News Review

Foreign Participation in Banking Reform: The Poland Experience

Hongyu LIU

Foreign banks have played an important role in banking reforms of transition economies. In the primary stage foreign banks have provided capital to facilitate privatization of the banking sector because after the initial restructuring of bad loans, domestic banks still need capital for future development. It takes many years for banks to recapitalize on their own through self-retained profits and the government, struggling with a budget deficit, cannot provide enough money to support the recapitalization of the banks. The domestic capital market is fledgling and incapable of absorbing all the financing needs of banks. Capital infusion from foreign banks becomes an important alternative. Foreign participation also aids in the modernization of the banking sector. It creates a competitive environment, induces sound corporate governance, and improves banking infrastructure. Finally, foreign banking activities have offered various financial services for economic growth.

Foreign participation, however, also raises concerns for government authorities. The banking sector is viewed to have strategic importance as it is the channel for monetary policy and preferential industrial policies. Domestic authorities therefore fear that foreign banks will dominate the banking system and domestic institutions will be unable to compete effectively. The bankruptcy of domestic banks with heavy debt burdens can trigger domestic financial crisis and sometimes also unemployment, civil unrest, and other political problems.

Governments in transition economies adopt different policies towards entry by foreign banks and the policies also change from time to time. Despite the policy shifts, foreign banks have entered the formerly planned economies of Central and Eastern Europe in the 1990s. These banks conduct cross-border transactions and even domestic transactions in the host country.

This article will review the background of the Polish economic and banking reforms in the 1990s, examine the Polish government policies towards entry by foreign banks, and evaluate the effects of foreign participation in the Polish banking reform and economic growth. In the end, some questions will be raised for readers to ponder.

I. Background

Under communist control from the end of World War II to the end of the 1980's, Poland's banking system became highly centralized and primarily served as a conduit for transferring funds between the central government and the various state enterprises that controlled the country's economy. The most important financial institution, the National Bank of Poland (NBP) served as both central bank and supplier of credit to key industries. During the 1980s, the Polish government began to reform its banking system. The Banking Act of 1982 separated the NBP from the Ministry of Finance. This act also legalized the formation of private banks as joint stock companies with or without foreign equity participation. However, the NBP continued to perform the functions of both a central and a commercial bank until 1989 when the parliament passed a new Banking Act and National Bank of Poland Act. Approximately 400 regional branch offices of the NBP were converted into nine regional State-Owned Commercial Banks (SOCBs).

As Poland's first non-communist government since the end of World War II assumed power in September 1989, the economy was in serious difficulty with a budget deficit soaring to 7.4% of GDP and inflation of 251.1%. After some discussion of what kind of economic reform program to put in place, the government implemented in January 1990 what came to be known as the Balcerowicz Plan. It is a bold program of "shock therapy" designed to speed the process of economic liberalization and make it extremely difficult for a future government to go back to the previous system. After heated parliamentary debate, the first privatization bill was passed in July 1990, opening the way to the first five sell-offs by the end of 1990.

In 1991, the trading arrangements of the Council for Mutual Economic Assistance collapsed. The Balcerowicz plan tipped the economy into a deep recession. Poland signed a European Union Association Agreement and like other Visegrad countries, Poland was offered an Association Agreement as part of the prelude to membership of the EU. The key feature of the agreement was its objective of an asymmetrical phasing in of free trade in most industrial goods by 1997. Debt forgiveness was agreed and close cooperation with the IMF created the basis for a generous debt forgiveness deal with official Paris Club creditors. [1] With this precedent, as the first step in the ultimate privatization of nine state-owned banks, in September and October 1991 they were converted into joint stock companies wholly owned by the Ministry of Finance (MOF).

The negative economic growth during 1990-92 led to severe distress in the banking sector and all enterprises. The number of debtors in financial stress owing money to the SOCBs increased six-fold 1989-90, five-fold the following year and doubled in 1992. For the entire banking system about 28 percent of bank debt was bad (about 5.8 percent of GDP) by the end of 1992. Furthermore, Poland experienced a sharp increase in inter-enterprise arrears. [2] The Law of 1993 on Financial Restructuring of Enterprises and Banks was implemented during 1993-95 to tackle enterprise and bank problems simultaneously.

