests – with the participation of future users – will start. T2S will commence its activities in September 2014,38 however migration of all users is to be completed in September 2015.

CCBM2

Work continued in 2010 on the launch of CCBM2 (Collateral Central Bank Management) system, which is to replace the current decentralised CCBM (Correspondent Central Banking Model). CCBM2 system is to enable euro area central banks to accept collateral, both on domestic and cross-border basis, for the Eurosystem open market and credit operations, on a single technical platform. The ECB planned the publication of key documents detailing the rules of that system for 2011, and testing of its operation for 2012. It is assumed that the migration of the system participants to CCBM2 will be carried out in two stages in 2013.39

3 .5 . Market participant protection systems

The principles of the operation of the Insurance Guarantee Fund and the Pension Guarantee Fund remained unchanged in 2010.

Bank Guarantee Fund

The Act on the Bank Guarantee Fund was amended in December 2010.40As a result of the amendment, deposit guarantee increased from PLN equivalent of EUR 50,000 to PLN equivalent of EUR 100,000 and the term of payment of guaranteed funds was shortened to 20 business days. The amended Act came into force on 30 December 2010.

37 Two instructions occur for each transaction. Delivery versus payment – a mechanism for transfer of securities in exchange for a corresponding transfer of funds. 38 In April 2010, the T2S platform launch date was postponed from June 2013 to September 2014, T2S OnLine – Quarterly Review – No 4, Spring 2010, the European Central Bank website, http://www.ecb.int/. 39 CCBM2. Project Status Overview, Brussels, 24 February 2011, the European Central Bank. 40 The Act of 16 December 2010 amending the Act on the Bank Guarantee Fund and certain other Acts (Dz.U. of 2010, No 257, item 1724). For further information see Chapter 2.

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In the future, the operation of the Polish deposit guarantee scheme may be affected by amendments to the European regulations. In July 2010, the European Commission presented a proposal of an amendment to the Directive on deposit guarantee schemes41, assuming changes in the scope of coverage and payment date of guaranteed funds, cooperation between national systems in the EU, the way those systems are financed, and the scope of information received by depositors.

Credit Unions’ Savings Protection Scheme

Credit Unions’ Savings Protection Scheme is run by two institutions, i.e. the National Association of Co-operative Savings and Credit Unions (Kasa Krajowa SKOK) and the Credit Unions Mutual Insurance Society (Towarzystwo Ubezpieczeń Wzajemnych SKOK – TUW SKOK). The value of funds held in credit unions by their members which are covered by the obligatory insurance in TUW SKOK was raised in 2010. Since 1 December 2010, the obligation has referred to the PLN equivalent of EUR 100,000 (previously, it was the PLN equivalent of EUR 50,000). Capital market participant protection system 3 Two new elements of the Polish capital market participant protection system began to operate in 2010. As the wholesale segment of Catalyst platform (organised as an ATS) was launched, the guarantee fund for settlement of transactions executed in the BondSpot ATS was established in January 2010. Moreover, since May 2010, settlement of transactions concluded in the regulated market has been guaranteed by KDPW_Clearpool. In 2010, capital market participants were also protected by the KDPW mandatory Investors Compensation Scheme, the KDPW guarantee fund for the settlement of transactions concluded in the regulated market and the ATS guarantee system for transactions concluded in the alternative trading systems organised by the WSE (NewConnect market and ATS on the Catalyst platform).

In the future, the functioning of the Polish investors’ compensation scheme operated by KDPW may be affected by amendments to the European regulations. In July 2010, the European Commission submitted a proposal to amend the Directive on investor compensation schemes,42 assuming changes in, among others, the value of funds covered by compensation, scope of protection and term of compensation payment, cooperation between national systems within the EU and financing of those systems as well as the scope of information obtained by investors.

3 .6 . Institutions that enhance information transparency

Credit Information Bureau

In 2010, 47 commercial banks and the banks affiliating cooperative banks, 524 cooperative banks,43 the National Association of Co-operative Savings and Credit Unions as well as the economic information bureau InfoMonitor participated in the Credit Information Bureau (Biuro Informacji Kredytowej – BIK). BIK provides an information exchange system in which data on the credit history of customers of banks and credit unions are collected, processed and distributed. During the past three years, the number of reports and scoring evaluations of individual clients made available by BIK steadily increased. In 2010, the number of reports increased by 46% compared with the previous year, while the number of scoring evaluations by 10% (Figure 3.11).

41 Proposal for a Directive of the European Parliament and of the Council on deposit guarantee schemes (recast), COM(2010)368 final, Brussels, 12 July 2010, European Commission. 42 Proposal for a Directive of the European Parliament and of the Council amending Directive 97/9/EC of the European Parliament and of the Council on investor compensation schemes, COM(2010)371 final, Brussels, 12 July 2010, European Commission. 43 Of which 273 banks provided data for BIK.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 63 System infrastructure

Figure 3.11. Number of reports and scoring evaluations on individual clients made available by the Credit Information Bureau, 2008–2010

million 50 41.1 40

30 28.4 25.1 19.9 22.8 20 13.3 10

0 2008 2009 2010 Reports Scoring evaluations

Source: BIK. 3 In 2010, management reports prevailed in the structure of reports on individual clients as they accounted for 47.2% of all reports made available by BIK. These reports are designed to identify the creditworthiness and reliability of a customer in connection with bank activities other than offering credit products (e.g. opening a bank account). This product allows banks to profile products by also considering customer risk assessment. Credit reports, which serve to determine the creditworthiness and reliability of the client upon loan application, accounted for 40.2% of reports on individual clients, and monitoring reports to enable monitoring of the client’s obligations towards the bank, accounted for 12.5% of reports made available by BIK.44

In 2010, data for the interbank information exchange system on enterprises (System Informacji BIK Przedsiębiorca), which was launched in 2008, were provided by five banks. The number of inquiries for BIK Enterprise reports amounted to 111 thousand. During the next years, the functioning of the economic information system in the Polish market will be influenced by the new Act on Granting Access to Business Information and Interchange of Economic Data, which came into force in June 2010.45

Institutions assessing investment risk of entities (rating agencies)

In 2010, only one rating agency – Fitch Polska, the Polish subsidiary of the global rating agency operating under the name of Fitch Ratings – was registered in Poland. In 2010, Fitch Polska assigned ratings to 9 new entities (2 cities, 2 banks and 5 enterprises) and new ratings to bond issues of 5 entities. As at the end of 2010, Fitch Polska ratings were given to 59 entities: the Republic of Poland as a country, 10 banks, 5 voivodships, 26 cities, 15 enterprises (including 2 leasing companies) and 2 insurance companies.

44 Tomasz Klepacki, Bank i Klient: Wykorzystanie zasobów bazy BIK przez sektor bankowy w latach 2006–2010, Miesięcznik Finansowy Bank, 2011/4. 45 The Act of 9 April 2010 on Granting Access to Business Information and Interchange of Economic Data (Dz.U. of 2010, No 81, item 530). For further information on changes resulting from this Act, see Chapter 2.

64 National Bank of Poland Financial institutions

4 Financial institutions

4 .1 . Banks

The acceleration of economic growth rate in Poland as well as a slow, gradual global economic recovery contributed to an improvement in the condition of the banking sector in Poland in 2010. The earnings and profitability ratios of the banking sector in Poland increased as compared to 2009. This can principally be traced to the increase in bank net interest income and a decrease in the growth rate of provisions for impaired loans. However, the profitability of the banking sector was significantly lower than in the years 2007–2008.

The cycle of tightening of the lending policy with respect to enterprises, initiated in 2008, was completed in 2010. Despite this fact, the annual growth rate in corporate loans as at the end of 2010 remained negative. This resulted from a limited demand for loans on account of low levels of new investments and the good financial standing of enterprises, allowing them to finance 4 investments with own funds.

The banks’ lending policy with respect to loans to households was largely determined by the necessity to make adjustments to the provisions of Recommendation T.1 The Recommendation includes provisions relating to the limit of loan repayment burden on the borrower’s income as well as the level of the LTV ratio. This Recommendation influenced the tightening of the lending standards with respect to housing and consumer loans. At the same time, the increased competition in the housing loans market resulted in a considerable reduction of loan spreads by most banks.

In 2010, the operation of the banking sector was also significantly influenced by the issue of Recommendation A2 on the management of risk associated with derivatives transactions concluded by banks, as well as Recommendation I3 on foreign exchange risk management by banks and principles for performing by banks of transactions involving exposure to foreign exchange risk. Moreover, Resolution No 434/2010 of the PFSA4 limiting the scope of financial instruments which may be included in credit institutions’ own funds came into force on 31 December 2010.

Concentration of lending growth in the household loans segment, in particular housing loans, contributed to a further decline in the share of loans to enterprises in the portfolio of loans to the non-financial sector. Concentration of bank activities in the segment of retail loans has been observed in the Polish banking sector for several years now. Similar trends can also be observed in other European countries. A decline in loans to enterprises may result both from a higher risk- -adjusted profitability of products offered to households, easier creditworthiness assessment of mass products such as retail loans, as well as increasing availability of alternative forms of funding

1 Resolution No 52/2010 of the Polish Financial Supervision Authority of 23 February 2010 on the issue of Recommendation T on good practices with regard to risk management of retail credit exposures (Official Journal of the PFSA of 2010 No 2, item 12). 2 Resolution No 134/2010 of the Polish Financial Supervision Authority of 5 May 2010 on the issue of the PFSA’a Recommendation A on the management of risk associated with derivatives transactions concluded by banks (Official Journal of the PFSA of 2010 No 3, item 20). 3 Resolution No 53/2010 of the Polish Financial Supervision Authority of 23 February 2010 on the issue of Recommendation I on foreign exchange risk management at banks and principles for performing by banks of transactions involving exposure to foreign exchange risk (Official Journal of the PFSA of 2010 No 2, item 13). 4 Resolution No 434/2010 of the Polish Financial Supervision Authority of 20 December 2010 on other balance sheet items included in the bank’s core capital, the amount and scope thereof, and the conditions of including them in the bank’s core capital (Official Journal of the PFSA of 2011 No 1, item 1).

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 65 Financial institutions

enterprises’ business activity, among others, the development of the leasing, factoring and debt securities markets.

In 2010, the impaired loans ratio in the portfolio of loans to the non-financial sector increased. At the same time, however, the growth rate of impaired loans, in particular as regards loans to enterprises, decreased.

In 2010, the competition for deposits of the non-financial sector declined and focused on the personal and savings accounts offer, which resulted in the decline in interest expense and improvement of net income from banking activity in the banking sector. The gap between the portfolio of granted loans and deposits taken in by the banks was still mainly funded with liabilities towards foreign parent entities. In 2010, there was an increase both in the share of foreign liabilities in the balance sheet total of the domestic banking sector as well as the number of banks for which they constitute an important source of funding.

In 2010, the banking sector’s regulatory capital increased by approximately PLN 10 billion, primarily as a result of retention of 2009 profits and the new share issue. Consequently, the average capital adequacy ratio in the banking sector also increased.

4.1.1. Evolution of the banking sector: size and structure

4 In 2010, the assets of the banking sector increased by 8.7% and at the end of December amounted to PLN 1,158.5 billion,5 which constituted 82.0% of the gross domestic product (Figure 4.1.1). The growth of assets, higher than in 2009, resulted largely from the improving condition of the Polish economy and the increase in the value of granted loans. The highest growth of loan value was registered in the segment of housing loans. The drop in the demand for corporate borrowing is the factor behind muted lending growth. Statistical factors, i.e. depreciation of the zloty against the Swiss franc (14.4%), which was the main currency in which housing loans were denominated, also had some impact on the asset growth.

Figure 4.1.1. Banking sector assets, 2003–2010

PLN billion % 1,200 96.4 120 75.9 82.4 1,000 100 65.7 800 80 57.8 600 47.1 60 34.0 38.8 1 062.1 977.2 963.2 400 40 727.1 539.3 624.0 499.7 200 455.0 20

0 0 2003 2004 2005 2006 2007 2008 2009 2010

Assets – commercial banking sector Assets – cooperative banking sector – left-hand scale – left-hand scale Growth rate – commercial banking Growth rate – cooperative banking – right-hand scale – right-hand scale Banking sector/GDP – right-hand scale Source: NBP.

As in the previous year, the cooperative banking sector assets6 increased much faster than commercial banking sector assets – by 17.1% and 8.7% respectively (Figure 4.1.1), which was largely due to a 26-percent increase in affiliating banks’ assets.

5 The figures are quoted taking into consideration adjustments sent by banks in August 2011. 6 Later in the text of this report, the cooperative banking sector is understood as cooperative banks and affiliating banks, whereas the commercial banking sector – as domestic banks operating in the form of a public limited company or a state-owned bank as well as branches of credit institutions.

66 National Bank of Poland Financial institutions

The number of domestic banks did not change in 2010. As a result of the merger of Getin Bank and Noble Bank, Getin Noble Bank was established. At the same time, in the first half of 2010, FM Bank commenced its operating activities. The number of branches of credit institutions reached 21. A branch of Commerzbank AG was wound up, whereas the following entities commenced their activities: Aareal Bank AG, Citibank Europe plc, Ikano Bank GmBH and Nordea Bank AB.

Further consolidation in the commercial banking sector may be expected in the years to come. In 2010, the Banco Santander and Getin Holding banking groups were involved in consolidation processes. In October 2010, Santander Consumer Bank obtained the consent of the PFSA to merge with AIG Bank Polska,7 in June 2010, Getin Holding took over GMAC Bank Polska. Furthermore, in November, Getin Holding signed a contract under which TUIR Allianz Polska sold a 100% stake of Allianz Bank Polska.8

In 2010, the number of cooperative banks did not change. All cooperative banks except Krakowski Bank Spółdzielczy were affiliated by three banks, i.e. Bank Polskiej Spółdzielczości (BPS) (359 affiliated banks), Gospodarczy Bank Wielkopolski (GBW) (150 affiliated banks) and Mazowiecki Bank Regionalny (MR Bank) (66 affiliated banks). In November 2010, MR Bank concluded an agreement on the merger with GBW.9 Ownership structure of the banking sector: condition and changes 4 The year 2010 brought no significant changes in the ownership structure of the banking sector. The commercial banking sector slightly decreased its market share in favour of cooperative banking sector. Despite the increase in the number of the branches of credit institutions, their share in the banking sector declined for another year in a row (Table 4.1.1).

In the commercial banking sector, banks whose major shareholders were foreign entities were of greatest significance, in terms of the value of assets. However, the year 2010 was another period in which their market position weakened. Both banks operating as public limited companies as well as branches of credit institutions recorded a decline in the share in the assets of the Polish banking sector.

In the group of banks controlled by domestic investors, four banks controlled by the State Treasury – three in the form of a public limited company: PKO BP, Bank Pocztowy and Bank Ochrony Środowiska, as well as a state-owned Bank Gospodarstwa Krajowego, were dominant. As a result of establishing Getin Noble Bank, the number of private banks with major Polish shareholding decreased to two.

In 2010, the share of the cooperative banking sector in the total banking sector assets increased again, approximating a historic maximum level of 6.4% recorded in 2001. The increase in assets of cooperative banks contributed to a significant increase in the assets of affiliating banks, which are their majority co-owners and in which they invest their available funds. One of the reasons for the low share of assets of affiliating banks in the total banking sector assets is the fact that these banks conduct limited commercial activities, and use a relatively small number of branches (102 own branches as at the end of 2010). Their activities are largely concentrated on servicing affiliated cooperative banks.

7 On 27 October 2010, the Polish Financial Supervision Authority approved the merger of Santander Consumer Bank (Polska) and AIG Bank Polska. 8 On 18 November 2010, GETIN Holding signed a contract under which it acquired a 100% stake in Allianz Bank Polska and took over its banking activities in Poland – Communication of Allianz Bank Polska: http://www.allianz.pl/ aktualnosci_4757_14887.html. 9 On 3 November 2010, an agreement was signed on the merger of Mazowiecki Bank Regionalny S.A. and Gospodarczy Bank Wielkopolski S.A. in Poznań – Communication of GBW: http://www.sgb.pl/gbw_aktualnosci_ tresc/1231/Polaczenie_GBW_S_A_i_MR_Banku_S_A_stalo_sie_faktem.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 67 Financial institutions

Table 4.1.1. Ownership structure of the banking sector, 2003–2010

Number of banks

2003 2004 2005 2006 2007 2008 2009 2010 COMMERCIAL BANKING SECTOR 1. Commercial banks which conduct operational 55 54 58 60 61 67 64 67 activities1 1.1. Domestic banks1 55 51 51 48 47 49 46 46 1.1.1. with major state shareholding 6 5 4 4 4 4 4 4 1.1.2. with major private shareholding:1 49 46 47 42 43 45 42 42 – Polish equity1 3 5 4 4 3 3 3 2 – foreign equity 46 41 43 40 40 42 39 40 1.2. Branches of credit institutions2 1 3 7 12 14 18 18 21 2. Commercial banks which do not conduct 2 6 8 5 6 6 6 6 operational activities – of which: branches of credit institutions 0 2 4 0 1 1 1 1 COOPERATIVE BANKING SECTOR 3. Affiliating banks 3 3 3 3 3 3 3 3 4. Cooperative banks which conduct operational 600 596 588 584 581 579 576 576 4 activities 5. Cooperative banks which do not conduct 4 4 3 3 3 3 1 1 operational activities Banking sector (1+3+4) 658 653 649 647 645 649 643 645 Share in total banking sector assets (%) 2003 2004 2005 2006 2007 2008 2009 2010 COMMERCIAL BANKING SECTOR 1. Commercial banks which conduct operational 93.0 92.9 92.0 91.5 91.7 92.7 92.2 91.7 activities1 1.1. Domestic banks1 92.4 92.2 91.1 88.4 87.7 87.3 87.0 87.0 1.1.1. with major state shareholding 24.4 20.6 20.3 19.8 18.4 17.3 20.7 21.5 1.1.2. with major private shareholding:1 68.1 71.7 70.8 68.6 69.3 70.0 66.3 65.5 – Polish equity1 0.8 4.7 1.7 2.0 2.5 3.0 3.3 3.9 – foreign equity 67.2 66.9 69.1 66.6 66.9 67.0 63.0 61.6 1.2. Branches of credit institutions2 0.6 0.6 0.9 3.1 4.0 5.4 5.2 4.7 COOPERATIVE BANKING SECTOR 3. Affiliating banks 1.7 1.9 2.2 2.3 2.1 1.9 2.0 2.2 4. Cooperative banks which conduct operational 5.3 5.3 5.8 6.2 6.2 5.4 5.8 6.1 activities

1 Excluding affiliating banks. 2 Societe Generale Branch in Poland – till Poland’s accession to the European Union, this bank operated in the legal form of a branch of a foreign bank. For the purposes of clarity, in this table it was presented in 2003 in the row “Branches of credit institutions”. Currently, in Poland there are no branches of foreign banks within the meaning of the Banking Law Act. Source: NBP.

Distribution channels and significance of banks for the economy

In 2010, the number of own branches in the commercial banking sector slightly decreased (Figure 4.1.2). This was partially a result of the banks’ need to reduce general expense and the increase in significance of Internet banking for the distribution of banking products. The banks limited the performance of cashless transactions in their branches and partner branches and at the same time they encouraged clients to perform such transactions on their own via Internet banking systems. As a consequence, the holders of bank accounts with Internet access more frequently had the opportunity to make transfers quickly and apply for loans, lending facilities and payment cards, while the banks could reduce the expense of maintenance of branch networks.

68 National Bank of Poland Financial institutions

Figure 4.1.2. Number of branches and sub-branches in the commercial banking sector, 2003–2010

12,000 10,500 9,000 7,500 5,789 5,566 4,978 6,000 5,806 4,539 4,559 4,854 5,217 4,500 3,000 1,500 3,047 3,638 3,659 3,735 4,073 4,511 4,733 5,292 0 2003 2004 2005 2006 2007 2008 2009 2010

Branches Sub-branches (subsidiaries, outlets) Source: NBP.

Commercial banks reduced the number of branches offering primarily cashless service by 588, while at the same time the number of branches offering the entire range of products was increased by 559. One of the reasons for the reduction of the number of bank branches was the transfer of a part of performed activities to partner branches. They constituted an alternative form 4 of a bank’s development and allowed it to execute the sales strategy in a very flexible manner and establish the distribution network. The banks transferred to these branches, among others, cash loan origination, mortgage loans, authorised overdrafts, opening of current accounts for individual persons and micro- and small enterprises, the sale of savings and investment products.

The banks used the cooperation with partner branches in various ways. Some of the banks which recently commenced their business activities were building their distribution networks almost exclusively with the use of partner branches, for example Meritum Bank and FM Bank. This strategy allowed the banks to relatively rapidly develop a network of branches. On the other hand, some banks reduced their cooperation with partner branches. According to the data of the PROFIT System company, seventeen commercial banks decreased the number of partner branches in 2010. In consequence, their number was reduced by 246 as compared to the previous year.10 PKO BP remained the leader in this group, even though it closed down 233 partner branches as part of a programme involving the restructuring of the oldest network of agency branches in Poland. Other banks which largely used this distribution channel were among others: DnB Nord, Getin Noble Bank, Bank BPH, Pekao SA and Euro Bank. Most partner branches operating in the market used the name of the bank or one of the brands owned by the bank, e.g. mBank, Multibank and Monetia.

Mini-branches, called mPunkty (mPoints), constituted a new banking products distribution channel and they were gaining in popularity. They were usually set up in large shopping malls. These branches offered only cashless services (e.g. opening bank accounts, sale of credit cards, awarding consumer loans).

The distribution network in the cooperative banking sector increased from 3,860 at the end of 2009 to 4,014 branches at the end of 2010. This was impacted both by the increase in the number of branches as well as sub-branches and customer service offices, from 1,618 to 1,675 and from 2,242 to 2,339, respectively.

In 2010, employment in the banking sector increased as compared to 2009 by 1,846 full- -time posts, of which approximately 1,400 were added in the commercial banking sector (Figure 4.1.3). The workload involved in the operations of banks in Poland still remained high as compared to the average in EU countries. In 2010, the average value of assets per employee in the Polish banking sector was PLN 6.6 million. The commercial banking sector was characterised by lower

10 Relevant information is available at: http://profitsystem.pl/usr/stuff/informacja-prasowa-franczyza-w-sektorze- bankowym-2010-2011-1.pdf.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 69 Financial institutions

workload. Its value per employee was on average almost PLN 7.5 million assets as compared to around PLN 2.8 million in the cooperative banking sector.

Figure 4.1.3. Number of employees and the share of branch employees in total employment in banks, 2003–2010

thousand % 200 100 33.5 33.9 34.4 180 32.4 90 30.8 31.3 160 29.9 30.2 80 140 70 120 60 100 50 80 121.4 119.5 122.2 126.7 134.7 147.8 141.1 142.5 40 60 30 40 20 20 10 0 0 2003 2004 2005 2006 2007 2008 2009 2010

Commercial banking sector – left-hand scale Cooperative banking sector – left-hand scale Employees: commercial banking Employees: cooperative banking – right-hand scale – right-hand scale 4 Source: NBP.

After the strong growth in the number of credit cards in the years 2008–2009, resulting from the aggressive sales of credit cards in packages with other banking products, the banks verified their actual use and the timely repayment of loans taken out via such cards. The banks tightened the standards for issuing new cards and awarding new limits, which was partially supported by the increase in the share of impaired loans in the loans taken out via credit cards of individual persons from 12.6% to 18.2% at the end of 2009 and 2010, respectively. As a result, the number of credit cards declined by 2 million. Despite this significant reduction of the number of credit cards, the value of credit card transactions increased by 1% as compared with the previous year.11

The year 2010 also saw a 3.7% decline in the total number of payment cards, composed of an 18% decrease in the number of credit cards and a 3.5% increase in the number of debit cards (Figure 4.1.4).

Figure 4.1.4. Number of payment cards and their growth rate, 2007−2010

million % 36 70 33.2 32.0 32 30.3 60 28 26.5 50 24 22.0 22.8 40 20.5 20 18.3 30 16 20 12 10 8 0 7.8 4 9.4 10.9 8.9 -10 0 -20 2007 2008 2009 2010

Number of debit cards – left-hand scale Growth rate of debit cards – right-hand scale Number of credit cards – left-hand scale Growth rate of credit cards – right-hand scale Total number of payment cards – left-hand scale Growth rate of all payment cards – right-hand scale

Source: NBP.

11 Information on payment cards – 2010 Q4, Warsaw 2011, NBP, pp. 9 and 28.

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The preference for cash payments remained prevalent, although the value of cashless transactions was systematically increasing. The value of transactions made with the use of payment cards increased by 7.1% to PLN 354 billion. In 2010, the number of current bank accounts of natural persons increased by 2.4 million to 34.1 million. The average number of cashless transactions carried out in a bank account increased to 35.6 during the second half of 2010. However, 22–23% of the population in Poland still did not have their own account at a bank or a credit union and only used cash to make payments.12

Figure 4.1.5. Number of devices, annual number and amount of transactions performed via Points of Sale (left-hand panel) and ATMs (right-hand panel), 2007–2010

A. POS B. ATMs

thousand/million PLN billion thousand/million PLN billion 1,000 100 700 280 245 900 85 90 232 600 253 240 800 75 80 209 700 67 70 500 200 600 54 60 400 160 500 50

610.9 120

300 635.9 671.3 400 40 673.1 824.8

300 697.7 30 80 580.9 200

200 460.9 20

.5 40 100 10 100 245.7 11 13.6 15.9 16.9 215.5 197.6

170.4 4 0 0 0 0 2007 2008 2009 2010 2007 2008 2009 2010

POS (thousand) – left-hand scale ATMs (thousand) – left-hand scale Transactions (million) – left-hand scale Transactions (million) – left-hand scale Value of transactions (PLN billion) Value of transactions (PLN billion) – right-hand scale – right-hand scale

Source: Information on payment cards – 2010 Q4, Warsaw 2011, NBP.

In March 2010, VISA and MASTERCARD lowered the interchange fee from PLN 3.5 to PLN 1.2−1.6. The lowering of the interchange fee brought about the positive effect of a more general use of ATMs. Lower fees encouraged banks to include the service of using ATMs which do not belong to a given bank for free in the promotion of their bank accounts offer.

Some of the banks equipped their ATMs with technology that allow customers to pay bills, purchase insurance policies, and collect funds transferred with the use of mobile phones without the need to use the payment card. As a result, the improved functionality contributed to the increase in the value of performed transactions to PLN 253.3 billion (3.4% y/y), and the number of operating ATMs as at the end of 2010 amounted to 16.9 thousand (increase by 6.4% y/y).

The use of Points of Sale (POS) to make payments was increasing at a higher rate. In 2010, the number of these devices increased to 245.7 thousand (increase by 14% y/y) and the value of performed transactions – to PLN 85.8 billion (increase by 13% y/y, Figure 4.1.5). However, due to the relatively strong preference for cash payments, in terms of the number of ATMs and POS per 1 million inhabitants, Poland is in the 24th and 26th place, respectively, among EU countries.13

The development of Internet banking accelerated in 2010. The number of clients who use their Internet accounts at least once a month increased to 10.2 million. The frequency of transferring funds from Internet accounts increased and the number of transfers ordered in December 2010 was 76.1 million and greater by 4.7% than that in the corresponding period of the previous year (Figure 4.1.7). The more frequent use of this distribution channel resulted from the increasing prevalence of Internet access and banks’ marketing activities aimed at presenting their clients the advantages of this method of using bank accounts. Combining cashless service with the use of the direct account and cash service

12 More about this in Assessments of the operation of the Polish payment system in the second half of 2010, Warsaw 2011, NBP. 13 Payment Statistics, Frankfurt 2011, ECB, available at: www.ecb.int.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 71 Financial institutions

via the networks of ATMs and cash deposit machines the banks provided their clients with a full range of banking services without the need to visit the banks. Having moved the service of a part of clients from operating branches to Internet portals, the banks could reduce their general expense.

Figure 4.1.6. Number of ATMs per 1 million inhabitants in the EU, 2009−2010

thousands of units 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 Italy Spain Malta Latvia EU-27 France Cyprus Greece Poland Ireland Austria Estonia Finland Sweden Belgium Bulgaria Slovakia Portugal Slovenia Hungary Romania Germany Denmark Lithuania Euro area Netherlands Luxembourg Czech Republic United Kingdom 4 2009 2010 Source: ECB.

Figure 4.1.7. Number of clients using internet banking and number of transfers ordered via the Internet channel, 2007–2010

million million 20 100 18 90 16 80 72.6 76.1 14 65.3 70 12 57.7 60 17.8 10 50 14.8 10.2 8 12.7 40 8.4 6 9.8 7.3 30 4 5.1 20 2 10 0 0 2007 2008 2009 2010 Number of internet banking customers – left-hand scale Number of active internet banking customers – left-hand scale Number of transfers ordered via internet in December – right-hand scale Source: The Polish Bank Association.

In 2010, the growth rate of the use of Internet banking by small and medium-sized enterprises (SME) was higher than in the case of individual persons. Banks interested in increasing the number of transactions in SME accounts organised special promotions for SME, offering exemption from commission as regards bank transfers to tax offices and the Social Insurance Institution. As at the end of 2010, over 1.6 million SME clients used the Internet service, which represented around 10% of all Internet account users.14

Assuming further dynamic growth in the number of active clients and their continuing preference for remote access to banking services, the Electronic Banking Council at the Polish Bank Association forecasts that during the next three years the number of Internet banking users will be increasing by 1 million a year. Moreover, it expects an increase in the use of Internet banking by SMEs.15

14 Internet banking and cashless payments – 2010 Q4, netB@nk, Polish Bank Association, Warsaw 2011, pp. 7–10. 15 Internet banking and cashless payments – 2010 Q3, netB@nk, Polish Bank Association, Warsaw 2011, p. 5.

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4.1.2. Concentration and competition in the banking sector

In 2010, the concentration of the domestic banking system decreased slightly. The HHI concentration index16 calculated for assets of commercial and cooperative banks decreased from 0.0583 as at the end of 2009 to 0.0570 as at the end of 2010, which was influenced by the increase in the share of a group of medium-sized banks in the market (Figure 4.1.8). The share of assets of five largest banks in total banking sector assets (CR5) decreased slightly to 43.9% (44.5% as at the end of 2009). As regards lending activities, the share of five largest banks grew to 45.3% from 44.7% in 2009, whereas in the case of deposit activities it decreased to 51.7% from 53.8% in 2009.

At the same time, the share of fifteen largest banks in total banking system assets (CR15) increased from 74.1% to 74.9%, which is a consequence of the growth in significance of medium-sized banks as well as one merger between medium-sized banks in 2010.

Figure 4.1.8. Concentration ratios of banking sector assets, 2003−2010

A. HHI B. CR5, CR10, CR10–30

% 0.09 80 80 70 0.08 70 60 0.07 4 60 12 14 18 18 21 50 0.06 7 3 50 40 0.05 30 46 55 51 51 48 47 49 46 40 0.04 20 0.03 30 10 2003 2004 2005 2006 2007 2008 2009 2010 2003 2004 2005 2006 2007 2008 2009 2010

Number of domestic commercial banks – right-hand scale CR10

Number of branches of credit institutions – right-hand scale CR5

HHI for net assets – left-hand scale CR10-30

Note: CR5 and CR10 are, respectively, the share of 5 and 10 largest banks in the net assets of the banking sector; CR10-30 is the share of banks, starting with the 11th up to the 30th, in terms of the value of assets in the net assets of the banking sector. Source: NBP.

The banking sector in Poland is still characterised by a relatively low concentration. The share of five largest banks in the assets of the banking sector is one of the lowest in the EU and significantly lower than the average level for the EU, euro area and CEC-5 countries. Nevertheless, it is higher than in countries with developed groups of cooperative and regional banks, such as Austria, Spain, Germany, United Kingdom and Italy. One of the reasons behind the relatively low concentration of the banking market in Poland is the strategy – observed since 2002 – consisting in the continuing and organic growth of small and medium-sized banks as well as limiting the consolidation activities to this group of banks only (with the exception of the takeover of a part of 17 Bank BPH SA branches by Bank Pekao SA). This development is supported by the CR10-30 ratio aggregating the market share of medium-sized and small banks, which grew from 14.5% as at the end of 2002 to 26.4% at the end of 2010.

The low level of HHI as well as the significantly lower market share of the largest banks than in other EU countries encourage competition in the banking sector, which was visible for example in the banks’ responses to questions about the reasons for changes in the lending policy. In the second half of 2010, senior loan officers at the banks indicated that the competitive pressure was

16 Herfindahl-Hirschman Index (HHI) for net assets is calculated as the sum of squares of the shares of individual entities in the sector’s net assets. The HHI indices for loans and deposits are calculated analogically. HHI values may range from 0 to 1, and the higher the value, the higher the market concentration. HHI with the value of 1 means that the sector comprises one entity which holds a 100% market share. 17 CR10-30 is the share in the sector assets attributed to banks classified in terms of asset value at positions 11–30.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 73 Financial institutions

an important factor taken into consideration when determining lending policy in the segment of housing loans as well as in the segment of loans to enterprises.18

4.1.3. Changes in the structure of bank assets

The significance of receivables from the non-financial sector for the structure of assets of the Polish banking sector is greater than in the case of countries with more developed banking systems (Figure 4.1.9). It follows from the fact that Polish banks focus on providing traditional banking services, primarily accepting deposits and extending loans to non-financial clients. At the same time, the ratio of receivables from the non-financial sector to GDP is lower than in the case of euro area countries.

The year 2010 brought no significant changes in the Polish banking sector asset structure (Figure 4.1.10). Despite the increase in the growth rate of receivables from the non-financial sector, their share in bank assets decreased slightly. The downward trend of the share of loans to enterprises and the opposite trend of loans to households continued. In consequence, the share of loans to households in total loans to the non-financial sector also increased (Figure 4.1.11). At the same time, the share of claims on the general government sector and the share of securities in the banks’ balance sheets increased as well. 4 Figure 4.1.9. Shares of selected balance sheet items in assets of monetary financial institutions in the euro area and selected EU countries as at the end of 2010

% 70 60 50 40 30 20 10 0 Czech CEE-5 Latvia United Poland Estonia Sweden Bulgaria Slovakia Slovenia Hungary Republic Romania Kingdom Denmark Lithuania Euro area

Loans to non-ﬁnancial sector Loans to MFIs Securities (excluding shares) Securities (excluding shares) – public sector entities – entities other than MFIs and public sector

Legend: MFI – monetary financial institutions. Note: Securities other than shares (e.g. debt securities). Data in the figure concern loans granted to residents and securities issued by residents. Source: ECB Statistical Data Warehouse.

The growing concentration of banks’ operations in the segment of loans to households has been observed in the Polish banking sector for several years. A similar trend can be observed in other European countries. The increase in the value of housing loans is particularly high, which is related to such factors as high fundamental demand for apartments resulting from the increase in the number of households. However, the value of housing loans, which as at the end of 2010 amounted to almost PLN 264 billion in relation to GDP, is still twofold lower than in euro area countries (Figure 4.1.12). At the same time however, the same ratio in the case of consumer loans is higher than in euro area countries and the countries in our region.

18 NBP, Senior loan officer opinion survey on bank lending practices and credit conditions, Warsaw, January 2011, pp. 4 and 7.

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Figure 4.1.10. Structure of commercial and cooperative banking sector assets, 2008−2010

% 4.6 4.3 0.2 0.2 0.5 4.3 4.0 100 8.1 0.5 0.5 7.4 2.2 1.9 4.7 4.8 4.4 0.8 2.1 1.8 90 4.6 4.1 3.9 13.7 14.5 4.3 4.1 3.9 3.9 16.7 3.9 80 18.6 19.5 0.2 0.4 18.2 19.2 16.3 3.4 4.3 4.6 16.4 70 0.8 1.3 1.3 0.8 1.3 1.2 2.2 3.9 4.8 2.3 3.9 4.8 60 50 48.4 51.3 48.7 40 57.3 56.3 57.8 57.5 55.7 56.9 30 20 24.0 22.7 23.3 10 4.4 3.0 2.8 2.1 2.8 5.9 4.3 4.5 4.4 0 3.4 4.5 4.0 2.3 3.3 3.8 2008 2009 2010 2008 2009 2010 2008 2009 2010 Commercial Cooperative Banking sector banking sector banking sector

Cash and accounts in the central bank Receivables from the ﬁnancial sector Receivables from non-ﬁnancial sector Receivables from the general government sector Receivables due to securities purchased Securities under repurchase agreements Fixed assets Other Receivables and other assets from non-residents Source: NBP. 4

Figure 4.1.11. Receivables from the non-financial sector, 2007−2010

PLN billion 500 450 400 350 300 250 200 150 100 50 0 I II III IV I II III IV I II III IV I II III IV 2007 2008 2009 2010

Enterprises Households Individuals Non-residents Note: The “non-financial sector” category includes enterprises, households and non-profit institutions serving households. The “households” category includes individual persons, individual entrepreneurs and individual farmers. Source: NBP.

Figure 4.1.12. Receivables of monetary financial institutions due to selected types of loans to the non-financial sector to GDP as at the end of 2010

% 120 100

40 20

0 Czech CEE-5 Latvia United Poland Estonia Sweden Bulgaria Slovakia Slovenia Hungary Republic Romania Kingdom Denmark Lithuania Euro area

Loans to enterprises Housing loans Consumer loans Note: Loans to residents, data for the monetary financial institutions sector. Source: Eurostat, ECB Statistical Data Warehouse.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 75 Financial institutions

The declining share of loans to enterprises in bank portfolios may be attributed to short-term and structural factors. The significant slackening of the growth rate of loans to enterprises, observed since the beginning of the global financial crisis, is largely cyclical in nature. The economic slowdown and reduction of enterprises’ investments contributed to the decrease in their demand for bank loans. This situation was additionally compounded by a strong tightening of the banks’ lending policy, particularly at the end of 2008 and in the beginning of 2009.19 The gradual reduction of the share of loans to enterprises in the banks’ balance sheets is also a result of the availability of alternative financing sources for these entities. Enterprises raise funds by issuing shares or bonds and use intra-group funding. Alternative sources of financing, other than bank loans, also include leasing and factoring, often offered by bank capital groups.

The growth in the share of receivables from the general government sector in the balance sheets of banks (in particular, commercial banks), observed in 2010, stemmed from both demand and supply-side factors. As the value of loans not repaid in a timely fashion increased, the banks were trying to limit credit risk and were more willing to extend loans to government and local- -government institutions. The credit risk of these entities is smaller than in the case of the non- -financial sector. At the same time, the demand for loans was stimulated by financial needs of the general government sector resulting, among others, from financing the budget deficit and implementation of projects co-financed with EU funds. The increase in receivables from the general government sector in bank assets concerned commercial banks to a greater extent than cooperative 4 banks. The year 2010 also saw the value of bonds issued by local-government institutions increase in banks’ balance sheets by approximately 50% (to PLN 6.8 billion).

The largest increase in the banking sector asset structure was that of securities (Figure 4.1.10). Similarly to 2009, this was primarily caused by the increase in the portfolio of NBP money bills, whose value in 2010 increased by over 80% to PLN 74.6 billion as at the end of December. The increased engagement in money bills reflected the dynamic growth of short-term excess liquidity of the banking sector, which was primarily due to NBP’s purchase of foreign currencies from EU funds.

The value of the Treasury bills portfolio decreased by PLN 15.2 billion, whereas the value of Treasury bonds increased by PLN 9.7 billion (Tables 4.1.2 and 4.1.3), which was largely a result of changes in the State Treasury financing structure. The share of securities other than debt securities issued by the NBP and the State Treasury in bank assets remained small and amounted to approximately 2.3% as at the end of 2010. In 2010, there was an increase in the portfolio of debt securities issued by local-government institutions as well as entities of the non-financial sector (each category by around 50%). The value of equity securities increased by approximately 33% to PLN 11.0 billion. At the same time, the value of securities issued by non-residents declined slightly to PLN 1.8 billion, which represented 0.8% of the whole bank securities portfolio.

The structure of the portfolio of securities of the Polish banking sector, dominated by Treasury securities and NBP money market bills, significantly differs from the structure of such portfolios in the euro area countries. In these countries, instruments issued by monetary financial institutions usually have the largest share in debt securities portfolios. Also, securities issued by entities of the non-financial sector and the sector of non-monetary financial institutions constitute a significant part (Figure 4.1.9).

A share of receivables from other entities of the financial sector in bank assets did not change as compared with 2009. The liquidity of the domestic market for interbank deposits with maturity exceeding one month remained very limited. In consequence, the value of commercial banks’ receivables from other domestic financial institutions increased only by PLN 0.5 billion in 2010. However, this category of receivables recorded a considerable increase in the case of cooperative banks, mainly because of allocating excess liquidity in affiliating banks.

19 More about this in Senior loan officer opinion survey on bank lending practices and credit conditions, editions from 2009 and 2010 Q1, Warsaw 2009 and 2010, NBP.

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Table 4.1.2. Selected assets of the commercial banking sector, 2007−2010 (PLN billion)

2007 2008 2009 2010 Receivables from the non-financial sector, of which: 409.7 573.9 603.9 654.5 – from non-residents 5.1 8.3 7.3 5.7 Receivables from the financial sector, of which: 107.4 88.9 54.0 59.6 – from non-residents 57.8 44.2 23.0 28.1 Receivables from the general government sector, of which: 19.2 22.1 40.4 54.0 – from non-residents 0.0 0.0 0.0 0.0 Securities issued by residents, of which: 126.4 167.8 194.0 222.4 – Treasury bonds 85.3 103.9 110.6 118.9 – Treasury bills 8.6 31.8 29.5 14.6 – money market bills 6.2 8.1 38.5 70.7 Securities issued by non-residents 6.1 3.6 1.9 1.9

Note: Data include branches of credit institutions, excluding banks affiliating cooperative banks. Source: NBP.

Table 4.1.3. Selected assets of the cooperative banking sector, 2007−2010 (PLN billion)

2007 2008 2009 2010 4 Receivables from the non-financial sector, of which: 33.0 38.0 43.7 48.5 – from non-residents 0.0 0.0 0.0 0.0 Receivables from the financial sector, of which: 18.4 18.9 19.4 23.5 – from non-residents 0.4 0.1 0.1 0.4 Receivables from the general government sector, of which: 2.4 2.6 3.7 4.6 – from non-residents 0.0 0.0 0.0 0.0 Securities issued by residents, of which: 9.2 13.1 11.6 14.4 − Treasury bonds 4.2 4.9 5.9 7.2 − Treasury bills 2.9 5.1 1.8 1.6 − money market bills 1.6 2.1 2.4 3.9 Securities issued by non-residents 0.0 0.0 0.0 0.0

Note: Data include banks affiliating cooperative banks. Source: NBP.

The share of receivables from non-residents in the Polish banking sector asset structure decreased to approximately 4.0% as at the end of 2010, however in the case of the cooperative banking sector it was a marginal one (Figure 4.1.12). Receivables from foreign financial institutions, which in 2010 recorded an increase by PLN 5.4 billion (to PLN 28.5 billion), constitute the principal element of this asset category. Nevertheless, the value of these receivables was lower than in the period preceding the global economic crisis.

Loans to households

The year 2010 saw an increase in loans granted to domestic households to PLN 57.1 billion. After excluding the impact of exchange rate changes, it translated to an increase in the value of these loans by 8.9% (12.4% in 2009). The above-mentioned growth concerned primarily housing loans. In consequence, the share of real estate loans in total loans to households increased to 58% (Figure 4.1.13). However, it was still lower than in euro area countries, where on average it amounted to almost 72%.

The banks’ lending policy with respect to housing loans was changing in 2010. In the first half of the year, the majority of banks surveyed by the NBP did not change their lending standards. In the second half of the year, however, they were significantly tightened. One of the reasons was the need to fulfil requirements set out in Recommendation T. This Recommendation includes

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 77 Financial institutions

provisions relating to, among others, the limit of the loan instalment repayment burden on the borrower’s income as well as the level of the LTV ratio. At the same time, due to increased competition, banks eased some of lending terms, including in particular lowered spreads charged on the loans.20 The average monthly growth of these loans, after excluding the impact of exchange rate changes, amounted to PLN 2.5 billion (PLN 2.0 billion in 2009). In the second half of the year, average monthly growths were slightly higher than in the first half, despite significant tightening of lending standards (Figure 4.1.16).

Figure 4.1.13. Type structure of loans to the non-financial sector, 2008–2010

% 100 3.0 3.3 3.6 90 18.9 20.1 19.1 21.6 23.2 22.4 28.4 28.8 25.9 80 0.1 0.1 70 0.1 28.0 60 29.4 30.5 42.1 43.7 47.3 50 53.9 53.9 58.0 40 2.2 24.1 21.9 21.3 2.5 2.2 30 14.3 13.8 13.3 20 3.4 3.6 3.2 10.4 8.9 7.9 10 23.2 22.1 22.1 6.2 5.9 5.6 2.4 2.3 2.2 12.1 11.0 10.2 0 5.7 5.5 5.1 2008 2009 2010 2008 2009 2010 2008 2009 2010 4 Enterprises Households Non-ﬁnancial sector

Authorised overdrafts Operating loans Investment loans Credit card loans Real estate loans Other

Note: The “Other” category is a complementary category; it differs from the “Other loans and lending facilities” category in Tables 4.1.4–4.1.6. It includes the value of export and discount loans as well as securities purchase loans. Source: NBP.

Figure 4.1.14. Currency structure of housing loans to households and disparity between WIBOR 3M and LIBOR CHF 3M, 2007−2010

% p.p. 80 16 71.3 69.4 70 69.0 66.6 14 62.2 62.5 64.9 63.4 65.5 63.3 63.0 58.6 58.1 60 57.0 55.2 56.9 12 50 44.8 10 41.4 43.0 43.1 41.9 40 37.8 37.5 36.7 37.0 8 33.4 35.1 36.6 34.5 30.6 28.7 31.0 30 6 4.0 3.8 20 2.9 5.2 4 1.9 3.6 10 1.0 3.0 2 0.3 3.0 0 0 I II III IV I II III IV I II III IV I II III IV 2007 2008 2009 2010

Share – loans in PLN – left-hand scale Share – loans in foreign currency – left-hand scale Disparity between WIBOR 3M and LIBOR CHF 3M Disparity between WIBOR 3M and LIBOR EUR 3M Note: Data concern residents and non-residents. Source: NBP.

Starting with the second half of 2009, some banks reintroduced foreign currency- -denominated loans to their offers, withdrawn previously at the turn of 2008 and 2009 in the period of the greatest turmoil in the financial markets. This contributed to the increase in the share of foreign currency-denominated loans in total new housing loans in the first half of 2010 (Figure 4.1.17). There was also a change in the currency structure of loans. In 2010, the euro became the

20 Senior loan officer opinion survey on bank lending practices and credit conditions, editions from 2010 and 2011, Warsaw 2010, 2011, NBP.

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dominant currency in which new foreign currency housing loans were denominated. Previously, the vast majority of foreign currency housing loans were Swiss franc indexed loans. The rise in popularity of euro as a loan currency was connected with the decrease in disparity between interest rates in Switzerland and the euro area as well as the relatively easy access of banks to financing in euro. That last factor related to banks which obtain financing from foreign parent entities, which in turn have access to liquidity-providing operations of the European Central Bank.

Figure 4.1.15. Currency structure of housing loans to households as at the end of 2009 and 2010

A. 2009 B. 2010 Foreign Foreign Foreign Foreign currency-denominated currency- currency-denominated currency- loans -denominated loans -denominated 64.9% loans 63.0% loans 94.0% 87.7%

Loans Loans in PLN in PLN 35.1% 37.0% 5.2% 11.6% 4

in PLN in CHF in EUR in other currencies

Note: Data concern residents and non-residents. Source: NBP.

Figure 4.1.16. Monthly growth in housing loans to households and loans to enterprises, 2008–2010

PLN billion 14 12 10 8 6 4 2 0 -2 -4 -6 III III IV VVIVII VIII IX XXIXII III III IV VVIVII VIII IX XXIXII III III IV VVIVII VIII IX XXIXII 2008 2009 2010 Housing loans to households – monthly growth as at the end of the month Housing loans to households – monthly ﬂows according to the value of new agreements Loans to enterprises – monthly growth as at the end of the month Loans to enterprises – monthly ﬂows according to the value of new agreements

Note: Data on monthly cash flows according to the value of new agreements was taken from the reporting sample of 20 banks. Data on increases, excluding the impact of exchange rate changes, concern residents. Source: NBP.

The quality of housing loans, those extended in PLN and those extended in foreign currency, was stable. The impaired loan ratio as at the end of 2010 was 2.8% and 1.3%, respectively.

Consumer loans21 are the second category of loans to households, in terms of value. In 2010, their share in loans to households diminished, which was partially due to a continuous tightening of the lending policy in this market segment, which started in the second quarter of 2008. In the first half

21 Consumer loans include credit card loans, authorised overdrafts and the “other loans to consumers” category (e.g. instalment loans).

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 79 Financial institutions

of 2010, the major reason for tightening the standards of granting consumer loans was the deterioration in the value of the portfolio of already extended loans. A decrease in the share of impaired loans and provisions for impaired consumer loans was a natural consequence of the slowdown in economic growth as well as the lenient lending policy of banks in in times of rapid lending growth. In the second half of the year, the major factor determining the bank policies, as in the case of housing loans, was the need to implement the instructions contained in Recommendation T. At the same time, some banks decided to lower spreads charged on extended loans. As a result of the tightening of the lending policy, the growth rate of consumer loans in 2010 was 1.0% (12.8% in 2009).

Figure 4.1.17. Currency structure of new housing loans, 2007−2010

% 100 90 80 70 60 50 40 30 20 10 0 4 III III IV VVI VIIVIII IX XXIXII III III IV VVI VIIVIII IX XXIXII III III IV VVI VIIVIII IX XXI XII III III IV VVI VIIVIII IX XXI XII 2007 2008 2009 2010

PLN USD EUR CHF

Note: Data taken from the reporting sample of 20 banks which report information on interest rates and values of new credit agreements to the NBP. Since June 2010, interest rate statistics does not include loans extended in USD. Source: NBP.

Figure 4.1.18. Impaired loans ratio for households and enterprises, 2008−2010

% 14 12.8 12.2 12.2 12.3 12 10.8 11.2 10 10.0 7.9 8 7.2 7.2 6.4 6.2 6.6 6.7 6 6.2 5.6 5.5 3.8 4.9 4 4.2 4.0 3.8 3.5 3.5 2 0 I II III IV I II III IV I II III IV 2008 2009 2010 Households Enterprises

Source: NBP.

The quality of the portfolio of loans to households deteriorated, however at a slower rate than in the previous year (Figure 4.1.18). The costs of credit risk were concentrated in the consumer loan portfolio. The rise of the costs of credit risk was a natural consequence of the lower rate in economic growth in previous years – in particular, in the segment of consumer loans – but it also reflected the lenient lending policy of banks in times of rapid lending growth.

Loans to enterprises

Loans to enterprises include four main types of loans: authorised overdrafts and operating loans, used to finance their day-to-day operations, as well as investment loans and real estate loans. At the end of 2010, the share of these types of loans in total loans to enterprises amounted to 95.3%.

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The cycle of tightening the lending policy with respect to enterprises ended in 2009. In 2010, the majority of banks surveyed by the NBP did not significantly change the standards while easing slightly the terms of granting loans (including primarily the lowering of spreads). The banks which eased their lending policy indicated that they had done so in view of the lowering of risk related to general economic situation as well as growing competitive pressure in the market.

Table 4.1.4. Selected types of loans to the non-financial sector in 2009 and 2010 (value as at the end of reporting periods, PLN billion)

Enterprises Households Non-financial sector Type of loan 2009 2010 2009 2010 2009 2010 Authorised overdrafts 45.9 45.1 22.6 24.0 68.6 69.2 Investment loans 61.0 62.3 24.1 26.3 85.7 89.3 Real estate loans, of which: 48.1 45.7 221.6 271.5 271.6 319.7 − housing loans 19.4 17.2 214.9 263.7 236.1 283.3 Credit card loans 0.2 0.3 15.0 14.8 15.2 15.1 Other loans and lending facilities1 5.6 5.9 116.7 119.8 122.3 125.8 Total 207.4 204.1 410.7 467.8 620.8 675.3 4 Note: Data for residents. 1 Mainly consumer loans, including instalment loans. This category does not include discount or export loans or securities purchase loans. Source: NBP.

Table 4.1.5. Changes in selected types of loans to the non-financial sector, 2009 and 2010 (%)

Enterprises Households Non-financial sector Type of loan 2009 2010 2009 2010 2009 2010 Authorised overdrafts -8.7 -1.6 9.3 6.0 -3.4 0.9 Investment loans 0.9 2.1 5.4 9.1 2.1 4.2 Real estate loans, of which: 3.1 -5.0 12.0 22.5 10.5 17.7 – housing loans 1.8 -11.4 11.6 22.7 10.9 20.0 Credit card loans -9.6 28.4 18.3 -1.1 17.8 -0.7 Other loans and lending facilities1 5.3 6.8 13.3 2.7 12.9 2.9 Total -4.0 -1.6 11.9 13.9 6.1 8.8

Note: Data for residents. 1 Mainly consumer loans, including instalment loans. This category does not include discount or export loans or securities purchase loans. Source: NBP.

As at the end of 2010, the annual growth rate in corporate loans remained negative as (after excluding the impact of exchange rate changes) it amounted to -0.9%. The changes in the value of loans varied depending on the size of enterprises. In 2010, the value of loans extended to large enterprises dropped by 1.8% whereas of those extended to small and medium-sized enterprises grew by 0.1%.

The year 2010 saw a decrease in the value of banks’ loans used for the financing of day-to- -day operations of enterprises: authorised overdrafts (fall by 1.4%) and operating loans (fall by 3.6%). This was partially due to the low demand for loans on the part of enterprises, related, among other things, to a better liquidity position and profitability of these entities, as compared with the previous economic slowdown. At the same time, there was a rise in the value of investment loans. However, it was an insignificant rise (2.9%) as enterprises reduced their investment activity, due to, among others, a decrease in the degree of utilisation of production capacity during the

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 81 Financial institutions

economic slowdown. Moreover, enterprises surveyed by the NBP more frequently reported to have financed investments with own funds than with bank loans.22

The impaired loans ratio for enterprises stabilised and remained at 12.3% at the end of 2010 (Figure 4.1.18). Loans to large enterprises were of higher quality (impaired loans ratio: 9.5%) than those to small and medium-sized enterprises (14.3%).

Table 4.1.6. Changes in selected types of loans to the non-financial sector in 2009 and 2010, after excluding the impact of exchange rate changes (%)

Enterprises Households Non-financial sector Type of loan 2009 2010 2009 2010 2009 2010 Authorised overdrafts -8.7 -1.4 9.3 6.0 -3.4 1.1 Investment loans 1.5 2.9 5.5 9.4 2.6 4.8 Real estate loans, of which: 3.7 -4.1 12.9 13.9 11.3 10.8 – residential loans 1.9 -11.3 12.5 13.8 11.7 11.9 Credit card loans -9.6 28.4 18.3 -1.8 17.8 -1.4 Other loans and lending facilities1 5.7 7.6 13.4 1.7 13.0 2.0 Total -3.6 -0.9 12.4 8.9 6.5 5.7

4 Note: Data for residents. 1 Mainly consumer loans, including instalment loans. This category does not include discount or export loans or securities purchase loans. Source: NBP.

Box 4.1.1

LoAnS To HoUSEHoLDS In PoLAnD AnD THE EU

The ratio of loans to households to GDP is growing in Poland. The situation is similar in the EU and other developed economies.1 In 2010, the value of loans to the household sector2 in EU-15 countries amounted to approximately 63% of GDP and in Denmark it considerably exceeded the level of 100% GDP (Figure I). In New Member States (NMS),3 the level of this debt was half the value of that in EU-15 countries and amounted to approximately 31% of GDP. The increase in debt was driven by prevalence of the housing loans which became one of the banks’ key credit products. The increased availability of loans among households resulted in a positive feedback between the increase in real estate prices and the sum of extended loans. The increasing demand contributed to the rise in real estate prices, therefore larger and larger loans had to be taken out to purchase them.

In several EU countries, Denmark, Spain, Ireland, Sweden, United Kingdom4 which experienced significant increases in real estate prices in the years 1997-2008, the value of the loans to households to GDP ratio was the highest. A similar relation is observed in the case of the Baltic States, which in the years 2005–2006 registered the highest increases in real estate prices5 and in the loans to households to GDP ratio among NMS (Figure I). Poland was one

1 EU banking sector stability, Frankfurt 2007, European Central Bank, p. 42. 2 Loans to households quoted in the box include all types of loans to households and non-commercial institutions serving households. 3 NMS are understood as all countries which joined the EU after 2004, excluding Cyprus and Malta. 4 The largest increases in real estate prices in the years 1997–2008 were recorded in: Ireland (172%), United Kingdom (146%), Spain (118%), France (108%), Sweden (108%), Denmark (89%) and the Netherlands (75%); see: Glick R., Lansing K.J., Global household leverage, house prices, and consumption, Federal Reserve Bank San Francisco Economic Letter 2010-01, January 11, 2010. 5 EU banking sector stability, op. cit., p. 45.

22 Information on the condition of the enterprise sector, including the economic climate – editions from 2010 and 2011 Q1, Warsaw 2010 and 2011, NBP.

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of the countries with a relatively low, albeit rising, ratio of loans to households to GDP (35% as at the end of 2010).

Growth rate of the value of loans to households

In the years 2004–2010, the value of loans to households in EU-15 countries rose on average by approximately 5% a year (Figure II). However, in the initial period in such countries as Greece, Spain and Ireland these increases markedly exceeded 20%. In NMS, the increase in the value of loans was much stronger and amounted on average to 30% y/y (in 2005, in the Baltic states as well as in Bulgaria and Romania, it exceeded 60% y/y).

Figure I. Loans to households to GDP ratio in EU countries, 2004−2010

% 140 120 100 80 60 40 4 20 0 DK IE ES PT SE UK LU NL GR FI DE FR AT EE LV IT PL HU BE LT CZ BG SI SK RO

2004 2010 EU-15 average (2010) NMS average (2010)

Source: ECB.

Figure II. Average annual growth rate of the value of loans to households in EU countries, 2004−2010

% 50 45 40 35 30 25 20 15 10 5 0 -5 RO LT LV BG EE CZ PL HU GR SK SI ES AT SE IE FI IT DK FR PT LU UK BE NL DE

Increase in loans to households y/y EU-15 average NMS average

Source: ECB.

The increase in debt recorded in EU in the years 2004–2006 was made possible by low interest rates as well as competitive pressure that forced banks to lower their interest rates and commissions as well as to ease loan origination procedures.6

In almost all EU countries, the loans to households’ growth rate slowed down as a result of the financial crisis of 2008. The value of loans to households fell by 4% y/y in EU-15 countries in that year. In NMS, the effects of the financial crisis were most evident in 2009, when the growth rate of loans to households decreased to 7% y/y. The negative consequences of the crisis for

6 In the case of real estate loans the banks lowered, among other things, their down payment requirements, extended loan maturities, increased LTV ratio as well as the loan to borrower’s income ratio; EU banking sector stability, op. cit., p. 42 and ECB surveys: The euro area banking lending survey for 2004–2006.

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the growth rate of loans to households surfaced most heavily in the countries which previously recorded high increases in real estate prices, for example in 2008 in: Ireland (-5%), Sweden (-5%), United Kingdom (-3%) and in 2009 in: Latvia (-5%), Lithuania (-4%) and Estonia (3%). In 2010, the value of loans to households in most EU countries was higher than in the previous year.

Loans to households in relation to household disposable income

In the years 2002–2009, the growth rate of loans to households exceeded the growth rate of disposable income (Figure III) in all EU countries. This global trend has been observed since the 1990s.7 In euro area countries, the average ratio of household loans to disposable income (debt to income, DTI ratio)8 increased from 77% (2002) to 96% (2009). In 2009, the highest indebtedness of households among EU-15 countries was primarily registered in countries with a significant real estate price growth (for example in Ireland, the Netherlands and Denmark DTI was 199%, 241% and 275%, respectively).

In NMS, the ratios of loans to disposable income were lower than in euro area countries. However, the value of DTI in these countries was rising relatively quickly. This was due to the increase in availability of loans on the back of the progress of the convergence process and a significant lowering of interest rates in NMS. Also in these countries, strong rises of real estate prices contributed to a higher rate of indebtedness of households. The problem 4 concerned mainly the Baltic states, where DTI was increasing most significantly in the entire region.9 In Poland, the Czech Republic and Slovakia, where real estate prices rose at a relatively slow pace, the level of DTI was one of the lowest in EU and on average amounted to 50%.

Figure III. Ratio of loans to households to household disposable income in EU countries, 2002−2009

300 %

250

200

150

100

0 DK NL IE UK SE PT ES FI EE DE AT BE FR LV HU IT SK CZ PL LT SI

2002 2009 Euro area (2002) Euro area (2009)

Source: Eurostat.

Housing loans and change of bank assets structure

In EU countries, the structure of loans to households is dominated by housing loans (Figure IV). In the years 2004–2010, the share of housing loans in EU-15 countries exhibited a slightly downward trend, and at the end of the period it amounted to 75%. On the other hand, in most NMS an upward trend was visible, reaching 55% in 2010.

7 Glick R., Lansing K.J., Global household leverage, house prices, and consumption, op. cit. 8 Eurostat defines the debt to income (DTI) ratio as a ratio of household loan debt as at the end of the year to annual disposable income. 9 EU banking sector stability, op. cit., p. 45.

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Figure IV. Share of housing loans in total loans to households in EU countries, 2004–2010

% 100 90 80 70 60 50 40 30 20 10 0 NL DK UK EE PT LV SE BE FR ES LT IE FI CZ SK DE GR IT LU AT PL SI HU BG RO 2004 2010 EU-15 average (2010) NMS average (2010)

Source: ECB.

In EU-15 and NMS countries, where real property prices rose significantly, housing loans accounted for over 80% of the total value of loans to households. In Poland, the share of housing loans exhibited an upward trend and at the end of 2010 it amounted to 55%. A lower share of housing loans in most NMS is a result of the fact that the share of consumer loans in 4 these countries is higher than in EU-15. This model of granting loans to households by banks is a source of additional credit risk because consumer loans are usually secured with less effective repayment mechanisms.

Changes in banking sector asset structure in NMS

The markedly growing value of housing loans extended in 2004–2010 changed the banking sector assets structure in NMS. At the beginning of this period, banks were financing the operation of enterprises to a greater extent. Loans to enterprises accounted for 22% of bank assets at that time, whereas loans to households: 15%. In subsequent years, this ratio almost reversed. In 2010, the share of loans to households in bank assets reached the level of 30% while the share of loans to enterprises increased only by 1 percentage point to 23% (Figure V). In the analysed period, the loan structure in EU-15 countries changed only slightly. The share of loans to households declined from 18% to 16% while the share of loans to enterprises remained at the level of 13%.

Figure V. Share of loans to enterprises and households in bank assets in EU countries, 2004−2010

% 50 45 40 35 30 25 20 15 10 5 0 PL EE LT DK SK LV RO SE GR PT ES HU BG CZ FI NL SI DE IT UK AT FR BE IE LU

Households 2004 Households – 2010 Enterprises – 2004 Enterprises – 2010 Households EU-15 – 2010 Households NMS – 2010 Enterprises EU-15 – 2010 Enterprises NMS – 2010

Source: ECB.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 85 Financial institutions

Changes in the structure of bank loans were of material significance for the model of financing the economy. As EU-15 countries had more developed financial markets, enterprises were, to a lesser extent, financing their operation with loans. In 2010, stock market capitalisation10 in relation to GDP in the euro area amounted to 52% and in the countries with the most developed capital markets it reached the levels of 138%, 84% and 75%, respectively, in United Kingdom, the Netherlands and France. Whereas in NMS, where the share of corporate loans in bank assets was nearly two times higher, the stock market capitalisation index was significantly lower with the highest indices recorded in Poland (41%), the Czech Republic (22%) and Hungary (21%).11

10 Stock market capitalisation is understood as total of the products of the stock prices and their number. 11 Data were taken from the World Bank database; data set: Market capitalisation: http://data.worldbank.org/ indicator/CM.MKT.LCAP.GD.ZS.

4.1.4. Changes in the structure of bank liabilities

Because of the traditional banking model the funding structure of the Polish banking sector differs significantly from the funding structure of banks in euro area countries (Figure 4.1.19). Deposits of the non-financial sector constitute the dominant part of the Polish banking sector’s 4 liabilities. The share of financing in the domestic inter-bank market and via issuing debt securities is significantly lower as compared with EU countries with more developed financial systems. The ratio of deposits made by entities other than monetary financial institutions is also higher in Poland than the average for the countries in the region.

Figure 4.1.19. Shares of selected items of liabilities in the monetary financial institutions sector in the euro area and selected EU countries as at the end of 2010

% 70 60 50 40 30 20 10 0 Czech CEE-5 Latvia United Poland Estonia Sweden Bulgaria Slovakia Slovenia Hungary Republic Romania Kingdom Denmark Lithuania Euro area

Deposits of monetary ﬁnancial institutions Deposits of other sectors Debt securities

Note: Data concern deposits and debt securities held by residents. Source: ECB Statistical Data Warehouse.

A significant share of liabilities to the non-financial sector is one of the factors behind a relatively low funding gap as compared to banking sectors in euro area countries. The fast growth of the gap in the Polish banking sector was halted as the global financial crisis intensified. The lowering of the high growth rate of loans to the non-financial sector and the accompanying growth in the deposit base of banks contributed to the stabilisation23 of the funding gap (Figure 4.1.20) which at the end of 2010 amounted to 10.6%. The loans to deposits ratio in the Polish

23 The variability of the funding gap in the analysed period is partially a result of exchange rate changes influencing the zloty value of foreign currency receivables and liabilities denominated in zlotys to the non-financial and general government sectors, including in particular housing loans denominated in foreign currency.

86 National Bank of Poland Financial institutions

banking sector is lower than the average for euro area countries, but at the same time slightly higher than the average for the countries of our region (Figure 4.1.21). The relatively low shortage of deposits in relation to loans is favourable from the point of view of the stability of the Polish banking sector. A large share of stable deposit base resulting in low dependency on financing on wholesale financial markets reduces the sensitivity to turmoil in these markets. It also enhances the capacity of Polish banks to implement the regulations relating to liquidity risk (i.e. Basel III).24

Figure 4.1.20. Funding gap in the Polish banking sector, 2008−2010

PLN billion % 800 35 700 30 600 25 500 20 400 15 300 10 200 5 100 0 0 -5 III III IV VVIVII VIII IX XXIXII III III IV VVIVII VIII IX XXIXII III III IV VVIVII VIII IX XXIXII 2008 2009 2010 Claims on the non-ﬁnancial and general government sectors – left-hand scale 4 Liabilities towards the non-ﬁnancial and general government sectors – left-hand scale Funding gap – right-hand scale

Note: The funding gap calculated as the ratio of the difference between claims and liabilities to the non-financial and general government sectors to claims towards these sectors. Source: NBP.

Figure 4.1.21. Loans/deposits ratio in euro area countries and in selected EU countries as at the end of 2010

% 350

300

250

200

150

100

50 Czech CEE-5 Latvia United Poland Estonia Sweden Bulgaria Slovakia Slovenia Hungary Republic Romania Kingdom Denmark Lithuania Euro area

Note: The ratio calculated as a difference between claims and liabilities of banks from and to residents from domestic sectors other than monetary financial institutions. Source: NBP estimates based on data from the ECB Statistical Data Warehouse.

There were no significant changes in the structure of the banking sector’s liabilities in 2010. The share of its dominant category – deposits of the non-financial sector – remained similar to that of 2009. At the same time, the significance of foreign funding increased and so did the significance of the issue of own securities although to a lesser extent. The year 2010 also saw a fall in the share of deposits of the general government sector as well as operations with the central bank (Figure 4.1.22).

24 More information on the influence of new liquidity risk regulations on Polish banks in Financial Stability Report – December 2010, Warsaw 2010, NBP.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 87 Financial institutions

Figure 4.1.22. The structure of liabilities of commercial and cooperative banking sectors, 2008−2010

% 0.1 100 3.5 2.9 0.2 2.8 8.0 8.8 8.6 90 22.4 20.1 20.5 0.1 20.8 18.4 18.9 8.7 8.0 6.7 80 4.7 5.8 4.6 5.6 8.4 8.0 9.1 70 9.1 9.2 1.8 9.1 7.2 1.9 2.2 7.3 1.1 2.1 1.2 5.1 5.1 4.7 60 4.9 4.8 4.6 50 57.5 58.1 58.0 40 52.6 30 47.2 52.7 48.1 53.1 53.0 20 22.2 22.0 10 6.8 5.2 5.0 23.6 7.9 6.5 6.5 0 1.9 1.5 0.1 0.1 0.1 1.7 1.4 0.1 2008 2009 2010 2008 2009 2010 2008 2009 2010 Commercial Cooperative Banking sector banking sector banking sector

Operations with the central bank Liabilities to the ﬁnancial sector Liabilities to the non-ﬁnancial sector Liabilities to the general government sector Liabilities due to the issue of own securities Equity and subordinated liabilities Other Liabilities to non-residents

Source: NBP. 4 Table 4.1.7. Selected items of liabilities of the commercial banking sector, 2007–2010 (PLN billion)

2007 2008 2009 2010 Liabilities to the non-financial sector, of which: 389.7 462.4 523.9 569.8 − to non-residents 7.1 7.1 8.4 10.0 Liabilities to the financial sector, of which: 144.2 225.7 207.6 232.0 − to non-residents 82.8 160.0 156.8 178.8 Liabilities to the general government sector, of which: 39.7 46.9 47.2 48.7 − to non-residents 0.1 0.1 0.1 0.1 Liabilities due to the issue of own securities 12.5 12.6 19.5 24.1 Equity and subordinated liabilities, of which: 63.2 76.2 96.7 106.2 − subordinated liabilities to non-residents 3.6 5.4 6.5 7.3

Source: NBP.

