The function of the banking sector in expanding Poland's military capacity and supporting systemic resilience

Barriers to arms financing

The defence and banking sectors have worked together for many years to a limited extent. Only over the last 5 years, the value of the portfolio of investment loans launched and utilized increased from PLN 140 billion in the first 4th of 2021 to over PLN 185 billion in the first 4th of 2026. In this increase, however, the defence manufacture mostly lacked, primarily for 2 reasons.

In most banks, the doors to arms finance, especially offensive weapons, were closed by business social work policies, inter alia, to guarantee compliance with global conventions. The outbreak of a full-scale war in Ukraine in 2022 changed this situation and enabled the financial sector to be brought closer to the arms industry, highlighting the request for an expansion of the armies of European countries.

The second issue was the financial results of the companies themselves. Over the past decades, expenditure on military equipment and infrastructure has been treated in Europe as an costly expense, dying in the sea of others. Armoured companies had to diversify their business as well as search synergies and scale in JV projects and consolidation processes. In its national backyard, in 2021, the full ecosystem of the arms industry, both private and state-owned, reached a single-digit rate of return on the capital invested. This reduced the rationality of the investment and the sense of debt financing from a management perspective.

The improvement of the defence manufacture present requires not only increasing public procurement, but besides the inclusion of new, innovative companies in conventional supply chains and the matching of the financial sector offer to support not only production but besides innovation. Only specified a combination creates the conditions for the long-term strengthening of state security.

Today, both the arms manufacture and the financial sector are in a very different situation. A dynamic increase in gross and a healthy return on investment meets the dedicated offer of banks, with products tailored to the needs of companies in all stages – from innovative start-ups to mature companies.

Specific risks and the request for State guarantees

The current scale and pace of the required increase in defence production, as well as the financial needs involved, represent a major challenge for conventional debt financing, in line with the general requirements of credit assessment. This determines the specificity of the financing of the arms sector and the request for systemic solutions to improve the essential movement of capital to that sector.

The financing of the arms manufacture poses very distinctive challenges in the hazard assessment. It is simply a very different market, with a advanced concentration of state capital and a very limited number of contracting entities. There are so circumstantial risks – not necessarily linked to the solvency of companies, but to political decisions, flexibility of supply chains and operational autonomy. Their nature and the circumstantial function of specified investments indicate the appropriateness of this kind of systemic support in the form of government guarantees. This would guarantee unchangeable and multi-annual financing of the arms industry, while maintaining a low level of hazard for the financial sector and avoiding costly future reserves.

The scale and specificity of investments in the arms sector require systemic financing instruments, taking into account their strategical importance for State security. Government guarantees can become a tool that will combine a unchangeable supply of capital to the defence manufacture with maintaining safety and predictability on the financial sector side.

First wave of contracts

At this phase of modernization of the Armed Forces, where capital is available from mechanisms specified as grants from the Capital Investment Fund, SAFE or flows from fresh contracts signed with the Armed Forces Agency, financed by the Armed Forces Support Fund, the main function of banks is not stricte the provision of debt financing.

Modernisation of the armed forces present requires banks, above all, to safe contracts efficiently and to stabilise financial flows throughout the defence manufacture value chain. In the context of multi-billion-dollar arms programmes, their function goes beyond funding, and besides involves securing the strategical feasibility of the safety of the state of contracts.

The systemic impact of banks on the expansion of the arms sector is focused on the provision of instruments to safeguard the execution of contracts and trade finance. Armed Forces modernisation programmes carried out can be clearly divided into stages, with the first wave of multi-billion-dollar contracts being signed with US and South Korea suppliers. In this situation, letters of credit and guarantees guarantee execution of key to national contract security, and the engagement of banks is essential to carry out the contract even if it has already negotiated terms, provided backing and equipment ready to purchase.

New function of the financial sector

The analysis of subsequent contracts signed as part of the implementation of the accelerated modernisation of the Armed Forces clearly shows the direction of action after completing the most urgent gaps in strategical equipment of the Army. expanding the stream of public procurement signed with companies forming the Polish arms manufacture ecosystem changes the function of the financial sector in the coming future.