The program, directly affecting nearly PLZ 50 trillion of bank debts, was implemented successfully. It enabled banks to write off part of their irrecoverable debts and to reduce the share of irregular loans in their portfolios. Government bonds were used to improve the banks financial situation to the point where the recapitaliztion was actually excessive if measured by standard bank capital adequacy. The program also introduced tighter bank regulations and more effective bank supervision to improve the banks' monitoring and credit granting procedures. The restructuring program significantly contributed to the economic recovery and growth of the Polish economy.

In July 1995, Poland became a member of the WTO and reduced the average tariff to 9.4%. Its privatization in SOE and the banking sector helped to attract foreign direct investment. However, the booming domestic demand had raised the current account deficit in 1996-97. A distinctive mass privatization program was launched in 1995 resting on the creation of 15 new National Investment Funds that would take responsibility for restructuring pool of 415 enterprises.

In 1996 Poland was the first to be able to claim that it had overcome the post-communist slump: its recorded GDP had surpassed the level the communist regime's statisticians had claimed the country had achieved back in 1989. Poland rightly has the reputation of being the post-communist world's "tiger economy". However, its average GDP per capita is, at present, only about a third of the EU average.

II. Government Policies toward Foreign Banks

In the first several years of the post-communist era, 1990-1992, Poland was very liberal in allowing foreign bank entry and privately owned banks to increase competition. Foreign banks were given tax holiday and were even able to keep part of their capital in hard currency. Only a few foreign banks entered because of the economic uncertainties in Poland. The rules concerning the background and experience of bank owners and managers were not rigorously enforced. Banks were permitted to set deposit and interest rates freely in January 1990. However, allowing the proliferation of small, poorly capitalized banks with little banking expertise was viewed as a mistake. The minimum capital requirements for foreign banks were then raised and the tax holiday eliminated. Since 1992, the authorities had been very reluctant to issue bank licenses, particularly to foreigners and started to restrict foreign participation for three years. [3] Rather than granting licenses for Greenfield operations, the government allowed foreign banks only as a Strategic Foreign Financial Institution (SFFI) in a private SOCBs or small failed banks.

Poland with some inducement from the G7 donor countries and the international financial institutions set a clear timetable for privatizing its nine SOCBs. In order to obtain financial support from the Polish Bank Privatization Fund for recapitalizing seven of the nine [4], Poland agreed to privatize all nine by the end of 1996. The original blueprint had the MOF retaining a 30 percent ownership stake, employees purchasing on preferential terms up to 20 percent, and the remaining half divided between large and small investor tranche. The small investor tranche involved a domestic IPO while the large investor tranche was intended to attract a SFFI core investor by tender.

The MOF sought strategic investors and encouraged foreign participation through the twinning program. As I mentioned earlier, the 1993 legislation linked bank recapitalization to improvements in the banks' operating systems, which aimed at increasing efficiency and loan recovery. The program was implemented with the assistance of Western twin banks. Twin banks provided technical assistance, helping SOCBs prevent the emergence of new bad debts through the improvement of credit procedures and risk management. The success of the recapitalization and reorganization of banks allowed Poland to move ahead with bank privatization. Although the original target of privatizing the nine commercial banks before the end of 1996 was revealed to have been too ambitious, four of the nine banks had been privatized before the end of 1996. The entry of foreign banks into Poland was delayed.

There is a conflict between objective of foreign banks and government. Foreign banks are willing to have control over the state banks but they are limited to purchasing shares. The government is concerned that foreign banks could dominate domestic banking industry by controlling ownership. However, the privatization of most state banks is delayed due to bad loan problem, undercapitalization and lack of regulation and supervision. NBP has therefore maintained a policy of quickly resolving troubled banks through consolidation, regardless the origin of potential buyers. Thus foreign banks have been allowed to enter the market if they could aid in restructuring local banks.

However, the government was cautious about the foreign role after privatization of WBK and BSK, and responded by actively seeking portfolio investors rather than foreign direct investment (that is, a SFFI) for its next bank privatization. The privatization of BPH in January 1995 then marked a change in basic privatization strategy in Poland. [5] Starting from 1995, the portfolio investment in banks began and increased in the following years.