Table 4.1.8. Selected items of liabilities of the cooperative banking sector, 2007–2010 (PLN billion)

2007 2008 2009 2010 Liabilities to the non-financial sector, of which: 38.5 43.7 47.9 56.0 – to non-residents 0.0 0.0 0.0 0.0 Liabilities to the financial sector, of which: 14.6 16.8 18.1 22.9 – to non-residents 0.0 0.0 0.0 0.1 Liabilities to the general government sector, of which: 5.0 6.6 6.6 6.4 − to non-residents 0.0 0.0 0.0 0.0 Liabilities due to the issue of own securities 0.0 0.0 0.0 0.1 Equity and subordinated liabilities, of which: 5.1 6.1 7.3 8.3 – subordinated liabilities to non-residents 0.0 0.0 0.0 0.0

Source: NBP.

88 National Bank of Poland Financial institutions

The year 2010 saw a gradual decline of the competition of banks for household deposits, which had intensified since 2008. However, the interest rate on new deposits with maturity of 1 to 3 months was still higher than the WIBOR 3M inter-bank rate (Figure 4.1.23). The average interest rate on new households’ term deposits however decreased permanently below this rate.

Figure 4.1.23. Average monthly interest rate on new deposit agreements and the WIBOR 3M rate, 2008−2010

% 7.5 7.0 6.5 6.0 5.5 5.0 4.5 4.0 3.5 III III IV V VI VII VIII IX X XI XII III III IV V VI VII VIII IX X XI XII III III IV V VI VII VIII IX X XI XII 2008 2009 2010 Deposits with original maturity over 1M to 3M inclusive – households 4 Deposits with original maturity over 1M to 3M inclusive – enterprises Average monthly WIBOR 3M

Note: Data taken from the reporting sample of 20 banks which report information on interest rates and values of new credit and deposit agreements to the NBP. Source: NBP.

Figure 4.1.24. Average interest rate on funds in current accounts of households and enterprises, 2008−2010

% 3.0 2.8 2.6 2.4 2.2 2.0 1.8 1.6 1.4 1.2 1.0 III III IV VVIVII VIII IX XXIXII III III IV VVIVII VIII IX XXIXII III III IV VVIVII VIII IX XXIXII 2008 2009 2010

Current accounts of households Current accounts of enterprises

Note: Average interest rate of all existing agreements as at the end of the reporting period, according to groups of entities. Data taken from the reporting sample of 20 banks which report information on interest rates and values of new credit and deposit agreements to the NBP. Source: NBP.

The competition of banks for the funds of households was increasingly focusing on the offer of savings accounts with higher interest rates than ordinary current accounts used for settlements. A significant part of banks launched aggressive campaigns promoting personal accounts, which led to an increase in the number of maintained accounts.25 Consequently, in 2010, the value of current deposits rose by 22.4% and their share in total households’ deposits grew to 52.7% (Figure 4.1.25). At the same time, the value of households’ term deposits dropped by 2.6% (Table 4.1.9).

25 According to the result of a survey conducted by PRNews.pl among 25 banks, the value of PLN personal accounts of individual clients (excluding savings accounts) increased from PLN 21.6 million in 2009 to PLN 23.4 million in 2010, http://prnews.pl/wojciech-boczon/rok-wojny-na-konta-kto-zyskal-kto-stracil-59739.html.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 89 Financial institutions

Figure 4.1.25. Term and currency structure of deposits of the non-financial sector, 2007−2010

A. Term structureB. Currency structure % % 100 100 7.6 7.8 9.0 9.3 9.5 10.9 10.6 13.9

90 13.1 90 13.8 14.8 18.0 80

45.5 80 51.2 46.8 56.2 54.4 47.3 51.6 46.0 50.1 43.5 50.7 70 52.9 70 60 60 50 50 92.4 92.2 91.0 90.7 90.5 89.1 89.4 86.1 86.9 86.2 85.2 40 40 82.0 30 30 54.5 48.8 53.2 43.8 45.6 52.7 48.4 54.0 49.9 56.5

20 49.3 20 47.1 10 10 0 0 2007 2010 2007 2010 2007 2010 2007 2010 2007 2010 2007 2010 Enterprises Households Non-ﬁnancial Enterprises Households Non-ﬁnancial sector sector

Current Term in PLN in foreign currency Note: Data for residents. Source: NBP.

4 Table 4.1.9. Changes in deposits of the non-financial sector, 2008−2010 (%)

Enterprises Households Non-financial sector 2008 2009 2010 2008 2009 2010 2008 2009 2010 Current deposits -9.8 6.1 16.3 4.8 28.0 22.4 -0.3 20.1 20.4 Term deposits 20.4 15.9 3.7 49.7 4.6 -2.6 39.6 7.6 -0.7 Deposits in PLN 7.3 12.3 9.8 28.8 16.3 9.9 21.5 14.7 9.8 Deposits in foreign currencies -14.7 4.1 8.6 3.9 0.2 5.7 -4.5 1.5 6.9 Total 3.4 11.1 9.6 26.0 14.8 9.6 18.1 13.3 9.6

Note: Data for residents. Source: NBP.

The growth rate of enterprises’ deposits was similar to that of households’ deposits. Also in this case, the increase concerned only current deposits, which grew by 16.3%. The enterprises’ deposit base was positively influenced by the good liquidity position of enterprises and low investment outlays, which resulted in a high value of available funds.

Funds obtained from foreign financial institutions, including in particular parent or affiliated entities, were the dominant source of eliminating the funding gap in the banking sector, resulting from the surplus of extended loans in relation to deposits taken. In 2010, the value of loans and deposits obtained from foreign financial institutions increased by approximately PLN 20 billion (Figure 4.1.26). After excluding the impact of exchange rate changes that increase would amount to approximately PLN 12 billion. The average maturity of obtained funds was extended, which reduced the risk of roll-over of this part of liabilities. In parallel, the number of banks for which foreign liabilities constituted the dominant source of financing rose. Some of them were carrying out a relatively expansive lending policy, in particular in the segment of housing loans (including foreign currency loans). In the countries of our region, the end-of 2010 share of foreign financing was higher than in Poland only in the case of Hungary (Figure 4.1.27).

Lack of signs of a strong recovery in the domestic inter-bank market, in particular in terms of operations with maturity exceeding 2W, contributed to the fact that the share of financing from domestic financial institutions remained unchanged, as compared to 2009. At the same time, the role of refinancing operations of the central bank in the bank’s financing structure decreased significantly. This was connected with the fact the NBP ceased to execute repo transactions in view of the reduced strains in the domestic money market and the low demand on the part of banks for such transactions.

90 National Bank of Poland Financial institutions

Figure 4.1.26. Liabilities of the banking sector to foreign entities of the financial sector, 2008−2010

PLN billion 140

120

100

20 III III IVVVIVII VIII IX XXIXII III III IV VVIVII VIII IX XXIXII III III IV VVIVII VIII IX XXIXII 2008 2009 2010 in PLN in foreign currency Source: NBP.

Figure 4.1.27. Share of foreign financing in total liabilities of the monetary financial institutions sector in euro area countries and selected EU countries, 2007−2010

% 70 4 60 53.6 50 41.3 40 38.6 28.7 30 30.8 26.4 21.6 21.6 17.2 20 18.3 15.5 14.0 10 9.8 4.8 3.9 0 Czech CEE-5 Latvia United Poland Estonia Sweden Bulgaria Slovakia Slovenia Hungary Republic Romania Kingdom Denmark Lithuania Euro area

2007 2008 2009 2010

Source: ECB Statistical Data Warehouse.

The increase in the share of liabilities due to the issue of own securities in banks’ liabilities in 2010 resulted largely from the increase in the value of this item at BGK. In 2010, BGK carried out two bond issues for the National Road Fund for the total of PLN 6.04 billion. In October 2010, PKO BP obtained funds from the issue of Eurobonds for the amount of EUR 800 million. The issue of these Eurobonds was conducted by a foreign subsidiary which subsequently extended a loan to the bank in the amount equal to that of the issue. In view of this form of the issue, its value is not recognised in statistics relating to the own issues of the banking sector.

In 2010, the banking sector’s regulatory capital grew by approximately PLN 10 billion, of which PLN 9.6 billion is the share of the commercial banking sector. The main source of the increase in funds in commercial banks was the retention of 2009 profits in the amount of PLN 4.8 billion. The banks obtained another PLN 4.3 billion via new share issues. Nearly three quarters of this amount constituted share issues carried out by two banks: BRE Bank and Bank Millennium. However, subordinated loans rose by PLN 0.4 billion. Additionally, taking advantage of the possibilities offered by the resolution of the PFSA26 some

26 Resolution No 314/2010 of the Polish Financial Supervision Authority of 14 October 2009 on other balance sheet items included in the bank’s core capital, the amount and scope thereof, and the conditions of including them in the bank’s core capital (Official Journal of the PFSA of 2009, No 1, item 8). The provisions of this resolution were repealed by Resolution No 434/2010 of the Polish Financial Supervision Authority of 20 December 2010 on other balance sheet items included in the bank’s core capital, the amount and scope thereof, and the conditions of including them in the bank’s core capital (Official Journal of the PFSA of 2011 No 1, item 1) whose provisions came into force on 31 December 2010.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 91 Financial institutions

cooperative banks began to issue debt securities in order to increase their core capital. In the middle of 2010, BPS and its four affiliated cooperative banks issued bonds of the total value of PLN 184.7 million.

The increase in regulatory capital led to the rise of the average capital adequacy ratio in the banking sector to 13.8% as at the end of 2010 (13.3% in 2009). The majority of assets of the commercial banks sector (around 85%) were concentrated in banks with the capital adequacy ratio above 12%.

The Polish banking sector is characterised by a high surplus on regulatory capital with respect to the required minimum. High-quality capital (core capital) constitutes a significant part of the capital (over 90%). The high value of regulatory capital as well as its quality indicate that the influence of banks’ new capital adequacy regulations (the so-called Basel III) will be limited. The need to take actions in order to meet minimum levels provided for in the regulations should only apply to some banks.27

4.1.5. Changes in banks’ product offer

The design of the banks’ product offer was significantly impacted by the global financial crisis, however, the scale of its impact was gradually fading as the macroeconomic condition of the country was improving. The improved situation in the labour market as well as still limited interest of households in depositing savings in investment funds increased the value of funds in banks’ 4 deposit accounts. The number of loans taken out by households, primarily housing loans, also increased in that time.

Banks were involved in intense competition for household deposits, not only in terms of prices. These actions were focused on acquiring as many clients opening a bank account as possible, as it was expected that in subsequent periods they would bring additional income on cross-selling. Banks offered to new account holders a number of improvements facilitating the use of bank accounts as well as financial and in-kind benefits.28 Moreover, many banks modified their tables of fees for using a bank account to encourage clients to use their accounts via Internet and not in a bank.

The competition in the banking market resulted in the growth in the number of branches surveyed by Pentor which recorded an increase in clients’ interest in moving accounts from 6% to 11.5% (in February and December 2010, respectively).29

Banks were increasingly linking bank account agreements to the possibility of a free-of- -charge or privileged use of insurance products. Many banks offered a medical services package for sale on preferential terms with the assistance package offered to account holders earlier. Apart from financial benefits awarded when opening an account, banks offered improved possibilities of managing the account and extended the scope of services available via Internet. In the second half of 2010, some clients were given the opportunity to make video conferences with bank’s financial advisers.

The bank accounts offer was clearly divided into segments. Banks targeted their offer at such groups as people under 30, however they did not distinguish any specific social group, for example students. They did not charge any transfer or standing order fees and did not require regular inflows to the account from the account holders. One of the banks reactivated the programme of opening savings accounts for primary school students, which it operated many years ago.

27 More information on the influence of new capital adequacy regulations on Polish banks in Box 4 in Financial Stability Report – December 2010, Warsaw 2010, NBP. 28 The methods most frequently used included for example paying a bonus for opening an account, transferring additional funds to the client’s account, being a specified percentage of the amount of earnings transferred by the employer, or paying fixed bonuses for each transaction performed with the use of a payment card. In some cases, the awarding of a bonus to a client was conditional upon purchasing products in an indicated retail chain. 29 The clients of cooperative banks were the ones least interested in moving their accounts in December 2010 (6% of field branches recorded an increased interest of clients in moving accounts). An increased level of clients’ activity was observed in field branches of banks with majority foreign shareholding (11%) and banks with majority state shareholding (15%), Monitor Bankowy, No 12/2010, p. 5, www.pentor.pl/publikacje_monitor_bankowy.xml.

92 National Bank of Poland Financial institutions

In 2010, micro- and small enterprises became an important group to which the promotion of bank accounts was addressed. Some of the newly established banks largely dedicated their operation to this group of clients, e.g. Meritum Bank, Idea Bank and FM Bank. Organisational units were identified by some commercial banks within their structures to service only this group of enterprises. As in the case of households, the incentives for enterprises to open an account included: the lowering or complete waiver of fees for maintaining the account, and transfers or withdrawals in ATMs owned by other banks.

The banks continued to exploit the loopholes which made it possible to round up tax amounts due to full zlotys and offered their clients the possibility to set up deposits with daily interest capitalisation without the need to pay tax on generated interest income. In the second half of the year, the deposit periods were being systematically extended, reaching 36 months in some banks.

In the analysed period, there were no significant changes to the banks’ loan offer. Housing loans were awarded largely in zlotys, which was, among other things, impacted by the restriction of the bank’s possibility to obtain funds denominated in foreign currency, tightening of the lending standards with respect to housing loans, arising from the implementation of Recommendation T30 as well as the continuation of the government-subsidised programme (First family home) supporting families in purchasing an apartment. Housing loans in foreign currency were primarily extended in euros. As part of a promotion, some banks made their housing loans offer more 4 attractive by agreeing to pay the costs of real estate valuation and entry into land and mortgage register, and often perform these actions on behalf of the client.

In the segment of loans to enterprises, banks paid particular attention to small and medium- -sized enterprises. A new aspect of the offers of many banks was the implementation of simplified principles of creditworthiness assessment, which made it possible for the potential borrower to monitor the process of loan origination. To make taking out loans by SMEs easier, some banks waived the requirement to present necessary certificates relating to the conducting of business activities and only required borrowers’ representations. As a result, an entrepreneur could obtain an operating or investment loan in the course of one day.

One of the new forms of lending to SMEs offered in 2010 was a loan under the JEREMIE (Joint European Resources for Micro-to-Medium Enterprises) initiative.31 Under the programme, the banks extended loans to micro-, small and medium-sized enterprises from funds provided by the European Commission and managed by BGK. Eligible projects included projects proposed by enterprises at an early stage, with no lending history or collateral required by banks in normal lending practice. Another banking product targeted at SMEs starting up their business activity, in operation for no more than 2 years, was an operating loan warranted by the European Investment Fund (EIF) and offered on preferential terms. The EIF granted the warranty for a maximum period of three years and covered both the credit amount and interest.32

4.1.6. Earnings of the banking sector

In connection with the improving economic condition, the earnings of the banking sector in Poland in 2010 were higher than in the previous year, however, still lower than the record levels in 2007–2008 (Figure 4.1.28). The profit of the commercial banking sector was growing at a much faster rate than in the cooperative banking sector.

30 Senior loan officer opinion survey on bank lending practices and credit conditions, Warsaw, NBP, editions: 2010 Q1–Q4 and 2011 Q1. 31 JEREMIE programme (Joint European Resources for Micro-to-Medium Enterprises) is aimed at increasing competitiveness of the European economy in the global market by ensuring flexible financing for micro-, small and medium-sized enterprises; relevant information available at: www.bgk.com.pl/jeremie. 32 The programme allowed eligible enterprises to obtain a loan of up to PLN 20 thousand, and EIF granted a free-of- -charge warranty of up to PLN 10 thousand to eligible enterprises. Information available at www.access2finance.eu/ pl/Poland/cip/index.htm.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 93 Financial institutions

Figure 4.1.28. Earnings of commercial and cooperative banks, 2007–2010

PLN billion % 18 50 37.8 16 39.5 40 25.7 30 14 0.75 0.95 12 27.1 0.85 20 10 10 - 1.4 8 0.77 10.0 0 6 12.9 -18..6 -10 4 12.7 10.6 -20 7.6 2 -30 0 -40 -40.0 -2 -50 2007 2008 2009 2010 Commercial banking sector – left-hand scale Cooperative banking sector – left-hand scale Commercial banking sector, a percentage change Cooperative banking sector, a percentage change – right-hand scale – right-hand scale

Source: NBP.

Figure 4.1.29. Profitability of commercial and cooperative banks, 2007–2010

% % 2.0 30 1.8 27 4 1.6 24 1.4 21 1.2 18 1.0 15

0.8 12 0.6 9 2007 2008 2009 2010

ROA – commercial banking sector – left-hand scale ROA – cooperative banking sector – left-hand scale ROE – commercial banking sector – right-hand scale ROE – cooperative banking sector – right-hand scale Source: NBP.

Figure 4.1.30. ROA of banking sectors in the region, 2001−2010

% 2.5

2.0

1.5

1.0

0.5

0.0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Czech Republic Poland Hungary

Source: NBP, central banks of the Czech Republic and Hungary.

Due to higher earnings, the profitability ratios of the banking sector (ROA, ROE) increased. Profitability ratios of the cooperative banking sector remained similar to 2009 levels. Profitability of the commercial banking sector increased significantly and thus, again after a break in 2009, exceeded the profitability of the cooperative banking sector (Figure 4.1.29). The increase in profitability was a distinguishing feature of the Polish banking sector as compared with the Czech Republic and Hungary (Figure 4.1.30).

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The number of banks reporting losses increased (20 as compared with 15 in 2009) and so did their share in the assets of the whole banking sector (8.2% as compared with 7.9% in 2009). Among banks which reported losses, there were 7 commercial banks and 11 branches of credit institutions as well as 2 cooperative banks. Half of these entities commenced their activity in 2008 or later. The negative results of these institutions may be explained by the small scale of their operation as well as relatively high costs of development. The group of loss-making entities also included medium-sized banks with a longer history, including some banks specialising in extending loans to households.

The concentration of profits of the banking sector in large institutions diminished as compared with 2009, however, it was still stronger than in the previous years. Six largest banks controlling 48.4% assets of the sector generated 73.8% of banking sector’s net earnings (in 2009: 80.4%). The high level of concentration of profit in the largest institutions of the commercial banking sector may be a consequence of the economies of scale, whereas higher concentration observed in the years 2009–2010 may prove that large banks are more resilient to economic slowdown, which results partially from higher diversity of operations and lower financing costs (effective interest on liabilities).

Net interest income was traditionally the most important source of net income from banking activity. Higher interest income resulted from the growth in the amount of extended loans (particularly housing loans) as well as the increase in effective interest on consumer loans. The 4 decrease in interest expense stemmed from the reduction of interest on liabilities which was due to lower price competition for deposits of the non-financial sector and the increase in the share of current deposits in total liabilities to the non-financial sector. In the cooperative banking sector, the share of net interest income in net income from banking activity amounted to 70% and was relatively stable as compared to the corresponding ratio for the commercial banking sector, which went up to 57%.

Table 4.1.10. Profit and loss account of the banking sector (PLN billion)

2008 2009 2010 Interest income 58.06 55.51 57.20 Interest expense 30.03 29.12 26.32 Net interest income 28.03 26.39 30.87 Net non-interest income 20.41 23.25 22.20 − net fee income 11.46 12.48 13.77 − dividends received 1.46 1.39 1.00 − gains/losses on valuation and trading activities1 7.49 9.38 7.43 Net income from banking activity 48.44 49.64 53.07 General expense 24.64 24.73 25.41 Depreciation 2.33 2.54 2.53 Net charges to provisions for financial instruments 4.27 11.51 10.52 − of which: net charges to provisions for impaired loans 4.18 11.49 10.50 Pre-tax earnings 16.75 10.29 14.27 Net earnings 13.63 8.40 11.48

1 This item comprises gains/losses on assets and financial liabilities of the portfolios “held for trading” and “designated at fair value through profit and loss account”, realised gains/losses on financial assets and liabilities from other portfolios and gains/losses on foreign exchange rate movements. Source: NBP.

Net income from banking activity was negatively influenced by the reduction of gains/losses on valuation and trading activities, which was mainly caused by a significant fall of income on the portfolio of derivative instruments held for trading. The income on this portfolio is negatively correlated with net interest income, which may suggest that the portfolio is at least partially used

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 95 Financial institutions

as a hedge against interest rate risk related to balance sheet items, however, formally, instruments from this portfolio are not covered by hedge accounting.

In 2010, the amount of charges to provisions for impaired assets and its ratio to net income from banking activity decreased (Table 4.1.11). This resulted among other things from the slower rate of the deterioration in loan portfolio quality, in particular with respect to loans to enterprises.33 In the cooperative banking sector, the burden of loan impairment charges on net income from banking activity was lower on average by 20 percentage points (3% as compared with 23% in the commercial banking sector), which resulted from better quality of assets.

Table 4.1.11. Operating indicators of banks, 2008−2010 (%)

As % of net income As % of average assets from banking activity 2008 2009 2010 2008 2009 2010 Net interest income 3.14 2.51 2.77 57.87 53.16 58.17 Net non-interest income 2.29 2.21 1.99 42.13 46.84 41.83 Net income from banking activity 5.43 4.72 4.77 100.00 100.00 100.00 Operating costs1 3.02 2.59 2.51 55.67 54.93 52.64 Net charges to provisions for financial 0.48 1.09 0.94 8.82 23.18 19.82 4 instruments − of which: net charges to provisions 0.47 1.09 0.94 8.64 23.15 19.78 for impaired loans Pre-tax earnings 1.88 0.98 1.28 34.58 20.73 26.89 Net earnings 1.53 0.80 1.03 28.13 16.94 21.63 ROE – pre-tax earnings2 25.34 12.81 15.72 – – – ROE – net earnings2 20.61 10.46 12.67 – – –

1 Operating costs = general expense + depreciation 2 Core capital without deductions; profits of foreign banks branches are deducted from the numerator. Note: Annualised data. Source: NBP.

The operating costs burden on net income from banking activity also decreased. In the cooperative banking sector, the operating costs to net income from banking activity ratio exceeded 70% and was much higher than in the commercial banking sector (51%). These differences are connected with workload ratios and ratios of assets per employee in both segments of the banking sector.

Credit products offered by banks were highly diversified in terms of profitability measured with adjusted net interest margin34 (Figure 4.1.31). Consumer loans, despite the highest burden of provisions for impaired loans, were characterised by the highest profitability. On the other hand, the margin obtained by banks on housing loans was low. The cooperative banking sector recorded a higher adjusted margin on all types of loans than the commercial banking sector, despite the higher average costs of funding (Figure 4.1.31). This was possible owing to high effective interest on loans and a very low burden of provisions for impaired loans. Therefore, the level of operating costs was primarily responsible for the usually lower ROA and ROE in the cooperative banking sector.

33 More about this in: Financial Stability Report. December 2010, Warsaw 2010, NBP, pp. 44–61. 34 The ratio of interest income from a particular type of loans less interest expense connected with the financing of these loans and charges to provisions from impaired loans to the average value of these loans.

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Figure 4.1.31. Estimated profitability of consumer, housing and corporate loans

A. Commercial banking sector

% of corporate loans 16 % of consumer loans 10 % of housing loans 10 12 8 8 8 6 6 4 4 4 2 2 0 0 0 -4 -2 -2 -8 -4 -4 -12 -6 -6 III III IV III III IV III III IV III III IV III III IV III III IV 2009 2010 2009 2010 2009 2010 Effective interest on loans Result of closing open currency position Effective interest on loans Burden of charges to provisions on loans Effective interest on loans Burden of charges to provisions on loans Effective interest on funding Burden of charges to provisions on loans Effective interest on funding Adjusted net interest margin on loans Effective interest on funding Adjusted net interest margin on loans Adjusted net interest margin on loans

B. Cooperative banking sector

16 % of consumer loans 10 % of housing loans 10 % of corporate loans 12 8 8 6 6 8 4 4 4 4 2 2 0 0 0 -4 -2 -2 -8 -4 -4 -12 -6 -6 III III IV III III IV III III IV III III IV III III IV III III IV 2009 2010 2009 2010 2009 2010 Effective interest on loans Result of closing open currency position Effective interest on loans Burden of charges to provisions on loans Effective interest on loans Burden of charges to provisions on loans Effective interest on funding Burden of charges to provisions on loans Effective interest on funding Adjusted net interest margin on loans Effective interest on funding Adjusted net interest margin on loans Adjusted net interest margin on loans Notes: 1. Annualised data. 2. The presented values of adjusted net interest margin should only be regarded as a proxy of the actual profitability of particular credit products. Identical funding costs (effective interest rate on liabilities) were assumed for each credit category. Estimated profitability takes no account of profit earned on foreign currency-denominated loans due to the difference between the bid and offer price of currencies (FX spread). Moreover, the calculation does not include operating costs which, most likely, vary depending on the product. 3. “The result of closing open currency position” for housing loans is an estimated net gains/losses on closing of an open FX position by banks (related to origination of Swiss franc-denominated housing loans) by 3-month FX swaps CHF/USD and USD/PLN. The result of such a hedging strategy was estimated as the product of the sum of long positions of banks (quarterly average of positive differences between the value of Swiss franc-denominated housing loan and the value of liabilities valued at amortized cost in this currency) and the quarterly average difference between WIBOR 3M rate and LIBOR CHF 3M rate adjusted for implied spread on FX swaps. Cooperative banks practically did not grant Swiss franc-denominated housing loans, therefore, the value of estimated result on FX swap operations is very small in that case. Source: NBP.

4 .2 . Credit unions

Credit unions (SKOK) are non-banking financial institutions classified as monetary financial institutions. Activity of credit unions is regulated by the Act on Credit Unions.35 Credit unions are not subject to supervision by the Polish Financial Supervision Authority and oversight of credit unions is exercised by the National Association of Credit Unions (KSKOK). On 5 November 2009, the Polish Parliament passed the Act on Credit Unions36 that defines, inter alia, the principles for foundation, organisation and activity of credit unions and KSKOK. It also implements supervision over their activity by the PFSA. On 30 November 2009, the Act was referred to the Constitutional

35 Act of 14 December 1995 on Credit Unions (Dz.U. of 1996 No 1 item 2, as amended). 36 Act of 5 November 2009 on Credit Unions (the text of the act finally set after consideration of amendments of the Senate), www.sejm.gov.pl.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 97 Financial institutions

Tribunal by the President of the Republic of Poland.37 By the end of 2010, the Constitutional Tribunal had not considered the case.

Credit unions are not covered by the deposit guarantee scheme under the Bank Guarantee Fund. Deposits in credit unions are protected by the Deposit Protection Program of credit unions. This program consists of a stabilisation fund and the deposits insurance offered by Credit Unions Mutual Insurance Society (TUW SKOK). According to the Act on Credit Unions, the stabilisation fund is set up by KSKOK from contributions made by associated unions of at least 1% of their assets. Guarantee of a return of a certain amount of deposit is provided by TUW SKOK. Since 1 December 2010, the guarantee of deposits of SKOK’s members has been increased to an amount that is PLN equivalent of EUR 100,000.38

The year 2010 saw further dynamic growth of credit unions’ assets. The ratio of credit unions’ total assets to cooperative banking sector total assets39 amounted to 14.6% as at the end of 2010 (Figure 4.2.1). Despite the systematic development of credit unions in recent years, their importance in the Polish financial system remains low. As at the end of 2010, loans and deposits of credit unions accounted for, respectively, approximately 1.2% and 1.6% of loans and deposits of the banking sector. The share of funds deposited by households at credit unions in the total volume of their financial assets were at a relatively low level and amounted to approximately 1.4%, as at the end of 2010. 4 Figure 4.2.1. Assets of credit unions as compared to assets of the cooperative banking sector, 2003−2010

PLN billion % 100 18 16.0 96.5 15.3 14.6 80 14.1 82.4 15 14.7 14.5 75.8 13.0 60 65.6 12.5 12 57.8 40 47.1 9 38.8 34.0 20 14.1 6 9.4 11.6 5.3 6.0 7.3 3.3 4.2 0 3 2003 2004 2005 2006 2007 2008 2009 2010

Assets – credit unions (left-hand scale) Assets – cooperative banking sector (left-hand scale) Share of assets of credit unions in assets of the cooperative banking sector (right-hand scale)

Source: NBP, KSKOK.

The coverage of credit unions was local and their products were primarily offered to households with average and low income, and to micro and small enterprises. Therefore, the activity of credit unions was competitive for cooperative banks. In 2010, the assets of credit unions grew faster than assets of cooperative banks and much faster than assets of the entire banking sector (Figure 4.2.2).

Credit unions are characterised by a well-developed network of branches across the country, which enables a wide range of customers to use their services. In 2010, there was a further increase in the development of the credit union branch network and at the same time there was increase in the number of members. As at the end of 2010, the number of branches amounted to 1,792, i.e. 53 branches more than in 2009 (Figure 4.2.3). At the end of this year, the number of members associated in credit unions amounted to 2,177 thousand (2,026 thousand at the end of 2009).

37 The request to examine conformity with the Constitution of the Act of 5 November 2009 on Credit Unions (Kp 10/09), www.trybunal.gov.pl/index2.htm. 38 Increasing the value of deposits guaranteed by TUW SKOK was related to the implementation of Directive 2009/14/ EC of the European Parliament and of the Council of 11 March 2009 amending Directive 94/19/EC on deposit- -guarantee schemes as regards the coverage level and the pay-out delay. 39 The cooperative banking sector includes cooperative banks together with affiliating banks.

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Figure 4.2.2. Growth rate of credit unions’ assets as compared to cooperative banking sector assets and the entire banking sector, 2003−2010

% 40 36.2 35 30.7 30 26.5 26.0 25 29.2 22.7 22.6 21.4 23.2 22.1 20 16.3 16.6 15.6 17.1 15 14.2 12.0 13.5 8.7 10 9.6 6.6 10.1 9.2 5 4.8 2.1 0 2003 2004 2005 2006 2007 2008 2009 2010

Credit unions Cooperative banking sector Banking sector

Source: NBP, KSKOK.

Figure 4.2.3. Development of the credit union network and the number of their members, 2003−2010

thousands 2,000 2,500 4 1,800 2,026 2,177 2,250 1,600 1,856 2,000 1,669 1,400 1,551 1,750 1,200 1,394 1,500 1,000 1,169 1,250 800 924 1,000 600 1,176 1,378 1,477 1,519 1,596 1,695 1,739 1,792 750 400 500 200 250 83 76 70 62 62 59 0 109 67 0 2003 2004 2005 2006 2007 2008 2009 2010

Number of unions – left-hand scale Number of members – right-hand scale Number of branches – left-hand scale

Source: KSKOK.

For many years, households have been the main recipients of services provided by credit unions. Their share in total loans and lending facilities extended by credit unions to companies, households and non-bank financial institutions amounted to 78% in 2010, and the share of deposits to 99% (Table 4.2.1). In 2010, the value of loans and lending facilities granted by credit unions to this group of customers increased by PLN 1.4 billion (i.e. 16.4%) and at the end of December reached PLN 9.8 billion. The value of household deposits at credit unions rose by PLN 2.2 billion (i.e. 20.2%) in 2010 and amounted to PLN 13.0 billion.

Table 4.2.1. Share of loans, lending facilities and deposits of households in total loans, lending facilities and deposits of credit unions, 2007−2010 (%)

2007 2008 2009 2010 Loans and lending facilities granted to households 81.1 84.8 83.5 77.9 of which: up to 1 year inclusive 9.4 6.8 5.8 5.9 from 1 year to 5 years inclusive 62.5 54.1 63.6 72.3 over 5 years 28.1 39.1 30.6 21.8 Household deposits 98.5 98.9 98.9 99.1 of which: current 10.4 9.4 17.2 19.4 term 89.6 90.6 82.8 80.6

Source: NBP.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 99 Financial institutions

The rapid growth in the balance sheet total of credit unions in 2007–2010 occurred, among others, due to increasing membership and the growing value of deposits held at credit unions. The attractiveness of the product offer of credit unions was the reason for high growth rate of deposits (Figure 4.2.4). As in previous years, the time structure of funds deposited in credit unions is dominated by term deposits (Table 4.2.1). The share of current deposits in total deposits rose to over 19% from less than 10% in 2008.

Figure 4.2.4. Loans, lending facilities and deposits of credit unions, 2007−2010

PLN billion % 14 13.1 70 12.1 12 11.0 60 10.1 10 50 8.0 8.4 8 40 6.8 6.3 30.2 6 26.1 30 26.6 23.6 25.9 20.0 4 21.5 19.7 20 2 10 0 0 2007 2008 2009 2010 Loans and lending facilities (PLN billion) Growth rate – loans and lending facilities 4 Deposits (PLN billion) Growth rate – deposits

Source: NBP.

In previous years, consumer loans and lending facilities, which accounted for almost 70% of the credit unions’ loan portfolio, prevailed in loans and lending facilities granted to households. In 2010, a change in this tendency was observed. As at the end of 2010, consumer loans accounted for 49.9% of household loans, the rest being mostly housing loans. The value of housing loans granted to households amounted to PLN 4.9 billion.

4 .3 . non-bank institutions providing financial services

4.3.1. Leasing

The size of the market

Leasing is used by enterprises as a source of financing of tangible assets. It is of great importance especially in the sector of small and medium-sized enterprises in which a number of entities with limited credit history have more difficult access to alternative, external sources of financing such as credit or debt securities issues. Turnover in the leasing market is highly dependent on the economic situation. Along with the improvement of economic conditions, activity in the leasing market grows because the willingness of enterprises to make investments increases.

Improvement of economic situation in 2010 contributed to an increase in turnover and operating income of enterprises. However, due to uncertainty over the sustainability of this improvement resulting from, among others, debt crisis of peripheral euro area countries, domestic companies continued to limit the value of undertaken investments. Despite these developments, a downward trend in turnover in the leasing market in Poland was reversed in 2010. The value of assets leased in 2010 amounted to nearly PLN 27.3 billion (compared to PLN 23.0 billion in 2009), which represented an increase of almost 19% (Figure 4.3.1). Demand for leasing raised by enterprises increased each quarter of 2010. The highest turnover (more than PLN 9.0 billion) was recorded by leasing companies in the fourth quarter. This increase was mainly a result of one-off factors – increased demand for cars with type approval for goods vehicles (the so-called cars with

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cargo compartment), which was determined by the upcoming entry into force in early 2011 of less favourable provisions for deduction of VAT.

The increased interest in leasing may also have been related to the tightening of lending policies by banks, in particular for small and medium-sized enterprises for which terms on long- -term loans deteriorated every quarter of the year. In addition, a slight decrease in margins by leasing companies may have had a positive impact on the development of this market in 2010. This was a result of increased price competition among leasing companies, in particular at the most competitive car leasing market as well as efforts to increase the volume of transactions.

Figure 4.3.1. Leased assets in Poland, 2007−2010

PLN billion % 35 3.5 30 2.8 3.0 2.6 25 2.5 1.9 20 1.7 2.0 32.7 33.1 1.5 15 27.3 23.0 10 1.0 5 0.5 4 0 0.0 2007 2008 2009 2010 Leased assets – left-hand scale Leased assets to GDP – right-hand scale

Source: ZPL.

Leasing companies continued to pursue conservative lending policy running since mid-2008, but it was still less restrictive than in the case of banks. In 2010, this policy was gradually eased, which may be proven by greater interest in financing vehicles for new enterprises. Smaller risk aversion of leasing companies stemmed from improvement of the economic situation in Poland and of the financial liquidity of enterprises. According to some market participants, it contributed to the decrease in customer arrears to leasing companies. In 2010, customers’ applications were still analysed very carefully. The most common form of collaterals in leasing agreements remained blank bills, bail bonds and assignments of receivables.

The share of leasing in financing of investment outlays in 2010 increased slightly, to approximately 12.6%.40 As at the end of 2010, the total value of active leases portfolio was still lower than at the end of 2008 and amounted to PLN 55.3 billion (approx. PLN 0.4 billion more than in the previous year).41 In 2010, the number of clients of leasing companies was slightly lower than in the previous year and amounted to 374 thousand (in 2009, it was 382 thousand businesses).42

The value of leased assets and real estate also increased in most European countries. The value of assets leased in 2010 in Europe was nearly 10% higher compared to 2009 and amounted to approximately EUR 242 billion.43 Assets leased in Poland accounted for approximately 3% of the European market value. Germany and the UK (totalling over 35% of turnover in the European market) had the largest leasing markets, measured by the value of financed assets. Due to the expiry of the agreements concluded during dynamic development of this market, prior to global financial crisis, the value of the portfolio of active leasing agreements in Europe decreased slightly and amounted to EUR 674.2 billion as at the end of 2010.

40 Based on Concise Statistical Yearbook of Poland 2011, Warsaw 2011, Central Statistical Office. 41 Based on data from Polish Association of Leasing Companies. 42 Działalność przedsiębiorstw leasingowych w 2010 r., Warszawa 2011, GUS, p. 1. 43 Based on Leaseurope data available on the website www.leaseurope.org.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 101 Financial institutions

According to GUS data, leasing activity in Poland was run by 84 entities in 2010, of which 31 were associated in the Polish Association of Leasing Companies (ZPL). In the case of 21 companies, leasing was the only type of activity, for 50 of them it was a dominant activity, while for remaining 13 it was only an additional service. More than half of the entities running leasing business in Poland were controlled by foreign shareholders. In 2010, companies dependent on banks and production entities dominated in the market but there was a significant increase in the number of leasing companies owned by non-bank financial institutions. The leasing market was characterised by a relatively strong competition. Among the companies associated in ZPL, the four largest operators had an around 35% market share (compared to 33% in 2009), measured by the value of leased assets. The European Leasing Fund remained the biggest entity in the leasing market. In 2010, it financed assets worth PLN 3.3 billion.

In 2010, the leasing companies financed their activity mainly from bank loans, usually granted by a bank from the same capital group. According to GUS data, the share of bank financing amounted to 83.4% in 2010. However, leasing companies financed 10.4% of leased assets with own funds. The rise of investor demand for non-Treasury debt securities encouraged leasing companies to use market-based financing. Decisions about issuing bonds were taken especially by entities with no access to bank financing within one capital group. The largest bond issue was carried out by Prime Car Management SA, a company owned by the Masterlease SA Group. Two- and four-year variable interest bonds worth PLN 534 million were admitted to organised trading 4 in two markets within the Catalyst platform (the Alternative Trading System led by the Warsaw Stock Exchange and BondSpot). Also the sale of two-year bonds worth PLN 55 million by Volkswagen Leasing Sp. z o.o. was a large bond issue.

Structure of leased assets

ZPL data indicate that domestic market was still dominated by agreements for movable tangible assets representing over 94% of all leasing agreements concluded in 2010. The value of movable tangible assets leased in 2010 amounted to PLN 25.7 billion. The largest share in the structure of movable tangible assets leased in Poland, as in previous years, was represented by means of road transport (Table 4.3.1).

Table 4.3.1. Leased assets and their structure, 2007−2010

Value (PLN billion) Structure (%) 2007 2008 2009 2010 2007 2008 2009 2010 Movables, including: 29.60 29.79 20.92 25.70 90.7 90.1 91.0 94.2 − machinery and equipment 8.86 9.78 7.65 8.54 27.1 29.6 33.3 31.3 − computers and office equipment 0.48 0.54 0.47 0.46 1.5 1.6 2.0 1.7 − means of rail, air and water transport 0.58 0.52 0.54 0.65 1.8 1.6 2.4 2.4 − means of road transport, of which: 19.46 18.69 12.12 15.90 59.6 56.5 52.7 58.3 − passenger cars 7.31 8.13 5.70 5.36 22.4 24.6 24.8 19.6 − other 0.22 0.26 0.14 0.15 0.7 0.8 0.6 0.5 Real estate 3.05 3.27 2.07 1.59 9.3 9.9 9.0 5.8 Total movables and real estate 32.65 33.06 22.99 27.29 100.0 100.0 100.0 100.0

Note: Data on computers and office equipment do not include information from IT equipment manufacturers which directly lease their products. Source: ZPL.

The leasing of trucks was the most popular among leased means of transport. Leasing of vehicles with weight of up to 3.5 tons accounted for approx. 75% of all agreements concluded in this market segment in 2010 but, in fact, passenger cars with type approval for goods vehicles dominated. In 2010, there was registered more than twice as many vehicles of this type than in the previous year. Nearly half of the purchases of new passenger cars with the truck homologation was

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financed through leasing.44 This substantial increase in enterprises’ interest in purchasing of cars resulted from a change in legislation. As of 1 January 2011, there is no difference in VAT deduction between the so-called ‘cars with cargo compartment’ and passenger cars. Under the new law, enterprises may deduct only 50% of VAT on the value of the purchased vehicles with weight of up to 3.5 tons and on fuel for these vehicles. In accordance with the judgment of the European Court of Justice of December 200845, enterprises had the right to deduct by the end of 2010 all the VAT on this account on principles applicable before 1 May 2004.

The value of cars leased in 2010 was nearly 6% lower than in the previous year, which explains a decrease in the share of this category in the structure of the leasing market. It resulted from demand concentration for commercial vehicles in the segment of cars with type approval for goods vehicles. The importance of car fleet management and full service leasing, otherwise referred to as long-term rental, was still growing in the structure of car leasing services. These services combine traditional leasing and comprehensive services to vehicle fleets. Main clients of leasing companies in this market segment in Poland are large enterprises, particularly international corporations. However, increased interest in this product was also shown by small and medium- -sized operators which account for the largest group of beneficiaries of such services in mature leasing markets.

The growth in activity of leasing companies in the segment of machinery and equipment, recorded in 2010, was primarily associated with the increase in demand for agricultural machinery 4 and medical equipment supplied by leasing companies. Unlike in other segments of the market, these categories were characterised by a large share of financing granted by leasing companies as a lending facility. According to market participants, this legal form of financing is more favourable to non-VAT payers (particularly farmers). In the case of lending facilities, the total of paid VAT may be, at one time, included to the deductible costs of these entities, whereas when leased settlement of these costs is spread over time. A modest increase in the largest category of assets in that market segment – construction equipment – was associated with a rise of construction and assembly production in 2010, being largely a result of larger use of EU funds for public investment.

In 2010, a slight increase in the value of leased means of transport such as vessels, aircraft and rolling stock was registered in 2010. However, due to the high average value of single transactions, this market displays high volatility. The largest clients of leasing companies in this market segment were, as in previous years, local government units.

The value of leased real estate in 2010 amounted to PLN 1.59 billion and was lower by 23.1% compared to 2009. According to ZPL data, the largest decrease was recorded in commercial property sector. The value of such properties leased amounted to PLN 478 million against more than PLN 1,131 billion in 2009 (decrease by 57.8%). A smaller decrease was recorded in the sector of industrial buildings and warehouses (in 2010, buildings were leased of the value of PLN 578 million). The growth of leased real estate concerned only the office buildings sector. The real estate leasing market was characterised by significantly higher concentration, which resulted from out of standard transactions and their higher average value. The three largest entities operating in this market accounted for over half of the value of concluded transactions.

The most popular was financial lease; 86% of lessees used it at the end of 2010. However, the number of users of operating lease decreased like a year ago. 48.2 thousand entities used this type of leasing, whereas in 2009 there were over twice as many as in 2010. In terms of the value of new leasing agreements, the importance of operating lease was, however, significantly higher, in 2010, as evidenced by a nearly PLN 3.5 billion growth in the value of assets leased in this form. Mixed lease was used only by approximately 2.4 thousand customers who financed assets worth nearly PLN 0.5 billion in this way.

44 Based on information available at ZPL website: http://www.leasing.org.pl. 45 Judgment of the European Court of Justice of 22 December 2008 in case C-414/07 Magoora sp. z o.o. (O J C44 of 2009, p. 17).

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Leasing agreements were usually concluded for a period of two to five years (nearly 82% of all agreements). Agreements for a period of up to two years usually applied to leasing of means of road transport whereas agreements exceeding five years were concluded usually in the segment of leasing of machinery and industrial equipment and real estate. The average value of concluded leasing agreement did not change significantly and amounted to almost PLN 120 thousand in 2010.46 The currency structure of leased assets also did not change significantly. Agreements in zlotys prevailed and accounted for almost 82% of the total value of all agreements. The share of leasing denominated in euro amounted to less than 18% and this type of agreements dominated in the case of real estate lease. The importance of other currencies was marginal, including the Swiss franc relatively popular in the years prior to the world financial crisis.

Barriers to development and development prospects

Basic barriers to the development of many leasing market segments are legal regulations, in particular tax ones. The need to meet numerous conditions regarding the leasing term, the method of financing, as well as depreciation of leasing items, frequently makes it difficult to determine whether an agreement is the leasing contract within the meaning of laws on corporate or personal income tax.47 Provisions on leasing taxation are complex and ambiguous and their interpretation causes problems both for operators in the market and tax authorities. It is evidenced by large discrepancy in opinions of directors of tax chambers and a number of cases ruled by administrative 4 courts (in 2010, correct interpretation of tax provisions relating to leasing was resolved, in 37 cases, only by this instance).

Qualifying financial lease as a service, not a supply of goods is also considered by companies operating in the market as a barrier to the development of leasing, which involves payment of input VAT in advance on the value of purchased fixed assets. In the opinions of market participants, a relatively long duration of the minimum operating lease is also unfavourable. It is at least 40% of the normative period of depreciation in the case of movables and in the case of real estate it may not be shorter than 10 years.

Changes to be implemented by an act prepared in 2010 by the Ministry of Economy on reducing administrative barriers for citizens and businesses48 should provide a positive impulse for the development of the leasing market. This act regulates tax treatment of leasing agreements concluded by natural persons not operating a business. It will enable individuals to conclude leasing agreements that can become an alternative to consumer loans. In countries where this form of leasing has been known for years, it represents even 30% of the value of the entire leasing market.49 In this case, however, it still remains a psychological barrier due to the issue of ownership of leased asset (e.g. a car), which is owned by a leasing company, regardless of the type of leasing.

A big increase in demand for leasing of local government units has been recently observed. Due to low credit risk, they are very attractive group of customers for leasing companies. Apart from local government units, municipal companies and budgetary establishments are also beneficiaries of this type of funding. These entities are primarily interested in leasing specialised equipment and machinery and vehicles such as excavators or equipment for road maintenance. They also often conclude leaseback transactions consisting in giving back for lessee’s use the asset that was previously sold to a leasing company (such transactions related to e.g. rolling stock). Due to legal regulations, local government units have not yet conducted leaseback transactions of real estate.50

46 Based on Działalność przedsiębiorstw leasingowych w 2010 r., Warszawa 2011, GUS. 47 Act of 15 February 1992 on Legal Persons’ Income Tax (Dz.U. of 1992 No 21 item 86 as amended) and Act of 26 July 1991 on Physical Persons’ Income Tax (Dz.U. of 1991 No 80 item 350 as amended). 48 The Draft Act on Reducing Administrative Barriers for Citizens and Businesses was received by the Parliament on 24 November 2010 (Parliamentary print No 3656, 6th term, www.sejm.gov.pl). 49 Based on information available at the ZPL website: http://www.leasing.org.pl. 50 Further information in Rozwój system finansowego w Polsce w 2009 r., Warszawa 2010, NBP, p. 166.

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4.3.2. Factoring

Turnover in the factoring market in recent years indicate that this market can expand both during the downturn, as well as during economic growth. When the macroeconomic conditions deteriorate and the lending policy of banks is tightened, factoring is used by enterprises as an additional source of funding for operating activity and as a protection against the insolvency of counterparties (non-recourse factoring). It is also a way to shorten the cycle of payments. In the period of economic growth and the increasing number of orders, factoring allows enterprises to increase sales, improve liquidity and the balance sheet structure.

In 2010, a significant rise of turnover was recorded in the factoring market in Poland. A better financial position of enterprises (earnings growth, improving profitability and liquidity ratios) stimulated the turnover growth.51 The better financial position was accompanied by tighter lending policies maintained by banks.52 As a result, businesses looked for additional external sources of funding growing sales and also – after a period of heightened uncertainty about further economic development – sought to protect themselves against the risk of insolvency of counterparties and to improve receivables management. Factoring market development was not supported by the restrictive policies of insurance companies. In comparison to 2009, insurance companies did not ease criteria for granting limits on insured claims to factoring agent.

Data on the factoring market in Poland used in this study come from: the Central Statistical Office (GUS) and the Polish Factors Association (PZF). Forty four factoring operators, including 4 25 specialised factoring companies and 19 commercial banks, were surveyed by GUS. However, PZF data include transactions of 13 companies associated in PZF (both subsidiaries of banks and non-bank entities).

Data presented in the previous edition differ from current data as data published by PZF and GUS were revised to include, among others, new members of PZF.

The size of the market

According to GUS data, turnover of factoring service providers rose from PLN 51.4 billion in 2009 to PLN 88.6 billion in 2010. The number of invoices purchased also grew substantially to amount to 3.8 million, i.e. almost 800 thousand more compared to 2009.53 Factoring companies associated in PZF purchased invoices worth PLN 55.9 billion.

Figure 4.3.2. Turnover of factoring companies in Poland, 2003−2010

PLN billion % 100 100 90 80.7 90 80 80 72.4 70 70 60 55.9 60 50 88.6 50 40 40 51.4 55.9 30 47.9 30 19.9 30.0 20 16.1 30.7 32.9 20 10.1 7.3 4.9 10 17.0 18.8 10 11.4 12.0 10.5 13.2 14.2 13.8 0 11.3 0 2003 2004 2005 2006 2007 2008 2009 2010

Turnover of PZF factors – left-hand scale Total market turnover – left-hand scale Change of turnover value (for the entire market) – right-hand scale Note: Due to revision of data resulting from the extension of research sample by GUS and PZF, data for 2009 have changed. Source: PZF, GUS.

51 Ocena kondycji ekonomicznej sektora przedsiębiorstw niefinansowych w 2010 r. w świetle danych F-01/I-01, NBP, Warszawa 2011. 52 Senior loan officer opinion survey on bank lending practices and credit conditions, 2011 Q1, 2010 Q4, 2010 Q3, 2010 Q2, NBP, Warsaw 2010. 53 Działalność faktoringowa przedsiębiorstw finansowych w 2010 r., GUS, Warszawa 2011.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 105 Financial institutions

In 2010, the value of factoring services in the European Union amounted to EUR 971 billion. This represents a rise of nearly 18% against 2009. The largest share in the total market was registered in the United Kingdom – 23.3%, France – 15.8% and Italy – 14.8%. The share of Poland amounted to 1.7%.54 Minor importance of factoring as a source of funding of domestic enterprises is evidenced by the number of enterprises using factoring. Although it was growing steadily in recent years, it did not exceed 6 thousand, which represented approximately 0.1% of all entities doing business in Poland.55

For only 9 entities, factoring was the sole business activity among all those surveyed by GUS. This means that the majority of entities that offer factoring services regard them as an additional source of revenue. In 2010, the share of the four largest operators in the total turnover of factoring services market amounted to 42.5% (15.2% of Raiffeisen Bank Poland56, 12.4% ING Commercial Finance, 8.6% Coface Poland Factoring and 6.3% Pekao Faktoring). According to available data, only one enterprise reported a falling turnover.

A characteristic feature of the Polish factoring market is the prevalence of enterprises from banking capital groups among businesses offering factoring services. In 2010, they financed receivables worth PLN 55.1 billion (in 2009 PLN 25.2 billion), which accounted for 62.2% of the market. Banks have an advantage over other entities offering factoring in terms of access to the customer base, share e-Factoring57 and the opportunity to present a more comprehensive offer. 4 Moreover, in the event of a tightened credit policy, banks could offer an alternative source of funding, namely factoring, to existing customers. It allowed them to maintain the customer base and provide an additional source of revenue. Introducing factoring services by other universal banks in Poland (BOS Bank and Alior Bank) is, among others, the evidence of the growing interest in factoring among banks.

Factoring structure

As in previous years, domestic factoring dominated in Poland in 2010. According to GUS data, its share in the total value of claims repurchased by banks and factoring enterprises amounted to 84%. The structure of turnover in this market indicates that recourse factoring was used still most often (58.7% of turnover in 2010). This may have resulted from the maintenance of limited insurance limits for insured claims, particularly in relation to automotive and transport sectors and from factoring providers’ expectations for a higher price for taking the risk of their counterparties. Recourse factoring was more prominent in turnover of banks which provide factoring services than in turnover of specialised factoring firms (Figure 4.3.3). This development was related to banks’ greater experience in hedging against credit risk of enterprises. The value of non-recourse factoring amounted to PLN 30.1 billion, which accounted for 40.4% of turnover in the factoring services market (43.1% in 2009). In 2010, the share of mixed factoring decreased.

According to GUS data, the value of claims repurchased under foreign factoring grew by as much as 73.8% (from PLN 8.2 million in 2009 to PLN 14.2 million in 2010). Banks that offer factoring recorded an over 3-fold increase in the value of purchased invoices of foreign factoring. As at the end of 2010, banks’ turnover of foreign factoring accounted for almost 14% of their total factoring turnover (in 2009 only 6.3%). The development of foreign factoring was still supported by Polish entrepreneurs’ limited confidence to foreign counterparties. On account of a rapid increase in claims repurchased under domestic factoring, the share of foreign factoring in the total value of the factoring services market did not change significantly compared to previous years (in 2010, this share amounted to 16%).

54 Based on data from Factors Chain International, www.factors-chain.com available on 22 July 2011 55 Zmiany strukturalne grup podmiotów gospodarki narodowej wpisanych do rejestru REGON, 2010 r., GUS, Warszawa 2011. According to GUS data as at the end of 2010, 3,909.8 thousand legal entities, unincorporated entities, sole entrepreneurs (excluding individual farmers), were registered in REGON register. 56 Raiffeisen Bank Poland joined PZF in November 2010. 57 E-factoring is to provide customers with an Internet module for online factoring transaction handling. E-factoring enables the firm using factoring to review invoices, send them to the factor and also to automatically post, generate reminders and calls for payment, reports on receivables, arrears in payments and available limits on the insured receivables.

106 National Bank of Poland Financial institutions

Figure 4.3.3. Structure of claims repurchased in domestic factoring, 2009−2010

% 100 0.8 7.3 0.2 2.0 90 80 39.8 36.6 47.7 70 47.2 60 50 40 30 59.4 63.2 50.3 20 45.5 10 0 Banks Factoring companies Banks Factoring companies 2009 2010 Recourse factoring Non-recourse factoring Mixed factoring

Note: Due to revision of data arising from the extension of research sample by GUS, data for 2009 have changed. Source: GUS.

Export factoring, which is usually offered without recourse, represented a dominant part of foreign factoring (96%). Increasing demand for this service by Polish enterprises was driven by growth in exports by 10.8%, in particular to France, Germany, United Kingdom and Russia. Furthermore, by submitting foreign invoices to early repurchase, exporters limited not only the risk 4 of insolvency of counterparties but also currency risk.

Barriers to development and development prospects

The fact that insurance companies continued to keep reduced limits for insured claims can impede enterprises access to non-recourse factoring and export factoring. Another factor that may slow the pace of factoring development in Poland is the policy of factoring service providers who – when assessing potential factoring clients – often take into account their financial position rather than quality of their claims portfolio. In addition, the development of factoring in Poland is not supported by the low finance management innovation of businesses, which is related to the persistently low level of business knowledge on alternative sources of external funding.

Growing competition among operators, driven by greater involvement of banks, may be a factor for development of the factoring market in the coming years. Banks extend a range of services with micro-factoring targeted at micro-businesses, local government factoring targeted at contractors of local government units. They also offer electronic access to factoring transactions handling.

In 2010, two debt collection agencies were interested in the acquisition of factoring enterprises. One of the acquisitions took effect and the second was planned for 2011. Due to the use of cross-selling, the acquisitions had a positive impact on the development of factoring enterprises. Factoring agents were enabled to use the service of claims due. Moreover, the combination of competence of debt collection agency and factoring company in a single entity made it possible to lower requirements for collaterals of low liquidity. Further development of foreign factoring and additional services such as collection of receivables and monitoring of debtors may be expected in the subsequent years.

4.3.3. Financial intermediation

The basic business areas of domestic financial intermediaries are the sale of loans and lending facilities granted by banks and the provision of financial advisory services. These entities also offer advice when purchasing non-life insurance and life insurance, participation units in investment funds and when choosing savings programmes. Generally, these services are used by households. Some financial intermediaries have also special offers for enterprises which, in addition to bank loans, include services such as leasing and factoring. There are several intermediaries operating in the Polish market who provide cash lending facilities from their own resources and offer own financial products designed for their customers along with other financial institutions.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 107 Financial institutions

The slowdown in economic growth in 2009 had a significant impact on the operations of domestic financial intermediaries in 2010. Some entities closed the business (e.g. Finamo), others changed the business profile (e.g. Money Expert which reduced the number of mobile advisors that offered cash lending facilities and focused on providing mortgage loans). After the mergers that took place in 2009, other enterprises were considering consolidation processes. Combining of financial intermediary services and real estate agency activities (e.g. Home Broker, Emmerson Finance, redNet Finance) and expanding the core business over debt collection services (e.g. Dom Finansowy QS) were new phenomena in the sector.

The Polish financial intermediary market is highly concentrated. In 2010, the share of the three most active entities in total turnover of the market for financial intermediary services amounted to about 65%.58 The largest providers of such services are often affiliated entities of banks or financial groups and carry out operations nationwide (e.g. Xelion owned by Bank Pekao, Expander owned by the private equity fund Innova Capital, or Open Finance from the Getin Holding group). The offer of these entities included financial products of many banks, investment fund management companies and insurance companies.

According to GUS data, the value of loans and lending facilities granted in 2010 in cooperation with financial intermediaries amounted to PLN 13.4 billion and was by 7.2% higher than in 2009 (Table 4.3.2). In terms of sales value, the most important group of products offered 4 by intermediaries were housing loans. In 2010, the value of all these loans granted in cooperation with intermediaries amounted to over PLN 11.3 billion and was over 14% higher than in the previous year. These loans accounted for about 30% of all housing loans granted by banks.59 Potential borrowers were eager to use the services of intermediaries because a very diverse banks’ offer made it difficult to choose the loan that was most suited to their needs and financial standing. Furthermore, intermediary services were free of charge. The increase in sales of housing loans via intermediaries was also supported by high demand for these loans reported by households and reduction of credit margins by banks. In 2010, the share of the three largest enterprises associated with the Association of Financial Advisory Firms (ZFDF)60 in sales of housing loans via financial intermediaries was about 50%.61

Table 4.3.2. Activities of financial intermediaries, 2009−2010

Number of agreements Value of completed Financial products offered signed (thousands) agreements (PLN million) 2009 2010 2009 2010 Total loans and lending facilities, including: 1,940.7 1,864.7 12,527.1 13,421.5 − loans, cash lending facilities and instalment loans 1,893.4 1,807.2 2,350.5 1,760.9 − housing loans 33.5 43.9 9,870.0 11,319.4 − car loans 4.1 3.3 55.4 106.5 − consolidation loans 9.1 9.8 142.8 148.3 Other financial products, including: 1,576.1 1,583.9 2,515.5 2,747.0 − insurance 1,440.8 1,536.9 1,689.8 1,764.4 − investment fund units 19.5 24.4 496.1 893.1

Note: Due to a change in the presentation of data by GUS and their revision, the data in the table may not be comparable to those published in the previous edition of this study. Source: Działalność przedsiębiorstw pośrednictwa kredytowego w 2010 r., Warszawa 2011, GUS.

58 NBP estimates based on data from ZFDF, GUS and from enterprises providing financial intermediary services. 59 Estimates based on data on housing loan agreements concluded with participation of financial service intermediaries, given by GUS, and NBP data on the value of new housing loans in 2010. 60 Association of Financial Advisory Firms was registered in June 2008. In 2010 it associated 15 firms dealing with financial intermediation. 61 Estimates based on data from ZFDF and GUS.

108 National Bank of Poland Financial institutions

Loans, cash lending facilities and instalment loans were the most popular (expressed with the number of contracts) among customers of financial intermediaries. In 2010, agreements for these financial products accounted for nearly 97% of the number of loan and lending facilities agreements and 13.1% of their value (Figure 4.3.4). The total value of loans granted via financial intermediaries amounted to PLN 1.8 billion and was lower by 25% compared to 2009. It was the only category of financial products offered by intermediaries, for which a decline of sales was recorded. It resulted from the apparent slowdown of growth in consumer loans which include loans, cash lending facilities and instalment loans. Banks tightened the standards and terms of granting such loans due to a strong deterioration in the quality of their portfolios and adaptation to Recommendation T on good practices with regard to risk management of retail credit exposures.62 The decline in sales of cash loans and lending facilities recorded by credit intermediaries may soon induce them to increase diversification of income sources and expand their product range with other products.

Figure 4.3.4. Structure of loans and lending facilities granted by financial intermediaries, 2009−2010

% 100 80 4

60 78.8 84.3 97.6 96.9 40

20 18.8 13.1 0 2009 2010 2009 2010 Number of agreements signed Value of agreements signed

Loans, cash lending facilities and instalment loans Housing loans Car loans Consolidation loans Other loans

In the nearest future, the amendment to the Act on Consumer Loan shall affect the scale and manner of selling consumer loans via credit intermediaries63, which will arise from the implementation into Polish law of the Directive of European Parliament and of the Council No 2008/48/EC of 23 April 2008 on credit agreements for consumers and repealing Council Directive No 87/102/EEC.64 This amendment implies imposing certain disclosure requirements on credit intermediaries. Credit intermediation firms will be required to provide customers with information about the loan on a uniform information sheet that will be in force in all countries (Standard European Consumer Credit Information). Due to the need to adapt IT infrastructure to the new requirements, the process of consumer lending via credit intermediaries may be lengthened. The intermediaries will also be required to inform customers what lenders these entities cooperate with and whether they get paid. Prior to the conclusion of the loan agreement, an intermediary will also be obliged to inform customers about the costs associated with the preparation and offering of a loan agreement that are to be covered by the borrower for the benefit of the intermediary. Work on the government draft amendments to the Act on Consumer Loan was started at the end of 2010.

62 Resolution No 52/2010 of the Polish Financial Supervision Authority of 23 February 2010 on the issue of T Recommendation on good practices with regard to risk management of retail credit exposures (Official Journal of the PFSA, 2010, No 2, item 12). 63 Act of 20 July 2001 on Consumer Loan (Dz.U. 2001, No 165, item 984). 64 Directive of European Parliament and of the Council No 2008/48/EC of 23 April 2008 on credit agreements for consumers and repealing Council Directive No 87/102/EEC (OJ L133 of 2008, p. 66).

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 109 Financial institutions

A marked increase in sales of participation units in investment funds via financial intermediaries was noted in 2010 (from PLN 0.5 billion in 2009 to PLN 0.9 billion in 2010). Participation units in investment funds were characterised by relatively low investment risk, i.e. money market funds and bond funds, were the most popular instruments. The value of insurance products sold via financial intermediation firms amounted to PLN 1.8 billion and was about PLN 0.1 billion higher than in the previous year. Households were most eager to buy unit-linked life insurance policies.

4 .4 . Private equity/venture capital sector

The size of the sector

In 2010, the value of investments started by domestic private equity funds65 decreased by 3% and amounted to PLN 2.0 billion. The number of enterprises that received the financing from these funds was 52 and was greater by 23 entities than in 2009. The value of investments made in the domestic market by foreign venture capital funds decreased substantially (by 44%) and amounted to PLN 1.0 billion. Amid uncertainty with regard to economic developments, private equity funds were more willing to invest in home countries and in countries where they have been present for several years. Moreover, valuation of companies was difficult in this period, which 4 increased investment risk and limited funds’ interest in new projects.

In 2010, the interest of venture capital funds operating in Poland in accumulation of resources for investment was still small as they had funds accumulated in previous years and did not use them due to uncertainty as to economic developments in the EU. The value of capital gathered by these funds was similar to that in 2009 and amounted to around PLN 0.5 billion (Table 4.4.1), whereas in 2005–2008, on average they were raising around PLN 2.2 billion yearly.

According to data from the European Private Equity and Venture Capital Association (EVCA), the value of investments started by private equity funds operating in Europe in 2010 was almost twice as high as in 2009 and amounted to EUR 42.6 billion.66 The investments to GDP ratio rose to 0.3% (in 2009 approximately 0.2%). In terms of the ratio of investments to GDP, the Polish venture capital sector was poorly developed compared to other European countries (Figure 4.4.1). Due to a relatively small size of Poland’s venture capital sector and its strong concentration, single transactions can have a big impact on the pace and directions of its development.

In the ranking of investment attractiveness for private equity funds67 Poland ranked 36 for 80 countries studied, ahead of all CEE countries. When determining the attractiveness index the following factors were taken into account, among others: the economic condition of the country (e.g. unemployment rate), the size of the capital market (e.g. stock market capitalisation), tax considerations, the protection of investors. In 2010, private equity investments made in Poland accounted for approximately 50% of all investments of this kind in the region. Domestic private equity funds raised about 18% of funds accumulated by the funds in the countries of the Central and Eastern Europe.68

65 The terms: “venture capital funds”, “venture capital sector” and “private equity funds” are used interchangeably. Venture capital funds are a subcategory of private equity funds. The term “private equity”, which refers to the operations of both private equity and venture capital funds, is used in the text. Domestic private equity funds (funds operating in Poland) should be understood as those funds that have a branch or a permanent representative office in Poland. 66 In the study EVCA Yearbook 2011, Brussels 2011, the following countries were taken into account: Austria, Belgium, Bulgaria, Czech Republic, Denmark, Finland, France, Greece, Spain, Netherlands, Ireland, Luxembourg, Germany, Norway, Poland, Portugal, Romania, Ukraine, Sweden, Switzerland, Hungary, United Kingdom and Italy. Aggregates for the Baltic States and for countries of former yugoslavia and Slovakia as a whole also were presented. 67 The Global Venture Capital and Private Equity Country Attractiveness Index, University of Navarra, Ernst&young, 2011. 68 EVCA Central and Eastern Europe Statistics 2010. EVCA, Brussels 2011. Apart from Poland, the Central and Eastern Europe region covered also Ukraine, Czech Republic, Romania, Croatia, Hungary, Bulgaria, Latvia, Estonia, Lithuania, Slovakia, Slovenia, Bosnia-Herzegovina, Macedonia, Serbia and Slovenia.

110 National Bank of Poland Financial institutions

Table 4.4.1. Investments and capital raised by private equity funds operating in Poland, 2007−2010 (PLN million)

2007 2008 2009 2010 Investments carried out by domestic private equity funds, of which: 2,162 2,549 2,079 2,015 − on the domestic market 1,742 1,778 1,154 1,661 − on foreign markets 420 771 925 354 Investments carried out by foreign private equity funds in Poland 1,082 448 1,731 962 Capital raised by domestic private equity funds during a year 2,158 2,614 583 458 Number of enterprises financed by domestic private equity funds 50 67 29 52 Number of enterprises where investments of domestic private equity 23 15 13 16 funds were completed Domestic private equity investments to GDP ratio (%) 0.2 0.2 0.2 0.1

Note: The average NBP exchange rate was used for the calculations: EUR/PLN = 3.7829 in 2007, 3.5166 in 2008, 4.3273 in 2009 and 3.9946 in 2010. Source: EVCA.

In 2010, the value of funds raised by venture capital funds operating in Europe increased by 14.3% and amounted to EUR 20.0 billion, while in 2005–2008 on average these funds were raising around EUR 86 billion yearly. Similar to the situation in Poland, European funds held in their 4 portfolios substantial funds accumulated in previous years. Moreover, due to the relatively large decline in the value of investments other than investments in private equity funds, the limits on allocating funds to different asset classes applicable to institutional investors constrained the opportunities of their involvement in these funds. When other factors remained constant, a significant drop in the value of investments, such as shares of companies listed on organised markets, leads to an increase in the share of other investments, e.g. in private equity funds, and may result in exceeding the investment limits for this asset class.

Figure 4.4.1. Investments of domestic private equity funds in relation to GDP in selected European countries, 2009−2010

% 1.2

1.0

0.8

0.6

0.4

0.2

0.0 Italy Spain Czech France United Greece Poland Ireland Europe Austria Finland Norway Sweden Belgium Bulgaria Portugal Hungary Republic Romania Kingdom Germany Denmark Switzerland Netherlands Luxembourg 2009 2010 Source: EVCA.

The structure of the capital raised

In 2010, 93.3% of funds raised by domestic private equity funds were accumulated in funds specialising in buy-outs and only 6.7% in venture capital funds. The structure of funds raised by the funds from different groups of investors largely depends on the type of planned investments. Generally, investors are involved in companies that operate in their preferred fields of business and are at a certain stage of development. Moreover, due to different investor risk appetite, not all the funds want to engage in leveraged buy-outs.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 111 Financial institutions

Compared to 2009, the structure of investors providing capital to private equity funds operating in Poland changed significantly (Figure 4.4.2). In 2010, more than 51% of capital raised came from the public sector and nearly 44% from funds investing in other private equity funds (funds of funds), which sometimes are funded by the public sector. The share of banks, insurance companies and private persons was almost none.

Figure 4.4.2. Private equity capital sources in Poland and Europe, 2009−2010

% 100 6.8 1.8 90 15.9 22.6 80 43.6 3.5 47.4 70 19.9 13.5 60 0.2 11.8 50 3.5 6.3 10.5 40 30.3 0.1 9.3 9.3 30 3.2 51.3 14.4 20 5.1 27.1 12.1 10 18.4 8.8 0 3.3 Poland Poland Europe Europe 2009 2010 2009 2010

4 Banks Pension funds Insurance companies Enterprises Public sector Academic institutions Funds of funds Private individuals Other

Source: EVCA.

