The Polish experience with bank and enterprise restructuring

Among transitional economies, Poland was a pioneer in bank and enterprise restructuring, tackling it through innovative pro tempore legislation which linked bank recapitalization to improvements in the bank's operating systems, aiming at increasing efficiency and loan recovery. The approach encouraged banks to play a central role in enterprise restructuring. In this paper, the authors critically and comprehensively analyze the Polish approach, presenting and discussing its pros and cons, describing the program's implementation, and providing a preliminary evaluation of the results. One result is that the banking sector now resembles that of a modern market economy in its structure, efficiency, and profitability; sector competition is increasing; interest rates are declining; and the menu of financial services is growing. It is not yet clear whether enterprises have been put on a permanently healthy and viable path, although some positive results noted are linked to the central role of banks in enterprise governance, such as maintaining incentives to avoid unloading debt onto the government, resolving conflicts between creditors without triggering unnecessary liquidations, and avoiding excessive use of bankruptcy procedures. The general lesson is that bank recapitalizations have to be accompanied by additional restructuring measures to resuscitate the banking sector, which may serve as the engine to successfully drive enterprise restructuring.