Sound and sustainable macro-economic policies

16. Poland’s sound economic policies in the decade prior to the global crisis led to healthy economic fundamentals, allowing it to weather the recent economic crisis better than all its EU peers. At the outset of the global crisis, Poland had limited macroeconomic imbalances: credit and domestic demand growth had remained relatively moderate, inflation was contained, and current account and fiscal deficits had been restrained. As a result, public debt and external debt were at comfortable levels. Poland’s commitment to the EU Stability and Growth Pact helped to lower the fiscal deficit and limit government debt. A determined anti-inflationary focus built confidence in monetary institutions and anchored inflation expectations.

17. Notwithstanding Poland’s favorable fundamentals, the economy was severely affected by the global crisis through both real and financial channels. With Poland’s key trading partners in recession, exports contracted by over 30 percent year-on-year in the first half of 2009. The freeze in global funding markets was transmitted to domestic financial markets, which experienced sharp price declines. The stock market index fell by half between June 2008 and March 2009; the exchange rate against the euro depreciated by about 30 percent from peak to trough; and interbank transactions came to a virtual standstill. The associated fall in confidence caused an abrupt decline in investment. As a result, GDP growth slowed sharply from 5.1 percent in 2008 to 0.9 percent y/y in the first half of 2009.

18. The authorities’ adequate policy response, including implementing countercyclical policies, to the global crisis helped to avoid an outright recession. Poland was the only EU country with positive GDP growth (1¾ percent) in 2009. Fiscal policy provided appropriate stimulus through a combination of tax cuts and by allowing automatic stabilizers to work on the revenue side. Monetary policy was also accommodative, with aggressive cuts in the policy interest rate through the first half of 2009, complemented by facilities for exceptional liquidity support. Measures were also taken to safeguard financial stability, including the recommendation that banks retain 2008 profits, restoring capital-adequacy ratios to pre-crisis levels.

A well-developed public infrastructure

19. Systemically important payment systems in Poland are efficient and secure. The NBP business continuity plan protects the banking sector as a whole against negative effects resulting from operational failures and the related liquidity risk. In addition, the very low failure rate and the accessibility ratios to date of systems operated both by the NBP (SORBNET and SORBNET-EURO) and KIR SA (ELIXIR and Euro ELIXIR) in 2010 reflect the high level of technical reliability of individual payment systems functioning in Poland. A number of technical projects are under development to further enhance reliability, including use of safer SWIFTNet, and to improve participants’ access to liquidity management tools.³

20. The NBP provides liquidity to the banking system through its open market operations in the form of repos with NBP paper. In emergencies, the NBP can provide collateralized short-term loans to illiquid banks for a period not exceeding three months, as a lender of last resort (LOLR), once the KNF gives a favorable solvency opinion of the borrower.

21. The BGF can offer financial assistance in the form of loans, guarantees, and the acquisition of receivables to commercial and cooperative banks to prevent bank insolvencies within a KNF-approved restructuring plan. Since its formation, the BGF has extended 101 loans to banks, out of which one is currently outstanding. The BGF does not, however, have bank resolution authority.

22. Oversight of external auditors was strengthened in 2009 with the establishment of the Audit Supervision Committee, an independent public administration body financed from the public budget. Its duties include approval of the National Chamber of Statutory Auditors resolutions and yearly control plans as well as controlling audit plans.

Effective market discipline

23. Listed companies in Poland are required to use International Financial Reporting Standards (IFRSs) as adopted by the European Union (EU) in their consolidated accounts beginning in 2005. All banks in Poland are also required to apply IFRS in their consolidated financial statements. Apart from the mandatory application of IFRS, Poland permits IFRSs in the annual accounts of listed companies as well as in the consolidated and annual accounts of all other companies that have either filed for admission to public trading or are a subsidiary of a parent which prepares its consolidated accounts in accordance with IFRS.

24. Other (smaller) commercial banks and credit cooperatives use Polish Accounting Standards (PAS), which implement relevant EU Accounting Directives. According to the KNF resolutions, all commercial banks and credit cooperatives are subject to Pillar 3 disclosure requirements.

Mechanisms for providing an appropriate level of systemic protection (or public safety net)

25. The framework for domestic information sharing and contingency planning has been strengthened. A Financial Stability Committee (FSC), chaired by the MoF and including the NBP governor and the KNF chairman, was recently established by the Act on the Financial Stability Committee of November 7, 2008. The FSC permanently monitors the condition of the Polish financial market, particularly considering risks to financial stability. Typically, the FSC meets every six months but met more frequently during the global financial crisis. The membership with the FSC could be enlarged in the future with the President of the Management Board of the Bank Guarantee Fund.

26. The weak resolution framework is a major gap in Poland’s legal system, as bank insolvencies are treated as any other corporate bankruptcies under the Commercial Code. Chapter 12 of the Banking Act (“Bank Rehabilitation Proceedings and Bankruptcies”) regulates bank rehabilitation proceedings, liquidations, and takeovers. The remedial and resolution process has four distinctive stages with progressive escalation, including: (1) early remedial and rehabilitation; (2) provisional administration; (3) resolution by take-over; and (4) liquidation (see CP 23).

27. The disposal of a troubled bank's assets, its takeover or liquidation, cannot be commenced prior to the court hearing the plaintiff's petition, which could cause considerable delay for depositors and undermine public confidence in the Polish banking system. As featured in Article 147 (3), notice provisions exist for the appointment of a trustee, administrator or liquidator of a domestic bank operating in an EU member state, and likewise, the KNF recognizes through Article 157 the liquidation measures taken against a foreign domiciled member state bank subsidiary or branch operating in Poland. However, there are no such provisions in place for banks operating in Poland domiciled outside the European Union.

28. Poland established an independent Bank Guarantee Fund (BGF) in 1995 as a key pillar of its financial safety net. Two sets of safety-net-related services are provided by the BGF: (i) deposit insurance for commercial and cooperative banks; and (ii) open bank assistance to commercial banks and cooperative banks. All commercial and cooperative banks participate in the deposit insurance regime. Deposit insurance coverage of up to €100,000 equivalent is available for natural persons and legal entity depositors' accounts. The BGF is prepared to return deposits in case of a bank failure in a month’s time. The NBP is authorized (Article 43 of the Act of the NBP) to grant loans to the BGF under stipulated conditions. Since its formation, the BGF has made payouts of insured depositors at 94 banks (5 commercial banks and 89 cooperative banks) to more than 300,000 depositors. The BGF collects annually two type of ex ante fees, reflecting banks’ capital and ex post reflecting the deposit base insured. As of end-2010, the BGF had accumulated reserves of about ZL 7 billion, equivalent to 3 percent of insured deposits in the banking sector, making it one of the best funded deposit systems in the European Union. Cooperative banks have a separate small fund with accumulated resources of ZL 123 million. The BGF is a member of the European Forum of Deposit Insurers (EFDI) and the International Association of Deposit Insurers (IADI).