Development of the domestic private equity sector is supported by the public sector and funds of funds via the Polish Agency for Enterprise Development (PARP) and the National Capital Fund (KFK).69 PARP is a government agency reporting to the Minister of Economy, responsible for the management of state budget and EU funds designated for the support of entrepreneurship and innovation. KFK is a fund of funds supporting private equity funds.70 Its sole shareholder is Bank Gospodarstwa Krajowego. KFK’s operations are financed from the state budget, EU structural funds and other sources, including funds available to Poland under the Swiss-Polish Cooperation Programme.71 An important source of capital for private equity sector development in 2007–2013 is the so-called EU Operational Programme Innovative Economy,72 in particular the so-called Measure 3.2 Support for venture capital funds, which is implemented by KFK. In 2010, KFK signed investment agreements with five private equity funds for grants totalling about PLN 190 million.

In Europe, key providers of funds for high-risk funds were pension funds, funds of funds and public sector entities. As in Poland, the share of banks in the capital structure of funds operating in Europe significantly decreased.

The global financial crisis started a discussion and action of regulators on banks’ involvement in this type of investment. Both in the United States (from where comes much of the capital of

69 Krajowy Fundusz Kapitałowy SA was established on 1 July 2005 under the Act of 4 March 2005 on the National Capital Fund (Dz.U. of 2005, No 57, item 491). 70 In accordance with Article 11 of the Act on the National Capital Fund, KFK may financially support private equity funds by holding and purchasing their participating interest, shares, investment certificates or participation units; acquiring bonds issued by the bond funds, convertible bonds, bonds with pre-emptive rights and subscription warrants; participating in capital funds operating in the form of limited partnerships, limited joint-stock partnerships or other organisational units without legal personality and non-reimbursable allowances to cover part of the costs of capital funds for the preparation of investments and monitoring of the portfolio of such investments. 71 Swiss-Polish Cooperation Programme is a form of foreign assistance granted to Poland and several other EU Member States by Switzerland. The largest part of the funds under this assistance (i.e. approximately CHF 489 million) was granted to Poland. The program provides for a commitment period of 5 years and a 10-year disbursement period, which began in 2007. 72 Innovative Economy is one of six national programs of the National Strategic Reference Framework, financed from European funds (European Regional Development Fund) and partly from the state budget. Its execution is scheduled for 2007–2013. This programme is mainly targeted at businesses seeking to develop projects that will help to strengthen the innovativeness of Polish economy.

112 National Bank of Poland Financial institutions

private equity funds operating in Poland) and in the EU regulatory solutions in the market of alternative investment funds, including private equity funds, were adopted in 2010. Dodd-Frank Act passed in the United States73 will significantly reduce the possibility of banks’ involvement in private equity funds. According to the Volcker rule, banks will be allowed to invest up to 3% of their Tier 1 capital in private equity funds. Additionally, banks will be allowed to control at most 3% of the units of a given private equity fund and may not be associated with the funds in which they invest nor guarantee their commitments. These solutions should come into force by 18 July 2012 at the latest and may affect development of these private equity funds operating in Poland, which accumulate capital from investors in the United States. These funds will probably have to seek additional sources of capital, such as international financial institutions. In 2010, the EU adopted the Directive on Alternative Investment Fund Managers74 to introduce, among others, the capital requirements for management companies of private equity funds75 and the obligation to perform financial audits of these companies and to use the services of a depositary bank. Moreover, the directive contains solutions to facilitate private equity funds to raise capital and to carry out their investments outside their home country, due to the introduction of the so-called single European passport. The Directive will not cover companies managing private equity funds, with a total value of managed assets (including assets acquired with the use of financial leverage) not exceeding EUR 100 million, and companies of managed assets worth no more than EUR 500 million if their portfolios consist of funds which do not use leverage and whose right to redemption may not be exercised for a period of 5 years from commencement of investment by each of the 4 managed funds. Companies excluded from the Directive, however, will be subject to registration in home countries and will be required to provide specific authority in home countries with information on the main instruments in their portfolios as well as major exposures and concentration of funds managed by them.76 The Directive will enter into force on 21 July 2011, while its transposition to the legislation of EU Member States should be completed by 22 July 2013.

Structure of investments

In 2010, the domestic private equity funds invested much more in Poland than in foreign markets. Therefore, the trend noted in previous years was reversed. It suggested a decline in the importance of domestic market as an investment venue for venture capital funds operating in Poland (Table 4.4.1). Among all foreign investments, funds were mostly interested in businesses in the markets in Romania, Hungary, Czech Republic and Estonia. Regarding private equity funds activity, Poland was an importer of capital in net terms in 2010. The value of funds that were invested by foreign funds in the Polish market was 2.7 times higher than the value of funds invested by domestic funds abroad.

Domestic funds invested mostly in businesses of FMCG and retail sector. They received 30.4% of the value of private equity investments (in 2009, 16.5%). Other popular sectors were: ICT (15.3%) and financial services (14.2%). Funds invested in, among others, foreign supermarket chains, Internet media groups, businesses offering financial services via Internet, as well as brokerage house registered in Poland with a network of branches in the EU. In 2010, the life sciences sector (grouping biotech, pharmaceutical and biomedical companies) received only 7.7% of the funds invested by the domestic funds (30.5% in 2009). Private equity funds showed limited interest in projects of the real estate sector, whereas in 2009, 9.2% of the total value of funds invested was directed to it.

73 The Dodd-Frank Wall Street Reform and Consumer Protection Act, 111th Congress Public Law 203, Sec. 619. 74 Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers and amending Directives 2003/41/EC and 2009/65/EC and Regulations (EC) No 1060/2009 and (EU) No 1095/2010, Official Journal of the European Union L 174/1, 1.07.2011. 75 In accordance with Article 9 of the Directive the management company of private equity funds should have initial capital of at least EUR 125 thousand. If the value of the portfolios of private equity funds managed by the company exceeds EUR 250 million, the management company must raise the equity by 0.02% of the difference between the value of the portfolio and EUR 250 million. 76 Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers and amending Directives 2003/41/EC and 2009/65/EC and Regulations (EC) No 1060/2009 and (EU) No 1095/2010, Official Journal of the European Union L 174/1, 1.07.2011, Art. 3.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 113 Financial institutions

As in 2009, domestic private equity funds were investing mainly in mature companies. Buyouts accounted for about 68% of the value of investment of those funds. Funds dedicated approximately 25% of the funds for financing companies that were in growth. Funds aimed at the venture capital sector, which includes projects such as seed, start-ups and later stage venture, accounted for only 2.9% of the value of investments of the private equity sector. Due to a high investment risk, private equity funds were reluctant to engage in such projects.

In 2010, the value of disinvestments, calculated according to their initial amount, stood at PLN 244.5 million and was almost 50% higher than in the previous year. Domestic funds completed investments in sixteen companies, one of which went bankrupt. In accounting terms, the loss on the project (referred to as write-off) amounted to PLN 145.4 million, which accounted for almost 60% of the total value of disinvestments made by domestic private equity funds in 2010. Only in the case of two companies, project completion was through the sale of shares in an organised market (1.6% of disinvestment value). Furthermore, funds completed investments in companies by selling shares to industry investors, the existing Management Board or another private equity fund.

4 .5 . Collective investment schemes

4 4.5.1. Investment funds

The Polish investment fund sector includes both domestic entities which operate on the basis of the Act of 27 May 2004 on Investment Funds77 and foreign entities operating in Poland in accordance with the single European passport, provided for in the UCITS Directive.

The participants of investment funds are mainly natural persons. As at the end of 2010, the value of participation units held by households (excluding units acquired by insurance companies due to concluded life insurance agreements with an insurance capital fund by natural persons) amounted to approximately PLN 75.5 billion, which represented 64.8% of those entities’ assets. The share of domestic investment funds participation units in household savings amounted to approximately 7.8% as at the end of 2010. However, the growth rate of savings in the form of investment fund units was faster than the growth in bank deposits. The ratio of assets of investment funds whose units were purchased by natural persons (after excluding investments of insurance companies) to deposits taken from households increased from 16.6% as at the end of 2009 to 18.3% as at the end of 2010.

The size and growth of the sector78

As of the end of 2010, net assets of domestic investment funds amounted to PLN 116.5 billion, which constitutes an increase of 24.7% (PLN 23.1 billion) in comparison with the end of 2009 (Figure 4.5.1). As opposed to 2009, when the increase in the value of investment funds’ assets was mainly related to increases in share prices on the WSE, in 2010 net capital inflow was of greater importance to the growth of those institutions. A breakdown of investment funds’ asset growth indicates that net inflow contributed to their increase in 53%, while a change in the investment portfolio valuation – in 47% (Figure 4.5.2). On a monthly basis, investment funds’ net assets increased for most of 2010. Their value decreased only in May and June. The monthly average increase in investment funds’ assets was approximately PLN 1.9 billion.

77 The Act of 27 May 2004 on Investment Funds (Dz.U. of 2004, No 146, item 1546, as amended). 78 The data on the investment funds sector are sourced from the Analizy Online service. Starting from 2010 Q2, the NBP obtains data from investment funds and prepares its own statistics for that sector. NBP data do not cover the entire 2010 and therefore were not used in this study.

114 National Bank of Poland Financial institutions

Figure 4.5.1. Monthly amount and growth rate of investment funds’ net assets, 2007−2010

PLN billion % 150 10

120 4

90 -2

60 -8

30 -14

0 -20 I III VVII IX XI I III VVII IX XI I III VVII IX XI I III VVII IX XI 2007 2008 2009 2010 Net assets – left-hand scale Rate of change – right-hand scale

Source: Analizy Online.

Figure 4.5.2. Structure of changes in investment funds’ net assets in 2010 (on an accumulated basis)

PLN billion 25 4 20 10.8 7.9 15 8.5 7.4 10 4.2 4.1 5.0 3.0 1.9 3.8 10.9 12.3 5 8.1 9.0 9.6 6.5 7.6 0.4 4.1 5.7 6.3 2.1 0 1.1 -0.6 -5 III III IV VVI VII VIII IX XXI XII Net inﬂows Changes of investment portfolio valuation

Note: The structure of changes in investment funds’ net assets is based on estimates. The distribution fee was deducted from the net inflows to the funds and the management fee was deducted from changes in the valuation of the investment funds’ portfolio. Source: Analizy Online.

The value of inflows to domestic investment funds exceeded the value of redemptions of units in all months of 2010 (Figure 4.5.3). Throughout the year, the funds attracted net PLN 12.3 billion – nearly four times more than in 2009. Most investors selected units of funds pursuing a safe investment policy. Nearly half of the capital which flew into investment funds in 2010 was invested in money market funds. The increased risk aversion of investors when making decisions on allocating capital was also evidenced by a substantial inflow of capital to bond funds.

Increased investor interest in investment fund units is also confirmed by the rise in the number of customers of investment fund management companies (TFI), the first increase in two years. As at the end of 2010, the number of purchasers of investment fund units amounted to 2.6 million. A vast majority of them were participants in the funds managed by TFI affiliated with domestic banks, which may be associated with the widespread use of bank branches in the distribution of investment fund units.

Net assets of foreign funds whose units were offered in Poland grew by almost 20% compared to 2009, reaching PLN 2.1 billion as at the end of 2010. Similarly to domestic funds, the foreign funds asset growth was primarily associated with new inflows to funds. The number of foreign funds’ participants also increased and as at the end of 2010 it amounted to 67.4 thousand. The number of those funds’ participants was much lower than in the case of domestic funds because their units are offered to a limited range of buyers, mostly private banking clients.79

79 Later in this study, the focus is put mainly on the description of domestic investment funds. If the analysis includes foreign funds, this will be clearly stated in the text.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 115 Financial institutions

Figure 4.5.3. Monthly balance of inflows and outflows from investment funds, 2007−2010

PLN billion 6 4 2 0 -2 -4 -6 -8 -10 -12 I III VVII IX XI I III VVII IX XI I III VVII IX XI I III VVII IX XI 2007 2008 2009 2010

Source: Analizy Online.

Polish investment funds and the European investment fund sector

Net assets of the European investment funds sector, including countries where organisations bringing together institutions related to the investment funds market that are members of the European Fund and Asset Management Association (EFAMA) operate, reached as at the end of 4 2010 the highest value since 2000 – EUR 8,025.5 billion. The asset growth (by 13.7% compared to the end of 2009) was mainly due to changes in the portfolio valuation. As at the end of 2010, investment funds’ net assets constituted approximately 66% of GDP of the European Union states. Polish entities accounted for a small part of the European investment funds market. Their share in the net assets of the entire sector amounted to 0.36%.

As at the end of 2010, assets of harmonised funds constituted approximately 3/4 of the European investment fund industry net assets. The assets of these funds rose by 12.7% in comparison to 2009 and as at the end of 2010 they amounted to EUR 5,989.6 billion. The increase in the UCITS asset value was recorded by a majority of European countries. Countries of southern Europe – Greece, Portugal, Spain, Italy, as well as France, Belgium and the Netherlands – were an exception. The growth rate of the Polish UCITS assets exceeded the European average and was the highest in the region, similarly to 2009. Nonetheless, the ratio of the investment funds assets to GDP in Poland was still lower than in Hungary (Figure 4.5.4).

Figure 4.5.4. Assets of harmonised investment funds as percentage of GDP in Poland, Czech Republic and Hungary, 2009−2010

EUR billion % of GDP 20 10 18 9 16 8 14 7 12 6 10 5 8 4 6 3 4 2 2 1 0 0 Czech Republic HungaryPoland IF net assets in 2009 – left-hand scale IF net assets in 2010 – left-hand scale IF assets as percentage of GDP in 2009 IF assets as percentage of GDP in 2010 – right-hand scale – right-hand scale

Source: EFAMA and Eurostat.

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The low level of short-term interest rates and a high activity of banks in raising deposits translated into a significant net outflow from European money market funds.80 The largest net inflow was recorded in bond funds. Balanced and equity funds also enjoyed great interest, indicating lower – than in 2009 – uncertainty of investors as to the evolution of the situation in the financial markets. Differing trends were observed in the Polish investment funds market – the highest net inflow was reported by money market and bond funds, while in balanced and equity funds the value of unit redemptions exceeded considerably the value of inflows.

Concentration and competition

Trends of changes in the concentration in the domestic investment funds sector, observed in previous years, continued in 2010. The market share of three largest investment fund management companies, measured with the value of assets under management declined and the importance of smaller entities increased (Table 4.5.1). The asset growth rate in funds managed by the three largest TFI was much lower than the average for the whole sector. These companies managed mainly open-end investment funds whose units are offered to a wide range of customers. The largest increase in the value of assets was, however, registered by funds managed by small companies whose offer was dominated by closed-end funds, including in particular private equity funds. The increased level of competition in the investment funds market in 2010 is demonstrated by the lower than in 2009 Herfindahl-Hirschman index. 4

Table 4.5.1. Investment fund management companies concentration indices, 2007−2010

2007 2008 2009 2010 CR3 (%) 50.08 38.37 37.26 34.16 HHI1 0.1134 0.0844 0.0801 0.0727

1 Herfindahl-Hirschman index. Source: NBP calculations based on Analizy Online data.

In 2010, the Polish Financial Supervision Authority issued seven permits for conducting the activity by investment fund management companies. Eight of them related to the establishment of TFI81 and four to the expansion of TFI activities by discretionary management of a securities portfolio. A permit of one company granted in 2009 expired because it did not start its operations within 12 months from the date of the permit issuance. As at the end of 2010, the PFSA-granted permit to conduct the activity was held by 50 TFI which managed 417 investment funds and 298 sub-funds (Table 4.5.2).

The number of permits issued by the PFSA to establish investment funds increased significantly from 50 in 2009 to 115 in 2010. A vast majority of permits (105) related to the establishment of closed-end investment funds. Five permits were issued for the establishment of open-end investment funds and five were granted for the establishment of specialised open-end investment funds.

Closed-end investment funds have dominated in the group of newly established entities for several years. Such legal form is assigned to a fund usually due to significantly lower investment restrictions than in the case of open-end investment funds. Owing to the ability to issue non-public investment certificates, closed-end funds are often used for creating customised investment solutions for individual investors. In November 2010, the Ministry of Finance presented a draft law amending the Act on Investment Funds, aimed at simplifying and accelerating the process of

80 Trends In the European Investment Fund Industry in the Fourth Quarter of 2010 and Results for the Full Year 2010, EFAMA Quarterly Statistical Release No 44, Brussels 2011. 81 Permits were obtained by the following entities: KGHM Towarzystwo Funduszy Inwestycyjnych S.A., Harenda Towarzystwo Funduszy Inwestycyjnych S.A., AXA Towarzystwo Funduszy Inwestycyjnych S.A., BPS Towarzystwo Funduszy Inwestycyjnych S.A., Towarzystwo Funduszy Inwestycyjnych Fortis Private Investments S.A., MS Towarzystwo Funduszy Inwestycyjnych S.A., Sovereign Fund Towarzystwo Funduszy Inwestycyjnych S.A., Provide Towarzystwo Funduszy Inwestycyjnych S.A.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 117 Financial institutions

creation of closed-end investment funds issuing investment certificates which in accordance with the articles of association will not be offered in a public offering or admitted to trading in a regulated market or introduced to an alternative trading system. In accordance with this proposal, an establishment of a non-public closed-end investment fund would not require a PFSA permit. This is because investment certificates of such funds are addressed primarily to professional investors, and not to retail customers. The proposed solution is justified by the fact that no broad protection is needed for investors with expertise and experience. The liberalisation of the rules of creating non-public closed-end investment funds would reduce the cost of their operation and increase the growth rate of this market segment.

Table 4.5.2. Number of investment funds and investment fund management companies in Poland, 2007−2010

2007 2008 2009 2010 Open-end investment funds 130 102 95 71 Specialised open-end investment funds 33 39 47 47 Closed-end investment funds 114 178 227 299 Total 277 319 369 417 4 Investment fund management companies 33 39 43 50 Note: Data for 2008–2010 refer to the number of registered funds and not funds which obtained a PFSA permit. Therefore, these data are not fully comparable with data for 2007. Source: Office of the Polish Financial Supervision Authority.

The group of closed-end investment funds created in 2010 was dominated by private equity funds (Table 4.5.3). They were often tailored for specific companies due to tax benefits they offer82 and the possibility of obtaining external financing without encumbering assets of those companies. Another advantage of these funds is the fact that inflows to the funds do not have to be made in the monetary form.

In 2010, six umbrella funds were created. As a result of the creation of new umbrella funds and a transformation of open-end investment funds into a new sub-fund of the already existing umbrella fund, the number of sub-funds increased from 261 as at the end of 2009 to 298 as at the end of 2010. One of the newly established umbrella funds was created as a fund with various categories of units. The popularity of umbrella funds is a result of tax benefits associated with investments in those entities’ units. This is because redemption of sub-fund units and their conversion into units of other sub-fund of the same investment fund does not result in income in this respect and therefore it does not create a tax liability.83

Investment fund management companies continued to show no interest in creating “money market” funds.84 As at the end of 2010, only two such entities operated and the share of their assets in the entire domestic investment funds sector assets did not exceed 1%. The lack of interest of TFI in the creation of this type of funds is a result of a low demand for their units. In 2010, net inflows to those entities represented less than 3% of all funds that flew to money market funds. This may be related to the relatively low rates of return achieved by these entities – in 2010 they were lower than the average rate of return earned by money market funds. Therefore, taking into account guidelines elaborated by the Committee of European Securities Market Regulators (CESR)

82 Pursuant to Article 6 para. 1 subpara. 10 of the Act of 15 February 1992 on Legal Persons’ Income Tax (Dz.U. of 2011, No 74, item 397 as amended), investment funds are exempt from corporate income tax. 83 Article 17 para. 1c of the Act of 26 July 1991 on Natural Persons’ Income Tax (Dz.U. of 2000, No 51, item 307 as amended) and Article 12 para. 4 subpara. 20 of the Act of 15 February 1992 on Legal Persons’ Income Tax Act (Dz.U. of 2011, No 74, item 397, as amended). 84 The name of the funds referred to in Article 178 of the Act of 27 May 2004 on Investment Funds (Dz.U. of 2004, No 146, item 1546, as amended) is given in quotation marks. If the name is given without quotation marks, it should be understood as funds which invest mainly in money market instruments.

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on a common definition of European money market funds85 it is worth considering whether the catalogue of investments available to “money market” funds, specified in the provisions of the Act on Investment Funds, should not be modified.

Table 4.5.3. Number of investment funds established on the basis of a permit granted in 2009 and 2010, by individual types and structures

Structures of investment funds 2009 2010 Types of investment funds 2009 2010 Funds with various unit categories 1 2 “Money market” funds 0 0 Umbrella funds 7 6 Securitisation funds 1 3 Master funds 0 0 Exchange traded funds 0 0 Feeder funds 0 0 Private equity funds 21 72

Source: Office of the Polish Financial Supervision Authority.

As at the end of 2010, no Polish investment fund was notified in other EU Member State. The PFSA received four notifications of the intention to sell units in foreign investment funds in Poland.86 The number of entities entered in the register of foreign funds increased from 72 as at the end of 2009 to 77 as at the end of 2010. A majority of funds notified in Poland came from Luxembourg and Austria. In 2010, seven foreign funds ceased to carry out their business in Poland, 4 two decided not to commence the distribution of units on the basis of a previously obtained notification, and one was liquidated. In addition, five funds were merged with other entities. As a result of these processes, as at the end of 2010 units were offered by 62 foreign funds and the number of sub-funds covered by notification fell to 680.

Investment funds may sell and repurchase units directly or through a TFI which manages them, an entity conducting brokerage activities, a domestic bank, a domestic branch of a credit institution or other entity established or domiciled in the territory of Poland which obtained a permit of the PFSA to conduct such activity. In 2010, the PFSA granted six permits and revoked one related to intermediation in selling and repurchasing investment funds units. As at the end of 2010, a PFSA permit for the distribution of units in the Polish market was held by 70 entities.

Market structure

In 2010, the structure of the investment fund market changed significantly. While in 2009, the largest growth of assets was recorded by foreign and domestic equity funds, in 2010 the pace of their growth was well below the average for all types of funds (Table 4.5.4). Due to persistent risk aversion, the prosperity in the stock market did not translate into increased investor interest in those entities participation units. Nonetheless, equity funds remained the largest part of the investment fund market in terms of assets under management (Figure 4.5.5).

During the analysed period, the largest increase in assets was observed in money market funds, mainly owing to a high inflow of funds to those entities. A large part of the inflows came from institutional clients who – due to low short-term interest rates – treated such investments as an alternative to bank deposits. The inflow into money market funds was also associated with a continued high risk aversion of investors.

85 CESR’s Guidelines on a common definition of European Money market funds, 19 May 2010, http://www.esma. europa.eu/index.php?page=document_details&from_title=Documents&id=6638. 86 Materiał informacyjny na temat zbywania na terytorium Rzeczypospolitej Polskiej tytułów uczestnictwa emitowanych przez fundusze zagraniczne w okresie od 1 stycznia do 30 czerwca 2010 r., Office of the Polish Financial Supervision Authority, Warsaw 2010; Materiał informacyjny na temat zbywania na terytorium Rzeczypospolitej Polskiej tytułów uczestnictwa emitowanych przez fundusze zagraniczne w okresie od 1 lipca do 31 grudnia 2010 r., Office of the Polish Financial Supervision Authority, Warsaw 2011.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 119 Financial institutions

Table 4.5.4. Net assets of basic types of investment funds, 2007−2010 (PLN billion)

Change Fund types 2007 2008 2009 2010 2010/2009 (%) Domestic equity funds 33.2 14.0 22.1 26.1 18.1 Domestic bond funds 6.5 9.8 11.1 14.0 26.9 Money market funds 8.7 7.5 8.7 15.3 75.8 Stable growth funds 25.7 11.4 12.3 14.2 15.2 Balanced funds 41.2 16.8 19.3 19.4 0.6 Foreign equity funds 8.8 3.5 5.6 6.5 17.5 Foreign bond funds 2.1 1.5 1.6 2.7 67.8 Other 7.9 9.3 12.7 18.1 43.1 Total 133.8 73.9 93.4 116.5 24.7

Note: Balanced funds also include capital protection funds and active asset allocation funds. Source: Analizy Online.

Figure 4.5.5. Structure of the investment fund sector by their type, 2007−2010 (% of net assets)

% 100 4 5.9 12.6 13.6 90 6.6 15.6 80 4.7 6.0 5.6 70 30.8 22.7 20.7 16.7 60 12.2 50 15.5 13.2 19.2 40 10.2 9.3 13.2 30 6.5 11.8 4.8 13.3 12.1 20 10 24.8 19.0 23.7 22.4 0 2007 2008 2009 2010 Domestic equity funds Domestic bond funds Money market funds Stable growth funds Balanced funds Foreign equity funds Foreign bond funds Other

Source: Analizy Online.

In 2010, assets of unclassified funds grew markedly primarily due to investors’ high interest in private equity funds and, to a lesser extent, in absolute return funds. The highest asset growth rate of in this category was recorded by the commodity market funds.

As at the end of 2010, the share of unclassified funds’ assets in the investment fund market did not differ significantly from the share of balanced funds. During the analysed period, the asset growth of balanced funds did not exceed 1%, which was a result of units redemptions being much higher than inflows of new capital. Balanced funds were the only category of funds which recorded a net outflow of funds in 2010.

Table 4.5.5. Net assets of individual types of investment funds, 2007−2010 (PLN billion)

2007 2008 2009 2010 Open-end investment funds 102.9 48.5 59.1 69.4 Specialised open-end investment funds 20.4 13.7 19.3 27.4 Closed-end investment funds 10.5 11.7 15.0 19.7 Total 133.8 73.9 93.4 116.5

Source: Analizy Online.

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The domestic market was still dominated by open-end investment funds whose units were addressed to a wide range of investors (Table 4.5.5). Despite the highest value of assets and the largest number of unit-holders, open-end funds were losing in their importance in terms of the number of entities operating in the market. In 2010, specialised open-end funds’ assets increased to the greatest extent for the second year in a row.

The asset structure of the European and US investment funds did not change significantly in 2010. The share of money market funds in the entire sector’s assets decreased in both regions. The outflow of funds from these entities was mainly associated with the low level of short-term interest rates. In the countries participating in the EFAMA, the importance of mixed funds, which previously were least popular among investors, increased. The increased interest in equity and bond funds units both in the European and US market was driven by, among others, reduced concerns of their participants related to price decreases in the capital market. The structure of the Polish investment funds market, in contrast to the Czech and Hungarian market, was similar to the structure of the European market (Figure 4.5.6).

Figure 4.5.6. Asset structure of UCITS funds by type in selected countries and the average for Europe in 2010 (% of net assets)

% 100 4.1 0.7 5.0 6.3 90 17.8 4 25.9 12.1 17.4 80 22.1 70 26.2 18.1 17.3 24.4 60 16.2 50 14.7 47.9 40 37.2 30 56.9 34.5 20 42.1 23.7 10 13.4 16.0 0 Czech Republic HungaryPoland Europe United States Money market funds Equity funds Bond funds Mixed funds Other

Note: Data for Europe include the following countries: Austria, Belgium, Bulgaria, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Italy, Liechtenstein, Luxembourg, Netherlands, Norway, Poland, Portugal, Romania, Russia, Slovakia, Slovenia, Spain, Sweden, Switzerland, Turkey, and United Kingdom. Source: EFAMA.

Box 4.5.1

MonEy MARkET FUnDS In THE UnITED STATES AnD THE EURoPEAn UnIon

Money market funds are collective investment schemes which invest mainly in short- -term securities, including Treasury securities and debt instruments issued by companies. Their main goal is capital preservation and achieving a moderate rate of return. Investments in those funds units offer investors a greater diversification of investment categories at a lower cost than in the case of individual investments.

There are two basic types of money market funds: constant and variable net asset value per unit. Units of constant net asset value funds are sold at the nominal price which does not change during the operation of the fund. The result on the investment is settled every day and any potential profit is paid out or allocated to a purchase of additional units. In the case of a variable net asset value funds, profits are not distributed but they increase the price of the unit.

Methods of assets and liabilities valuation, accounting principles and reporting standards are also different for these fund structures. In the case of constant net asset value

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 121 Financial institutions

funds, assets are valued in accordance with the acquisition cost adjusted for the straight line amortisation of the premium or accretion of discount. The net assets book value of the fund may therefore differ from the market value of its units, however due to a short-term nature of its investments these differences should be minor. In the case of variable net asset value funds, assets are marked to market daily.

The first money market funds were established in the United States in the early 1970s when Regulation Q1 was in force which limited the maximum interest rate on bank term deposits. By the end of the 1970s, the difference between rates of return achieved by these funds and the interest rate on bank deposits caused an increase in the number of investors interested in the acquisition of these funds units.

All money market funds operating in the United States are constant net asset value funds. Apart from money market funds, there are funds of a similar structure which are however not money market funds within the meaning of US laws (i.e. enhanced cash funds, sometimes referred to as money market plus funds or money market-like funds). These are collective investment schemes which usually are not registered with the US Securities and Exchange Commission and are focused on achieving higher rates of return than in the case of money market funds by investing assets in a wider – than in the case of money market funds – catalogue of instruments, often with longer maturity and issued by entities with lower 4 credit quality.

In the European Union, the activities of investment funds, including money market funds, are regulated by the UCITS Directive. This directive sets out the general limits of diversification and concentration for all open-ended (collective) investment companies, without separately specifying the limits for money market funds. Each Member State creates its own definitions of these funds2 and also applies its own requirements for registration and supervision over them. In Europe, money market funds may operate as entities with a constant or variable unit value.

The global financial crisis significantly affected the money market funds sector. A sudden increase in redemptions of units after Lehman Brothers’ bankruptcy in September 2008 translated into a considerable outflow of capital from this sector. As at the end of 2010, the assets of the global money market funds sector exceeded USD 4.5 trillion. Assets of US funds amounted to approximately USD 2.8 trillion and the assets of European funds stood at approximately USD 1.1 trillion.

1 Regulation Q Prohibition against Payment of Interest on Demand Deposits was published in volume 12 of the Code of Federal Regulations (C.F.R.), § 217. 2 In order to improve investor protection CESR’s Guidelines on a common definition of European money market funds were published in May 2010.

Structure of the investment funds’ portfolio and their impact on financial markets

The asset structure of domestic investment funds did not change significantly in 2010. Similarly to 2009, shares were the main category of their investments (Figure 4.5.7). The portfolio of shares listed on the WSE held by investment funds increased, in comparison with 2009, by 23.1% and as at the end of 2010 it amounted to PLN 38.5 billion. Since the inflow of new capital to equity funds and stable growth funds in 2010 was relatively low and balanced funds recorded a net outflow of capital, the increase in the value of the investment funds’ equities portfolio was mainly caused by a change in its valuation, with a small share of the balance of the purchase and sale of shares. The WIG index rose by 18.8% in this period and WIG20 index by 14.9%. Despite the increase in the value of the domestic shares portfolio, the share of investment funds in free float and WSE capitalisation decreased (Table 4.5.6). The portfolio of shares listed on the domestic and foreign market amounted to PLN 55.6 billion as at the end of 2010.

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Table 4.5.6. Exposure of investment funds in the Polish financial market, 2007−2010 (%)

2007 2008 2009 2010 Share in Treasury bill market 10.4 4.3 5.6 8.9 Share in Treasury bond market 10.7 6.7 6.6 6.4 Share in free float on the Warsaw Stock Exchange 24.0 21.0 18.2 16.1 Share in the Warsaw Stock Exchange capitalisation 9.8 8.1 7.4 7.1

Note: Capitalisation and free float include only domestic companies. Source: Ministry of Finance, WSE, Analizy Online.

In terms of value, Treasury securities were the second component of the investment funds’ portfolio. The value of these instruments held by investment funds increased, as compared with 2009, by approximately one fourth and it stood at PLN 38.5 billion as at the end of 2010. Investment funds were still willing to purchase 2-year zero coupon Treasury bonds due to, among others, a high supply of these securities on the primary market. As at the end of 2010, these instruments had the largest share in the investment funds’ domestic Treasury bonds portfolio, while in 2009 this portfolio was dominated by 10-year fixed rate bonds. Despite the increase in the value of the Treasury bonds portfolio, the share of investment funds in the structure of investors in the domestic Treasury bond market decreased. 4 Different trends related to investments in Treasury bonds. The portfolio of these instruments held by investment funds fell from PLN 2.8 billion as at the end of 2009 to PLN 2.5 billion as at the end of 2010, while their share in the structure of investors in the Treasury bonds market clearly increased. This was due to a limited scale of the Treasury bond issuance by the Ministry of Finance – as compared with 2009 – accompanied by a continued demand for these instruments from investment funds, in particular money market funds which recorded the highest inflow of capital in 2010.

In 2010, investment funds allocated a smaller part of funds to investments in other investment funds units. As in 2009, these investments were dominated by investments in foreign investment funds units.

Depending on legal structure, investment funds differ in the investment portfolio structure. In 2010, the main component of the closed-end funds’ portfolio was shares which constituted 63.9% of its value. The largest share in the portfolios of open-end funds and specialised open-end funds was represented by debt securities – 48.9% and 52.2%, respectively.

Figure 4.5.7. Asset structure of investment funds, 2009−2010

A. 2009 B. 2010

4.0% 1.5% 1.6% 4.8% 7.3% 6.7%

47.1% 45.4%

40.0 % 41.6 %

Shares Debt securities Participation units Deposits Other

Source: GUS.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 123 Financial institutions

Investment performance and risk level

In 2010, nearly all types of investment funds recorded poorer results than in 2009. In nominal terms, only domestic bond funds achieved higher rates of return than in 2009.

The lowest profits were generated by money market funds. Due to lower inflation, their real rates of return were however higher than in 2009. Some of those funds invested a significant portion of assets in corporate bonds. Owing to those investments, rates of return achieved by money market funds exceeded the level of interest rates on bank term deposits (Table 4.5.7). The average interest rate on new bank term deposits of six to twelve months inclusive did not exceed in individual months of 2010 the level of 4.4% for households and 4.6% for enterprises.

Table 4.5.7. Rates of return of investment funds, 2007−2010 (%)

Fund types 2007 2008 2009 2010 Domestic equity funds 12.5 -52.7 40.6 18.7 Domestic bond funds 2.1 9.5 6.2 6.4 Money market funds 3.6 4.2 4.8 4.8 Stable growth funds 4.6 -16.4 15.3 9.0 4 Balanced funds 4.1 -15.1 10.6 7.0 Foreign equity funds -2.2 -44.5 43.7 14.6 Foreign bond funds -8.0 7.8 16.1 7.2 Weighted average for all types of investment funds 6.1 -19.7 20.4 10.5 Average annual inflation rate (CPI) 2.5 4.2 3.5 2.6

Note: The weighted average for all investment funds does not include the group of unclassified funds. The group of stable growth and balanced funds includes funds investing in foreign markets. Balanced funds include also capital protection funds and active asset allocation funds. Source: Analizy Online, GUS.

Both domestic and foreign equity funds recorded the highest rates of return in 2010. The average rate of return for domestic equity funds was almost equal to the rate of return on the portfolio replicating the WIG index. Of the 54 equity funds investing mainly in the Polish equity market, 20 funds beat the benchmark in the form of WIG index.

As in 2009, balanced funds achieved worse rates of return than stable growth funds. Out of balanced funds, the poorest results were achieved by capital protection funds and the best results – by active asset allocation funds investing in the Polish market.

Figure 4.5.8. Distribution of annual rates of return of investment funds in 2009 and 2010

0 -100 -50 0 50 100 150 200 250 300 2009 2010 Note: Density function estimated with the non-parametrical method. The x-axis presents annual rates of return of investment funds (%) and the y-axis presents the density function value. Source: NBP calculations based on Analizy Online data.

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Concentration of investment funds rates of return in 2010 was definitely higher than in 2009 (Figure 4.5.8), while their variability expressed as standard deviation was nearly two times lower.

Depending on the investment policy, investment funds are characterised by a different level of risk and a related potential for achieving high rates of return. In 2010, the difference between investment performance of individual types of funds decreased (Figure 4.5.9). A lower level of undertaken risk was accompanied by lower rates of return achieved by funds.

Figure 4.5.9. Rate of return to risk ratio in investment funds in 2009 and 2010

% 0.20

0.15 AK

0.10 ZR AK

Rate of return SW ZR 0.05 SW RP PDK

0.00 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 % Risk 4 2009 2010

Notes: 1. Abbreviations used in this Figure stand for the following: AK – domestic equity funds, PDK – domestic bond funds, RP – money market funds, SW – stable growth funds, ZR – balanced funds, excluding capital protection funds and active asset allocation funds. The analysis covers only funds investing on the domestic market. 2. Rate of return is stated on a monthly basis, while risk is expressed as the standard deviation of the rates of return for a given fund. Source: NBP calculations based on Analizy Online data.

In 2010, the Sharpe index, reflecting the efficiency of investment portfolio management, was the highest for money market funds (Figure 4.5.10). The Sharpe index for these funds used to record negative values for several years. In 2010, the rates of return of money market funds were slightly higher than the profitability of the 52-week Treasury bills and, in addition, they demonstrated a relatively low variability. The efficiency of investment portfolio management also increased in funds investing in Polish debt securities, while in the case of other funds it was lower than in 2009.

Figure 4.5.10. Sharpe index for selected types of investment funds in 2009 and 2010

0.14 0.12 0.10 0.08 0.06 0.04 0.02 0.00 -0.02 AK PDK SW ZR RP 2009 2010 Note: Abbreviations used in this Figure stand for the following: AK – domestic equity funds, PDK – domestic bond funds, RP – money market funds, SW – stable growth funds, ZR – balanced funds, excluding capital protection funds and active asset allocation funds. The analysis covers only funds investing on the domestic market. Source: NBP calculations based on Ministry of Finance and Analizy Online data.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 125 Financial institutions

New products offered

In 2010, the first exchange-traded fund (ETF) was offered by foreign investment funds notified in Poland. The aim of ETFs is to replicate a specific market index, and their units are listed on the stock exchange on the same principles as shares. The level of fees in ETFs is much lower than in actively managed investments funds. The first ETF in the Polish market replicates the WIG20 index. Its units were introduced to trading in the WSE in September 2010.

Units of index funds were included in the product offer of the domestic investment fund sector in 2010. They were funds reflecting the performance of mWIG40 index and derivative indices of WIG20 – WIG20lev and WIG20short.

4.5.2. Open pension funds

The size of the sector

In the analysed period, net assets of open pension funds (OFE) grew by PLN 42.6 billion, i.e. 23.9%, and as at the end of December 2010 they amounted to PLN 221.3 billion (Figure 4.5.11). The increase in net assets of OFE in 2010 resulted from the inflow of contributions transferred by the Social Insurance Institution, adjusted by fees charged (PLN 23.2 billion), and the investment performance of funds (PLN 21.1 billion). In comparison with 2009, the value of contributions 4 transferred to OFE was higher by PLN 1.6 billion owing to an increase in salaries and larger number of pension system participants. The increase in the value of the OFE investment portfolio resulted from a fall in interest rates which increased the value of its debt part as well as from an increase in prices of shares on the WSE.

Figure 4.5.11. Size and monthly changes in net assets of pension funds, 2007−2010

PLN billion % 250 12

200 8

150 4

100 0

50 -4

0 -8 I III VVII IX XI I III VVII IX XI I III VVII IX XI I III VVII IX XI 2007 2008 2009 2010 Net assets – left-hand scale Growth rate – right-hand scale

Source: Office of the Polish Financial Supervision Authority.

In January 2010, modifications were introduced to the pension system in Poland which aimed at reducing the costs of participation. As a result of a reduction in the percentage of the contributions transferred to pension funds from 7% to 3.5%,87 there was a significant decline in PTE revenues from contribution fee. In accordance with the new regulations, the rate of fee charged by PTE on the value of assets under management also decreased. The maximum monthly amount of that fee was set at PLN 15.5 million.

87 Act of 26 December 2009 amending the Act on the Organisation and Operation of Pension Funds and the Act Amending the Act on the Organisation and Operation of Pension Funds and Certain Other Acts (Dz.U. of 2009, No 127, item 1048).

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Since 2009, pension benefits are paid from the capital accumulated in OFE in the form of a periodic funded pension.88 These pensions were paid by the business units of the Social Insurance Institution together with the pension granted pursuant to the Act on the Social Insurance System.89 In 2010, both the number of persons entitled to receive such a pension and the total amount of pension benefits paid by OFE increased. This amount had however a minor impact on the value of assets of those funds (Table 4.5.8). Due to a short time during which contributions were paid and capital was accumulated by persons who in 2009 and 2010 acquired the right to a periodic funded pension, the value of benefits paid from the capital accumulated in OFE was low.

Figure 4.5.12. Breakdown of the growth of net assets of open pension funds, 2009−2010

A. 2009 B. 2010

Assets (growth) 40.4 Assets (growth) 42.6

Premiums and interest (+) 21.5 Premiums and interest (+) 23.2

Fees on premiums (–) 1.3 Fees on premiums (–) -0.8

Other items (–) 0.4 Other items (–) -0.9 Financial result (+) 20.7 Financial result (+) 21.1 4 130 140 150 160 170 180 175 185 195 205 215 225 PLN billion PLN billion

Source: Office of the Polish Financial Supervision Authority.

The number of open pension funds did not change and 14 OFE operated by the end of 2010. In addition, there were no material changes in the shareholders’ structure of PTE. The assets of all pension funds increased, however unlike in 2009, the first pension fund in the market, in terms of the value of funds under management, was ING OFE. In previous years, Aviva BZ WBK had the largest market share. The tendency to diminish a difference between assets accumulated in the largest and the smallest fund has been observed so far in OFE in Poland. In 2010, this trend continued, which resulted from a decrease in the market share of the largest entity. Nonetheless, this difference was still large: the largest OFE held PLN 53.2 billion of assets, while the smallest fund only PLN 2.1 billion.

As at the end of 2010, the number of participants of open pension funds amounted to 14.9 million, i.e. 570.3 thousand more than in the previous year. In three pension funds, there was a slight decrease in the number of participants, while in five OFE the growth rate of the number of participants was in double digits. In 2010, the number of participants between pension funds varied considerably. The largest fund managed funds of 2.9 million participants, while the smallest one only 311 thousand people. As a result of a draw, 166.8 thousand people became participants of pension funds in 2010, i.e. nearly two thirds more than in the previous year.

Polish pension funds may be considered to be one of the most developed funds in the Central and Eastern Europe which have pension systems consisting of a capital part with a defined contribution on a compulsory basis (Figure 4.5.13). Compared with similar institutions in the world, only Mexican funds have more participants, while in terms of assets Chile and Mexico have larger funds.

88 An OFE member acquired the right to a periodic funded pension when he/she became 60 years old and if funds accumulated in his/her account were equal to or greater than twenty times the amount of the care supplement. Periodic funded pensions will be paid until the pensioner becomes 65 years old. After this age is exceeded, the pensioner will acquire the right to an annuity pension. 89 The Act of 13 October 1998 on the Social Insurance System (Dz.U. of 2009, No 205, item 1585 as amended).

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 127 Financial institutions

Table 4.5.8. Periodic funded pensions paid by the Social Insurance Institution in 2010 (PLN)

Number of eligible persons OFE Amount paid in 2010 as at 31.12.2010 Aegon 55 27,303.50 Allianz Polska 22 17,256.50 Amplico 92 55,850.72 Aviva BZ WBK 100 83,751.56 AXA 37 16,553.24 Generali 51 24,045.83 ING 170 158,643.72 Nordea 36 18,373.75 Pekao 21 7,975.76 PKO BP Bankowy 20 9,720.35 Pocztylion 45 17,634.95 Polsat 13 3,844.89 PZU “Złota Jesień” 98 46,741.65 Warta 15 5,977.67 Total 775 493,674.09

4 Source: Office of the Polish Financial Supervision Authority.

Figure 4.5.13. Pension fund market in selected countries in 2010

USD billion million 150 60

120 50 40 90 30 60 20

30 10

0 0 Peru Chile Latvia Poland Mexico Croatia Estonia Bulgaria Slovakia Hungary Romania Lithuania Colombia

Net assets – left-hand scale Number of members – right-hand scale

Source: FIAP.

Concentration and competition

During the last four years there have not been changes in the pension fund sector that considerably affected the level of concentration and competition among funds. Such conclusion may be drawn from the analysis of CR3 and HHI indexes which remained stable in 2007–2010 (Table 4.5.9).

In 2010, the HHI concentration index fell again despite the fact that the number of the functioning pension funds did not decrease. This decline was mainly driven by higher growth rate of assets in two medium-sized funds in comparison with the largest funds.

Participants of open pension funds have a possibility to transfer funds between them. This mechanism should promote competition in the pension fund sector. In 2010, 603.5 thousand people transferred their funds to another pension fund (569.1 thousand people in 2009). AXA OFE acquired the largest number of participants due to transfers (136.2 thousand people). Taking into account persons who resigned from the membership in this fund, this represented an increase in the number of members of 100 thousand people. A positive transfer balance was also recorded

128 National Bank of Poland Financial institutions

by six other funds. As in the previous year, the largest number of people resigned from the membership in Aviva BZ WBK OFE and the number of these persons increased considerably.

Table 4.5.9. Concentration indices of open pension funds, 2007−2010

2007 2008 2009 2010 CR3 (in %) 63.91 63.74 63.36 61.88 HHI 0.1601 0.1602 0.1579 0.1522

Note: Herfindahl-Hirschman Index (HHI) for net assets is defined as the sum of squares of the shares of individual funds in total net assets. Source: NBP calculations based on data from the Office of the Polish Financial Supervision Authority.

Given the number of transfers of members between funds, and an increase in expenditures on acquisition activities and their large share in the cost structure, it can be concluded that in 2010 fund agents focused their activities on people with long contributory periods. The report of the Office of the Polish Financial Supervision Authority shows that some pension fund management companies tied the remuneration of their agents to the amount transferred to the fund managed by that company.90 This is because PTE charge a fee for the management of an open pension fund, which depends on the value of assets of that fund. However, from a long-term increase in the value 4 of funds perspective, it is not optimal to change OFE based on activities of fund agents or good investment performance of the fund in the last 1–3 years (Box 4.5.2).

Box 4.5.2

EFFECTIvEnESS oF PEnSIon FUnD SELECTIon BASED on HISToRICAL RATES oF RETURn

A diversification of the investment performance of pension funds over the last 1–3 years is a factor that may encourage the participants of the capital part of the pension system in Poland to change the fund. Based on data from the Office of the PFSA, an analysis was performed on the efficiency of OFE members’ decisions to change the fund made on the basis of historical rates of return. It was assumed that a participant of a pension fund makes a decision to change the fund every year on the basis of the investment performance of funds in the previous period.1 As a criterion for the selection made, a 3-year average rate of return of OFE (scenario A) and the annual rate of return (scenario B) were adopted.

The funds which achieved the highest 3-year rates of return and the highest annual rates of return, respectively, were selected between 20012 and the end of 2010. Then, they were assigned to rates of growth of an accounting unit achieved in the next calendar year, in accordance with the scenario under which the system participant changes the fund into a fund which – in the last year – achieved the best results for the previous period (Table I). It was

1 The maximum charge for a change of OFE in between 1999 and 2010 was as follows: – from 1 January 1999 to 31 March 2004 – 5–40% of the lowest salary, depending on the time elapsed from the date of payment of the first contribution or transfer payment from another fund until the date of the transfer payment, – from 1 April 2004, PLN 0, PLN 80 or PLN 160 – depending on the time elapsed from the date of obtaining membership in the OFE until the date of the transfer payment. To simplify the analysis, an assumption was made that OFE participants are not charged fees for a change of the fund. 2 In 2004, the methodology of determining statutory rates of return of open pension funds was changed. Until March 2004 the rates were determined quarterly for the period of 24 months. Since September 2004, the rates are determined for the period of 36 months and are announced as at the end of March and September. Until 2003 the analysis took into account a 2-year rate of return.

90 Nieprawidłowości w akwizycji do otwartych funduszy emerytalnych, Warszawa 2010, UKNF.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 129 Financial institutions

assumed that in the period of 1999–2001 an OFE participant did not transfer its funds and the rate of accounting unit growth was equal in that period to the average rate of return in the OFE market. In both scenarios, the hypothetical unit value was calculated using the recurrence method, as the value of the unit in the previous year increased by the amount resulting from the increase in the value of the unit of the fund which achieved the best investment results in the previous year.

Table I. Annual rates of growth of the value of accounting units of open pension funds which achieved the highest rates of return in the previous year

Scenario A Scenario B OFE which achieved Annual rate of growth OFE which achieved Annual rate of growth Year the highest 3-year of the accounting unit the highest rate of return of the accounting unit rate of return in the value (%) in the previous year value (%) previous year 2002 Polsat 10.80 Sampo 15.10 2003 Sampo 11.10 Bankowy 11.00 2004 Bankowy 15.90 Polsat 13.90 2005 Bankowy 13.20 Pekao 12.20 4 2006 ING 16.60 ING 16.60 2007 Pekao 7.10 Polsat 2.20 2008 Polsat -17.90 CU -15.30 2009 Pekao 13.90 Allianz 13.30 2010 Generali 9.30 Polsat 9.30

Source: Office of the Polish Financial Supervision Authority.

Table II. Annual rates of growth of the value of accounting units of open pension funds which achieved the highest rates of return in the previous year and the average value of the accounting unit and hypothetical unit values

Scenario A Scenario B Average unit Increase in Increase in Year Hypothetical unit Hypothetical unit value (PLN) hypothetical unit hypothetical unit value (PLN) value (PLN) value (%) value (%) 1999 11.51 11.51 11.51 2000 13.01 13.01 13.01 2001 13.75 13.75 13.75 2002 15.85 10.80 15.24 15.10 15.83 2003 17.58 11.10 16.93 11.00 17.57 2004 20.08 15.90 19.62 13.90 20.01 2005 23.09 12.30 22.04 12.20 22.45 2006 26.88 16.60 25.70 16.60 26.18 2007 28.55 7.10 27.51 2.20 26.75 2008 24.51 -17.90 22.59 -15.30 22.67 2009 27.88 13.90 25.73 13.30 25.69 2010 31.01 9.30 28.13 9.30 28.09

Source: NBP calculations based on data from the Office of the Polish Financial Supervision Authority.

If the OFE participant transferred funds since 2002, using as the criterion the highest 3-year rates of return (scenario A), the hypothetical value of the accounting unit as at the end of 2010 would be PLN 28.13. However, if the criterion for the selection of the new OFE was the annual

130 National Bank of Poland Financial institutions

increase in the value of the accounting unit (scenario B), the value of such a hypothetical unit would be PLN 28.09 (Table II). For both adopted scenarios, the results of the simulation would not differ significantly and as at the end of 2010 they would be lower than both the average value of the accounting unit and the lowest value of the unit in the pension market (Figure I).

According to the above analysis, the strategy of transferring funds accumulated in OFE to a fund which achieved the best investment results in previous year leads to a situation that the value of the accounting unit of the pension fund where participant’s funds are ultimately accumulated is lower than the market average. This analysis shows that an active management of pension savings in accordance with the historical rate of return criterion is inefficient and produces worse results than a passive management consisting in keeping savings consistently in selected OFE.

Figure I. Average accounting unit value and hypothetical accounting unit values achieved by OFE in 1999−2010

25 4

10 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Average accounting unit value Average hypothetical accounting unit value – Scenario A The lowest accounting unit value Average hypothetical accounting unit value – Scenario B

Source: NBP calculations based on data from the Office of the Polish Financial Supervision Authority.

Structure of the investment portfolio of open pension funds and their influence on financial markets

The increase in prices of equities on the Warsaw Stock Exchange and large privatisation offerings influenced the structure of the investment portfolio of pension funds. In 2010, Treasury debt securities prevailed, however their share decreased, mainly due to increased exposure to shares of public companies. As at the end of 2010, the share of equities listed on organized markets (WSE and NewConnect) in the portfolio of open pension funds reached 36%, i.e. the level observed before the onset of intense turmoil in global financial markets. Nearly all pension funds applied the strategy of increasing their exposure to equities.

Domestic Treasury securities were the most important asset category in the investment portfolio of open pension funds. As at the end of 2010, the value of those instruments amounted to PLN 115.9 billion, i.e. increased by nearly 5.1% as compared to the end of 2009. However, their share in the structure of the funds’ portfolio declined due to a higher rate of growth of the value of its equity part. The largest category of assets in domestic Treasury securities portfolios were fixed-interest rate bonds. The share of these instruments fell to 66.3% as at the end of 2010, mainly due to an increase in share of zero coupon bonds (from 11.1% as at the end of 2009 to 17.6% as at the end of 2010). As at the end of 2010, Treasury bills accounted for 0.77% of the investment portfolio of funds, nearly two times more as compared to 2009. Pension funds increased their investments in Treasury bills in times of uncertainty in financial markets, treating investments in these instruments as a safe form of investing.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 131 Financial institutions

Figure 4.5.14. Structure of the investment portfolio of pension funds in Poland, 2007−2010

% 100

21.4 34.3 30.1 75 36.0

50 73.5 61.6 59.9 25 52.4

0 2007 2008 2009 2010 Treasury securities Stocks, pre-emptive rights, bonds convertible to stocks Deposits and bank securities Foreign investments Other items Source: Office of the Polish Financial Supervision Authority.

In the analysed period, the duration of the debt securities portfolio of open pension funds shortened from 3.89 years as at the end of 2009 to 3.51 years as at the end of 2010. There was 4 an increase in investment in debt securities with a maturity of less than one year (from 7.7% of debt securities’ portfolio as at the end of 2009 to 10.9% as at the end of 2010). At the same time there was a decline in investments in debt securities with the maturity of one to five years (from 47.9% to 45.6% respectively) and in debt securities with maturity of more than five years (from 44.4% to 43.6% respectively). Supposedly, pension funds were interested in purchasing short- term securities due to expectations in the fourth quarter of increasing NBP interest rate in subsequent months.

In 2010, the value of the equity portfolio of pension funds increased by more than PLN 26 billion (from 54.6 billion as at the end of 2009 to PLN 80.7 billion as at the end of 2010). This resulted mainly from rising share prices listed on the WSE (in 2010 rate of return on WIG index was 18.8%) and a net purchase of equities on the Warsaw Stock Exchange for PLN 10.6 billion. Funds acquired shares on the WSE for the amount two times higher than in 2009 (PLN 5.3 billion net). Pension funds increased their exposure to equities due to initial public offerings of shares admitted to trading in a regulated market, in particular shares of state-owned companies, such as PZU and Tauron. The value of IPOs on the Warsaw Stock Exchange and NewConnect in 2010 amounted to PLN 16.1 billion. As at the end of 2010, pension funds held in their portfolio shares of 20 out of 34 companies that were admitted to trading on the Warsaw Stock Exchange in 2010. All funds excluding PZU OFE91 acquired shares of the largest Polish insurer (PZU), while Tauron shares were held by 12 out of 14 funds as at the end of 2010. Moreover, OFE invested in shares of two companies listed on the NewConnect market. Net purchases of shares made by pension funds contributed to an increase in their share in capitalisation and free float of the Warsaw Stock Exchange (Table 4.5.10).

Highly liquid shares of companies with the largest capitalisation on the Polish stock exchange accounted for the largest part of the equity portfolio of pension funds. Share of equities of companies composing the WIG20 index in the OFE equity portfolio did not change significantly and amounted to 60% as at the end of 2010. Pension funds were significant shareholders of the following companies: Elektrobudowa (77%), Grupa Kęty (67.4%) and Bogdanka (61.1%). A sector which dominated the equity part of the OFE portfolio was the banking sector (28% of equity portfolio).

91 Pursuant to Article 144 of the Act of 28 August 1997 on the Organisation and Operation of Pension Funds (Dz.U. of 2010, No 34, item 189 as amended), open pension funds cannot invest assets in securities issued by affiliated companies.

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Table 4.5.10. Open pension funds on the Polish financial market, 2007−2010 (%)

2007 2008 2009 2010 Share in the Treasury bill market 11.0 2.0 1.1 6.2 Share in the Treasury bond market 23.2 27.3 26.8 24.4 Share in free float on the WSE 2.2 28.0 30.4 31.7 Share in the capitalisation of the WSE 8.7 9.0 11.9 14.0

Note: Capitalisation and free float cover only domestic companies. Source: NBP calculations based on data from the Office of the Polish Financial Supervision Authority, Ministry of Finance, WSE.

As at the end of 2010, the share of equities in the investment portfolio of pension funds was in the range from 33.9% to 39.7%, while the average for the market was 36.7%. The difference in the exposure of pension funds to equities declined in comparison with 2009. In previous years, one fund consistently pursued an aggressive investment policy and the share of equities in its portfolio was significantly higher than in other pension funds. In 2010, the value of the equity portfolio of this open pension fund increased, however the remaining funds increased their exposure to equities much more. As a result, there was a reduction of the above mentioned difference in the structure of investment portfolios. Pension funds invested assets in deposits in domestic banks and in bank securities (3.6% in 4 total of the investment portfolio) as well as in corporate debt securities (approximately 1.1%). Compared with 2009, there was an increase (from PLN 5.1 billion to PLN 9.4 billion) in value of bonds issued by BGK for Toll Motorways and the National Road Fund. These bonds were popular among funds due to their higher yields compared to yields on Treasury bonds and comparable investment risk.

The share of foreign investments in the OFE investment portfolio remained unchanged (0.7%, while the statutory limit is 5%). The reasons for the low interest of OFE in this category of investments are regulatory barriers that discourage OFE portfolio managers from investing assets outside Poland92 and the inability to hedge against currency risk.

Investment performance of open pension funds vs. risk level

Rising share prices on the Warsaw Stock Exchange and high rates of return on the bond part of the portfolio of pension funds in comparison with previous years contributed to achieving a double-digit weighted average rate of return (Table 4.5.11). The difference in the investment performance between the best and the worst fund narrowed from 8.2 percentage points in 2009 to 2.6 percentage points in 2010. In previous years, share of equities in one fund was significantly higher than in other pension funds and its investment performance differed from that of other funds. Converging of investment strategies of open pension funds in 2010 resulted in a reduction of that difference.

Table 4.5.11. Rates of return obtained by pension funds, 2007−2010 (%)

2007 2008 2009 2010 Average annual weighted rate of return 6.2 -14.3 13.7 11.2 The best OFE in a given year 7.1 -11.9 20.7 11.9 The worst OFE in a given year 2.2 -17.9 12.5 9.3 Average annual inflation rate (CPI) 2.5 4.2 3.5 2.6

Source: Office of the Polish Financial Supervision Authority, GUS.

92 Pursuant to Article 136a para. 2 and 137 of the Act of 28 August 1997 on the Organisation and Operation of Pension Funds (Dz.U. of 2010, No 34, item 189, as amended). PTEs are required to cover the excess of transaction costs of investments in foreign markets over their foreign counterparts in the Polish market.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 133 Financial institutions

In 2010, the weighted average rate of return (SWSZ) and the minimum required rate of return (MWSZ) were set twice. For the period of March 2007-March 2010, SWSZ amounted to 2.9% and MWSZ to -1.10%. For the period of September 2007-September 2010, both rates were higher and amounted to: SWSZ – 3.36%, and MWSZ – -0.64%, respectively. All pension funds achieved 36-month rates of return which were higher than the minimum required rate of return. Consequently, there was no shortfall in any fund. In the period of March 2007- March 2010, the difference between the highest and the lowest rate of return of open pension funds was 4.8 percentage points and in the period of September 2007-September 2010 – 4.7 percentage points. This was the lowest difference between the 3-year rates of return achieved by open pension funds.

In the period of March 2007-March 2010, the average rate of return of the equity part of the open pension fund portfolio was slightly higher than the variability in WIG and WIG20 indices (respectively: -25.56%, and -26.21% and -29.11%). The difference between the lowest and the highest investment performance achieved on the equity part of portfolio by pension funds amounted to 12.6 percentage points. An average rate of return of pension funds on the debt securities portfolio was lower by 0.05 percentage points than the change of the index of domestic fixed-rate Treasury bonds.93

4 Figure 4.5.15. Net assets and rates of return of pension funds PLN billion % 60 6

50 5

40 4

30 3

20 2

10 1

0 0 ING AXA Pekao Polsat Polska Allianz PKO BP Nordea AEGON WARTA Amplico Generali Bankowy Pocztylion

Net assets – left-hand scale Aviva BZ WBK Rate of return (March 2007 – March 2010) – right-hand scale PZU “Złota Jesień” Rate of return (September 2007 – September 2010) – right-hand scale Source: Office of the Polish Financial Supervision Authority, GUS.

Lower increases in share prices on the Warsaw Stock Exchange in 2010 in comparison with the previous year contributed to a slight deterioration in the rates of return achieved by pension funds. At the same time, a risk level of OFE investments was lower. This was due to the lower volatility of share prices quoted on the Warsaw Stock Exchange and changes in the portfolio structure, including mainly the increase in the share of floating interest rate bonds (Figure 4.5.16). In comparison to 2009, the difference between monthly rates of return of pension funds decreased as a result of the above mentioned similarity of the funds’ investment policy.

Slightly lower rates of return and lower risk of OFE investment were reasons for the Sharpe indices being leveled off in comparison with 2009 (Figure 4.5.17). The exception was one fund which had a greater share of equities in the portfolio in previous years than other pension funds and had a higher ratio of the rate of return to risk taken (measured by standard deviation of monthly rates of return).

93 Informacja o działalności inwestycyjnej funduszy emerytalnych w okresie 30.03.2007–31.03.2010, Warszawa 2010, UKNF, p. 26.

134 National Bank of Poland Financial institutions

Figure 4.5.16. Rates of return and investment risk of open pension funds, 2009−2010

% 2.00

1.75

1.50

1.25

Rates of return 1.00

0.75

0.50 1.5 2.0 Risk 2.5 3.0 2009 2010 %

Note: Average monthly rate of return of the accounting unit on a monthly basis in 2009 and 2010 respectively. A standard deviation of monthly rates of return for open pension funds was used as a risk measure. Source: NBP calculations based on data from the Office of the Polish Financial Supervision Authority.

Figure 4.5.17. Sharpe index for individual open pension funds, 2009−2010

0.5

0.4 4

0.3

0.2

0.1

0.0 ING PZU AXA Aviva Polsat Pekao Allianz PKO BP AEGON Nordea WARTA Amplico Generali BZ WBK Bankowy Pocztylion 2009 2010 Source: NBP calculations based on data from the Office of the Polish Financial Supervision Authority.

Potential changes in the pension fund sector

In January 2010, the Ministry of Labour and Social Policy presented a draft framework for a draft law amending the Act on Funded Pensions and Certain Other Acts.94 The draft assumed significant changes in the functioning of the pension system. It included, among others, a proposal to reduce the contribution transferred to open pension funds from 7.3% to 3% of the basis for calculating pension insurance contributions. There was also a proposal to introduce the possibility of a one-off withdrawal of funds accumulated in OFE by persons who have attained 65 years of age (after satisfying certain conditions). The presented solutions also involved allowing members of pension funds who attained 55 years old (women) and 60 years old (men) to transfer all or part of the funds accumulated in OFE to a pension fund separated in the Social Insurance Fund.

In subsequent months legislative works continued and their results were presented in August. In October 2010, the Chancellery of the Prime Minister prepared a draft framework for the law amending the Act on the Organisation and Operation of Pension Funds.95 This draft provided for changes in the capital part of the pension system, aimed at increasing its efficiency. The draft framework proposed the introduction of investment strategies in the form of sub-funds with different risk profiles, taking into account the age of OFE participants. Moreover, there was a proposal to resign from the existing weighted average rate of return in favour of a reference rate

94 Draft framework for the draft law of 6 January 2010 amending the Act on Funded Pensions and Certain Other Acts. 95 Draft framework for the Act of 21 October 2010 amending the Act on the Organisation and Operation of Pension Funds.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 135 Financial institutions

of return, determined on the basis of published indices of selected classes of financial instruments. The presented solutions also included modifications to the system of fees charged on a pension contribution and fees for fund management, the introduction of capital requirements dependent on the value of funds under management as well as a change in the covering the shortfall. Furthermore, it was suggested to limit acquisition activity in the secondary market and to completely prohibit acquisition services from 1 January 2014.

Towards the end of 2010, the discussion was reopened on proposals of the Ministry of Labour and Social Policy and the Ministry of Finance related to reducing the contribution transferred to open pension funds from 7.3% to 2.3% of the basis for calculating pension insurance contributions.96 The remainder of the pension contribution (5%) was to be paid to a sub-account in the Social Insurance Institution. It was assumed that in subsequent years the contribution rate transferred to OFE would increase gradually, while the limit of OFE investments in equities would increase. The proposed changes were aimed at, among others, reducing the deficit of the public finance sector and the increase of the public debt. Similar solutions with regard to reducing the contribution rate transferred to the capital part of the pension system were introduced in recent years in other European countries (Box 4.5.3).

In the coming years, the introduction of sub-funds with different investment strategies adjusted to the age of fund members seems to be necessary. The establishment of sub-funds 4 would provide protection for OFE members against adverse changes in the value of their savings as a result of declines in share prices several years before acquiring the right to a pension benefit. Moreover, the current acquisition system should be modified due to irregularities observed in the pension fund market. The issue of the payment of pension benefits from funds accumulated in OFE should also be resolved. Retirement benefits in this form are to be paid from January 2014.

In accordance with applicable regulations concerning capital requirements for PTE, they are not obliged to increase equity capital when there is an increase in the value of assets of pension funds they manage. PTE equity capital may be used to cover a shortfall arising from a lower rate of return attained by a pension fund than the minimum required rate of return. This occurs when funds accumulated on the reserve account and in the additional part of the Guarantee Fund are insufficient to cover the shortfall. It is therefore necessary to introduce regulations under which the minimum required equity capital of a pension fund management company will be determined by the scale of OFE activities.

Box 4.5.3

CHAngES In PEnSIon SySTEMS In SELECTED EURoPEAn CoUnTRIES

In 2010, significant changes in the percentage of the contribution transferred to pension funds were introduced in EU countries operating a pension system with a mandatory capital part in the form of a defined contribution. These changes were primarily motivated by the difficult situation of public finance.

Hungary

Private pension funds have been operating in Hungary since 1998. Participation in the capital part of the pension system is mandatory for persons joining the labour market and voluntary for all other employed persons. In 1998–2002, the contribution rate amounted to 6% of gross salary. In 2003, this contribution rate was increased to 7% and in 2004 to 8% of gross salary.

96 No relevant draft law regulating changes in the Polish pension system was adopted in 2010.

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In 20101, the Hungarian government decided to suspend the transfer of contributions to private pension funds between 1 November 2010 and 31 December 2011. It also passed a law encouraging Hungarians to withdraw pension savings from private pension funds and to transfer them to the public pillar. This law provides that persons who decide to transfer all funds accumulated in the private pension fund to the public pillar will have, among other things, the option to inherit funds accumulated by spouses and to pay lower contribution. If a member decides to remain the member of the second pillar, the contribution rate paid by the member will not change, however the amount of the benefit from the first pillar will depend on the value of funds accumulated in that pillar before 1 February 2011.2

Latvia

The funded defined-contribution pension scheme started operation in 2001. Participation in the new system was mandatory for persons born after 1 July 1971 and voluntary for those who were born after 1 July 1951 and before 1 July 1971.

By 2008, the contribution rate transferred to private pension funds amounted to 4% of gross salary. In 2008, the contribution rate was increased to 8%. When designing the reform an assumption was made that in subsequent years the contribution transferred to pension funds would be gradually increased, reaching 10% in 2010. However, in May 2009 the contribution rate was lowered to 2% of gross salary and an announcement was made that it 4 would be increased to 6% from 2011.3

Estonia

Estonia implemented a mandatory privately managed pension system in 2002. Participation in the scheme is mandatory for persons born after 1982 and voluntary for all other employees.

Until May 2009, the total contribution to the funded scheme amounted to 6% of gross salary. From 1 June 2009, the transfer of pension contributions to private pension funds was suspended until the end of December 2010. From 2011, the transfer of contributions is to be resumed, however the contribution rate will amount to 2% of gross salary and in 2012 and 2013 – to 4%. A compensation mechanism is proposed for years 2014-2017, when the contribution rate will increase to 6% of salary.4

Lithuania

Equity pension funds have been operating in Lithuania since 2004. Contrary to the solutions adopted in most European countries which have a pension system with a mandatory capital part in the form of a defined contribution, participation in Lithuanian pension funds is voluntary. However, once the decision to join the voluntary system has been made, it is irreversible.

Until the end of 2006, the contribution rate to funded pension funds amounted to 2.5% of gross salary, while in 2007 and 2008 the contribution rate was increased to 5.5%. Between January and June 2009, the contribution amounted to 3% of gross salary, while in July 2009 it was reduced to 2%.5

1 FIAP calls on International Organizations and authorities in Central and Eastern Europe to not weaken the pension reforms in the region, material available on www.fiap.cl. 2 Hungary: Staff Report for the 2010 Article IV Consultation and Proposal for Post-Program Monitory, Country Report No 11/35, Washington D.C., 2011, IMF. 3 Pensions in Crises: Europe and Central Asia Regional Policy Note, 2009, World Bank. 4 S. Segaert, A. Võrk, Pensions, Health Care and Long-term Care. Estonia, Annual National Report, 2011, Analytical Support on the Socio-Economic Impact of Social Protection Reforms, European Commission. 5 Law on reform of the pension system, 3 December 2002 (as last amended 30 June 2010), available on: http:// www3.lrs.lt/pls/inter3/dokpaieska.showdoc_l?p_id=382018.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 137 Financial institutions

Czech Republic

Changes in the Czech pension system run in the opposite direction to changes in most European countries which operate funded pension funds. The Czech Republic considers introducing a mandatory transfer of pension contributions to funded pension funds. Participation in funded pension funds, which have been operating since 1994, is voluntary.