Poland's membership in the Organization for Economic Cooperation & Development (OECD) which it joined in November 1996 demanded that Poland open up its banking and financial markets to foreign competition at the latest in the beginning of 1999. This led the MOF agreed to allow foreign banks to control the majority of equity in a large bank. The Ministry agreed to sell the remainder of its stake in Bank Slask to ING raising its stake to 51 percent. Until 1997, foreign bank licensing has been liberalized in Poland. The Association Agreement with the European Union opens up the banking sector to European banks. The government considers the consolidation of domestic banks necessary as a defense against foreign takeover of the domestic banking sector.

III. Role of Foreign Participation in Privatization

The foreign participation played a dynamic role in the process of recapitalization, restructuring, privatization and consolidation. Through twinning program, foreign twins helped implement the restructuring program and thus facilitated the privatization process. The twinning program also provided chance for foreign banks to know local banks and prepared them for future participation in privatization. Through capital infusion and share purchasing, foreign banks played an important role in privatization. Foreign entry also pushed the government to consolidate the local banks. Consolidation is supposed to be a way of institutions large enough to compete with multinational banking organizations such as Citigroup. On the other hand, the privatized banks with foreign equities also participated and facilitated this process. WBK participated actively in the consolidation process of the Polish banking system. [6]

IV. Impacts of the Foreign Entry

Poland's decision to follow Hungary's lead in letting foreign banks take strategic stakes in banks forming the core of the country's banking system has had dramatic results. The growing foreign bank presence, plus the retreat of state ownership, and the ambitious activities of privately owned banks [7], transformed Polish banking sector. First, the structure of ownership has changed and banking capital has increased. Second, growing competition of the players with varied ownership structures is helping to stimulate a wider range and better quality of banking services: electronic banking services are already spreading, and the consumer loan business is growing apace. The spread of interest rates has narrowed and market penetration has increased. The deposit as percentage of GDP is growing from 19% to 25% and the loans as percentage of GDP increased from 21% to 24%. Third, the profitability of the banking industry has steadily improved.

A. Ownership

The equity held by foreign parties at the end of 1997 (totaling 2,462.4m zloty) constituted 41.5% capital at the commercial banks. Among these, 374.7m zloty invested in 14 banks remaining under majority Polish control. Almost one third of the foreign capital invested in the Polish banking system was from Germany (33.2%, amounting to 818.3m zloty). Equity investments of above the zloty equivalent of 200m had also been made by parties from the USA, Holland, Austria and France, with these representing 7.93%, 7.32%, 3.87% and 3.72%, respectively, of the equity capital of the commercial banks.

Foreign investors held a controlling interest in 28 commercial banks. The equity of these 28 banks represented 38.1% of the total share capital of the commercial banks. The net assets of these banks - which reflect the real scale of banking operations - accounted for 15.7% of total net assets at the commercial banks. At year-end 1993, there were 10 banks with majority foreign equity; these currently hold almost 6% of the net assets of Polish banks. After 1994, another 7 banks wholly owned by foreign capital were established, and these now account for slightly over 1% of total assets. Further, in the years 1995-97, foreign investors acquired controlling interests in 11 banks which had previously had majority Polish equity. Foreign banks are taking larger and large part in shares of capital, but their net assets and deposits taken from non-financial sectors are still lower proportionally than their Polish counterparts.

B. Capital infusion

The entry of foreign banks provides capital for domestic banks during privatization. When foreign banks win the tender offer and buy shares of banks from the government, there is no capital infusion because the money is paid to government as privatization revenue. By issuing new shares in the capital market, local banks get capital infusion from outside. At this stage, foreign banks play important role given the limited capacity of domestic institutional and individual investors. The equity securities in banks were zero before 1995. It increased from $25million in 1995 to $126million in 1997.

In 1994, foreign banking capital (including strategic investment in Polish banks) was 8.5% percent of total banking capital. At the end of 1998, foreign banks contributed 44% of all bank capital. The capital ratio for the whole Polish banking industry was also increasing. The average Tier One capital as percentage of capital for the whole banking industry in Poland increased from 7.53% in 1996 to 10.03% in 1997, passing the ratio of 8% recommended by Basle Committee. There are eight banks ranked within top 1000 banks in the world by "Bankers". The rank of Bank Gdanski in soundness has been moved from 544 in 1996 to 3 in 1997 after privatization.

