Prudential regulationi Relationship with the prudential regulator
The objective of banking supervision is to ensure the safety of funds held in banks, and the compliance of the banks with the provisions of law, statutes and their banking licences.
Since 2007, the PFSA has been implementing a risk-based approach to supervision. The goal of the regulator is to develop a harmonised methodology for supervision that would use risk as the major factor in determining priorities and the frequency of supervisory actions. Every department of the PFSA is expected to follow a standardised approach for supervisory assessment based on a set of criteria that specify the risks associated with the activities of supervised entities and provide for more accurate quantification of risks associated with the activities of various capital groups on the Polish market. The harmonised methodology encompasses the method of assessing the risk management and control mechanisms of supervised entities, the compliance of activities of supervised entities with the law and the method for identifying irregularities in business conduct.
Banks are required to submit audited financial statements to the PFSA, on a consolidated and unconsolidated basis, with an auditor's opinion and report. Banks, branches and representative offices of non-EU banks in Poland are also required to:
- notify the PFSA of the commencement and cessation of business activity; and
- enable authorised PFSA staff to perform their supervisory functions, in particular by:
- making books of account, balance sheets, records, plans, reports and other documents available to them;
- allowing them, on receipt of a written request, to make copies of such documents and other information media; and
- providing explanations to any questions raised.
Furthermore, banks must provide to the central bank, at the request of the National Bank, the data necessary to assess their financial standing and the risks to the banking system. Those banks that participate in monetary clearing and interbank settlements must also provide the data necessary for assessing the monetary clearing and interbank settlements.
In recent years, the major focus of the PFSA has continued to be the regulation of the retail markets and the marketing of bank products to retail clients. The PFSA has issued specific recommendations with regard to the marketing by banks of structured investment products, the distribution of insurance products (bancassurance) and the selling of long-term deposits formally structured as insurance to avoid capital gains tax.
The past year was also influenced by a discussion concerning the restructuring of mortgage loans denominated in Swiss francs.
Before the financial crisis, most long-term credits extended by banks in Poland (in particular, mortgage loans) were denominated in foreign currencies (Swiss francs or euros) to take advantage of lower interest rates and thus reduce the total cost of the credit; however, as most retail clients earn their wages in Polish zlotys, they are confronted with foreign exchange volatility with almost no possibility of hedging against that risk. To eliminate the foreign exchange risk, apart from the capital adequacy measures, the PFSA requests that:
- banks inform their clients about the currency spread and the associated risks, both before and during the credit relationship;
- set the exchange rate for the repayment of loans at the same level as for their other customers; and
- enable repayment of a loan directly in a foreign currency acquired from a source other than the lending bank.
In the autumn of 2011, Parliament allowed consumers to repay loans and credits denominated in foreign currencies directly in cash in those currencies, and thus limited the additional source of income for banks resulting from currency spreads. However, the issue has become very acute since the sudden rise of the Swiss franc in mid-January 2015, brought about by the monetary policy decisions of the Swiss National Bank, and the resulting substantial increase of the value of loans and credits denominated in Swiss francs.
The issue of mortgage loans denominated in Swiss francs has been vigorously debated since 2015. Banks and lenders have presented their own ideas for resolving the crisis. However, there were so many discrepancies between these parties, in particular regarding bearing costs of planned operations, that they have not managed to reach a compromise. In consequence, there are numerous lawsuits pending before Polish courts in which clients are attempting to invalidate mortgage loan agreements or at least be reimbursed for the bank spreads. At the Regional Court in Warsaw, the cases related to the loans denominated in Swiss francs constituted nearly 30 per cent of all new cases initiated in 2018.