Objectives, Independence, Powers, Transparency, and Cooperation (CP 1)

29. The operational and financial independence of the KNF is subject to significant constraints. Indeed, there is no legal source for the independence of the KNF, as the Financial Market Supervision Act (FMSA) does not stipulate explicitly the independence of the agency. Moreover, there are limitations in the KNF powers to set its own budget, amend its statute (including divisions, departments, and so-called separate positions) or add key staff. The KNF annual operating budget, organizational structure, and key staffing decisions are all subject to the approval of the prime minister.

30. There are important legal limitations regarding the regulatory powers of the KNF. The Banking Act takes a prescriptive approach by authorizing the KNF to issue binding resolutions only in the specific areas defined in the law, rather than giving the supervisor ample and more flexible powers to discharge its responsibilities. In other areas, the KNF can only provide recommendations for best practices in the banks’ activities, which are not strictly obligatory for the banks. Moreover, the MoF can issue binding ordinances regulating certain aspects of banks’ activities. The assessors note that the nonmandatory nature of the KNF recommendations undermines the enforcement capacity of the supervisor, may offer means for banks to escape implementing sound prudential standards, and could result in an uneven playing field. Therefore, the law should be amended to fully empower the KNF to issue binding resolutions more broadly, for example, with the purpose of ensuring the safety and the soundness of the banking sector. In the longer term, it is also recommended that a comprehensive review of the regulatory powers of the KNF be undertaken.

31. There are gaps in the legal framework providing for supervisors’ protection. More legal clarity is recommended regarding the protection against potential administrative responsibilities and economic liabilities resulting from actions or omissions by the four non-executive commissioners, who are not KNF employees, when discharging their duties in good faith. Also, the Act should specifically state that the legal protection provided KNF’s commissioners and employees is not limited in time (i.e., provides protection beyond the termination of appointment or employment). Legal protection should also be granted to the persons designated by the KNF to act as trustees or receivers in bank rehabilitation procedures, according to the provisions of Chapter 12 of the Banking Act. Also, at the minimum, it is necessary that protection against incurring the costs of defending the actions of supervisors is stated clearly (at least at the level of internal procedures), including the financing of any expenses since the start of the legal proceedings.

32. The non-executive members of the Commission have full-time senior positions in their respective organizations, while they are simultaneously faced with a heavy workload as KNF commissioners. It is questionable if the non-executive members can properly discharge their KNF duties, as industry participants point to long delays in approvals requiring the Commission to vote. Prior and sitting commissioners concur with the difficulty to discharge their obligations in a part-time capacity. Moreover, there is no fixed term for the appointment of the non-executive commissioners. The KNF Commission has been characterized by a high level of turnover among its members since its establishment. More precisely, more than 10 non-executive members have been dismissed from their post since; in one case, after only just four weeks. The dismissal and appointment of members of the Commission is also, in some instances, aligned with the political cycle. Such high turnovers combined with the heavy workload of the position have undoubtedly affected the effectiveness of the KNF. Moreover, the position of vice chairman has also been vacant for almost two years, as the prime minister has yet to approve a replacement proposed by KNF’s chairman more than a year ago.

33. Although, strictu sensu the non-executive members do not represent their ministries or other government bodies, it is difficult to conceive how this can be achieved in practice. The external commissioners serve in their personal capacity representing the principal referred in the Act to occupy such position (ministers of finance and labor, NBP governor, and the President of the Republic). In addition, the external KNF commissioners cannot discuss or seek the counsel of colleagues within their respective offices due to strict confidentiality clauses in the Act. The latter may inhibit their ability to provide informed inputs to the KNF and prevents any delegation of work to third parties.

34. Asymmetries in the access of information between external and internal commissioners of the KNF and ambiguities in their decision-making powers lead to diffused responsibilities. On the one hand, external commissioners do not take part in decision making relating to KNF’s internal organization, budget, and strategy. On the other hand, they remain accountable for the consequences of these decisions. For example, the document “Summary for the Management,” which includes the individual supervisory risk assessments for banks is prepared only for the chairman of the KNF and is not distributed to the external commissioners. The latter document is, however, presented to the NBP. The “Quarterly Information on the Situations of Banks,” a document which contains broad information on the whole banking sector, including information on individual banks, is presented to all the commissioners. Thus, it is unclear how external members are supposed to take responsibility for the supervisory activities if they do not receive regular access to all relevant information.

35. The formal requirement for the prime minister’s approval of changes in the organization hampers managerial flexibility. The KNF’s current operational and organizational structure is complex and fragmented, with many departments involved in banking supervision, resulting in diffused and/or overlapping responsibilities.

Licensing and Structure (CPs 2–5)

36. Essential criteria for assessing bank licensing applications are generally in place, but improvements in the fit-and-proper assessments for banks’ supervisory and management Board members are crucial. The KNF does not assess the fitness and propriety of the members of supervisory Boards or the head of the banks’ internal audit departments. Moreover, the KNF does not have the power to remove supervisory Board members. There is also asymmetry in the assessment and approval processes for the members of the management Board. The legal requirements should require banks to demonstrate, at least, collective expertise of the management Board for all risk areas and allow the KNF to apply proportionate individual requirements of competence and experience, depending on the specific management functions assigned. The regulatory requirements for risk management and corporate governance in banks should provide more detail and be better aligned with international best practice.

37. The Banking Act clearly defines permissible activities of banks; however, there are no restrictions regarding the banks’ participations in nonfinancial entities. Furthermore, credit unions as retail deposit-taking institutions are not subject to KNF supervision.

38. Major financial and nonfinancial acquisitions by domestic banks require only 30-day ex ante notification to the KNF, while establishment of banks’ subsidiary branches in third countries requires explicit approval. In principle, the KNF can oppose a bank’s acquisition in a third country, but in view of the limited time and the lack of clear criteria for approval, it is doubtful if, in practice, it has sufficient time to thoroughly assess the application and oppose it. Although the bank subsidiary acquisitions of domestic banks in third countries—mainly Ukraine—may at first sight appear immaterial in terms of assets, the reputational risks for the Polish banks cannot be ignored. A comprehensive and structured supervisory assessment methodology to consider the quality of supervision in a third country and its own ability to exercise supervision on a consolidated basis should be developed.