C. Corporate governance

The main objective of privatizing state owned banks is to create the proper incentives and internal governance structure to ensure that the newly privatized banks act like private banks. It is reasonable to suggest that with the increasing capital shares in banking sector, foreign investors are having more and more impact on corporate governance of the banks they invest. Usually, a strategic investor requires a larger stake to take an active role in bank governance and market strategy. 1991 legislation on bank privatization stipulated that a foreign investor would be limited to a 30% share of the bank. It can negotiate with MOF for higher shares. Early 1998, the chief executive of Pekao (one of the state owned saving banks) also helped to persuade the government to raise the stake on offer to a strategic investor from a cramping 30% to a more viable 55%, desperate for fresh capital and access to foreign banking know-how.

All Polish bank privatization have been accompanied by some personnel changes in internal governance under the influence of foreign investors. When WBK was privatized, EBRD placed two members on the Bank Council, joining the seven members already appointed by the Ministry of Finance. The ownership composition creates a counterbalance between cooperation of AIB and EBRD with the coalition of the state and the employees. AIB finally took control after it acquired all shares held by EBRD.

The eclectic bank privatization method used initially in Poland left BSK in a situation whereby the MOF and ING participated in bank governance on somewhat equal terms. Since the IPO component of that privatization led to extremely dispersed distribution (consisting of three shares each to more than eight thousand individuals), these two owners wield significant control over the bank. The most dramatic change in governance occurred in BSK, when ING took a core-investor stake. ING is behaving the way a core investor would be likely to act with respect to internal governance and market position.

Does the corporate governance change the performance significantly? Little statistical data can be used to test the influence of corporate governance on performance. We can only look at what happened afterwards to see some correlation. Once ING had taken minority ownership in BSK, it provided considerable technical support to modernize BSK's operations. The marketing and credit analysis procedures were revamped according to ING's recommendations. BSK was listed in Feb 2, 1994, and had very good performance after its privatization. Its Earning Per Share grew consecutively for 1993-96 period, by 15%, 23%, and 16% respectively.

D. Services and infrastructure

The competition provided by the growing number of foreign banks has undoubtedly helped to stimulate a wider range and better quality of banking services. The first fully licensed foreign bank was Raiffeisen Centralbank, which started operating in 1990 and has about $7 million in equity. Besides its core banking activities, the bank does advisory work, underwriting and leasing. Foreign interest is beginning to extend beyond banking as well. Citibank, Creditanstalt Securities and Credit Suisse First Boston are active as brokers. ING has introduced some capital market instruments, a private placement of dollar-indexed bonds and a commercial paper instrument. Some foreign banks are pioneering the provision of telephone and Internet banking services as well as credit cards and personal banking services for richer households. Foreign banks also start to provide niche services such as car loan.

The banking infrastructure and operation have been modernized. WBK operates its own network of ATMs in Poland. ATMs of WBK are open to ATM cards issued by the Bank (Polska Karta WBK SA) and to VISA cards issued by other domestic and foreign banks. All offices of WBK are equipped with the SEZAM computer system, which has significantly improved the overall efficiency of the Bank's operations.

E. Financial performance

During 1993-96, the top four banks were still controlled by the state. The top four banks group has the lowest leverage ratio, lowest risk based capital ratio, lowest loans to assets ratio, and highest securities to assets ration of any group of Polish banks. Since they are all undercapitalized, it is impossible for them to operate in high leverage ratio. They are focused on non-risk assets, the government securities naturally and cannot take risk of lending.

As for the foreign banks, they have the adequate capital ratio and the ratio is increasing during this time period. Their percentage of total assets in banking sector is increasing and has reached 15.7% in 1998. Private and foreign banks are increasing their market shares while the state banks are losing shares in assets.

When foreign banks enter, they tend to deal with subsidiaries or joint ventures of international firms that are known to the bank from abroad. The bank's interest in investing is inhibited by concern about the reliability of information on Polish companies. Beyond that, they tend to enlarge their activities to include the largest and best-known Polish domestic customers. With the economic development, the middle class and wealthy people are becoming targeting markets of the foreign banks.

During 1993-98, the percentage of corporate loans in total assets was in the range of 30% - 35%. On the contrary, the loans to household increased from 1.9% to 7%. In 1993, there were not many financing opportunities for individuals. Foreign banks have brought products such as home mortgage, car mortgage, credit cards and other personal financing products. The household consumption increased the demand and led to economic growth.