In January 2016, a draft law aimed at regulating the issue of mortgage loans denominated in Swiss francs and other currencies was presented by the Chancellery of the President of Poland (Chancellery). The draft involved the possibility of converting mortgage loans denominated in Swiss francs and other foreign currencies into Polish zlotys at a fair exchange rate, which was to be calculated individually in relation to each mortgage loan agreement, and the reimbursement of borrowers for bank spreads. However, calculations made by the PFSA proved that the proposed law could jeopardise the financial stability of certain banks and would adversely affect the entire Polish banking sector. Therefore, in August 2016, the Chancellery presented another draft law aimed at regulating the issue of mortgage loans denominated in Swiss francs and other currencies concentrated primarily on the reimbursement of borrowers for bank spreads. In August 2017, the Chancellery presented yet another draft law aimed at resolving the issue, targeting amendments to the Act on support for borrowers in difficult financial situations, regarding borrowers who took out mortgage loans. Proposed changes included increasing the amount (from 1,500 zlotys to 2,000 zlotys) and length (from 18 months to 36 months) of financial support, reducing the requirements of obtaining support and introducing the possibility of getting a loan in the event of a sale of a credited real property. According to the draft, in the event of a sale of a credited real property, borrowers would be entitled to draw a loan in an amount up to 72,000 zlotys. Moreover, banks that decide to restructure mortgage loans denominated in foreign currencies by converting them into zlotys would be reimbursed for balance sheet differences in mortgage loan values resulting from the restructuring. It remains to be seen what the final shape of this law will be and how it will influence the financial situation of Polish banks.ii Management of banks
Following the implementation of the Capital Requirements Directive IV (CRD IV), which entered into force in November 2015, Polish law provides for specific corporate governance requirements for banks. Banks that operate as joint-stock companies are governed by general corporate law with modifications originating from the Banking Law. The supervisory board of a bank must comprise at least five persons, and the management board must comprise at least three. Banks must inform the PFSA of the composition of and any changes to the supervisory or management board. The chair of a bank's management board is in charge of internal audit. It should also be indicated which member or members of the management board are responsible for supervising material risks for the bank's activities. The member or members of the management board should not be supervising the area of the bank's activities that is generating the risk. Moreover, it is not permissible to combine the positions of the president of the management board and the member of the management board in charge of supervising material risk. Further, the division of responsibilities between the members of the management board of a bank should indicate the persons responsible for supervising compliance with laws, internal regulations and market standards, and accounting and financial reporting, including financial control.
Members of a bank's management and supervisory boards should have knowledge, skills and experience relevant to their functions and duties, and give an adequate guarantee of due performance of their duties. In general, the number of functions permitted for members of the management and supervisory boards depends on individual circumstances and the character, scale and degree of complexity of the bank's activities. In the case of significant banks, a member of a management or supervisory board may at the same time perform the duties as a member of no more than one management board and two supervisory boards, or four supervisory boards. In certain situations, the PFSA may give consent to a member to perform duties on one additional supervisory board.
Certain members of the management board of a bank, namely the chair and those in charge of supervising material risk in the bank's activities, must be approved by the PFSA. Consent may be refused if the candidate, inter alia:
- has been convicted of an intentional or fiscal offence;
- does not have knowledge, skills and experience relevant to his or her functions and duties;
- does not give an adequate guarantee of due performance of his or her duties; or
- cannot prove sufficient knowledge of the Polish language. This last requirement can be waived if knowledge of Polish is not necessary for prudential supervision, taking into account in particular the level of permissible risk or the scope of the bank's activities.
The consent of the PFSA is also necessary for the appointment of the manager and deputy manager of a branch of a non-EU bank. The PFSA uses the same criteria as previously described to evaluate candidates. There are no such requirements with respect to the managing personnel of a branch of an EU credit institution or a representative office.
The PFSA may ask the relevant bank authorities (i.e., a meeting of shareholders or the supervisory board) to dismiss a member of its management or supervisory board who does not fulfil the requirements imposed by law. Moreover, the PFSA is entitled to suspend a member of a bank's management or supervisory board until the relevant bank authorities adopt a resolution on his or her dismissal. The PFSA is obliged to dismiss a member of a bank's management board in the event of a conviction for an intentional or fiscal offence, with the exception of offences tried in a private prosecution, or of a failure to inform the PFSA of charges relating to an intentional or fiscal offence, with the exception of offences tried in a private prosecution, within 30 days of the charges being brought.
The articles of association of a bank shall specify the management system, which is a set of principles and mechanisms relating to the decision-making processes and to evaluating banking activities. The management system comprises the risk management system and internal control system. It must include a procedure of anonymous reporting of violations of the laws, internal regulations and ethical standards applicable to the bank (whistle-blowing). The procedure shall provide protection for whistle-blowers against retaliation, discrimination and other possible instances of unfair treatment.
Except for the general duties imposed on bank managers by corporate law, such as the duties of care and loyalty, the Polish Banking Law provides for specific legal and regulatory duties. Members of a bank's management and supervisory boards are obliged to perform their functions honestly and fairly, and to be driven by independent judgements, to provide efficient assessment and verification of making and enforcing decisions connected with the current management of the bank. General corporate law also governs the decision-making process within the bank – as the default rule, the management board has broad discretion with respect to the conduct of the bank's business. However, the internal regulations (in particular the articles of association) can impose restraints and provide that, for example, certain credit commitments need to be authorised by the supervisory board or the shareholders.
