Risk management in the polish financial system

Risk Management in the Polish Financial System


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Risk Management in the
Polish Financial System
A Systemic Approach
Konrad Raczkowski
Marian Noga
and

Jarosław Klepacki


© Konrad Raczkowski, Marian Noga and Jarosław Klepacki 2015
Softcover reprint of the hardcover 1st edition 2015 978-1-137-54901-3
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work in accordance with the Copyright, Designs and Patents Act 1988.
First published 2015 by

PALGRAVE MACMILLAN
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registered in England, company number 785998, of Houndmills, Basingstoke,
Hampshire RG21 6XS.
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ISBN 978-1-349-57154-3
DOI 10.1057/9781137549020

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A catalogue record for this book is available from the British Library.
Library of Congress Cataloging-in-Publication Data
Raczkowski, Konrad.
Risk management in the Polish financial system : a systemic approach/
Konrad Raczkowski, Marian Noga, Jarosław Klepacki.
pages cm
1. Finance – Poland. 2. Financial institutions – Poland. 3. Risk
management – Poland. I. Noga, Marian. II. Klepacki, Jarosław III. Title.
HG186.P7R33 2015
332.09438—dc23

2015018871


Contents
List of Figures

viii

List of Tables

x

Preface
1

2

xii

National Systemic Risk Management
Introduction
1.1 Managerial grounds for risk and making strategic
decisions
1.2 Economic risk versus state risk
1.2.1 State systemic risks
1.2.2 Economic risk
1.2.3 Tax risk from the perspective of the state
and the economy
Conclusions
Stability of the Polish Financial System and the

Risk Involved
Introduction
2.1 Macroprudential policy
2.1.1 The operation of a financial system and the
influence it exerts on economic growth
2.1.2 Interaction between financial institutions
2.1.3 Protection of financial stability –
macroprudential policy goals and tools
2.2 Microprudential policy
2.2.1 Prevention of individual bankruptcy
Individual hazard analysis
2.2.2 Depositor protection
2.3 Comprehensive assessment of the financial situation
in Poland
Conclusions

v

1
1
2
8
8
20
24
39

40
40
47

47
59
61
73
73
91
94
99


vi

Contents

3

Management of Financial Stability Risk
Introduction
3.1 The structure and function of the financial
safety system
3.2 Systemic risk institutions in the network of international
capital ties
3.3 The principles of effective supervision of the
financial market
3.4 Transfer of banking risk into the financial system
3.5 Reorganization of legal risk management processes
Conclusions

100
100

The Risk of Investing in Financial Instruments
Introduction
4.1 Types of financial instruments
4.1.1 Money market instruments
4.1.2 Debt instruments
4.1.3 Equity instruments
4.1.4 Derivative instruments (derivatives)
4.2 Investment risk involved in equity financial
instruments
4.2.1 Market risk
4.2.2 Issuer risk
4.2.3 Liquidity risk
4.2.4 Risk of total value loss
4.3 The risk of investing in debt instruments
4.3.1 Inflation risk
4.3.2 Currency risk
4.3.3 Risk of price change and risk related to a
given company
4.3.4 Default risk
4.3.5 Risk of early amortization
Conclusions

138
138
138
146
148
155
160

4

5

Strategic Risks of Investing in Stock Exchange
Introduction
5.1 Stock exchange investment style
5.2 Risk of investment strategies
5.2.1 Speculation
5.2.2 Short selling