Prudential Regulation and Requirements (CPs 6–18)

39. The prudential requirements for monitoring risks in the banking activity are generally compliant with the BCP requirements. The prudential standards are comprehensive and often very detailed and, importantly, have kept pace with risks emerging in the banking sector. Nevertheless, the assessors note that it is essential that the KNF regularly verifies the compliance with such requirements more frequently through onsite inspections.

40. The capital adequacy framework is compliant with the relevant CP, and Basel II has been implemented since 2008. Banks generally display high CARs (with average CAR for the banking sector at around 14 percent), with Tier 1 capital representing more than 90 percent of the total capital. The KNF is to be commended for the early alignment of the risk weights for FX residential loans under the standardized approach to the Polish environment. While the KNF has requested banks to raise additional capital where needed, the assessors recommend that the KNF introduce an articulated methodology for determining the need, if any, for additional capital requirements under Pillar 2.

41. Prudential regulations in the areas of credit risk are generally adequate, with relatively minor shortcomings noted in the areas of exposures to related parties. The KNF has actively tightened recommendations regarding lending standards in particularly risky areas (mortgage lending and consumer credit) and the onsite verification of compliance is thorough, although relatively infrequent, given the long supervisory cycle. The legal provisions in respect of arm’s-length credit decisions are comprehensive and detailed. Nevertheless, the definition of related parties should be expanded to include close relatives or affiliations of the persons identified in Articles 79, 79a, and 79b of the Banking Act. Also, a more general ban for Board members with conflicts of interest to not take part in credit decisions should be envisaged. Banks are also required to incorporate country and transfer risks in their risk-management framework, while provisions for such risks are set by individual institutions at levels subsequently judged by external auditors and the KNF.

42. The supervisory framework for market risk is in line with the requirements of the relevant CP. The KNF Resolution 76/2008 introduces a separation of the trading book from the banking book. Banks are required to perform stress tests to determine the banks’ response to a sudden and unexpected change in interest rates by 200 basis points and the KNF is able to demand an increase of capital in cases where the economic value of an institution declines by more than 20 percent of own funds as a result of applying this shock.

43. The liquidity framework is comprehensive and provides a good mix of qualitative and quantitative requirements. Poland is advanced in implementing a rigorous framework for monitoring short term and long term liquidity, which has been in place since 2007. The assessors note that there is a great degree of reliance on the commitments made by foreign parents of local banks to provide liquidity support when needed. In this regard, the KNF could ask banks to take into consideration more closely situations of parent banks’ inability to fulfill their funding commitments as part of the liquidity contingency plans. Recent impact studies performed by the NBP and KNF determined that most banks will be compliant with the liquidity coverage ratio requirements under the proposed Basel III framework, while compliance with the net stable funding ratio will depend on the further calibration of the indicator.

44. The assessors note shortcomings related to the operational risk framework. First, banks can shift freely from the basic indicator approach (simple capital charge calculation and low-risk sensitivity) to the standardized approach (intermediate approach, more risk-sensitive and more intense in terms of organization of the risk-management framework), which can generate a capital relief effect of which the KNF learns post factum, after receiving the periodical prudential returns. The assessors recommend the introduction of a supervisory procedure for evaluating the capacity of banks to meet the criteria for the standardized approach implementation. Moreover, more specificity is needed in terms of the requirements for IT audit in banks, in particular by setting more clearly their scope, frequency, and minimum set of requirements. Finally, the compliance function should be more specifically addressed in the regulations.

45. The internal control and audit requirements are generally adequate, but the assessors recommend that KNF include a legal or regulatory obligation that calls for the banks to notify the supervisor as soon as they become aware of any material information which may negatively affect the fitness and propriety of a Board member or a member of senior management. Moreover, it is recommended that the KNF regularly exchange views on the scope, quality, and independence of banks’ internal audit function with the external auditors during tri-partite meetings.

46. The assessors note that the risk-management framework should be strengthened in both the areas of regulatory requirements and the KNF’s approach to evaluating risk management in banks. First, the existing risk-management regulations should become more explicit and comprehensive for many risk categories (e.g., concentration risk, securitization risk, residual risk, and market risk, etc.) and should offer more clarity regarding the supervisory expectations for the oversight functions, risk management, and internal control, so as to ensure banks’ governance is aligned with their complexity and riskiness. Moreover, the KNF’s approach to evaluating risk management practices in banks should be enhanced through a more balanced supervisory approach. Currently, the assessors note the supervisory approach relies rather heavily on the offsite monitoring. Finally, it is recommended that the KNF develops internal guidelines setting supervisory expectations for risk management practices in banks according to the bank’s size and risk profile. This could assist in aligning consistency in supervisory judgment across the agency.

47. The anti-money laundering framework covers most requirements in the relevant CP, but remains to be tested, given relatively new legal provisions and institutional setup. AML/CFT oversight functions are shared between the GIFI at the MoF and the KNF. Customer identification, enhanced due-diligence procedures, and other relevant financial integrity requirements are in place. Nonetheless, the legislation should be improved to require banks to report to the KNF any suspicious activities and incidents of fraud when they are material to their safety, soundness, and reputation, and also with respect to correspondent banks and foreign operations of local banks. The assessors also recommend enhancing the KNF resources for AML/CFT surveillance.

Methods of Ongoing Banking Supervision (CPs 19–21)

48. The assessors consider that the KNF has well-developed onsite and offsite supervisory techniques; however, they note important shortcomings regarding the length of the supervisory cycle and the mix between offsite and onsite supervision. Assessors recommend that the offsite and onsite functions be viewed as complementary instead of independent sources, and that the KNF seek to fully exploit synergies to ensure closer monitoring and a timely intervention in banks.

49. The KNF's supervisory cycle for commercial banks ranges from two to four years and the inspections are extended, sometimes lasting up to two months. Although the KNF aims to allocate its resources and set supervisory priorities on a risk-based basis, in terms of setting the length of the supervisory cycle, it remains largely compliance-driven when setting the scope of the inspections. At minimum, the KNF should have the resources to inspect the 10 largest banks, as well as particularly risky areas in the remaining banks, on an annual basis. To achieve this objective, the onsite resources of the KNF need to be significantly strengthened.

50. As a result of the long supervisory cycle, the KNF's approach to evaluating risk management in banks is heavily reliant on the offsite monitoring process, which may lead to delays in the identification of emerging weaknesses in banks. The mission found that KNF's supervisory processes do not focus on obtaining a full understanding of the business model of the institution, including strategies, commercial objectives, significant activities, risk areas, and risk-management processes and capabilities. The supervisory approach also makes little use of targeted examinations of risk management to complement or verify information obtained through offsite reporting. The KNF approach to monitoring risk-management practices in banks could be enhanced through a better balanced mix of offsite and onsite instruments (in particular, targeted onsite inspections) and a stronger involvement in the onsite monitoring of the implementation of recommendations, especially in cases where the risk-management processes of a bank need improvement.