Pension scheme participants who are under 40 years will transfer 3% of gross salary to private pension funds. After three years, the contribution rate is to increase to 4%, and after 6 years to 5%. The contribution rate for the public part of the pension system will be reduced accordingly from 28% of gross salary.6

Table I. Amount of contributions paid to funded pension funds in selected European countries operating defined contribution schemes

Country Period Contribution rate (in %) 1998–2002 6 2003 7 Hungary 2004–10.2010 8 10.2010 suspension of the transfer of contributions for 14 months 4 2001–2007 4 Latvia 2008 8 from 2009 2 2002–05.2009 6 06.2009 suspension of the transfer of contributions until the end of 2010 Estonia 2011 2 2012–2013 4 2014–2017 6 2004–2006 2.5 2007–2008 5.5 Lithuania 01-06.2009 3 from 07.2009 2

6 Central and Eastern European Pensions 2007. Systems and Markets, 2007, Allianz Global Investors, p. 45.

4.5.3. Occupational pension schemes and individual pension accounts

Additional funds for pension purposes can be voluntarily raised through Occupational Pension Programs (PPE) and Individual Pension Accounts (IKE). As at the end of 2010, only 7.1% of the employed had savings in the voluntary part of the pension system.97 The number of PPE participants was 342.5 thousand and the value of funds accumulated in them was PLN 6.3 billion. The total amount of savings accumulated in individual pension accounts by 792.5 thousand people was PLN 2.7 billion (Figure 4.5.18).

The average value of assets attributable to one PPE participant amounted to PLN 18.6 thousand as at the end of 2010. The average value of funds accumulated in IKE was much lower – PLN 3.4 thousand. These differences result from different rules and periods of operation of both forms of voluntary savings for pension purposes. PPE have been operating in Poland since 1999, while the development of IKE was initiated only in 2004. In addition, contributions collected under PPE are paid mainly by employers (in 2010, they accounted for 97.3% of the value of contributions to PPE), and are more regular in comparison with voluntary contributions to IKE.

97 As at the end of 2010, the number of the employed was 16.1 million people. Aktywność ekonomiczna ludności Polski IV kwartał 2010 r., Warsaw 2011, Central Statistical Office, p. 34.

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Figure 4.5.18. Number of participants and funds raised under the Occupational Pension Programs and in Individual Pension Accounts, 2007−2010

PLN billion thousand 7 1,400 6 1,200 6.3 5 1,000 5.0 4 800

3 3.8 3.6 600 2 400 2.7 1 1.9 1.6 2.2 200 0 0 2007 2008 2009 2010 PPE assets – left-hand scale Number of PPE participants – right-hand scale IKE assets – left-hand scale Number of IKE participants – right-hand scale

Source: Office of the Polish Financial Supervision Authority.

Occupational Pension Programs (PPE)

Occupational pension programs may be operated in the form of an employee pension fund, an agreement on payment by the employer of employee contributions to the investment fund, 4 a group unit-linked life insurance for employees (UFK) or foreign management.98 As at the end of 2010, PPE were operated by 1,148 employers (16 more than in 2009) and 1,113 schemes operated in the market. In 2010, 29 new schemes were registered, i.e. 20 less than in 2009. The newly created PPE were dominated by schemes in the form of an agreement on the payment by the employer of employee contributions to the investment fund. In order to streamline the process of PPE registration, Office of the PFSA undertook steps to simplify the verification of applications for an entry of PPE into the register of occupational pension schemes (Box 4.5.4).

In 2010, PPE assets grew by 25.8% in comparison with 2009. The greatest increase was recorded for assets entrusted to investment funds (30.7%), and the lowest increase was observed for funds accumulated in occupational pension funds (26.7%). An influx of new contributions and good investment performance contributed to the growth of PPE assets.99

Box 4.5.4

STREAMLInIng THE PRoCESS oF REgISTRATIon oF oCCUPATIonAL PEnSIon PRogRAMS

The occupational pension program is created pursuant to a collective agreement between the employer and the representation of employees. In the case of the program in the form of an agreement on payment by the employer of employee contributions to the investment fund or an agreement on a group unit-linked life insurance for employees, an agreement is also concluded between the employer and the investment fund or an insurance company, respectively. Both documents are attached to applications for registration of the PPE in the register kept by the PFSA.

The provisions of the Act on Occupational Pension Programs determine only the scope of information that should be included in the collective agreement. However, there are no legal requirements as to the design of the collective agreement or the agreement with a financial

98 Article 6 para. 1 of the Act of 20 April 2004 on Occupational Pension Programs (Dz.U. of 2004, No 116, item 1207, as amended). 99 Pracownicze programy emerytalne w 2010 r., Warsaw 2011, Office of the Polish Financial Supervision Authority, pp. 3–18.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 139 Financial institutions

institution. Therefore, they usually contain detailed information, including the information that is not subject to supervisory review.

A wide scope of agreements and their inconsistent editorial layout made it difficult for the PFSA to review applications for the establishment of PPE. In order to streamline the registration process of occupational pension programs, templates of collective agreements and agreements with the financial institution concerning PPE in the form of the payment of contributions to the investment fund and in the form of a group unit-linked life insurance were published in December 2010.1 The developed forms contain only the necessary elements of agreements, which means that employers have the possibility of introducing in them additional provisions.

The creation of these agreement templates should help to standardise the documentation concerning PPE and to facilitate the registration of programs. The use of these forms should also contribute to the lowering of legal costs associated with the process of their registration, which may translate into a greater interest in establishing PPE among employers.

1 Templates of these agreements are available on the PFSA website: http://www.knf.gov.pl/dla_rynku/ Informacje_dla_podmiotow_nadzorowanych/Rynek_emerytalny_info_dla_podmiotow/Informacje_dla_ pracodawcy/formularze.html. 4 Source: Pakiet odbiurokratyzowania rynku finansowego, 21 December 2010, Office of the Polish Financial Supervision Authority, document available on the following website: http://www.knf.gov.pl/Images/Pakiet_ tcm75-24990.pdf.

In 2010, employers transferred to PPE PLN 948.3 million, i.e. 9.7% more than in 2009. Employee payments in the form of additional contributions rose by 7.3% and amounted to PLN 26.3 million. Employees made transfer payments to a PPE operated by another employer with the total value of PLN 39.3 million, and 6.4 thousand people moved PLN 109.3 million to IKE.

The highest value of assets and the highest number of members was recorded by schemes in the form of an agreement on payment by the employer of employee contributions to the investment fund (Figure 4.5.19). As at the end of 2010, there were 285 such schemes and the assets accumulated in those schemes amounted to PLN 2.9 billion. The largest number of PPE, i.e. 795, was operated in the form of an agreement on a group unit-linked life insurance for employees. Funds accumulated in them amounted to PLN 1.8 billion as at the end of 2010.

Figure 4.5.19. Structure of Occupational Pension Programs by the number of active participants and net assets in each form of PPE, 2009−2010

% 100 28.7 28.9 42.5 40.2 75

50 44.6 46.4 44.4 48.9 25 26.7 24.7 13.1 10.9 0 2009 2010 2009 2010 PPE assets Number of PPE participants

Employee Pension Funds (PFE) Investment funds Insurance companies Source: Office of the Polish Financial Supervision Authority.

As at the end of 2010, 33 schemes operated in the form of employee pension funds and assets under their management amounted to PLN 1.6 billion. The structure of the occupational pension

140 National Bank of Poland Financial institutions

funds’ investment portfolio was determined by the provisions of law and the investment policy principles specified in their articles of association. As in previous years, these funds invested their capital primarily in investment funds units and Treasury bonds (Figure 4.5.20). Funds deposited in employee pension funds were not managed directly by employee pension companies – these tasks were transferred to third parties. In 2010, no PPE was operated in the form of foreign management.

Figure 4.5.20. Structure of the employee pension funds’ investment portfolio, 2007−2010

% 100

75 62.8 62.1 58.5 68.3 50

9.6 12.0 14.3 25 10.0 19.1 23.2 23.3 24.3 0 2007 2008 2009 2010

Treasury bonds Shares Investment funds’ participation units Banks’ deposits Other 4 Source: Office of the Polish Financial Supervision Authority.

In 2010, changes in the form of PPE or of the entity managing funds accumulated under the scheme were made more frequently than in previous years. The Act on Occupational Pension Programs does not define rules under which such transformations should be performed. Cases in which these changes may occur and their conditions are determined by employers in the collective agreement.

In 2010, work continued on adapting Polish regulations to the European directive on activities and supervision of institutions for occupational retirement provision100 in connection with the 2009 charge of the European Commission regarding incomplete implementation of the Directive in national law. Concerns by the European Commission were raised about the lack of legal standards allowing the institutions for occupational retirement provision to accept contributions funded by entrepreneurs from the countries in which PPE forms other than defined contribution schemes operate.

Individual Pension Accounts (IKE)

Individual pension accounts may be maintained on the basis of a written agreement concluded by the saver with an investment fund, an entity conducting brokerage activities, an insurance company (an agreement on unit-linked life insurance) or a bank.101 The number of people accumulating additional retirement savings in IKE in Poland is low. Applicable tax incentives did not contribute to a large-scale interest in IKE. The level of public awareness on this product is limited and its attractiveness is not evaluated explicitly, as evidenced by, among other things, results of a survey conducted in May 2010 by the Public Opinion Research Center (CBOS) and the Chamber of Fund and Asset Management (IZFiA) in May 2010.102

In 2010, the number of IKE was lower than in 2009 by 16.8 thousand accounts. Number of accounts maintained by banks, insurance companies and investment funds decreased (Table 4.5.18). Only entities conducting brokerage activities recorded an increase in the number of accounts (24.1%). Similarly to 2009, IKE holders were mainly persons between 51 and 60 years of age. Only 8.8% of accounts belonged to people under 30 years of age.

100 Directive 2003/41/EC of the European Parliament and of the Council of 3 June 2003 on the activities and supervision of institutions for occupational retirement provision (O J L235 of 2003). 101 Article 8 of the Act of 20 April 2004 on Individual Pension Accounts (Dz.U. of 2004, No 116, item 1205 as amended). 102 Polacy o dodatkowym oszczędzaniu na emeryturę, Warszawa 2010, CBOS and IZFiA, pp. 11–14.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 141 Financial institutions

Table 4.5.18. Basic data on the IKE market, broken down by entities maintaining accounts, 2009−2010

Entities conducting Banks Investment funds Insurance companies brokerage activity 2009 2010 2009 2010 2009 2010 2009 2010 Number of IKE 31,982 30,148 11,732 14,564 172,532 168,664 592,973 579,090 Ratio of active 63.5 64.8 67.0 62.1 29.0 26.5 43.0 41.3 accounts (%) Value of accumulated 244,180 292,696 190,659 293,762 800,436 972,295 964,146 1,167,642 funds (PLN ‘000) Average payment to 2,609 2,793 8,388 7,813 1,911 2,196 1,435 1,421 IKE (PLN) Number of newly 2,196 3,008 2,240 3,453 21,053 20,581 16,784 13,681 opened IKEs Withdrawals from 14,574 12,170 1,434 1,687 10,587 17,776 9,014 12,418 IKE (PLN ‘000) Returns from IKE 26,961 29,091 3,235 3,621 57,788 70,507 126,007 102,953 (PLN ‘000)

Source: Office of the Polish Financial Supervision Authority.

4 Despite the reduction in the number of IKE maintained, the value of funds accumulated in them was higher by approximately 24% (up from PLN 2.2 billion as at the end of 2009 to PLN 2.7 billion as at the end of 2010). The increase in savings related to all institutions maintaining IKE and this was mainly due to the net inflow of contributions. In 2010, persons saving in IKE paid into their accounts PLN 495.5 million, PLN 11.4 million less than in 2009, however these funds were paid only to approximately 32% of accounts.103 In accordance with the announcement of the Minister of Labour and Social Policy, the limit of payments into one account in 2010 amounted to PLN 9,579.104 The average amount paid into one IKE was PLN 1,971, i.e. PLN 121 more than in 2009. As in previous years, the average payment was the highest in the case of accounts set up in entities conducting brokerage activity (PLN 7,813), and the lowest – in insurance companies (PLN 1,421).

Figure 4.5.21. Structure of Individual Pension Accounts by entities maintaining accounts, 2009−2010

% 100 11.1 10.7 4.0 3.8 8.7 10.8 21.3 21.3 75 36.4 35.7 50 73.3 73.1 25 43.8 42.8

0 2009 2010 2009 2010 Funds accumulated on IKE Number of IKE

Insurance companies Investment funds Brokerage ofﬁces Banks

Source: Office of the Polish Financial Supervision Authority.

The share of individual institutions in the IKE market, both in terms of the number of accounts maintained and assets accumulated in them, did not change significantly in comparison

103 Indywidualne konta emerytalne w 2010 r., Warsaw 2011, Office of the Polish Financial Supervision Authority, p. 11. 104 Announcement of the Minister of Labour and Social Policy of 2009 regarding the amount of payments to individual pension account in 2010 (Monitor Polski of 2009 No 978, item 979).

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with 2009 (Figure 4.5.21). The highest amount of funds was accumulated in accounts maintained by insurance companies. These institutions also maintained the largest number of accounts.

In 2010, the number of returns from IKE was 49.6 thousand, i.e. 31.9 thousand less than in 2009. The largest number of returns concerned accounts maintained by insurance companies (53.3%) and investment funds (39.3%).

4 .6 . Insurance companies

The size of the insurance sector, measured by the gross premium written105 (hereinafter referred to as the premium) collected by insurance companies, grew in 2010. An increase in the premium was recorded both in the life insurance sector and in the sector of other property and casualty insurance (hereinafter referred to as non-life insurance). Despite the technical loss in the non-life insurance sector, the total financial result of insurance companies was higher in 2009. The Polish insurance sector had sufficient own funds to cover statutory parameters of solvency and assets adequate to liabilities arising from insurance contracts signed.

4.6.1. The size and structure of the insurance sector

Gross premium written 4

Gross premium written for the entire insurance industry for 2010 amounted to PLN 54.2 billion (PLN 51.3 billion in 2009). In the life insurance sector, the gross written premium increased by 3.8% and in the non-life insurance sector – by 8.0%. An increase in sales of unit-linked insurance contributed to the growth in the premium in the life insurance sector. In the non-life insurance sector, this increase was a result of the increase in the premium from the accident and theft insurance and third party liability insurance for owners of motor vehicles (Figure 4.6.1).

Figure 4.6.1. Gross written premium and its growth rate, 2007−2010

PLN billion % 60 80

50 20.3 60 22.7 40 21.1 40 18.2 30 20

20 39.0 31.4 0 30.3 25.5 10 -20

0 -40 2007 2008 2009 2010 Written premium – left-hand scale: Life insurance sector Non-life insurance sector Growth rate of premium – right-hand scale: Life insurance sector Non-life insurance sector

Source: Office of the Polish Financial Supervision Authority.

The size of the Polish insurance market, measured by the ratio of gross written premium to GDP (penetration rate), decreased from 3.8% in 2009 to 3.7% in 2010 and it was lower by more than a half than the average in EU countries (Figure 4.6.2). The value of the premium per capita (insurance coverage ratio) amounted to USD 465 in 2010. In this respect, the Polish insurance market was comparable with the markets in Slovakia and Hungary, however it was much smaller than in most EU countries (Figure 4.6.3).

105 Gross written premium is the premium due for the insurance period, and in the case of life insurance contracts and contracts for an indefinite period, it is the premium due for the period of the insurance company’s liability. Gross written premium is correlated with revenues of insurance companies and reflects the scale of risk covered by insurance.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 143 Financial institutions

Figure 4.6.2. Gross written premium to GDP in 2010

% 16 14 12 10 8 6 4 2 0 Italy Spain Malta Serbia Russia France Cyprus Greece Poland Ireland Austria Croatia Finland Ukraine Norway Sweden Belgium Bulgaria Average Slovakia Portugal Slovenia Hungary Romania Germany Denmark Lithuania Switzerland Netherlands Luxembourg Czech Republic United Kingdom Life insurance Non-life insurance

Source: World insurance in 2009. Statistical appendix, “Sigma” No 3/2011, www.swissre.com.

Figure 4.6.3. Gross written premium per capita in 2010

USD thousand 4 7 6 5 4 3 2

1 0 Italy Spain Malta Serbia Russia France Cyprus Greece Poland Ireland Austria Croatia Finland Ukraine Norway Sweden Belgium Bulgaria Average Slovakia Portugal Slovenia Hungary Romania Germany Denmark Lithuania Switzerland Netherlands Luxembourg Liechtenstein Czech Republic United Kingdom Life insurance Non-life insurance

Source: World insurance in 2009. Statistical appendix, “Sigma” No 3/2011, www.swissre.com.

Number of insurance companies and their ownership structure

Insurance activities in Poland may be conducted by insurance companies in the form of a public limited company or mutual insurance company, with a registered office in Poland. Moreover, foreign insurance companies which are based in the EU or EFTA countries may offer and provide insurance coverage against the risk of the effects of random events (and perform other insurance activities) under the freedom to provide services or through branches.

In 2010, Towarzystwo Ubezpieczeń Medica Polska Ubezpieczenia Zdrowotne commenced its operations and HDI-Gerling Poland merged with HDI Asekuracja. Towarzystwo Ubezpieczeń Wzajemnych Bezpieczny Dom and the main branch of Mondial Assistance International AG discontinued their activities.

As at the end of 2010, there were 63 insurance companies conducting business activities, including 30 life insurance companies and 32 non-life insurance companies as well as one reinsurance company (Table 4.6.1). In addition, the PFSA was notified of 529 foreign insurance companies (including the largest number from the UK and Ireland) which were allowed to provide insurance coverage. Insurance activity could be performed in Poland also by 17 foreign insurance companies through their branches.106

106 Raporty o stanie sektora ubezpieczeń po IV kwartale 2010, Warsaw 2011, Office of the Polish Financial Supervision Authority, p. 7.

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Table 4.6.1. Insurance companies conducting insurance activities in Poland, 2007−2010

2007 2008 2009 2010 Insurance and reinsurance companies 66 65 64 63 Life insurance 32 30 30 30 Non-life insurance 34 35 34 33

Source: Office of the Polish Financial Supervision Authority.

As at the end of 2010, the core capital of insurance companies operating in Poland amounted to PLN 5.8 billion (PLN 5.4 billion in 2009). Insurance companies operating in Poland included 45 entities with predominantly foreign capital – mainly from Austria, Germany and the Netherlands. The share of these companies in the insurance market measured by the value of premiums collected amounted to 53.0% and by assets – 53.5% (Figure 4.6.4).

Figure 4.6.4. Premium structure of insurance companies in Poland by investor groups, 2009−2010

A. 2009 B. 2010 15.2% 14.4% 4 15.4% 13.4% 19.3% 17.2%

52.1% 53.0%

Foreign entities PZU Życie PZU Other domestic entities Source: Office of the Polish Financial Supervision Authority.

Concentration and competition in the insurance sector

In 2010, both in the life insurance sector and non-life insurance sector, CR3 and CR5 concentration ratios as well as the Herfindahl-Hirschman (HHI) concentration index calculated for the gross written premium decreased (Table 4.6.2). The reason for the reduced concentration in these insurance sectors was the decline in a market share of PZU Group companies.

Table 4.6.2. Insurance sector concentration ratios, 2007−2010

2007 2008 2009 2010 Life insurance companies CR3 51.7% 53.7% 50.3% 50.1% CR5 65.5% 68.1% 64.8% 62.6% HHI 0.1281 0.1526 0.1452 0.1298 Non-life insurance companies CR3 62.1% 59.4% 56.2% 53.3% CR5 74.3% 71.5% 67.8% 65.5% HHI 0.2210 0.1959 0.1700 0.1518

Source: Office of the Polish Financial Supervision Authority.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 145 Financial institutions

In the life insurance sector, the market position of individual insurance companies depended mainly on the size of the group insurance portfolio and sales of unit-linked insurance. The largest increase in the market share was recorded by Towarzystwo Ubezpieczeń Europa Życie107 which had a large portfolio of insurance with a guaranteed rate of return and unit-linked insurance (Figure 4.6.5).

The market share of non-life insurance companies was influenced to the greatest extent by sales of motor insurance, including accident and theft insurance and third party liability insurance for motor vehicle owners, which constitute the largest segment of this market. Entities with the largest portfolios of motor insurance, except for PZU, retained the existing position in the market (Figure 4.6.6).

Figure 4.6.5. Share of selected life insurance companies in the gross written premium, 2009−2010

% 40

32.8 31.8 31.3 29.6 30

4 20 12.5 8.9 8.6 8.4 10 8.0 6.4 6.2 5.5 6.1 4.0

0 PZU Życie Europe Warta ING Nordea Aviva Other

2009 2010

Source: Office of the Polish Financial Supervision Authority.

Figure 4.6.6. Share of selected non-life insurance companies in the gross written premium, 2009−2010

% 50

40 37.0 34.5 34.2 32.6 30

20 10.4 10.3 10 8.8 8.8 7.6 7.6 3.7 4.6 0 PZU Ergo Hestia Warta Allianz Interrisk Other 2009 2010

Source: Office of the Polish Financial Supervision Authority.

107 Gross written premium of TU Europa Życie, determined in accordance with the provisions of the Act on Insurance Activity, increased by 45% – Quarterly Bulletin. Insurance Market IV 2010, Office of the PFSA. Gross written premium in accordance with IAS decreased by 22% – 2010 Annual Report, TU Europa SA. According to information provided in the annual report, the company has in its offer products with a guaranteed rate of return and unit-linked products that do not generate significant insurance risk and do not meet the definition of an insurance product in accordance with IFRS 4. Therefore, these types of insurance were classified by the insurance company as investment products, valued in accordance with IAS 39, which explains the discrepancy of published data. This report is available on the following website: http://www.tueuropa.pl/rekordowe-wyniki-grupy-kapitalowej-europa-po-i-polroczu- 2010,new,mg,4.html,2831.

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4.6.2. Premium structure

In the life insurance sector, the largest share in the premium was recorded by group 1 insurance (including: endowment life insurance, anti-tax insurance and structured insurance products, as well as employee group insurance) whose share in the premium in 2010 was 59.8%. The largest increase in the premium (25.7%) concerned unit-linked insurance (group 3). The premium in this product group increased from PLN 6.46 billion in 2009 to PLN 8.12 billion in 2010, which accounted for 25.8% of premium collected in this insurance division. The increase in sales of this insurance was driven by better investment performance of unit- -linked insurance funds. Due to the low profitability of the anti-tax insurance and structured insurance products, most insurance companies reduced or stopped the sale of these products. The premium on accident and sickness insurance (group 5) which was offered as a supplement to the basic product offer together with the employee group insurance accounted for 13.6% of the insurance portfolio in this sector. As in previous years, the share of dowry insurance (group 2) and annuity (pension) insurance (group 4) in the structure of premium in life insurance was marginal.

Figure 4.6.7. Premium structure in the life insurance sector, 2007−2010

% 100 13.6 10.5 14.4 13.6 4 16.2 75 21.4 25.8 47.0 50 72.9 63.6 59.7 25 38.7

0 2007 2008 2009 2010 Life insurance (group 1) Dowry insurance (group 2) Unit-linked life insurance (group 3) Annuity (pension) insurance (group 4) Accident and sickness insurance (group 5) Source: Office of the Polish Financial Supervision Authority.

The structure of the premium (on direct insurance)108 collected in 2010 by non-life insurance companies did not change significantly in comparison with 2009. Motor insurance (accident and theft insurance and third party liability insurance) was still the most important group, although its share in the premium of this sector decreased from 58.3% in 2009 to 57.6% in 2010 (Figure 4.6.8). This was a result of strong price competition between insurance companies, especially those that sell policies via Internet and by phone. The pricing policy pursued by these companies, aimed at selling as many policies as possible and increasing the share in the motor insurance market, led to a reduction of premiums to such a level at which they were not sufficient to cover withdrawals and other costs arising from such insurance.

The second most important class of insurance was fire and theft insurance (classified to group 8 and 9) whose share in the premium of the non-life insurance sector in 2010 was 18.7%. In the analysed period, the premium on such insurance increased slightly, which should, on one hand, reduce losses of companies in the last two years.

In 2010, the number of policyholders’ complaints relating to insurance against burglary, fire and other accidents increased (1,194 complaints which accounted for 10.0% of the total number of complaints reported to the Insurance Ombudsman). A significant number of those cases referred to irregularities in the activities of insurance companies at the settlement of claims related to

108 Direct insurance includes premium under insurance contracts concluded but does not include reinsurance ceded premium.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 147 Financial institutions

damage to buildings caused by flood, high wind and heavy rainfall, as well as damage to vehicles incurred in the winter.109

The most popular financial insurance products included mortgage loan related insurance. These products offered protection against the risk of non-repayment of the loan until the entry in the land and mortgage register becomes final and binding (the so-called bridge insurance), insurance of the missing down payment, insurance against loss of job, deterioration of health, and insurance protecting banks against a decrease in prices of real estate constituting collateral for loans granted. Insurance related to mortgage loans represents a small segment of the non-life insurance market. In 2010, its share in the premium of this sector was 2.1% and was concentrated in several insurance companies specialising in these products.

Figure 4.6.8. Premium structure of non-life (direct) insurance, 2007−2010

% 100 4.2 3.6 5.3 5.1 3.6 5.6 3.5 5.8 75 17.3 16.7 18.0 18.7

26.6 26.2 23.7 50 23.7 4 25 34.9 35.3 34.6 33.9

7.7 7.2 7.3 0 6.5 2007 2008 2009 2010

Accident and sickness insurance (groups 1 and 2) Third party liability motor insurance (group 10) Motor insurance AC (group 3) Marine. aviation and transport insurance Insurance against ﬁre and other damage to property (groups 4, 5, 6 and 7) (groups 8 and 9) Third party liability insurance (groups 11, 12 and 13) Credit and guarantees insurance (groups 14 and 15) Other insurance

Source: Office of the Polish Financial Supervision Authority.

4.6.3. Assets and investment portfolio of insurance companies

Assets structure

As at the end of December 2010, assets of the insurance sector amounted to PLN 145.1 billion (Figure 4.6.9). The life insurance sector recorded an increase in assets, mainly owing to an increase in premium from the sale of unit-linked insurance. Assets held to cover liabilities arising from such insurance increased from PLN 32.8 billion as at the end of 2009 to PLN 39.2 billion as at the end of 2010 (Figure 4.6.10A). Assets of non-life insurance companies remained at the 2009 level, partially due to an increase in the value of claims paid related to car damage and floods. The decrease in investments of these companies caused by the payment of the above mentioned claims was offset by an increase in receivables in respect of direct insurance and reinsurance by PLN 0.8 billion and an increase in the value of deferred acquisition costs by PLN 0.7 billion (Figure 4.6.10B).

109 Skargi kierowane do Rzecznika Ubezpieczonych dotyczące problematyki ubezpieczeń gospodarczych oraz zabezpieczenia społecznego w 2010 roku, Warsaw 2011, Insurance Ombudsman, p. 4.

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Figure 4.6.9. Assets of the insurance sector and their growth rate, 2007−2010

PLN billion % 160 30

120 51.1 20 52.8 51.1 47.3

80 10

94.0 40 79.6 85.1 87.9 0

0 -10 2007 2008 2009 2010

Assets of insurance companies – left-hand scale: Life insurance sector Non-life insurance sector Assets growth rate – right-hand scale: Life insurance sector Non-life insurance sector

Source: Office of the Polish Financial Supervision Authority.

Figure 4.6.10. Structure of assets of insurance companies, 2007−2010

A. Life insurance companies B. Non-life insurance companies

PLN billion PLN billion 100 60 4 4.0 3.9 4.8 3.0 3.7 75 4.1 4.9 26.3 32.8 39.2 40 3.5 36.0 50

20 40.8 45.1 43.1 41.4 25 54.5 50.9 50.5 40.4

0 0 2007 2008 2009 2010 2007 2008 2009 2010

Deposits Unit-linked (UFK) assets Deposits Receivables Receivables Other assets Other assets

Source: Office of the Polish Financial Supervision Authority.

Investment portfolio structure

The value of the investment portfolio of insurance companies from the life insurance and non-life insurance sectors increased from PLN 126.8 billion in 2009 to PLN 131.0 billion in 2010 and its structure did not change significantly. Units of investment funds were the largest category of investments in the investment portfolio of unit-linked life insurance. The share of these financial instruments in the portfolio of investments increased and their value as at the end of 2010 amounted to PLN 26.0 billion. However, the share of bonds in this portfolio decreased. The portfolio of other life insurance for which investment risk is borne by insurance companies was dominated by bonds (PLN 30.3 billion) and term deposits (PLN 11.7 billion). Shares and units of investment funds accounted for a negligible part of this portfolio (Figure 4.6.11).

In accordance with applicable law, the structure of the investment portfolio of non-life insurance companies should be adjusted to the maturity structure of their liabilities. As at the end of 2010, Treasury bonds accounted for a majority of the investment portfolio of both sectors. The Ministry of Finance data show that these were mostly 5 and 10-year Treasury bonds with fixed interest rate as well as 2-year zero coupon bonds. Shares in affiliates (exposure of entities in companies belonging to the same group, including PZU) were 8.8%. Cash and bank deposits were earmarked for payment of claims and constituted a small part of the investment portfolio of non- -life insurance companies (Figure 4.6.11).

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 149 Financial institutions

Figure 4.6.11. Structure of the investment portfolio of insurance companies, 2009−2010

A. 2009 B. 2010 % % 100 100 5.0 7.6 6.6 9.2 5.5 7.7 6.8 8.88.8 4.3 5.2 75 27.0 75 31.731.7

67.3 58.8 57.7 69.9 59.5 50 50 69.9 59.5 57.657.6 44.3 42.242.2 25 4.8 25 4.8 20.4 25.6 23.023.0 17.0 21.0 18.5 13.913.9 20.320.3 0 0 Unit-linked Other life Life Non-life Unit-linked Other life Life Non-life insurance insurance insurance insurance insurance insurance insurance insurance (total) (total) Deposits at afﬁliated entities Term deposits Bonds Investment fund units Stocks and shares Other deposits

Source: Office of the Polish Financial Supervision Authority.

4 4.6.4. Financial results of the insurance sector During the analysed period, the life insurance sector recorded a slight decrease in the financial result. Despite the increase in the payment of claims arising mainly from a large scale of damage, caused by adverse weather events, net profit of the non-life insurance sector rose to PLN 3.1 billion. The result of the entire insurance sector in Poland grew from PLN 6.6 billion in 2009 to PLN 6.7 billion in 2010 (Figure 4.6.12).

Figure 4.6.12. Financial results of the insurance sector, 2007−2010

PLN billion % 8 100

6 60 2.6 3.1 2.0 4 3.3 20

2 3.6 -20 3.3 4.0 2.5

0 -60 2007 2008 2009 2010

Financial result – left-hand scale: Life insurance sector Non-life insurance sector Financial result growth rate – right-hand scale: Life insurance sector Non-life insurance sector

Source: Office of the Polish Financial Supervision Authority.

Owing to higher sales of unit-linked insurance than in 2009, revenues from premiums (earned premium net of reinsurance)110 of life insurance companies increased to PLN 31.0 billion in 2010. Income on net investments111 (profit on investments) decreased slightly due to a lower increase in share prices on the WSE in comparison with the previous year, and it amounted to PLN 6.8 billion. The highest profit on investment activities was achieved by investments in fixed-

110 Earned premium net of reinsurance is a written premium net of reinsurance in the reporting period, less the change in the provision for premiums. Earned premium less the shares of reinsurers is earned premium net of reinsurance. § 2 subpara. 16 of Regulation of the Minister of Finance of 8 October 2003 on special accounting principles of insurance undertakings (Dz.U. of 2003, No 218, item 2144, as amended). 111 Investment income after accounting for the costs of investment activities.

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-rate bonds and investments in units of investment funds. Owing to revenues from premiums and profit on investment activities which were higher than in 2009, as well as to lower claims payments (PLN 22.0 billion) and costs of insurance activity (PLN 5.2 billion), this sector generated net profit of PLN 3.6 billion (Figure 4.6.13A).

The rate of growth of claims payments (caused by adverse weather events, the effects of floods and damage to vehicles) in the non-life insurance sector was higher than the rate of growth of premium earned. This factor, along with an increase in net operating expenses, resulted in a technical loss registered by the non-life insurance sector of PLN 1.3 billion. However, owing to higher profit on investments (PLN 4.9 billion), the financial result (net profit) was PLN 3.1 billion (Figure 4.6.13B).

Figure 4.6.13. Net revenues and costs of insurance companies, 2009−2010

A. Life insurance companies B. Non-life insurance companies

PLN billion PLN billion 40 40 29.3 31.0 30 26.7 30 22.0 20 20 18.4 18.7 12.0 11.3 4 8.1 6.8 6.9 10 10 6.5 5.4 6.2 5.2 4.9 4.0 3.6 3.6 2.6 3.1 0.3 1.2 1.5 0 0

-10 -10 2009 2010 2009 2010 Earned premiums net Revenues from deposits net Claims paid net Change in provisions net Operating expenses net Mandatory charges Net ﬁnancial result

Source: Office of the Polish Financial Supervision Authority.

The results of the entire insurance sector were largely influenced by profits of PZU Group companies. In 2010, PZU Życie paid out a dividend of PLN 3.12 billion to PZU. After deducting this dividend, profits from investments of the non-life insurance sector would amount to PLN 1.7 billion and its financial result would fall to PLN 0.6 billion. The profit of PZU Życie accounted for 58.7% of the financial result of the life insurance sector.

4.6.5. Solvency and capital adequacy

In 2010, insurance companies operating in Poland had sufficient funds to cover the solvency margin and their assets allowed them to cover liabilities to policyholders. As at the end of 2010, the activity monitoring ratio112 in the life insurance division amounted to 317% and in the non-life insurance sector to 390%. The provision coverage ratio113 was at 109% and 123% respectively.

In 2010, the life insurance sector recorded a higher technical profit than in 2009, but nonetheless the activity monitoring ratio in this sector decreased. However, the activity monitoring ratio in the non-life insurance sector increased despite the deterioration of the financial result. Funds from the dividend paid by PZU Życie to PZU contributed to the improvement of aggregate solvency ratios in this division.

112 Activity monitoring ratio is expressed as a percentage ratio of own funds to the solvency margin (or the guarantee capital, if it is higher than the solvency margin). 113 Provision coverage ratio is expressed as a percentage ratio of assets covering technical provisions to gross technical provisions.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 151 Financial institutions

Results of stress tests in the insurance industry indicate that this sector is more exposed to market risk than the risk associated with the insurance business, such as: cat risk, higher costs, lower premiums (lapses) and demographic risk. Cat risk (for the non-life insurance sector), estimated on the basis of flood damage in the period of 1997–2010, was lower than the market risk. In 2010, the domestic insurance companies paid PLN 0.5 billion of compensations net of reinsurance in respect of flood damage. Claims paid by insurance companies as a result of the largest floods (both in 1997 and in 2010) can be considered comparable in scale with claims payments as a result of losses caused by single random events in large industrial facilities. The highest losses on investment activities may be caused by the materialisation of the risk of changes in equity prices and of interest rate risk.

In 2010, European insurance and reinsurance companies, including 50 from Poland, performed the fifth quantitative impact study of new regulatory arrangements set out in the Solvency II directive114 on their financial position and solvency in accordance with the data as at the end of 2009 (Fifth Quantitative Impact Study – QIS5). The aim of this study was to review the assumptions used in this directive and to prepare insurance and reinsurance companies for the entry into force of new rules for determining capital requirements by starting the so-called pre-application process.115 Results of these studies indicate that the insurance sector in Poland had a surplus of assets over technical provisions as at the end of 2009. The solvency ratio for life insurance entities amounted to 325%, and for non-life insurance entities – 211%. The QIS5 study 4 confirms that market risk was a dominant factor for domestic insurance companies, affecting the solvency capital requirement.

4.6.6. Selected technical ratios

Insurance companies operating in Poland received reinsurance coverage primarily from foreign insurance and reinsurance companies. It was a result of the need for geographic dispersion of risk, capital abilities of domestic reinsurers and the adjustment of the scope of reinsurance to the conditions under which long-term reinsurance contracts would be binding. There was one reinsurance company in the Polish insurance market. Reinsurance coverage was also provided – to a limited extent – by domestic insurance companies.

In the non-life insurance sector, the premium retention ratio116 was 87.6%, and the claims retention ratio117 stood at 85.0%. These ratios show that in the analysed period, the share of reinsurers in claims payments was higher than their share in the premium (Figure 4.6.14). Damage caused by adverse weather conditions amounted to PLN 1.7 billion in 2010, of which only PLN 0.5 billion net of reinsurance of domestic insurance companies (reinsurers’ share: 71%).118

The main indicators for assessing the efficiency of insurance companies include: the gross claims ratio and the corresponding claims ratio net of reinsurance.119 In 2010, the non-life insurance sector saw a marked increase in the gross claims ratio and the claims ratio net of reinsurance (Figure 4.6.15). The increase in these ratios resulted from a higher number of damages in motor insurance as well as insurance of houses and industrial buildings, caused by adverse weather conditions, and from an increase in flood claims payments. These ratios confirm that in 2010 reinsurers had a higher share in claims payments in relation to the premium than insurance companies.

114 Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the taking-up and pursuit of the business of insurance and reinsurance (OJ L 335, 2009). 115 A description of this process is contained in Proces przedaplikacyjny dotyczący modeli wewnętrznych na potrzeby Wypłacalności II, Zawartość pakietu przedaplikacyjnego, Warsaw, 2011, Office of the PFSA. 116 Premium retention ratio is the quotient of premiums, net of reinsurance, and gross premiums amount. 117 Claims retention ratio is the quotient of claims, net of reinsurance, and gross claims paid out. 118 Komunikat w sprawie szkód spowodowanych przez powodzie, burze oraz ulewne deszcze w okresie maj, czerwiec, sierpień i wrzesień 2010 roku, PFSA, 27 April 2011, www.knf.gov.pl. 119 Claims ratio (net of reinsurance) is a ratio of claims (net of reinsurance) to earned premium (net of reinsurance), taking into account changes in provisions for outstanding claims (net of reinsurance).

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Figure 4.6.14. Premium and claims retention ratios for non-life insurance companies, 2007−2010

92.5 % 91.6 90.9 89.7 91.6 90.0 90.1 89.8 87.6 87.5

85.0 85.0 2007 2008 2009 2010

Premium retention ratio Claims retention ratio

Source: Office of the Polish Financial Supervision Authority.

Figure 4.6.15. Claims ratios, 2007−2010

% 80 76.6 75 4

72.5 70 67.7

63.7 66.8 65 61.5 60.7 61.0 60 2007 2008 2009 2010

Claims ratio (net of reinsurance) for non-life insurance Gross claims ratio for non-life insurance

Source: Office of the Polish Financial Supervision Authority.

4.6.7. Product structure and distribution channels

In terms of collected premiums, group life insurance (the so-called employee insurance) represented the largest segment of the life insurance market (Figure 4.6.16A). It is a product specific for the Polish insurance market where the insured (covered by the insurance) is an employee, and the policyholder120 is usually the employer. To streamline procedures for concluding contracts and facilitate the selection of the variant and scope of the insurance coverage, general insurance terms and conditions (GTC) are simplified and standardised. For this reason, this insurance may be handled both by agents, company employees or employees of insurance companies who jointly had the largest share in sales of this product in 2010. Other distribution channels, including brokers and sales by telephone and Internet, had no significant share in the distribution of group life insurance (Figure 4.6.16A).

The second most important product, in terms of premium collected, was individual life insurance, including unit-linked insurance and endowment life insurance (the so-called classic insurance). Due to the specificity of individual insurance and the manner of their distribution, this type of insurance is mainly offered by insurance agents who are required to maintain permanent relation with the customer and assist the customer in the implementation of medical and legal procedures related to concluding an insurance contract. Therefore, the share of agents in the sale

120 Policyholder is a natural or legal person which contracts insurance. Unlike in group insurance, in the case of individual life insurance when a natural person enters into a contract aimed at providing the insurance coverage for its life or health, the policyholder is at the same time the insured.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 153 Financial institutions

of individual life insurance is the largest. In the case of complex agreements, a complicated legal structure and high sums insured, insurance brokers (natural or legal persons) have a more important role in the sale of such agreements than agents. However, due to high costs of such insurance and a limited demand, the share of this distribution channel in life insurance sales was not significant. Structured insurance products and anti-tax insurance (also classified as endowment life insurance) were offered mainly by banks (Table 4.6.3).

In terms of the value of premium collected, motor insurance was the most important product in the non-life insurance sector (more than 50% of collected premium) (Figure 4.6.16B). This insurance is sold primarily by insurance agents or employees of insurance companies. Moreover, some of these products were offered through auto dealers (performing services on behalf of insurance companies) as part of the package when selling new cars.

Figure 4.6.16. Insurance product structure by premium, 2007−2010

A. Life insurance B. Non-life insurance

% % 100 6 11 4 4 100 9 14 15 16 17 23 22 7 6 8 7 75 25 75 17 17 18 43 18 20 19 4 16 50 50

62 62 58 58 25 54 53 41 48 25

0 0 2007 2008 2009 2010 2007 2008 2009 2010

Group life insurance Motor (car) insurance Unit-linked individual insurance Fire and theft insurance Individual life insurance Financial insurance Other life insurance Other non-life insurance

Source: Office of the Polish Financial Supervision Authority.

Fire and theft insurance contracts for houses and flats, small and medium-sized enterprises were mainly concluded through agents, while insurance contracts for large industrial facilities, as well as financial insurance contracts functionally related to insurance against damage caused by natural forces, were concluded by brokers. When selling insurance to small and medium-sized businesses, insurance companies with a well-developed branch network (e.g. PZU) used direct sales, while medium and small-sized insurance companies that did not have their own sales channels – used the intermediation of agents and brokers. Therefore, brokers also played an important role in the non-life insurance sector (except for agents and direct sales). Sales of non-life insurance through other channels, including Internet, telephone and through banks, was marginal (Table 4.6.3).

Table 4.6.3. Share of distribution channels by gross written premium in 2010 (in %)

Group life insurance Individual life insurance Non-life insurance Direct sales 21.0 41.8 15.1 Insurance agents 78.1 49.6 67.5 Brokers 0.4 3.0 15.4 Other distribution channels 0.5 5.6 2.0

Source: Office of the Polish Financial Supervision Authority.

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4 .7 . Entities conducting brokerage activities

There are three types of institutions which conduct brokerage activities (investment firms) in the Polish market: brokerage houses, banks which conduct brokerage activities121 and foreign entities which offer brokerage services (foreign investment firms and credit institutions). The latter operate under a permit granted by the financial supervision authority of the country in which they are established, after such authority notifies the PFSA of that entity’s intention to start operations in Poland.

4.7.1. Conditions for the operation of entities conducting brokerage activities in the Polish market

The development of the brokerage services market in Poland depends mainly on price trends of equities and other financial instruments traded in an organised market, as well as on the related interest in investing in this market. The demand for services provided by entities conducting brokerage activities is also highly influenced by the interest in share issuance by companies (in Poland the issuance of these securities is mainly arranged by brokerage houses and offices) and the inflow of capital to investment funds (these entities mediate in the sale of units and charge a significant part of the distribution fee for this activity).

In 2010, the domestic capital market, as well as global markets, saw the upward trend in all major stock indices; WIG index rose by 18.77%. At the same time, the value of turnover in the 4 equity market and the market of allotment certificates increased by more than 33% as compared to 2009. The number of IPOs increased both in the WSE Main Market and in NewConnect market. A positive balance of purchases and redemptions of units of investment funds also created favourable conditions for the activities of investment firms. However, capital flew mainly into money market funds and debt securities funds, whose distribution fees are relatively low compared with equity and balanced funds or are waived.

As at the end of December 2010, there were 64 entities conducting brokerage activities in Poland, including 50 brokerage houses and 14 banks conducting brokerage activities. Brokerage houses whose majority shareholders were banks, accounted for 61% of the entire sector of brokerage houses (in terms of asset value). Key figures related to the operation of the sector of entities conducting brokerage activities are presented in Table 4.7.1.

Table 4.7.1. Key figures related to the operation of the brokerage entities sector, 2007−2010

2007 2008 2009 2010 Turnover on the stock and allotment certificates market (WSE Main Market, 239.74 165.66 175.94 234.29 PLN billion)1 Number of IPOs in markets organised by the WSE: WSE Main Market 81/24 33/61 13/26 34/86 and NewConnect2 WIG index (year end, points) 55,648.54 27,228.64 39,985.99 47,489.91 Number of brokerage entities3 53 58 59 64 Assets of brokerage entities (PLN billion) 11.8 8.6 9.9 9.2 Equity of brokerage houses (PLN billion) 2.9 3.1 2.7 2.9

1 Session turnover and block trades, net. 2 Non-regulated NewConnect equity market has been operating since 30 August 2007. 3 The number of brokerage entities does not include branches of foreign investment firms. Source: WSE, PFSA.

121 Act of 4 September 2008 amending the Act on Trading in Financial Instruments and certain other Acts (Dz.U. of 2009, No 165, item 1316) which entered into force on 21 October 2009, lifted one of the conditions for separating by the bank of the brokerage activity, consisting in keeping separate accounting books and drawing up separate financial statements on the principles defined in separate regulations (financial separation). Currently, the condition for obtaining a permit to conduct brokerage activities by the bank is only an organisational separation of these activities from other activities of the bank (organisational separation).

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 155 Financial institutions

4.7.2. Brokerage services market

During the analysed period, there was a significant increase in the number of securities accounts maintained by investment firms – from 1,133 thousand as at the end of 2009 to 1,477 thousand as at the end of 2010. These accounts were opened owing to, among other things, the interest in large privatisation offerings of state-owned companies. The WSE Main Market witnessed the IPOs of PZU, Tauron and the WSE itself.

In line with the current trend, the importance of the Internet channel increased in the distribution of brokerage services. As at the end of 2010, the number of Internet accounts amounted to 773 thousand (an increase of 84% year on year). Such a significant increase in the number of these accounts should be associated with the above mentioned interest in privatisation offerings and lower costs of brokerage services performed via internet as well as the possibility of faster execution of orders in response to changing market conditions. In the second half of the year, the share of transactions executed via Internet in the turnover of retail investors in the WSE Main Market reached a record level of 72%. This share decreased slightly in the futures market in comparison with 2009 (Figure 4.7.1).

Figure 4.7.1. Share of turnover executed via internet in the turnover of retail investors 4 in the WSE Main Market, 2007−2010 % 100

50 1st half 2nd half 1st half 2nd half 1st half 2nd half 1st half 2nd half 2007 2008 2009 2010 Equity market Futures market Options market

Source: WSE, PFSA.

Short selling is a commonly used investment technique in the developed equity markets.122 The entry into force of amendments to the Act on Trading in Financial Instruments that allow a sale of securities before recording them in a securities account of the seller and repeal the delegation for the Minister of Finance to issue a regulation on terms and conditions for securities lending, eliminated existing legal barriers for this type of transactions.123 As a result of the amendments to the WSE Rules and KDPW Rules,124 from 1 July 2010 these transactions could be executed on the Warsaw Stock Exchange on the basis of a framework agreement developed by the working group at the WSE. The most common way to acquire securities for this purpose is to borrow them under an agreement with a brokerage house maintaining a securities account. In 2010, short selling transactions could be executed on shares of 140 companies. The list of securities that may be subject to short selling transactions is published by the WSE on its website. In 2010, the total value of short sale transactions amounted to PLN 1.1 billion. The greatest activity in this segment was recorded in August, when more than 10 thousand transactions were concluded with the total value of PLN 235.6 million.

122 More information on the short selling investment strategy can be found in Box 5.2.1 in Financial System Development in Poland 2008, Warsaw 2009, NBP, pp. 225–227. 123 Article 7 paras. 5 and 5a and Article 94 amended by the Act of 4 September 2008 amending the Act on Trading in Financial Instruments and Certain Other Acts (Dz.U. of 2009, No 165, item 1316). 124 Resolution No 1/1233/2010 of the Supervisory Board of the Warsaw Stock Exchange of 17 February 2010 on the amendment of the WSE Rules and Resolution No 8/383/10 of the Supervisory Board of the National Depository for Securities dated 10 March 2010 regarding the amendment of KDPW Rules.

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At the end of the third quarter of 2010, by amending the WSE Rules, the authorities of the WSE125 decided to extend the trading session from the beginning of 2011. From 3 January 2011, a session will end one hour later than in 2010. The WSE argued that the change is necessary in order to increase the international recognition of WSE markets, and hence their attractiveness to investors and issuers of financial instruments. Moreover, according to representatives of the stock exchange, closing the trading at 17.30 will make the domestic capital market similar to the largest European stock exchanges (operating in Paris, Frankfurt and London). This change is to be the second stage of the process which started on 1 September 2008, when the Warsaw Stock Exchange decided to start trading in shares at 9.00 (previously it was 9.30).

The extension of the trading session will force the entities conducting brokerage activities to develop a new work schedule and probably to increase the employment. The previous trading hours allowed the broker to start the day with a morning market analysis and contacting customers. He transferred orders during the day, and after the close of trading he still had time to register the transaction and summarise the situation in financial markets in reports and conversations with customers. Along with the extension of the session, it can be expected that a shift system will be introduced in brokerage operations and the above activities will be divided. According to the Chamber of Brokerage Houses (IDM), there is a risk that the level of turnover generated on the WSE after the session extension will not offset additional costs that brokerage houses operating in the Polish territory will be forced to incur.126 4 In addition to the announced extension of the trading session, the proposal presented by the PFSA to abolish the licensing of securities brokers and investment advisors (Box 4.7.1) was also the subject of the debate among participants of the domestic capital market.

Box 4.7.1

PRoPoSAL To ABoLISH THE LICEnSIng oF SECURITIES BRokERS AnD InvESTMEnT ADvISoRS

In mid-2010, the PFSA presented a proposal to abolish the state licensing of securities brokers and investment advisors.1 In the light of applicable law2, the principle of double licensing functions of brokerage business exists. It requires entities wishing to conduct brokerage activities to obtain a PFSA permit to conduct such activities, as well as persons wishing to pursue the profession of securities broker and investment advisor to obtain an appropriate license.

The PFSA supports its proposal with the fact that the responsibility for the unreliable operation of investment firms is diluted. According to the PFSA, management boards of these entities sometimes tolerate or pretend not to notice irregularities in the operation of licensed persons, and if errors and omissions are detected, they charge employees with the responsibility. The abolition of state licensing of brokers and investment advisers would therefore facilitate the unambiguous identification of responsibility for abuse of the financial services market. Moreover, in the opinion of the PFSA, a removal of barriers to access to the professions of securities broker and investment advisor should help to enhance competition in the brokerage and advisory services market, resulting in lower prices for these services.

1 Komunikat KNF z dnia 1 lipca 2010 w sprawie pakietu odbiurokratyzowania rynku finansowego; the document available on the website: http://www.knf.gov.pl/Images/KNF%20spotkanie%20ws.%20pakietu%20 odbiurokratyzowania%201.07.09_tcm75-23193.pdf. 2 Articles 69 and 126 of the Act of 29 July 2005 on Trading in Financial Instruments (Dz.U. of 2005, No 183, item 1538, as amended).

125 Resolution No 23/1255/2010 of the Supervisory Board of the Warsaw Stock Exchange of 15 September 2010 on amending the WSE Rules. 126 Resolution No 3 of the Extraordinary General Meeting of the Chamber of Brokerage Houses of 22 July 2010 on the draft proposal of the Warsaw Stock Exchange to extend the trading session.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 157 Financial institutions

In its position, the PFSA also noted the problem of fictitious hiring of brokers and investment advisors to meet statutory requirements, in particular by newly established brokerage entities with a small scale of operations.

It would be advisable to analyse the PFSA’s proposal in a broader context, i.e. regulations applicable in the entire domestic financial system. A lack of uniform standards for the licensing of persons selling financial products, such as units of investment funds, mortgage loans and currency derivatives, is not advantageous from the perspective of the consumer. Although sellers of various types of financial instruments provide customers with products whose value often exceeds the nominal value of transactions executed by securities brokers, they are not required to hold a license for their activities. Therefore, a transaction with a similar risk profile may be executed, depending on the choice of the type of financial institution, by a licensed or unlicensed person. It seems therefore that any regulatory action should seek to harmonise standards for assessing the competence of persons involved in the sale of financial instruments or advice in this regard.

4.7.3. Activities of brokerage entities in an organised market

4 Brokerage entities may operate in organised markets operated by the Warsaw Stock Exchange (Main Market, NewConnect and as part of the Catalyst platform: the regulated stock exchange market and ASO) and BondSpot (as part of the Catalyst platform: the OTC regulated market and ASO).

WSE Main Market

As at the end of 2010, the status of the stock exchange member was held by 49 companies, including 28 established in Poland and 21 conducting their activities directly from abroad (from Austria, Bulgaria, Czech Republic, Cyprus, Slovakia, Estonia, France, Germany, Sweden, Hungary and the UK). The function of the WSE Main Market maker was performed by 19 stock exchange members (15 domestic and 4 foreign ones). The status of the issuer’s market maker was held by 20 stock exchange members (18 domestic and 2 foreign ones).

The largest number of IPOs (seven) was arranged in the WSE Main Market by BZ WBK Brokerage House. Initial public offerings for five companies were conducted by BOŚ Brokerage House, while three IPOs were arranged by: DM BDM, DM IDM and DM PKO BP.

In 2010, concentration on the share and allotment certificates market decreased once again – the share of five largest brokerage entities in this market turnover fell to 47.4% from 50.4% a year earlier (Figure 4.7.2). The largest entity increased its share in turnover to 14.8% (from 12.8% in 2009). There was also a significant rise in the proportion of remote stock exchange members in trading on the share and allotment certificates market to 16.7% (from 8.3% in 2009).

Taking into account the share in turnover of the three largest brokerage entities, greater concentration was observed for other financial instruments traded in the WSE Main Market (Table 4.7.2) than in the share and allotment certificates market. The largest shares in the market of investment certificates, structured products and options were held by entities which expanded their product range with such instruments relatively rapidly. On each of these segments of WSE markets, as a result of increasing competition, the combined share of the three largest entities fell in comparison with 2009. The share of remote members in the futures market dropped to 6.2% (from 5.6% in 2009), and on the options market to 6.3% (from 6.1% in 2009).

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Figure 4.7.2. Share of the largest brokerage entities in trading in shares and allotment certificates on the WSE Main Market, 2009 and 2010

A. 2009 B. 2010

30.6% 35.3% 5.6% 5.4% 6.6%

5.9% 12.8% 6.8% 14.8% 5.9% 7.2% 11.0% 6.2% 8.3% 8.5% 10.9% 7.9% 10.2%

DM BH DM BZ WBK ING Securities Ipopema Securities DI BRE Bank UniCredit CAIB DM PKO BP KBC Securities DB Securities CS Securities Other

Notes: 1. Data include: session transactions, block trades, acquisition of large blocks of shares (tender offers), public offer of sale as well as repurchase and resale transactions. 2. In 2010, UniCredit group (consisting of the following entities: UniCredit Bank AG, UniCredit CAIB AG, UniCredit CAIB Poland SA, 4 DM Pekao, CDM Pekao) had an 8.93% share in trading in shares and allotment certificates in the WSE Main Market. Source: WSE.

Table 4.7.2. Entities with the highest share in gross turnover in the WSE Main Market in 2010 (market share – %, turnover – PLN million and units)

Shares and allotment certificates Bonds Futures contracts DM BH 14.8% PLN 70,031.12 million DM PKO BP 39.8% PLN 1,763.3 million DM BOŚ 18.1% 5,072,517 units ING Securities 10.2% PLN 48,274.5 million CDM Pekao 22.1% PLN 631.9 million DI BRE Bank 14% 3,924,691 units DM BZ WBK 8.3% PLN 39,109.5 million DM BZ WBK 7.1% PLN 203.8 million DM BZ WBK 13.6% 3,823,542 units Investment certificates Structured products Options DM BZ WBK 20.1% PLN 43.0 million Raiffeisen Centrobank 40.3% PLN 230.3 million DI BRE Banku 21.2% 286,842 units DI BRE Banku 18.3% PLN 39.4 million ING Securities 12.1% PLN 69.3 million DM PKO BP 18.9% 254,538 units DM BOŚ 15.6% PLN 33.4 million DM BOŚ 11.7% PLN 66.7 million DM BZ WBK 12.3% 165,659 units

Notes: 1. Turnover was calculated for each party to the transaction (buying and selling). Therefore, the presented figures are two times greater than the value of transactions concluded in these markets. 2. For equity and allotment certificates, the data include: session transactions, block trades, acquisition of large blocks of shares (tender offers), public offer of sale as well as repurchase and resale transactions. 3. For bonds, futures contracts, investment certificates, structured products and options data include session transactions and block trades. Source: WSE.

NewConnect market

As at the end of 2010, the number of members of the NewConnect market amounted to 31 (an increase by one entity in comparison with 2009). The role of market makers for the 107 financial instruments listed on NewConnect was performed by 11 entities conducting brokerage activities.

An analysis of the structure of trading in shares on NewConnect by brokerage entities acting as intermediaries in transactions shows trends similar to trends in the WSE Main Market (Figure 4.7.3). The share in the turnover of the five largest investment firms fell to 64.3% (from 70% in 2009). A reduction of the concentration stemmed from a greater activity of entities with smaller market shares.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 159 Financial institutions

Figure 4.7.3. Share of the largest brokerage entities in trading in shares in the NewConnect market, 2009 and 2010

A. 2009 B. 2010 3.4% 3.7% 3.5% 24.4% 4.0% 18.9% 3.7% 7.5% 4.1%

8.6% 9.5%

10.7% 17.3% 24.0% 13.6% 12.0% 15.7% 15.4%

DM BZ WBK DI BRE Bank DM BOŚ CDM Pekao DM PKO BP DM Pekao ING Securities IDM SA Alior BM Other

Note: CDM is a brokerage house of bank Pekao SA, and DM Pekao is a brokerage office of that bank. Source: WSE. 4 Catalyst market

Brokerage entities also conducted activities in markets operating within Catalyst, a trading platform for debt instruments. As at the end of 2010, the status of a Catalyst member was held by:

− 48 entities in the retail stock exchange regulated market organised by the Warsaw Stock Exchange,

− 18 entities on the wholesale OTC regulated market organised by BondSpot,

− 8 entities in ASO for retail customers organised by the Warsaw Stock Exchange,

− 11 entities in ASO for wholesale customers organised by BondSpot.

Figure 4.7.4. Share in trading of the largest brokerage entities in markets comprising the Catalyst platform, 2009 and 2010

A. Markets operated by the WSEB. Markets operated by BondSpot

7.2% 4.6% 9.8% 10.5% 3.4% 24.0% 8.5% 2.1% 4.1% 12.0%

12.6% 26.5% 26.9% 33.3% 14.7% DM BPS DM BZ WBK UniCredit CAIB DI BRE Bank Copernicus Securities DM BH DM PKO BP CDM Pekao DM Millennium Other

Source: WSE.

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In 2010, operating activities in markets operated by the WSE were performed by 26 brokerage entities and on markets operated by BondSpot – by 10 entities. The role of market makers in all segments of the Catalyst platform, performing their functions for 47 series of debt instruments, was played by 5 entities conducting brokerage activities. In 2010, the largest share in trading in the markets operated by the WSE as part of the Catalyst platform was held by DM BPS. This was related to the performance by that entity of the market maker function in respect of trading in bonds of co-operative banks in ASO for retail customers.

4.7.4. Financial results

The increased activity of brokerage entities in the primary market translated into an increase in commissions revenues related to offering financial instruments. In the case of brokerage houses which drew up financial statements in accordance with the Polish accounting principles, these revenues amounted to nearly PLN 100 million in 2010 (PLN 56.6 million in 2009). An increase in revenue was also recorded in the case of commissions charged for transactions in securities in the secondary market (by 5.6% compared to 2009) and commissions for intermediation in trading in units of investment funds (by 21.5% compared to 2009). At the same time, revenues for discretionary management of a securities portfolio decreased (by 17.7% compared with 2009). 4 Figure 4.7.5. Pre-tax earnings and pre-tax profit margin ratio of brokerage offices and houses, 2003−2010

PLN million % 2,100 60 1,875.4 49.9 1,750 50 44.2 50.9 39.7 1,400 36.3 40 1,191.4 1,181.8 1,076.9 31.1 1,050 30 24.6 29.2 894.2 716.4 20 700 524.7 350 249.9 10

0 0 2003 2004 2005 2006 2007 2008 2009 2010

Pre-tax earnings – left-hand scale Pre-tax proﬁt margin ratio – right-hand scale

Notes: Data for 2010 do not include brokerage offices on account of changes in the law. In 2009, pre-tax earnings of brokerage offices constituted 11.67% of cumulative pre-tax earnings of brokerage offices and houses. Two brokerage houses whose fiscal year is different than the calendar year are not included. Source: PFSA.

In the same group of entities, staff costs and other non-staff costs rose by 18.7% and 94.9% respectively in the analysed period. One of the reasons for the increase in these costs was the growth in headcount and modernisation of infrastructure associated with the preparation of these entities for extended hours of the trading session from the beginning of 2011.

Higher revenues related to public offerings and intermediation in trading in financial instruments did not offset rising costs of brokerage activity. As a result, pre-tax earnings and the pre-tax profit margin ratio127 for 2010 of entities conducting brokerage activity declined in comparison with 2009 (Figure 4.7.5).

127 Pre-tax profit margin calculated as the ratio of pre-tax earnings to revenues from operations.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 161 Financial markets

5 Financial markets

5 .1 . Money market

5.1.1. Evolution of the money market: size and structure

The year 2010 was the period of stabilisation in the domestic money market and of increased liquidity in the deposit transactions market (Table 5.1.1). There was an increase in activity in conditional transactions market, where average daily turnover reached the level higher than before the intensification of the global financial crisis in 2008, and in the FX swap market. On the other hand, in the segment of unsecured interbank deposits, the value of transactions dropped slightly as compared with 2009. The improvement of the situation in the domestic financial market and the diminishing demand in the banking sector for the instruments offered under the Confidence Package led the NBP to gradually limit the use of these tools.

The FX swap remained the most liquid domestic money market instrument. A significant part of FX swap transactions was used by non-residents for financing their investments in the 5 domestic capital market, in particular in the Treasury bond market. Low credit limits imposed by banks on one another and keeping monetary surpluses in the NBP by using standing deposit facilities limited the turnover in the unsecured interbank deposits market and determined their term structure – still almost exclusively one-day transactions were concluded. As in previous years, SBB/BSB transactions with non-bank entities dominated in the market of conditional transactions. The interbank repo market remained underdeveloped.

In 2010, the NBP bill market became the largest segment of the short-term debt securities market. The significant increase in the value of these instruments issued and outstanding resulted from the growing excess liquidity in the domestic banking sector. At the same time, the strategy of extension of maturity dates of the public debt applied consistently by the Ministry of Finance resulted in a significant decrease of the scale of issue of Treasury bills and the outstanding value of those instruments.

Table 5.1.1. Outstanding value of money market individual instruments as of year-end and value of turnover in the deposit transactions market, 2007–2010 (PLN billion)

2007 2008 2009 2010 Debt securities market (outstanding value as at the end of the period) Treasury bills 22.6 50.4 47.5 28.0 NBP bills 7.8 10.2 41.0 74.6 Short-term bank debt securities 2.9 2.1 3.0 2.6 Short-term corporate bonds 10.6 11.6 6.2 11.7 Deposit transactions market (average daily net turnover) Unsecured deposits (interbank deposits) 11.5 10.3 7.3 7.0 FX swaps 12.5 11.7 9.4 10.9 repo/SBB/BSB transactions 9.0 8.8 8.1 10.0

Note: Due to the adjustments made, the data may differ from the data presented in previous versions of the study. Source: NBP.

162 National Bank of Poland Financial markets

Enterprises infrequently financed their operating activity through the issue of short-term debt securities. Although the outstanding value of those instruments at the end of 2010 amounted to PLN 11.7 billion and was significantly higher than in 2009, this resulted mostly from the concentration of their issue in the fourth quarter of 2010. The banks operating in Poland rarely financed their operations through the issue of debt securities in the money market.

5.1.2. Short-term debt securities market

5.1.2.1. Treasury bills

Market size

In 2010, the significance of Treasury bills in the financing of State Treasury borrowing needs gradually decreased. The average value of traded Treasury bills in 2010 was PLN 40.1 billion (in 2009, it was over PLN 56.5 billion). The fall of the average outstanding value of Treasury bills resulted from the increase in the demand for Treasury bonds and the issuance policy of the Ministry of Finance. Following the improvement of the situation and decrease of the risk aversion in the global financial market, investors showed greater interest in instruments with longer maturity than in the previous two years. In response to the growth of demand for Treasury bonds, the Ministry of Finance continued the gradual reduction of issue of Treasury bills launched in the second half of 2009, in line with the adopted The Public Finance Sector Debt Management Strategy in the Years 2010-12.1 These activities were aimed at limiting the risk of refinancing the debt by extending its average maturity. Moreover, due to the advanced financing of borrowing needs and better than expected implementation of the State budget, towards the end of the year the Ministry of Finance significantly reduced the number of issues of Treasury bills. In November and December, there were no auctions for these instruments. 5 In order to avoid the excessive accumulation of expenditure due to redemption of Treasury securities, in 2010 the Ministry of Finance increased the scale of early redemption of Treasury bills as compared with the previous year. In 2010, there were four buy-back auctions for these instruments, one in July, one in August and two in December. The interest of investors was lower than expected. From the bills offered for buy-back of the total amount of PLN 31.4 billion, the early redemption of bills in the amount of PLN 6.2 billion succeeded, out of which PLN 6.0 billion in December.

As a result of the policy of the Ministry of Finance, the outstanding value of Treasury bills fell from PLN 48.1 billion as at the end of 2009 to PLN 28.0 billion as at the end of 2010. The share of Treasury bills in the total outstanding value of Treasury securities decreased by nearly a half from 10.2% to 5.5% (Figure 5.1.1).

Figure 5.1.1. Treasury bills (amounts outstanding) and the share of Treasury bills in the outstanding value of Treasury securities issued in 2007−2010 (as at period-ends)

PLN billion % 70 28 60 24 50 20 40 16 30 12 20 8 10 4 0 0 I III V VII IX XI I III V VII IX XI I III V VII IX XI I III V VII IX XI 2007 2008 2009 2010

Treasury bills outstanding value – left-hand scale The share of Treasury bills in the outstanding value of Treasury securities – right-hand scale Source: NBP, MF.

1 The Public Finance Sector Debt Management Strategy in the Years 2010-12, Warsaw 2009, Ministry of Finance.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 163 Financial markets

In the euro area, there was no such considerable fall of the share of Treasury bills in the financing of borrowing needs of individual states. Due to the fiscal problems of some of its members and an associated increase in credit risk, reflected among others in the quotations of CDS transactions for Treasury bonds, the share of Treasury bills in the total outstanding value of Treasury securities dropped only by 0.83 percentage points to 12.2% at the end of 2010.2

Primary market

Treasury bills are sold in the primary market within the Primary Dealers System (DSPW). It is a primary wholesale market which can be accessed by institutions selected in a competition each year.3 BGK is also entitled to participate in the auctions pursuant to a separate agreement with the Minister of Finance. The sale of Treasury bills takes place in auctions in multi price auction system, namely the participants purchase Treasury bills at the declared price which is not lower than the minimum price set by the issuer. The auctions are organised by the NBP which is also the issue agent and which manages the depository and settlement system for these debt securities. In 2010, the number of entities acting as Primary Dealers increased to 12, as compared with 11 in 2009. Among them there were eight domestic banks, one foreign branch of a credit institution operating in Poland and three credit institutions from the EU.

In 2010, the value of Treasury bills sold by the Ministry of Finance amounted to PLN 35.0 billion, as compared with PLN 55.6 billion in 2009. Apart from the factors mentioned above, the lower issue value was also influenced by the extended term structure of the bills offered (Table 5.1.2). In 2010, the Ministry of Finance organised 34 auctions for 52-week bills. Bills with different 5 original maturity were offered only in two auctions.

Table 5.1.2. Time structure of Treasury bills issued in 2007–2010 (%, by value of bills sold in the primary market)

Treasury bills 2007 2008 2009 2010 13-week 5.9 21.4 0.0 0.0 26-week 0.0 14.7 10.3 0.0 39-week 2.6 3.8 0.9 3.3 52-week 68.7 51.6 83.8 92.8 Other 22.8 8.5 5.0 3.9 Total 100.0 100.0 100.0 100.0 Average original maturity (in weeks) 38.9 35.1 48.3 51.4

Note: The “Other” category includes: 6-week bills in 2007, 2-day and 3- and 6-week bills in 2008, 25-, 28- and 49-week bills in 2009, 48-week bills in 2010. Source: Calculated on the basis of the data of the Ministry of Finance.

The value of Treasury bills issued in individual months depended mostly on the current borrowing needs of the State Treasury and the demand for specific types of Treasury securities declared by the investors (Figure 5.1.2). The improvement of the situation in Polish economy was one of the reasons why the budget implementation in 2010 was better than planned, which in conjunction with the growing demand for Treasury bonds enabled the Ministry of Finance to finance the borrowing needs with more flexibility, including the resignation from the sale of Treasury bills in November and December 2010. The frequency and number of Treasury bill auctions also dropped. In 2010, 36 auctions were organised, against 48 in 2009. The average value of Treasury bills sold in the primary market in 2010 amounted to PLN 973.5 billion, while in 2009 it amounted to PLN 1,323.3 billion.

2 Calculated on the basis of ECB data available at the website www.ecb.int/stats/money/securities/debt. 3 Rules for the system’s operation are established in the annual Regulations on Performing the Function of Primary Dealers. The activity in the domestic market of Treasury debt securities is the main criterion for the selection of Primary Dealers.

164 National Bank of Poland Financial markets

Figure 5.1.2. Monthly value of Treasury bill issued in 2007–2010 at Treasury bills auctions and the monthly balance of the State budget

PLN billion PLN billion 12 12

10 8

8 4

6 0

4 -4

2 -8

0 -12 I III V VII IX XI I III V VII IX XI I III V VII IX XI I III V VII IX XI 2007 2008 2009 2010 Treasury bills issued – left-hand scale Monthly balance of the State budget – right-hand scale

Source: NBP, MF.