101
107
121
124
131
136

167
170
173
175
176
177
178
180
181
182
184

184
186
186
186
191
195
197


Contents

5.3 Risk of other strategies
5.3.1 Opportunistic strategy
5.3.2 Buy and hold strategy
5.3.3 Market timing strategy
5.3.4 Behavioral strategy
5.3.5 Dollar cost averaging strategy
5.3.6 Current yield strategy
5.3.7 Ratio investment strategy
5.3.8 Capital preservation strategy
5.3.9 The Benjamin Graham strategy
5.3.10 Fixed structure strategy
5.3.11 Constant proportion strategy
5.3.12 The black swan strategy
Conclusions
Final remarks

vii

201

202
204
206
207
209
214
216
218
219
222
225
227
232
234

Notes

235

References

239

Index

255


List of Figures
1.1

1.2
1.3
1.4
1.5
1.6
1.7
1.8
2.1
2.2
3.1
3.2
3.3
3.4
3.5
3.6
4.1
4.2
5.1
5.2
5.3
5.4
5.5
5.6
5.7

The influence of the socioeconomic system on
individual risk management
Profitability of ten-year government bonds in Poland
The population of Poland by functional age groups
in the years 2015 and 2050

Overall risk involved in the financial system
Economic risk
Overall and primary balances of national and local
government institutions in Poland
The total tax burdens in EU Member States in 2014
The VAT gap in Poland
A functional model of the transformation of a
financial crisis into a crisis of the real economy
Model of the system of interactions among financial
institutions in Poland
Comparison between systematic and systemic risk
The dynamics of the GDP of Poland and Germany
New European architecture of financial supervision
Types of bank risk in the area of finance
Model of credit risk transfer
Financial risk according to the Bank for International
Settlements
Classical investment areas and the scales of
accompanying investment risk
Juxtaposition of changes to the reference rate in
Poland between 1991 and 2014
Changes to WIG over the last 30 years
Changes to WIG20 over the last 30 years
Short selling diagram
Prices of shares of Volkswagen AG between
January 2008 and March 2010
KGHM stock prices
Changes to WIG at the beginning of its functioning
Changes to the American S&P 500 Index at the
beginning of its functioning

viii

4
15
17
19
22
27
31
38
55
59
110
111
119
126
129
132
169
179
193
193
198
200
203
205
206

List of Figures

5.8
5.9
5.10

5.11
5.12
5.13
5.14

5.15
5.16

KGHM share price, the purchase price averaging
strategy, diversification in time
KGHM share price, the purchase price averaging
strategy, diversification in the price in an uptrend
KGHM share price, the purchase price averaging
strategy, diversification in the price in a
downward trend
Changes to stock prices
Changes to the WIG index and profitability of Polish
ten-year government bonds
Behavior of the WIG20 index and the profitability of
ten-year government bonds between 2006 and 2014
Behavior of the S&P 500 Index and the profitability
of ten-year German government bonds between
2005 and 2014
Behavior of the American S&P 500 Index

Juxtaposition of percentage changes in valuation
of the units of the Eurogeddon Fund

ix

210
211

212
215
219
223

225
229
230


List of Tables
1.1
1.2

1.3
1.4
1.5
1.6
1.7
1.8

1.9

2.1

2.2
2.3
2.4
2.5
2.6
2.7
2.8
2.9

Exemplary juxtaposition of the basic components of
risk assessment for a given state
Estimated indicators for comparison of the main
economic perspectives, according to the OECD,
relevant for risk management
Basic risk assessment scale of rating agencies
European Union Member States rating for March 1, 2013
Taxonomy of global risk according to the
World Economic Forum
The foundations underlying operational tax risk
management
Revenue, expenditure, and debt in the public finance
sector in Poland in the years 2006–2019
Affiliation of companies conducting business in
Poland based on confidential tax agreements concluded in
Luxembourg
Tax burdens and tax optimization of the most profitable
legal persons in Poland for 2013
Assets of financial system in relation to GDP in selected

countries from Eastern and Central Europe and from
Euro Area in period 2009–2015
Assets of Polish financial institutions during 2005–2015
Number of financial institutions in Poland between
2005 and 2015
GDP in selected countries between 2001 and 2014
Recommendations with respect to institutional manner
of organization of macroprudential policy
Macroprudential instruments and their features
Values of indicators in discriminant functions
by Dorota Hadasik
Efficiency of classification of systems by D. Hadasik
for training data set
Efficiency forecasts of systems by D. Hadasik for
training data set