51. More frequent communication with supervisory Board members, external and internal auditors, as well as a more intense dialogue with home supervisors, would give the KNF additional insights into the changing risk profile of banks between inspections. Frequent interaction with the supervisory Board, as well as regular individual meetings with the internal and external auditors to discuss issues of common interest and to serve as validation of findings, are essential components of the supervisory process. Given the prominence of offsite supervision and the heavy reliance on foreign parent funding in the financial system, the KNF should also ensure regular dialogue with home supervisors. While taking part in supervisory colleges is important, it should be supplemented, where possible, by the participation in joint inspections and the integration of home supervisory findings and risk assessments in the supervisory plan.

52. The assessors did not encounter strong evidence of rigorous, timely, and forward-looking onsite/offsite coordination processes. It is not clear if the current ad hoc coordination processes could withstand the test in more stressful times. Supervisory judgments made by the offsite department should be accurate, timely, and robust enough to ensure early supervisory intervention aligned with the risk profile of the bank. Due to the long inspection cycle and the backward-looking nature of the prudential reports, it is possible that the KNF may not be able to identify and address weaknesses and problems before they become serious threats to the health of the institutions and, potentially, the financial system.

53. While the new Supervisory Review and Evaluation Process (SREP) methodology is a step toward a more risk-based approach, it poses the risk of overreliance on a bank's, information, procedures, and policies. Despite its sophistication and volume, the SREP remains a self-assessment with no external verification or management Board level sign-offs within the supervised institutions. Very close coordination between onsite and offsite resources, as well as the active involvement of the KNF's most experienced staff with strong risk-management expertise, will be required before it can become an effective supervisory tool. Cumulatively, the largely ad hoc coordination processes and physical separation between the Inspection Department and the Banking Supervision Department, as well as the limited resources, have the potential to seriously compromise successful implementation. The new SREP methodology also provides for a late intervention through onsite inspections (i.e., when the bank is considered “in crisis”); such a reactive approach is not in line with a proactive supervisory stance.

54. There is a high percentage of supervisory resources allocated to areas deemed to be of lower systemic priority and additional pressure on supervisory resources is likely to arise in the near term. In 2010, 40 percent of onsite resources were allocated to the supervision of cooperative banks, which represent about 6 percent of total bank assets. This observation raises concerns regarding the effectiveness of the supervisory process in terms of an adequate risk-based allocation of resources. The KNF will also have to cope with additional pressure on supervisory resources as the scope of the oversight may be widened and the new regulations will multiply (credit unions, Basel III). Also, the intensity and sophistication of supervisory methods will be increased (i.e., the introduction of the SREP annual review for all banks). The assessors recommend that KNF conduct an assessment of supervisory needs versus resources and align the intensity of supervision to risk profiles. The KNF’s plan to delegate some supervisory responsibilities to the banks heading the networks of credit cooperatives is welcome, but the agency should be satisfied that their oversight capacities are adequate.

55. The assessors note that the reporting framework is comprehensive and meets the relevant CP’s requirements.

Accounting and Disclosure (CP 22)

56. The assessors are of the opinion that the accounting and disclosure practices in Poland are generally compliant with the relevant BCP. While, at present, all commercial banks are requested to prepare IFRS consolidated financial statements and the banks publicly listed and other banks prepare individual IFRS financial standards, the assessors recommend further harmonization by introducing IFRS standards for the individual financial statements of all commercial banks. The credit cooperatives could continue to use the PAS.

Corrective and Remedial Powers of Supervisors (CP 23)

57. The bank resolution framework in Poland is underdeveloped and the number of enforcement actions is relatively low. The liquidation of a bank is to be carried out in accordance with the enterprise Bankruptcy Law and the Commercial Code, which is not designed to account for the specific characteristics of deposit-taking institutions. Moreover, the number of KNF enforcement actions—only five—in the last year is rather low compared to the total number of banks. Similarly, only one cautioning action was linked to the implementation of risk-management practices and policies.

Consolidated and Cross-Border Banking Supervision (CPs 24–25)

58. Arrangements are in place for effective consolidated supervision, including adequate powers to receive adequate information on group structures and to impose limitations on their activities. However, the assessors note that the supervisory practices for performing consolidated supervision should be enhanced in a number of areas. The KNF should further align supervisory methodologies across sectors to enable more coordination and consistency in the supervisory actions across groups. Also, the KNF should develop a framework for assessing contagion risks stemming from nonfinancial entities which are part of some banking groups. The supervision of foreign activities of domestic banks should consider the full range of risks, including reputational, that such entities can pose on parent banks. The KNF should develop guidelines for assessing the equivalence of supervisory standards in foreign countries.

59. Finally, the cross-border cooperation and exchange of information with foreign supervisory authorities is adequate. The KNF participates in supervisory colleges and appropriate Memoranda of Understanding are in place. Given the predominantly foreign ownership in the banking sector, the assessors recommend that the supervisor take a more proactive stance with respect to the supervisory activities of home supervisors, including through the latter’s participation in onsite inspections. Such an approach would enable a better overall understanding of the group situation and would enrich the information necessary for performing supervision on a sub-consolidated basis.

Table 1 offers a principle-by-principle summary of the assessment results.

Table 1.

Republic of Poland: Summary of Compliance with the Basel Core Principles

Table 1.

