It made assistance on the stock problem contingent on concrete actions to improve lending practices, with the prospect of possible privatization or liquidation. The lesson Poland's experience offers is that solving the stock problem through bank recapitalization is necessary but not sufficient. Bank recapitalization without measures to improve performance incentives and bank skills is likely to fail. Poland took steps to modernize bank supervision and adopted measures to privatize banks and set up workout units showing genuine interest in changing banking practices. Poland's banking sector now resembles a modern market economy in structure.
Commercial banks have a more than adequate capital base.
Banking competition has increased and the sector seems relatively efficient and profitable. The experience of the workout departments has strengthened the skills needed for credit allocation and monitoring. Some positive results in enterprising restructuring have been linked to the banks' central role in enterprise governance, maintaining incentives to avoid unloading debt on the government, resolving conflicts between creditors to avoid triggering unnecessary liquidations, and preventing unnecessary bankruptcies. But it is unclear whether enterprises are on a healthy path or whether a second wave of bad loans may emerge, especially after a downswing in the business cycle. The full report is available in PDF format.