x

9

10
12
13
18
26
28

30
33

48
50
51
54
67
70
77
77
78


List of Tables

2.10
2.11
2.12
2.13

Creation of credit money by commercial banks
Ratings of Polish banks according to Moody’s,
Fitch, and S&P
Selected balance sheet items in Polish banking sector
Results of assessment of resistance of banks to
external shocks

xi

81
82
83

85


Preface
The classic understanding of supply and demand, that is, typical forces
stirring free market economies, is nowadays more and more commonly
identified as the need to seek financial stability and security. It is quite a
practical approach, considering that neoliberal ideology, which had been
spreading for many years as part of neoclassical economics, provided the
directions for socioeconomic transformations. Eventually, it has led to
many financial crises and the financialization of the economy, which not
only caused the financial market to become a major creator of the GDP
in many countries and thus tied the institutional domain of the state
to it, but also, due to an increase in its importance, generated systemic
risk that exerts an overwhelmingly strong influence. In the period of
unification, globalization, and practically limitless possibilities for the
transfer of capital, a completely new phenomenon has emerged: an integrated worldwide capital market. On the one hand, nearly all sources
of broadly defined economic freedoms meet here. On the other hand,
it is full of state-of-the-art mechanisms, relationships, correlations, and
threats on top of that. The role of an individual economy in such a
system of correlations has never been as minor as it is now. The transfer
and diagnosis of risks have never been so imprecise before. This dramatically changes the conditions for making investment, as risk has become
inseparable and the possibilities of dispersion are often blocked.
In consequence, the generating of theoretical models up to now
subsequent attempts at incorporating them into the rapidly changing
reality are vastly insufficient. The example of continually refined systems
of financial supervision, which are either overregulated at some point
in time or are devoid of control and supervision mechanisms at other
times, is a perfect illustration of the situation. Therefore, it is becoming
inevitable that a different perspective on these phenomena should be

adopted – a perspective that is not only provided by researchers and
theoreticians but also, and perhaps most importantly, one that is real
and practical, a perspective that physically exists.
Economic crises have always been arising, and they always will
be. However, the fundamental problem in the contemporary global
economy has to do with countering the transformation of a financial
crisis into an economic crisis, and not only in one country or region but

xii


Preface

xiii

all over the world. As is widely recognized, a financial crisis will arise if
one of the three possible economic scenarios unfolds: a run on banks
(a crisis in the banking sector), an attack on a national currency and its
purchase power (a national currency crisis), or an increase in interest
rates applied to bonds in a given country (i.e., a transformation of stable
assets into “junk” bonds – a sovereign debt crisis).
If it were possible to limit a financial crisis so that it affected solely the
financial system, then it would not lead to an economic crisis in a country
and in the whole world later on. The relevant literature offers such a
possibility, but world history – from the 20th and 21st centuries – has
not registered any such occasion. This is why theoretical economists
have been looking for the causes of the transformation of a financial
crisis into an economic one. As far as the economy is concerned, we
have observed that insufficient attention is paid to systemic risk, which
is a principal contributor to economic crises. The following monograph

is devoted to this very fundamental problem of the contemporary global
economy. It is, as we acknowledge, a bold but realistic undertaking to
study systemic risk. For the purpose of attaining our goals, we define a
financial system in simple terms as part of an economic system, which
allows money to circulate across the economy. We wish to stress that an
abundance of different definitions of a financial system may be offered,
but taking into account that the Polish financial system is composed
out of ten groups of entities, it is virtually impossible to provide a single
definition of a financial system that would suit everyone. Certainly,
while deliberating on various aspects of the financial system throughout
the book, we will be adding different elements to the above-mentioned
working definition; however, it will never contradict the accepted claim
that a financial system is part of an economic system, which allows
money to circulate across the economy.
The purpose of this book is to present possibilities for managing risk
in the Polish financial system. In particular, a map of risk in the Polish
financial system 2015+ serves to achieve this aim by way of indicating
the wide institutional and market frames, principles, and prospects
of exposure to risk and risk dispersion. We put forward a hypothesis
that risk management in the Polish financial system is necessary and
possible if the principles of an appropriately formulated micro- and
macroeconomic policy that is able to prevent the increase in systemic
risks are observed. From the point of view of the government, it should
take place by way of consistent and effective implementation of a welldesigned public policy oriented especially toward fiscal and monetary
policies. From the perspective of households and companies, it should