Republic of Poland: Summary of Compliance with the Basel Core Principles

Core Principle	Grading	Comments
1. Objectives, Autonomy, Powers, and Resources	MNC	See below.
1.1 Responsibilities and Objectives	LC	The KNF responsibilities and objectives are clearly stated in the legal framework. The laws and regulations are updated as necessary; however, the Banking Act needs to be more closely aligned to relevant EU directives. The KNF should take stock of the existing recommendations and bring them in line with current market developments and supervisory expectations. Some efforts in this area are already ongoing.
1.2 Independence, Accountability, Transparency	MNC	The operational and financial independence of the KNF is subject to significant constraint as the authority’s annual operating budget, organizational structure, and key staffing decisions are all subject to approval of the prime minister, which hampers the managerial flexibility. The appointment and dismissal for some of the external commissioners is aligned with the political cycle, and the agency has been confronted with a high turnover since its inception. Moreover, the external commissioners have full-time senior positions in their respective organizations while they are faced with a heavy workload at the KNF. Lastly, asymmetries in the information of external and internal commissioners of the KNF and ambiguities in their decision-making powers lead to diffused responsibilities. Moving to a system with full-time, remunerated external commissioners, appointed for cascading fixed terms, would improve the KNF’s governance.
1.3 Legal Framework	MNC	The KNF can issue binding resolutions only in the areas explicitly mentioned in the Banking Act. This legal shortcoming is resolved in practice through the issuance of MoF ordinances or by KNF recommendations, which state nonbinding best practices. The nonmandatory nature of the KNF recommendations weakens the enforcement capacity of the supervisor, may offer escape-ways for banks in implementing sound prudential standards, and thus result in an uneven application. Some banks have raised concerns regarding the uniform application of KNF recommendations across supervised institutions. The law should be amended to fully empower the KNF to issue binding resolutions more broadly, for example, with the purpose of ensuring the safety and soundness of the banking sector. Moreover, the KNF should move to a system of fully enforceable prudential standards in the form of binding resolutions. In the longer term, it is recommended that the ambiguities regarding the regulatory powers of the KNF (which is not a source of law according to the Polish Constitution) are more fundamentally analyzed and addressed. If the current arrangement for sharing regulatory responsibilities between the KNF and MoF is to be maintained for a transitional period, the KNF’s influence in the design and calibration of MoF ordinances and the independence of the regulatory process from political and industry interference should be secured. Moreover, a clear division of tasks between MoF and KNF in identifying and promoting relevant regulations should be established.
1.4 Legal Powers	LC	The KNF lacks the power to suspend members of the banks’ supervisory Boards.
1.5 Legal Protection	LC	The legal protection for the KNF staff has shortcomings in a number of areas. The law should specifically state that the legal protection to KNF’s Board members and employees extends beyond their termination of their appointment or employment. More legal clarity is recommended regarding the legal protection of the four non-executive members of the Commission. Legal protection should also be extended to the persons designated by KNF to act as trustees or receivers in bank rehabilitation proceedings. Finally, at the minimum, it is necessary that the protection for the costs of defending the actions of supervisors is stated clearly (preferably in the law or at least at the level of internal procedures), including the financing of any expenses from the start of the legal proceedings.
1.6 Cooperation	LC	It is unclear how the “Poland’s economic interest” provision is to be interpreted in practice as the KNF has not established criteria to assess if, and when, information sharing would impair the economic interests of Poland.
2. Permissible Activities	LC	The permissible activities for banks are clearly defined in the legislation. As a key risk mitigant, the legal framework should be amended to limit the acquisition of real estate property to the purpose of conducting banking activities or for carrying out other activities, which can contribute to the good performance of the banks’ operations. In addition, the law should establish limits for banks’ investments in nonfinancial entities (EC 5). The credit unions, which are retail deposit taking institutions and use the name “bank” (Polish translation “kasa”) should be brought under the KNF supervision.
3. Licensing Criteria	MNC	The licensing requirements are broadly in place and the licensing process is thorough; however, some major shortcomings regarding the governance framework are noted: - No fit-and-proper criteria for members of the supervisory Board. The fit-and-proper assessment for the members of the supervisory Board should become an integral part of the ongoing assessment of the banks’ risk management. - Clear fit-and-proper criteria for all the members of the management Board and the head of the internal audit should be established. - The legislation should state the obligation to present a receipt of an assurance of the absence of potential conflicts of interest from all members of the supervisory and management Boards. The legislation needs to require a systematic analysis of the direct and indirect shareholders, natural or legal persons that have qualifying holdings in the bank or of the close links existing between the bank and other natural and legal persons. Moreover, the definition of “close links” should be expanded. Finally, a more specific and coherent licensing framework (in a form of a KNF resolution or a licensing manual) is recommended to enhance understanding of supervisory requirements and a more uniform and structured approach.
4. Transfer of Significant Ownership	C	The law should be amended to require banks to notify KNF as soon as they become aware of any material information, which may negatively affect the suitability of a major shareholder.
5. Major Acquisitions	LC	Major acquisitions by domestic banks require only one month’s prior notification to the KNF. In view of the limited time for assessment of the notification and of the lack of clear criteria for approval, it is unlikely the KNF would have sufficient time in practice to thoroughly assess the acquisition. The Banking Act does not restrict individual holdings in nonfinancial entities as a percentage of capital as long as they do not exceed the single counterparty exposure limits (see CP 10). The authorities should develop a rigorous supervisory methodology for the assessment of contagion risk and restrict individual holdings to 15 percent of capital and aggregate qualifying holdings in nonbanking activities to 60 percent of capital in accordance with the EU Directives. Moreover, the Banking Act or the regulations should specify the criteria for the authorization of cross-border activities of domestic banks by the KNF. Furthermore, the KNF should develop a comprehensive and structured supervisory assessment methodology to consider the quality of supervision in a third country and its own ability to exercise supervision on a consolidated basis.
6. Capital Adequacy	C	The KNF is to be commended for the early alignment of the risk weights for FX residential mortgage loans under the standardized approach to the Polish environment. The assessors note that more progress would be desirable in terms of developing a methodology to set risk-based capital requirements based on the individual risk profile of the bank, i.e., drawing from the SREP analysis.
7. Risk Management Process	LC	The framework for the risk-management process is generally adequate; however, the assessors note that the following areas should be strengthened: - Some difficult to measure risks, like strategic and business risks, need to be more explicitly addressed in the risk-management framework. - The existing regulations should ensure that banks’ complexity and riskiness are appropriately aligned with internal governance arrangements. - A more balanced mix of offsite and onsite instruments (i.e., targeted onsite inspections) and a stronger involvement of the onsite monitoring of follow-up actions are required, as, at present, the KNF’s approach to evaluating risk management in banks is heavily reliant on the offsite monitoring process. - It would be useful if KNF develop internal guidelines setting supervisory expectations for risk-management practices in banks according to the bank’s size and risk profile. This could assist in aligning consistency in supervisory judgment across the agency. - The KNF should strengthen the dialogue with the members ofthe supervisory Board.
8. Credit Risk	C	The legal provisions in respect of arm’s length credit decisions are comprehensive and detailed, but legal provisions regarding exposures to related parties need to be strengthened (see CP 11) and a more general ban for Board members with conflicts of interest to not take part in credit decisions should be considered.
9. Problem Assets, Provisions and Reserves	C	The SREP process will provide additional information to KNF for evaluating provisioning and reserving policies and processes. It remains crucial, however, that frequent onsite inspections are performed to ensure that the policies and procedures are properly implemented.
10. Large Exposure Limits	C	No comments.
11. Exposures to Related Parties	LC	The legislation should be amended to include in the range of related parties close family members of the bank’s major shareholders, members of the management and supervisory Board, persons occupying managerial positions in the bank, or corresponding persons in affiliated companies. The legal provisions regarding the prevention of conflicts of interest should also be enhanced.
12. Country and Transfer Risks	C	No comments.
13. Market Risks	C	Although the KNF has introduced separation between the trading and the banking book in Resolution 76/2008, it is recommended that separation be more apparent in the other regulations and recommendations of the KNF.
