Banking supervision policy pursued, among others, through specific reserves affects banks' activity and, first of all, their financial performance. The reserves constitute banks' costs that reduce their financial performance.

From banks' point of view three aspects of reserves are of a particular importance:

• For what claims and in what amount the reserves are to be made.
• What are procedures for the implementation of regulations.
• Whether reserves are recognized tax deductible by tax authorities.

The first aspect is particularly clear against the background of recent changes related to the provision and maintenance of specific reserves. Regulations implemented under the Resolution 13/98 of the Commission for Banking Supervision (CBS) are much more restrictive than those previously required (changed several times in this decade).

Under the Regulation 13/98 the CBS increased the number of claims' categories for which specific reserves are provided. As early as in the middle of this year banks must make reserves upon signing each consumer credit agreement with individuals. The minimum rate of reserves will be increasing up to 2% starting from 1 July 2000. The requirement to make reserves upon signing the credit agreement may be perceived as a sort of "penalty" for banks. At the same time it should be mentioned that banks make also general reserves, being cost deductible, first of all for exposures not covered by specific reserves. Thus, exposures on performing consumer credit could be covered by general reserves. Any changes to expand the obligation to make specific reserves lead to a situation where the provision of general reserves become, in fact, unnecessary.

The necessity to make reserves for consumer credit will, most probably, worsen financial situation of Polish banks, i.e. increase their costs, which are, moreover, not recognized deductible.

Instead of the obligation to make reserves for the whole portfolio of consumer credits banks will not have to evaluate borrower's economic and financial condition, which was also related to certain operating expense. Thus, at present timeliness of principal and interest repayment is the basis of the evaluation of consumer credit quality.

It is also worth noting that new rules for the classification of claims on the State Treasury have been introduced. For such receivables banks must also make, in specific cases, specific reserves, which means that, according to provisions of the CBS resolution, claims on the State Treasury may be classified as non-performing. According to previous regulations, such claims were automatically classified to performing receivables. At the same time, specific reserves are not made on the State Treasury guarantees and sureties, which proves certain inconsequence. Additionally, banks have been given only three months to solve problems related to the new classification of claims on the State Treasury. This timing is not sufficient given the fact that banks must make numerous agreements with the State Treasury representatives to confirm legitimacy the receivables. Only following this procedure one can assess the amount of reserves to be made, however, one can suspect it will be inconsiderable.

In relation to receivables other than consumer credits and claims on the State Treasury a new category of receivables under observation, for which banks will also have to make specific reserves. The Resolution 13/98 of the CBS fails to define precise criteria of classifying receivables to the above group. Respective burden for banks depends, moreover, on their share in total performing receivables.

Moreover, according to the Resolution 13/98, when classifying claims to particular groups delays in repayment should be related to original maturity. It means ineffectiveness of annexes to agreements, since specific reserves cover all roll-over credits. This leads to a situation where reserves are made for receivables not due according to a new agreement. On the one hand, such an approach limits the roll-over procedure that aims at avoiding provisioning requirement and presenting "paper" loss/profit. On the other hand, it affects adversely those banks, which postponed repayment also for their good clients.

The change that may have a positive effect on banks' financial performance is the extension of the list of legal securities that reduce the base of provisioning. The list does not provide, however, for insured credits.