For the first time in decades, the home arms manufacture has a clear, multi-annual procurement perspective, precisely defined in the contracts, alternatively of framework agreements that are more a sign of political will than real contracts for many years ahead. This applies especially to companies that are suppliers for key to the national integrator industry. These companies, frequently in the SME sector, may not always have contractual conditions, specified as advance payments, at levels specified as their customers, which are straight parties to an agreement with the Armed Forces Agency. erstwhile we talk not only of increasing, but even of multiplying home production capacity, the balance sheet of the full arms supply chain first appears the request for a gradual increase in the request for working capital. The request then arises to cover the essential investment in production capacity, which is not at this phase adapted either to the planned scale or to the nature of the essential investments. In each case, the banking sector has the products and capital essential to implement these plans.

Capital present strengthens the safety of the state erstwhile it reaches the full national arms supply chain, not just its largest integrators. The function of the banking sector is, therefore, to turn long-term defence contracts into real production capacities, fresh technological competences and sustainable ability of Polish companies to develop.

As part of completing strategical competence gaps, we will observe investments in areas specified as electronics, integrated circuits or engines for unmanned aircraft. In order to produce Polish equipment, not only the dense one, 1 must besides think about expanding national supply chains in these areas. This will require companies not only to increase production, but besides to enter fresh business areas. Companies will bear the essential investment outlays based on cash flows from their core business. This creates a capital gap in which banks can effectively help.

Flexibility of manufacture as a condition for state resilience

Despite the predictability of gross for respective years ahead, the stream of contracts is not infinite. Companies must anticipate to drop orders for fresh equipment in a certain, even more distant, time horizon. This constitutes a regulation on investment plans.

During peacetime, expanding production results in expanding stocks – needed for wartime. In turn, even during the armed conflict, the life cycle of equipment is drastically reduced, which justifies expanding industrial possible on a much larger scale. Therefore, the only way for a country facing a real threat of armed conflict is to invest in flexibility, understood at different levels. It must affect a wider value chain for another industries, initially even on a tiny scale, into the ecosystem of the arms industry. Companies from the wider industrial sector, which are a reserve of the arms industry, must be able to guarantee in a short time the production of appropriate components gathering military quality standards, which requires prior preparation, consultation and business relations. In each of these aspects, the banking sector has a function to play – from CAPEX financing, through contractual guarantees, to the usage of a wide network of contacts with its corporate clients.

State resilience is being built present primarily thanks to the flexibility of industry, which can rapidly increase capacity, include fresh suppliers and respond to changing safety needs. specified capacity requires prior preparation of the full economical ecosystem and unchangeable financial support, which allows to transform industry's possible into real state readiness.

Capital markets and fresh defence

The area of the financial markets is another area on which the function of the banking sector can be analysed in the improvement of armed capacity. The current geopolitical environment, with the ongoing war in Ukraine and the fast acceleration of the reconstruction of the military capacity of the European states, has created very favourable conditions for publically listed armed companies of the region. This is due to the fact that it is simply a narrow group of companies that have the ability to respond rapidly to the surge in demand, having a portfolio of finished products and existing, functioning factories. This is simply a completely fresh stream of capital that flows to a comparatively tiny group of companies in the past years, with advanced predictability, given, for example, the increase in the ambition of NATO associate States to scope the level of 5% of their military spending. In this situation, the function of the banking sector is to support companies in raising capital straight from investors, whether through stock-market debuts, to which there is simply a large space in Poland, or secondary emissions, which are included in the valuations that are beneficial to armed companies.

Social resilience and financial stableness in war conditions

Banks, as public trust institutions, have a major function to play in building resilience in times of crisis. The national banking sector already demonstrated in 2022 how, through product innovation, simplification of procedures, multi-annual investments in digitalisation and a network of branches, the function of extending certain functions of public administration in the process of adopting and integrating financial integration of Ukrainian war refugees. However, account should be taken of the sector-specific risks associated with the possible outbreak of armed conflict.