14. Liquidity Risk	C	The regulatory framework for liquidity management is generally adequate, providing a good mix of qualitative and quantitative requirements. Closer attention should be paid to situations of inability of parent banks to fulfill their funding commitments, which should be considered as part of the banks’ liquidity contingency plans.
15. Operational Risk	LC	While separate criteria for the use of the three methods for calculating capital requirements for operational risk are provided in the KNF Resolution, the discretion left to banks in freely using STA method may potentially lead to regulatory arbitrage (through a capital relief effect). The KNF should introduce a supervisory procedure for evaluating the capacity of banks to meet the enhanced risk-management criteria for the STA implementation and should be able to fully control transition between the two simpler approaches. The regulations should impose more specific requirements regarding the IT audit in banks, in particular regarding its scope, frequency, and minimum requirements. The compliance function should be more specifically addressed in the regulations (see CP 17).
16. Interest Rate Risk in the Banking Book	C	No comments.
17. Internal Control and Audit	LC	It is recommended to introduce a legal or regulatory obligation that calls for the banks to notify the supervisor as soon as they become aware of any material information which may negatively affect the fitness and propriety of a Board member or a member of senior management. The minimum requirements for the compliance function fall short of the international best practice guidance (BCBS 2005 principles for Compliance and the compliance function in banks), particularly in the areas of staffing, independence, access to information, conflicts of interest and seniority of head of the compliance officer. The KNF should perform a fit-and-proper assessment of the head of internal audit and impose a notification requirement on commercial banks for his/her dismissal. The KNF should also regularly exchange views on the quality and independence of internal audit with the external auditor during tri partite meetings.
18. Abuse of Financial Services	LC	The legal framework for AML/CFT is generally adequate and the assessors note the good cooperation between GIFI and KNF in sharing their AML/CFT oversight functions. However, given the relatively new legislation, the effectiveness of the AML/CFT supervision and the integration of the AML/CFT risk management into the banks’ general risk-management framework are yet to be tested. Improvements should be sought in a number of areas: - The law should require banks and external auditors to report to KNF any suspicious activities and incidents of fraud when they are material to their safety, soundness or reputation. - The law should require that KNF is notified in cases where an investigation has been initiated in a bank by competent judicial authorities. - The law should specifically require banks the immediate termination of a relationship with a correspondent bank if subsequently found that correspondent bank does not have adequate controls against criminal activities or is not effectively supervised for AML/CFT by the relevant authorities. - The law should specifically require the escalation of decisions in cases of high risk-accounts to senior management level. - The law should require banks to notify KNF when their foreign offices are unable to apply adequate AML/CFT standards. Finally, the assessors ascertain that the KNF could consider enhancing its resources for AML/CFT surveillance.
19. Supervisory Approach	LC	The KNF has a well developed offsite supervisory system, but the assessors note that further improvements are needed in the following areas: The quality of the quarterly Executive Summaries (ES) could be further improved and the work plan flowing from the ES would benefit from a more detailed description of the specific risks and areas for attention. The new SREP methodology is a step forward in a more risk-based direction for the KNF. Nevertheless the assessors express the following concerns: - Given the intensity of the SREP process, it is doubtful that the KNF can effectively and efficiently handle the information received with the present supervisory resources. - Despite its sophistication and volume, SREP remains a self assessment completed by the banks. A critical review of the SREP is a complex task that requires good risk-management skills as well as sound supervisory judgment. It should therefore be performed and overseen by the KNF’s experienced supervisors. Moreover, close coordination and cooperation between the onsite and offsite division is a crucial factor crucial for the assessment of the SREP. - The KNF should require sign off by the management Board, the supervisory Board or an independent review of the bank’s responses to SREP for quality assurance. The SREP methodology should not been seen as a substitute for onsite inspections or an instrument to further reduce onsite resources. Although there is clear evidence of coordination and consultation between onsite and offsite, it remains unclear to the assessors where the ultimate responsibility for the supervisory methodology and processes (onsite and offsite) sits and how the process of changing and updating the methodology are project managed.
20. Supervisory Techniques	MNC	Assessors consider that KNF has well developed onsite supervisory techniques; however, note important shortcomings regarding the length of the supervisory cycle and the mix between offsite and onsite supervision. The inspection cycle (two to four years) is much too long and not aligned to international best practices. At the minimum, KNF should be able to inspect the largest banks on an annual basis and to deploy adequate resources for a closer monitoring of riskier banks. A closer involvement of onsite supervisors in the follow up with post-examination recommendations and a larger number of targeted inspections would be necessary. The assessors note that under the new offsite BION (SREP) supervisory methodology, the onsite inspections are required only when the bank’s condition is deemed to be “bad” or “in crisis.” Such approach is very reactive and may not offer sufficient time for effective remedial action. Assessors recommend that the offsite and onsite functions are viewed as complementary and KNF fully exploits synergies between the two so as to ensure a closer monitoring and a timely intervention in banks. The assessors reviewed some examination reports and ascertain that the analysis is thorough and comprehensive. The assessors note that post-examination recommendations should be more clearly prioritized. Assessors recommend that KNF should engage more actively in a dialogue with the supervisory Board members, and with external and internal auditors. KNF could also consider implementing the good practice of other supervisors’ “tri-partite” meetings. Finally, the large amount of supervisory resources for the cooperative banks compared to the relative small importance of the sector coupled with inadequate intensity of supervisory oversight for commercial banks raises concerns regarding the effectiveness of the supervisory process.
21. Supervisory Reporting	C	Assessors note that the reporting framework for banks is adequate; however, the KNF could further strengthen it by developing a systematic program for periodic verification of supervisory returns.
22. Accounting and Disclosure	LC	The framework for accounting and disclosure is generally adequate, but improvements should be sought in the following areas: - KNF be forceful in ensuring audit quality by actively challenging external auditors and the bank’s management when understatement of provisions is identified; - KNF introduce trilateral meetings, at least once a year, with the internal auditor and external auditors to discuss issues of common interest and to serve as validation and consistent communication; - IFRS become mandatory for the solo accounts of all commercial banks; and - KNF introduce specific banking expertise and experience requirements for auditors of commercial banks.
23. Corrective & Remedial Powers of Supervisors	LC	The requirement to caution a bank should be removed from the legislation. The KNF cannot suspend a member of the supervisory Board (see CP3). The bank resolution framework is inadequate, as bank insolvencies are treated as any other corporate bankruptcies under the Commercial Code. The disposal of a trouble bank’s assets, its takeover or liquidation cannot be commenced prior to the court hearing the plaintiff’s petition, which could cause considerable delay for depositors and undermine public confidence in the Polish banking system. Finally, the assessors also recommend that KNF establishes an internal methodology establishing well defined “red flags,” firmly assigned responsibilities, and a clear ladder for proportionate supervisory intervention.
		24. Consolidated Supervision	LC	The legal framework for performing consolidated supervision is generally adequate; however, improvements are needed in the following areas: - empowering the KNF to oppose ex-ante to major acquisitions made by banks; - specifying limitations for holdings in nonfinancial entities; and - providing fit-and-proper criteria for senior management of bank’s parent companies. Further improvements are also needed in the supervisory practices for performing consolidated supervision. The supervisory methodologies across sectors (i.e., banking, insurance) should be further aligned to enable a more coordination and consistency in the supervisory actions across groups. A framework for assessing contagion risks stemming from nonfinancial entities part of banking groups should be also developed. Finally, the agency should take a more intrusive stance in respect to the supervision of foreign activities of domestic banks and consider more closely a full range of risks (i.e., reputational) that such entities can pose on parent banks. The effectiveness of performing effective consolidated supervision over financial holding companies is yet to be tested and the assessors recommend that the KNF maintain a close understanding and oversight over all financial and nonfinancial entities of the groups.
25. Home-Host Relationships	LC	There is no legal requirement for the home supervisor of banks established in Poland to practice consolidated supervision. The KNF should take a more proactive approach when foreign home supervisors inspect their subsidiaries. The assessors believe that the authorities as a home supervisor place too much emphasis on the quantitative indicators of the materiality of the group (see CP 24).