Due to the annual report of NBP in 1997, Bank income totaled 45.2bn zloty, representing 34.7% growth compared to 1996 (in real terms - 17.2% [8]). Income rose in real terms in all the particular groups of banks, although it increased over 30 points faster at banks with majority foreign equity than at those with majority Polish equity. Competition has brought down the interest rate spreads. The spread of lending and deposit rates has narrowed down during 1990-97. A narrowed interest rates spread is expected to bring down the profit margin. The recent data shows that profit margin for the whole banking industry slid down for 1997 and 1998, 10.4% and 4.6% respectively. For the listed 16 banks, profit margins were 13.6% and 6% in 1997 and 1998. Revenue growth is lower than the cost increase. For the whole industry, interest income as percentage of assets stayed around 5 percent and slide down to 4.3% in 1998. After 1996, the reserve requirement has been increased due to financial crisis Russia as well as in Asia. The overall cost of operation increased over 1995-98. Therefore, the ROA (Return On Assets) and ROE (Return On Equity) reached its peak in 1996 and quickly fell down after then.

V. Problems

Although foreign participation has played a very important role in Polish banking privatization and modernization, the Polish experience also identifies some impediments and challenges during the reform.

A. Government intervention

The Polish government recognizes that foreign banks bring in modern technology, management techniques, additional capital, which can enhance the quality and sophistication of the financial services offered to the public. On the other hand, they fear that with the strong financial capacity and advanced technology, foreign banks may take control of the domestic banking sector and squeeze the backward local banks out of market. Polish banks are simply too small and too backward to survive the competition. Given Poland's history of being dominated by foreign countries, there is a strong feeling that allowing foreign bans to gain the upper hand would not be in the country's best interest in the long run.

Throughout history, Western experience also shows that it is usually the case that national authorities are often opposed of foreign ownership of banking. For example, Denmark, Norway and Sweden did not allow entry of foreign bank branches until the mid 1980s and Sweden only lifted a ban on foreign ownership of banks in 1990. To the Polish political elite, commercial consideration has always been less than nationalism. The extreme case was sale of PBK, a Warsaw based commercial bank in 1997. South Korea's Samsung won the open tender to buy the bank. Rather than let the bank fall into foreign banks, however, the government cancelled the tender and sold it to a local Polish consortium for a knockdown price.

Also in 1996, Pekao, the country's second-largest bank, was forcibly merged with three smaller state-owned banks, as finance ministry sought to create a bank big enough to take on foreign competition. However, small banks were using their political influence to retain their autonomy.

The foreign ownership is expected to reach and surpass 50% in 1999 in Poland after two of the biggest specialized banks are denationalized. Privatization will certainly be preceded by a serious debate concerning the desirable level of foreign capital in the Polish banking sector. Suppose the government had permitted over 50% shares to foreign banks. Foreign banks would have had more interest and enter in the earlier stage. The privatization process may proceed quicker. However, domestic private banks and the rest of state banks may confront much more pressure than they could stand. This may lead to liquidation and bankruptcy of local small banks and social problems such as payment crisis and unemployment. On the other hand, if Poland imposed heavy protection, this may impede the modernization of banking industry and also its process to access to EU which the whole economy is supposed to benefit from. There is no model showing that to what extent and what speed the foreign ownership is beneficial to the whole industry. The practical way is to take all things into consideration such as strategic importance, national security, domestic industry and economic growth.

B. Challenge on bank regulation and supervision

Foreign owned or controlled banks in Poland are subject to all the Polish banking regulations. The European Union banking directives, which are designed to create and integrated banking community, adopt this principle. However, it may be more difficult to apply regulations and bank supervision to foreign banks. First, small start-up banking operations may be difficult to monitor. The costs of monitoring and auditing many small and new banks may be very high and the government has no means via taxes or fees to recapture these costs. In the early years of post-communist years, this was a significant issue for the Polish government. It would have been reasonable to slow down the rate of foreign bank entry before the authorities had developed infrastructures for supervision and examination.