In 2010, a further increase in demand for Treasury bills in relation to their supply was noted. Bids for these instruments exceeded the planned supply over 3 times (in 2009, the ratio was 2.8). Higher reductions of the declared demand for Treasury bills resulted from the limitation of its supply and concentration of demand for these instruments in a smaller number of auctions. It was one of the factors which contributed to lowering of the cost of Treasury bills issues in comparison with the second half of 2009 (Figure 5.1.3). The average yield on 52-week Treasury bills in the primary market throughout 2010 was lower than in the previous year and was below the 1y WIBOR rate. 5

Figure 5.1.3. Yield on money market instruments, 2007–2010

% 7.5 7.0 6.5 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 I III V VII IX XI I III V VII IX XI I III V VII IX XI I III V VII IX XI 2007 2008 2009 2010 The yield on 52-week Treasury bills in the primary market 1Y WIBOR rate Average interest on new household deposits Average interest on new corporate deposits Note: The interest on household deposits and corporate deposits refers to the average interest of new zloty denominated businesses with maturity date from six months to one year inclusive. Source: NBP.

Secondary market

The liquidity of the Treasury bills market in Poland in recent years has been highly volatile. The secondary market turnover is influenced by the changes of the value of the instruments issued and outstanding. In 2010, the average daily value of transactions was almost 14% lower than in 2009 and amounted to PLN 2.1 billion (Table 5.1.3). A decrease in turnover was observed in the segment of conditional transactions. The lower value of Treasury bills issued and outstanding and an associated decrease in the value of portfolios of these instruments in domestic banks limited the possibilities to use them as collateral in conditional transactions. In 2010, conditional transactions accounted for less than 61.8% of net turnover in the domestic market of Treasury bills. Among the conditional transactions secured by Treasury bills, the sell-buy-back/buy-sell-back

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 165 Financial markets

(SBB/BSB) transactions dominated; as in the previous year they constituted approximately 93% of all conditional transactions. In the case of outright transactions, similarly to the previous years, the increase in the value of turnover was noted.

The decrease of average net monthly turnover in the market of Treasury bills was lower than the average value of these instruments traded, which resulted in a considerable improvement of the liquidity ratio of this market. The ratio for the whole secondary market of Treasury bills increased from 0.92 in 2009 to 1.12 in 2010. For outright transactions, the ratio of average net value of turnover to the average outstanding value was 0.29 and 0.43, respectively.

Table 5.1.3. Average daily net turnover in Treasury bills, 2007−2010 (PLN billion)

2007 2008 2009 2010 Net turnover, of which: 0.40 1.24 2.45 2.11 – outright transactions 0.17 0.33 0.77 0.81 – conditional transactions 0.23 0.91 1.68 1.30

Note: Average daily turnover calculated on the basis of the following numbers of working days: 252 days in 2007, 254 days in 2008, 255 days in 2009 and 256 days in 2010. Source: NBP.

Table 5.1.4. Monthly net turnover in Treasury bills by transaction type, 2007−2010

PLN billion 80 70 5 60 50 40 30 20 10 0 I III V VII IX XI I III V VII IX XI I III V VII IX XI I III V VII IX XI 2007 2008 2009 2010 Outright transactions Repo transactions SBB/BSB transactions Note: Conditional transactions calculated individually, i.e. according to the initial exchange value. Source: NBP.

The main participants in the secondary market of Treasury bills included domestic banks, constituting the largest group among the entities acting as Primary Dealers. The share of transactions between domestic banks and non-bank domestic investors in gross turnover in the secondary market of Treasury bills rose from 55.3% in 2009 to 58.7% in 2010. The banks resold the bills purchased in auctions to other investors. In 2010, there was a considerable increase in the share of non-residents in the turnover – from 5.7% in 2009 to 13.3% in 2010.

Secondary trading in Treasury bills occurred mostly in an unregulated OTC market (99.5% of turnover value), despite the considerable increase in the number and value of transactions concluded with the use of electronic Treasury BondSpot Poland platform. The average monthly value of net turnover in 2010 was almost PLN 415 million (in 2009, it was only about PLN 100 million). Almost 35% of transactions concluded via this platform in 2010 were conditional transactions (in 2009, no transactions of this type were concluded). The growth of this market segment could be connected with enabling general collateral transactions at the end of 2009, which may be collateralised by any instruments among debt securities established by the market organiser. For Treasury BondSpot Poland, these are all Treasury bills listed in this market.

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Investors

In 2010, domestic banks remained the most important group of investors in the Treasury bills market (Figure 5.1.5). However, the value of bills held by these institutions decreased more than twice from PLN 32.7 billion in December 2009 to PLN 15.9 billion as at the end of 2010, and their share in the structure of buyers decreased to 56.8%. However, in relation to the average involvement throughout the year, this fall was smaller. The average value of Treasury bills portfolio owned by these institutions decreased from PLN 38.3 billion in 2009 to PLN 26.5 billion in 2010. It was influenced by the aforementioned limitation of issue of Treasury bills and their early redemption in December, which enabled domestic banks to decrease their involvement in this market. The fall of the share of domestic banks in the investor structure could also be driven by the gradual discontinuing by NBP of liquidity providing operations. Some of the funds obtained in these operations were invested by domestic banks in the Treasury bills market.

Foreign entities were the second category of investors in the Treasury bills market in terms of the size of involvement; they increased their share in the structure of buyers to 12.5% as at the end of 2010. The observed inflow of foreign investors in the market of Polish Treasury debt securities, including the purchase of Treasury bills, could be a result of positive assessment of the fundamentals of the Polish economy against other EU countries, as well as of the higher level of interest rates as compared with the countries characterised by a similar level of investment risk.

Apart from non-residents, increased involvement in the Treasury bills market was also displayed by pension funds, their portfolio increased almost twice, achieving the value of PLN 1.7 billion as at the end of 2010. Throughout the year, the value of Treasury bills in the portfolios of these institutions fluctuated considerably – from PLN 0.4 billion in March to PLN 3 billion in November. Its average value was approximately PLN 1.6 billion. The growth of interest of pension 5 funds in Treasury bills investments was observed in the periods of elevated uncertainty in financial markets, which may mean that investments in these instruments were considered a temporary safe form of deposit. The positive balance of inflow of capital to investment funds, including the high interest in participation units of money market funds, contributed to the growth of share of this group in the structure of buyers of Treasury bills.

Figure 5.1.5. The structure of buyers of Treasury bills, 2009−2010 (by outstanding value as at period-ends)

A. 2009 B. 2010

1.1% 0.3% 5.6% 2.7% 8.9% 2.9% 5.3% 9.2% 6.2% 8.6% 6.9% 4.1%

12.5%

68.9% 56.8%

Banks Foreign investors Insurance companies Pension funds Investment funds Individuals Non-ﬁnancial entities Other entities

Source: NBP.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 167 Financial markets

5.1.2.2. NBP bills

The issue of NBP bills is the main open market operation performed by the NBP. The value of money market bills offered in auctions depends on the forecasted scale of excess liquidity in the domestic banking system. The central bank uses this instrument to absorb excess liquidity and in this way determines short-term interbank deposits interest rates at the level close to the reference rate established by the Monetary Policy Council (MPC).

Market size

In 2010, there was a further significant growth of the excess liquidity of the banking sector, measured by the balance of NBP bills issued and outstanding. The growth of banks’ operating liquidity resulted mainly from the purchase by NBP of foreign currencies from EU funds and the foreign currency account of the Ministry of Finance. As a result of these operations, the liquidity of the banking sector grew by PLN 55.2 billion over the year. Its growth was additionally impacted by the 29 July 2010 payment of approximately PLN 4.0 billion from the NBP profit for 2009 to the State budget. The increase of required reserve maintained on the current accounts of the NBP and the growth in notes and coins in circulation, caused mainly by the increase in deposits in banks, were the main factors contributing to a diminishing liquidity of the banking sector. Over the year, the average level of notes and coins increased by PLN 0.5 billion.4 On the other hand, the reserve requirement of banks as at the end of 2010 was by PLN 5.8 billion higher than at the end of 2009. With the improvement of the liquidity position of the banking sector in autumn, the MPC decided to increase the reserve requirement ratio by 50 basis points, from the reserve requirement maintenance period beginning on 31 December 2010.5 As a result, the reserve requirement ratio was established at the level from before 30 June 2009 (lowering the rate in 2009 was aimed at restoring the efficient functioning of the money market by 5 providing the banking sector with additional liquidity). Due to the time of its introduction, the change had minor influence on limiting the operating liquidity of banks in 2010.

Moreover, the liquidity of the banking sector in 2010 was still influenced by repo operations used by the NBP under the so-called Confidence Package (Box 5.1.1). As a result, zloty funds in the money market increased on an average annual basis by PLN 5.1 billion. Bilateral FX swap operations, which in 2008–2009 served to provide banks with foreign currencies and at the same time contributed to limiting zloty liquidity, were not used in 2010.

Figure 5.1.6. NBP bills issued and outstanding, 2007−2010 (as at month-ends)

PLN billion 100 90 80 70 60 50 40 30 20 10 0 I III V VII IX XI I III V VII IX XI I III V VII IX XI I III V VII IX XI 2007 2008 2009 2010 Source: NBP Securities Register.

The scale of issue of NBP bills in 2010 was considerably increased in response to a strong growth of excess operating liquidity of the banking sector, caused mainly by the aforementioned autonomous factors. On an average annual basis, the value of NBP bills issued and outstanding

4 More on the factors determining the liquidity of the banking system in 2010 in Monetary policy instruments of the National Bank of Poland, 2010, Banking sector liquidity, Warsaw 2011, NBP, pp. 9–18. 5 Resolution No 9/2010 of the Monetary Policy Council of 27 October 2010 amending the resolution on the reserve requirement ratios of banks and interest rates on the required reserve (Dz.Urz. NBP of 2010, No 15, item 16).

168 National Bank of Poland Financial markets

was PLN 75.0 billion, which means an increase by 135.1% against the average level in 2009 (PLN 31.9 billion) (Figure 5.1.6). The value of issues of NBP bills could have been higher. In the situation of persistent uncertainty in global financial markets and relatively low credit limits, banks still preferred to keep current excess liquidity in the central bank on current accounts or by using standing deposit facility and did not always invest all available funds in NBP bills.

Primary market

Since 2005, the NBP has conducted main open market operations by issuing NBP bills with the maturity of 7 days.6 Since 1 January 2006, all banks operating in Poland which meet the technical requirements related to performing open market operations, as well as the Bank Guarantee Fund, can take part in NBP bills actions for bills issued as part of main operations.7 In accordance with the provisions in force since 7 November 2008, the NBP Management Board could, in justified circumstances, allow all banks meeting the necessary technical requirements8 to participate in fine-tuning operations. Earlier, only Money Market Dealers (DRP) were authorised to participate in auctions for NBP bills issued as part of fine-tuning operations.9 The provisions in force since 1 November 2010 preserve the possibility to conduct fine-tuning operations with counterparties that do not hold the status of Money Market Dealers in justified cases.10

The yield on NBP bills was equal to the current reference rate established by the MPC.11 Auctions for NBP bills as part of main open market operations were held regularly once a week, each Friday.12 On 8 and 21 December 2010, the NBP conducted NBP bills auctions as part of fine- tuning operations. These operations, with 2- and 3-day maturity, were aimed at the stabilisation of the POLONIA rate around the NBP reference rate.

In 2010, in line with the monetary policy guidelines, the central bank influenced the liquidity in the banking sector via open market operations in order to enable the POLONIA rate to settle 5 around the NBP reference rate.13 The volatility of the POLONIA rate in the analysed period decreased to 38 basis points from 51 basis points in 2009, however, it still remained higher than before the turmoil in the domestic money market in 2008 (Figure 5.1.7). However, the average derivation of this rate from the reference rate was 69 basis points, as compared with 89 basis points in 2009 (after recalculating the reference rate on the basis of 365 days per year). Although the situation in the domestic money market stabilised, the POLONIA rate often decreased towards the deposit rate at the end of the reserve requirement maintenance periods. This resulted from the reduced interest of banks in participating in the last open market operation in a given reserve requirement maintenance period, since banks decided to maintain a liquidity buffer. Other short- term interbank deposit reference rates also showed lower volatility. For example, the average deviation of the SW WIBOR rate from the reference rate amounted to approximately 17 basis points in 2010 (after recalculating the reference rate on the basis of 365 days per year) and it was lower than the average deviation in the previous year by almost 6 basis points.

6 Resolution No 14/2004 of the Monetary Policy Council of 14 December 2004 on the principles of conducting open market operations (Dz.Urz. NBP of 2004, No 21, item 39) as amended by the Resolution No 20/2008 of the Monetary Policy Council of 23 December 2008 on the principles of conducting open market operations (Dz.Urz. NBP of 23 December 2008). 7 Act of 14 December 1994 on the Bank Guarantee Fund (consolidated text: Dz.U. of 2000, No 9, item 131, as amended) and Resolution No 30/2003 of the Management Board of the NBP of 12 September 2003 on issuing NBP money market bills (Dz.Urz. NBP of 2003, No 15, item 24). 8 The Resolution of the Management Board of the NBP No 47/2008 of 16 October 2008 amending the resolution on the introduction of the “Rules of maintaining of securities deposit accounts and handling operations on securities and their registration on deposit accounts of the securities by the National Bank of Poland” (Dz.Urz. NBP of 2008, No 18, item 22). 9 These banks are selected each year in a competition on the basis of uniform criteria of the Dealer Activity Index developed by the NBP. 10 Resolution No 56/2010 of the Management Board of the NBP of 21 October 2010 on the criteria for participation of domestic banks, branches of foreign banks and branches of lending institutions in open market operations carried out by the National Bank of Poland (Dz.Urz. NBP of 2010, No 14, item 15). 11 Resolution No 11/2007 of the Monetary Policy Council amending the Resolution on the principles of performing open market operations (Dz.Urz. NBP of 2007, No 17, item 31). 12 Where Friday was a statutory holiday, auctions were held on Thursday. 13 Polish Monetary Policy Guidelines for 2010, Warsaw 2009, NBP, p. 16.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 169 Financial markets

Figure 5.1.7. Deviation of the POLONIA rate from the NBP reference rate, 2008–2010

basis points 160 140 120 100 80 60 40 20 0 -20 -40 -60 -80 -100 -120 -140 -160 I III V VII IX XI I III V VII IX XI I III V VII IX XI 2008 2009 2010

Source: NBP.

Figure 5.1.8. The POLONIA rate and NBP deposit, Lombard and reference rates, 2009–2010

% 7

3 5 2 1 III III IV VVI VII VIII IX XXI XII III III IV VVI VII VIII IX XXI XII 2009 2010 Reference rate Lombard rate Deposit rate POLONIA

Source: NBP.

Figure 5.1.9. The nominal value of bills issued and the ratio of demand to supply in the primary market of NBP bills, 2009–2010

PLN billion 100 5.0 90 4.5 80 4.0 70 3.5 60 3.0 50 2.5 40 2.0 30 1.5 20 1.0 10 0.5 0 0.0 XIIXIXIXVIIIVIIVIVIVIIIIIIXIIXIXIXVIIIVIIVIVIVIIIIII 2009 2010

The nominal value of NBP bills accepted – left-hand scale Submitted demand for/supply of NBP bills – right-hand scale Source: NBP.

In 2010, the demand for NBP bills declared in auctions was close to the supply offered (Figure 5.1.9). Banks usually made bids which were slightly lower than the supply offered (the so-called underbidding), however in some auctions the demand exceeded the supply (the so-called overbidding). Underbidding was associated with maintaining relatively low credit limits imposed on one another by domestic banks. As a result, the banks did not invest all excess liquid funds in NBP bills, but they maintained liquidity buffers. Such strategies were frequently used

170 National Bank of Poland Financial markets

towards the end of the reserve requirement maintenance period, in particular in the months closing a quarter, which resulted from the intention to avoid using the NBP Lombard loans at the end of the reporting periods. Moreover, the reasons of underbidding may include the growing level of surplus funds at the disposal of the Ministry of Finance. Since the banks did not know in which institutions and for how long these surpluses would be deposited. In consequence, banks were not certain to receive these surpluses, therefore, they did not present them in their own liquidity position forecasts.

Secondary market

NBP bills were traded in the unregulated OTC interbank market. On account of the functions of these instruments and their short original maturity, the secondary market of money market bills is characterised by low liquidity. In 2010, the average daily net turnover in this market amounted to PLN 0.21 billion and was higher by approximately 50% in comparison with the turnover in the previous year (PLN 0.14 billion), however, the average daily number of transactions fell from 2.3 to 1.7. Outright transactions prevailed. The share of repo operations collateralised by NBP bills in net turnover in the market of these instruments was approximately 10%.

Figure 5.1.10. Monthly net turnover in the secondary market of NBP bills, 2007–2010

PLN billion 18 16 14 12 10 8 5 6 4 2 0 III III IV VVI VII VIII IX XXIXII III III IV VVI VII VIII IX XXIXII III III IV VVI VII VIII IX XXI XII III III IV VVI VII VIII IX XXI XII 2007 2008 2009 2010

Note: The values presented include both outright transactions and repos. For repo transactions, the initial and final exchange values have been taken into account. Source: NBP Securities Register.

5.1.2.3. Short-term bank debt securities14

The domestic market of short-term bank debt securities (SBDS) includes bonds and bank securities (instruments issued under the Banking Law Act, also referred to as certificates of deposit) with original maturity of up to one year. Both types of these debt securities could be issued in Poland by commercial banks and cooperative banks.15

Market size

As at the end of 2010, the value of SBDS issued and outstanding was lower than at the end of 2009 and amounted to PLN 2.6 billion (Figure 5.1.11). The banks operating in Poland are rarely funded by issuing debt securities in the money market, which is indicated by the low share of SBDS in liabilities of the banking sector. This share decreased slightly from 0.29% as at the end of 2009

14 Due to the change in the bank reporting system, data on bank debt securities for 2009 and 2010 are taken from the Reporting Information System (SIS) and data for the previous periods – from the Banking Reporting Information (BIS). Due to the differences in reporting methodology, data from these two sources are not fully comparable. 15 Cooperative banks may, with permission from the affiliating bank, issue bank securities and incur liabilities associated with the issue of bank securities as of 28 August 2009. They were enabled to do so by the amendment to the Act on the Operations of Cooperative Banks, their Association and Associating Banks – Act of 1 July 2009 Amending the Act on the Operations of Cooperative Banks, their Association and Associating Banks (Dz.U. of 2009, No 127, item 1050).

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 171 Financial markets

to 0.23% as at the end of 2010. As in previous years, total liabilities of the banking sector arising from short-term debt securities resulted from issues for the domestic market.

Figure 5.1.11. Outstanding value of SBDS in the domestic market, 2007–2010 (as at period-ends)

PLN billion % 3.5 32.4 35 2.9 3.0 3.0 30 2.6 24.4 2.5 26.3 25 2.1 25.5 2.0 20 1.5 15 1.0 10 0.5 5

0.0 0 2007 2008 2009 2010

Outstanding value of SBDS issued by banks in the domestic market – left-hand scale Share of SBDS in the outstanding value of debt securities issued in Poland by domestic banks – right-hand scale Note: Infrastructure bonds issued by BGK for the National Road Fund were not included in the liabilities of domestic banks arising from the issues of own securities. Source: NBP.

The year 2010 saw a considerable increase in the number of SBDS issues, namely from 124 5 in 2009 to 241. Their value also increased respectively from PLN 7.7 billion to PLN 9.3 billion. Issuing bank securities is not subject to the provisions of the Act on Public Offering. Therefore, banks do not need to draw up a prospectus or obtain a permit from the PFSA for their sale. However, pursuant to the Banking Law Act they are obliged to notify the PFSA of the intention to issue such securities.16 In terms of value, bank securities constituted approximately 87.6% of all SBDS issues conducted in 2010. Short-term bank bonds were sold through non-public offering and were not traded in the organised markets.

SBDS issues were often performed within one programme and took place on the day of maturity of instruments from the previous issue. Short-term bank debt securities were mainly denominated in PLN and had a relatively low value (the average value of a single issue was PLN 10.5 million). As in previous years, these instruments were mostly issued by commercial banks specialising in extending consumer loans and with a small deposit base as well as by car-financing banks and one mortgage bank. In 2010, cooperative banks did not issue SBDS.

Secondary market and investors

SBDS were traded outside the organised market. Data on the value of transactions in these instruments are not available. The information received from banks which arrange issues shows that the transactions are performed very rarely. Due to very short original maturity, investors keep the instruments until their maturity date.

The structure of investors in the SBDS market is diversified and depends on the legal form of these instruments. The most important groups of investors in the SBDS market were banks and enterprises that used these instruments as an alternative for bank deposits (Figure 5.1.12). In 2010, the involvement of investment funds in the SBDS market increased, which was facilitated by the large interest in the participation units of money market funds and the intention of their managers to obtain higher rates of return than the yield on Treasury bills.

16 Article 89 para. 2 of the Banking Law Act of 29 August 1997 (consolidated text: Dz.U. of 2002, No 72, item 665, as amended).

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Figure 5.1.12. Investors in the market of short-term bank debt securities, 2008−2010 (as at period-ends)

% 100 3.0 4.3 2.7 2.4 6.3 13.5 14.2 16.3 2.1 24.9 20.0 3.6 80 40.0 3.2 24.3 18.8 60 17.4 4.5 5.6 14.4 7.1 45.5 3.0 40 77.6 55.0 53.7 1.1 20 42.4 46.8 23.6 0 2008 2009 2010 2008 2009 2010 Bank securities Bank bonds

Banks Insurance companies Investment funds Enterprises Households Non-residents Other Source: NBP study based on data received from the group of banks acting as depositaries.

5.1.2.4. Short-term corporate bonds

The domestic market of short-term corporate bonds (SCB) includes debt instruments with the original maturity period of up to one year inclusive, issued by non-financial corporations, other financial intermediaries and financial auxiliaries in Poland.17 5 Market size

As at the end of 2010, the outstanding value of SCB issued was approximately PLN 11.7 billion (Table 5.1.4). As compared with the previous year, this meant an increase by over 88%. In the analysed period, issues of the value of PLN 68.8 billion were conducted (by PLN 18.1 billion less than in 2009). This significant growth in SCB in trading as at the end of 2010 with a decrease in gross issues resulted from the base effect, namely the effect of very low outstanding value of these instruments as at the end of 2009 and heightened activity of enterprises in issuing SBDS in the fourth quarter of 2010. The average monthly value of issues in the last quarter of 2010 was approximately PLN 7.7 billion, and in the third quarter – PLN 5.4 billion.

Figure 5.1.13. Outstanding value of SCB issued in selected European countries and in Poland, and ratio of outstanding value of SCB issue to GDP, 2009−2010

EUR billion % 140 35 120 114.0 30 187.7 96.6 100 168.5 25 80 20 60 14.1 15

40 7.7 10 23.2 22.3 23.0 23.6 23.8 23.5 20 16.9 14.8 3.2 5 2.1 1.2 10.8 8.6 1.6 2.9 0.9 1.4 0.8 0 0 Euro area Great Britain France Germany Portugal Spain Belgium Poland

Outstanding value as at the end of 2009 – left-hand scale Oustanding value as at the end of 2010 – left-hand scale SCB to GDP ratio at the end of 2010 – right-hand scale

Source: NBP study based on data from Statistical Data Warehouse, ECB.

17 The above categories of issuers correspond to the sectoral division of the economy of the European System of Accounts 95. The term “enterprise” used later in the text of the chapter includes the three categories mentioned above.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 173 Financial markets

In 2010, the ratio of the outstanding value of SCB issue to GDP in Poland was approximately 0.8%. In the euro area, enterprises used the issue of short-term debt securities relatively more often than in Poland and the ratio was higher. It amounted to 2.1% (Figure 5.1.13).

Table 5.1.4. Outstanding value of SCB issued and value of new issues, 2007–2010 (PLN billion)

2007 2008 2009 2010 Outstanding value 10.6 11.6 6.2 11.7 Value of new issues 65.3 87.5 86.9 68.8

Source: Estimation by the NBP based on data from the NBP.

Market structure

Similarly to previous years, short-term corporate bonds were most frequently issued by non- financial corporations. Their share in the outstanding value of these instruments as at the end of 2010 was 96%. The largest issues were conducted by public companies from the energy, construction and telecommunications sectors and by companies from the oil industry. The remaining outstanding value was mostly the issues conducted by leasing companies. The group of enterprises issuing SCB in 2010 included mostly the existing issuers. They rolled over the issues under programmes signed earlier.

The use of the strategy to roll over the issues of SCB influenced the time structure of corporations’ outstanding amounts of these instruments. The debt securities with the original maturity of up to 5 1 month still dominated. The issuers included companies which have been issuing SCB with very short maturity for years (e.g. 7-day) and direct them in full to affiliated companies. In 2010, the enterprises actively managed their liquidity via short-term instruments, they did not, however, show such a significant interest in SCB issues with the shortest maturity, as it happened in the period of economic slowdown in 2009. Therefore, there was an increase of the share of SCB with maturity over 3 months. The majority of issues were denominated in PLN and instruments denominated in other currencies were very rare. SCB had no rating and constituted unsecured instruments.

Figure 5.1.14. The share of banks acting as issue arrangers in the market of SCB traded as at the end of 2009 and 2010

A. 2009 B. 2010

10.7% 9.5% 5.3% 10.2% 27.6% 40.5%

10.0%

27.1%

13.2% 28.3% 10.4% 7.3% ING Bank Śląski Bank Handlowy Pekao SA PKO Bank Polski BRE Bank Other

Source: NBP study based on data received from a group of banks acting as depositaries and data from Fitch Polska SA.

Similarly to previous years, the issues of SCB were arranged by a dozen or so of banks with a stable position in the corporate banking segment. They also often performed many other functions associated with the issues of these debt securities, e.g. of a depositary, paying agent, documentation agent, guarantor and dealer. The market of entities handling SCB issues was very

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concentrated. As at the end of 2010, three of the largest issue arrangers accounted for approximately 78% of the outstanding value of SCB (Figure 5.1.14). This situation was caused by the fact that large enterprises frequently conducted a considerable number of SCB issues within one programme serviced by one bank. In 2010, the share of the most active bank in the primary market constituted 40% of the value of issues arranged.

Secondary market and investors

Short-term corporate bonds were traded in the OTC market, which stemmed from the non- public nature of issues of these instruments. Similarly to the previous years, the secondary market was organised and transactions were settled by banks arranging the issues and keeping records of these securities. The liquidity of the market of these debt securities was still low, since due to their short maturity the investors most often kept them until the maturity date.

Enterprises had the largest share in the structure of buyers of SCB (Figure 5.1.15). It results, among others, from the non-public nature of issues of these instruments and the fact that they were targeted at affiliated entities. This is aimed at optimising the management of the working capital within the group, as well as obtaining tax benefits. When issuing SCB, unlike in the case of a loan, the enterprise does not have to pay tax on civil law transactions. The second important group of SCB buyers included banks, which – acting as issue arrangers – purchased the issued bonds into their own portfolio and kept them until maturity if there was no interest among investors.

In 2010, a decrease in household involvement in SCB was observed (from 8.3% to 4.4%). The interest of investment funds in these instruments did not change significantly, whereas the involvement of other institutional investors in this market was still low. Insurance companies and pension funds reluctantly invested their assets in these instruments, since they did not correspond 5 with the investment horizon of these institutions. Moreover, the involvement connected with analysis of investments and financial condition of issuers was too high in comparison with the potential period of exposure maintenance period, which resulted from short original maturity of these instruments.

Figure 5.1.15. Buyers of SCB, 2009−2010 (by outstanding values as at period-ends)

A. 2009 B. 2010

69.1% 74.4%

1.0% 1.4% 4.4% 8.3% 3.5% 0.2% 4.7% 0.2% 4.1% 0.1% 1.9% 15.9% 10.8%

Enterprises Banks Insurance companies Pension funds Investment funds Foreign entities Households Other

Source: NBP study based on data received from the group of banks acting as depositaries.

5.1.3. Deposit transactions market

The deposit transactions market is used for current financial liquidity management by enabling market participants to invest temporary surpluses or to borrow funds when they are insufficient. Taking into account the credit risk, unsecured deposits as well as deposits collateralised

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 175 Financial markets

by foreign currency (FX swaps) and by securities (conditional operations – repos and sell-buy- backs) can be distinguished among deposit transactions. The most important participants of the deposit transactions market are domestic banks which lend available funds to one another on a daily basis. Large-value transactions with maturity periods ranging from one day to one year are concluded in the interbank market.

In 2010, the situation in the domestic money market further improved. The credit risk premium, measured by the spread between quotations of 3M WIBOR and 3M OIS transactions, decreased (Figure 5.1.16). In comparison with the previous year, the activity of banks in the unsecured interbank deposit market was slightly lower, whereas the liquidity of the FX swap market increased considerably. In such conditions, domestic banks systematically decreased the use of instruments introduced by the NBP under the Confidence Package. This led the central bank to gradually withdraw from conducting these operations (Box 5.1.1). However, redistribution of funds in the domestic money market still was not fully effective. This was caused by sustained low credit limits which did not reflect the sound financial condition of banks operating in Poland but resulted from the policy of credit risk management of counterparties at the level of bank groups, within which the majority of domestic banks operate.

Figure 5.1.16. Credit risk premium in the money market in the euro area and in Poland, 2008–2010

basis points 240 220 200 180 5 160 140 120 100 80 60 40 20 0 I II III IVV VI VII VIII IX X XI XII I II III IV V VI VII VIII IX X XI XII I II III IV V VI VII VIII IX X XI XII 2008 2009 2010

3M WIBOR / 3M OIS spread 3M EURIBOR / 3M OIS spread Source: NBP.

Box 5.1.1

ACTIvITIES oF THE nBP UnDER THE ConFIDEnCE PACkAgE

In 2010, the NBP gradually limited the use of instruments offered under the Confidence Package due to the improvement of the situation in the domestic financial market and the diminishing demand for these instruments in the banking sector. Detailed timetables of open market operations and FX swap operations were published in advance on the NBP website, which made it easier for banks to plan their liquidity position for at least several weeks.

At the beginning of 2010, banks participated in 3- and 6-month repo operations, conducted by the NBP in auctions without allotment limit. They enabled obtaining financing in PLN in the amount declared by banks. From 9 February 2010, during each auction the central bank determined the maximum value of bids that may be accepted (auctions allotment limit). From 1 April 2010, the NBP discontinued repo operations with 6-month maturity, still enabling banks to use 3-month operations. In addition, from the third quarter of 2010, Polish Treasury securities denominated in euro were no longer accepted as collateral in liquidity-providing operations. Finally, on 1 October the NBP discontinued to use repo operations, however, it

176 National Bank of Poland Financial markets

announced the possibility to conduct open market operations of any type if a need arises. In 2010, the total of 12 repo operations was conducted (nine 3-month operations and three 6-month operations). As a result of these repo operations, the liquidity of the banking sector in 2010 was increased on an average annual basis by PLN 5.1 billion against PLN 11.5 billion in 2009.

From 1 January the NBP resigned from conducting bilateral FX swap operations, providing the banking sector with the Swiss francs. From the beginning of the second quarter of 2010, the central bank also ceased to offer liquidity-providing operations for banks in the euro and the US dollar. Although FX swap operations were available in the first quarter of 2010, they were not conducted due to the lack of demand.

The structure of deposit transactions, which was still significantly different than the one in the euro area, had also an impact on the ineffective redistribution of funds in the interbank market in Poland (Figure 5.1.17). Conditional transactions – mainly repo transactions – were the instrument most frequently used by banks for liquidity management in the euro area money market.18 The popularity of this instrument resulted mainly from the necessity of limiting counterparty credit risk exposure19 and the associated possibility to reduce capital requirements. The primary liquidity management instruments for banks in Poland were unsecured interbank deposits. The market of repo transactions was still underdeveloped because of legal and tax environment, lack of widely accepted framework agreement and infrastructure shortcomings. As a result, unsecured interbank deposits constituted the only liquidity management instrument for a group of domestic money market participants. The 5 O/N transactions dominated, since due to daily shifts in both liquidity in the banking system and the demand for liquid resources, banks wanted to ensure flexibility in managing their own liquidity. Moreover, entering into transactions with the shortest maturity contributed to limiting credit risk exposure. This factor became particularly important after the period of turmoil in the domestic money market in 2008–2009.

Figure 5.1.17. Structure of deposit transactions in the interbank market in Poland and the euro area, 2007–2010

% 100 8 11 12 16 15 25 29 30 31 80 21 22 23 60 47 44 49 52 40 77 68 66 61 20 28 27 21 17 0 2007 2008 2009 2010 2007 2008 2009 2010 Poland Euro area Unsecured deposits Conditional transactions FX swaps

Note: Net turnover in the interbank deposit transactions market in Poland and the euro area is equal to the nominal value of unsecured deposits, conditional transactions (repo and SBB) and FX swaps concluded exclusively between resident banks of, respectively, Poland and the euro area. Source: NBP calculations based on data from the NBP, Ministry of Finance and Euro Money Market Survey 2010, Frankfurt 2010, ECB.

18 Information on the structure of the euro area money market based on: Euro Money Market Survey 2010, Frankfurt 2010, ECB, pp. 6–15, 29. 19 The charge on the credit limit arising from conditional transactions constitutes approximately 10% of the nominal value of a transaction, whereas for a traditional interbank deposit it amounts to 100% of the nominal value. Credit risk exposure in repo and SBB transactions, and so the amount of the credit limit burden, depends on the credibility of the issuer of securities constituting collateral of these transactions, volatility of their prices and the fact whether or not these transactions are settled by CCP.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 177 Financial markets

FX swaps were much more rarely used to finance short-term borrowing needs by banks operating in Poland than in the euro area. These transactions were concluded mostly with foreign banks which, by renewing short-term loans in PLN – mostly T/N and FX swap transactions – financed investments in the domestic capital market. On the other hand, with the use of, among others, these transactions domestic banks covered open FX positions originating from portfolios of housing loans indexed to foreign currencies.

In the first months of 2010, the situation in the euro area money market was stable. As a result, the ECB started to systematically withdraw from using non-standard operations which enabled banks to, among others, obtain unlimited liquidity in euro. However, in May 2010, as the public finance crisis in peripheral states of the euro area intensified, the ECB restored the use of some previously withdrawn instruments in order to counteract further turmoil in the money market.20 Nevertheless, in the second and third quarter of 2010 the counterparty’s credit risk premium remained at a relatively high level which was reflected by the increase in spread between 3M EURIBOR rate and quotations of 3M OIS transactions (Figure 5.1.16). Until the end of 2010, the situation in the money market in the euro area was largely determined by the concerns related with the debt crisis, and the mutual trust between banks was limited.

In such conditions, the repo transactions settled via entities acting as central counterparty (CCP) gained in popularity. This was encouraged by the concerns of market participants regarding the recurrence of turmoil in the money market and deterioration in the capital position, or even bankruptcy, of their counterparties. The advantage of transactions settled by CCP lies in limiting the credit, legal and operational risk to the minimum. After concluding such a transaction, CCP, most frequently through novation,21 becomes counterparty for each of the parties, and valuates, 5 accepts and releases collateral on an on-going basis. In 2010, the liquidity of the euro area FX swap market was slightly higher than in the previous year. Transactions with maturity periods ranging from T/N22 to 1 month still dominated in this market. However, the activity of banks in the unsecured interbank deposits market in the euro area decreased by approximately 18% in comparison with 2009, nevertheless, it was still concentrated in the segment of O/N transactions.

5.1.3.1. Unsecured deposits

Unsecured interbank deposits are the simplest and most common liquidity management instrument used by banks operating in Poland. In the interbank deposit market, funds are continuously transferred from banks with temporary surpluses to banks with liquidity shortages. Liquidity needs of a bank, which result from its operations in different segments of financial market (among others, granting loans, activity in the securities market, foreign exchange transactions) and the necessity to maintain the average level of the required reserve, are satisfied in the interbank deposit market on a daily basis. For this purpose, banks most often use O/N transactions.

Market size

In 2010, average daily turnover in the unsecured interbank deposits market was PLN 7.0 billion, which means a fall by approximately 3% in comparison with the turnover noted in the previous year (Figure 5.1.18). Lower activity in this market is also confirmed by the decrease of average banks’ outstanding value of interbank deposits as at the end of individual quarters – from PLN 27.0 billion in 2009 to PLN 25.4 billion in 2010 (Figure 5.1.19). At the same time, the turnover

20 More in: The ECB’s response to the financial crisis, in: “ECB Monthly Bulletin. October 2010”, Frankfurt 2010, ECB. 21 Novation is a legal arrangement in which the original agreement between the buyer and the seller is terminated and replaced by two new agreements – one between CCP and the buyer and the other one between CCP and the seller. 22 The form used in the market for denoting the maturity periods of deposit transactions. Standard maturity dates: one-day – O/N, T/N, S/N, one-week – SW, two-week – 2W, three-week – 3W, one-month – 1M, two-month – 3M, three-month – 3M, six-month – 6M, nine-month – 9M and one-year – 1y. All deposits except for O/N and T/N begin on the second business day after the transaction date. The O/N deposit (overnight) begins on the transaction date and matures on the next business day. The T/N deposit (tomorrow next) begins on the first business day after the transaction date and matures on the next business day.

178 National Bank of Poland Financial markets

in the O/N transactions segment was further concentrated. The average daily value of O/N transactions providing the basis for calculating the POLONIA rate increased from PLN 3.7 billion and was by 37% higher than in 2009. Interbank deposits with maturity longer than 1 month were still made very rarely.

Figure 5.1.18. Daily net turnover in the interbank deposit market, 2009−2010

PLN billion 14 12 10 8 6 4 2 0 III III IV VVI VII VIII IX XXI XII III III IV VVI VII VIII IX XXI XII 2009 2010 The value of transactions for the calculation Net turnover – data received of the POLONIA rate from SORBNET system Trend line (the value of transactions Trend line (net turnover – data received for the calculation of the POLONIA rate) from SORBNET system)

Source: NBP. 5 The liquidity of the interbank deposits market in the segment of transactions with maturity over 1 month was limited by the relatively low number of entities with structural excess liquidity and low credit limits imposed by banks on one another. Despite the very good financial situation of banks operating in Poland, the maximum limits of credit exposure remained at levels considerably lower than before the turmoil in the domestic money market. Banks remained reluctant to lend available funds in the interbank market, abandoning additional interest on placing a deposit in another bank at market interest rate. Due to the uncertainty regarding global financial markets and the willingness to gain fast and reliable access to funds, banks preferred to keep current excess liquidity in the central bank on current accounts or by using standing deposit facility. In 2010, the average value of deposits placed in the NBP was PLN 1.0 billion, whereas in the previous year it was PLN 2.5 billion.

Figure 5.1.19. Interbank deposits outstanding at the end of the quarters, 2007–2010

PLN billion 50 45 40 35 30 25 20 15 10 5 0 III III IV III III IV III III IV III III IV 2007 2008 2009 2010 Source: NBP.

The intraday credit facility granted by the NBP to participants in the SORBNET system in return for the transfer of ownership of Treasury securities and debt securities issued by the NBP was used by banks in order to manage liquidity in the course of an operating day. In 2010, the list of securities which may serve as collateral for this credit facility was extended by non-Treasury debt

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 179 Financial markets

securities deposited in KDPW and presented in the list on the NBP website.23 The average daily value of the intraday credit facility in 2010 was PLN 20.3 billion as compared with PLN 15.8 billion in the previous year. There was also a considerable increase in the average daily value of turnover on current accounts of the banks with the NBP. To a large extent this increase resulted from greater interest of foreign investors in instruments denominated in PLN (among others, the involvement of non-residents in the Treasury bond market grew significantly) and an associated 22% increase of average daily value of interbank customer orders (Figure 5.1.20).

Figure 5.1.20. Turnover on banks’ accounts with the NBP, 2009–2010

PLN billion 13 500 12 450 11 400 10 350 9 300 8 250 7 200 6 150 5 100 4 50 3 0 III III IV VVI VII VIII IX XXI XII III III IV VVI VII VIII IX XXI XII 2009 2010 Ratio of turnover to balance of banks’ accounts Average daily turnover on banks' accounts with the NBP – left-hand scale with the NBP – right-hand scale Interbank customer transfer orders – right-hand scale Intraday credit – right-hand scale 5 Source: NBP.

Market structure and money market rates

Low limits, imposed by banks within international bank groups in order to limit the counterparty risk, and risk aversion, reflected in the reluctance to invest excess liquidity in other banks, determined the term structure of operations in the unsecured deposit market. O/N operations dominated in the structure. In 2010, they constituted approximately 90% of the value of transactions concluded (Table 5.1.5). That is because banks preferred to use operations with the shortest maturities possible to manage their liquidity, since this allowed them to plan their liquidity position in a flexible manner and reduce the scale of credit risk exposure. Occasionally, banks were willing to deposit funds for three, or even six months, however the share of transactions with such maturity in the structure of turnover was still negligible.

In 2010, the O/N WIBOR rate and POLONIA24 rate remained within the fluctuation range set by NBP deposit and Lombard rates (Figure 5.1.21). The volatility of the aforementioned interest rates in the analysed period fell as compared with 2009, however it was still higher than before the period of turmoil in the domestic financial market. The interest rate on one-day deposits was the most variable, which was affected by, among others, the preference of banks to maintain the liquidity buffer and rolling them over in one-day transactions. When banks purchased fewer NBP bills than it resulted from their liquidity position, the value of funds invested in O/N transactions increased considerably, causing the reference rate of such deposits to decrease substantially below the reference rate. As a result, there were considerable fluctuations of rates of one-day deposits with their simultaneous decrease towards the NBP deposit rate. In 2010, the average derivation of the O/N WIBOR rate from the reference rate was 49 basis points, against 69 basis points in 2009 (after recalculating the reference rate on the basis of 365 days per year).

23 Resolution No 7/2010 of the Management Board of the NBP of 4 March 2010 on the introduction of “The Regulations on Bank Refinancing with Lombard Loans and the Intraday Credit Facility by the National Bank of Poland”, (Dz.Urz. NBP of 2010, No 4, item 4). 24 The POLONIA rate (Polish Overnight Index Average), an equivalent of the EONIA rate in the euro area, was introduced to the domestic money market on 24 January 2005. Its value is published each business day at 5 p.m. in the Thomson Reuters news service on the NBPS website. The POLONIA rate is calculated by the NBP.

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Table 5.1.5. The term structure of turnover in unsecured interbank deposit market in the third and fourth quarter of 2010 (%)

Original deposit maturity: 2010 Q3 2010 Q4 O/N 91.2 90.1 Up to 1 week inclusive (excluding O/N) 7.7 9.3 From 1 week up to 1 month inclusive 0.9 0.3 Over 1 month 0.2 0.3 Total 100.0 100.0

Source: NBP.

Figure 5.1.21. WIBOR rates and NBP deposit, lombard and reference rates, 2009−2010

% 7

1 III III IV VVI VII VIII IX XXI XII III III IV VVI VII VIII IX XXI XII 2009 2010 5 O/N WIBOR SW WIBOR Reference rate Lombard rate Deposit rate Source: NBP and Thomson Reuters.

WIBOR rates, calculated on the basis of bank quotations for deposits with original maturity over 1 month, still did not fully reflect the real cost of obtaining funds in the unsecured interbank deposit market. It was caused by very limited interest of banks in concluding transactions with such maturity and by low market liquidity.

Market participants and infrastructure

The unsecured interbank deposits market is a local market with a small number of active participants, which stems from, among others, strong asymmetry and concentration of liquidity distribution in the banking system. As a result, the liquidity of the market largely depends on transactions concluded by a few large banks with structural excess liquidity. In 2010, banks with stable deposit bases and developed retail networks and banks acting as correspondents for foreign banks and as agents in their payments for transactions concluded in the market of instruments denominated in PLN showed the highest activity in the unsecured interbank deposits market.

Transactions in the unsecured interbank deposits market were concluded mainly with the use of Reuters Direct electronic conversational system and voice brokers. The preference to remain anonymous in contacts with potential counterparties was the reason why establishing transaction terms via voice brokers was more frequent than in the case of other financial instruments.

5.1.3.2. Secured deposits

The analysis of the secured deposit transactions market will be divided into two parts – FX swaps (deposits collateralised by foreign currency) and conditional transactions – repos and sell-buy-backs/buy-sell-backs (deposits collateralised by securities).

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 181 Financial markets

5.1.3.2.1. FX swaps

An FX swap is a combination of two opposite foreign exchange transactions which are settled on different dates. Thus, in economic terms, it consists of two secured deposit transactions in different currencies. The FX swap may be used, among others, for liquidity management. The sale of a foreign currency in the initial exchange and its obligatory repurchase in the final exchange make it possible to obtain zlotys for a period specified in the terms of the transaction.

Market size and participants

The zloty FX swap market was the largest market among the currencies of our region. In April 2010, the average daily net turnover in this market amounted to USD 19.1 million (PLN 54.9 billion),25 of which turnover in the domestic market accounted for only 21% (Table 5.1.6). The systematic increase in value of offshore transactions (operations between non-residents) observed for several years stemmed from the increase in activity of non-banking financial institutions, including hedge funds. These entities used FX swaps in synthetic forward transactions to speculate on the zloty exchange rate and in carry trade strategies, which were most often financed with loans, among others in yen or US dollar. Moreover, some foreign institutional investors financed their investments in the domestic Treasury securities market by obtaining zlotys in transactions in the FX swap market.

In the domestic FX swap market, the gradual increase in the activity of banks initiated in 2009 continued. The average net daily turnover in the domestic interbank FX swap market was by approximately 11% higher than the turnover registered in 2009 and amounted to PLN 9.8 billion (Figure 5.1.22). In 2010, the FX swap remained the most liquid domestic money market 5 instrument.

Table 5.1.6. Average daily turnover in the FX swap market in zloty, Czech koruna and forint in April 2007 and 2010 (USD million)

Zloty Czech koruna Forint

2007 2010 2007 2010 2007 2010 Total turnover, of which: 16,736 19,074 3,789 5,446 4,349 9,937 Transactions between residents 607 978 241 600 447 663 Resident – non-resident transactions 3,907 2,993 1,634 2,054 2,516 2,003 Transactions between non-residents (offshore) 12,222 15,103 1,914 2,792 1,386 7,271

Source: NBP calculations based on Triennial Central Bank Survey. Report on global foreign exchange market activity in 2010, Basel 2010, Bank for International Settlements, pp. 47–48 and national results made available by the NBP, Czech National Bank and National Bank of Hungary. Net omissions were not included.

The increase in liquidity of the domestic FX swap market was supported, among others, by the stabilisation of the situation on global financial markets. FX swaps connect the money markets of two currencies, thus the improvement of the situation of financial markets in developed countries and the decrease of risk aversion translated into increased activity of banks in the zloty FX swap market. Moreover, the inflow of non-residents to the domestic capital market, in particular the Treasury bonds market, contributed to the growth of turnover in the FX swap market. The positions of non-residents in Polish Treasury bonds issued in the local market were partially financed with zlotys acquired in the short-term FX swap transactions market. As at the end of 2010, the value of portfolio of domestic Treasury securities held by foreign investors was PLN 124.8 billion, which is a rise by approximately 59% as compared with the end of 2009. However, the activity of domestic participants in the FX swap market was still limited by relatively low credit limits which were considerably reduced at the bank group level after the bankruptcy of the Lehman Brothers investment bank. In addition, the liquidity of FX swaps could also be negatively affected

25 This is the average daily nominal value of FX swaps after adjusting for double counting. Only the zloty leg of the initial or final exchange is calculated.

182 National Bank of Poland Financial markets

by the liquidity of the interbank deposit market in the segment of transactions with maturity longer than 1W remaining low and low representativeness of WIBOR rates which did not reflect the real cost of obtaining liquidity.

Figure 5.1.22. Monthly net turnover in the interbank zloty FX swap market in Poland, 2007−2010

PLN billion % 450 100 400 90 350 80 300 70 250 60 200 50 150 40 100 30 50 20 0 10 I III V VII IX XI I III V VII IX XI I III V VII IX XI I III V VII IX XI 2007 2008 2009 2010

Total net turnover – left-hand scale Share of transactions with foreign banks – right-hand scale Note: Net turnover – the monthly nominal value of transactions after adjusting for double counting. The values presented include only transactions where the zloty was one of the currencies involved. Source: NBP data received from a group of banks most active in the domestic financial market.

Figure 5.1.23. Spread between implied and theoretical interest on currencies in the three- 5 -month FX swap market in USD/PLN and bid-ask spread in the one-week FX swap market in USD/PLN, 2008–2010

basis points basis points 24 300 21 250 18 200 15 150 12 100 9 50 6 0 3 -50 0 -100 I II III IV VVI VII VIII IX XXI XII III III IV VVI VII VIII IX XXI XII III III IV VVI VII VIII IX XXI XII 2008 2009 2010 Bid-ask spread on the market of one-week FX swaps – left-hand scale Margins on the market of three-month FX swaps – right-hand scale

Source: NBP calculations based on data from Thomson Reuters.

Similarly to previous years, the domestic interbank FX swap market was dominated by transactions with non-residents. In 2010, they accounted for approximately 81% of net turnover value. Foreign banks borrowed zlotys in the domestic interbank FX swap market most frequently in the form of repeatedly renewed one-day T/N transactions. Moreover, the turnover in the domestic market was strongly concentrated. In 2010, the share of five most active domestic banks in net turnover was approximately 68%, with the highest activity among members of international bank groups. In 2010, the cost of acquiring foreign currencies in FX swap transactions systematically decreased. However, the margins in the market of three-month FX swaps, namely the spread between implied and theoretical interest on foreign currencies in FX swap transactions, dropped but still remained higher than before the turmoil in the domestic money market. However, the difference between the purchase and selling price in swap quotations (the bid-ask spread) was approaching the levels observed before the bankruptcy of the Lehman Brothers bank (Figure 5.1.23).

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 183 Financial markets

As a result, it was easier for domestic banks to acquire foreign currencies in swap transactions. This may be confirmed, among others, by the lack of interest of those banks in bilateral FX swap transactions offered in the first months of 2010 by the NBP under the Confidence Package.

In 2010 a significant increase in activity of domestic non-banking entities in the FX swap market in Poland was observed. The daily average value of transactions concluded in the customer market amounted to approximately PLN 530 million, i.e. it grew by approximately 140% in comparison with 2009. The group of non-banking market participants included, among others, private banking customers who used synthetic forward transactions consisting in combining spot and FX swap transactions for speculations in the zloty market.

Market structure

In 2010, the share of transactions involving exchange of local currencies for US dollars in the FX swap markets in the countries in our region was smaller than in 2007, however, these operations still dominated in the currency structure of turnover (Table 5.1.7). This resulted from the standard of using the US dollar in interbank FX swap transactions, which has existed in the global FX market for years. In their investment strategies, London banks borrow currencies with low interest rates, then exchange them for US dollars and finally obtain currencies of the region (e.g. PLN in USD/PLN FX swap operations). In comparison with 2007, the importance of transactions with the use of euro in the currency structure of turnover in the markets of our region increased. It resulted from, among others, serious disturbance in the global FX swap market in the fourth quarter of 2008. Access of banks from outside the United States to US dollars was considerably limited. In 2009, as a result of a fall in risk aversion and the actions of the Federal Reserve aimed at providing the financial system with liquidity, the availability of financing in US dollar rose, and the cost of its 5 acquisition fell. As a result, the share of transactions of exchange of local currencies for US dollars in the FX swap market turnover was systematically growing in 2009–2010.

Table 5.1.7. Average daily turnover and structure of the FX swap market in Poland, the Czech Republic and Hungary, April 2007 and 2010 (USD million)

Poland Czech Republic Hungary

2007 2010 2007 2010 2007 2010 Turnover – foreign currencies/domestic currency 4,514 3,970 1,875 2,654 2,963 2,666 – of which: EUR/domestic currency (%) 5 22 15 41 4 18 – of which: USD/domestic currency (%) 95 76 84 58 95 80 Interbank market 4,472 3,939 1,725 2,341 2,848 2,434 Customer market 42 31 150 313 115 232 Turnover – foreign currencies/foreign currencies 1,368 1,398 699 1,121 1,380 1,258

Source: NBP calculations based on national results of the Triennial Central Bank Survey – Foreign Exchange and Derivatives Market Activity in 2007 and 2010, made available by the NBP, Czech National Bank and National Bank of Hungary.

In 2010, USD/PLN exchange operations evidently dominated the currency structure of turnover in the domestic FX swap market. Their share was 76.8%, in comparison with 70.1% in the previous year. Simultaneously, the share of EUR/PLN exchange operations fell from 27.3% to 22.5% (Figure 5.1.24). The systematic growth of the share of USD/PLN exchange operations was a result of the aforementioned improvement of the situation on global financial markets and of the return to the previously used standard of using US dollars in interbank FX swap transactions. The relatively high share of EUR/PLN exchange operations (before the fourth quarter of 2008 at the level of several per cent) resulted to a large extent from transactions between domestic banks and affiliated entities operating in the euro area.

Similar changes in the currency structure of turnover of FX swap transactions were observed in the customer market in Poland. The share of USD/PLN exchange operations increased to 50% from 34% in 2009, whereas EUR/PLN transactions in 2010 constituted 41% of registered turnover (61% in

184 National Bank of Poland Financial markets

2009). Similarly to previous years, participants in the domestic FX swap market also performed operations without the use of zloty, mainly with the following currency pairs: EUR/USD, CHF/USD and CHF/EUR. In 2010, the average daily turnover in this segment amounted to PLN 2.4 billion.

Figure 5.1.24. Currency structure of turnover in the domestic interbank FX swap market in Poland, 2007−2010

% 100 22 3 3 2 2 2 3 3 4 6 11 12 17 16 90 24 20 20 20 18 29 25 28 80 40 70 50 60 50 96 94 89 88 40 82 83 78 79 77 79 74 68 73 70 30 57 48 20 10 0 III III IV III III IV III III IV III III IV 2007 2008 2009 2010 USD/PLN EUR/PLN Other foreign currencies/PLN

Source: NBP data received from a group of banks most active in the domestic financial market.

The domestic zloty FX swap market was characterised by strong concentration of turnover in the segment of transactions with maturity of up to 7 days inclusive. In 2010, the share of these operations was 83%, as compared with 81% in the previous year (Figure 5.1.25). This maturity 5 structure stemmed from the use of FX swaps. They are used by foreign banks to, among others, obtain zlotys for investments in the domestic capital market. These entities most often renew FX swap transactions on a daily basis – mostly T/N and O/N. This strategy gives high flexibility in financing positions in securities and makes it possible to hedge against the currency risk. As mentioned above, in 2010 foreign investors purchased domestic Treasury bonds, which contributed to an increase in the share of short maturity operations in the term structure of turnover in the FX swap market. On the other hand, operations with maturity longer than one month are mostly initiated by domestic banks and concluded in order to hedge against the currency risk arising from portfolios of housing loans denominated in foreign currencies, namely in Swiss francs and euro. In addition, transactions with maturity over 1 month are used for speculation on interest rate and F/X rate movements, as well as to mitigate exposures arising from futures transactions concluded with non-banking entities. Low credit limits imposed by banks on one another limited the scale of such speculation operations.

Figure 5.1.25. Maturity structure of turnover in the FX swap market in Poland, 2007−2010

2.2 % 2.0 2.7 5.6 3.7 4.0 2.5 2.6 4.8 4.9 2.6 3.2 4.5 2.1 100 3.1 6.5 4.2 3.3 5.7 3.8 4.3 6.7 6.8 4.2 5.0 90 3.5 4.4 5.9 5.6 5.3 5.9 7.9 8.9 6.6 6.2 5.7 5.2 5.9 5.8 6.3 6.4 6.7 5.8 7.4 6.1 80 8.8 8.7 8.5 70 60 50 91.4 89.6 88.4 87.2 84.9 88.5 86.9 40 82.7 84.3 84.0 76.8 77.6 80.0 82.9 82.6 83.7 30 20 10 0 I II III IV I II III IV I II III IV I II III IV 2007 2008 2009 2010 Up to 7 days (inclusive) From 7 days to 1 month (inclusive) From 1 month to 3 months (inclusive) Over 3 months

Source: NBP data received from a group of banks most active in the domestic financial market.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 185 Financial markets

Market infrastructure

In 2010, domestic banks set the terms of FX swap transactions mostly with the use of electronic conversational systems, such as e.g. Reuters Dealing Direct and by phone (in total, approximately 48% of gross turnover registered in April 2010). Around 36% of the value of interbank FX swap transactions was executed via voice brokers. The share of these methods of concluding transactions fell to 84% from 95% in comparison with April 2007. At the same time, the use of the Reuters Forward Matching electronic platform, automatically matching buy and sell offers, increased. In 2010, transactions concluded in this way constituted between 10–20% of turnover in the domestic interbank zloty FX swap market. The standard value of a single interbank FX swap transaction with maturity of up to 7 days was EUR 50 million. For FX swaps with longer maturity, this amount was EUR 25–50 million.

5.1.3.2.2. Conditional transactions

The advantage of conditional transactions is the fact that owing to the use of collateral, they involve a much lower counterparty credit exposure than in the case of traditional interbank deposits. The credit risk in these transactions results mainly from the volatility of the prices of securities which serve as collateral.26 Therefore, conditional transactions facilitate managing liquidity even in the case of turbulences in the money market and restricted credit risk limits for counterparties, provided that market participants have securities which may serve as collateral in these operations.

Two types of conditional transactions, which include the temporary transfer of ownership of securities, are concluded in the Polish money market: repos and SBB/BSB transactions. The 5 existence of two types of conditional transactions is the result of the differences between them before 2004, which pertained to, among others, the recording of those instruments in accounting books, the rules governing the reserve requirement, legal documentation on the basis of which they were concluded. Those differences and the development of non-banking financial institutions using BSB operations as a substitute for bank deposits resulted in the SBB/BSB operations segment of the domestic money market being significantly more developed.

At present, repos and SBB/BSB transactions are concluded on the basis of a standard framework agreement, modelled on the Global Master Repurchase Agreement, have almost identical economic nature and should be recorded in accounting books in the same way.27 For both types of operations concluded by banks with non-banking entities the zero rate of the required reserve applies. These two types of conditional transactions differ only by terms specifying transfer of proceeds, the substitution of collateral and recording in securities depositories. In the domestic money market, some banks conclude SBB/BSB transactions without the standard framework agreement. Such operations are referred to as undocumented and should be treated as two separate transactions: the purchase and sale of securities.

Market size28

In 2010, the average daily value of conditional transactions concluded in the domestic money market was approximately PLN 10.0 billion, which is an increase by 23% in comparison with the previous year. The development of this market was affected mainly by the further growth of the value of SBB/BSB operations, which, similarly to previous years, prevailed in the turnover structure of conditional transactions. The domestic repo market, with its daily net turnover of approximately PLN 0.6 billion, was still underdeveloped.

26 There is also legal risk in repo transactions. A failure to apply an appropriate framework agreement (documentation describing the legal relationship of the conditional transaction in detail) creates the risk of altering the legal nature of the financial instrument, which in the case of counterparty’s bankruptcy may be the reason for ineffectiveness of the collateral. 27 In accordance with IAS 39, the party obtaining funds should still record securities used as collateral for these transactions in its assets. 28 Due to the adjustments of data, the value of net turnover in the conditional transactions market for 2007–2010 may differ from the data presented in previous versions of the study.

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Figure 5.1.26. Monthly net turnover in SBB/BSB and repo markets, 2007−2010

PLN billion 270 240 210 180 150 120 90 60 30 0 I III V VII IX XI I III V VII IX XI I III V VII IX XI I III V VII IX XI 2007 2008 2009 2010 SBB/BSB transactions Repo transactions Source: NBP study based on data from the NBP and MF.

In 2010, average daily net turnover in the SBB/BSB operations market grew by approximately 24% to PLN 9.4 billion. The liquidity of this segment of conditional transactions market was influenced primarily by the activity of non-banking financial institutions, mainly investment funds. This is because these entities use SBB/BSB transactions for investment purposes, as a substitute for unsecured deposits. In 2010, there was an increase in financial surpluses held by investment funds. This resulted from a further improvement of the situation in the capital market and households’ increased interest in investing via these institutions. As a result, investment funds increased their activity in the secured deposit market. As in previous years, the interbank conditional transactions market had significantly lower 5 liquidity than the customer market. In 2010, the average daily net turnover in the interbank market was PLN 2.7 billion, and in the customer market it was PLN 7.3 billion. The interbank repo transactions market was still relatively underdeveloped. The creation of an effective conditional transactions market in Poland is hampered by the lack of both commonly used framework agreement, meeting the standards of developed financial markets, and of uniform terminology in the field of conditional transactions. The tax regulations are also a barrier for the repo transactions market, since in accordance to the provisions in force, the party “selling” securities in the initial exchange is obliged to pay the tax upon the temporary transfer of ownership of these securities. This leads to a decrease in the profitability of repo and SBB/BSB transactions and forces market participants to keep two independent registers of operations – the accounting one and the fiscal one. From the perspective of financial market development and stability in Poland, it would be recommended to create a CPP settling repo transactions. Such solutions in the post-transaction infrastructure function in cooperation with electronic platforms in the repo market in the euro area and they were very popular among banks at the time of turmoil in the money market. This is confirmed by, among others, the dynamic development of the Eurex Repo market (Box 5.1.2). In 2010, KDPW still did not perform the CCP function and did not offer collateral management services. In 2011, this institution plans to appoint a clearing house which in future would act as a central counterparty and settle, among others, repo transactions.29 The unclear regulations of the Act – Bankruptcy and Rehabilitation Law,30 regarding the guaranteed effectiveness of the so called compensation clauses which in the case of declaring counterparty’s bankruptcy enable the termination of the framework agreement and compensation of unmatured liabilities, were also a barrier to the development of this market in Poland. As a result, market participants were not certain, if the provisions in force make it impossible for the trustee to select conditional transactions covered by the framework agreement and if in the case of counterparty’s bankruptcy, they would be entitled to the ownership right to securities serving as collateral of these transactions. In June 2010, a draft amendment of the aforementioned act was submitted to the Sejm, and it included, among others, provisions removing interpretation doubts regarding compensation clauses.

29 See KDPW Strategy for 2010–2013, information and presentation available at the website: http://ww.kdpw.pl./pl/ kdpw/Strony/Celestrategiczne.aspx. 30 Article 85 of the Act of 28 February 2003 – Bankruptcy and Rehabilitation Law (consolidated text: Dz.U of 2009, No 175, item 1361, as amended).

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 187 Financial markets

Box 5.1.2

EUREx REPo MARkET

Eurex Repo is one of the euro area’s largest electronic platforms for repo transactions settled by CCP. Eurex Clearing is the entity serving as a central counterparty for this market. In the situation of distortions in the functioning of the euro area money market and relatively low risk aversion there was a strong growth of one of the largest segments of the Eurex Repo market – Euro GC Pooling, which is used by banks for obtaining liquidity secured with specified securities with high creditworthiness and liquidity (the so-called general collateral). As at the end of 2010, the value of open positions in the GC Pooling segment was EUR 122.5 billion and was almost four times higher than at the end of 2007. In the same period, the number of participants in this market, including mainly banks, increased from 21 to 52.

The rise of interest of banks in concluding repo transactions via electronic trading platforms using CCP services is primarily associated with limiting the credit risk of such operations to the minimum. As a result of novation, CCP is becoming counterparty for each party of the previously concluded transaction. The credit risk of the central counterparty is lower than the credit risk of original parties of the transaction, since CCP does not operate in fields other than settlement and clearing of transactions with financial instruments. In addition, this entity has an advanced system for securing the liquidity of settlements and the possibility to use its equity in the case of bankruptcy of one of the counterparties. The transparency of obligations and rules of functioning of CCP eliminates the uncertainty regarding the operational risk in repo 5 transactions. The central counterparty is also better prepared to manage the collateral – it makes valuation on an on-going basis and depending on its amount it accepts and releases collateral and liquidates it if counterparty goes bankrupt. The additional merit of transactions made via electronic trading platforms lies in their anonymity.

Source: Prepared on the basis of information available at http://www.eurexrepo.com/index.html and Euro Money Market Study 2010, Frankfurt 2010, ECB.

Market participants

The Polish money market was dominated by conditional transactions with domestic non- banking entities (Figure 5.1.27). In 2010, the average daily value of operations in the customer market increased by approximately 26% to PLN 7.3 billion. These transactions accounted for approximately 73% of net turnover in the domestic repo market. The most active participants in the domestic customer market included non-banking financial institutions (investment funds, insurance companies and pension funds). Changes in the composition of the investment portfolio and the settlement dates of transactions with securities are the reasons why non-banking financial institution have at their disposal temporary financial surpluses which they invest most frequently using short-term conditional transactions. The advantage of these transactions, as compared with unsecured bank deposits, lies in their low credit risk. Moreover, conditional transactions were used because of the applicable limits on placing unsecured deposits in one bank. In 2010, the average daily value of secured deposits placed by non-banking financial institutions operating in Poland amounted to approximately PLN 5.2 billion, of which over 50% were transactions of investment funds. Similarly to previous years, these entities concluded mostly SBB/BSB transactions (a 95% share). It was a result of, among other, legal doubts concerning the possibility of open pension funds to use repo transactions. Moreover, non-financial institutions very rarely used standard framework agreements for repo transactions.

Banks offered conditional transactions as deposit products also for government and local government institutions and for enterprises. The share of government and local government institutions in net turnover in the customer conditional transactions market amounted to approximately 16%. This form of investing financial surpluses was not popular among enterprises.

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Figure 5.1.27. Monthly net turnover in the interbank and customer conditional transactions markets, 2007−2010

PLN billion 270 240 210 180 150 120 90 60 30 0 I III V VII IX XI I III V VII IX XI I III V VII IX XI I III V VII IX XI 2007 2008 2009 2010

Interbank market Customer market Source: NBP study based on data from the NBP and MF.

The share of interbank operations in net turnover in the domestic conditional transaction market accounted for approximately 27%. SBB/BSB transactions dominated in the interbank market (approximately a 90% share). Similarly to previous years, BGK was active in this market and by making BSB transactions with banks acting as Primary Dealers, invested the funds of the Ministry of Finance in the money market.

Operations in which foreign entities were counterparties were also conducted in the domestic conditional transactions market – they accounted for approximately 6% of turnover in 5 this market. The conditional transactions market was characterised by a high activity of foreign banks in the segment of repo transactions secured with Treasury bonds denominated in PLN. Transactions in which at least one of the parties was a non-resident accounted for over 40% of turnover in the market of repo transactions secured with these securities.

Market structure

As in previous years, operations secured with Treasury bonds dominated in the domestic conditional transactions market (Figure 5.1.28). In comparison with 2009, the share of Treasury bills in the structure of collateral of repo and SBB/BSB transactions decreased. This resulted primarily from limiting of the scale of issue of these short-term debt papers by the Ministry of Finance, which was related to a decrease in the portfolio of these instruments in domestic banks (the average value of Treasury bills held by banks as at the end of individual months decreased from PLN 42.2 billion in 2009 to PLN 26.5 billion in 2010). Moreover, the decrease of the share of conditional transactions secured with Treasury bills could have been influenced by the increase in the availability of Treasury bonds in banks which in 2008–2009 used these securities as collateral in the liquidity-providing operations of the NBP. In 2010, transactions secured with non-Treasury securities were concluded occasionally.

The term structure of conditional transactions in the Polish money market was closely related to the main purpose of their application. The majority of domestic banks treated these transactions as an instrument to enrich their deposit offer rather than as a tool for current liquidity management. Transactions with maturity of up to 7 days inclusive dominated in the customer market, which was a result of the specific nature of activity of investment funds and other non-banking financial institutions (Table 5.1.8). These entities invested for several days their available funds which they had at their disposal between the dates of settlement of transactions in the capital market. However, in the interbank repo transactions market operations with O/N maturity dominated. The preference to conclude transactions with the shortest possible maturity in this market stemmed mainly from the uncertainty of banks regarding the effectiveness of the aforementioned compensation clauses and associated risk. Since there is no such risk in undocumented SBB/BSB transactions, the maturity dates of SBB/BSB operations in the interbank market were longer.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 189 Financial markets

Figure 5.1.28. Structure of collateral of conditional transactions in Poland, 2007−2010

% 100 1.5 2.0 4.0 1.5 0.5 2.0 2.0 0.5 2.0 3.0 1.0

60 75.0 76.5 87.0 85.0 96.0 95.0 94.0 92.0 40

20 21.0 21.0 11.0 13.5 0 2.5 2.5 4.0 4.0 2007 2008 2009 2010 2007 2008 2009 2010 BSB Repo Treasury bills Treasury bonds NBP bills securities Other debt

Source: NBP study based on data from the NBP and MF.

Table 5.1.8. Term structure of conditional transactions in Poland in the second half of 2010 (%)

Interbank market Customer market Total repo SBB/BSB repo SBB/BSB O/N 77.5 30.1 28.1 25.6 28.8 T/N and S/N 7.3 15.8 5.1 14.0 14.4 Up to 1W inclusive (excluding O/N, T/N, S/N) 11.8 46.2 62.7 56.0 51.0 From 1W up to 1M inclusive 1.3 7.6 3.4 4.4 5.6 5 Over 1M 2.2 0.4 0.7 0.0 0.2 Total 100.0 100.0 100.0 100.0 100.0

Source: NBP.

Market infrastructure

The repo and SBB/BSB transactions were concluded in the unregulated OTC market. Counterparties established the terms of transactions in the Reuters Dealing Direct conversational system, by phone or via voice brokers. Conditional transactions collateralised by Treasury securities could also be concluded on the Treasury BondSpot Poland electronic platform. In 2010, the average daily value of transactions collateralised with Treasury bills and bonds concluded on this platform amounted to PLN 370 million, i.e. 4% of net turnover in the domestic conditional transactions market.

5 .2 . Capital market

5.2.1. Evolution of the capital market: size and structure

In 2010, the equity market and the Treasury bond market were the most important segments of the Polish capital market. The non-Treasury debt securities market was still underdeveloped.

