This article is a part of Poland Unpacked. Weekly intelligence for decision-makers
In recent months, government-bond yields have been rising around the world, including in Poland. This poses a challenge for governments, while also making the broader economy more vulnerable to certain risks.
One area where such risks are mounting is the banking sector. This stems from what is known as the sovereign-bank nexus, which can also be described as the sovereign-bank doom loop. Put simply, banks hold very large quantities of government bonds in their portfolios, and the value of those bonds falls as yields rise.
Interactive chart Polish banks hold large amounts of government bonds
Eurostat data show that at the end of 2025, government debt held by banks and money-market funds in Poland amounted to as much as 23% of GDP. This was the second-highest level in the EU. Only Italy recorded a higher figure, at 27% of GDP. Czechia, Spain, France, Hungary and Croatia also ranked near the top. The EU average was 12%.
What does this mean? Compared with other European countries, Poland’s banking sector holds a large volume of government-issued bonds. They account for almost 40% of Poland’s total public debt.
Interactive chart According to Eurostat, government securities accounted for 27% of banking-sector assets at the end of 2025. This was the highest share in the EU. The figures were also elevated elsewhere in the region, including Romania, Hungary and Croatia.
It is worth noting, however, that Poland has a relatively small banking sector, one of the smallest in the EU compared with the size of its economy. Bank assets were equivalent to 86% of GDP.
Government securities therefore make up a sizeable share of banks’ portfolios partly because Polish banks hold relatively few other assets. Above all, they extend comparatively little credit: the stock of loans relative to GDP is among the lowest in the EU. The reasons for this are a separate debate. The main factor appears to be weak demand for credit, particularly from companies. But supply-side factors, including high interest rates, as well as regulatory constraints, may also play a role.
Why banks buy government bonds
The main incentive pushing banks toward government bonds is the structure of Poland’s bank tax, introduced in 2016. The levy amounts to 0.44% of assets, but government bonds are exempt. In effect, holding government securities in a portfolio is untaxed, whereas extending a loan is taxed.
Government bonds also receive preferential treatment under risk regulations. They do not carry capital requirements and are counted as high-quality liquid assets for liquidity ratios.
That gives banks a strong incentive to buy them. Government bonds accounted for about 16% of Polish banks’ assets in 2015. Their share then rose sharply during the pandemic and has since remained at around 25%. Including Treasury bills, the figure reaches 27%.
The rising share of government securities in bank assets is not unique to Poland, however. According to IMF data, it has increased steadily across emerging economies since the 2008 financial crisis, rising from about 11% to 16% of net assets. No comparable increase has occurred in advanced economies, where the share has remained broadly stable at around 6%.
How the sovereign-bank nexus works
A high share of government bonds in banks’ assets creates risks on several levels. To understand the mechanism, it helps to look at how bonds behave on a bank’s balance sheet. Some are valued at market prices, or marked to market. This means that when yields rise in the secondary market, bond prices fall. If the value of bonds on the asset side of a bank’s balance sheet declines, there must be a corresponding adjustment on the other side: its equity falls proportionately.
In an extreme scenario, if yields rose very sharply, the resulting decline in bond values could erode banks’ capital. That, in turn, could force them to curb lending.
At the same time, the government might then have to recapitalize banks or even rescue them from failure. This happened during the euro-zone crisis of 2008–2012. Such interventions deepened governments’ fiscal problems and could, in turn, push bond yields even higher. That is how the sovereign-bank loop can begin to tighten.
The Polish version of the sovereign-bank loop
How do these risks affect the banking sector? According to NBP data, bonds marked to market accounted for 42% of banks’ bond portfolios at the end of 2025, and that share has been falling in recent years. In 2020, it was 70%.
The portfolio’s duration – a measure of its sensitivity to changes in yields – is also relatively short. Put simply, duration is the average time it takes to recover the value invested in bonds, including coupon payments received along the way. It stands at around 2.2 years, limiting the scale of banks’ potential losses if yields rise.
The NBP modeled a potential increase in bond yields in its December 2025 Financial Stability Report. The central bank assumed a three-percentage-point rise in yields, with June 2025 taken as the point at which the shock occurred. The conclusion was that such a move would reduce banks’ equity by PLN 28 billion (about EUR 6.6 billion), although the impact would not be evenly distributed across institutions. That is equivalent to roughly 10% of the sector’s total capital.
It is worth remembering that since the simulation was conducted, yields on ten-year Polish government bonds have already risen by around 0.7 percentage points. The cushion is therefore somewhat smaller, though still substantial.
It appears that only a powerful external shock – such as a deep global economic crisis or a direct attack on Poland – would be likely to push yields sharply higher. In 2022, yields briefly rose above 8%, without triggering any catastrophic scenarios, even though the share of bonds marked to market was higher at the time.
For now, the risk of the sovereign-bank loop being set in motion remains limited, though it should not be dismissed entirely.
There are benefits, too
Banks’ purchases of government bonds also bring some benefits. Above all, they increase demand for sovereign debt, which matters at a time of a very high budget deficit and substantial borrowing needs. Domestic banks are also a more stable source of demand for government debt: they are unlikely to sell unless forced to do so, and they have a strong understanding of Poland’s economic conditions.
What next?
The risks associated with the sovereign-bank nexus are well recognized among economists. The issue was recently discussed at the Fiscal Council’s forecasting forum. A presentation on the subject was delivered by Ludwik Kotecki, a member of the Monetary Policy Council, and Sebastian Roy, PhD, an economist at the SGH Warsaw School of Economics who works at Bank Pekao and devoted his doctoral dissertation to the topic.
The concentration is likely to increase further, because the government has little incentive to change the bank tax. One potentially acceptable solution is Roy’s proposal to introduce an additional capital requirement to cover potential losses resulting from declines in bond prices.
The issue of sovereign-bank linkages, and of what constitutes a safe share of government bonds on banks’ balance sheets, is therefore certain to return.
Key Takeaways
- Polish banks have exceptionally high exposure to public debt. At the end of 2025, government bonds and Treasury bills accounted for about 27% of banking-sector assets, while the value of public debt held by banks and money-market funds reached 23% of GDP. That is one of the highest levels in the EU.
- The large share of government bonds creates the potential for a sovereign-bank loop. A sharp rise in yields would reduce the value of some bonds and generate losses for banks, potentially limiting their ability to lend. In an extreme scenario, problems in the banking sector could in turn put additional pressure on public finances.
- For now, the risk of such a scenario remains limited. Only 42% of bonds in banks’ portfolios are marked to market, while the portfolio’s average duration is about 2.2 years. According to an NBP simulation, a three-percentage-point rise in yields would reduce banks’ capital by around PLN 28 billion (about EUR 6.6 billion), but even a shock of that scale would not automatically trigger a banking-sector crisis.