In addition, the foreign bank may move activities between its domestic and home country operations, making it difficult for domestic regulators and examiners to monitor activities. The ability of a foreign bank to move deposit balances across borders or offer very close substitute foreign deposits may make the task of monetary control more difficult. This problem in regulating foreign banks may weaken the monetary control ability of the domestic central bank. As we notice that in banks with majority foreign equity, off balance sheet operations were over six time greater than the total capital base, while at those with majority Polish equity the corresponding ratio was over 3.5:1. Banks with majority foreign equity were also distinguished by a higher ratio of off balance sheet items to net assets, which stood at 53.3% in 1996 and 82.7% in 1997, whereas at banks with majority Polish equity it came to 19.5% and 26.5%, respectively. Off balance sheet operations at banks with majority foreign equity increased more quickly than those with majority Polish equity did. [9] Although we have not observed the adverse effect of those off-balance sheet items, it is an important area for bank supervision and international coordination.

According to EBRD's transition report 1998, Poland is one of the transition countries whose strong progress in and commitment to institutional reform have enabled them to maintain impressive stability and growth even in the face of global stresses.

C. Pricing in privatization

If banks are sold, either by tender or IPO [10], a selling price must be determined. Allowing the price to be determined by tender runs the risk of establishing too low a selling price. This is because at the early stage that there is an imbalance between the supply of seekers and the demand from prospective takers for whom non-diversifiable systemic risk creates an option value to waiting. The alternative of setting the price administratively in negotiation with a SFFI that may have been selected by tender is also problematic. The political cost of selling banks to foreigners in what appears to be a fire sale is severe. However, undue preoccupation with "getting the price right " is likely to retard significantly progress toward achieving the primary goal of independent governance. For example, in the case of BSK, its price was set at $11.5 so that the total value of the shares outstanding would be approximately equal to its book value. Someone argued that the price was too large for a Polish investor. The price was set using the first two banks and stock market index as benchmarks. The MOF was unable to attract a significant SFFI in the bidding process as demand was generally low. The tender offer price turned out to be $12.5. While the stock market kept going up, the MOF cancelled the tender offer and reset the price at $25 per share. The process was delayed and finally the ING bought 26% of the shares at price of $25 and agreed to hold these shares for at least three years.

VI. Conclusion

As Poland looks toward the year 2000, it aims to become more integrated into the West by joining the European Union. Reform of the banking system is necessary for this integration to occur. The entry of foreign banks has played an important role in banking recapitalization, privatization, and consolidation effecting these areas in a dynamic way. Foreign participation creates a competitive environment and facilitates the modernization of the banking industry. Government is also concerned about the treatment from the foreign entry and responds by consolidating local banks as a way of building institutions large enough to compete with multinational banking organizations. However, capital adequacy is more important than size. Without adequate capital, a bank's growth is constrained, and it is limited to holding less risky securities instead of potentially more profitable loans. The protection is not a long-term solution and it only distorts the resource allocation and reduces the national welfare. The question for the government is to keep the speed of openness in pace with the reform of local banking industry.

(The author is an Associate at J.P. Morgan Chase in New York.)

Endnotes:

1. This was followed in 1994 by a similar deal with private London Club banks.

2. Fernando Negret and Luca Papi, "The Polish Experience in Bank and Enterprise Restructuring" , World Bank, November 1996

3. Hungary responded differently by tightening entry requirement after some of the new foreign banks ran up big losses.

4. At that time, WBK and BSK were two banks what met the capital requirement.

5. The privatization of BPH was conducted solely through an IPO.

6. WBK is the first SOCBs being privatized. After then, it acquired of 86.9% holding in Gliwicki Bank Handlowy (GBH) at the cost of PLN 25 million. Through acquisition of the Branch of Bydgoski Bank Budownictwa in Bydgoszcz, it expanded its presence in new market. The Bank considers other options related to the banking sector consolidation and aiming at establishment of a strong capital group around WBK.

7. Private banks, such as Boguslaw Kott's Band BIG and Stanislaw Pacuk's Kredyt Bank

8. Adjusted by reference to annualized average inflation in 1997, as measured by the Consumer Price Index, which came to 14.9%. Cf. Bulletin Statystyczny GUS [Statistical Bulletin of the Central Office of Statistics], no. 12 (482), Table 30 p. 98.

9. In 1997, net assets and the total capital base at commercial banks with majority Polish equity increased by a nominal 26% and 23%, respectively, while at banks with majority foreign equity the corresponding growth came to 39% and 47%.

10. The IPO method encounters two additional impediments, namely, the underdeveloped infrastructure for handling the processing of claims from a large number of small owners and the lack of absorption capacity of nascent domestic capital markets in which bank stocks dominate market capitalization.