xiv

Preface

be perceived as a capability of getting to know the risk of daily life in
order to skillfully (and to the accompaniment of lower information
asymmetry) take action in terms of planning, organizing, and controlling with respect to given socioeconomic activity.
The book that we present consists of five chapters, each preceded by
a short introduction and followed by a conclusion. Chapter 1 deliberates on national systemic risk management and presents an approach to
those processes both in terms of real and regulatory socioeconomic processes. A depiction of tax risk (which is of such immense importance from
the point of view of both a person conducting a business and the state –
elimination of a legal loophole) is a valuable addition to those deliberations. The stability of the Polish financial system and the involved risk
are presented in Chapter 2. The micro- and macroprudential policies are
illustrated here along with the assessment of the stability of the Polish
financial system. An addition and extension to that is Chapter 3, which
is concerned with financial stability risk from a managerial perspective. It discusses the principles of effective supervision with a systemic
approach. The next two chapters, that is Chapters 4 and 5, present the
current risk involved in investing in financial instruments and the risk
of strategic investing in stock exchange. A considerable cognitive merit
for investors (but not only them) is the presentation of practical references of the explored strategies in relation to exposure to risk.
The book is meant both for practitioners from all the sectors of the
economy, especially those interested in financial risk, as well as students
in Bachelor’s, Master’s, or Doctoral programs who would like to widen
their knowledge on risk management in finance.
We hope that this book will satisfy the readers’ expectations by
proving that risk dispersion is not always possible and that the forms of
risk management and the processes involved should be understood so
that they can become part of our everyday activity, which we will then
undertake with full awareness at the least.


1
National Systemic Risk

Management

Introduction
In order to manage systemic risk in an organization, such as a
state, three points of reference must be established, that is a microorganizational (households, companies), a macro-organizational (the
state institutional system, the socioeconomic system of a country),
and a mega-organizational one (global relationships). The most important in this case is the macro-organizational point, as looking at the
executive of the state institutional system allows to assume a holistic
perspective on risk within the framework of shaping the immediate
systemic environment and neutralizing the threats posed by a distant
systemic environment. In turn, any human activity, especially if related
to trade, is connected with taking risks and the possibilities of incurring
potential losses, particularly in legal and financial terms. There is also a
global perspective on top of that, which should not only be taken into
account but perpetually born in mind as it may pose both opportunities
and threats. This is because every type of risk, systemic or incidental
in nature, assumes its own significance or generates cyclical or stable
costs that must be incurred in order to regain the efficiency of operation
chiefly in economic terms.
The nature of any risk is always dynamic, irrespective of the fact
that it might remain stable at some points in time. As far as management is concerned, it must first be identified, and subsequently its real
or estimated weight must be defined, which will make regular control
possible and allow the adoption of appropriate security measures. Next,
human skills must be used in a broad-minded way and not merely on
an individual, sector-, or department-based scale. Therefore, this chapter
presents an introduction to the abundance of approaches that one might
1


2

Risk Management in the Polish Financial System

take to systemic risk, while at the same time showing how to achieve a
compromise between exposition to risk and its aversion when it comes
to decision-making.