View Table

Table 1.

Republic of Poland: Summary of Compliance with the Basel Core Principles

Core Principle	Grading	Comments
1. Objectives, Autonomy, Powers, and Resources	MNC	See below.
1.1 Responsibilities and Objectives	LC	The KNF responsibilities and objectives are clearly stated in the legal framework. The laws and regulations are updated as necessary; however, the Banking Act needs to be more closely aligned to relevant EU directives. The KNF should take stock of the existing recommendations and bring them in line with current market developments and supervisory expectations. Some efforts in this area are already ongoing.
1.2 Independence, Accountability, Transparency	MNC	The operational and financial independence of the KNF is subject to significant constraint as the authority’s annual operating budget, organizational structure, and key staffing decisions are all subject to approval of the prime minister, which hampers the managerial flexibility. The appointment and dismissal for some of the external commissioners is aligned with the political cycle, and the agency has been confronted with a high turnover since its inception. Moreover, the external commissioners have full-time senior positions in their respective organizations while they are faced with a heavy workload at the KNF. Lastly, asymmetries in the information of external and internal commissioners of the KNF and ambiguities in their decision-making powers lead to diffused responsibilities. Moving to a system with full-time, remunerated external commissioners, appointed for cascading fixed terms, would improve the KNF’s governance.
1.3 Legal Framework	MNC	The KNF can issue binding resolutions only in the areas explicitly mentioned in the Banking Act. This legal shortcoming is resolved in practice through the issuance of MoF ordinances or by KNF recommendations, which state nonbinding best practices. The nonmandatory nature of the KNF recommendations weakens the enforcement capacity of the supervisor, may offer escape-ways for banks in implementing sound prudential standards, and thus result in an uneven application. Some banks have raised concerns regarding the uniform application of KNF recommendations across supervised institutions. The law should be amended to fully empower the KNF to issue binding resolutions more broadly, for example, with the purpose of ensuring the safety and soundness of the banking sector. Moreover, the KNF should move to a system of fully enforceable prudential standards in the form of binding resolutions. In the longer term, it is recommended that the ambiguities regarding the regulatory powers of the KNF (which is not a source of law according to the Polish Constitution) are more fundamentally analyzed and addressed. If the current arrangement for sharing regulatory responsibilities between the KNF and MoF is to be maintained for a transitional period, the KNF’s influence in the design and calibration of MoF ordinances and the independence of the regulatory process from political and industry interference should be secured. Moreover, a clear division of tasks between MoF and KNF in identifying and promoting relevant regulations should be established.
1.4 Legal Powers	LC	The KNF lacks the power to suspend members of the banks’ supervisory Boards.
1.5 Legal Protection	LC	The legal protection for the KNF staff has shortcomings in a number of areas. The law should specifically state that the legal protection to KNF’s Board members and employees extends beyond their termination of their appointment or employment. More legal clarity is recommended regarding the legal protection of the four non-executive members of the Commission. Legal protection should also be extended to the persons designated by KNF to act as trustees or receivers in bank rehabilitation proceedings. Finally, at the minimum, it is necessary that the protection for the costs of defending the actions of supervisors is stated clearly (preferably in the law or at least at the level of internal procedures), including the financing of any expenses from the start of the legal proceedings.
1.6 Cooperation	LC	It is unclear how the “Poland’s economic interest” provision is to be interpreted in practice as the KNF has not established criteria to assess if, and when, information sharing would impair the economic interests of Poland.
2. Permissible Activities	LC	The permissible activities for banks are clearly defined in the legislation. As a key risk mitigant, the legal framework should be amended to limit the acquisition of real estate property to the purpose of conducting banking activities or for carrying out other activities, which can contribute to the good performance of the banks’ operations. In addition, the law should establish limits for banks’ investments in nonfinancial entities (EC 5). The credit unions, which are retail deposit taking institutions and use the name “bank” (Polish translation “kasa”) should be brought under the KNF supervision.
3. Licensing Criteria	MNC	The licensing requirements are broadly in place and the licensing process is thorough; however, some major shortcomings regarding the governance framework are noted: - No fit-and-proper criteria for members of the supervisory Board. The fit-and-proper assessment for the members of the supervisory Board should become an integral part of the ongoing assessment of the banks’ risk management. - Clear fit-and-proper criteria for all the members of the management Board and the head of the internal audit should be established. - The legislation should state the obligation to present a receipt of an assurance of the absence of potential conflicts of interest from all members of the supervisory and management Boards. The legislation needs to require a systematic analysis of the direct and indirect shareholders, natural or legal persons that have qualifying holdings in the bank or of the close links existing between the bank and other natural and legal persons. Moreover, the definition of “close links” should be expanded. Finally, a more specific and coherent licensing framework (in a form of a KNF resolution or a licensing manual) is recommended to enhance understanding of supervisory requirements and a more uniform and structured approach.
4. Transfer of Significant Ownership	C	The law should be amended to require banks to notify KNF as soon as they become aware of any material information, which may negatively affect the suitability of a major shareholder.
5. Major Acquisitions	LC	Major acquisitions by domestic banks require only one month’s prior notification to the KNF. In view of the limited time for assessment of the notification and of the lack of clear criteria for approval, it is unlikely the KNF would have sufficient time in practice to thoroughly assess the acquisition. The Banking Act does not restrict individual holdings in nonfinancial entities as a percentage of capital as long as they do not exceed the single counterparty exposure limits (see CP 10). The authorities should develop a rigorous supervisory methodology for the assessment of contagion risk and restrict individual holdings to 15 percent of capital and aggregate qualifying holdings in nonbanking activities to 60 percent of capital in accordance with the EU Directives. Moreover, the Banking Act or the regulations should specify the criteria for the authorization of cross-border activities of domestic banks by the KNF. Furthermore, the KNF should develop a comprehensive and structured supervisory assessment methodology to consider the quality of supervision in a third country and its own ability to exercise supervision on a consolidated basis.