With the exception of state-owned banks, Polish law does not contain any restrictions on bonus payments to management and employees of banking groups, and this issue has never been subject to closer scrutiny by the regulator. Unlike in the United Kingdom and the eurozone countries, the topic of bonus payments in the financial industry has been absent from Polish public discourse, and the remuneration of high-level bankers has not been subject to public scrutiny. This may be explained by the fact that during the financial crisis, none of the Polish financial institutions needed to be bailed out by the government, and at no time was there a risk of collapse of the financial sector.
As at March 2019, Polish law also does not provide any limitations on the amount of remuneration that the managers of a Polish bank, except for state-controlled banks, can receive. However, it should be noted that following the implementation of the CRD IV, banks are obliged to draw up and implement remuneration policies for the categories of persons whose professional activity has significant effect on the risk profile of a bank. The remuneration policy applies to bank's subsidiaries, and should be in line with the remuneration policy adopted by the dominant entity of the bank. Every year, banks shall provide the PFSA with information about persons whose professional activity has significant effect on the risk profile of a bank, and whose total remuneration for the previous year amounted to at least the equivalent of €1 million. A remuneration committee composed of members of the supervisory board should be established in significant banks. The purpose of the remuneration committee is assessing and monitoring remuneration policies, and supporting bodies of a bank in shaping and implementing these.iii Regulatory capital and liquidity
The CRD IV package entered into force on 1 January 2014. The Capital Requirements Regulation (CRR) is directly applicable in Poland, whereas the CRD IV needed to be implemented into Polish law (this occurred in November 2015). Following the implementation of the CRD IV, the relevant provisions of the Banking Law regarding banks' own funds, internal capital and capital adequacy have been amended.
The entry into force of the CRR and the implementation of the CRD IV resulted in material changes in the structure of banks' own funds, which were previously regulated solely by provisions of the Banking Law. Banks must currently maintain own funds defined as the sum of Tier 1 and Tier 2 capital adjusted to the size of the conducted business. Capital instruments and subordinated loans may be qualified as additional instruments in Tier 1 or instruments in Tier 2 after obtaining the consent of the PFSA.
Banks are required to maintain a sum of own funds at a level not lower than the higher of:
- the amount resulting from the fulfilment of requirements regarding own funds specified in the provisions of the CRR; or
- the amount estimated by a bank to be necessary to cover all identified material risks appearing in the bank's activities and changes in the economic environment, taking into account the expected level of risk (the internal capital).
Banks are obliged to draw up and implement strategies and procedures for estimating and constantly maintaining their internal capital. On the demand by the PFSA, banks are required to provide information regarding the structure of own funds and the fulfilment of requirements and norms specified in the Banking Law and the CRR. In addition, banks are obliged to maintain capital buffers, in particular the safeguarding and countercyclical capital buffer. Additional capital in the form of a countercyclical buffer is collected by banks during a period of economic growth, and is aimed at weakening the credit expansion of banks, which shall result in smoothing fluctuations in the cycle. During an economic downturn, banks will be exempt from the requirement to maintain countercyclical buffer capital, and will be able to use additional capital accumulated during the period of economic growth.
The PFSA may recommend that a bank comply with additional requirements relating to liquidity and own funds, or may order a bank to withhold the payment of dividends until liquidity is restored or normal standards of permissible risk in the bank's activities are achieved. The PFSA is also entitled to impose on a bank additional requirements relating to own funds, or to impose higher factors than were previously adopted in the event of significant irregularities in identifying risk using an internal method of calculating own funds. In January 2019, the PFSA issued recommendations relating to the payment of dividends by commercial banks, pursuant to which only banks meeting supervisory expectations regarding the minimum level of total capital ratio and security capital, and not realising a recovery programme, shall be entitled to pay dividends in the full amount.
Generally, Polish banks were well capitalised in 2018. Own funds of Polish banks increased from 198 billion zlotys at the end of 2017 to 209 billion zlotys at the end of Q3 2018. The total capital ratio of Polish banks increased from 19 per cent at the end of 2017 to 19.2 per cent at the end of Q3 2018.