The defence business makes capital markets an crucial origin of financing for companies capable of rapidly expanding production for the safety of the state. The function of the banking sector present is not only to handle current transactions, but besides to support arms companies and dual-use in effectively raising capital for improvement and strengthening their marketplace power.

According to historical patterns, at the time of the outbreak of the armed conflict, abroad capital flows, which in panic attempts to limit the hazard of investment in a country abruptly under attack. There is simply a sharp weakening of currency, which rapidly and importantly increases the cost of importing strategical goods – fuel, ammunition, food or medical means – leading to advanced inflation. It is no different with debt – a country that is financing abroad capital is more susceptible to increased debt handling costs and the sale of government bonds, which is 1 of the mechanisms for transferring the armed conflict to the financial sector. taxation bonds are the largest component of the balance sheets of the national banking sector. At the time of the fast sale of debt, it is essential to supply an adequate line of financing for commercial banks in the National Bank of Poland so that they can proceed to service in the economy and society in terms of deposit protection and the availability of capital.

The high, even record, share of government bonds in the balance sheets of the Polish banking sector means that a smaller part of the debt is at hazard of currency risk. There is simply a clear analogy with the situation in Ukraine. The government's lending needs do not vanish at the time of the war – they are growing, further reinforced by a fall in budgetary revenues following a simplification in economical activity. Faced with abroad investors' expectations, the Ukrainian government is mostly financed in the home banking sector, in its own currency, at the rate set by its own central bank. This shows that a strong banking sector with adequate equity reserves is simply a key pillar for maintaining financial stableness not only for the economy but besides for the state itself.

The strength of the banking sector becomes 1 of the pillars of the state's resilience under war as it co-decisions on the sustainability of public finances, the availability of capital and the safety of deposits. The ability of banks to keep the continuity of backing and to keep social assurance can determine, in times of crisis, not only the condition of the economy but besides the efficiency of the state.

Cost of capital, credit and social resilience

The increase in bond yield and non-marketable changes in request (focusing on first-hand assets, fast stock building) lead to the request to keep higher interest rates, which straight affects banks. As capital in the economy is exceptionally expensive, the function of banks in hazard assessment and effective capital allocation becomes even more important. During the war in Ukraine, the interest rate set by the National Bank of Ukraine reached 25%. With this advanced interest rate, government cover programmes specified as credit holidays or mortgage payments were needed to reduce the effective interest paid by key social groups specified as professional soldiers, medical staff or teachers to 3%. Covering solutions do not cover all types of credit or all social groups, but supply the essential protection of critical groups for the functioning of the state at war and those most susceptible to the collapse of the household budget as a consequence of the increase in credit instalments. Despite very advanced interest rates, the Ukrainian economy has been able to keep the widest possible access to capital and bank balance sheets stay comparatively secure. erstwhile the banking sector reduces credit due to increased hazard and cost of funding, social resilience decreases rapidly. At the same time, this affects households, businesses, local governments and supply chains applicable to defence.

Nor can it be overlooked that the advanced interest rate on loans is linked to the increase in the profit of the banking sector. These gains represent an crucial origin of backing for the State. Going back to the example of Ukraine, in a advanced interest rate environment, banks gain from the fiscal bonds in which they place funds, providing request for government debt. At the same time, however, there is simply a 50% income taxation rate in the banking sector, which supports government taxation revenues during the war.

Under costly capital conditions, the ability of the banking sector to keep financing co-decisions on social resilience, state stableness and the economy. The experience of war shows that efficient shielding mechanisms and strong banks can at the same time mitigate the effects of the crisis, sustain request for public debt and strengthen the financial basis of the state's action.

The multi-dimensional function of the banking sector

Banks have a number of roles to play in support of social resilience and the improvement of the military possible of Poland. Providing an efficient channel of efficient capital allocation in the economy, with reasonable lending costs, and maintaining an extended private digital infrastructure, which is an effective extension of public administration, are the most crucial functions supporting social resilience. The financing of the essential investments in the arms manufacture in the SME sector, the warrant service of military contracts and the management of capital for double, civil-military investments are, in turn, key functions of the banking sector in actively supporting the modernisation of the Armed Forces and building the country's resilience.