Polish Fundusz Pomocy Instytucjom Kredytowym

Between September and December 1925, the Second Polish Republic faced a so-called twin-crisis: the złoty,^FNIn this paper, “złoty,” as well as the currency notation “PLN,” refers to the Polish monetary unit from 1924 to 1935. the Polish currency, collapsed, and the financial system faced bank runs and flights of deposits. On November 28, 1925, the Polish Government established Polish Fundusz Pomocy Instytucjom Kredytowym (FPIK), injecting over PLN 60 million capital through Bank Gospodarstwa Krajowego (BGK), a national development bank. The government-led capital injection scheme kept supporting the unstable Polish financial system during the inter-war period. Furthermore, in the 1930s, the FPIK served not only the large banks but also smaller financial institutions, and sometimes, non-financial companies. While the FPIK successfully buttressed the financial system, the scheme also contributed to the emergence of authoritarian statism, as the state took significant centralized control over the economy during the 1930s.

The Second Polish Republic (1918-39) was established as the Treaty of Versailles in June 1919 confirmed Poland’s independence. After a period of hyper-inflation in 1923, a new currency, the złoty, was introduced. The new złoty notes were issued as legal tender by a newly established central bank, the Bank Polski (Smith 1936). In the summer of 1925, the so-called second inflation occurred, and the złoty became unstable. Simultaneously, both the real economy and the banking system started to crumble. Farmer-debtors faced a plunge in crop prices and became insolvent. In September 1925, the financial system started to face bank runs, and 58 percent of private banks became insolvent (Landau and Morawski 1995).

On September 4, 1925, the Bank Polski, the central bank, lent 15 million złoty to the five largest private banks (Bank Handlowy in Warsaw, Bank of the Union in Poznań, Ziemski Bank Kredytowy in Lviv, Bank Zachodni in Warsaw, and Bank United Polish Lands in Warsaw), as deposits started to flow from Polish banks. The loans were secured and paid an interest rate of 8% (lower than the usual lending rate of 12%) (Stelmach 2012; Morawski 1996).

The Bank Polski loans in September 1925 seemed inadequate to halt the panic in the financial system. However, given the simultaneous currency instability, the central bank was reluctant to offer any further aids, as it considered further funding from the central bank would lead to an increase in the money supply and risk further inflation. In other words, the central bank decided to prioritize its mandate of currency stability over its financial-stability mandate (Komierzyńska-Orlińska 2018; Morawski 1996). Thus, the government (led mostly by the Ministry of Finance) took steps to protect the banking system (Landau 2007).

On September 21, 1925, the government established the Komitet Sanacji Banków (the Bank Sanation Committee). Given the limited fiscal capacity, the government could only grant PLN 25-28 million to the Committee, an amount met by the seigniorage from issuing new coins. The Bank Sanation Committee provided PLN 26.9 million to troubled large banks (Stelmach 2012; Morawski 1996). On October 13, 1925, the Bank Sanation Committee announced that it had completed providing immediate help to the banks and was ready to move on to the “second phase.” The second phase implied further structural changes within the Polish financial system, including liquidation of branches and potential mergers. As the central bank continued to prioritize currency stability, the government was the only actor to initiate the second phase (Komierzyńska-Orlińska 2018; Morawski 1996).

The Bank Sanation Committee was transformed into Fundusz Pomocy Instytucjom Kredytowym (Credit Institutions Assistance Fund, hereafter FPIK) on November 28, 1925, and was mandated to provide assistance to credit institutions and restructure the banking system (Landau and Morawski 1995; Wierzbicki, n.d.). The government, initiated by the Ministry of Finance, provided PLN 65 million to the FPIK (Landau and Morawski 1995). The FPIK injected PLN 63.4 million into 15 financial institutions. The capital was injected through Bank Gospodarstwa Krajowego (BGK), a national development bank which was created by a merger of three public banks from the Galicia region (Morawski 1996). Bank Handlowy SA in Warsaw received the largest injection of PLN 21.7 million, approximately one-third of the entire injected capital. Furthermore, as a part of the FPIK, guarantees were granted for foreign loans; according to Morawski (1996), the FPIK guaranteed PLN 1.0 million in foreign loans in 1925 and 0.8 million in 1926.

On May 17, 1927, the FPIK was terminated as the President of the Republic of Poland determined that the financial crisis in 1925 was over and the FPIK had fulfilled its mandate (Morawski 1996; DURP 1927 nr. 46). However, as the credit market fluctuated during the Great Depression and as the Polish financial system encountered another banking crisis, the FPIK was reintroduced. The Act of March 17, 1931, authorized the Minister of the Treasury to spend PLN 20 million for bank rehabilitation (DURP 1931 nr. 3). In 1932, FPIK was incorporated as a part of new regulation (Morawski 1996; DURP 1932 nr. 94) and continued to support the Polish financial system during the inter-war period, with minor amendments made in November 1935.