Poland has not adopted any bank holding regulations that would restrict the permissible activities of bank holding companies. According to information from the European Commission, so far no financial conglomerates have been identified in Poland: the provisions regarding the supplementary supervision of financial conglomerates therefore remain a paper exercise. If a Polish bank operates in a holding company, supervision of that entity is exercised on a consolidated basis. The Banking Law contains a set of default rules on the selection of the consolidated supervisor depending on the type of the holding and the home country of the parent company.
In 2015, the national rules regarding liquidity standards were replaced by the liquidity coverage ratio specified in the CRR and Commission Delegated Regulation 2015/61 of 10 October 2014 to supplement the CRR with regard to the liquidity coverage requirement for credit institutions. Consequently, banks shall currently hold liquid assets, the sum of the values of which covers the liquidity outflows less the liquidity inflows under stressed conditions, so as to ensure that institutions maintain levels of liquidity buffers that are adequate to face any possible imbalance between liquidity inflows and outflows under gravely stressed conditions for a period of 30 days. During times of stress, banks may use their liquid assets to cover their net liquidity outflows. The liquidity coverage ratio was introduced gradually, and reached the target level of 100 per cent as from 1 January 2018.iv Recovery and resolution
Following implementation of the Bank Recovery and Resolution Directive (BRRD), which entered into force in October 2016, Polish law requires banks to draw up recovery plans. Each bank that is not operating in a holding (banks operating in holdings will be included in group recovery plans) must draw up a recovery plan, including actions to be taken in the event of a significant deterioration of the bank's financial standing, a threat to the bank's financial standing, a difficult economic situation, or other circumstances that may adversely affect the financial market or the bank's situation. In the case of a breach or the threat of a breach of the provisions regarding the required level of own funds or liquidity measures, the bank's management board is obliged to inform the PFSA and the Bank Guarantee Fund thereof and ensure implementation of the recovery plan. The bank's management board shall promptly notify the PFSA and the Bank Guarantee Fund of the above-mentioned violations and ensure implementation of the recovery plan in the event of a material deterioration of the bank's financial standing, such as:
- the occurrence of a balance loss or a threat thereof;
- a danger of insolvency or loss of liquidity,
- an increasing level of leverage; or
- an increasing number of loans and credits that are at risk or an increasing concentration of exposures.
The PFSA is entitled, inter alia, to:
- impose on a bank's management board the obligation to implement the recovery plan;
- restrict the granting of credits and cash loans to a bank's shareholders, members of its management and supervisory boards, and its employees;
- impose a reduction of the variable component of the remuneration of a bank's senior management; and
- order implementing changes in a bank's business strategy, or amendments to its statutes or its organisational structure.
In the event of a breach or the threat of a breach of the legal provisions regarding the required level of own funds or liquidity measures, the PFSA may establish a curator in the bank to improve the bank's standing or to ensure the effectiveness of the implementation of the recovery plan. The curator's powers include participating in meetings of the bank's authorities and opposing decisions thereof to the competent commercial court. If the implementation of the recovery plan proves ineffective, the PFSA may decide to establish a receivership administration. In that case, the right to adopt resolutions and make decisions in all matters vested by law or by statute with the bank's authorities and governing bodies is transferred to the receivership administrators. However, the PFSA may stipulate that certain actions require its approval. Upon establishing the receivership administration, the supervisory board is suspended, members of the management board are automatically recalled, and previously established commercial proxies and powers of attorney expire. For the duration of the receivership administration, the rights of other bodies of the bank are also suspended. Receivership administrators may close the bank's ledgers and prepare a financial statement of the bank for the day indicated by the PFSA, and adopt a resolution on the coverage of loss for the period ending on that day, and a loss from previous years.
Moreover, the BRRD introduced a compulsory restructuring mechanism. The body responsible for compulsory restructuring is the Bank Guarantee Fund. In performing its functions relating to compulsory restructuring, the Bank Guarantee Fund cooperates with the PFSA, the National Bank and the Minister of Finance. The aims of compulsory restructuring are, inter alia, maintaining financial stability, in particular by protecting confidence in the financial sector; ensuring market discipline; and protecting funds entrusted to banks by their clients. The Bank Guarantee Fund shall draft plans for the compulsory restructuring of each bank that is not part of a group subject to consolidated supervision in a Member State conducted by an authority other than the PFSA (those banks will be included in a group plan for compulsory restructuring). However, banks are obliged to provide the Bank Guarantee Fund with assistance in drafting and updating the plans if the Bank Guarantee Fund requests them to do so. If a bank refuses to provide assistance, the Bank Guarantee Fund is entitled to impose a penalty of up to 10 per cent of the projected annual turnover of the bank (but not exceeding 100 million zlotys). It should be noted that following the implementation of the BRRD, banks are obliged to maintain a level of own funds and liabilities subject to redemption or conversion as determined by the Bank Guarantee Fund.