1.1 Managerial grounds for risk and making
strategic decisions
Although risk has existed on Earth since any human activity was first
documented, regular academic interest in various categories of risk
started to be evinced only in the early 20th century. A. Willett saw it as
“the objectified uncertainty as to the occurrence of an undesired event.
It varies with the uncertainty and not with the degree of probability”
(Willet, 1951). In the seventies, risk and its management were directed
at incidental and credit risks; in the eighties, market risk was added;
and in the nineties, operational, strategic, and financial risks were also
being developed (Cican, 2014, 280). If, in turn, we refer to the decision theory in its classical form, the greater the dispersion around the
expected values of variance distribution of profit and loss, the higher the
risk (Kubińska and Markiewicz, 2012, 45). Whereas risk management is
intended to make people conscious of what risk is involved in a given
activity so that it can be managed, from the perspective of an individual
(household), a state institutional system, and a company, it is supposed
to improve financial results and bring about conditions that will allow
to keep loss at a level not higher than specified earlier (Dziawgo, 2011,
314). The best principle of risk management in history was written down
in the Code of Hammurabi (about 1772 BC). It read, “If a builder build
a house for some one, and does not construct it properly, and the house
which he built fall in and kill its owner, then that builder shall be put to
death” (Taleb, 2015, 244). The death penalty mentioned in this passage

might as well be replaced by money damages, if its amount would in fact
compensate for the incurred loss (although it is hard to claim that any
amount of money could be a substitute for the life of a person).
Risk has many synonyms, and is interdependently related to many
terms, such as chance (the positive aspect of risk), systemic risk (common
for a given group), unique risk (specific), shock (negative or positive
change that may be either evolutionary or unpredictable), exposure to
risk (shocks and vulnerability to risk), susceptibility (to losses generated
by negative shocks), resistance to shocks, crisis (emerging under the
impact of the negative effects of risk), and uncertainty about the future
(World Development Report, 2014, 61).


National Systemic Risk Management

3

In general, risks may be categorized as follows:
a)

according to the categories of decisions made for the purpose of
achieving goals (risk as uncertainty with respect to future events or
the outcomes of decisions), and the results brought about by those
decisions may either be loss or profit,
b) according to the sources of risk (uncertain information or a decision
made on the basis of a not optimal choice),
c) according to the manifestations of risk (deviation from the expected
value of the goal that has been set),
d) according to probabilistic or statistical measures as the subjective
probability of one-time events (including ones that have never

taken place) (Tyszka and Zaleśkiewicz, 2010, 58–60).
The risk involved in an individual’s actions is always to some extent
dependent on the external environment and may be examined from the
perspective of numerous overlapping correlations that eventually affect
decisions (Figure 1.1).
In this system, an individual (a human being) will always receive
the necessary support, starting from a household, which protects its
members and has the possibility of making use of the combined total
resources, through companies, which ensure income and allow the
absorption of shocks, to the state, which, through to an institutional
system, is capable of exerting local, national, or international influence
and serves as the last resort in ensuring that the fundamental rights are
observed (World Development Report, 2014, 19).
The dimensions of risk management, from the broad to the
very specific ones, may be presented as follows (Improving the
Management ... , 2011, 5):
a)

risk management (organizational principles, effective risk prediction):
placing an emerging strategy of risk management within the
framework of organizational strategic decision-making,
●
explaining the roles and responsibilities of the particular members
of an organization.
b) risk culture (an active culture of risk management oriented at supervision, absorption, and assessment of information):
●
developing incentives to exercise supervision and prizes,
●
Removing barriers to becoming involved in supervision,
●

adopting various points of view.
●


4

Risk Management in the Polish Financial System

Individual risk management
(everyday life risk)
The state
Social protection
• Health, unemployment
insurance, advanced age;
• Help and support
Public goods
• Infrastructure;
• Law and order;
• National defense
Public policy
• Macroeconomic
management;
• Legal framework

Civic society and the private
sector
Households
• Familyties;
• Collective activity
The enterprise sector

• Work and income
The financial system
• Insurance and credits

The international community
(resources, global rules,
coordination, experience)
Figure 1.1 The influence of the socioeconomic system on individual risk
management
Source: World Development Report, Risk and Opportunity – Managing Risk for Development,
World Bank, Washington 2014, p. 19.

c)

training and developing the potential for/capabilities of:
supervising and scheduling/forecasting,
●
informing about the problems that arise and holding a dialogue
with the chief interested parties,
●
working and cooperating with others for the purpose of understanding the problems and threats that arise.
d) adaptation planning and management (stress placed on communication and identification of risk):
●
predicting and preventive preparation in case of adverse effects,
●
drawing up of a list of options and priorities in order to ensure
flexibility and a possibility to change a decision,
●
formulating a strategy for resistance and response to the emerging
threats.

