Shadow banking in Poland

The term shadow banking is often used to signify very different things, so it is helpful to start with the definition. There is no single commonly accepted definition of shadow banking. Shadow banking is

often seen as a form of regulatory arbitrage or near-banking. The Finan-cial Stability Board defined the shadow banking system as the system of credit intermediation that involves entities and activities outside the regular banking system [Shadow, 2011]. This definition implies the shadow banking system is based on two intertwined pillars.

Firstly, here belong entities operating outside the regular banking system are engaged in one of the following activities:

– accepting funding with deposit-like characteristics, – performing maturity and/or liquidity transformation, – undergoing credit risk transfer,

– using direct or indirect financial leverage.

Good examples of this type of activities were found in Poland’s saving unions. Now they are regulated as Monetary Financial Institu-tions.

Secondly, you need to include activities that could act as important sources of funding of non-bank entities. These activities include secu-ritization, collateral intermediation, securities lending and repurchase transactions. Securitization funds operating in the Polish market are an example of this concept of shadow banking. In this meaning shadow banking refers to the activity of issuing very short term IOUs and in-vesting the proceeds in long-term financial assets. Shadow banking is from this perspective, a monetary phenomenon [Ricks, 2012, p. 731].

The banking system creates credit and private money. Private money is an investment perceived as highly safe, liquid and redeem-able at par, which is a key factor behind its development. Essential to that process is maturity transformation. If the credit extended was repayable immediately, the matching money created could not be used effectively and maturity transformation is potentially welfare enhanc-ing. This is because it enables the non-financial real economy to fi-nance projects with long-term credit liabilities while holding short- -term financial assets: it should therefore facilitate long-term invest-ment. Essentially, therefore, the shadow banking system can create forms of private money held either by the non-financial real economy or by financial intermediaries, in a fashion analogous to the banking system’s own creation of money deposits. However, where there is maturity transformation and private money creations, there is a poten-tial for runs, which is a potenpoten-tially destabilizing factor.

Despite the multiplicity of views, there is a general agreement on shadow banking characteristics:

– raising short-term funds from financial markets to deploy else-where,

– funds raised are not guaranteed, – no access to a central bank.

This shadow banking could exist, at least theoretically, as a stand-alone system parallel to, but quite separate from banking and the real economy. In practice it does not; rather the shadow banking system, which actually developed involves complex interconnections between the banking system and shadow banks.

The risks emanating from shadow banking could be primarily of four types viz., (i) liquidity risk, (ii) leverage risk, (iii) regulatory arbi-trage and (iv) contagion risk.

Shadow banking entities have close inter-linkages with the banking sector from the asset as well as the liabilities side and also with other segments of the financial system, which can lead to a contagion risk in times of uncertainty and loss of confidence.

Part of the difficulty of assessing the impact of non-bank financial institutions on financial stability and economic growth is the fact of the wide range of institutions involved. Globally, shadow banking entities could be considered under the broad heads of (i) Money Mar-ket Funds, (ii) private equity firms, (iii) Hedge Funds, etc. (iv) pension funds and insurance undertakings, (v) central counterparts, and UCITS and exchange trade funds (vi) securitization vehicles.

Some non-banking financial institutions are highly inter-connected with the banks and other non-banking financial entities. According to the EU 27 data at the end of 2001, the assets of MFI’s were counted at 20.84 trillion EUR’s. Other Financial Institutions at 21.62 trillion EUR’s and pension funds and insurance undertakings at 10.98 trillion EUR’s.

In our analysis of Poland we will use the term “shadow banking”

on a par with the term “other financial institutions.” The extent of such defined “shadow banking” in Poland in December 2010 was estimated at 58 bln EUR’s [Non-bank, 2012, p. 11]. The institutional structure of shadow banking in Poland indices, is shown in Table 1.

Table 1. Shadow banking in Poland in figures

Type of institution POS

1. Credit Unions 1,954

2. Payment services 22,500

3. Shopping Centers 786

4. Debt traders 1,281

5. Fore 1,729

6. Leasing firms 119

7. Factoring firms 44

8. PE firms 52

9. Credit intermediation 400

9. Social lending 3

10. Money lenders firms 10

Sources: Own calculation. Data for 2012.

The strengthening of the current supervisory frameworks for banks and insurance corporations might provide incentives for regulated entities to again shift a part of their business into the shadow banking sector. This sector is thus likely to amplify pro-cyclicality and sys-temic risks generally via its maturity and/or liquidity transformation, relying often on short-term uninsured funds. The higher the growth rate of the financial sector value added relative to the non-financial sector, the greater its power in precipitating subsequent financial busts [Financial…, 2013].

Residency-based statistics on investment funds as collected under Regulation ECB/2008/30 provide a breakdown of investment funds by purpose, separating hedge funds from bond funds, equity funds and mixed funds. A second source of statistics providing a useful overview of other financial intermediaries heavily engaged in the repo market are the regular MFI balance sheet statistics as collected under Regula-tion RCB/2008/32. Within this framework, it is possible to monitor repos between banks and non-banking financial intermediaries, further broken down into central counterparties as well as other types of fi-nancial intermediaries.

One further sector of interest in the analysis of shadow banking is that of money market funds. A unique source of information for this sector is offered again by the MFI balance sheet statistics collected under Regulation EBC/2008/32.

Finally, securitization schemes are important activities of the shadow banking sector. Such schemes vary within and across debt securities markets. They can be grouped into three broad types. The first type of scheme, usually known as on-balance sheet securitization, involves the issue of debt securities backed by an income stream generated by the assets, which remain on the balance sheet of the debt securities issuer, typically as a separate portfolio. In the second type, called true- -sale securitization, the original owner transfers assets from the bal-ance sheet to a financial vehicle, which issues debt securities to fi-nance the acquisition. Synthetic securitization, the third type of securi-tization, involves a partial or total transfer of credit risk related to a pool of assets without a transfer of the assets themselves. The origi-nal asset owner buys protection against possible default losses on the pool of assets using a portfolio of credit default swaps adjusted to the owner’s desired level of credit-risk protection.

Another path is the acquisition of portfolios of non-performing loans from the banks. There is no shortage of banks keen to sell such portfolios to get rid of risky assets, cut their losses, improve their bal-ance sheets and use the proceeds to boost capital reserves.

Table 2. Non-performing loans in securitization founds in Poland from 20052009 in 1,000 zloty

Type of issuers 2005 2006 2007 2008 2009

Banks 82,162 182,363 249,431 400,648 326,595

Other 237,422 142,846 80,613 44,578

Trade company 6,578 10,111 30,749 10,603

IT 1,827 6,231 14,418 3,640

Insurers 593 419 1,085

Total 82,162 428,783 409,038 527,513 385,416

Source: E. Nasterowicz (2013), Wierzytelnoci bankowe w funduszach sekurytyzacyj-nych dziaajcych na rynku polskim, Bezpieczny Bank, Vol. 50, No. 1, p. 19.