Compulsory restructuring proceedings will be conducted by the Bank Guarantee Fund after receiving information about the threat of insolvency of a bank from the PFSA. During the course of compulsory restructuring proceedings, the Bank Guarantee Fund is entitled to use the following instruments:
- the acquisition of an enterprise: the Bank Guarantee Fund is entitled to issue a decision on the acquisition of a bank's enterprise or its organised part by another entity;
- a bridge institution: the Bank Guarantee Fund is entitled to set up a bridge institution in the form of a capital company. The aim of the bridge institution's activity would be managing the acquired share rights in a bank under restructuring and exercising the rights thereof, or continuing the activity of the acquired enterprise of the bank under restructuring or its organised part until the disposal to a third party or liquidation thereof;
- the redemption or conversion of liabilities: the Bank Guarantee Fund is entitled to:
- redeem or convert liabilities to recapitalise the bank under restructuring;
- redeem or convert liabilities transferred to a bridge institution to equip it with own funds;
- redeem or convert liabilities transferred under the instrument of the separation of property rights; or
- redeem liabilities under the instrument of the acquisition of an enterprise; and
- the separation of property rights: the Bank Guarantee Fund is entitled to set up an entity in the form of a capital company and transfer to that newly established entity separated property rights and liabilities of a bank under restructuring or a bridge institution. The separation of property rights is permissible if:
- the liquidation thereof could adversely affect the market situation;
- the transfer thereof is necessary for continuing the activity of a bank under restructuring or a bridge institution; or
- the transfer of property rights shall increase the revenues from those property rights.
If application of the above-mentioned instruments of restructuring does not lead to the disposal of the bank under restructuring, or the application of those instruments is not possible, the bank under restructuring shall be subject to liquidation through insolvency proceedings. During compulsory restructuring proceedings, the right to adopt resolutions and make decisions in all matters vested by law or by statute with the bank's authorities and governing bodies is transferred to the Bank Guarantee Fund. The Bank Guarantee Fund is entitled to appoint an administrator of the bank under restructuring who exercises those powers in its name.
Banks are required to pay contributions to a compulsory restructuring fund, which will be used to finance the actions of the Bank Guarantee Fund under compulsory restructuring proceedings.
The legal framework for the government's bail-in powers in a crisis situation is provided in the Act on recapitalisation of certain institutions and government instruments of financial stabilisation. This Act allows the government to guarantee the increase of own funds by a financial institution or to use government instruments for financial stabilisation, which include capital support (a public instrument) and the temporary takeover of an institution by the State Treasury. A guarantee issued by the state is triggered when the shares or bonds issued by a bank are not acquired by the existing shareholders or third parties, and can only be extended if a bank is not threatened by bankruptcy. The government's financial stabilisation instruments may be used in the event of a financial crisis to avoid the liquidation of a bank that is subject to compulsory restructuring proceedings if the application of the compulsory restructuring instruments would be insufficient to avoid adverse consequences for Poland's financial stability or public interest. The use of the capital support instrument involves the State Treasury acquiring or purchasing instruments in a bank's Tier 1 or Tier 2 capital, or the issuance by the State Treasury of a guarantee by a bank to increase its own funds. The temporary takeover of a bank by the State Treasury consists in the transfer of all shares in the bank to a state legal person or a company in which the State Treasury has a dominant position. All this being said, as at March 2019, Polish banks remain well capitalised, and the Act on recapitalisation of certain institutions and government instruments of financial stabilisation has never been tested in practice.
Furthermore, a mechanism pursuant to which a bank that does not meet requirements relating to own funds may be acquired forcibly by another bank, subject to an administrative decision of the PFSA, was re-introduced in 2018. In such case, following a decision of the PFSA, the acquiring bank steps into the rights and obligations of the bank being acquired. The bodies of bank being acquired are dissolved, and previously established commercial proxies and powers of attorney expire. The Bank Guarantee Fund may provide financial support to a bank acquiring another bank.