●

As far as the economy is concerned, risk is an inscrutable factor, a random
one, which is very often seen through the prism of the possibilities of


National Systemic Risk Management

5

stabilization and reduction across time by way of dispersion. However,
not all such factors may be stabilized or dispersed, and reduction in the
level of accompanying uncertainty may also have a merely subjective
character, if there are no sufficient grounds for objective appreciation.
The unexpected character of certain events is rather a consequence of
insufficient knowledge on a given subject. But why is it that having,
as we believe, quite extensive knowledge, we are still surprised by the
lack of certainty, if we are empirically proven wrong (Hadyniak, 2010,
13–14)?
Since J. von Neumann and O. Morgenstern elaborated on the
D. Bernoulli’s expected utility principle, this rule has governed decisions involving risk, as it offered guidelines on which path to choose.
Further development of this theory on the basis of experiments that
were conducted has led to the formulation of the so-called conventional
theory (Kopańska-Bródka, 2012, 133–134). “These theories study the
preference relationships inevitable to explain the sources of inconsistencies with the independence axiom. In such extensions, the axiom system
of the theory of expected utility is accepted. However, the functional on
a set of risky decisions is not an expected value but a decision-weighted
transformation of the utility of possible outcomes. This new principle
has not led to such inconsistencies as the principle of expected value
maximization” (Kopańska-Bródka, 2012, 134). Nevertheless, even these

theories did not prove quite useful, which led to the development of
alternative theories known as unconventional ones as well as prospect,
dual, or generalization theories. In general, each instance of strategic
decision-making should be – from the point of view of the state or the
market – dependent on the mutual infiltration and complementation of
prescriptive and descriptive approaches (i.e., the so-called conventional
and unconventional ones), which would mean taking into account
individual reasonableness associated with the subjectivity of the act of
making a choice (Kopańska-Bródka, 2012, 134, 146–147).
Therefore, a taxonomy of the threats and risks to macroeconomic
growth, which must be taken into consideration when making strategic
decisions, especially related to finances, includes the following units that
may be examined from the perspective of insurance companies, corporations, financial risk managers, and political decision-makers (Coburn
et al., 2013, 20–24, Coburn, 2014, 7–8):
a)

financial shocks:
market crash,
●
insolvency and potential bankruptcy of a state,
●
speculative (asset) bubbles,
●


6

Risk Management in the Polish Financial System

financial irregularities,

run on banks, that is, a mass withdrawal of deposits from
banks.
b) commercial disputes:
●
labor dispute,
●
trade sanctions,
●
customs war,
●
nationalization,
●
collusion (e.g., between manufacturers with respect to product
prices in a given year).
c) geopolitical conflict:
●
conventional warfare,
●
asymmetric warfare,
●
nuclear warfare (local or global),
●
civil war,
●
influence of external forces.
d) political violence:
●
terrorism,
●
separatism,

●
riots,
●
assassinations,
●
organized crime.
e) natural disasters:
●
earthquakes,
●
hurricanes/storms,
●
tsunamis,
●
floods,
●
volcanic eruptions.
f) climate disasters:
●
drought,
●
freezing/low temperatures,
●
the heat,
●
atmospheric discharges (thunderstorms),
●
tornado and hail,
g) environmental disasters:
●

rise of the sea level,
●
oceanic changes,
●
atmospheric changes,
●
pollution,
●
fire.
●
●