Capitalisation of companies listed on the Warsaw Stock Exchange increased by 11.3% in 2010 and reached PLN 796.4 billion at year end (Table 5.2.1). The increase in the capitalisation of the Warsaw Stock Exchange resulted mainly from new public offerings of companies and, to a lesser extent, from the rise in share prices. The share of domestic companies (whose value reached PLN 542.6 billion at the end of 2010) in capitalisation of the Warsaw Stock Exchange increased. As at the end of 2010, the relation of capitalisation of domestic companies to GDP was 38.3% (against 31.4% in 2009).

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Table 5.2.1. The size of individual capital market segments, 2007−2010 (PLN billion)

2007 2008 2009 2010 Debt securities 387.1 398.6 444.2 523.7 Marketable Treasury bonds 350.9 360.8 405.4 471.3 BGK bonds for KFD – – 7.9 13.9 Long-term corporate bonds 15.8 16.0 15.5 19.9 Municipal bonds 4.1 4.5 6.9 10.9 Long-term bank debt securities1 6.1 6.6 5.5 5.2 Mortgage bonds 2.4 2.9 3.0 2.5 NBP bonds 7.8 7.8 0.0 0.0 Equities – stocks 1,080.3 465.1 715.8 796.4

Note: For debt instruments, the size of individual segments of the capital market is measured by the outstanding value of these instruments and for equities – by capitalisation of domestic and foreign companies listed on the main market of the Warsaw Stock Exchange. 1 The data contain only the bonds and bank securities denominated in PLN and foreign currency, issued by banks operating in Poland. The bonds of the European Investment Bank and credit institutions from the EU were also traded in the Polish market. Source: NBP study on the basis of data from MF, NBP, WSE, Fitch Poland.

The Treasury bond market remained the second major segment of the domestic capital market. Lower risk aversion related to improved sentiment in the global financial markets and a relatively good economic situation allowed the Ministry of Finance to reduce the risk of debt refinancing by extending its average maturity. As a result, in 2010 the scale of issue and share of Treasury bonds in the structure of financing of Treasury borrowing needs increased. At the end of 2010, the outstanding value of marketable Treasury bonds reached PLN 471.3 billion and was by 5 16.3% higher compared with the end of 2009. Accordingly, further increase of non-residents bond holdings in the domestic market was observed.

Figure 5.2.1. The structure of the long-term debt securities market, 2003−2010 (outstanding values as at period-ends)

% 100 3.9 3.2 2.6 2.3 2.0 2.0 3.0 3.5 3.8 90 2.6 3.0 2.9 4.1 4.0 80 70 60 50 91.4 91.9 92.5 92.4 90.6 90.5 91.3 90.0 40 30 20 10 0 2003 2004 2005 2006 2007 2008 2009 2010 Marketable Treasury bonds BGK bonds for KFD Long-term corporate bonds Municipal bonds Long-term bank debt securities Mortgage bonds NBP bonds Note: The category of long-term bank debt securities contains only the bonds and bank securities denominated in PLN and foreign currencies, issued by banks operating in Poland. Source: NBP study on the basis of data from the Ministry of Finance, NBP, WSE and Fitch Poland.

In 2010, the market of Treasury bonds remained the largest segment of the debt securities market. The share of marketable Treasury bonds in the whole market of long-term debt securities slightly decreased from 91.3% as at the end of 2009 to 90.0% as at the end of 2010 (Figure 5.2.1). The value of outstanding long-term non-Treasury debt securities significantly increased in 2010. The recorded increase of bonds concerned first of all local government units (LGUs) and enterprises. Moreover, Bank Gospodarstwa Krajowego continued subsequent issuance of bonds for the

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 191 Financial markets

National Road Fund for the total value of PLN 5 billion. The value of outstanding debt securities of banks slightly decreased compared with 2009.

In all segments of long-term non-Treasury debt securities market, except for the market of mortgage bonds, non-public issues in the OTC market were the most popular. However, more frequently than in previous years issuers decided to introduce bonds to the organised market (the Catalyst bond platform).

5.2.2. Long-term debt securities market

5.2.2.1. Treasury bonds

Market size

The budget deficit, at PLN 44.6 billion in 2010 was almost twice higher than in the previous year and contributed to the increase in the borrowing needs of the State Treasury. These needs were primarily satisfied in the domestic market of Treasury securities. Expansionary monetary policy in the United States and lower risk aversion related to the improving sentiment in the global financial markets supported an inflow of capital to the countries with stable and developing economies. Together with the relatively good economic and fiscal situation of Poland, comparing to the remaining EU states, it enabled the Ministry of Finance to reduce the risk of refinancing the public debt by extending its average maturity according to the public debt management strategy. As a result, the scale of new issues and the outstanding value of Treasury bonds increased in 2010. At the end of 2010, it amounted to PLN 479.0 billion and was over 15% higher than in 2009 (Table 5 5.2.2). The share of zloty-denominated Treasury bonds which remained the main source of financing in the total State Treasury debt grew from 65.7% as at the end of 2009 to 68.2% as at the end of 2010.

Table 5.2.2. State Treasury debt, 2007−2010 (PLN billion, as at period-ends)

2007 2008 2009 2010 State Treasury debt 501.5 569.9 631.5 701.9 I. Domestic debt 380.4 420.2 462.8 507.0 1. Outstanding value of Treasury securities 380.2 419.4 462.4 507.0 1.1. Treasury bills 22.6 50.4 47.5 28.0 1.2. Treasury bonds 357.6 369.0 414.9 479.0 1.2.1. Marketable bonds 350.9 360.8 405.4 471.3 1.2.2. Savings bonds 6.3 7.9 9.3 7.6 1.2.3. Non-marketable bonds 0.4 0.3 0.2 0.1

Note: The category of “non-marketable bonds” includes restructuring bonds issued in 1993-1994, intended for the increase of equity and reserves of 10 banks and bonds from 1996, whose issue aimed at the increase of the equity of BGŻ. As at the end of 2010, only the last ones were outstanding. Source: Ministry of Finance.

The Polish market was the largest market of Treasury bonds in the countries of Central and Eastern Europe. Among the countries of the European Union with smaller economies than Poland, the market of Treasury debt securities was larger only in the Netherlands and Belgium.

Market structure

As in previous years, fixed-rate bonds were the most important instrument for the financing of the State budget borrowing needs on the capital market (Figure 5.2.2). As at the end of 2010, the share of these instruments in the State Treasury debt arising from bonds issued in the domestic market reached 81.6%. The significant share of these instruments in the financing of borrowing needs was driven by the large demand of investors for this type of bonds and a related adjustment

192 National Bank of Poland Financial markets

of the policy of the Ministry of Finance, which in line with the guidelines of the public debt management strategy, preferred the issues of large and liquid series of fixed-rate bonds.31 The similar structure of Treasury bonds was also observed in developed financial markets, for example as at the end of 2010 the share of bonds with a fixed coupon in the total outstanding value of Treasury bonds in the euro area countries was 90.2%.32

Figure 5.2.2. Structure of outstanding Treasury bonds, 2007–2010 (by value as at period-ends)

% 100 1.8 2.1 2.2 1.6 90 14.9 14.9 12.4 13.6 80 70 60 50 40 80.9 79.9 82.6 81.6 30 20 10 0 2007 2008 2009 2010 Marketable fixed-rate bonds Marketable floating-rate bonds Marketable inflation-indexed bonds Savings bonds Non-marketable bonds

Source: Ministry of Finance. 5 Zero-coupon bonds with 2-year maturity continued to grow in significance in financing the State Treasury debt in 2010 (Table 5.2.3). Following the improvement of the situation and decrease of the risk aversion in the global financial market, investors demonstrated greater – than in the past two years – interest in instruments with original maturity longer than offered by the Treasury bills. Continued implementation of the refinancing risk reduction policy by the Ministry of Finance diminished the scale of issue of Treasury bills and, at the same time, increased the supply of 2-year bonds. The interest of investors in bonds with maturities longer than two years, due to mentioned lower risk aversion and relatively optimistic assessment of the economic prospects for Poland was also higher than in 2009.

Table 5.2.3. Structure of the outstanding value of marketable fixed-rate bonds issued by the State Treasury, 2008–2010 (as at period-ends)

Bond value Bond structure Type of bonds (PLN billion) (%) by original maturity 2008 2009 2010 2008 2009 2010 2-year zero-coupon bonds 24.8 59.9 105.5 8.4 17.5 27.0 5-year bonds 105.9 128.9 131.9 35.9 37.5 33.7 46.0 10-year bonds 135.9 123.1 120.6 35.9 30.8

20-year bonds 23.3 29.0 31.6 7.9 8.5 8.1 30-year bonds 1.4 1.4 1.4 0.5 0.4 0.4 5-year retail bonds 1.1 0.6 – 0.4 0.2 – 10-year converted bonds 2.6 – – 0.9 – – Total 295.0 342.9 391.0 100.0 100.0 100.0

Source: Ministry of Finance.

31 The Public Finance Sector Debt Management Strategy in the Years 2010-12, Warsaw 2009, Ministry of Finance, p. 5. 32 Calculated on the basis of: ECB Monthly Bulletin, August 2011, Frankfurt 2011, ECB, p. S36.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 193 Financial markets

The outstanding value of marketable floating-rate bonds issued by the State Treasury rose by almost 25% in 2010 compared to 2009 (Table 5.2.4). It was both an effect of large issues (in particular, 10-year bonds) as well as conversion of fixed-rate bonds to floating-rate bonds within switch auctions. These issues raised great interest, in particular of banks and open pension funds. The latter’s interest in this type of instruments stemmed from the instrument’s much less exposure to the interest rate risk, which the said entities are not able to hedge with derivatives. The large share of these two groups of investors (Figure 5.2.3) could also be connected with their activity in the market of conditional transactions, in which floating-rate bonds were willingly used due to low price fluctuations.

Table 5.2.4. Structure of the outstanding value of marketable floating-rate bonds issued by the State Treasury, 2008−2010

Bond value (PLN billion) Bond structure (%) Type of bonds by original maturity 2008 2009 2010 2008 2009 2010 3-year retail bonds 1.3 1.2 1.0 2.4 2.4 1.5 7-year wholesale bonds 19.7 19.7 19.7 35.7 38.1 30.1 10-year wholesale bonds 33.3 29.9 43.9 60.5 58.0 67.1 Private placements 0.8 0.8 0.8 1.4 1.5 1.2 Total 55.1 51.6 64.4 100.0 100.0 100.0

Source: Calculated on the basis of data of Ministry of Finance.

5 Figure 5.2.3. Structure of Treasury bonds outstanding by type of investors (%, by outstanding value as at the end of 2010)

% 100 3.1 90 22.0 12.4 31.2 32.3 29.9 80 35.5 9.6 7.3 70 0.2 3.6 7.5 2.2 9.3 60 5.4 6.2 7.6 25.4 4.4 50 21.1 27.2 21.5 23.8 6.3 40 9.7 49.8 30 16.4 11.4 20 43.2 32.4 29.7 10 16.2 21.0 7.2 0 4.4 3.6 DS OK PS WS WZ IZ

Banks Insurance companies Pension funds Investment funds Other entities Foreign investors Note: DS – 10-year fixed-rate bonds, IZ – inflation-indexed bonds, OK – 2-year zero-coupon bonds, PS – 5-year fixed-rate bonds, WS – 20-year fixed-rate bonds, WZ – floating-rate bonds. Source: Prepared on the basis of data of Ministry of Finance.

The significant increase in the outstanding value of inflation-indexed bonds (by 36.4% compared to the end of 2009) was a result of a switch auction conducted in November, when PLN 2.3 billion of 15-years bonds were sold, as well as a sale auction of these instruments of the value of about PLN 1 billion.33 As a result the total outstanding value of inflation-indexed bonds as at the end of 2010 amounted to PLN 14.9 billion, which represented 3.1% of the outstanding value of marketable bonds in the domestic market. Apart from 15-year bonds, 12-year bonds were also outstanding. Due to the relatively low liquidity of the secondary market and a long maturity of inflation-indexed bonds, interest in investments in these instruments was observed first of all among entities with a long-term investment horizon, in particular pension funds (Figure 5.2.3).

33 The very structure of these instruments had a certain impact on the rise in value of traded inflation-indexed bonds. It is because the face value of these bonds is adjusted for an inflation index.

194 National Bank of Poland Financial markets

In 2010, the outstanding value of savings bonds issued by the State Treasury decreased (Table 5.2.5).34 Savings bonds were purchased almost exclusively by domestic natural persons (97.8% share in the structure of investors).

Figure 5.2.5. Structure of savings bonds, 2008−2010 (outstanding value at period-end)

Bond value Bond structure Type of bonds by original maturity (PLN billion) (%) 2008 2009 2010 2008 2009 2010 2-year fixed-rate bonds 5.5 5.7 3.4 69.5 61.2 44.7 4-year inflation-indexed bonds 1.1 1.5 1.6 14.3 15.7 21.1 10-year pension bonds 1.3 2.1 2.6 16.2 23.1 34.2 Total 7.9 9.3 7.6 100.0 100.0 100.0

Source: Calculated on the basis of data of Ministry of Finance.

Primary market

In 2010, growth in the value of issues of Treasury bonds in the domestic market continued. The value of gross issues involving new issues and switch auctions was by almost 27% higher than in 2009 and amounted to PLN 127.8 billion (Figure 5.2.4). The value of issues of Treasury bonds would have been even higher, if a part of public expenditure had not been financed by the issue of infrastructure bonds guaranteed by the State Treasury (Box 5.2.1). 5 Figure 5.2.4. Value of Treasury bonds issued in the domestic market, gross, 2007−2010

PLN billion 140 127.8 120 100.2 100 81.8 80 62.2 60 40 20 2.9 6.2 3.8 2.4 0 2007 2008 2009 2010

Wholesale bonds Retail bonds Source: Data of the NBP and the MF.

In 2010, there were no significant changes in the organisation of the primary market of Treasury bonds. The form of issue depended on the type of debt instrument. Marketable wholesale bonds were offered in the primary market exclusively at auctions organised by the NBP for Primary Dealers. Auction sales were the main form of the offering of wholesale bonds to the market. Such auctions usually took place on Wednesdays in a form of multi price auction system. In 2010, the value of bonds placed in this way amounted to PLN 94.2 billion (against PLN 66.5 billion in 2009).

As in previous years, the supply of wholesale bonds was accompanied by an excess of demand over supply (Figure 5.2.5). This excess demand is of structural nature and results, inter alia, from the auction system of fixing the prices of bonds in the primary market. In such a system, each

34 Savings bonds are debt instruments intended mainly for natural persons. They may be also purchased by non- corporate legal persons. Savings bonds are not traded in the secondary market. However, bondholders may sell these bonds to the issuing agent. Those instruments are registered in the Bond Purchaser Register maintained by the issuing agent (since 2003 – PKO BP).

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 195 Financial markets

bank acting as Primary Dealers, in order to optimise the purchase price and to execute customer orders, submits several offers with various prices. The value of purchase offers at auction sales was usually over twice higher than the value of bonds sold (Table 5.2.6). It also concerned bonds with longer maturities, in particular 10-year zero-coupon bonds.

Figure 5.2.5. Treasury bonds: demand and supply and bid-to-cover ratio at auctions, 2009−2010

PLN billion 35 14 30 12 25 10 20 8 15 6 10 4 5 2 0 0 III III IV VVI VII VIII IX XXI XII III III IV VVI VII VIII IX XXI XII 2009 2010

Supply – left-hand scale Demand – left-hand scale Bid-to-cover ratio – right-hand scale Source: NBP.

Table 5.2.6. Demand for selected wholesale bonds at auctions, 2009−2010

5 Value of purchase offers Value of sale offers Bid-to-cover ratio Type of bonds (PLN billion) (PLN billion) 2009 2010 2009 2010 2009 2010 2-year zero-coupon bonds 91.11 125.16 42.83 53.65 2.13 2.33 5-year fixed-rate bonds 27.91 30.61 15.54 16.84 1.80 2.02 10-year fixed-rate bonds 8.31 39.94 3.57 17.44 2.33 2.29 10-year floating-rate bonds 0.00 18.13 0.00 4.67 – 3.88 20-year fixed-rate bonds 11.34 1.81 4.59 0.59 2.47 3.07

Source: Ministry of Finance.

Apart from auction sales, depending upon the level of borrowing needs, each month the Ministry of Finance organised switch auctions, through which in 2010 Treasury bonds worth PLN 33.6 billion were offered (early redeeming PLN 32.6 billion of other bonds). Switch auctions made the bonds redemption schedule more flexible without cash exchange.

In 2010, the number of series of traded wholesale bonds increased to 27 (against 26 in 2009). As a result of the policy pursued by the Ministry of Finance leading to the increase in the value of single issues and large scale of gross issue, the average value of single series of Treasury bonds traded as at the end of 2010 reached PLN 17.3 billion and was by 12.1% higher than the year over year index. At the same time, in 2010 the number of benchmark issues to the value over PLN 20 billion rose to 14 (compared to 12 in 2009). The largest benchmark issues were 5-year fixed-rate bonds.

Marketable retail bonds and savings bonds were sold through the network of PKO BP branches. In 2010, further decline in interest of individual investors in retail bonds was noted. The value of retail bonds sold by the Ministry of Finance in 2010 was by 36.8% lower compared to 2009 and amounted to PLN 2.4 billion.

196 National Bank of Poland Financial markets

Box 5.2.1

InFRASTRUCTURE BonDS oF THE nATIonAL RoAD FUnD

Infrastructure bonds issued by BGK for the National Road Fund1 are bearer securities, dematerialised (registered by the National Depository for Securities), interest-bearing or offered at a discount. Infrastructure bonds are covered by the guarantees of the State Treasury. The debt incurred from the issues of BGK for the National Road Fund is classified as a debt of the public sector; however it does not have an impact on the increase in the budget deficit.

Table I. The list of infrastructure bonds issues offered by BGK for the National Road Fund, 2009−2010

Size of issue Average yield on the Yield of comparable Date of auction Maturity Bid-to-cover ratio (PLN billion) primary market (%) Treasury bonds (%) 11.08.2009 3 years 0.60 – – – 14.10.2009 5 years 0.80 3.64 6.008 5.685 21.10.2009 9 years 1.801 2.19 6.429 6.096 4.11.2009 5 years 1.50 1.70 6.068 5.738 18.11.2009 9 years 1.24 1.77 6.524 6.170 09.12.2009 9 years 1.912 2.24 6.583 6.254 19.05.2010 9 years 3.01 1.60 5.995 5.717 09.06.2010 5 years 3.033 1.80 5.750 5.324 5 1 Of which PLN 300 million issued at the supplementary auction. 2 Of which PLN 113 million issued at the supplementary auction. 3 Of which PLN 489 million issued at the supplementary auction. Source: Prepared on the basis of data of BGK and Bloomberg news service.

The value of issues of these instruments in 2009 and 2010 amounted to PLN 7.9 billion and PLN 6.0 billion, respectively. They were fixed-rate debt instruments. Their individual series varied only as regards their maturities. The largest series of these bonds traded as at the end of 2010 were bonds with 9-year original maturity (IDS1018) to the value of nearly PLN 8.0 billion. Another large series of these instruments were 5-year bonds (IPS1014). The total outstanding value of infrastructure bonds as at the end of 2010 was PLN 13.9 billion.

Infrastructure bonds are sold at auctions organised by the National Bank of Poland, which can be attended by Primary Dealers. These bonds enjoyed large demand of investors due to their yield higher than that offered by Treasury bonds with similar investment risk (as the investments in infrastructure bonds entail higher liquidity risk than in the case of Treasury bonds).

Infrastructure bonds were traded in the non-regulated OTC market and on the stock exchange and over-the-counter regulated market (in markets operating within the Catalyst platform: regulated retail market organised by the WSE and regulated wholesale market organised by BondSpot).

The value of trade in infrastructure bonds was relatively low. The liquidity ratio for the whole market amounted to 0.04. The highest liquidity was observed in 5-year bonds, for which this ratio slightly exceeded 0.06. Many buyers of infrastructure bonds hold these securities to

1 The National Road Fund was established in the Bank Gospodarstwa Krajowego by the Act of 27 October 1994 on Toll Motorways and the National Road Fund (consolidated text: Dz.U. of 2004, No 256, item 2571). The Fund provides financial support for implementation of the government Roads and Motorways Construction Programme by collecting financial resources (coming, among others, from fuel fees and tolls) for the preparation, construction, reconstruction, overhauls, maintenance and protection of motorways, expressways as well as other national roads.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 197 Financial markets

maturity, including in particular pension funds, which as at the end of 2010 held infrastructure bonds to the value of PLN 9.4 billion (over 67.6% of these instruments). The overwhelming majority of transactions (nearly 98.7% of the value of trade) were concluded in the non- regulated market. In 2010, trade on the Catalyst platform amounted only to PLN 78.3 million. Conditional transactions secured by infrastructure bonds were concluded occasionally and exclusively in the OTC market.

Table II. The value of trade in infrastructure bonds, broken down by the place of the transaction in 2010 (PLN million)

Catalyst Type of OTC market WSE regulated market BondSpot regulated market transaction IPS1014 IDS1018 IPS1014 IDS1018 IPS1014 IDS1018 Outright 2,986.5 2,650.1 20.1 15.6 2.8 39.8 Buy-sell-back 88.0 60.0 – – – – Repo – 30.0 – – – – Total 3,074.5 2,740.1 20.1 15.6 2.8 39.8

Note: Conditional transactions are calculated individually, according to the initial exchange value. Source: Prepared on the basis of data of the National Depository for Securities.

Source: Prepared on the basis of data of the PFSA included in the Quarterly Bulletin, OPF market 4/2010 and information available on the BGK website http://www.bgk.com.pl/emisje-obligacji-infrastrukturalnych-banku- gospodarstwa-krajowego-na-rzecz-krajowego-funduszu-drogowego. 5

Secondary market

In 2010, the value of trade in the domestic market of Treasury bonds remained at the historically high level. The average daily net turnover amounted to PLN 24.0 billion and was nearly 73.5% higher than in 2009.35 The recorded growth concerned both the segment of outright and conditional transactions (Figure 5.2.6). The value of outright transactions, which best reflect the liquidity of the market, was nearly twice higher, while the value of conditional operations increased by almost 40.0%. The liquidity ratio rose from 0.43 in 2009 to 0.74 in 2010.36

Figure 5.2.6. Average daily transaction value (net turnover) in the Treasury bond market, 2007−2010

PLN billion 30 25

20 8.0 7.4 15 0.6 0.9 7.3 5.7 10 0.4 0.4 15.4 12.6 5 9.4 7.7 0 2007 2008 2009 2010

Outright transactions Repo transactions Sell-buy-back transactions Source: Prepared on the basis of data of the Ministry of Finance.

35 The net turnover in the market of Treasury bonds presented in this chapter constitutes the sum of the values of outright transactions and conditional transactions calculated according to the value of initial exchange. In 2007–2010, the number of working days was: 251, 254, 255 and 256 days, respectively. 36 This ratio is calculated as a quotient of the average value of outright transactions and the average outstanding value marketable bonds issued by the State Treasury in a given year. Due to a change of the source of data concerning the value of transactions, these data may differ from those presented in the previous editions of this study.

198 National Bank of Poland Financial markets

In 2010, a marked increase of the share of outright transactions was observed in the turnover structure (Table 5.2.7). It could have been related to the constant inflow of foreign institutional investors to the domestic capital market. Moreover, continued growth of prices in the bond market observed in particular in the first half of 2010 could have encouraged those entities, which until now were reluctant to sell these instruments, to be more active in the secondary market. The share of non-residents in turnover in the segment of outright transactions oscillated between 30% in May (during the escalation of the fiscal problems of Greece and related depreciation of the Polish zloty, which may have discouraged foreign investors from reducing their exposure in the domestic market of Treasury bonds, resulting in generation of losses arising from foreign exchange differences) and 46% in October, when the outflow of non-residents from the domestic market of Treasury bonds was observed.

As in previous years, the market of conditional transactions was dominated by transactions with the participation of national institutions (93.3% share in turnover). The most frequently concluded were sell-buy-back transactions, which for non-bank financial institutions were a way to invest temporary financial surpluses. Repo transactions constituted only 6.7% of the conditional transactions. In this market segment, non-residents were very active as they concluded 45% of all repo transactions in 2010. The share of non-residents in the whole segment of conditional transactions in Treasury bonds reached 6.7% in 2010 against 4.8% in 2009. Floating-rate bonds were most frequently used in these operations. It was due to the increased stability of prices of floating-rate bonds, which enabled to reduce the risk of changes in the value of collateral.

Table 5.2.7. Share of individual types of transactions in the total value of transactions in Treasury bonds, 2007−2010 (%) 5 Year Outright transactions SBB/BSB transactions Repo transactions 2007 60.3 35.5 4.2 2008 55.0 42.5 2.5 2009 55.7 41.1 3.2 2010 64.3 33.3 2.4

Source: Calculated on the basis of the data of the Ministry of Finance.

Figure 5.2.7. Monthly value of transactions in Treasury bonds and liquidity ratio, 2007−2010

PLN billion 660 1.3 600 1.2 540 1.1 480 1.0 420 0.9 360 0.8 300 0.7 240 0.6 180 0.5 120 0.4 60 0.3 0 0.2 I III V VII IX XI I III V VII IX XI I III V VII IX XI I III V VII IX XI 2007 2008 2009 2010

Outright transactions – left-hand scale Repo transactions – left-hand scale SBB transactions – left-hand scale Liquidity ratio – right-hand scale

Note: The liquidity ratio was calculated as the ratio of the monthly value of transactions and the outstanding value of marketable bonds issued by the State Treasury in a given month. The value of conditional transactions was calculated according to the value of initial exchange. Source: Prepared on the basis of data of the Ministry of Finance.

Domestic banks remained the most important participants of the secondary market of Treasury bonds as regards the value of concluded transactions (Figure 5.2.8). It was due to the fact

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 199 Financial markets

that many of these entities acted as Primary Dealers and market makers. Foreign banks were also active investors in the domestic market of Treasury bonds (the highest rise in the share in the structure of investors). The much higher share of investment funds in turnover compared to 2009 could have been connected with the increased interest of investors in participation units of the money market funds and debt securities funds.

Figure 5.2.8. Share of investors in turnover in the Treasury bond market, 2009−2010

A. 2009 B. 2010

19.8% 9.7% 30.0% 6.2% 0.3% 1.6%

12.2% 5.7% 1.4% 0.4% 5.5% 38.2% 3.8% 14.4% 44.7% 2.6% 2.2% 1.3%

Commercial banks Insurance companies Pension funds Investment funds Non-ﬁnancial entities Other entities Foreign banks Foreign ﬁnancial institutions Other non-residents

Note: The data refer exclusively to outright transactions. 5 Source: Prepared on the basis of data of the Ministry of Finance.

Treasury bonds were traded in four markets: the OTC market, the electronic platform – Treasury BondSpot Poland and in two markets operating within the Catalyst platform: the regulated stock market for retail investors run by the WSE and in the wholesale regulated market of BondSpot S.A. Registration and settlement of transactions in domestic Treasury bonds were conducted by the National Depository for Securities.

Similarly to the majority of developed markets, turnover concentrated in the OTC market (Table 5.2.8). The majority of transactions in this market are concluded via electronic conversational systems or, to a lesser extent, via voice brokers. The OTC market enables quicker performance of transactions and is characterised by lesser transparency than organised markets, which translates into its popularity among investors. Throughout 2010, the average daily net turnover in the OTC market amounted to PLN 23.0 billion (of which 35.4% were conditional transactions) and was higher by PLN 71.2 billion in comparison to 2009.

A higher growth rate of the value of concluded transactions was observed in other segments of the market. Despite this fact their share in the turnover structure remained insignificant and did not exceed 3.7%. In 2010, the daily average value of transactions on the Treasury BondSpot Poland platform was nearly three times higher than in the previous year and reached PLN 0.9 billion (of which 41% were conditional transactions). The increased interest in concluding transactions in this market was also reflected by the growth in the number of its participants, including in particular market makers. As at the end of 2010, 33 entities, including 25 market makers, 6 market takers and two qualified investors, were participants of this electronic platform of trading in Treasury bonds.

The Catalyst platform of debt instruments turnover was the smallest market where Treasury bonds were traded. In 2010, net turnover on this platform (in both regulated markets run by the WSE and BondSpot) did not exceed PLN 1.57 billion and represented about 0.02% of the total value of transactions. They were exclusively outright transactions. In total, 39 series of wholesale and retail bonds were traded on the Catalyst platform, which made this market accessible also to individual investors. Retail bonds were traded in the regulated WSE market. The Catalyst platform was dominated by transactions in wholesale Treasury bonds.

200 National Bank of Poland Financial markets

Table 5.2.8. Share of individual markets in total turnover in the Treasury bond market, 2009−2010 (%)

Treasury BondSpot Catalyst OTC market Poland WSE BondSpot Total turnover in 2009 97.76 2.19 0.05 0.00 – outright transactions 54.57 1.52 0.05 0.00 – conditional transactions 43.19 0.67 0.00 0.00 Total turnover in 2010 96.27 3.71 0.02 0.00 – outright transactions 62.22 2.18 0.02 0.00 – conditional transactions 34.05 1.53 0.00 0.00

Source: Calculated on the basis of the data of the National Depository for Securities.

Investors

As at the end of 2010, the largest group of investors in the domestic market of Treasury bonds (as in 2006–2008) were pension funds. Their bond holdings grew by 5.4% compared to the end of 2009. Domestic banks, which significantly increased the value of their portfolio of Treasury bonds in the previous two years, insignificantly reduced investments in these instruments in 2010 (Figures 5.2.9 and 5.2.10). However, the data as at the end of individual periods do not fully reflect the involvement of domestic banks in the domestic market of Treasury bonds in 2010, due to nearly 20-percent growth in their investments in such instruments in the fourth quarter of 2009. The average value of the bonds held by banks in 2010 was nearly 15% higher than in 2009. Among domestic investors, also insurance companies and investment funds increased their involvement in 5 the domestic market of Treasury bonds, which was connected with significant inflow of funds to the money market funds and debt securities funds.

The most important change in the structure of investors in the domestic Treasury bond market was significant growth in holdings of foreign investors, whose share in the market increased from 18.9% as at the end of 2009 to 26.1% as at the end of 2010. The growing investments of foreign entities in Treasury bonds issued in the local market was a result of decline in global risk aversion, fiscal problems of some countries of euro area and the related rebalancing of portfolios of debt securities by institutional investors, as well as attractive rates of return offered by these instruments.

A positive balance of the capital movement from developed countries to the matured emerging markets was observed in 2010. The stable economic situation and positive assessments of the economic growth prospects enhanced confidence in the Polish financial market. In the conditions of low interest rates in the developed markets, Polish bonds offered a high – against peripheral states of the euro area – rate of return in relation to the credit risk of Poland, reflected in CDS premia (Figure 5.2.11) and assessments of rating agencies.37 This factor could have had a significant impact on the interest in Polish Treasury bonds among foreign insurance companies and defined benefit pension funds, which – in above mentioned low interest rates environment in developed markets – could have had difficulties in achieving rates of return at the level of technical rates of return or benchmarks assumed before the global financial crisis. It could lead to an increase in their exposures, inter alia, in the local markets of Treasury bonds of the countries with stable and developing economies, such as Poland. Moreover, an inflow of non-residents to the domestic market was supported by a relatively stable exchange rate of the zloty and its gradual appreciation in 2010 (except for April and May, which saw the increase of the exchange rate EUR/PLN and its volatility as a result of the increased risk aversion arising from concerns for the solvency of Greece).

37 In 2010, the major rating agencies retained a long-term rating of Poland for the debt in foreign currency at the A-, A- and A2 according to the agencies: Standard & Poor’s, Fitch and Moody’s, respectively.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 201 Financial markets

Figure 5.2.9. Investors in the Treasury bond market, 2009–2010 (by outstanding values as period-end)

PLN billion 140 120 117.0 112.1 110.4 111.0 102.8 100 80 61.1 59.5 60 53.8 40 26.830.2 17.4 21.9 16.1 23.0 20 12.4 10.1 3.9 3.9 0 Banks Foreign Other Insurance Pension Investment Individuals Non-ﬁnancial Other entities banks non-residents companies funds funds entities

2009 2010

Source: Data of the Ministry of Finance.

Figure 5.2.10. Structure of Treasury bond investors, 2009–2010 (by outstanding values as at period-ends)

A. 2009 B. 2010 6.5% 6.3% 3.0% 2.1% 0.8% 0.9% 24.4% 3.9% 4.8% 26.8% 5 23.1% 27.0% 12.4%

13.0% 4.6% 4.2% 14.7% 21.5%

Commercial banks Foreign banks Other non-residents Insurance companies Pension funds Investment funds Individuals Non-ﬁnancial entities Other entities

Source: Data of the Ministry of Finance.

Figure 5.2.11. CDS premia in selected EU countries, 2009−2010

basis points 1,200

1,000

800

600

400

200

0 III III IV VVI VII VIII IX XXI XII III III IV VVI VII VIII IX XXI XII 2009 2010 Poland Czech Republic Hungary Spain Portugal Italy Greece Germany

Source: Bloomberg.

202 National Bank of Poland Financial markets

As a result, as at the end of 2010 bond holdings of non-residents in the domestic market were by 59% higher as compared to the end of 2009 and reached PLN 124.8 billion (Figure 5.2.12). Non-bank financial institutions increased their investments to the largest extent. The value of Treasury bonds held by these institutions was growing month by month. The portfolio of foreign banks was more volatile, which may attest to more speculative nature of their investments.

Figure 5.2.12. Treasury bonds held by foreign investors and the yields of benchmark bonds of Poland and the selected states of the euro area, 2009−2010

PLN billion % 140 7.0 120 6.0 100 5.0 80 4.0 60 3.0 40 2.0 20 1.0 0 0.0 III III IV VVI VII VIII IX XXI XII III III IV VVI VII VIII IX XXI XII 2009 2010

Foreign investors’ portfolio – left-hand scale Yield on 5-year Polish bonds – right-hand scale Yield on 5-year Italian bonds – right-hand scale Yield on 5-year Spanish bonds – right-hand scale Yield on 5-year Portuguese bonds – right-hand scale Yield on 5-year German bonds – right-hand scale 5 Source: Prepared on the basis of data of the Ministry of Finance and Bloomberg news service.

5.2.2.2. Municipal bonds

The market of municipal bonds is the smallest part of the capital market. As at the end of 2010, the share of these instruments in the market of long-term debt securities in Poland amounted to about 2%. The outstanding value of bonds issued by local government units accounted for about 0.8% of GDP.

Market size

As at the end of 2010, the outstanding value of long-term debt securities issued by LGUs amounted to PLN 10.85 billion38 and was by 57% higher than at the end of 2009 (Figure 5.2.13). Debt securities issued by the capital city of Warsaw constituted the largest part (about 14.7%) of outstanding bonds issued by municipalities. In 2010, local governments raised PLN 4.64 billion in bonds, which was the highest value in this decade.

The increased interest in bond issues was connected with significant demand of local governments for external sources of financing the investments. In 2010, the LGU deficit was higher than this recorded in 2009 and reached about PLN 15 billion. Deterioration of the financial position was mainly a consequence of lower revenues from direct taxes caused among other things by a higher unemployment rate than in 2009 and the increase in expenditures. At the same time, the investment expenditures of LGUs were about 4% higher than in 2009. Therefore, local governments were looking for additional funding sources in order to complete already implemented projects or to start new ones. The majority of issues of municipal bonds were carried out in the last quarter, which was caused, first of all, by lower than expected revenues of LGUs.

38 In Poland, short-term municipal bonds are of limited importance. According to Ministry of Finance data, as at the end of 2010 short-term municipal bonds constituted nearly 0.2% of the outstanding value of debt securities issued by local government units.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 203 Financial markets

Figure 5.2.13. Outstanding value of debt securities issued by local government units, 2003−2010

PLN billion % 12 22

10 19.7 20

8 17.1 18 15.5 15.6 15.4 16.0 15.5 6 15.3 16 4 10.9 14 4.5 6.9 2 2.6 3.0 3.3 3.8 4.1 12

0 10 2003 2004 2005 2006 2007 2008 2009 2010 Outstanding value of municipal bonds issued by local government units – left-hand scale Share of outstanding value of municipal bonds in local government units' debt – right-hand scale

Source: Prepared on the basis of data of the Ministry of Finance and Fitch Polska S.A.

Local governments allocated funds raised from the bond issues for investment projects in the area of local transport, environmental protection, road infrastructure and water supply and sewage infrastructure. Moreover, the host cities of UEFA EURO 2012 financed infrastructure investments related to this event (in 2010, their issues accounted for 30% of the value of all newly issued bonds). The major issuer was the capital city of Warsaw, which in 2010 placed almost PLN 1 billion municipal bonds under the programme valued PLN 4 billion established one year earlier. Sale through public offering applied to PLN 900 million of these bonds. The main buyers of these 5 instruments were open pension funds. One PLN 99.41 million issue was carried out as a non-public offering. Large issues were also carried out by the remaining cities-hosts of UEFA EURO 2012 (Poznań, Wrocław and Gdańsk) as well as Białystok.

The considerable part of investment projects managed by LGUs was co-financed from the Cohesion Fund and the EU structural funds. The costs of such projects are divided into: eligible costs, which are refundable from the EU funds and non-eligible costs, which are non-refundable. At the implementation of investments co-financed by EU funds, LGUs make their own contribution at the amount of 15–25% of eligible costs and cover non-eligible costs. Eligible costs are reimbursed only after documenting that they have been incurred. Due to the time difference between costs being incurred and refunded, local governments also have to raise funds for covering part of eligible costs.

The issues of municipal bonds were also carried out in order to lower the costs of LGU debt servicing. Raised funds were used to refinance high interest-rate bearing loans and credits taken out in previous years. The size of issues of municipal bonds in subsequent years will be highly affected by the statutory restrictions on LGU debt (Box 5.2.2).

As at the end of 2010, the share of outstanding value of municipal bonds in the total debt of LGUs amounted to 19.7% (Figure 5.2.13). As in previous years, bank loans were the main source of financing their borrowing needs. (Figure 5.2.14). Banks willingly participated in tenders for granting loans to LGUs as they perceived co-operation with this type of customers as particularly interesting from a point of view of future cross-selling of different products and services, including operating accounts.

204 National Bank of Poland Financial markets

Box 5.2.2

LEgAL LIMITATIonS on LoCAL govERnMEnT UnITS’ DEBT

In accordance with Article 85 para. 3 of the Act of 27 August 2009 on the Provisions Implementing the Public Finance Act,1 the provisions of the Public Finance Act of 20052 concerning the debt limits of local government units remain in force till 31 December 2013. Pursuant to Articles 169 and 170 of the Public Finance Act of 2005, as at the end of the fiscal year the amount of outstanding debt of LGUs should not exceed 60% of the total realised revenues in this fiscal year, and the level of annual repayments of the principal and interest – 15% of the planned revenues. To circumvent these requirements LGUs moved part of their investments to LGU-controlled commercial companies, which are not subject to the statutory debt limits. In 2010, these entities issued bonds to the value of nearly PLN 850 million. The funds raised were allocated to the infrastructure projects.

The Public Finance Act of 20093 introduces significant amendments regarding limitations on LGU debt. Pursuant to Article 243 of this Act, the relation of the annual value of payments arising from LGUs’ liabilities and their service costs to the total planned revenues shall not exceed calculated for the last three years arithmetic mean of current revenues increased by the income from sales of property and decreased by current expenditures to the total revenues. Pursuant to Article 121 para. 2 of the Act of 27 August 2009 on the Provisions Implementing the Public Finance Act, this solution will be applicable for the first time to budget resolutions drawn up for 2014. However, already in 2010 it restricted the access of certain local governments to external funding sources. For example, this happened 5 in the case of Rybnik, as in May 2010 the Regional Accounting Chamber (RIO) in Katowice issued a negative opinion on the possibility of future redemption of the city bonds, justified by the argument that in 2014 it would exceed the allowable debt ratio. For this reason, the city abandoned the planned issue of debt securities to the value of PLN 50 million. The opinion of RIO concerning the ability to repay the liabilities of LGU is not binding, however it is taken into account by potential organisers of the issue and buyers of the bonds. Therefore, lack of a positive opinion of RIO is a serious obstacle for local governments in obtaining financing in the capital market.

A new limit of debt may reduce the scale of LGUs’ investments, also those co-financed by EU funds. As the above-mentioned article of the Act indicates, with respect to the projects implemented with participation of EU funds, the ratio will take into account the residual interest and principal of loans outstanding after the lapse of 90 days from closing the investment project and obtaining a refund. Pursuant to the current Articles 169 and 170 of the Public Finance Act of 2005, the debt limits were not applied to the debt incurred in connection with this type of investments until the time of their completion and final settlement.

In order to avoid the exceeding of the debt limits, local government units will look for other forms of financing. It is likely that LGUs will show greater interest in revenue bonds. In the light of the binding provisions, the liabilities due to revenue bonds are recognised in the limit concerning the amount of LGU debt as at the end of the budget year, but the debt limit, to apply as from 2014, will not cover such liabilities.4

1 The Act of 27 August 2009 on the Provisions Implementing the Public Finance Act (Dz.U. of 2009, No 157, item 1241, as amended). 2 The Public Finance Act of 30 June 2005 (Dz.U. of 2005, No 249, item 2104, as amended). 3 The Public Finance Act of 27 August 2009 (Dz.U. of 2009, No 157, item 1240, as amended). 4 Article 23b para. 7 of the Bonds Act of 29 June 1995 (consolidated text: Dz.U. of 2001, No 120, item 1300, as amended) excludes legal restrictions on the debt of LGUs included in the Public Finance Act.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 205 Financial markets

Figure 5.2.14. Capital inflow from bank loans and municipal bonds issued by local government units and share of these funding sources in total revenues, 2007−2010

PLN billion % 18 90 16 17.3 80 14 70 12 13.3 51.4 60 46.5 10 40.2 44.9 50 8 40 7.7 8.5 6 30 4 14.8 4.4 13.3 4.5 20 4.1 2 10 4.5 0.8 0.9 0 0 2007 2008 2009 2010 Loans to local government units – left-hand scale Issuance of local government units bonds – left-hand scale Share of revenues from credits and loans in total local government units' revenues – right-hand scale Share of revenues from bond issues in total local government units' revenues – right-hand scale Source: Prepared on the basis of data of Ministry of Finance.

Market structure

According to the data of the Ministry of Finance, cities with the county status prevailed among the issuers of municipal bonds. As at the end of 2010, bonds issued by these entities accounted for nearly 76% of the total outstanding value of debt securities issued by local government units. The share of the debt of boroughs amounted to about 12%, provinces – 8%, 5 and counties – 5%. The associations of local government units so far have not issued any debt securities.

The maturity of over half of municipal bonds issued in 2010 ranged from 5 to 10 years. The share of debt securities with maturity exceeding 10 years amounted to about 27%, and with maturity shorter than 5 years – 22%. An average maturity of debt securities issued in 2010 was longer as compared to 2009.

As in previous years, local government units issued floating-rate bonds. An exception was the issue of debt securities of Warsaw. The interest of almost all bonds depended upon the level of the reference rates in the interbank deposit market (mainly the 6M WIBOR rate).

Figure 5.2.15. Municipal bond issues arrangers by the outstanding value of bonds, as at the end of 2009 and 2010

A. 2009 B. 2010 5.2% 7.1% 4.8% 5.1% 9.2% 6.6% 5.3% 7.4% 5.6% 4.0%

5.6% 7.7%

4.5% 8.0% 31.4%

13.2% 37.0% 10.4%

9.2% 12.7%

PKO BP Pekao SA/CDM Pekao BGK BRE Bank Bank Handlowy Nordea Bank Polska Bank DnB NORD Polska BOŚ /Dom Maklerski BH ING Bank Śląski Other Source: Fitch Poland.

206 National Bank of Poland Financial markets

In 2010, issues of municipal bonds, except for the issues of the bonds of Warsaw, were carried out through non-public offering. Usually, the arrangement of this type of issue takes shorter time and is less complicated than the issue carried out through public offering. Considering the non-public nature of the majority of issues, banks were almost sole arrangers of these issues. The scale of banks’ activity in servicing municipal bonds’ issues was determined by the bank strategy and its organisational capacity. As in previous years, PKO BP was an institution with the highest share in the market (Figure 5.2.15).

Secondary market and investors

The market of municipal bonds was dominated by small issues. In addition to that, partially due to applicable debt limits, local governments usually divided them into many series. Owing to this, the repayment of debt could be conveniently deferred over time and did not constitute such considerable burden for the budget of LGUs as one-off redemption of the entire issue. The small scale of individual issues was the reason for low liquidity of the market of municipal bonds and constituted a barrier to its development.

Secondary trading in municipal bonds took place mainly in the OTC market. Due to its strong segmentation, transactions in this market were concluded occasionally. As in previous years, the main investors in bonds were banks (Figure 5.2.16). They often treated an arrangement of issue as an alternative to granting a loan to a LGU. Therefore, they directly acquired the issues and kept the bonds in their portfolios until maturity date. The low liquidity of the secondary market was the reason why non-bank financial institutions showed little interest in these instruments.

Figure 5.2.16. Investors in the municipal bond market in 2009−2010 (outstanding 5 securities outside the organised market, as at period-end)

A. 2009 B. 2010 2.1% 0.7% 5.8% 1.6% 3.5% 9.6% 4.3% 2.7% 0.2%

81.8% 87.7%

Commercial banks Insurance companies Investment funds Pension funds Foreign investors Other entities Source: NBP study based on data obtained from the group of banks acting as depositories.

Slightly over 16% of municipal bonds outstanding were traded in the Catalyst organised market. In 2010, these instruments were traded in both regulated markets of the platform and in the retail segment – ATS organised by the WSE (Table 5.2.9). Local governments admitted only a few series of issued debt securities to trading on Catalyst, because the related charges were collected separately for each of them. As compared to the end of 2009, the value of municipal bonds listed on the Catalyst platform increased almost twice. It resulted from the admission to trading of two series of Warsaw bonds to the total value of PLN 900 million. As at the end of 2010, 27 series of municipal bonds valued at PLN 1.75 billion, of which bonds issued by Warsaw accounted for PLN 1.5 billion, were listed in the markets operated within this bond trading platform.

Bonds may be also admitted to listing on the Catalyst platform by obtaining an authorisation for a given issue without admitting it to trading. In order to obtain an authorisation, the issuer must fulfil certain (simplified) disclosure requirements. It may enhance credibility and

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 207 Financial markets

recognisability of the issuer in the financial market. An authorisation of Catalyst was held by 11 series of municipal bonds to the value of PLN 40.4 million (in 2009, there were 12 series valued at PLN 41.5 million).

The liquidity of the secondary market of municipal bonds was limited. The value of transactions in municipal bonds in 2010 in all markets of the Catalyst platform amounted to PLN 194 million, of which session transactions accounted for PLN 124 million. The prevailing part of transactions (about 96%) was completed on Warsaw debt instruments. The remaining issuers introduced to the market only a few small series of bonds, therefore the number and value of transactions in these securities were low.

Table 5.2.9. Municipal bonds listed on the Catalyst platform, 2009−2010

September – December 2009 January – December 2010

WSE BondSpot WSE BondSpot Regulated regulated Regulated regulated ATS ATS market market market market Value of issue (PLN million) 602.00 – 928.00 1,502.00 24.95 1,726.50 Number of series 3 – 7 5 17 8 Number of issuers 2 – 4 2 8 4 Number of transactions 160 – 22 549 47 34 Turnover net (PLN million) 26.78 – 49.90 130.86 3.90 59.05

Note: Municipal bonds were not listed in ATS operated by BondSpot. The Warsaw bonds were admitted to trading in both regulated markets operating within the Catalyst platform. 5 Source: Prepared on the basis of the Statistical Bulletin of Catalyst.

5.2.2.3. Long-term debt instruments issued by banks

Long-term debt instruments issued by domestic banks are negotiable securities with the original maturity period of at least one year. Among these instruments we may distinguish bonds, bank securities issued by commercial banks, including mortgage banks and cooperative banks,39 as well as mortgage bonds issued exclusively by mortgage banks.

This analysis of the development of the market of long-term debt securities issued by banks was divided into two categories of instruments: long-term bank debt securities (bonds and bank securities issued pursuant to the Banking Law Act) and mortgage bonds issued by domestic banks.

5.2.2.3.1. Long-term bank debt securities40

Market size

As at the end of 2010, the outstanding value of domestic long-term bank debt securities (LBDS) issued in Poland amounted to PLN 5.2 billion. Financing through the issue of debt securities in the capital market was of little significance for the majority of banks operating in Poland. LBDS constituted only 0.5% of the banking sector liabilities, while in the group of issuers of these securities this share was about 1.4%.

39 Cooperative banks may, with permission from the affiliating bank, issue bank securities and incur liabilities associated with the issue of bank securities as of 28 August 2009. They were enabled to do so by the amendment to the Act on the Operations of Cooperative Banks, their Affiliation and Affiliating Banks – Act of 1 July 2009 Amending the Act on the Operations of Cooperative Banks, their Affiliation and Affiliating Banks (Dz.U. of 2009, No 127, item 1050). 40 This section analyses long-term bank debt securities, except for infrastructural bonds issued by BGK for the National Road Fund in 2009 and 2010 to the total value of PLN 13.89 billion. This type of debt securities was described in chapter 5.2.2.1.

208 National Bank of Poland Financial markets

In 2010, the value of LBDS issued increased significantly and reached about PLN 2.2 billion. Among securities issued by domestic banks, bank securities prevailed (about 60% of the value of LBDS sold in 2010). Five commercial banks, one mortgage bank and entities from the sector of cooperative banks, were active in the primary market of LBDS.

The amendment to the Act on the Operations of Cooperative Banks, their Affiliation and Affiliating Banks enabled cooperative banks to increase own funds within the subordinated loans incurred upon a consent of the affiliating bank in the form of issue of debt securities. Pursuant to Resolution No 314/200941 of the PFSA, which ceased to apply as of 31 December 2010 banks could upon a consent of the PFSA include in the core capital the issued convertible bonds with maturity no shorter than 5 years from the date of closing the issue or long-term bonds with maturity no shorter than 10 years and no longer than 30 years, which could be redeemed by the issuer being a bank, and which provide the bond holder only with the right to obtain interest. Several cooperative banks and one affiliating bank took advantage of this opportunity to increase own funds and, in 2010, issued debt securities to the value of PLN 184.7 million, which constituted 8.5% of the issue of LBDS. They were mainly bonds with original maturity of 10 or 15 years, with floating interest rate admitted to trading in ATS organised by WSE within the retail segment of the Catalyst platform.

In 2010, commercial banks, while competing for savings of the non-financial sector, offered mainly long-term bank debt securities with embedded derivatives (EUR/PLN exchange rate, WIG 20 index and precious metal price options).42 As compared to 2009, the maturity structure of LBDS has not changed.

Figure 5.2.17. Outstanding value of long-term debt securities issued by domestic banks in the domestic market, 2007−2010 (as at period-end) 5

PLN billion % 7 70 6 60 50.6 50.1 5 46.5 48.0 50 4 40 3 30 6.6 6.1 2 5.5 5.2 20 1 10 0 0 2007 2008 2009 2010 Outstanding value of LBDS issued by domestic banks – left-hand scale Share of LBDS in the outstanding value of debt securities issued by domestic banks in Poland – right-hand scale

Source: NBP.

Table 5.2.10. Maturity structure of long-term bank debt securities issued by domestic banks in Poland according to original maturities, 2009−2010 (%, as at period-end)

2009 2010 1 to 2 years (inclusive) 11.5 7.1 2 to 5 years (inclusive) 72.1 73.3 5 to 10 years (inclusive) 16.4 17.3 Over 10 years 0.0 2.3

Source: NBP.

41 Resolution No 314/2009 of the Polish Financial Supervision Authority of 14 October 2009 on other balance sheet items included in the core capital, the amount and scope thereof, and the conditions of including them in a bank’s core capital (D.Urz. KNF of 2009, No 1, item 8). 42 The market of structured products in Poland in 2010, the study available on the website http://www.structus.pl/.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 209 Financial markets

In the domestic financial market, the issues of long-term debt securities were carried out also by foreign banks. Structured certificates of Raiffeisen Centrobank AG, Deutsche Bank AG London and bonds issued by Barclays Bank Plc were registered in the National Depository for Securities in 2010. In total, long-term debt securities of PLN 7.5 billion issued by credit institutions were traded in the domestic capital market as at the end of 2010 (Table 5.2.11).

Table 5.2.11. Long-term debt instruments issued by banks, 2007−2010 (PLN million, as at period-end)

2007 2008 2009 2010 Domestic banks 6,135.2 6,585.7 5,522.7 5,176.0 EIB 1,982.0 1,530.0 1,440.0 1,440.0 Foreign credit institutions 164.3 591.9 837.3 927.4 Total 8,281.5 8,707.6 7,800.0 7,543.4

Source: NBP and the National Depository for Securities.

Secondary market and investors

Secondary trading in long-term debt securities of domestic banks issued through non-public offering took place mainly in the OTC market. Some issuers of structured debt instruments created a secondary market for them. Investors could sell such securities to other investors via the issuer during sessions organised at regular intervals or, in the case of lack of demand, present them for 5 early redemption. The information about the turnover in the OTC market is not available. Only 12 series of bonds of cooperative banks with the value of PLN 158 million were traded in the organised non-regulated market. This trade proceeded in ATS organised by the WSE within the Catalyst platform. In 2010, the value of transactions in these instruments amounted to around PLN 200 million. Moreover, EIB bonds were listed in the regulated ATS market of the WSE, the retail segment of the Catalyst platform.

The structure of investors in the LBDS market strongly differed depending on the legal form of these instruments (Figure 5.2.18). In 2010, households remained the most important group of investors in the bank securities market. They were the main addressees of the structured debt instruments offered. However, in the structure of buyers of bank bonds the biggest share was held by pension funds, investment funds and banks.

Figure 5.2.18. Investors in the LBDS, 2008−2010, by type of instrument

% 100 0.1 1.3 0.1 6.1 5.3 12.6 2.7 17.9 80 22.2 50.8 55.8 50.4 21.7 18.8 60 15.2 29.3 2.7 3.5 13.0 14.6 40 10.1 3.7 11.8 26.6 14.9 16.7 20 3.6 16.2 40.2 42.0 11.3 17.9 3.5 1.6 19.6 8.9 0 6.6 2008 2009 2010 2008 2009 2010 Bank securities Bank bonds

Banks Insurance companies Pension funds Investment funds Enterprises Households Non-residents Source: NBP study based on data obtained from the group of banks acting as depositaries.

210 National Bank of Poland Financial markets

5.2.2.3.2. Mortgage bonds

In line with the regulations in force in Poland in 2010, mortgage bonds could be issued solely by mortgage banks.43 There are two types of mortgage backed securities: mortgage bonds collateralised by mortgage on credited properties and public mortgage bonds issued on the basis of the receivables of a mortgage bank resulting from its loans to the public sector. Mortgage banks concentrated their credit activities on financing the market of commercial properties, which determines the type of mortgage bonds issued.

In 2010, the following mortgage banks operated in the Polish market: BRE Bank Hipoteczny SA, Pekao Bank Hipoteczny SA and ING Bank Hipoteczny SA. Moreover, the bank Nykredit Realkredit A/S SA – Branch in Poland operated in the form of a branch of a foreign credit institution.

Market size

The mortgage bonds market in Poland is underdeveloped, and the share of mortgage banks in financing of properties by the banking sector at the end of 2010 amounted only to 1.5%. In the analysed period, the outstanding value of mortgage bonds issued by mortgage banks decreased by PLN 390 million and at the end of 2010 amounted to PLN 2.5 billion (Figure 5.2.19). All mortgage bonds outstanding were denominated in PLN. BRE Bank Hipoteczny remained a leader of the issue of mortgage bonds (a 75.5% share in the market of these instruments, by outstanding value as at the end of 2010).

Table 5.2.12. Mortgage bonds and public mortgage bonds issued in Poland by mortgage banks, traded as at the end of 2010 5 Original Value of issue Currency of Name of bank Date of issue maturity (million) issue 27.07.20071, 2 5 years 100 PLN 28.09.20071, 2 5 years 200 PLN 25.04.20081 3 years 250 PLN 13.06.20081 3 years 200 PLN 22.09.20081, 2 5 years 100 PLN 10.10.20081 3 years 150 PLN 20.05.20091 2 years 60 PLN BRE Bank Hipoteczny SA 24.06.20091 3 years 300 PLN 28.04.20101 3 years 25 PLN 28.04.20101 4 years 25 PLN 29.07.20101 4 years 200 PLN 28.09.20101 5 years 100 PLN 29.11.20101 4 years 100 PLN 29.11.20101, 2 5 years 100 PLN 2.06.20051 7 years 200 PLN 28.03.20061 5 years 200 PLN Pekao Bank Hipoteczny SA3 12.03.20071 5 years 100 PLN 28.12.20101 10 years 100 PLN ING Bank Hipoteczny SA 31.03.2008 3 years 20 PLN

1 Public issues admitted to trading in the secondary over-the-counter regulated MTS-CeTO market (as from 30 September 2009, the over-the-counter regulated market organised by BondSpot and the regulated WSE market operate within the Catalyst platform). 2 Issues of public mortgage bonds. 3 Issues of BPH Bank Hipoteczny SA until November 2007. Source: NBP, annual reports of banks.

43 The Act of 29 August 1997 on Mortgage Bonds and Mortgage Banks (Dz.U. of 2003, No 99, item 919).

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 211 Financial markets

Six issues of mortgage bonds collateralised by mortgage and one issue of public mortgage bonds to the total value of PLN 650 million were carried out in 2010. All issues – six of BRE Bank Hipoteczny and one of Pekao Bank Hipoteczny – were carried out through public offering. Mortgage bonds admitted to trading were denominated in domestic currency and had floating interest rates.

The share of the outstanding value of mortgage bonds in the financing structure of mortgage banks diminished and amounted to 38.0% as at the end of 2010. As in previous two years, liabilities towards the financial sector were an important source of financing the activities of mortgage banks (Figure 5.2.20). The majority of them were long-term loans incurred in dominant or affiliated entities.

Figure 5.2.19. Outstanding value of mortgage bonds issued by mortgage bonds in Poland, 2007−2010, as at quarter-end

PLN billion % 3.0 30

2.5 25

2.0 20 2.56 2.56 1.5 2.54 2.64 2.92 2.92 2.92 2.92 2.97 2.11 2.33 2.87 15 1.77 2.53 1.0 1.47 1.47 10

0.5 5 0.36 0.35 0.34 0.32 0.31 0.27 0.28 0.35 0.40 0.05 0.04 0.04 0.04 0.03 0.0 0.03 0.00 0 III III IV III III IV III III IV III III IV 5 2007 2008 2009 2010

Mortgage bonds in PLN – left-hand scale Mortgage bonds in foreign currency – left-hand scale Share of mortgage bonds in outstanding value of debt securities issued by banks on the domestic market – right-hand scale

Source: NBP.

Figure 5.2.20. Sources of financing of mortgage banks, 2007−2010

PLN billion 8 7.04 6.88 7 6.67

6 5.35 5 4 3 2 1 0 2007 2008 2009 2010 Due to ﬁnancial sector Due to non-ﬁnancial sector Due to mortgage bonds issued and outstanding Due to bonds issued and outstanding Capital (funds), subordinated debt Result for the current year Balance sheet total Source: NBP.

Secondary market and investors

Secondary trading in mortgage bonds took place almost exclusively in regulated markets operating within the Catalyst platform – in the regulated WSE market intended for retail investors (six series of mortgage bonds) and in the wholesale regulated OTC market organised by BondSpot (seventeen series of mortgage bonds). The value of mortgage bonds quoted on those markets

212 National Bank of Poland Financial markets

amounted to PLN 2.41 billion as at the end of 2010. In 2010, 19 transactions with mortgage bonds to the value of around PLN 100 million were conducted on the Catalyst platform (they were exclusively operations in the wholesale segment organised by BondSpot). The details on the structure of buyers of mortgage bonds admitted to trading in regulated markets within the Catalyst platform are not available.

As at the end of 2010, only two series of mortgage bonds outstanding remained outside the organised trade, while one of them was issued in the last days of 2010 and will be ultimately quoted on the BondSpot regulated OTC market. Banks, mainly from the capital group of the issuer, which served as an arranger of the issue, were the most important group of buyers of mortgage bonds traded in the OTC market.

5.2.2.4. Corporate bonds44

Market size

As at the end of 2010, the outstanding value of long-term bonds issued by enterprises amounted to PLN 19.9 billion and was by 28.6% higher as compared to the end of 2009 (Table 5.2.13). The share of long-term corporate bonds in the whole market of non-Treasury debt securities in Poland did not significantly change and amounted to 35.9%. Trading was carried out for bonds issued by about 100 enterprises.

Development of the market of corporate bonds in Poland was supported by a noticeable improvement of the economic situation of enterprises.45 In 2010, enterprises continued the investments commenced in previous years. After a severe decline in the first quarter of 2010, in the subsequent quarters the investment activity started to improve. Furthermore, growing 5 investment outlays translated into the increasing demand of this sector for long-term financing, which was partly satisfied from external sources, including the issue of long-term debt securities. The value of new issues of LCB in 2010 amounted to PLN 7.8 billion and was by over PLN 5 billion higher as compared to 2009. However, own funds still played the most important role in the financing structure of Polish enterprises.

Table 5.2.13. Outstanding value of LCB issued and value of new issues, 2007−2010

2007 2008 2009 2010 Outstanding value (PLN billion), of which carried out: 15.75 16.04 15.47 19.90 − through public offering 0.16 0.09 0.15 0.65 − through private placement 15.59 15.95 15.44 19.25 Value of new issues 7.96 2.79 2.35 7.80

Source: Estimates based on data of the NBP, Fitch Poland SA, PFSA.

In 2010, the majority of EU countries saw an increase in the outstanding value of long-term corporate debt instruments. The exceptions were: Bulgaria and Cyprus. The largest market of corporate bonds operated in the United Kingdom. In Poland, the ratio of the outstanding value of LCB to GDP amounted to 1.4%. This ratio was significantly lower as compared to the euro area, were it amounted to 43.2% in 2010 (Figure 5.2.21). In the Netherlands, this ratio amounted to over 151%, and in Slovakia only 0.8%. This points to the high differentiation of LCB market development in the euro area.

44 The market of corporate bonds includes bonds issued in Poland by the following categories of entities (according to the ESA’95 classification): corporations, other financial intermediaries, excluding investment funds, and financial auxiliaries. In this chapter, the terms LCB (long-term corporate debt securities) and corporate bonds are used interchangeably. 45 Ocena kondycji ekonomicznej sektora przedsiębiorstw niefinansowych w 2010 r. w świetle danych F-01/I-01, NBP, Warszawa 2011.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 213 Financial markets

Figure 5.2.21. Outstanding value of corporate bonds in selected EU countries, 2008−2010

EUR billion % 1,000 250 900 881.0 800 200 700 151.3 627.7 600 3934.0 1265.2 573.9 150 500 3849.2 1316.3 2684.6 400 85.8 326.3 100 300 59.6 240.8 200 43.2 29.9 2.3 50 21.2 111.1 7.2 5.0 0.5 100 9.7 8.8 1.4 1.4 0.8 0 0 Italy area Euro Spain Czech France United Poland Belgium Slovakia Hungary Republic Kingdom Germany Netherlands

Outstanding value at the end of 2008 Outstanding value at the end of 2009 – left-hand scale – left-hand scale Oustanding value at the end of 2010 Ratio of LCB to GDP at end of 2010 – left-hand scale – right-hand scale Note: The definition of corporation refers to the entities defined according to ESA’95 as non-financial corporations and other financial intermediaries. According to the definition of ESA’95, the group of other financial intermediaries does not include: insurance companies and pension funds. The outstanding value of the issue of LCB in Poland was converted according to the average exchange rate of EUR as at the end of December 2009 (4.1082) and December 2010 (3.9603). Source: NBP study based on data from Statistical Data Warehouse, ECB and data from NBP.

Market structure 5 In 2010, the LCB market was dominated by the issues carried out through private placements, directed to the OTC market (72% of gross issue). The value of LCB issued in 2010 through private placements and admitted to trading in the organised market (ATS WSE and (or) ATS BondSpot operating within the Catalyst platform) amounted to about PLN 2.15 billion. Enterprises applying for the admission of their bonds to trading on this platform were motivated not only by the willingness to raise financing and get access to the largest group of potential investors, but also by marketing opportunities. The information about new issuers on Catalyst, and presentation of their activities appear not only on the Catalyst website, but also in sectoral journals.

The interest of corporations in the issues of bonds through public offering grew significantly. The total value of these issues reached nearly PLN 650 million (in 2009, around PLN 150 million). The issuers of these instruments were 14 corporations, mainly from the construction sector, whose shares were listed on the WSE or NewConnect. The increased activity of corporations as regards LCB issues through public offering was connected, inter alia, with the operation of the Catalyst platform. The value of LCB issued in 2010 through public offering and admitted to trading in ATS WSE and (or) ATS BondSpot amounted to about PLN 150 million.

As in previous years, corporate bonds were usually issued by companies from the construction, telecommunication and energy sectors. The largest issue of LCB in 2010, valued at PLN 1 billion, was conducted by Polkomtel Finance AB. It was a private placement under the so-called EMTN programme (Euro Medium Term Note)46 with the value of EUR 1 billion. The issued bonds were admitted to trading on the Catalyst platform within the alternative system of trading for retail investors operated by BondSpot. Large issues of LCB were carried out also by PBG (PLN 450 million), Multimedia Polska (PLN 400 million) and the Municipal Water Supply and Sewerage Company in the capital city of Warsaw (PLN 300 million). The interest of some companies in the

46 The EMTN bonds are one of the types of Eurobonds. The issue under the EMTN programme allows for more flexibility in shaping such parameters of the issue as maturity, currency, value of issue. The issuers are often special purpose companies, which hold guarantees of their parent companies. Such was also the case of the issue of Polkomtel Finance AB. From the funds raised through this issue, the special purpose vehicle granted a PLN 1 billion loan to the parent company. It was the first issue denominated in PLN carried out in the Polish market under the EMTN programme. The programme of this issue was registered in Luxembourg, and the special purpose vehicle was established in Sweden.

214 National Bank of Poland Financial markets

bond issues exceeded the offered supply, hence in a few cases their allotment had to be reduced. In 2010, the largest programmes of LCB issues were signed by Energa-Operator (PLN 3.5 billion) and PGE (PLN 1.8 billion).

Long-term corporate bonds were primarily denominated in national currency. The share of PLN in the currency structure of bonds traded in the OTC market was over 90%. The interest on the majority of corporate bonds traded in this market was based on a floating interest rate, most often the WIBOR rate. LCBs listed on the Catalyst platform were denominated in national currency and they were mainly floating-rate instruments.

The estimates of the NBP show that as at the end of 2010 about 40% of the outstanding value of corporate bonds traded in the OTC market were instruments with maturity up to 5 years. The share of bonds with original maturity from 5 years inclusive to 10 years amounted to about 35%, and bonds with maturity over 10 years – 25%. Instruments with shorter maturities, usually up to 3 years dominated among LCBs listed on the Catalyst platform.

Revenue bonds and convertible bonds were also traded in the OTC market. The outstanding value of revenue bonds amounted to nearly PLN 785 million, which represented around 4% of the total outstanding value of the LCB issue. As at the end of 2010, the value of traded convertible bonds amounted to about PLN 330 million, which accounted for less than 2% of the outstanding value of the LCB issue.

The overwhelming majority of the LCB issues traded in the OTC market were unsecured. Secured bonds issued mainly by entities from the construction and development sectors were usually backed by mortgage. Similarly to short-term corporate bonds, the issues of long-term corporate bonds were 5 arranged mainly by banks with a stable position in the corporate banking segment. The group of the largest arrangers of issues included: BRE Bank, Bank Pekao, ING Bank, PKO BP, Bank Handlowy and Nordea Bank Polska. Brokerage houses became more active in the arrangement of issues of these instruments, which was connected with the aforementioned greater interest in issues through public offering. In 2010, they were the arrangers of the LCB issue to the value exceeding PLN 1 billion.

Secondary market and investors

Corporate bonds were traded mainly in the OTC market. As at the end of 2010, LCB of PLN 17.6 billion were traded in this market. The banks which arranged issues in the form of private placements organised trading in LCB in the OTC market, kept their records and settled the transactions. Data on the value of transactions concluded in the non-regulated market are not available.

Since the launch of the Catalyst platform in September 2009, the interest in this system of trading in debt securities rose significantly. As at the end of 2010, bonds of 23 corporations of the face value of PLN 2.3 billion (as at the end of 2009 it was PLN 89.7 million) were traded on this platform. Eleven out of twenty three were public companies, whose shares were listed on the WSE or NewConnect. The overwhelming majority of bonds were listed in ATS organised by BondSpot (PLN 2.2 billion). In the alternative trading system of the WSE, bonds for retail investors were traded to the value of PLN 871.9 million. In the regulated market much fewer bonds were traded, i.e. PLN 25.8 million in the retail regulated market operated by the WSE and PLN 11.5 million in the wholesale regulated market organised by BondSpot.