It is also worth noting that, from its establishment, the FPIK served political means. This was particularly true after the May 1926 coup d’états. The FPIK evolved as a part of “Sanacja” (“sanation,” or “healing”), a political movement to address perceived corruption, and the bill which legally established the FPIK was called the “Sanation bill.” As a result of regulation passed in 1932, BGK had new tools including debt relief, debt cancellations, guarantees, and capital injections. Following the new rule, FPIK could acquire equity in banks and private enterprises. The rule eventually enabled the government’s takeover of targeted troubled institutions (Wierzbicki n.d.; Morawski 1996). For instance, during the 1930s, some private enterprises and state banks secured debt and capital using FPIK despite their apparent difficulties in repayment. These private enterprises were selected based on their significance for military, economic, and political reasons. The BGK, the conduit of the FPIK, took over those private enterprises under its direct management, establishing the so-called “syndicate of the Bank Gospodarstwa Krajowego,” whose shares amounted to PLN 39 million by 1935 and PLN 43.9 million by 1939 (Landau and Morawski 1995; Wierzbicki, n.d.). Meanwhile, the BGK and other state banks also benefitted from the extensive governmental support including through capital and legal privileges, like tax deduction (Landau and Morawski 1995).

The 1925 capital injection by the FPIK was effective for those large financial institutions that could participate in the scheme; however, the scope of the FPIK was limited to large banks, as the government faced severe budget constraints. After the revival in 1931, the FPIK could inject capital not only to large banks but also to the municipal savings banks and cooperative banks (Wierzbicki n.d.). While literature evaluating the capital injection is scarce, Morawski (1996) considers the capital injection after the 1930s revival as unsuccessful compared to that of 1925 as some participating financial institutions failed shortly after the capital injection in 1931.

From a macroeconomic perspective, some consider the crisis of 1925 and accompanying policy responses, including the establishment of FPIK by the government, as having a significant impact on the Polish banking system and policies. 

First, some authors have criticized the central bank’s passive approach to its financial stability mandate and its prioritization of currency stability. This is supposedly because in the wake of the hyperinflation of the early 1920s The Bank Polski continued to provide banks discounted loans from the late 1920s to 1930s, but only to an extent that would align with its interest in currency protection. This can be interpreted as a fair decision, given the Bank was only recently created in order to fight against the hyperinflation (Morawski 1996).

Second, the government became far more influential in the field of financial stability. For instance, in 1926, the government reformed the banking law, established the Banking Commissariat (Komisariatu Bankowego) within the Ministry of Finance, and reshaped the banking system. In December 1926, the Ministry of Finance rigorously enforced minimum-share capital requirements and liquidated smaller banks that could not meet the requirements. Therefore, the government was committed to enforce hard stances on private banks, as it had seen how the collapse of a bank could lead to a systemic crisis, and it had spent its limited fiscal budget on the FPIK. The government viewed the fragility within the financial system as caused by small and weak banks, which were mainly engaged in currency trading activities and not much lending (Landau 2007; Morawski 1996). Landau and Morawski (1995) note that the credibility of the private banking sector decreased after the crisis in 1925. Consequently, they stated that the “trauma persisted and became one of the premises of étatisme^FNRefers to Polish statism. in banking in the following period,” leading to statism in Poland.

During the crisis in 1925, foreign investors took advantage of the crisis, demanding that Polish banks repay foreign currency denominated loans. The Polish banks, which could not repay the loans in time (and had little access to the governmental aids, including the FPIK), were often taken over by foreigners. Dependency on foreign capital continued and became even more prominent after the crisis of 1925. As of 1930, the total contribution of foreign capital accounted for approximately one-third of the entire banking system’s capital. Polish private banks relied on funding from foreign investors; however, most of the funding was short- and medium-term as investors were worried about the fragility of an economy situated between Germany and the Soviet Union (Morawski 1996; Landau and Morawski 1995).

Consequently, following the crisis of 1925 and the capital injection by the FPIK, the banking industry structure had changed, notably, in two ways. First, state-owned banks grew significantly  while both the number and shares of private banks decreased due to governmental policies. Second, private banks became more dependent on government (state) capital and on foreign capital (Landau and Morawski 1995). The Ministry of Finance preferred to have fewer private banks. The government thought that along with state banks, several large private banks could thrive, attracting deposits and financing domestic and export trends; however, it was hard for private banks to compete with state banks, which benefitted from various governmental supports. Eventually, private banks gave up building long-term credit and focused more on short-term credit (Morawski 1996).

However, the increased dependency on foreign capital had unintended ramifications during the Great Depression and the consequent banking crisis in 1930. The significant differences between the crisis of 1925 and the crisis of the 1930s was that Polish banks, to some extent, benefitted from the credit assistance from foreign banks in 1925. In contrast, in the 1930s, Polish banks faced a significant outflow of foreign capital as the international economy went into the Great Depression (Morawski 1996).