National Systemic Risk Management

7

h) technological disasters:
●
nuclear disasters,
●
industrial emergencies,
●
infrastructural failure,
●
technological incidents,
●
cyber catastrophes.
i) epidemics:
●

epidemics affecting humans,
●
epidemics affecting animals,
●
epidemics affecting plants,
●
zoonoses,
●
water epidemics.
j) humanitarian crises:
●
famine,
●
no access to water,
●
refugee crisis,
●
failure of or no social protection system,
●
child poverty.
k) outer space:
●
meteors,
●
solar storms,
●
satellite systems failures,
●
ozone layer depletion,
●

threats from the outer space.
l) other threats.
Such a multifaceted and multidimensional list of factors that is taken
into account in risk management builds awareness that not only sectorrelated risks, which are characteristic for a given market segment or a
broader socioeconomic structure, are important, but also the risks that
seem far away.
A certain mood of the decision-maker can affect their decisions that
are made in uncertain conditions. Research conducted by A. Bassi,
R. Colacito, and P. Fulghieri demonstrates that even the weather can
exert an influence on risk aversion. By affecting people’s moods, good
weather encourages the taking of risk, while bad weather increases the
propensity for averting risk. The results of this research are particularly
important in the making of strategic decisions involving risk in the
context of investment behavior and the dynamics of the rate of return
on assets (Bassi et al., 2013, 1844–1845).


8

Risk Management in the Polish Financial System

1.2

Economic risk versus state risk

1.2.1 State systemic risks
State risk is closely related to the cognitive purpose of economics
regarding the explanation of agentic actions taken as part of doing business, that is, the “production and exchange of various goods and determination of the frequency of spontaneously repeated production and
distribution processes” (Klimczak, 2013, 15). This is associated with the
cognitive purpose of risk that is relevant for any dimension of individual

and institutional activity of not only the citizens or residents of a given
country but also of the whole global society, which directly or indirectly
shapes the level of international and state risk.
Naturally, the state must investigate risk with reference to various categories of system failures that occur in all parts of the state and not only
in its individual and often selective elements (Kaufman and Scott, 2003,
371). This type of risk is characterized by risk fragmentation and may be
transferred to other areas of the state as a system, and even slight (and
seemingly meaningless) fragments indirectly contribute to the far-reaching
consequences of a failure. In addition, systemic risks pose difficulties in
regaining balance after a shock (Goldin and Mariathasan, 2014). W.A. Rowe
sees risk as a negative consequence of a given event (Rowe, 1977), which is
consistent with the views held by J. Sinkey, who claims that risk manifests
itself through an unexpected change in events and that it is concerned with
the uncertainty connected with some event (Sinkey, 1992). B. Shanmugan
believes that political risk may influence (and it usually does) the profitability of global ventures and that the lack of foreign exchange reserves in the
process of external debt management is the main reason behind the emergence of risk that a given state will face (Shanmugam, 1990). Therefore, as
T. L. Brever and P. Rivoli put it, economic, political, and financial factors are
key in the assessment of risks with which a given state is posed (Brewer and
Rivoli, 1990, 357–369). These factors are based on both short- and longterm variables that reflect the political system of a country as well as the
fundamentals of the economy, which are treated as priorities by investors
when it comes to making investment decisions (Sari et al., 2013, 5).
It may thus be stated that there are three factors among 22 variables
that are of cardinal importance for a state as far as risk estimation is
concerned, that is,
a)

the economic factor – GDP per capita, annual inflation rate, the real
GDP growth rate, government budget balance as a percentage of the
GDP, and balance of trade as a percentage of the GDP,