In 2010, the value of session transactions in corporate bonds on the Catalyst platform amounted to PLN 44.5 million, while the value of package transactions PLN 51.9 million (in 2009 there were no transactions at all). The highest turnover was realised on bonds of two companies: Prime Car Management (PLN 66.5 million) and Gant Development (PLN 16 million). The total share of session transactions and block trades in bonds of these issuers in trading on the Catalyst platform amounted to 85.6%. The liquidity of the LCB market was still limited, however further development of the Catalyst platform should in future support its improvement thanks to concentration of demand for bonds, which has been dispersed until now. One of the important

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 215 Financial markets

factors which contributed to the low liquidity of trading on the Catalyst platform was lack of possibility to place buy or sell orders for securities by those banks, which did not held a permit for conducting brokerage activity.47

In 2010, domestic banks and investment funds were the most important group of investors (Figure 5.2.22). The growing involvement of investment and pension funds in the LCB market resulted mainly from their search for the opportunities to generate higher rates of return than on Treasury bonds. Collective investment schemes were interested in purchasing bonds issued by large companies with stable position in the market, which issue bonds within the programmes of issues of large value. Foreign entities’ involvement in the LCB market was limited, inter alia, by low values of individual issue and lack of ratings. As at the end of 2010, only seven Polish corporations had international ratings assigned.48

Figure 5.2.22. Buyers of LCB admitted to trading in the OTC market (as at year-end)

A. 2009 B. 2010 1.9% 4.6% 7.7% 25.2% 30.7% 4.8%

5.6% 23.4% 18.5% 5.4%

15.2% 5 12.1% 21.8% 23.0%

Banks Insurance companies Pension funds Investment funds Enterprises Foreign entities Other

Source: NBP study based on data obtained from the group of banks acting as depositaries.

5.2.3. Equity market

The Polish equity market includes shares, allotment certificates and subscription rights. In 2010, shares were traded in the organised way in the Main Market of the Warsaw Stock Exchange,49 NewConnect platform and the regulated OTC market operated by BondSpot. Allotment certificates and subscription rights were listed on the WSE Main Market and on the NewConnect market.

In 2010, as in the previous years, in Poland shares were mainly traded in the WSE Main Market, where transactions in shares of 400 companies were concluded. This market concentrated over 99% of turnover in shares in domestic organised markets. NewConnect, an alternative trading system, was developing very dynamically. As at the end of December, the securities of 185 companies were listed on this market.

On the Regulated OTC Market operated by BondSpot, shares of only one company were listed (by three entities less than as at the end of the previous year). Transactions in this market were concluded occasionally and the turnover value was very low.

47 The Act of 29 July 2005 on Trading in Financial Instruments (Dz.U. of 2010, No 211, item 1384, consolidated text). 48 Rating & Market – Review of the market of non-Treasury debt instruments, December 2010, Fitch Poland. The following enterprises had an international rating: Aquanet, Koleje Mazowieckie, PKN Orlen, Polska Grupa Energetyczna (PGE), Tauron Polska Energia, Telekomunikacja Polska (TPSA) and Zakład Komunikacji Miejskiej (city transport company) in Gdańsk. 49 The Main Market of WSE includes the basic market and parallel market.

216 National Bank of Poland Financial markets

5.2.3.1. Shares traded in the WSE Main Market

In 2010, the WSE equity market was still developing. Basic indicators of its development, including capitalisation, turnover and the number of listed companies, increased significantly. The capitalisation of the WSE Main Market, including domestic and foreign companies (including those dual-listed), increased by almost 11.3% and amounted to PLN 796.5 billion as at the end December. The capitalisation of domestic companies reached PLN 542.6 billion and its ratio to the Polish GDP amounted to 38.3% and was by 7 percentage points higher than as at the end of 2009.

As compared to the previous year, the annual net turnover in shares rose by 34.2% to PLN 236.2 billion. As at the end of 2010, shares of 400 companies were listed on the WSE, i.e. 21 entities more as compared to the end of 2009. The admission of shares of large companies privatised by the State Treasury to trading on the WSE and rising share prices attracted new investors to this market. As at the end of 2010, the number of securities accounts amounted to 1,447 thousand and was by over 30% higher than at the end of the previous year (Table 5.2.14).

Table 5.2.14. WSE Main Market, 2007−2010

2007 2008 2009 2010 WSE capitalisation, year-end (PLN billion)1 1,080.3 465.1 715.8 796.5 – of which capitalisation of domestic companies 509.9 267.4 421.2 542.6 Capitalisation of domestic companies to GDP ratio (%) 43.3 21.0 31.3 38.3 Number of companies 351 374 379 400 5 − of which foreign companies 23 25 25 27 Number of IPOs 81 33 13 34 Value of IPOs (PLN billion) 8.02 3.9 7.0 15.9 Number of delisted companies 14 10 8 13 Free float to capitalisation of domestic companies (%) 41.1 38.4 39.1 44.1 WIG index (points) − year-end 55,648.5 27,228.6 39,986.0 47,489.9 − year minimum 49,264.4 24,853.0 21,274.8 37,322.5 − year maximum 67,568.5 55,522.0 40,852.9 47,911.5 Return on WIG index (%) 10.4 -51.1 46.9 18.8 Investment accounts at year-end (thousands) 997 1,029 1,133 1,477

1 Capitalisation of all companies listed on the WSE (both domestic and foreign ones). 2 In the case of the global offer of the Austrian company Immoeast, only the value of shares sold via the WSE (PLN 463 million) was taken into account. The total value of this offer amounted to around PLN 10.7 billion. Source: Bloomberg, GUS, WSE, KDPW.

As at the end of 2010, the WSE capitalisation was higher than the capitalisation of stock exchanges in Austria and Greece, i.e. countries with GDP similar to the Polish GDP. Moreover, much more companies were listed on the WSE. As regards the average daily transaction value, the WSE was ranked among relatively small markets in Europe. Turnover on the largest European stock exchanges (LSE, NySE Euronext, Deutsche Boerse) was several dozen higher than on the WSE. The liquidity of the equity market on the WSE measured by the turnover/ capitalisation ratio was low not only in comparison with large stock exchanges, but also in comparison with the stock exchanges of a similar size (for example Athens Stock Exchange and Wiener Stock Exchange).

One of the reasons of the low liquidity of the equity market on the WSE was a relatively large number of companies with small capitalisation and low free float, whose shares were traded in this market. According to data of the World Federation of Exchanges (WFE), the

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 217 Financial markets

average capitalisation of companies listed on the WSE as at the end of 2010 amounted to USD 326 million and was almost four times lower than the average capitalisation of companies listed on other European markets (USD 1,252 million).50 The experience of other countries indicates that those markets, on which mainly shares of small entities are listed, have lower liquidity than the markets on which shares of large companies are primarily listed. It is because investors conclude transactions in shares of large companies relatively more often than in shares of small companies.51 Another factor, which had an impact on the low liquidity of the equity market on the WSE, was lack of the efficiently functioning mechanism of short selling of shares. It limited the liquidity of the equity market, because part of securities held by entities with a long-term investment strategy (such as strategic investors, pension funds) was not returning to the stock exchange trade.

Table 5.2.15. Main indicators of selected European stock exchanges, 2007−2010

2007 2008 2009 2010 2007 2008 2009 2010 Stock exchange Capitalisation of domestic companies Number of listed companies1 (USD billion) Athens Stock Exchange 283 285 288 280 265.0 90.9 112.6 67.6 BME Spanish Exchanges 3,537 3,576 3,472 3,345 1,781.1 948.4 1,434.5 1,171.6 Budapest Stock Exchange 41 43 46 52 46.2 18.5 30.0 27.7 Deutsche Boerse 866 832 783 765 2,105.2 1,110.6 1,292.4 1,429.7 Istanbul 319 317 315 339 286.6 118.3 234.0 307.1 LSE Group2 3,307 3,096 3,088 2,966 4,924.2 2,390.2 3,453.6 3,613.1 5 MICEX NDA 233 234 245 0.0 0.0 736.3 949.1 NASDAQ OMX Nordic 851 824 797 754 1,242.6 563.1 817.2 1,042.2 NYSE Euronext (Europe) 1,155 1,002 1,160 1,135 4,222.7 2,101.7 2,869.4 2,930.1 Oslo Bors 248 259 238 239 353.4 145.9 227.2 295.3 SIX Swiss Exchange 341 323 339 296 1,271.0 857.3 1,064.7 1,229.4 Warsaw Stock Exchange 375 458 486 584 211.0 90.8 151.0 190.2 Wiener Stock Exchange 119 118 115 110 236.4 76.3 114.1 126.0 Concentration of capitalisation3 (%) Concentration of turnover4 (%) Athens Stock Exchange 72.8 68.6 70.3 71.8 76.3 91.5 93.6 94.9 BME Spanish Exchanges NDA NDA NDA NDA NDA NDA NDA NDA Budapest Stock Exchange 0.0 0.0 58.6 62.8 0.0 0.0 81.2 83.2 Deutsche Boerse 62.9 52.3 79.6 78.4 78.0 78.8 84.0 82.3 Istanbul 42.8 57.7 58.3 55.8 44.5 45.5 50.1 41.0 LSE Group2 64.5 69.5 82.7 82.3 58.0 69.8 53.5 54.1 MICEX 86.0 88.8 71.2 64.3 87.1 84.4 97.8 97.5 NASDAQ OMX Nordic 68.5 75.2 71.4 69.7 76.9 78.0 91.7 85.8 NYSE Euronext (Europe) 68.1 69.3 70.2 68.9 57.8 63.3 82.6 77.2 Oslo Bors 73.3 66.5 68.6 61.7 71.8 77.7 76.6 77.8 SIX Swiss Exchange 71.4 72.4 73.5 65.6 83.6 81.6 83.6 76.3 Warsaw Stock Exchange 62.6 68.2 72.3 74.6 55.1 77.1 80.4 83.8 Wiener Stock Exchange 47.9 48.4 48.6 49.4 50.6 67.1 62.0 62.2

50 The average capitalisation of companies listed on European stock exchanges takes into account the markets included in Table 5.2.15, excluding the WSE. 51 For example, turnover in shares (including session transactions and block trades) of five largest companies in terms of capitalisation as at the end of 2010 accounted for 58.8% of turnover in shares on the WSE. As at the end of 2010, the share of these types of companies in capitalisation amounted to 38.7%.

218 National Bank of Poland Financial markets

2007 2008 2009 2010 2007 2008 2009 2010 Stock exchange Average daily value of transactions Ratio of turnover in shares of domestic (USD million) companies (%)5 Athens Stock Exchange 667.9 460.2 244.8 171.9 64.0 61.2 52.6 49.3 BME Spanish Exchanges 11,691.0 9,491.0 4,649.9 5,315.5 191.9 171.4 112.4 117.2 Budapest Stock Exchange 194.2 122.3 101.1 102.6 104.0 94.5 117.6 92.5 Deutsche Boerse 17,162.4 18,420.6 5,615.8 6,375.2 208.4 264.0 123.1 119.3 Istanbul 1,167.8 987.6 1,194.9 1,642.4 129.7 135.1 178.7 150.6 LSE Group2 49,855.2 30,617.7 10,095.1 10,782.5 154.2 152.7 91.1 76.1 MICEX NDA NDA 1,742.2 1,643.5 NDA NDA 84.0 52.8 NASDAQ OMX Nordic 7,186.6 5,268.4 2,584.5 2,939.2 137.0 138.0 99.4 79.7 NYSE Euronext (Europe) 22,030.3 17,231.4 7,107.0 7,838.0 136.9 141.8 83.9 76.5 Oslo Bors 2,192.4 1,756.5 907.9 1,042.4 145.4 143.2 114.1 94.1 SIX Swiss Exchange 7,563.3 5,977.6 2,827.6 3,110.8 133.9 121.8 83.9 73.5 Warsaw Stock Exchange 353.3 276.9 212.3 273.3 43.4 43.6 51.1 41.5 Wiener Stock Exchange 526.2 418.8 193.4 195.1 55.6 65.7 53.3 44.9

1 The number of listed companies includes domestic and foreign companies except for ETF funds listed on the main market and on alternative markets. In the case of the WSE, the list includes companies listed on the main market (except for shares of National Investment Funds and ETF) and on the NewConnect platform. 2 For the purpose of consistency, data for 2007–2008 also include the values for Borsa Italiana, which merged with the LSE in 2009. 3 Concentration of the capitalisation is calculated as the ratio of 5% of companies of the highest capitalisation to the capitalisation of all companies listed on a given market. 4 Concentration of turnover is calculated as the ratio of turnover in shares of 5% of domestic companies of the highest value of session transactions to the value of session transactions in shares of all domestic companies in a given market. 5 The ratio of turnover in shares of domestic companies is calculated as the annualised average ratio of monthly turnover in shares of 5 domestic companies to the capitalisation of these companies as at the end of a month. Source: World Federation of Exchanges.

Concentration of capitalisation, understood as a ratio of capitalisation of 5% of domestic companies of the highest capitalisation to the capitalisation of all domestic companies amounted to 74.6% as at the end of 2010 and was slightly higher than the average for other European stock exchanges (67.1%). Concentration of turnover in shares of companies listed on the WSE, calculated as a ratio of the value of transactions in shares of 5% of domestic companies with the highest value of session transactions to the value of session transactions in shares of all domestic companies, also was higher than the average for European stock exchanges, which amounted to 76.3% (Table 5.2.15). The higher level of these ratios for the WSE indicates that the activity of stock exchange investors concentrates on the relatively small number of entities.

Capitalisation

In 2010, the capitalisation of the WSE Main Market, including domestic and foreign companies (including those dual-listed), increased by almost 11.3% to PLN 796.5 billion as at the end of December. The capitalisation of domestic companies amounted to PLN 542.6 billion and was by 28.8% higher than as at the end of 2009.

Trends prevailing in developed equity markets supported growth in prices on the WSE. In 2010, the WIG broad market index and the index of companies of the highest capitalisation and the highest liquidity of shares – WIG20 increased, by 18.8% and 14.9%, respectively. Similar increases in share prices were recorded in the case of small and medium-sized companies, whose instruments are included in the sWIG80 and mWIG40 indices – respectively by 19.6% and 10.2% (Figure 5.2.23). Equity indices on other stock exchanges of the Central and Eastern Europe recorded smaller increases as compared to the Polish market. The index of the Budapest stock exchange BUX grew by only 0.5%, while the index of the Prague stock exchange PX – by 9.6%. It was connected with the relatively high share price rises of companies listed on these markets in 2009, when the above mentioned indices increased, respectively, by 73.4% and 30.2% (Figure 5.2.24).

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 219 Financial markets

Figure 5.2.23. WIG20, WIG, mWIG40 and sWIG80 indices, 2007−2010

points 260 240 220 200 180 160 140 120 100 80 60 40 I III V VII IX XI I III V VII IX XI I III V VII IX XI I III V VII IX XI 2007 2008 2009 2010 WIG WIG20 mWIG40 sWIG80

Note: The series were standardised up to 100 points as at 31 December 2009. Source: Bloomberg.

Figure 5.2.24. Selected stock exchange indices, 2007−2010

points 180 160 140 120 100 5 80 60 40 I III V VII IX XI I III V VII IX XI I III V VII IX XI I III V VII IX XI 2007 2008 2009 2010 WIG20 BUX PX S&P 500 DJ EURO STOXX 50

Note: The series were standardised up to 100 points as at 31 December 2009. Source: Bloomberg.

Unlike in previous two years, when changes in the capitalisation were determined first of all by changes in share prices, in 2010 new listings had the biggest impact on the capitalisation of the WSE Main Market (Figure 5.2.25). The capitalisation of companies, whose shares were admitted to trading on the WSE in 2010, calculated according to the prices from the IPO day, amounted to PLN 50.4 billion. Such high value was influenced, inter alia, by the initial offerings of large companies of the State Treasury from the financial and energy sectors.

The data of the WSE and KDPW show that through the issues of shares under the initial public offering (IPO) domestic and foreign companies gained PLN 1.3 billion on the WSE in 2010, i.e. over 80% less than in the previous year (Figure 5.2.26). At the same time, the existing investors used initial public offerings for ending their investments in companies to a larger extent than in the previous year. The value of shares sold by their owners during IPOs amounted to PLN 14.6 billion, which was a record amount in the last four years. It resulted, inter alia, from the manner of privatisation of large companies of the State Treasury, which offered to investors in IPO on the WSE only the shares from old issues.

In 2010, shares of 34 companies were admitted to trading in the WSE Main Market, including shares of two foreign entities and three State Treasury-owned companies. The data of the WFE show that the WSE ranked second in Europe, after the London Stock Exchange in terms of the number of IPOs, and fifth in terms of their value (Figure 5.2.27). The shares admitted to trading on the WSE were mainly of medium-sized companies. According to the data of the WFE, the average capitalisation of companies carrying out IPOs in the WSE amounted to USD 156 million (USD 464

220 National Bank of Poland Financial markets

million in 2009) in 2010 and was significantly lower than in other European markets, where its average was USD 1,938.4 million. The average value of IPO on the WSE, including new and old stock issues, amounted to USD 43 million, while for the companies offering their shares in other European markets it was USD 700 million.52

Figure 5.2.25. Decomposition of changes in the capitalisation of the WSE, 2007−2010

100 % 2.8 5.0 9.7 80 20.9 60 74.4 58.8 40 73.4 20 20.6 0.7 -0.3 28.6 0 -2.0 -0.2 4.3 -0.4 -2.9 -20 -40 -94.2 -60 -80 -100 -0.7 -0.1 2007 2008 2009 2010 Changes in share prices New listings of companies Delisting of companies New issues of stocks by companies listed on the WSE Redemption of shares

Note: Decomposition of changes in the capitalisation of the WSE in 2010 does not take into account the purchase of own shares by companies for redemption due to unavailability of data. Source: NBP study based on data of the WSE, KDPW and World Federation of Exchanges.

Figure 5.2.26. Stock issues in the WSE Main Market, 2007−2010 5

PLN billion 25

20 8.3

15 12.9 1.3 12.8 10 14.6 4.6 5 5.1 7.0 3.0 2.9 0.1 0 0.9 2007 2008 2009 2010 Value of old stock issues in IPOs Value of new stock issues in IPOs Value of new stock issues in SPOs

Source: WSE, KDPW.

A large scale of public offerings carried out by the companies already listed on the WSE (Secondary Public Offering – SPO) also was of major importance for the increase of capitalisation of the domestic equity market. In 2010, the value of secondary public offerings amounted to PLN 8.3 billion and was over one third lower than in the previous year. Such significant lowering of the SPO value was mainly the base effect. In 2009, one company conducted the issue to the value exceeding PLN 5 billion, which had a strong impact on the value of funds raised through SPOs.

In 2010, 13 companies were delisted from the WSE Main Market (in 2009, 8 companies). The reasons for their exclusion were, inter alia: the issuer’s decision to withdraw shares from trading in the regulated market, merger with another entity, compulsory redemption and declaration of bankruptcy. Withdrawal of shares of these companies from trading on the stock exchange contributed to the fall of the capitalisation of the WSE by PLN 2.5 billion.

52 The average value of funds raised through IPOs on European stock exchanges was calculated for the markets listed in Figure 5.2.27, excluding the WSE and LSE Group (NDA). The data of the WFE include IPOs conducted in all markets operated by a given stock exchange.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 221 Financial markets

Figure 5.2.27. IPOs in selected European markets, 2010

USD billion 80 240 70 210 63.2 188 60 180 60.4 50.5 50 150 40 37.5 120 109 108 30 90 20 17.1 60 53 11.7 52 11.9 11.1 7.7 10 24 0.3 30 1 19 23 0 6 0 LSE Oslo BME NYSE Swiss Group MICEX Boerse Warsaw Euronext NASDAQ Deutsche Budapest Exchange Exchange OMX Nordic

Capitalisation of companies whose shares were admitted to trading — left-hand scale Number of IPOs — right-hand scale Notes: 1. The World Federation of Exchanges gives the total number of IPOs in all markets operated by a given stock exchange. In the case of the WSE, it takes into account initial public offerings of companies in the WSE Main Market and NewConnect. 2. BME (Bolsas y Mercados Españoles) is an alliance of four Spanish stock exchanges in: Madrid, Barcelona, Valencia and Bilbao. Source: World Federation of Exchanges.

Turnover

In 2010, the value of all session transactions and block trades in shares traded in the WSE Main Market increased by 34.3% to PLN 236.2 billion. The average daily value of session 5 transactions amounted to PLN 816.4 million. The increase in the value of turnover stemmed from further growth in equity prices and increase of the average transaction value. In 2010, investors concluded 12.2 million session transactions, i.e. nearly 6% less than in the previous year (Table 5.2.16). Reduction in the number of session transactions was related to smaller activity of individual investors in this market. At the same time, in 2010 the number of block trades significantly increased to 4,482 (2,888 in 2009). The value of these transactions rose almost three times, to PLN 27.4 billion. The increase in the number and value of block trades resulted from the fact that foreign and domestic institutional investors were more active than in the previous year. By concluding block trades (particularly in shares of low liquidity companies) those investors could buy or sell large packages of shares without exercising a direct impact on their prices.

The ratio of the net value of annual turnover in shares to the capitalisation of domestic companies as at the end of the year, which is one of the indicators used for assessment of liquidity of the equity market, slightly increased and in 2010 amounted to 43.5%.

Table 5.2.16. Turnover in shares in the WSE Main Market, 2007−2010

2007 2008 2009 2010 Annual net turnover in the equity market (PLN million) 237,582 167,366 175,943 236,193 – of which session turnover (PLN million) 227,505 160,358 165,696 206,546 – average per session (PLN million) 913.7 638.8 657.5 816.4 Number of transactions per session 60,820 38,211 51,395 48,393 Ratio of net value of turnover in shares to the capitalisation of domestic 46.6 62.0 41.8 43.5 companies at year-end (%)1

1 Net turnover in shares includes transactions of purchase and sale of shares of both domestic and foreign companies. Due to a relatively low turnover in shares of foreign companies, it may be assumed that the presented ratio illustrates well the liquidity of shares of domestic companies listed on the WSE. Source: WSE.

222 National Bank of Poland Financial markets

The highest turnover in shares on the WSE in 2010 was recorded in May and in the period from September to November (Figure 5.2.28). The high value of transactions in May was connected with the significant fall in equity prices and their high volatility, which reflected the investors’ uncertainty as regards price developments in future.53 High turnover in shares in the period from September to November 2010 was connected with dynamic growth in equity prices in those months and a significant number of new companies, whose shares were admitted to trading on this platform. From the beginning of September to mid-November, the WIG20 index rose by 14.7%.54

Table 5.2.28. Monthly net turnover in shares in the WSE Main Market, 2007−2010

PLN billion 28 26 24 22 20 18 16 14 12 10 8 6 4 2 0 I III V VII IX XI I III V VII IX XI I III V VII IX XI I III V VII IX XI 2007 2008 2009 2010

Source: WSE.

Participants 5

According to NBP data collected for the purpose of preparing the international investment position of Poland, as at the end of 2010 the major group of investors in the equity market were domestic entities. Their share in the capitalisation of domestic companies listed on the Main Market of the Warsaw Stock Exchange amounted to 56.9% and was by 3.1% lower than at the end of 2009.

Among domestic entities the major group were institutional investors, mainly open pension funds and investment funds. As at the end of 2010, open pension funds held in their portfolios shares of domestic companies listed on the WSE to the value of PLN 80.3 billion (PLN 53.8 billion at the end of 2009). Due to rising equity prices, which encouraged investment in these instruments, and a constant inflow of funds to open pension funds, they purchased, in net terms, the shares to the value of approx. PLN 7.4 billion (PLN 5.3 billion in 2009). Investment funds kept in their portfolios shares to the value of PLN 38.5 billion. In net terms, available data show that investment funds purchased the shares of a low value. In the ownership structure of domestic companies listed on the WSE, individual investors and the State Treasury were also present. The share of individual investors and of the State Treasury in the capitalisation of domestic companies listed on the WSE may be estimated at several per cent. The involvement of the State Treasury in this market resulted from the manner in which the companies were privatised through the WSE. As a rule, the State Treasury sells only a part of shares of privatised corporations and remains a shareholder of listed companies after their shares are admitted to trading on the WSE. The State Treasury is a passive investor, i.e. does not participate in equity trade on the WSE.

Rising equity prices on the WSE and privatisations of large companies of the State Treasury via the stock exchange contributed to a significant increase in the involvement of non-residents in shares of domestic companies listed on the WSE (Figure 5.2.29). In 2010, foreign investors invested

53 In May, a difference between the highest and the lowest level of WIG20 index amounted to 10.9%. The average annualised monthly volatility of WIG20 index in May amounted to 30.2% as compared to 19.9% in 2010. The highest daily level of volatility in the whole year, i.e. 36.0%, was also registered in May. 54 During the periods of rapid growth in equity prices, investors quite often conclude transactions, because they take profits by selling shares (execution of take profit orders) or stop losses (execution of stop loss orders).

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 223 Financial markets

in shares in the WSE Main Market PLN 21.4 billion net (PLN 6.9 billion in 2009), which was a record amount in the last four years (Figure 5.2.30). Among non-residents, strategic investors prevailed. As at the end of 2010, they held 60.7% of the equity portfolio of domestic companies listed on the WSE owned by foreign investors (62.5% as at the end of 2009). A positive balance of purchases of shares by non-residents contributed to the increase of their share in the capitalisation of the WSE, which as at the end of 2010 was 43.1%, against 40.1% as at the end of the previous year.

Figure 5.2.29. Share of foreign investors in the capitalisation of domestic companies listed on the WSE Main Market, 2007–2010

PLN billion % 280 70 240 60 200 50 160 40 120 30 80 20 40 10 0 0 I III V VII IX XI I III V VII IX XI I III V VII IX XI I III V VII IX XI 2007 2008 2009 2010 Non-residents’ portfolio – left-hand scale Share of foreign investors in the WSE capitalisation – right-hand scale 5 Source: NBP.

Figure 5.2.30. Change in foreign investors’ involvement in shares of domestic companies listed on the WSE Main Market, 2007−2010

PLN billion 30 20 10 0 -10 -20 -30 -40 I III V VII IX XI I III V VII IX XI I III V VII IX XI I III V VII IX XI 2007 2008 2009 2010 Transactions Changes in valuation Source: NBP.

Figure 5.2.31. Foreign investors’ portfolio structure, 2007−2010

% 100 90 12.6 15.7 14.7 14.7 80 70 60 63.7 50 68.3 65.2 64.3 40 30 20 10 23.7 16.0 20.1 21.0 0 2007 2008 2009 2010 MIDWIG/mWIG40 WIG20 Other Source: NBP.

224 National Bank of Poland Financial markets

Shares from the WIG20 index had an over 64% share in the portfolio of foreign investors. On account of high amounts of investments, non-residents prefer to invest in large companies with highly liquid shares. It enables them to quickly take and reverse their positions. Foreign investors were to a lesser extent involved in shares of medium-size companies included in the mWIG40 index and shares of small companies (Figure 5.2.31).

The year 2010 saw important changes in the investor structure of session turnover in shares in the WSE Main Market. The most active group of investors were foreign investors, who concluded transactions worth PLN 96.6 billion (PLN 60.2 billion in 2009). The share of non-residents in turnover in shares on the WSE reached 47% and was the highest since 2003 (Figure 5.2.32). The second most active group of participants in this market were domestic institutional investors (mainly financial institutions), which concluded transactions worth PLN 69.9 billion. The value of operations carried out by individual investors amounted to PLN 40.3 billion. Therefore, their share in session turnover in shares in the WSE Main Market fell by 8 percentage points as compared to 2009.

Figure 5.2.32. Individual groups of investors’ share in session turnover in the equity market, 2007−2010

% 100 90 80 3737 3939 3737 3434 70 60 1919 1818 50 3030 2727 40 30 5 4343 4747 20 3333 3636 10 0 2007 2008 2009 2010 Foreign investors Individual domestic investors Institutional domestic investors

Source: WSE.

5.2.3.2. Other equities listed on the WSE Main Market – allotment certificates and subscription rights

The value of issues of allotment certificates and subscription rights is related to companies’ activity in obtaining capital through the WSE. During a favourable situation in the stock market, when companies actively obtain capital from this market, the number and value of issues of allotment certificates and subscription rights are usually high. In 2010, the prices of shares listed on the WSE continued to rise, which contributed to the significant growth of investor demand for equities. Those corporations, including companies, whose shares were already listed on the WSE, took advantage of such a situation and were obtaining capital through issues of shares in the regulated market, preceded by issues of allotment certificates and subscription rights. In 2010, companies conducted 35 issues of allotment certificates (against 18 in 2009) in the WSE Main Market. The entities, whose shares were traded in this market, conducted 14 issues of subscription rights, i.e. twice more as compared to 2009. Although the number of issues of allotment certificates and subscription rights was larger, available data show that their value diminished. It was connected with large issues of these securities conducted in 2009 by two entities having the State Treasury as their strategic shareholder.

The value of transactions in allotment certificates amounted to PLN 359 million and was thirteen times lower than in 2009. The value of transactions in subscription rights also diminished significantly (Figure 5.2.33). The liquidity of this market is strictly related to the value of allotment certificates and subscription rights. In the years, when companies conduct large issues of these instruments, turnover in them is usually high.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 225 Financial markets

Figure 5.2.33. Net turnover in allotment certificates and subscription rights, 2007−2010

PLN billion 7 6 1.77 5

4 0.67 3 4.64 2 3.45 1 0.10 0.27 0.48 0.36 0 2007 2008 2009 2010 Allotment certiﬁcates Subscription rights

Note: Net turnover includes the value of session transactions and block trades. Source: WSE.

5.2.3.3. Equity market on the NewConnect platform

The upward trend in share prices in the NewConnect market was observed in 2010. Compared to the end of December 2009, NCIndex55 rose by 27.7% and reached its highest value towards the end of November (Figure 5.2.34). Due to the structure of market participants, dominated by domestic individual investors, changes in this index depended upon trends prevailing in equity markets in developed countries, but to a lesser extent than in the WSE Main Market. 5

Figure 5.2.34. NCIndex, 2009−2010

points 70 65 60 55 50 45 40 35 30 III III IV VVI VII VIII IXXXI XII III III IV VVI VII VIII IXXXI XII

2009 2010 Source: Bloomberg.

Capitalisation

As at the end of 2010, the capitalisation of the NewConnect market was twice higher than at the end of December 2009 and amounted to PLN 4.97 billion (Table 5.2.17). It was influenced by: share price rises, new listings and new issues of shares by already listed companies. In 2010, the securities (shares and allotment certificates) of 86 entities were admitted to trading on the NewConnect platform. As regards the number of IPOs, this platform was the top alternative market in Europe. As at the end of the year, securities of 185 companies were listed on the NewConnect market. According to the data of the KDPW, in 2010 the value of issue of shares and allotment certificates in the NewConnect market, including IPOs and SPOs, amounted to PLN 1.35

55 The NCIndex comprises shares of all companies listed on the NewConnect market. Weightings of all index participants are determined based on the number of shares of a given company listed for trading on the stock exchange. The NCIndex index is an income-based index, i.e. it accounts for both prices of underlying shares and dividend and subscription rights’ income. Its base date is 30 August 2007 and its first value was 100 points.

226 National Bank of Poland Financial markets

billion, of which shares sold in IPOs accounted for PLN 210 million. Such high value of offerings was influenced by another PLN 853.5 million issue of shares of the EGB Investments company. The largest IPO was the PLN 26.0 million share issue of the MO-BRUK company. The average value of IPO on NewConnect, including the value of new share issues and shares of old issues sold by the company owners, amounted to PLN 1.9 million.

The companies, which intended to float their securities in the NewConnect market, conducted mainly private placements, i.e. offers targeted at the selected group of investors. Then, their securities were admitted to trading on this platform. As required by the Rules of NewConnect Alternative Trading System, such manner of carrying out the offering did not require an approval of the prospectus or the information memorandum by the PFSA. The companies offering to sell their shares or allotment certificates through private placements were only required to draw up an information document.

Table 5.2.17. Basic indicators of the NewConnect market, 2007−2010

2007 2008 2009 2010 Capitalisation at year-end (PLN million) 1,184 1,396 2,457 4,970 Number of companies at year-end 24 84 107 185 Number of IPOs 24 61 26 86 Value of NCIndex at year-end (points) 144.2 38.2 49.7 63.4 Rate of return on NCIndex (%) 44.2 -73.5 30.1 27.7 Value of net turnover in shares and rights to shares in a year (PLN million) 151.3 413.2 581.2 1,847.1 Average net value of turnover in shares and rights to shares per session 1.8 1.6 2.3 7.3 5 (PLN million) Average number of transactions per session 719 986 1,285 3,471 Average value of a single transaction (PLN) 2,535 1,669 1,795 2,103

Source: WSE.

Some companies and their existing shareholders did not sell shares to investors, but only floated them in the NewConnect market. In such a situation there was no need to draw up public information documents addressed to investors (prospectus, information memorandum), which accelerated the admission of securities to trading and reduced the costs of the process. The admission of shares of these companies to trading in the NewConnect market was aimed at obtaining their market valuation and allowing shareholders to partially end their investment later.

Turnover

In 2010, the total net turnover value in shares and allotment certificates of companies listed on NewConnect amounted to PLN 1,847 million, of which block trades accounted for PLN 94 million. The ratio of annual turnover in shares and allotment certificates listed on the NewConnect market to the market capitalisation as at the end of the year amounted to 36.9% (23.7% in 2009) and was by 6.6 p.p. lower than in the WSE Main Market. The lower level of this ratio for the NewConnect market was related to the size of companies listed on this market. As compared to the WSE Main Market, shares of very small entities were traded on the NewConnect platform, which adversely affected the liquidity of turnover in their shares.

High turnover in shares and allotment certificates in the NewConnect market was recorded from September to December. In each of these months, it exceeded PLN 200 million, with the average monthly for the period from January until August 2010 equal to PLN 112 million (Figure 5.2.35). High turnover in shares in the last months of the year resulted from the increase in prices of shares quoted on the NewConnect market. The significant number and value of IPOs in these months also contributed to the increase in the value of transactions in shares. High turnover in shares in the NewConnect market are usually observed on the IPO day and during a few following days. At a later period, turnover is relatively low.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 227 Financial markets

Figure 5.2.35. Monthly turnover in shares and allotment certificates on NewConnect, 2007−2010

PLN million 280 240 200 160 120 80 40 0 IX XI I III V VII IX XI I III V VII IX XI I III V VII IX XI 2007 2008 2009 2010

Source: WSE.

Participants

In 2010, individual investors remained a dominant group of participants of the NewConnect market. Their share in total turnover in shares and allotment certificates equalled 82%. The operations of domestic institutional investors and foreign investors accounted for respectively 11% and 2% of total turnover (Figure 5.2.36). Such a structure of participants of the NewConnect market was connected with the type of companies whose shares were listed on this market – the majority of them were entities with a low capitalisation and short track record. It often happened 5 that at the time of admitting their shares to trading on NewConnect, no detailed annual financial reports were available, which made a thorough analysis of newly listed companies impossible.56 Therefore, some investors could have perceived investments in shares of companies listed on the NewConnect market as involving a higher risk than investments in shares of the majority of companies listed on the WSE. Domestic institutional investors and foreign investors are interested mainly in shares of companies with a large capitalisation and good financial position. They also attach importance to the liquidity of the securities market facilitating the process of disinvestment. For these reasons, despite the possibility of generating large profits, the NewConnect market was not attractive for the said investors.

Figure 5.2.36. Share of investors in turnover in shares and allotment certificates in the NewConnect market, 2007−2010

% 100 3 2 2 2 5 6 9 11 80

92 92 89 87 40

0 2007 2008 2009 2010 Individual investors Institutional domestic investors Foreign investors

Source: WSE.

56 Those companies, whose securities were listed on the NewConnect market, were obliged to prepare current and periodical reports pursuant to Appendix 1 to Resolution No 450/2009 of 25 September 2009 of the Management Board of the Warsaw Stock Exchange S.A. The scope of information provided by these companies was smaller than that provided by those companies, whose shares were listed on the WSE Main Market.

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5 .3 . Spot Fx market

The year 2010 was a period of stability in the zloty spot market. A decline in risk aversion, maintaining low interest rates in developed markets and global excess liquidity made investors invest capital in the financial markets of countries with solid fundamentals and fast-paced economic growth. The zloty exchange rate and its volatility were primarily influenced by events in global financial markets and foreign investors’ willingness to take risk.

The increased interest in investments in the Polish capital market triggered further activity growth in the zloty spot market. Another factor that had an impact on the turnover in this market was an increase in the number of transactions performed with the use of algorithmic trading. According to the results of a triennial BIS survey,57 the value of transactions in the offshore market in April 2010 amounted to USD 5.8 billion and was about 75% higher than 3 years earlier. In the same period, the turnover in the domestic zloty market amounted to USD 1.4 billion, and despite an increase in comparison to 2009, it remained about 9% lower than in the period preceding the intensification of the global financial crisis (1.54 billion in April 2007).

EUR/PLN remained the dominant currency pair on the zloty market, and the share of exchange transactions involving these currencies in turnover in the domestic interbank zloty market was over 90%.

The size of the market

In 2010, the zloty market remained the largest currency market in Central and Eastern Europe. The average daily value of transactions involving the zloty (domestic and offshore markets) grew significantly in comparison to 2009, and amounted to around USD 7.2 billion in April 2010. The turnover in the zloty market was more than four times higher than the turnover in the Czech 5 koruna market, and about 70% higher than the turnover in the forint market (Table 5.3.1). The study of data provided by the Bank of England suggests that the average daily turnover in the zloty market in the fourth quarter was even higher and amounted to about USD 8 billion. The greatest growth in market activity was recorded in the offshore market, where about 80% transactions involved the zloty. The average daily value of transactions between foreign entities in April 2010 amounted to USD 5.8 billion, in comparison to USD 3.3 billion in April 2007 (Table 5.3.1). London was the main centre of zloty exchange transactions in the offshore market. In April 2010, the average daily value of transactions conducted in London was approximately USD 4.5 billion, which accounted for 75% of the turnover in the offshore market of the zloty.

Table 5.3.1. Average daily net turnover in the zloty, Czech koruna and forint spot FX markets in April 2007 and April 2010 (USD million)

Zloty Czech koruna Forint

2007 2010 2007 2010 2007 2010 Total turnover, of which: 4,851 7,193 1,630 1,330 2,959 4,144 – transactions between residents 700 707 279 205 268 384 – resident – non-resident transactions 840 698 504 464 423 412 – transactions between non-residents 3,311 5,787 847 662 2,268 3,348

Source: NBP study based on data provided by the Czech National Bank, the National Bank of Hungary and the NBP, and on the results of Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity in 2010 (Basel 2010).

Sources of such a significant increase in activity in the zloty market should be primarily traced in a change concerning the foreign financial institutions’ propensity to take risks. Expansionary monetary policy pursued by the Federal Reserve Bank and the Bank of England in 2008–2010, and

57 Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity in 2010, Basel 2010, Bank for International Settlements.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 229 Financial markets

the extension of the maximum period for repo loans provided to banks by the ECB, largely restored liquidity in the financial markets.58 The ensuing decline in risk aversion contributed to the growth of foreign exchange transactions of a speculative nature, carried out in the offshore market, mainly by investment banks and hedge funds. Moreover, low interest rates in developed markets and the search for yield moved institutional investors to invest their assets in the financial markets of countries with solid macroeconomic fundamentals and fast-paced economic growth. Foreign entities (particularly non-bank financial institutions) used the carry trade strategies to increase their involvement in the market of securities (assets) denominated in zloty, which indirectly translated into the liquidity in the zloty market. Another important factor that triggered growth in market turnover was the increasing volume of foreign exchange transactions performed with the use of algorithmic trading.

In the domestic zloty spot market, where at least one party to transactions is a bank operating in Poland, the average daily value of transactions in April 2010 was approximately USD 1.4 billion, i.e. 110% and 76% more than within the domestic Czech koruna and forint markets, respectively (Table 5.3.1). All local markets were largely dominated by the exchange transactions of local currencies into euro (Table 5.3.2). In the remaining months, the dynamics of zloty spot transactions in the domestic market did not differ significantly from the dynamics observed in April. Throughout 2010, the average daily net turnover in this market amounted to PLN 4.3 billion and was higher by PLN 0.4 billion than in 2009.

Table 5.3.2. Average daily net turnover and structure of the domestic FX market in Poland, Czech Republic and Hungary in April 2007 and April 2010 (USD million)

5 Poland Czech Republic Hungary

2007 2010 2007 2010 2007 2010 Turnover − foreign currencies/domestic currency 1,540 1,405 782 668 932 796 Interbank market 1,083 959 566 511 554 475 − of which: EUR/domestic currency (%) 90 91 61 59 91 93 − of which: USD/domestic currency (%) 7 6 32 36 6 5 Customer market 457 446 216 157 378 321 − of which: EUR/domestic currency (%) 68 64 70 77 56 69 − of which: USD/domestic currency (%) 24 29 23 15 19 16 Turnover − foreign currencies/foreign currencies 870 550 845 398 707 343

In 2010, the domestic zloty market was dominated by interbank transactions, which accounted for approximately 70% of net turnover in this market. In April 2010, the average daily interbank market turnover amounted to USD 0.96 billion, and therefore was lower by over 10% in comparison to April 2007. Most of the interbank market turnover in Poland (around 85%) comprised transactions with foreign entities (Figure 5.3.1). Turnover in the domestic customer market slightly dropped within three years and amounted to USD 0.45 billion.

In 2010, the EUR/PLN exchange rate varied within the range of 3.8–4.2, which was narrower than in previous two years. An inflow of foreign capital into the Polish capital market, and greater consideration of fundamental factors in investment decisions resulted in the stabilisation of the EUR/PLN exchange rate. Foreign financial institutions’ strong demand for zloty-denominated assets contributed to a continuation of the zloty appreciation trend, initiated in the second quarter of 2009, in the first months of 2010. From January to April 2010, the zloty appreciated by over 6%, to 3.83 per euro. On 9 April 2010, the NBP purchased a certain amount of foreign currencies.

58 World Economic Outlook: Rebalancing Growth, April 2010, International Monetary Fund, Washington 2010, pp. 4–6.

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Figure 5.3.1. Monthly net turnover in the domestic interbank zloty market, 2007−2010

PLN billion % 100 100 90 90 80 80 70 70 60 60 50 50 40 40 30 30 20 20 10 10 0 0 I III V VII IX XI I III V VII IX XI I III V VII IX XI I III V VII IX XI 2007 2008 2009 2010 Total net turnover – left-hand scale Share of transactions with foreign banks – right-hand scale

Source: NBP data received from a group of banks most active in the domestic financial market.

Concerns about the solvency of Greece, reinforced with downgrade of the country’s credit rating to BB+ (i.e. below Investment grade) as of 27 April 2010, caused a strong increase in risk aversion in global financial markets. This resulted, among others, in a sudden depreciation of the – by about 7% against euro and by more than 10% against the US dollar within a few days. At the same time, other currencies in the region recorded slightly smaller falls in value. The increased sensitivity of the zloty to global factors could have stemmed from high liquidity of the zloty market, greatly facilitating the rapid closing of investment positions. Upon obtaining the financial support by Greece from the EU and the IMF,59 and easing tensions in global financial markets since July 2010, the zloty started to strengthen again. 5 The zloty re-weakened temporarily in November and it was triggered by the news about the public finances problems in Ireland, arising from higher-than-estimated costs of the increasing the capitalization of the Irish banking system.

Figure 5.3.2. Average zloty exchange rate against the euro and the US dollar, 2007−2010

PLN 5.0 4.8 4.6 4.4 4.2 4.0 3.8 3.6 3.4 3.2 3.0 2.8 2.6 2.4 2.2 2.0 IVIII VII IX XI IVIII VII IX XI IVIII VII IX XI IVIII VII IX XI 2007 2008 2009 2010

EUR/PLN USD/PLN

Source: Thomson Reuters.

59 The plan to aid Greece involved the ECB, the EU and the IMF. From 10 May 2010, the ECB conducted sterilised purchases of Greek bonds, which translated into a decrease in debt service costs. On the other hand, on 10 May 2010, the EU and the IMF agreed to grant loans to the Government of Greece, provided that it implements a jointly developed programme of the restructuring of its public finances. To this end, the EU decided to create the European Stabilisation Mechanism, allowing countries that are unable to obtain financing on the market to get financial support. This mechanism consists of two elements: the European Financial Stability Mechanism (EFSM) and the European Financial Stability Facility (EFSF). The EFSM was introduced pursuant to the Council Regulation (EC) No 407/2010 of 11 May 2010 establishing the European Stabilisation Mechanism (EU Official Journal L 118 of 2010, p. 1). EFSM funds available to the European Commission are determined on the basis of the EU budget. The EFSF is an autonomous special purpose vehicle based in Luxembourg, established under a framework agreement between the euro area countries of 7 June 2010, and financed by the issue of bonds guaranteed by these countries.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 231 Financial markets

A rapid conclusion of an agreement between the Government of Ireland and the IMF and EU for financial assistance, made the scale of the depreciation of the zloty much smaller than in late April and early May. As a consequence of negative signals from other euro area countries with unstable public finances, the EUR/PLN no longer returned to the level from early April until the end of 2010.

A continuation of an appreciation trend and rising liquidity of the zloty market were responsible for the low volatility of the EUR/PLN exchange rate at the beginning of 2010 (Figure 5.3.3). In the period from January to April 2010, the three-month historic volatility of the EUR/PLN rate remained stable and was maintained at a level slightly higher than before the escalation of the global financial crisis. A sudden transient increase in volatility of the PLN exchange rate in early May was related to its strong depreciation, caused by the said debt service troubles in Greece, and by the concerns about their spread to the European banking sector and other euro area countries. In July, the three-month historic volatility of the EUR/PLN exchange rate significantly decreased, and stood at approximately 9%, i.e. below the volatility of the EUR/USD rate, until the end of 2010.

Bank dealers treated the USD/PLN exchange rate as resultant one which is dependent on the EUR/PLN and EUR/USD exchange rates, which is confirmed by the high correlation between the USD/PLN and EUR/USD exchange rates (in 2010, the correlation coefficient between these exchange rates varied between 0.8 and 0.9). Therefore, persistent uncertainty in the EUR/USD market, associated with fiscal and structural problems of some euro area economies, had a direct impact on much greater volatility of the USD/PLN exchange rate than the EUR/PLN exchange rate.

Figure 5.3.3. EUR/PLN, USD/PLN and EUR/USD three-month historic volatility, 2007−2010

% 5 40 35 30 25 20 15 10 5 0 I III V VII IX XI I III V VII IX XI I III V VII IX XI I III V VII IX XI 2007 2008 2009 2010

EUR/PLN USD/PLN EUR/USD

Note: Three-month historic volatility is a standard deviation of daily returns distribution observed over 66 trading days. Source: NBP, Thomson Reuters.

Market structure

In 2010, EUR/PLN transactions within the interbank zloty spot market in Poland accounted for about 92% of market turnover (Figure 5.3.4). Moreover, the dominant position of the EUR/PLN pair on the zloty exchange transaction market is confirmed by the participation of the EUR in the basket with minimum variance of daily returns, which amounted to 100% throughout the entire 2010.

In the customer market, most transactions also involved the EUR/PLN exchange transactions – their share in the turnover amounted to approximately 64%. USD/PLN was the second most important currency pair in this market segment, representing 29% of market turnover. These shares resulted largely from the currency composition of monetary payments arising from Poland’s foreign trade, dominated, as in previous years, by transactions denominated in euro.

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Figure 5.3.4. Currency composition of zloty exchange transactions concluded in the domestic interbank market, 2007−2010

% 0.6 0.7 0.7 0.6 0.7 1.2 0.7 0.6 0.8 0.8 1.2 1.6 1.5 100 1.3 0.8 0.7 6.4 6.9 9.6 6.8 9.9 6.2 4.5 4.4 4.6 4.2 4.6 5.6 7.7 7.2 90 14.9 12.6 80 70 60 93.0 92.5 95.0 50 89.7 84.5 92.0 93.0 94.8 94.9 94.8 94.6 93.2 91.3 86.7 88.8 90.7 40 30 20 10 I II III IV I II III IV I II III IV I II III IV 2007 2008 2009 2010 EUR/PLN USD/PLN Other currencies/PLN

Source: NBP data obtained from a group of banks most active in the domestic financial market.

Transactions in which foreign currencies were exchanged for other foreign currencies were also carried out in the domestic market. In April 2010, the average daily turnover in this market segment amounted to around PLN 0.55 billion and was almost 37% lower than three years earlier. Among transactions of this type, operations in the interbank market were dominant – their value amounted to PLN 393 billion, 84% of which were EUR/USD exchange transactions. This was related, among others, to the dominant role of the USD/PLN currency pair in the domestic interbank FX swap market. In order to neutralize risks arising from operations in the customer market, domestic banks took positions on the zloty forward market, by the corresponding carrying out of 5 the transactions: USD/PLN FX swap, EUR/USD FX swap, and EUR/PLN spot. For this reason, an around 13% decline in the value of FX swaps in 2007–2010 could have translated into a decrease in liquidity in the domestic market of EUR/USD spot transactions. The customer operations were likewise dominated by EUR/USD foreign exchange transactions.

Market participants

Foreign exchange transactions carried out between non-residents (in April 2010, these accounted for about 80% of average net daily turnover), prevailed in the global zloty market because speculative transactions of London-based banks and hedge funds had a considerable impact on the value of the zloty spot market turnover. The first group of financial institutions, having a larger pool of capital than banks operating in Poland, as well as the relevant support of specialists in quantitative methods and information technologies, could carry out operations of a speculative nature on a large scale, including the use of algorithmic trading. Moreover, these institutions offered a wide range of services related to handling FX transactions (prime brokerage, own trading platforms, fully automated confirmation of the transaction terms and conditions as well as their settlement), making it easier for customers to implement their speculative strategies in the zloty market. For this reason, they almost exclusively handled the servicing of foreign non- -banking financial institutions (particularly hedge funds). In April 2010, the activity of non-banking financial institutions was much higher than three years earlier – their share in the net turnover in the global zloty market amounted to about 44%.

Foreign banks were very active also in the domestic zloty market. Operations with their participation accounted for about 85% of the value of transactions concluded in the interbank market, which corresponded to one tenth of turnover in the global zloty market. The increased activity of foreign banks observed since 2009 in the domestic zloty interbank market resulted from, among others, the aforementioned increased interest in investing in the Polish Treasury bond market and the Warsaw Stock Exchange. Transactions between domestic financial institutions accounted for only 4% of the average daily net turnover in the global zloty market.

Data from the Bank for International Settlements and the NBP show that in April 2010 the average daily turnover in the global market of zloty transactions, involving non-financial entities,

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 233 Financial markets

amounted to USD 0.9 billion, and was around USD 0.5 billion lower than in the corresponding period of 2007. This, along with the increasing value of the offshore market transactions between financial institutions, resulted in a decrease in the share of transactions relating to the real sphere of the economy in turnover of the global zloty market, from 29% in April 2007 to 13% in April 2010. The share of transactions in which one party was a domestic bank and the other party was a domestic non-financial entity in the average daily net turnover in the global zloty market, amounted to little more than 6%.

Market infrastructure

NBP data collected for the Triennial Central Bank Survey – Foreign Exchange and Derivatives Market Activity in 2010 indicate that the domestic zloty market was dominated by direct trading methods. In April 2010, approximately 48% of zloty exchange transactions were concluded with the use of electronic conversational systems, such as Reuters Dealing Direct and the phone. Transactions performed through voice brokers accounted for about 4% of gross turnover in the domestic zloty spot market. The electronic brokerage systems (automatically matching buy and sell orders) managed 36% of transactions, which corresponded to approximately 52% transactions between financial entities – the only participants in these systems.

Popularisation by domestic banks of the automatic order matching system Reuters Spot Matching in the zloty market was consistent with the worldwide trend for increasing the popularity of electronic broking systems. Banks are attracted by these systems due to large trading liquidity, fast execution and low transaction costs. In addition, electronic trading brokerage systems allow algorithmic trading, for which orders to buy or sell the base currency are initiated on the basis of algorithms programmed in computers connected to the trading platform. Properly configured 5 computer software based on very high frequency data analyse market developments (including the possibility of arbitrage, order structure, changes in interest rates) and initiate transactions without direct human intervention. Algorithmic trading can also be used for optimal allocation of large orders, to avoid the negative impact that an implementation of a single large order could have on the foreign exchange rate.60 It is estimated that transactions carried out using algorithmic trading systems account for about 50% of the value of electronic brokerage transactions, and that the share of such operations in the zloty market amounts to just over 10%.

The importance of the trading platforms created by individual banks, including online platforms offered to customers by banks operating in Poland, grew significantly in the last three years. In April 2010, currency trading on these platforms amounted to 13% of turnover in the domestic spot market (11% of the zloty exchange transactions market), whereas in April 2007, only about 2% of transactions were concluded in this way, because the number of electronic FX platforms offered by banks on the basis of white labeling in the zloty domestic customer market increased.61 Customers were attracted by electronic foreign exchange platforms with low transaction costs, fast transaction execution, and built-in systems to monitor market situation (access to news agency data or economic analyses of the platform-offering banks). It seems that competition in the market of such platforms will grow in subsequent years, particularly within the scope of functionality of proposed solutions.

In the London zloty market, transactions with non-banking entities (mainly hedge funds) were usually carried out via electronic trading platforms offered by individual banks or bank consortia.

The standard value of transactions concluded in the zloty market between financial entities amounted to 3 million euro and US dollar, for the EUR/PLN and USD/PLN exchange rate respectively. The value of transactions executed via the Reuters Spot Matching system often amounted to 1 and 2 million euro.

60 R. Kong, D. Rime, The USD 4 trillion question: what explains FX growth since the 2007 survey?, BIS Quarterly Review, December 2010, p. 36. 61 A service whereby a bank active in the foreign exchange market, or a company engaged in the organisation of electronic transaction systems provides a smaller entity with modern infrastructure to conclude and handle the foreign exchange market transactions.

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Box 5.3.1

MAIn ConCLUSIonS FRoM THE STUDy oF THE zLoTy spot market microstructure in 2008−2009

Study of the zloty market microstructure was based on data sets obtained from Thomson Reuters from the Reuters Dealing 3000 Spot Matching transaction system1 (hereinafter: Reuters Spot Matching). The data contain all executed transactions and orders that were recorded on this trading platform from January 2008 to November 2009, for the EUR/PLN currency pair. Turnover on this trading platform accounted for approximately 60% of net turnover in the EUR/PLN global spot market in 2008 and about 50% in 2009.2 The Reuters Spot Matching system is an order- -driven market where dealers can submit two basic types of orders:

− buy/sell market orders for the base currency, carried out at the most competitive ask/ bid rates and resulting in the immediate execution of the buy/sell transaction.

− buy/sell limit orders entered into the order book with ask/bid quotes specified by a dealer and, in the absence of corresponding offers on the opposite side of the market, waiting for future execution for a predetermined period of time; limit orders are executed upon the inflow of market orders or limit orders of equal or better rates on the opposite side of the market.

The distinction between market orders and limit orders allows to define the concepts of buy and sell transactions and of the order flow. Purchase of the base currency (the EUR for the PLN) occurs upon the execution of a market buy order against pending, most competitive sell limit orders. A dealer buying the base currency is defined as the aggressor – an entity whose 5 action led directly to the transaction. Similarly, the sale of the base currency (the EUR for the PLN) occurs upon the execution of a market order to sell the base currency (the EUR) against pending, most competitive buy limit orders. Therefore, the aggressor in such a transaction is a dealer selling the base currency. The difference between volumes of buy and sell transactions of the base currency in the given periods of time is referred to as the order flow.

Dependency between exchange rate changes and the order flow results from the foreign exchange market microstructure theory. It is proved in this theory that the order flow may reflect the scale of information heterogeneity of individual market participants and their expectations about future exchange rates.3 Net buying pressure, i.e. net purchase of the base currency, may suggest that entities engaged in foreign exchange transactions have short-term expectations regarding the appreciation of the base currency. Similarly, net selling pressure may suggest that the majority of entities actively operating within the market expect its depreciation in a short period of time.

The study considers transactions and orders recorded on working days between 8.00 a.m. and 6 p.m. of the Central European Time (CET), since beyond this time interval, both the number and the value of transactions were very small. Econometric models have been estimated on the basis of fifteen-minute and daily data. Due to expected differences in the zloty market in this period, the study distinguishes three subperiods:

1) before the turmoil in domestic financial markets caused by the global financial crisis (January – July 2008 – a period of strong appreciation of the zloty),

2) during the turmoil in domestic financial markets (October 2008 – February 2009 – a period of rapid depreciation of the zloty),

1 In the Reuters Dealing Spot Matching system transactions can only be concluded by banks. 2 Calculations based on data from the Reuters Dealing 3000 Spot Matching system, the Bank of England and the NBP. 3 See: Evans M.D., Lyons R.K. (2002), Order Flow and Exchange Rate Dynamics, “Journal of Political Economy”, No 110, pp. 170–180.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 235 Financial markets

3) after the turmoil in the domestic financial markets (June – November 2009 – a period of gradual strengthening of the zloty).

In all three periods, the intraday seasonality pattern for transaction turnover resembles the shape of the letter “M”. The highest transaction volumes were recorded between 9.30 a.m. and 10.30 a.m., and between 2.30 p.m. and 4.00 p.m. Lower activity of market participants between 12.00 a.m. and 2.00 p.m. results from the so-called “lunch effect”. The lowest average turnover was recorded on Mondays, due to uncertainty resulting from information released over the weekend. The largest average turnover was recorded on Tuesdays, Wednesdays and Thursdays4 (Figure I, left-hand panel).

The bid-ask spread intraday seasonality function in all examined periods was U-shaped i.e. the largest bid-ask spread was observed in the morning and late afternoon, especially on Monday and Tuesday mornings, and on Thursdays and Fridays (mainly in the afternoon). Settlement of spot transactions in the interbank market always takes place on the second working day after their execution. Therefore, the transactions executed on Friday significantly increase risk that exchange rate changes until Tuesday (the established exchange rate depends on events and information published over the weekend) as well as settlement risk associated with such transactions. At the turn of 2008 and 2009 (the second of the test periods), the average bid-ask spread increased almost threefold compared with the first period, and amounted to about 52 pips. However, in the period June – November 2009, market liquidity was gradually improving, and the average bid-ask spread decreased to 29 pips (Figure I, right- -hand panel). However, it was still almost twice as large as in early 2008. 5 The obtained results show that from January 2008 to July 2008, strengthening of the zloty was accompanied by a slow decline in the order flow. Its average daily value during this period was negative and amounted to approximately EUR -20 million. Therefore, in accordance with the zloty strengthening at that time, banks were submitting more market (aggressive) sell orders than market buy orders (EUR for the PLN). On the other hand, rapid depreciation of the zloty in the period August 2008 – February 2009 was accompanied by a considerable predominance of the buy trades over the sell trades. Average daily value of the order flow during this period was positive and amounted to approximately EUR 99 million. Banks were closing foreign exchange positions in the zloty by entering market buy orders to the Reuters Spot Matching system. These market orders increased the scale of the zloty depreciation. However, the upward trend for the value of the order flow changed into the downward trend at the beginning of April 2009. In the period April 2009 – October 2009, banks expected the zloty to strengthen, executing on average more sells than buys of EUR for the PLN (average daily value of the order flow during this period amounted to EUR -37 million). This was associated with a gradual decline in risk aversion in global financial markets and the relatively good economic situation in Poland.

Results of the econometric models show that the change in the order flow in 2008–2009 had a significant positive impact on the rate of return from the PLN exchange rate. However, the EUR/PLN exchange rate reaction to net EUR buy was subject to considerable fluctuations in the examined periods (Figure II). Before the outbreak of the global financial crisis (January – July 2008), net purchase of EUR 10 million resulted in an immediate5 increase in the EUR/PLN exchange rate, and thus the weakening of the PLN, on average by about 6–7 pips, or hundredths of groszes (ceteris paribus). Long-term impact was slightly (by about 1–2 pips) smaller and was subject to weaker fluctuations in time.

4 These results confirm conclusions presented for the currency pair EUR/PLN in a 2007 article by K. Bień entitled Przepływ zleceń a kurs walutowy – badanie mikrostruktury międzybankowego kasowego rynku złotego, “Bank i Kredyt”, 2010, 41(5), pp. 5–39. 5 Estimations based on regression model with parameters varying in time (the dynamics of parameters is subject to random walk process). The immediate effect applies to the response of the EUR/PLN exchange rate to change in the order flow at the fifteen-minute frequency, long-term impact – on one-day frequency (except the overnight returns).

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Figure I. Intraday seasonality of value of transactions concluded in the fifteen-minute intervals (left-hand panel) and the bid-ask spread (right-hand panel) in the highlighted examined periods

January 2008 – July 2008

Value of turnover (EUR million) Bid-ask spread (pips) 45 25 40 23

35 21 19 30 17 25 15 20 13 15 11 10 9

8:00 9:00 8:00 9:00 10:00 11:00 12:00 13:00 14:00 15:00 16:00 17:00 18:00 10:00 11:00 12:00 13:00 14:00 15:00 16:00 17:00 18:00 Central European Time (CET) Central European Time (CET)

Monday Tuesday Wednesday Thursday Friday

October 2008 – February 2009

Value of turnover (EUR million) Bid-ask spread (pips) 70 100

60 90 80 50 5 70 40 60 30 50 20 40 10 30

8:00 9:00 8:00 9:00 10:00 11:00 12:00 13:00 14:00 15:00 16:00 17:00 18:00 10:00 11:00 12:00 13:00 14:00 15:00 16:00 17:00 18:00

Central European Time (CET) Central European Time (CET)

Monday Tuesday Wednesday Thursday Friday

June 2009 – November 2009

Value of turnover (EUR million) Bid-ask spread (pips) 50 55 45 50 40 45 35 40 30 35 25 20 30 15 25 10 20

8:00 9:00 8:00 9:00 10:00 11:00 12:00 13:00 14:00 15:00 16:00 17:00 18:00 10:00 11:00 12:00 13:00 14:00 15:00 16:00 17:00 18:00 Central European Time (CET) Central European Time (CET)

Monday Tuesday Wednesday Thursday Friday Source: NBP calculations based on data from the Reuters Spot Matching transaction system.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 237 Financial markets

During the rapid depreciation of the zloty (October 2008 – February 2009), impact of the order flow on the EUR/PLN exchange rate changes was much larger. Net purchase of EUR 10 million resulted in an immediate weakening of the PLN on average by about 25 pips (ceteris paribus). The increased exchange rate reaction was associated with a significant decrease in market liquidity (approximated by the value of the bid-ask spread) during this period. Fourfold growth of the EUR/PLN exchange rate sensitivity to fluctuations in the order flow was accompanied by approximately fourfold increase in bid-ask spread. Furthermore, the parameter estimate corresponding to the impact of the order flow on exchange rate changes was very unstable (its estimates were subject to very strong fluctuations in time), making it very difficult to precisely define the average scale of reaction. Dispersion in the value of the EUR/PLN response to the purchase of EUR 10 million reached a dozen or even dozens of pips. It should be noted however that the strong immediate impact was largely neutralised, because the average effect of the order flow over a long period of time was significantly lower (by about 5–10 pips depending on the day).

In the period June 2009 − November 2009, after reversing the zloty depreciation trend and the termination of turmoil in global financial markets, net purchases of EUR 10 million resulted in an immediate increase in the EUR/PLN exchange rate (zloty depreciation) on average by about 15 pips (ceteris paribus). The long-term impact was lower by a few pips. Fall in the response of the zloty exchange rate to fluctuations in the order flow was accompanied by a gradual increase in market liquidity (approximated by the value of bid-ask spread).

The study also showed that the immediate response of the zloty exchange rate to change in the order flow varied according to times of the day. In the morning (between 8.00 and 9.00 a.m. CET), when the market was characterised by low liquidity, the response of the 5 zloty exchange rate to net euro purchases was the most significant. During the turmoil in global financial markets (October 2008 – February 2009), the difference in the exchange rate response to the order flow of EUR 10 mn reached tens of pips.

Figure II. The average impact of net purchase of EUR 10 million on the EUR/PLN exchange rate changes (pips) in the period January 2008 − November 2009

pips 75 70 65 60 55 50 45 40 35 30 25 20 15 10 5 0 III III IV VVI VII VIII IXXXI XII III III IVVVI VII VIII IXXXI 2008 2009

Immediate impact Long-term impact

Source: NBP calculations based on data from the Reuters Spot Matching transaction system.

5 .4 . Derivatives market

Financial derivatives are traded both in the stock exchange and over-the-counter. The advantages of the exchange market include the centralisation of trade and functioning of a clearing house, which contributes to better market transparency and reduces counterparty credit risk. The OTC market, on the other hand, makes it possible to tailor the conditions of contracts to

238 National Bank of Poland Financial markets

investor needs. To a very limited extent, derivatives are also subject to trade within multilateral trading facilities, outside the regulated market.

The statistics of daily net turnover show that the exchange market is much more liquid, which is influenced by the standardisation of trade in regulated markets. In turn, the value of gross open positions of banks – the sum of nominal values of sold and purchased derivatives – indicates that the OTC market plays a greater role in the global financial system.

5.4.1. Evolution of the derivatives market: size and structure

In spite of the global financial crisis, the years 2007–2010 saw the growth of the global derivatives market. Between April 2007 and April 2010, average daily net turnover in the OTC derivatives market increased by 21%, and in the exchange market – by 34% (Table 5.4.1). The nominal value of open positions from transactions in derivatives in the OTC market at the end of 2010 exceeded the corresponding value for 2007 by over 12% (Table 5.4.2). At the same time, a drop by approximately 13% in the value of open positions from transactions in exchange-traded derivatives was observed.

One of the main reasons for the aforementioned increase of turnover in derivatives on worldwide stock exchanges in the recent years was the popularisation of automated investment strategies, such as algorithmic trading. In the case of developed financial markets, these strategies were used mainly by non-bank financial institutions, in particular by hedge funds, to speculate using futures contracts. The activity of investors applying such strategies – as opposed to entities from the real sector – does not diminish along with the decline of their activity in underlying instrument markets. 5

Table 5.4.1. Average daily net turnover in the global derivatives market in April 2004, April 2007 and April 2010 (USD billion)

2004 2007 2010 OTC derivatives 1,374 2,291 2,782 – interest rate derivatives 1,025 1,686 2,057 – FX derivatives 349 605 725 Exchange-traded derivatives 4,550 6,179 8,308 – interest rate derivatives 4,524 6,099 8,142 – FX derivatives 26 80 166

Source: NBP study based on the Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity in 2010 – Final results of the Bank for International Settlements, December 2010, FOW TRADE data, Futures Industry Association and data from derivatives stock exchanges.

Table 5.4.2. Nominal value of positions in the global derivatives market at the end of 2004, 2007 and 2010 (USD billion)

2004 2007 2010 OTC derivatives 219,791 449,376 523,058 − interest rate derivatives 190,502 393,138 465,260 − FX derivatives 29,289 56,238 57,798 Exchange-traded derivatives: 42,943 71,364 62,258 − interest rate derivatives 42,769 71,051 61,943 − FX derivatives 174 313 314

Source: NBP study based on data from the Bank for International Settlements.

The Polish OTC derivatives market is much more developed in terms of the value of turnover and variety of instruments offered. The average daily net turnover in the OTC market in 2007−2010

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 239 Financial markets

was significantly higher than turnover in derivatives listed on the WSE (Table 5.4.3). Domestic banks, i.e. institutions with the largest assets in the Polish financial system, as well as foreign banks, which are much less active on the WSE, acted as market makers in the OTC market. Additionally, companies preferred to manage their financial risk using derivatives offered by banks rather than those traded on stock exchanges. This was influenced, among others, by: the long-term relationships between banks and enterprises, a greater variety and flexibility of bank products and a higher liquidity of the OTC market, which translated into a relatively lower cost of hedging.

The sharp downward trend in turnover in the OTC derivatives market, which began in the last quarter of 2008, turned around in 2010. Average daily net turnover in that year was almost 30% higher than in 2009. This can be attributed chiefly to the growing expectations of interest rate increases in Poland, as well as the growing popularity of Credit Support Annexes used in business with foreign banks and aimed at reducing exposures to counterparty credit risk. Such annexes enable the parties to use collateral – mostly in form of cash or Treasury debt securities – with respect to receivables resulting from all transactions in derivatives covered by the annex. The activity of OTC derivatives market participants was still lower in 2010 than before the global financial crisis, mainly due to still relatively low credit limits imposed by banks on one another, as well as the continual risk aversion.

Table 5.4.3. Average daily net turnover in the domestic derivatives market, 2007−2010 (PLN million)

2007 2008 2009 2010 OTC derivatives 13,159.3 14,817.0 5,912.2 7,638.3 – interest rate derivatives 10,227.4 11,373.4 3,954.0 5,824.1 5 – FX derivatives 2,932.0 3,443.6 1,958.2 1,814.2 Exchange-traded derivatives 1,411.0 1,255.2 1,059.8 1,413.2 – interest rate derivatives 0.8 – – – – FX derivatives 0.7 14.4 23.4 15.2 – equity-linked derivatives 1,409.5 1,240.8 1,036.5 1,397.9 – of which: WIG20 futures 1,343.2 1,198.7 995.1 1,319.6

Note: Turnover for the OTC market was calculated using nominal value, and for the exchange market – using transaction settlement amounts. The exchange market only includes instruments listed on the WSE. For this market, both session transactions and block trades are included. In 2008–2010, trade in exchange-traded interest rate derivatives was suspended on the WSE. The category of FX derivatives does not include FX swaps. For the OTC market, the impact of changes in the population of banks providing data to NBP in the individual years was eliminated. Source: NBP study based on NBP data supplied by the group of banks which are most active in the domestic financial market and on WSE data.

The interest rate derivatives market formed the largest segment of the domestic OTC derivatives market in 2007–2010. The liquidity of that market grew significantly in 2010 as compared to the previous year, mainly because domestic banks increased the scale of speculative operations on interest rate changes and used IRS transactions both in order to reduce the risk resulting from the Treasury bond portfolio, and to carry out arbitrage operations. In turn, the liquidity of the domestic FX derivatives market decreased, mainly due to a 40% drop in turnover in the FX options market, resulting from less interest in such instruments among non-financial enterprises.

Zloty-denominated OTC derivatives were traded not only in the domestic market, but also in the offshore market, which includes transactions between non-residents. According to the results of the triennial survey conducted by the Bank for International Settlements,62 the value of transactions involving zloty exchange rate derivatives, concluded between foreign entities, was several times higher than turnover in the domestic market. This is chiefly attributable to a high level of activity of London-based banks and hedge funds.