National Systemic Risk Management

9

b) the financial factor – external debt as a percentage of the GDP, stability
of currency exchange rate, external debt servicing (percentage of the
GDP), net liquidity, and balance of trade as a percentage of export, and
c) and the political factor – stability of the government, external and
internal conflicts, socioeconomic conditions, investment profile,
the presence of the army in politics, corruption, ethnic, and religious tensions, the level of democracy, the level of bureaucracy, the
legal system (Hoti, 2002, 1–61).
Simultaneously, a randomized study by B.K. Asiri and R.A. Hubail
conducted with a group of over 70 countries based on a period between
2006 and 2011 shows that political risk exerts a powerful influence on the
evaluation of a given country as a whole. Additionally, rating agencies use
GDP per capita and gross capital formation as the basic points of reference in estimating the overall risk that a state faces (Table 1.1). The ratio
of external debt to export and the rate of economic growth must also be
included within this group (Asiri and Hubail, 2014, 65).
Economic perspectives reflecting risk or lack of it may be compared
in all types of business reviews (and they are). One of those is offered
by the Organization for Economic Co-operation and Development
(OECD). It evaluates positive changes as well as risks and the weight of
threats, especially in terms of accommodative monetary policy, financial
stability, and systemic challenges. The four basic comparison measures
(but naturally not the only ones) for a given country are GDP growth (in
percentages), unemployment rate (percentage of labor force), debt of the

Table 1.1 Exemplary juxtaposition of the basic components of risk assessment for a
given state (on the example of data for Poland)

Indicator

2006

2007

2008

2009

2010

2011

2012

2013

Political
stability*

55.29

69.71

77.51

80.09

83.02

83.96

83.41

78.67

Gross capital
formation
(USD)**

21.0524 24.44531 23.90012 20.34712 20.99763 22.05812 20.46954 18.73311

GDP per
capita***

27792.23 30868.83 33455.29 35241.12 37099.23 39656.43 41425.78 42453.02

Notes: *Political stability/no aggression/terrorism; **accumulation of the national capital over a
specified period of time; ***Nominal GDP (in current prices in PLN).
Source: drawn up by the authors on the basis of data obtained from the World Bank, October,
2014.


10

Risk Management in the Polish Financial System

public sector (percentage of the GDP), and inflation expressed with the
consumer price index (CPI in percentages) – Table 1.2.

Assessment of the credibility of a given state (similarly to assessment
of economic entities) is controversial and does not always reflect the real
condition of the entity undergoing assessment, which was clearly demonstrated by the last financial crisis. As a result of considerable exposition
to risk due to subprime lending, banks were forced to take out short-term
loans from the market in order to finance risk assets and, so to say, established the risk assets in effect. It has also been proven that financial institutions, or in fact their employees, are motivated to achieve effectiveness
and increase the efficiency of financial operations, which they carry out
by way of exploiting the defects and loopholes in the internal control
system. Thus they cause excessive exposure to risk, which if not alleviated,
may lead to dual losses – of the client and the institution – and to bankruptcy of both at the extreme. This happens because managers responsible
for managing risk do not have real knowledge and their function mainly
comes down to exercising control over the rules and standards established
by supervisory agencies, and often purely on paper. Exposure to risk is
controlled by people holding operational commercial positions and the
management department of a bank instead of people who could exercise
control from the perspective of risk management, that is, with full participation of the management department and within flexible and not rigid
frames (Kashyap et al., 2008, Ellul and Yerramilli, 2013, 1758–1759 ff.). It is
thus not surprising that such a state of affairs regarding the whole financial

Table 1.2 Estimated indicators for comparison of the main economic perspectives, according to the OECD, relevant for risk management
2014
The Euro
Area

Poland

3.3

0.8

9.2

11.4

–3.3
0.1

Indicator (%)

Poland

GDP growth*
Unemployment
rate
Fiscal balance
Headline
inflation

2015

2016

The Euro
Area

Poland

The Euro
Area

3.0

1.1

3.5

1.7

8.6

11.1

8.2

10.8

–2.6

–2.9

–2.3

–2.6

–1.9

0.5

0.6

0.6

1.6

1.0

Note: *at constant prices.
Source: compare your country – OECD Economic Outlook, Paris, November 2014.