62 Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity in 2010 (Basel 2010, Bank for International Settlements).

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In 2010, the volume of trade in derivatives on the WSE increased by 6% as compared to 2009 and amounted to 14.7 million transactions. At the same time, the value of transactions increased by approximately 34% to PLN 357.5 billion. The most popular derivatives available to investors on the WSE were WIG20 futures. Trade in those instruments accounted for over 90% of the total turnover in the WSE futures market. Individual investors were still the main participants of the WIG20 futures market. On the Warsaw Commodities Exchange, a decrease in the volume of trade in FX derivatives by 30% was observed, as compared to 2009. As in previous years, interest rate derivatives were traded neither on the WSE, nor on the WCE in 2010.

5.4.2. OTC derivatives

The domestic OTC derivatives market enables financial institutions and enterprises to hedge against interest rate risk and currency risk. It also makes it possible to undertake a certain kind of market risk to a desirable extent. Apart from that, derivatives that generate cash flows similar to payments related to the underlying financial instruments (e.g. IRS transactions and Treasury bonds) make it possible to perform arbitrage transactions.

Due to the decentralised nature of the OTC market banks are the major market makers and participants. As at the end of 2010, domestic banks held the largest off-balance-sheet gross positions in interest rate derivatives, mainly IRS and FRA, with zloty-denominated instruments clearly prevailing (Table 5.4.4). As compared to 2009, a sharp increase was recorded in domestic banks’ involvement in the FRA and OIS market, as well as – to a lesser degree – in the IRS market. As IRS transactions are frequently entered into for several years, they are visible in banks’ financial statements for a relatively long time.63 This explains why in 2010 the value of the gross positions resulting from IRS transactions was significantly higher than e.g. from FRA transactions. 5 As in 2009, the largest positions among FX derivatives resulted from CIRS transactions. This stems from the fact that the years 2009–2010 saw a significant increase in the scale on which such instruments were used by banks to eliminate the mismatch between assets and liabilities.

Table 5.4.4. Gross positions of domestic banks in OTC derivatives market as at the end of 2009 and 2010 (nominal value of instruments, PLN billion)

2009 2010 PLN1 other currencies PLN1 other currencies Interest rate derivatives 786.4 160.0 1,019.6 160.5 – FRA 221.7 2.8 390.2 7.8 – IRS 524.4 140.9 557.3 136.3 – OIS 34.8 11.0 66.0 11.3 – options 2.9 4.9 3.0 4.8 – bond forwards 2.3 0.2 2.5 0.2 – other 0.2 0.2 0.7 0.1 FX derivatives 209.0 32.9 183.2 29.2 – forwards 68.3 5.8 58.2 5.6 – CIRS 88.2 23.1 92.3 23.0 – options 52.5 4.0 32.7 0.5 Equity-linked derivatives2 8.7 5.7 Credit derivatives 0.1 0.0

1 For FX derivatives, the nominal value of derivatives transactions involving the PLN exchange rate against foreign currencies has been shown in this column. 2 This category also includes exchange-traded options for shares and share indices. Source: NBP.

63 Banks’ reports on off-balance-sheet positions include the value of all transactions that have not been settled – irrespective of when they were concluded.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 241 Financial markets

The value of banks’ gross positions related to equity-linked derivatives was insignificant. These instruments were chiefly traded in the exchange market, with brokerage entities acting as market makers. The Polish credit derivatives market remained underdeveloped.

As a result of disturbances in the domestic financial market in 2008 and 2009, as well as financial losses of some enterprises with respect to transactions in the FX options market, the Polish Financial Supervision Authority released two recommendations in 2010: Recommendation I64 relating mainly to foreign exchange risk management by banks, and Recommendation A65 on the management by banks of risk associated with derivatives. These recommendations are aimed at increasing the security of trading in the OTC FX market and the derivatives market, in particular in respect of banks’ business with retail customers, at improving banks’ information policy towards such customers with regard to financial instruments offered to them, and raising the standards of documenting derivatives transactions, as well as making it easier for banks to fully implement the MiFID directive.

The entry into force of the PFSA recommendations may affect the functioning of the domestic OTC derivatives market. The recommended separation of employee compensation systems from the sales volumes of specific products should reduce the degree of mis-selling – a phenomenon whereby a bank strives to maximise its margin and fails to analyse the adequacy of a customer’s position to their needs. At the same time, the recommendations call for promoting uncomplicated financial instruments, such as forwards or the purchase of a single option by the customer. Additionally, Recommendation A obligates banks to carry out periodical simulations of the impact of changes in market conditions (e.g. a sudden depreciation of the zloty) on the valuation of FX derivatives in customer portfolios. Such simulations are supposed to take account of both their hedging and hedged positions.66 In line with the recommendations, banks should 5 have complete and internally consistent risk management systems in place, including derivatives valuation models, market risk and counterparty credit risk monitoring models, as well as appropriate legal documentation.

Apart from the aforementioned PFSA recommendations, the development of the domestic derivatives market will also be heavily influenced by the entry into force of the draft regulation on derivatives traded outside the regulated market, central counterparties and data repositories.67 The aim of the Regulation is to improve the security of trade, enhance the transparency of the OTC derivatives market and reduce the counterparty credit risk. It is to be implemented, among others, by changing the post-transaction infrastructure of the aforementioned market – the settlement of transactions involving standardised OTC derivatives is to be transferred to CCP and an obligation to transmit transaction data to data repositories is to be introduced. The scope and the impact of the Regulation on the domestic derivatives market will largely depend on the final shape of its provisions, in particular with respect to the classes of derivatives subject to the obligation of settlement in CCP, the groups of entities and types of transactions exempt from this obligation and the possible extension by the European Commission of the proposed solutions to the exchange-traded derivatives market. Another issue of high importance for the development of the Polish derivatives market may also be that of arrangements concerning the threshold below which non-financial entities will be exempt from transferring transactions involving derivatives to CCP. Moreover, the draft Regulation provides for the introduction of requirements for the management of risk resulting from bilateral exposures associated with transactions involving derivatives that will not be settled in CCP. The Regulation is expected to enter into force in 2012.

64 Recommendation I concerning the management of currency risk at banks and rules of execution of transactions carrying currency risk, Warsaw 2010, Polish Financial Supervision Authority. 65 Recommendation A regarding the management of risk associated with derivatives transactions concluded by the banks, Warsaw 2010, Polish Financial Supervision Authority. 66 The fact that some banks failed to apply joint analysis of hedging and hedged positions in 2007-2008 was one of the reasons why such banks underestimated the level of potential losses resulting from FX options transactions. 67 Proposal for a Regulation of the European Parliament and of the Council on OTC derivatives, central counterparties and trade repositories, COM(2010) 484 final, Brussels, 15 September 2010, European Commission.

242 National Bank of Poland Financial markets

The remaining part of this section presents a more detailed analysis of growth factors and the structure of the domestic OTC derivatives market in 2010, broken down into interest rate and FX derivatives.

5.4.2.1. Interest rate derivatives

Market size

The market for FRA denominated in PLN remained the most developed sector of the OTC derivatives market in Poland. In 2010, the average daily net turnover in this sector amounted to PLN 3.5 billion and was 46% higher than in 2009 (Figure 5.4.1). The main factor which favoured the growth of activity of FRA market participants was the increased anticipation of interest rate hikes, especially in the second half of 2010. However, the scale of speculative transactions was smaller than before the outburst of the financial crisis, due to the continuing risk aversion and low credit limits imposed by banks on one another.

Figure 5.4.1. Monthly net turnover in the domestic FRA market for transactions denominated in PLN, 2007−2010

PLN billion % 230 100 207 90 184 80 161 70 138 60 115 50 92 40 5 69 30 46 20 23 10 0 0 I III V VII IX XI I III V VII IX XI I III V VII IX XI I III V VII IX XI 2007 2008 2009 2010 Total net turnover – left-hand scale Share of transactions with non-residents – right-hand scale

Note: The impact of changes in the population of banks providing data to NBP was eliminated; data adjusted for double-counting with respect to transactions between resident banks. Source: NBP data received from the group of banks which are most active in the domestic financial market.

A dynamic growth of average daily net turnover was observed in the IRS transactions market – in 2010, it was almost the double of the previous year’s figure and amounted to approximately PLN 1.4 billion (Figure 5.4.2). Domestic banks used IRS mainly to speculate on interest rate changes by the NBP and to hedge against potential losses resulting from a drop in the prices of Treasury bonds held in their portfolios. Additionally, banks implemented arbitrage strategies that exploited differences in cash flows generated by IRS transactions and the corresponding Treasury bonds.

The average daily net turnover in the OIS market increased by 11% – as compared to 2009 – to approximately PLN 960 million, with only a few transactions concluded on average in this market every day (Figure 5.4.3). The increase in turnover was accompanied by a significant growth in the value of banks’ gross off-balance-sheet positions resulting from these transactions, which may be seen as an indication of domestic banks’ growing interest in hedging against the risk of change in the costs of maintaining liquidity in the interbank deposits market (Table 5.4.4). The increase in turnover recorded in the second and third quarters of 2010 may be partly attributable to the phasing out by the NBP, as of April 2010, of repo transactions which led to an increased anticipation of volatility of the POLONIA rate among domestic banks.

The relatively small growth of the OIS market in 2010 may be related, among others, to a continued low liquidity of deposits with maturities exceeding two months, and a lower volatility of the POLONIA rate than that recorded in the previous year. That is because banks preferred to use

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 243 Financial markets

operations with the shortest maturities to manage the liquidity position, which enabled them to plan this position in a flexible manner and reduce the scale of the counterparty credit risk undertaken.

Figure 5.4.2. Monthly net turnover in the domestic IRS market for transactions denominated in PLN, 2007−2010

PLN billion % 63 100 56 89 49 78 42 67 35 56 28 44 21 33 14 22 7 11 0 0 I III V VII IX XI I III V VII IX XI I III V VII IX XI I III V VII IX XI 2007 2008 2009 2010 Total net turnover – left-hand scale Share of transactions with non-residents – right-hand scale

Figure 5.4.3. Monthly net turnover in the domestic OIS market for transactions 5 denominated in PLN, 2007−2010 PLN billion % 90 100 81 90 72 80 63 70 54 60 45 50 36 40 27 30 18 20 9 10 0 0 I III V VII IX XI I III V VII IX XI I III V VII IX XI I III V VII IX XI 2007 2008 2009 2010 Total net turnover – left-hand scale Share of transactions with non-residents – right-hand scale

Figure 5.4.4. Gross positions of domestic banks in the OTC interest rate derivatives market at the end of individual quarters of 2009 and 2010 (nominal value of derivatives)

PLN billion 1,800 1,600 1,400 1,200 891 1,000 729 828 800 696 694 733 80 652 600 665 117 59 115 77 400 35 643 54 519 200 433 46 381 398 336 224 279 0 I II III IV I II III IV 2009 2010 FRA OIS IRS

Source: NBP.

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FRA, IRS and OIS transactions formed a group of interest rate derivatives of significant importance for the domestic financial market, both in terms of quantity and value of the operations made, as well as in terms of exposure of domestic banks to the risk resulting from such transactions (Figure 5.4.4). The involvement of domestic banks in other interest rate derivatives, such as interest rate options or bond forwards, was insignificant in 2010, as in previous years.

Market structure

Standard reference rates in the market for FRA transactions denominated in PLN were WIBOR 1M, WIBOR 3M and WIBOR 6M. Standard transaction amounts in the interbank market were PLN 500 million for transactions settled according to WIBOR 1M, PLN 250 million for transactions with the WIBOR 3M reference rate and PLN 100–150 million for transactions settled according to the WIBOR 6M rate. As compared to 2009, a slight increase in the market share of transactions with an original maturity of 6–9 months was observed in the maturity structure of FRA transactions (Figure 5.4.5). This was particularly noticeable in the first and second quarter and was connected with growing expectations of interest rate hikes which market participants displayed in that period. The market liquidity was concentrated in the following segments: 3x6, 9x12 and 6x9.

In the domestic PLN-denominated IRS market, the reference rate for transactions with an original maturity of up to one year was WIBOR 3M, while in the case of transactions with longer maturities it was WIBOR 6M. The standard nominal value of 1y interest rate swaps was PLN 100 million. In the case of 2y IRS the nominal value was PLN 50 million, while for transactions with longer original maturities it was PLN 25 million. The share of transactions with maturities of less than one year increased significantly in comparison with 2009. These transactions also had 5 the largest share in the maturity structure (Figure 5.4.6).

Figure 5.4.5. Maturity structure of FRA transactions denominated in PLN, 2009−2010

% 100 90 22.7 30.1 25.7 32.2 29.6 30.5 80 34.6 41.1 70 6.7 15.2 9.3 11.2 60 21.4 18.3 14.1 4.7 25.1 9.9 50 16.5 13.2 14.5 14.2 40 18.4 21.1 23.5 31.3 16.1 30 17.2 23.1 30.6 20 13.1 19.6 31.1 10 20.6 19.6 18.0 16.9 13.5 11.0 14.5 0 I II III IV I II III IV 2009 2010 <1M 1–3M 3–6M 6–9M >9M

Note: Maturity structure according to original maturities; contract maturity intervals are left half-open. Source: NBP data received from the group of banks which are most active in the domestic financial market.

In the case of OIS transactions, POLONIA was the reference rate – in 2010, banks made no transactions settled according to the O/N WIBOR rate. The standard nominal values of transactions with maturity of up to one week amounted to PLN 500 million and in the case of transactions with longer maturities – to PLN 100 million. The maturity structure of OIS transactions was related to the term structure of the unsecured interbank deposit market. As compared to 2009, there was a decrease in the market share of transactions with maturities of between one week and one month, which was especially noticeable in the second half of 2010 and was accompanied by an increase in the share of transactions made for a period of 3–6 months (Figure 5.4.7). This could have been related to market participants’ expectations of increased volatility of the POLONIA rate.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 245 Financial markets

Figure 5.4.6. Maturity structure of IRS transactions denominated in PLN, 2009−2010

% 100 8.5 10.4 10.4 7.7 6.7 6.7 8.6 9.0 90 7.6 11.1 12.9 8.7 8.6 12.8 13.7 9.8 80 8.6 15.4 13.2 12.9 10.0 70 14.1 15.3 19.6 60 25.6 23.2 27.0 32.7 50 33.3 27.6 28.6 40 33.3 30 51.0 20 41.0 46.1 35.2 35.1 32.2 38.5 10 27.3 0 I II III IV I II III IV 2009 2010 <1Y 1– 2Y 2– 3Y 3 – 5Y >5Y Note: Maturity structure according to original maturities; contract maturity intervals are left-open. Source: NBP data received from the group of banks which are most active in the domestic financial market.

Figure 5.4.7. Maturity structure of OIS transactions denominated in PLN, 2009−2010

% 100 5.3 4.7 7.2 1.8 90 10.9 3.9 7.8 17.3 12.2 9.4 24.3 5.7 11.5 80 10.4 26.4 23.0 14.5 19.8 22.1 70 20.5 23.7 60 14.1 18.5 50 46.5 32.3 40 20.0 45.6 51.0 39.1 38.5 28.4 30 14.5 5 20 34.4 10 26.5 21.7 17.5 18.8 13.5 15.6 21.1 0 I II III IV I II III IV 2009 2010 <1W 1W – 1M 1 – 3M 3 – 6M >6M Note: Maturity structure according to original maturities; contract maturity intervals are left half-open. Source: NBP data received from the group of banks which are most active in the domestic financial market.

Market participants

The structure of turnover in the OTC interest rate derivatives market was clearly dominated by transactions concluded with other domestic and foreign banks (in particular London-based), which accounted for almost 99% of the turnover (Table 5.4.5). The high level of bank activity was linked to the fact that they used derivatives to speculate on interest rate movements and to hedge against the interest rate risk arising chiefly from positions in Treasury securities.

A characteristic feature of the Polish interest rate derivatives market was a relatively high share of non-residents in the turnover structure, especially in the IRS segment (over 75%, Figure 5.4.2) and the FRA segment (almost 70%, Figure 5.4.1). The 2010 saw a strong increase in trading with foreign banks in the IRS market (despite persisting low credit limits imposed by banks on one another), which may have been influenced by the growing popularity of credit support annexes among domestic banks. The importance of non-residents is reflected by data on off-balance sheet positions of domestic banks resulting from transactions in derivatives (Figure 5.4.8). In the case of OIS transactions, the level of foreign bank activity was lower than in other market segments – transactions with non-residents had a 25% share in the interbank market (Figure 5.4.3). The local nature of this market was related to the fact that the POLONIA reference rate reflected the current liquidity conditions of the domestic banking sector.

246 National Bank of Poland Financial markets

Table 5.4.5. Average daily value of domestic banks’ transactions in the OTC interest rate derivatives market in Poland, 2007–2010, by counterparty (PLN million)

2007 2008 2009 2010 FRA 6,047.5 7,625.9 2,399.4 3,504.9 – with domestic banks 2,532.2 2,880.6 727.9 1,071.8 – with non-banking entities 2.6 3.6 6.0 17.7 – with non-residents 3,512.7 4,741.7 1,665.5 2,415.4 IRS 1,795.6 1,827.0 682.5 1,353.0 – with domestic banks 455.5 575.3 197.3 285.5 – with non-banking entities 103.2 56.7 32.7 51.8 – with non-residents 1,236.9 1,195.0 452.5 1,015.7 OIS 2,376.1 1,912.5 868.2 963.7 – with domestic banks 1,895.5 1,126.2 579.2 717.9 – with non-banking entities 0.8 3.9 0.0 3.9 – with non-residents 479.8 782.4 289.0 241.9 Interest rate options 8.1 8.1 3.9 2.5 – with domestic banks 0.5 0.1 0.0 0.0 – with non-banking entities 4.0 3.9 2.0 1.5 – with non-residents 3.6 4.1 1.9 1.0

Figure 5.4.8. Gross positions of domestic banks in the OTC interest rate derivatives market at the end of 2009 and 2010, by counterparty (nominal value of derivatives)

PLN billion 700 411.3 600 384.3

500 400 300 193.7 6.1 12.1 0.3 22.5 23.1 200 117.4 7.1 251.3 247.1 100 196.9 18.4 21.1 107.0 0 28.2 0.4 56.1 2009 2010 2009 2010 2009 2010 FRA OIS IRS Domestic banks Domestic non-ﬁnancial sector Non-banking ﬁnancial institutions Non-residents Source: NBP.

The share of non-banking financial institutions in turnover in the domestic interest rate derivatives market was insignificant (Figure 5.4.8). The investment funds operating in Poland did not show considerable interest in derivatives. Pension funds, on the other hand, due to the absence of appropriate implementing procedures could not use derivatives to hedge against adverse Treasury bond price movements. At the end of 2010, Treasury bonds accounted for over 50% of their investment portfolio. Non-financial entities seldom made transactions involving interest rate derivatives. Enterprises usually managed the interest rate risk by means of IRS transactions, while the use of FRA and OIS transactions or options for this purpose was very limited.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 247 Financial markets

5.4.2.2. FX derivatives

Market size

The global zloty-denominated OTC derivatives market was the most developed market for Central and Eastern European FX derivatives. The value of transactions concluded in April 2010 in the market for forward contracts, FX options and CIRS transactions for the Polish zloty exchange rate was much higher than in the case of the Czech koruna or the Hungarian forint (Tables 5.4.6– 5.4.8). Transactions carried out between non-residents, i.e. in the offshore market, were particularly important for the markets of these currencies.

The liquidity of the FX derivatives market in Poland was heavily influenced by transactions with non-financial entities. Lower interest in hedging instruments on their part contributed to a drop of average daily turnover in that market by 7.4%, as compared to 2009. The limited use of FX derivatives by enterprises was mainly attributable to a relatively stable EUR/PLN exchange rate, which remained within the range of 3.84–4.20 throughout 2010. Furthermore, some market participants feared entering into transactions involving FX options which brought about losses for certain enterprises speculating on the appreciation of the zloty in 2008–2009.68

The PLN forward market constituted the largest segment of the domestic FX derivatives market. In 2010, the average daily net turnover in this market amounted to PLN 1.3 billion and was almost 8% higher than in 2009 (Figure 5.4.9). As in previous years, the popularity of these instruments was relatively stable. Many enterprises still hedged themselves against the FX risk, usually by means of forwards.

As was the case with the other currencies of the region, a major part of trade in the global 5 PLN forward transaction market took place in the offshore market (Table 5.4.6). On the basis of the results of the triennial survey conducted by the Bank for International Settlements as well as data from the Bank of England, it can be estimated that in April 2010 the trade in the London market accounted for approximately 63% of PLN forward transactions conducted in the offshore market (i.e. in transactions between non-residents). Transactions with non-banking financial institutions, such as hedge funds, accounted for approximately 65% of trade in that market.

Figure 5.4.9. Monthly net turnover in the domestic PLN forward market, 2007−2010

PLN billion % 50 100 45 90 40 80 35 70 30 60 25 50 20 40 15 30 10 20 5 10 0 0 I III V VII IX XI I III V VII IX XI I III V VII IX XI I III V VII IX XI 2007 2008 2009 2010

Net turnover in the interbank market – left-hand scale Turnover in the customer-driven market – left-hand scale Share of transactions with non-residents in the interbank market – right-hand scale

68 This issue is discussed in greater detail in the study entitled Financial System Development in Poland in 2008, Warsaw, November 2008, NBP, pp. 94–96. The loss associated with an FX derivative is not the same as the actual loss incurred by an enterprise. If the derivative is only used as a means of hedging against risk, the loss incurred with respect to such an instrument is compensated by a greater income from the hedged transaction (e.g. resulting from exports).

248 National Bank of Poland Financial markets

Table 5.4.6. Average daily net turnover in the global PLN, CZK and HUF forward markets in April 2007 and April 2010 (USD million)

PLN CZK HUF

2007 2010 2007 2010 2007 2010 Total turnover, of which: 2,644 3,559 1,432 612 1,357 1,816 – transactions between residents 393 284 205 132 82 228 – resident–non-resident transactions 64 23 565 25 34 18 – transactions between non-residents 2,187 3,252 662 455 1,241 1,570

Source: NBP study based on data provided by the Czech National Bank, the National Bank of Hungary and the NBP, and on the results of the Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity in 2010, Basel 2010, Bank for International Settlements.

For a second year running, there was a significant decline in activity in the domestic FX options market. In 2010, the average daily net turnover in this market fell by 41% as compared to the previous year and amounted to approximately PLN 341 million (Figure 5.4.10). The demand for FX options on the part of enterprises declined very sharply, which contributed to a drop in turnover in the interbank market. The activity level of enterprises may have dropped partly in response to financial losses by certain non- -financial entities in the fourth quarter of 2008 and the first half of 2009, as well as the implementation by banks of Recommendation A issued by the PFSA, which recommended that customers should be offered mainly simple derivatives, such as forward transactions. Additionally, the limited demand for FX options was influenced by a relatively stable EUR/PLN exchange rate throughout 2010.

Figure 5.4.10. Average monthly net turnover in the PLN FX options market, by nominal 5 value, 2007–2010

PLN billion % 30 100

24 80

18 60

12 40

6 20

0 0 III III IV III III IV III III IV III III IV 2007 2008 2009 2010 Net turnover in the interbank market – left-hand scale Turnover in the customer-driven market – left-hand scale Share of transactions with non-residents in the interbank market – right-hand scale

Note: The impact of changes in the population of banks providing data to NBP was eliminated; data adjusted for double-counting with respect to transactions between resident banks. The figures presented in this figure include the nominal value of each option comprising the strategy. Source: NBP data received from the group of banks which are most active in the domestic financial market.

In 2010, there were still only a few banks that actively managed a portfolio of FX options. Other banks that offered such products hedged against the risk resulting from transactions in options by concluding opposite transactions (back-to-back hedging), usually with parent entities or other foreign banks. As transactions were made in the customer-driven market on a much smaller scale, there was also a significant decrease in the scale of hedging transactions conducted in the interbank market.

The activity in the domestic PLN options market was much lower than in the offshore market. In 2010, almost 95% of all the transactions involving these instruments were operations between non-residents (Table 5.4.7). In the London market, which was the main centre of trade in PLN options, interbank transactions were the prevailing type.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 249 Financial markets

Table 5.4.7. Average daily net turnover in the global PLN, CZK and HUF FX options market in April 2007 and April 2010 (USD million)

PLN CZK HUF

2007 2010 2007 2010 2007 2010 Total turnover, of which: 940 2,083 226 216 269 1,243 – transactions between residents 207 61 26 16 26 30 – resident–non-resident transactions 99 65 27 17 39 49 – transactions between non-residents 634 1,957 173 183 204 1,164

The CIRS transaction market remained the smallest segment of the domestic FX derivatives market for the PLN exchange rate. In 2010, as in the previous year, the average daily turnover in this market amounted to approximately to PLN 155 million. The increase in activity in this market in the last three years (Figure 5.4.11) was mainly attributable to a noticeable change in the way domestic banks managed FX risk resulting from foreign currency-denominated housing loan exposures (mainly in the Swiss franc and the euro). This change consisted in a more frequent use of CIRS basis transactions69 in order to eliminate the aforementioned FX exposures instead of the rollover of short-term FX swap transactions. In 2010, there was a significant growth of spreads in the prices of CIRS basis, which translated into increasing costs of acquisition of foreign currencies in return for the zloty (Figure 5.4.12). This was attributable, among others, to the turmoil in financial markets associated mainly with public finance problems of peripheral euro area countries. 5 In spite of the relatively high cost of such a hedging mechanism, domestic banks used CIRS transactions because they wanted to reduce the liquidity risk resulting from the lack of possibility of rolling over short-term FX swap hedging operations or of renewing them on favourable terms. The CIRS transactions used to hedge against the market risk were usually non-standardised and tailor-made.

Figure 5.4.11. Average monthly net turnover in the PLN market for CIRS FX/PLN transactions, 2007−2010

PLN billion % 4.0 100 3.6 90 3.2 80 2.8 70 2.4 60 2.0 50 1.6 40 1.2 30 0.8 20 0.4 10 0.0 0 III III IV III III IV III III IV III III IV 2007 2008 2009 2010 Net turnover in the interbank market – left-hand scale Turnover in the customer-driven market – left-hand scale Share of transactions with non-residents in the interbank market – right-hand scale

Note: The impact of changes in the population of banks providing data to NBP was eliminated; data adjusted for double-counting with respect to transactions between resident banks. Source: NBP data obtained from the group of banks which are most active in the domestic financial market.

69 A type of CIRS transaction, in which interest rates fixed for each party are variable rates (they are specific reference rates denominated in different currencies) and one of them is adjusted for the margin agreed upon in the terms of the transaction, i.e. the so-called basis.

250 National Bank of Poland Financial markets

Figure 5.4.12. Margins in the CIRS basis and FX swap transactions market, 2008−2010

basis points 400 300 200 100 0 -100 -200 -300 I III V VII IX XI I III V VII IX XI I III V VII IX XI 2008 2009 2010 EUR/PLN USD/PLN CHF/PLN through USD/PLN and CHF/USD CIRS basis (EURIBOR/WIBOR) Note: In the case of CIRS basis transactions, the margin has been defined as a premium paid over the WIBOR rate in exchange for the EURIBOR rate; in the case of FX swaps, the margin has been defined as the difference between the disparity of interest rates implied from the prices of FX swaps and the disparity of interest rates observed in the interbank deposits market. Source: Thomson Reuters.

CIRS transactions weigh heavily on credit limits imposed by banks on one another, due to the associated currency and interest rate risks. In spite of persistent low credit limits, the growth of this segment of the FX derivatives market in 2009–2010 was possible, because domestic banks had signed the aforementioned Credit Support Annexes with foreign banks, used hedging deposits in CIRS transactions and used resettable CIRS transactions to a greater extent than before.70 Furthermore, given the continuing risk aversion, banks often arranged transaction terms even 5 several months in advance (the so-called forward-starting swaps).

In the domestic market, CIRS operations were occasionally used to speculate on interest rate or FX rate movements, chiefly because they weighed heavily on credit limits. Activities of speculative nature had more importance for the offshore market, whose liquidity exceeded the liquidity of the domestic market – transactions between non-residents accounted approximately for 60% of the total value of all PLN exchange rate CIRS transactions (Table 5.4.8). Banks were the main participants of the offshore market, while the participation of non-financial institutions accounted for less than 10% of turnover in April 2010.

Table 5.4.8. Average daily turnover in the global market for PLN, CZK and HUF CIRS transactions in April 2007 and April 2010 (USD million)

PLN CZK HUF

2007 2010 2007 2010 2007 2010 Total turnover, of which: 185 181 40 30 11 45 – transactions between residents 43 2 0 0 0 – – resident–non-resident transactions 18 70 8 16 0 – – transactions between non-residents 124 109 32 14 11 –

70 In resettable CIRS, the market value of the swap resulting mainly from FX rate movements is settled during the interest rate swap, using the current FX rate (the nominal value of the CIRS transaction changes in one of the currencies). This serves to reduce the counterparty credit risk exposure.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 251 Financial markets

Market structure

Data concerning the currency structure of turnover in April 2010, which allow one to make a cross-country comparison of this structure, indicate that the share of the individual currency pairs in the Polish, Czech and Hungarian forward markets was similar (Table 5.4.9). There were no significant changes in the currency structure of PLN forward transactions market as compared to 2009 – in 2010, the EUR/PLN pair had a turnover share of 68%, while USD/PLN – approximately 26%. The high importance of EUR/PLN transactions may indicate that the major part of activity was aimed at reducing currency risk. Most frequently enterprises hedged cash flows resulting from foreign trade that were usually denominated in the euro, which was closely linked to the geographical structure of Polish trade.

Most forward transactions were concluded using electronic conversational systems or the telephone. Moreover, in 2010, banks developed their offer of electronic trading platforms, which enabled selected groups of customers to conclude transactions automatically. This resulted in a greater market share of such transactions.

Table 5.4.9. Structure of the forward transactions market in Poland, the Czech Republic and Hungary in April 2007 and April 2010 (average daily turnover, USD million)

Poland Czech Republic Hungary

2007 2010 2007 2010 2007 2010 Turnover – foreign currencies/domestic currency, of which: 456 306 770 156 116 246 – EUR/domestic currency (%) 67 71 28 72 64 70 5 – USD/domestic currency (%) 28 23 67 24 22 21 Customer-driven market 373 214 76 130 69 230 Turnover – foreign currencies/foreign currencies 71 12 105 42 58 94

On the FX options market in Poland, the Czech Republic and Hungary, the EUR/domestic currency pair dominated the currency structure of turnover (Table 5.4.10). However, the domestic PLN FX options market saw a significant decrease in the share of that currency pair in the turnover structure – from approximately 74% in 2009 to approximately 66% in 2010. This may have been related, among others, to the outflow of activity of some non-residents interested in EUR/PLN options from the domestic market to the offshore market. At the same time, the average maturity of transactions entered into in that market became shorter (Figure 5.4.13).

Table 5.4.10. Structure of the FX options market in Poland, the Czech Republic and Hungary in April 2007 and April 2010 (average daily turnover, USD million)

Poland Czech Republic Hungary

2007 2010 2007 2010 2007 2010 Turnover – foreign currencies/domestic currency, of which: 306 126 53 33 65 79 – EUR/domestic currency (%) 70 88 97 84 77 96 – USD/domestic currency (%) 27 12 2 5 10 4 Customer-driven market 192 51 24 16 26 28 Turnover – foreign currencies/foreign currencies 38 2 20 2 77 12

252 National Bank of Poland Financial markets

The majority of the options traded in the domestic interbank market were European plain vanilla options and option strategies based on them. Only a small group of domestic banks occasionally entered into transactions involving PLN exchange rate exotic options, while foreign banks often conducted such transactions in the offshore market. Although the domestic market was dominated by transactions made over the telephone or via electronic conversational systems, there were also more transactions conducted via voice brokers than in the preceding years. A few banks also provided their non-financial customers with the possibility of entering into transactions involving options via electronic trading platforms.

Figure 5.4.13. Maturity structure of turnover in the PLN FX options market, 2009−2010

% 100 6.7 5.4 2.8 1.9 11.3 11.8 7.2 14.2 9.0 8.9 90 3.2 11.1 13.9 15.9 7.4 7.8 11.5 80 4.8 11.0 9.9 9.0 12.0 70 17.3 15.4 13.7 7.4 22.9 60 16.7 27.2 13.2 17.0 18.5 24.4 50 23.2 16.3 21.1 40 18.8 14.9 14.8 30 16.9 48.6 20 34.2 39.1 39.0 37.3 35.7 10 27.0 22.7 0 III III IV III III IV 2009 2010 <1M 1–3M 3–6M 6–9M 9–12M >12M Note: Maturity structure according to original maturities; contract maturity intervals are left half-open. Source: NBP data received from the group of banks which are most active in the domestic financial market. 5

The greatest share in the currency structure of banks’ positions due to CIRS transactions at the end of 2010 was that of CHF/PLN (approximately 55%) and EUR/PLN (24%). Positions related to EUR/CHF transactions also played an important role (approximately 14%). This was largely dependent on the currency structure of foreign currency-denominated housing loans granted by domestic banks. At the same time, trading in the CIRS market in Poland was clearly dominated by EUR/domestic currency operations, similarly to the Czech Republic (Table 5.4.11). There was an increase in the significance of transactions with maturities exceeding 2 years – their share in the domestic CIRS transactions market in 2010 was approximately 49%, while in 2009 it was approximately 33% (Figure 5.4.14). Transactions with maturities exceeding 5 years became more popular, which was related to the aforementioned reduction of counterparty credit risk on the part of banks consisting in the use of Credit Support Annexes, in establishing and managing collateral, as well as in increasing the scale of resettable CIRS operations.

Table 5.4.11. Structure of the CIRS transactions market in Poland, the Czech Republic and Hungary in April 2007 and April 2010 (average daily turnover, USD million)

Poland Czech Republic Hungary

2007 2010 2007 2010 2007 2010 Turnover – foreign currencies/domestic currency, of which: 61 72 8 16 0 – – EUR/domestic currency (%) 46 80 61 99 0 – – USD/domestic currency (%) 19 0 39 1 0 – Customer market 15 0 0 0 0 – Turnover – foreign currencies/foreign currencies 7 7 0 19 0 –

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 253 Financial markets

Figure 5.4.14. Maturity structure of turnover in the CIRS market, 2009–2010

% 100 3.3 5.8 11.9 90 10.1 5.7 15.3 14.2 19.6 6.8 31.5 24.4 80 15.9 10.0 11.3 19.3 70 6.4 30.4 4.0 3.8 13.3 60 43.2 8.2 27.7 26.1 14.7 25.3 4.1 3.5 50 29.3 40 25.3 8.3 30 53.0 6.7 43.0 43.3 50.4 20 38.5 35.1 10 24.9 26.3 0 I II III IV I II III IV 2009 2010 <1Y 1–2Y 2–3Y 3–5Y >5Y

Note: Maturity structure by original maturities; contract maturity intervals are left half-open. Source: NBP data received from the group of banks which are most active in the domestic financial market.

Market participants

As opposed to the interest rate derivatives market, trading in the domestic OTC FX derivatives market was conducted mainly within the customer segment. The prevalence of transactions with non-financial institutions was especially noticeable in the PLN forward transactions market, where such transactions accounted for 83% of turnover value (Figure 5.4.9). For enterprises, forward transactions were a simple and relatively easily accessible instrument of reducing currency risk. Domestic banks frequently hedged exposures to the currency risk resulting from concluded 5 forward transactions in the interbank market (usually with foreign banks), using the appropriate combination of a spot transaction and an FX swap.

The FX options market saw a slight predominance of interbank transactions (Figure 5.4.10). The small difference in the scale of turnover between the customer market and the interbank market was related to the strategy applied by most domestic banks participating in this market, which consisted in hedging against the market risk associated with option transactions with non-financial entities by entering into opposite transactions in the interbank market (hedge back-to-back). The share of non-residents in trading in the interbank market was very high (over 90%), as the reverse transactions were mainly entered into with foreign banks, most frequently dominant entities. In 2010, this share decreased, which was related to the decline in the number of banks operating in the customer market and with the concentration of trade in several banks that actively managed a portfolio of options and applied the so-called delta-hedging for that purpose.

As opposed to the other segments of the domestic OTC FX derivatives market, CIRS transactions were conducted almost exclusively between banks, with operations with non- -residents accounting for approximately 95% of turnover in the interbank market (Figure 5.4.11). This was related to the aforementioned basic application of CIRS transactions, i.e. managing the currency risk resulting from granted housing loans denominated in foreign currencies. The significant role of non-residents in that market stemmed from the limited possibility of conducting such operations with domestic banks, as none of them performed the function of a market maker in 2010. Moreover, they were more inclined to acquire, rather than transfer, foreign currencies in CIRS transactions, while foreign banks conducted such operations in order to acquire the Polish zloty for the purpose of investing in the domestic capital market.

Non-banking financial institutions used instruments available in the OTC FX derivatives market only to a small extent. Investment funds investing in foreign assets did not show interest in these instruments. Pension funds had to comply with low limits for investing abroad and could not use derivatives to hedge, among others, against fluctuations of exchange rates. At the end of 2010 in the insurance companies sector deposits denominated in foreign currencies accounted only for approximately 3% of all the deposits, which was related to a low value of liabilities under insurance contracts expressed in foreign currency. Pursuant to the Act on insurance activity, the

254 National Bank of Poland Financial markets

assets which serve to cover technical provisions have to be denominated in the currency of liabilities under the insurance contracts for which such provisions are created.71 This had an influence on the level of interest among insurance companies in FX derivatives – at the end of 2010 their market value accounted only for 0.06% of all the deposits.

5.4.3. Exchange-traded derivatives

In 2010, financial derivatives were the subject of organised trade on the WSE and on the Warsaw Commodity Exchange. Trading on the WSE was carried out for FX futures and derivatives related to the equity market (individual equity futures, index futures and index options and MiniWIG20 index participation units). The WCE offered WIBOR reference rate futures and domestic Treasury bond futures, FX futures as well as options on FX futures.

In 2010, the volume of trade in derivatives on the WSE rose by over 6% as compared to 2009 and reached 14.7 million contracts, while the value of transactions grew by 33.9% to PLN 357.5 billion. As in previous years, the activity of investors was concentrated in the segment of WIG20 index futures.

As compared to 2009, the volume of trade in FX derivatives offered by the WCE fell by over 30%. Investors were most interested in EUR/PLN and USD/PLN exchange rate contracts. In 2010, no transactions were concluded in the interest rate (WIBOR 1M and WIBOR 3M) and Treasury bond futures markets on the WCE.

According to data from the Futures Industry Association,72 in 2010 the volume of trade in the worldwide futures and options contracts exchanges increased by almost 25.7% and amounted to 22.3 billion contracts. Thus, the share of the Polish market in global turnover in exchange-traded 5 derivatives reached 0.07%. In 2010, the WSE was classified 37th among world stock exchanges as regards the volume of trade in futures and options contracts. In this classification for Europe, the WSE ranked 9th,73 while WIG20 index futures contracts were 6th, in terms of trade volume, among the most liquid contracts on equity indices traded on the European exchanges. The relatively high ranking of WIG20 index futures resulted, among others, from a low nominal value of such contracts. For instance, the nominal value of a WIG20 index contract as at the end of 2010 was PLN 27,441, i.e. EUR 6,929, while for the DJ EURO STOXX 50, IBEX35 and DAX indices it was EUR 27,928, 98,591 and 172,855 respectively.

Table 5.4.12. Trading volume in futures contracts on the main equity indices in Europe, 2007−2010 (millions of contracts)

Underlying index Stock exchange 2007 2008 2009 2010 1. DJ EURO STOXX 50 Eurex 327.0 432.3 333.4 372.2 2. CAC40 Euronext LIFFE 44.7 49.2 41.9 44.6 3. DAX30 Eurex 50.4 49.2 40.1 41.0 4. FTSE100 Euronext LIFFE 33.5 42.3 38.5 37.6 5. OMX Stockholm 30 OM 30.9 38.7 33.2 32.4 6. WIG20 WSE 9.3 11.7 12.8 13.5 7. AEX Euronext LIFFE 12.9 12.5 10.5 12.0 8. SMI Eurex 14.4 17.7 12.1 11.6 9. IBEX35 MEFF 8.4 7.3 5.4 6.3 10. MIB30 IDEM 4.7 4.9 4.2 5.4

Source: Eurex, NySE Euronext, WSE, IDEM, MEFF, OM.

71 Article 154 para. 2 of the Act of 22 May 2003 on Insurance Activity (Dz.U. of 2010, No 11, item 66, as amended). 72 B. Acworth, 2010 Record Volume, Annual Volume Survey, “Futures Industry Magazine”, March/April 2011. 73 This classification, apart from exchanges in EU Member States, also takes account of Russian markets: Russian Trading Systems Exchange (RTS) and Moscow Interbank Currency Exchange (MICEX).

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 255 Financial markets

5.4.3.1. Equity derivatives

Futures contracts for the WIG20 and mWIG40 indices, as well as European options on the WIG20 index were traded on the WSE. Furthermore, the WSE offered futures contracts on equities of ten companies and MiniWIG20 index participation units.

In 2010, the volume of trade in equity derivatives rose by over 6% as compared to 2009 and the value of transactions increased by 33.9%. WIG20 futures contracts remained the most liquid instrument. Their share in the volume and value of trade in the futures market amounted to over 90% (Figure 5.4.15). Investors were also active in the WIG20 options market. The liquidity of the other segments of the equity derivatives market (mWIG40 futures contracts, individual equity futures and MiniWIG20 index participation units) was still very low (Table 5.4.13). The main reasons for low turnover in the aforementioned segments of the derivatives market included: the lack of market makers and the fact that investors preferred more liquid instruments – WIG20 futures contracts. The further part of this section will describe in detail the development of the most liquid instruments – WIG20 futures contracts and WIG20 options.

Figure 5.4.15. Structure of the equity derivatives market on the WSE, 2007−2010, by turnover value

% 100 4.1 2.7 3.2 4.8 90 80 70 60 5 50 95.3 96.6 96.0 94.4 40 30 20 10 0 2007 2008 2009 2010 WIG20 futures mWIG40 futures WIG20 options MiniWIG20 index participation units Equity futures

Note: The value of turnover for WIG20 options is calculated according to the base index level. Source: WSE.

Table 5.4.13. Size of the equity derivatives market on the WSE, 2007−2010

2007 2008 2009 2010 ABABABAB WIG20 futures 334,467 9,169,649 300,880 11,743,240 250,775 12,766,514 333,850 13,481,633 mWIG40 futures 757 16,606 646 25,349 580 30,240 834 32,998 WIG20 options 14,255 394,913 8,295 326,583 8,391 421,648 16,888 675,112 MiniWIG20 index 8 22,258 9 36,327 8 42,084 9 36,240 participation units Equity futures 1,370 114,021 1,595 331,646 1,435 465,696 2,108 375,496

Note: The value of turnover is calculated according to the closing price of the underlying instrument. A – annual value of turnover (session transactions and block trades) (PLN million) B – annual volume of trade (number of contracts) Source: WSE.

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Market size

In 2010, investors conducted transactions for approximately 13.5 million WIG20 futures contracts, which means a 5.6% rise as compared to 2009 (Figure 5.4.16). The average number of open positions at month-end amounted to 111,006 contracts and was over 25% higher.

Figure 5.4.16. WIG20 futures traded on the WSE, 2007−2010

thousand thousand 1,600 160 1,400 140 1,200 120 1,000 100 800 80 600 60 400 40 200 20 0 0 I III V VII IX XI I III V VII IX XI I III VVII IX XI I III VVII IX XI 2007 2008 2009 2010

Volume (number of contracts) – left-hand scale Open positions as at month-end – right-hand scale

Source: WSE.

The high liquidity of the WIG20 futures contracts market is the main factor which contributes to its growth, as it attracts new market participants by enabling them to expose themselves to the 5 equity market and, subsequently, to close such an exposure at a low cost. In 2010, the number of individual derivatives accounts grew by 22.0% and amounted to 68,672 as at year-end. Also, a rise in the activity level of foreign investors was noted, as well as in the number of foreign members of the WSE. Non-residents may have been drawn to making investments in that segment by its high liquidity, which enabled them to take up and close quite large positions. Additionally, the liquidity of the market was improved by an increase in the number of market makers. As at the end of 2010, there were 12 entities who acted as market makers in the WIG20 futures contracts market, i.e. three entities more than at the end of the previous year. The increase in the volume of trade in WIG20 futures contracts was also a result of a relatively high variability of the WIG20 index during the first half of the year and high daily fluctuations of this index, expressed in index points74 (Figure 5.4.17).

Figure 5.4.17. Historic volatility and daily changes of the WIG20 index, 2008−2010

points % 280 77 240 66 200 55 160 44 120 33 80 22 40 11 0 0 I III V VII IX XI I III V VII IX XI I III V VII IX XI 2008 2009 2010

Daily changes – left-hand scale 30-day volatility – right-hand scale

Source: Bloomberg.

74 For investors operating in the futures contracts market, the change in the underlying index expressed in index points is more important than its percentage change. This is because investors receive PLN 10 from the other party to the transaction for each index point, provided that their prediction of how the index will move is correct, or pay the amount calculated in the same way, if the projection is wrong.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 257 Financial markets

A significant rise of the value of turnover in WIG20 futures contracts led in 2010 to an increase of the ratio of turnover value in these contracts to the turnover value in equities included in the WIG20 by 21.6 percentage points to 219.6% (Figure 5.4.18). A much higher liquidity of this market segment as compared to the liquidity of shares comprising the WIG20 index is confirmed by the bid-ask spread. In 2010, the spread in transactions involving WIG20 futures of a series with the closest maturity date was usually 1–2 index points, i.e. 4–8 basis points. For the shares of companies included in the index it was 29 basis points on average.

Figure 5.4.18. Turnover value of WIG20 futures and turnover value of WIG20 equities on the WSE, 2003−2010

PLN billion % 350 350 300 300 250 250 200 200 150 150 100 100 50 50

0 0 2003 2004 2005 2006 2007 2008 2009 2010

Turnover in WIG20 equities – left-hand scale Turnover in WIG20 futures – left-hand scale Liquidity ratio – right-hand scale 5 Source: NBP calculations based on data from the WSE.

In 2010, the volume of trade in index options increased by 60.1% as compared to 2009 and amounted to 675,112 contracts. The value of transactions in index options increased by over 100% and amounted to PLN 16.9 billion. The increase in the volume of trade in index options stemmed, among others, from a relatively low variability of the WIG20 index, which caused some investors who operated actively in the futures market to move to this segment of the derivatives market. In the climate of low volatility, the WIG20 options market provided more opportunities for making a profit than the futures contracts market involving the same index. A combination of several options (the so-called option strategy) makes it possible to profit not only from a correct prediction of how the price of the underlying instrument is going to change, but also from the increase or decrease in its volatility (e.g. the straddle and strangle strategies).

The value of option premiums paid by investors in 2010 was PLN 418.3 million and was 4% higher than in the previous year. The relatively low increase in the value of premiums against the growth of volume and value of turnover in options resulted from a significant drop in the volatility of the WIG20 index in 2010 as compared to the previous year.

As at the end of 2010, there were 106 series of WIG20 options traded on the WSE. Liquidity in the WIG20 option market was concentrated on series with the closest expiration date and, at the same time, negative intrinsic value (out-of-the-money options) or with the exercise price close to the current market price (at-the-money options or near-the-money). High volume of trade was also recorded in out-of-money option series expiring at the second closest date. The high popularity of these options among investors was a consequence of their relatively low price. The liquidity of the remaining segments of the index options market was low (Figure 5.4.19). Order books contained few bid and ask offers for such options, thus bid/ask spreads were wide (sometimes the difference between the best bid and best ask offer in relation to the mid offer was in the range of 10–20%). This discouraged investors from operating in the aforementioned market segments, as it would entail relatively high transaction costs.

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Figure 5.4.19. Share of individual WIG20 options series in the total volume of turnover in these options in 2010 by expiration date and moneyness

% 50

0 Up to 3M 3–6M 6–9M

In-the money At-the-money Out-of-the-money

Source: NBP calculations based on data from the www.bossa.pl website.

One of the reasons for the aforementioned concentration of trade in the index options market was the organisation of market making. Throughout most of 2010, there was one market maker in the index options market,75 who actively operated only on a few option series. This state of affairs resulted from the agreements concluded by such entities and the WSE, whereby market makers were obliged to place regular bid and ask offers for call and put options for: two series of call options and two series of put options selected out of three series with exercise prices closest to the level of the WIG20 index and having the nearest maturity date; two series of call options and two series of put options selected out of three series with exercise prices closest to the level 5 of the WIG20 index and having other expiration dates; as well as a fifth series of call options and a fifth series of put options selected freely by the market maker.

Market participants

The main participants of the WIG20 futures market were individual investors. However, their participation in turnover was the lowest in the history of listing of this instrument (Figure 5.4.20). The second most important group of investors in the WIG20 futures market were domestic institutional investors. Among them, 60% of trade was generated by market makers. A high level of activity was also displayed by investment funds, which had a 17% share in the trading volume of futures contracts generated by domestic institutional investors. Transactions conducted by brokerage houses on their own account accounted for approximately 11% of the turnover. Due to lack of implementing provisions to the Act on the Organisation and Operation of Pension Funds,76 such institutions still could not participate in the derivatives market, which prevented them from hedging their equity portfolios against a drop in prices.

Individual investors prevailed among the participants of the index option market. Their transactions accounted for more than a half of trade in these instruments (Figure 5.4.21). Another significant group of this market’s participants were also domestic institutional investors, with market makers prevailing in this group, as their share in its operations exceeded 50%. Transactions carried out by banks accounted for nearly 40% of trade generated by domestic institutional investors. Such a high level of activity displayed by banks in the WSE index options market resulted from a statistical change which consisted in a reclassification of transactions conducted by a single entity. In previous years, the transactions of such a bank were regarded as market markers’ transactions. The remaining part of trade generated by domestic institutions were transactions of investment funds and enterprises (5% and 3%, respectively). In 2010, there was a slight increase in the activity level of foreign investors in the WIG20 options market. This was related to the

75 The other market maker began operating in the WSE options market towards the end of December of 2010. 76 Article 141 para. 3 of the Act of 28 August 1997 on the Organisation and Operation of Pension Funds (consolidated text: Dz.U. of 2010, No 34, item 189, as amended).

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 259 Financial markets

improved liquidity of this segment of the derivatives market, which allowed such investors to trade in larger option blocks and contributed to a decrease in transaction costs.

Figure 5.4.20. Structure of investors in the WIG20 futures contracts market on the WSE, 2007–2010, by number of contracts

% 100 90 80 34 37 37 36 70 60 50 40 56 53 52 50 30 20 10 11 14 0 10 10 2007 2008 2009 2010

Foreign investors Individual investors Domestic institutional investors

Note: The presented shares include all the futures contracts traded on the WSE. As WIG20 futures contracts dominated the trade, it may be assumed that they offer an accurate reflection of the share of individual groups of investors in the WIG20 futures market. Source: WSE.

Figure 5.4.21. Structure of investors in the WIG20 options market on the WSE, 2007−2010, by number of contracts

5 % 100 90 30 31 28 80 35 70 60 50 58 60 40 53 65 30 20 10 12 12 4 12 0 2007 2008 2009 2010 Foreign investors Individual investors Domestic institutional investors

Note: For 2007, the presented shares include all the options traded on the WSE, i.e. WIG20 options and individual equity options traded on the stock exchange between 17 October 2005 and 4 July 2007. As WIG20 options dominated the trade, it may be assumed that they offer an accurate reflection of the share of individual groups of investors in the WIG20 options market. Source: WSE.

5.4.3.2. FX derivatives

FX futures contracts were traded on both the WCE and WSE. Most of the FX futures contracts offered by the WSE were settled by way of actual delivery of currency. Among the instruments traded on the WSE there were also FX futures contracts options. The futures contracts traded on the WSE included USD/PLN, EUR/PLN, CHF/PLN and GBP/PLN futures. All of the FX futures contracts listed on the WSE were non-delivery forwards.

Market size

The WCE does not publish detailed data concerning the value turnover in FX derivatives. The value of transactions involving FX futures and FX futures options listed on the WCE, as presented in this study, was calculated on the basis of monthly data on the volume of trade in such instruments, using the average monthly exchange rates. According to this method, the value of annual trade in FX derivatives on the WSE in 2010 amounted to approximately PLN 5.0 billion (PLN 6.5 billion in 2009) and was 25% higher than on the WSE. The value of FX transactions

260 National Bank of Poland Financial markets

involving futures contracts that were conducted on the WSE amounted to PLN 3.9 billion. In terms of the volume of trade, the WSE futures market was the larger one, with more than three times as many FX derivatives sold/bought as the WCE. The liquidity of the WCE market for FX futures and FX futures options was assured by two market makers. On the WSE, there was one market maker operating in the FX futures market.

In 2010, the volume of turnover in FX futures contracts on the WCE amounted to 33,561 contracts and was 32.9% higher than in the previous year (50,022 contracts in 2009). In comparison with 2009, the volume of trade in FX futures options decreased significantly and reached the level of 9,277 contracts (Table 5.4.14). Such a sharp decline in the volume of trade in these derivatives was a consequence of a relatively high level of FX rates against the zloty, which discouraged market participants from operating in that market. According to WCE data, approximately 80% of transactions on the WSE are conducted by exporters, whose increased activity in the FX derivatives market can be seen whenever the zloty strengthens and the EUR exchange rate falls below PLN 3.80.77

The highest turnover in futures contracts was registered in September 2010 – it accounted for over 30% of the turnover recorded in the entire year. Additionally, high turnover was recorded in March, June and December (Figure 5.4.22). High activity levels in these months are typical for this market and result from the maturity dates of contracts and from the fact that investors have to renew positions. FX futures contracts offered by the WCE expire every three months, on the third Wednesday of each month from the March settlement cycle. The longest maturity for contracts is 12 months. In practice, investors operating in this market open positions on the most liquid series of contracts, i.e. the series with the nearest maturity date. Thus, investors who wish to take positions for a long term are forced to renew contracts every three months. 5

Figure 5.4.22. FX futures on the WCE, 2007−2010

15,000 6,000

12,000 4,800

9,000 3,600

6,000 2,400

3,000 1,200

0 0 I III V VII IX XI I III V VII IX XI I III V VII IX XI I III V VII IX XI 2007 2008 2009 2010

Volume (number of contracts) – left-hand scale Number of open positions as at month-end – right-hand scale Source: WCE.

In 2010, the volume of trade in FX futures contracts on the WSE decreased by 26.4% as compared to 2009 and amounted to 119,075 contracts (Figure 5.4.23). The drop in turnover in this market resulted from a lower volatility of the PLN exchange rate in 2010 as compared to the previous year, which implied lower activity of speculators.

77 In surveys conducted by the NBP, enterprises reported that the exchange rate at which export was no longer profitable in 2010 was around PLN 3.70. More details can be found in Information on the condition of the enterprise sector, including the economic climate in 2010 Q3 and forecasts for 2010 Q4, NBP, Warsaw 2010.

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 261 Financial markets

Figure 5.4.23. FX futures on the WSE, 2007−2010

36,000 3,600 32,000 3,200 28,000 2,800 24,000 2,400 20,000 2,000 16,000 1,600 12,000 1,200 8,000 800 4,000 400 0 0 I III V VII IX XI I III V VII IX XI I III V VII IX XI I III V VII IX XI 2007 2008 2009 2010

Volume (number of contracts) – left-hand scale Number of open positions as at month-end – right-hand scale

Source: WSE.

Table 5.4.14. Size of the FX futures options market on the WCE, 2007−2010

2007 2008 2009 2010 ABABABAB EUR/PLN 3,488 956 20,598 2,182 8,955 1,848 5,722 424 GBP/PLN 18 0 17,460 2,996 2,950 0 1 0 USD/PLN 3,730 717 6,048 217 680 135 3,344 57 5 EUR/USD 309 0 233 14 204 1 129 0 Other exchange rates 59 7 136 NDA 15 NDA 81 NDA

A – annual volume of turnover (contracts) B – open positions as at year-end (contracts) Source: WCE.

Market structure

In 2010, the most popular FX futures contracts on the WCE were EUR/PLN contracts, whose share in the trading volume was 46.4% (58% in 2009). The transactions in futures contracts on the USD/PLN exchange rate accounted for 40.2% of the trading volume (28% in 2009). Furthermore, EUR/USD contracts were popular with investors and had a 5.5% share in the trading volume (8% in 2009). In 2010, the highest turnover in FX futures contracts options was recorded in the EUR/PLN segment – 61.7% of the total volume of turnover. Of high significance were also transactions involving USD/PLN exchange rate instruments, whose share in the trading volume rose from 5.3% in 2009 to 36.0% in 2010. This particular structure of FX derivatives transactions on the WCE is determined by the currency structure of foreign trade payments of Polish enterprises. According to data from the Central Statistical Office, trade with the euro area countries accounted for 55% of Polish export and 46% of import.78

Over 70% of the value of transactions in FX futures contracts conducted on the WSE was registered in the USD/PLN segment. This was connected to a relatively low volatility of the USD/PLN exchange rate as compared to the EUR/PLN exchange rate, which increased the attractiveness of this market segment for speculators. As compared to 2009, the participation of EUR/PLN futures contracts in the volume of trade in all future contracts dropped by 20 percentage points to 23.6%. Turnover in CHF/PLN futures was very low.

78 Foreign trade turnover in total and by countries, January – December 2010, Central Statistical Office, Warsaw, 2011.

262 National Bank of Poland Financial markets

Market participants

In order for the WCE to comply with the requirements of the Act on Public Offering, Conditions Governing the Introduction of Financial Instruments to Organised Trading, and on Public Companies,79 the market organised by that commodity exchange was not allowed to have more than 99 participating entities. In a situation when the current participants of the market display a low activity level, the WCE has a limited ability to expand its pool of investors, which affects the volume of trade generated on that exchange. Small and medium-sized enterprises remained the largest group of investors in the FX derivatives market organised by the WCE. They used this market to hedge their receivables in foreign currency. The second important category of market participants comprised foreign speculative financial investors, who often acted as counterparties for Polish enterprises.

The main participants of the market organised by the WSE were individual investors, who used FX futures contracts to speculate on the fluctuation of the PLN exchange rate against EUR, USD and CHF. The low interest of enterprises in the instruments offered by the WSE may have resulted from the limited diversity of these instruments, low market liquidity and competition from other markets – mainly the OTC market, including the trading platforms offered by banks and investment firms. Enterprises interested in hedging against a drop in the value of export receivables expressed in PLN (or an increase in import liabilities) preferred the solutions offered by banks or, to a lesser degree, the WCE. The diverse and flexible range of contracts offered by banks enabled enterprises to adjust the value and the maturity of the hedging transaction to the value and date of receipt of receivables (payment of liabilities) expressed in foreign currency arising from commercial transactions. In turn, individual investors who wished to speculate on the volatility of the PLN exchange rate usually opted for trading platforms, as these offered a wide range of instruments, the possibility of using greater financial leverage resulting from lower 5 margins, as well as spreads in the quotations of futures contracts that were lower than those offered by the WSE.

79 Act of 29 July 2005 on Public Offering, Conditions Governing the Introduction of Financial Instruments to Organised Trading, and on Public Companies (consolidated text: Dz.U. of 2009, No 185, item 1439, as amended).

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 263 Abbreviations used in the report

Abbreviations used in the report

1M one-month

2M two-month

3M three-month

6M six-month

9M nine-month

12M twelve-month

1W one-week

2W two-week

3W three-week

1y one-year

2y two-year

3y three-year

5y five-year

AC accident and theft insurance

AMA Advanced Measurement Approach

ATS Alternative Trading System

ATM Automated (Automatic) Teller Machine

BFG Bank Guarantee Fund (Bankowy Fundusz Gwarancyjny)

BGK Bank Gospodarstwa Krajowego

BGŻ Bank Gospodarki Żywnościowej

BIK Credit Information Bureau (Biuro Informacji Kredytowej)

BIS Bank for International Settlements

BME Bolsas y Mercados Españoles

BPS Bank Polskiej Spółdzielczości

BSB buy-sell-back

BUX Budapest Stock Exchange Index

CBOS Public Opinion Research Center (Centrum Badania Opinii Społecznej)

CCBM Correspondent Central Banking Model

CCBM2 Collateral Central Bank Management

CCP central counterparty

CDS credit default swap

CEBS Committee of European Banking Supervisors

CEC Central European Country

264 National Bank of Poland Abbreviations used in the report

CEE Central and Eastern Europe

CEIOPS Committee of European Insurance and Occupational Pensions Supervisors

CESR Committee of European Securities Regulators

CeTO Central Table of Offers (Centralna Tabela Ofert)

CFR Code of Federal Regulations

CHF Swiss franc

CIRS currency interest rate swap

CLS Continuous Linked Settlement

CPI Consumer Price Index

CR (3, 5, 10) concentration ratio (3, 5 or 10 largest entities)

CRD Capital Requirements Directive

CSD Central Securities Depository

CSM clearing and settlement mechanism

CZK Czech koruna

DAX Frankfurt Stock Exchange Index

DBPD long-term bank debt securities

DM brokerage house

DPDP long-term corporate debt securities

DRP Money Market Dealers

DSPW Treasury Securities Dealers

DTI debt to income ratio – a ratio of the indebtedness of households under loans as at the end of the year to annual disposable income

DvP Delivery versus Payment

Dz.U. Journal of Laws (Dziennik Ustaw)

Dz.Urz. KNF Official Journal of the Polish Financial Supervision Authority (Dziennik Urzędowy Komisji Nadzoru Finansowego)

Dz.Urz. NBP Official Journal of the National Bank of Poland (Dziennik Urzędowy Narodowego Banku Polskiego)

EACHA European Automated Clearing House Association

EBA European Banking Authority

EC European Community

ECB European Central Bank

ECOFIN Economic and Financial Affairs Council

EEA European Economic Area

EEC European Economic Community

EFAMA European Fund and Asset Management Association

EFSF European Financial Stability Facility

EFSM European Financial Stability Mechanism

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 265 Abbreviations used in the report

EFTA European Free Trade Association

EIB European Investment Bank

EIF European Investment Fund

EIOPA European Insurance and Occupational Pensions Authority

EMIR European Market Infrastructure Regulation

EMTN Euro Medium Term Note

EMV Europay MasterCard Visa

EONIA European Overnight Index Average

EPC European Payments Council

ESA 95 European System of Accounts 95

ESFS European System of Financial Supervision

ESMA European Securities and Markets Authority

ESRB European Systemic Risk Board

ETF Exchange Traded Fund

ESAs European Supervisory Authorities

EU European Union

EU-15 15 member states which belonged to the European Union before 1 May 2004

EUR euro

EURIBOR Euro Interbank Offered Rate

EVCA European Private Equity and Venture Capital Association

FESE Federation of European Securities Exchanges

FRA forward rate agreement

FSB Financial Stability Board

FUS Social Insurance Fund (Fundusz Ubezpieczeń Społecznych)

FX foreign exchange

GBW Gospodarczy Bank Wielkopolski

GDP Gross Domestic Product

GUS Central Statistical Office (Główny Urząd Statystyczny)

HHI Herfindahl-Hirschman index

HUF Hungarian forint

IAS International Accounting Standards

IDEM Italian Derivatives Exchange Market

IDM Chamber of Brokerage Houses (Izba Domów Maklerskich)

IFRS International Financial Reporting Standards

IKE Individual Pension Account (Indywidualne Konto Emerytalne)

IMF International Monetary Fund

266 National Bank of Poland Abbreviations used in the report

IPO Initial Public Offering

IRS interest rate swap

IZFiA Chamber of Fund and Asset Management (Izba Zarządzających Funduszami i Aktywami)

JEREMIE Joint European Resources for Micro to Medium Enterprises

KBPD short-term bank debt securities

KDPW National Depository for Securities (Krajowy Depozyt Papierów Wartościowych)

KFD National Road Fund (Krajowy Fundusz Drogowy)

KFK National Capital Fund (Krajowy Fundusz Kapitałowy)

KIR National Clearing House (Krajowa Izba Rozliczeniowa)

KPDP short-term corporate debt securities

KPRM Chancellery of the Prime Minister (Kancelaria Prezesa Rady Ministrów)

KSKOK National Association of Credit Unions (Krajowa Spółdzielcza Kasa Oszczędnościowo-Kredytowa)

LBDS long-term bank debt securities

LCB long-term corporate bonds

LGU local government units (jednostki samorządu terytorialnego)

LIBOR London Interbank Offered Rate

LSE London Stock Exchange

LTV loan-to-value

MEFF Mercado Español de Futuros Financieros

MF Ministry of Finance

MICEX Moscow Interbank Currency Exchange

MIDWIG former name of mWIG40

MFI monetary financial institutions

MiFID Markets in Financial Instruments Directive

MPC Monetary Policy Council (Rada Polityki Pieniężnej)

MPiPS Ministry of Labour and Social Policy

MR Bank Mazowiecki Bank Regionalny

MŚP small and medium-sized enterprises

MSSF International Financial Reporting Standards

mWIG40 Warsaw Medium-Sized Enterprise Stock Index (Warszawski Indeks Giełdowy Średnich Spółek)

MWSZ required rate of return

NASDAQ National Association of Securities Dealers Automated Quotations

NBP National Bank of Poland

NCIndex NewConnect market index

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 267 Abbreviations used in the report

NFI National Investment Fund (Narodowy Fundusz Inwestycyjny)

NMS New Member States of the European Union

NySE New york Stock Exchange

O/N overnight

OC third party liability

OECD Organisation for Economic Co-operation and Development

OFE open pension fund (Otwarty Fundusz Emerytalny)

OIS Overnight Index Swap

OM Optionsmäklarna

OTC over-the-counter

PARP Polish Agency for Enterprise Development (Polska Agencja Rozwoju Przedsiębiorczości)

PDA allotment certificate (prawo do akcji)

PE-ACH pan-European automated clearing house

PFSA Polish Financial Supervision Authority (Komisja Nadzoru Finansowego)

PKO BP Powszechna Kasa Oszczędności Bank Polski

PLN Polish zloty

POLONIA Polish Overnight Index Average

POS point of sale

PPE occupational pension scheme (Pracowniczy Program Emerytalny)

PRT Polish Derivatives Market (Polski Rynek Terminowy)

PSD Payment Services Directive

PSIK Polish Private Equity Association (Polskie Stowarzyszenie Inwestorów Kapitałowych)

PTE pension fund management company (Powszechne Towarzystwo Emerytalne)

PZF Polish Factors Association (Polski Związek Faktorów)

PZU Powszechny Zakład Ubezpieczeń

PX Prague Stock Exchange Index

QIS5 Quantitive Impact Study 5

RIO Regionalna Izba Obrachunkowa

ROA return on assets

ROE return on equity

RPW Securities Register (Rejestr Papierów Wartościowych)

RPW CeTO RCeTO Securities Market

RRP Regulated OTC market

RRRF Council for Financial Market Development (Rada Rozwoju Rynku Finansowego)

268 National Bank of Poland Abbreviations used in the report

RTGS real time gross settlement

S/N spot next

SBB sell-buy-back

SBDS short-term bank debt securities

SCB short-term corporate bond

SCF SEPA Card Framework

SCT SEPA Credit Transfer

SDD SEPA Direct Debit

SEPA Single Euro Payments Area

SFTI Secure Financial Transaction Infrastructure

SIX Swiss Exchange

SKOK Credit Union (Spółdzielcza Kasa Oszczędnościowo-Kredytowa)

SPAN Standard Portfolio Analysis of Risk

SPO Secondary Public Offering

SSP Single Shared Platform

SW spot week

SWSZ weighted average rate of return

sWIG80 Warsaw Medium-Sized Enterprise Stock Market Index (Warszawski Indeks Giełdowy Małych Spółek)

T2 TARGET2

T2-NBP TARGET2-NBP

T2S TARGET2-Securities

T/N tomorrow next

TARGET Trans-European Automated Real Time Gross Settlement Express Transfer system

TechWIG index of companies listed on the WSE which belong to the High-Tech Segment

TFI investment fund management company (Towarzystwo Funduszy Inwestycyjnych)

TUW mutual insurance company (Towarzystwo Ubezpieczeń Wzajemnych)

TUW SKOK SKOK mutual insurance company (Towarzystwo Ubezpieczeń Wzajemnych SKOK)

UCITS Undertakings for Collective Investment in Transferable Securities

UEFA Union of European Football Associations

UFG Insurance Guarantee Fund (Ubezpieczeniowy Fundusz Gwarancyjny)

UFK unit-linked fund (ubezpieczeniowy fundusz kapitałowy)

UKNF Office of the Polish Financial Supervision Authority (Urząd Komisji Nadzoru Finansowego)

USD US dollar

FINANCIAL SySTEM DEVELOPMENT IN POLAND 2010 269 Abbreviations used in the report

UTP Universal Trading Platform

VAT Value Added Tax

WCE Warsaw Commodity Exchange (Warszawska Giełda Towarowa)

WFE World Federation of Exchanges

WIBOR Warsaw Interbank Offered Rate

WIG Warsaw Stock Exchange Index (Warszawski Indeks Giełdowy)

WIG20 Warsaw Stock Exchange Index of 20 Large Enterprises (Warszawski Indeks Giełdowy Dużych Spółek)

WIG20lev Warsaw Stock Exchange Index of 20 Large Leverage Enterprises (Warszawski Indeks Giełdowy Dużych Spółek typu leverage)

WIG20short Warsaw Stock Exchange Index of 20 Large Short Enterprises (Warszawski Indeks Giełdowy Dużych Spółek typu short)

WSE Warsaw Stock Exchange (Giełda Papierów Wartościowych)

ZBP Polish Bank Association (Związek Banków Polskich)

ZFDF Związek Firm Doradztwa Finansowego

ZPL Polish Leasing Association (Związek Polskiego Leasingu)

ZUS Social Insurance Institution (Zakład Ubezpieczeń Społecznych)

270 National Bank of Poland