6. Capital Adequacy	C	The KNF is to be commended for the early alignment of the risk weights for FX residential mortgage loans under the standardized approach to the Polish environment. The assessors note that more progress would be desirable in terms of developing a methodology to set risk-based capital requirements based on the individual risk profile of the bank, i.e., drawing from the SREP analysis.
7. Risk Management Process	LC	The framework for the risk-management process is generally adequate; however, the assessors note that the following areas should be strengthened: - Some difficult to measure risks, like strategic and business risks, need to be more explicitly addressed in the risk-management framework. - The existing regulations should ensure that banks’ complexity and riskiness are appropriately aligned with internal governance arrangements. - A more balanced mix of offsite and onsite instruments (i.e., targeted onsite inspections) and a stronger involvement of the onsite monitoring of follow-up actions are required, as, at present, the KNF’s approach to evaluating risk management in banks is heavily reliant on the offsite monitoring process. - It would be useful if KNF develop internal guidelines setting supervisory expectations for risk-management practices in banks according to the bank’s size and risk profile. This could assist in aligning consistency in supervisory judgment across the agency. - The KNF should strengthen the dialogue with the members ofthe supervisory Board.
8. Credit Risk	C	The legal provisions in respect of arm’s length credit decisions are comprehensive and detailed, but legal provisions regarding exposures to related parties need to be strengthened (see CP 11) and a more general ban for Board members with conflicts of interest to not take part in credit decisions should be considered.
9. Problem Assets, Provisions and Reserves	C	The SREP process will provide additional information to KNF for evaluating provisioning and reserving policies and processes. It remains crucial, however, that frequent onsite inspections are performed to ensure that the policies and procedures are properly implemented.
10. Large Exposure Limits	C	No comments.
11. Exposures to Related Parties	LC	The legislation should be amended to include in the range of related parties close family members of the bank’s major shareholders, members of the management and supervisory Board, persons occupying managerial positions in the bank, or corresponding persons in affiliated companies. The legal provisions regarding the prevention of conflicts of interest should also be enhanced.
12. Country and Transfer Risks	C	No comments.
13. Market Risks	C	Although the KNF has introduced separation between the trading and the banking book in Resolution 76/2008, it is recommended that separation be more apparent in the other regulations and recommendations of the KNF.
14. Liquidity Risk	C	The regulatory framework for liquidity management is generally adequate, providing a good mix of qualitative and quantitative requirements. Closer attention should be paid to situations of inability of parent banks to fulfill their funding commitments, which should be considered as part of the banks’ liquidity contingency plans.
15. Operational Risk	LC	While separate criteria for the use of the three methods for calculating capital requirements for operational risk are provided in the KNF Resolution, the discretion left to banks in freely using STA method may potentially lead to regulatory arbitrage (through a capital relief effect). The KNF should introduce a supervisory procedure for evaluating the capacity of banks to meet the enhanced risk-management criteria for the STA implementation and should be able to fully control transition between the two simpler approaches. The regulations should impose more specific requirements regarding the IT audit in banks, in particular regarding its scope, frequency, and minimum requirements. The compliance function should be more specifically addressed in the regulations (see CP 17).
16. Interest Rate Risk in the Banking Book	C	No comments.
17. Internal Control and Audit	LC	It is recommended to introduce a legal or regulatory obligation that calls for the banks to notify the supervisor as soon as they become aware of any material information which may negatively affect the fitness and propriety of a Board member or a member of senior management. The minimum requirements for the compliance function fall short of the international best practice guidance (BCBS 2005 principles for Compliance and the compliance function in banks), particularly in the areas of staffing, independence, access to information, conflicts of interest and seniority of head of the compliance officer. The KNF should perform a fit-and-proper assessment of the head of internal audit and impose a notification requirement on commercial banks for his/her dismissal. The KNF should also regularly exchange views on the quality and independence of internal audit with the external auditor during tri partite meetings.
18. Abuse of Financial Services	LC	The legal framework for AML/CFT is generally adequate and the assessors note the good cooperation between GIFI and KNF in sharing their AML/CFT oversight functions. However, given the relatively new legislation, the effectiveness of the AML/CFT supervision and the integration of the AML/CFT risk management into the banks’ general risk-management framework are yet to be tested. Improvements should be sought in a number of areas: - The law should require banks and external auditors to report to KNF any suspicious activities and incidents of fraud when they are material to their safety, soundness or reputation. - The law should require that KNF is notified in cases where an investigation has been initiated in a bank by competent judicial authorities. - The law should specifically require banks the immediate termination of a relationship with a correspondent bank if subsequently found that correspondent bank does not have adequate controls against criminal activities or is not effectively supervised for AML/CFT by the relevant authorities. - The law should specifically require the escalation of decisions in cases of high risk-accounts to senior management level. - The law should require banks to notify KNF when their foreign offices are unable to apply adequate AML/CFT standards. Finally, the assessors ascertain that the KNF could consider enhancing its resources for AML/CFT surveillance.
19. Supervisory Approach	LC	The KNF has a well developed offsite supervisory system, but the assessors note that further improvements are needed in the following areas: The quality of the quarterly Executive Summaries (ES) could be further improved and the work plan flowing from the ES would benefit from a more detailed description of the specific risks and areas for attention. The new SREP methodology is a step forward in a more risk-based direction for the KNF. Nevertheless the assessors express the following concerns: - Given the intensity of the SREP process, it is doubtful that the KNF can effectively and efficiently handle the information received with the present supervisory resources. - Despite its sophistication and volume, SREP remains a self assessment completed by the banks. A critical review of the SREP is a complex task that requires good risk-management skills as well as sound supervisory judgment. It should therefore be performed and overseen by the KNF’s experienced supervisors. Moreover, close coordination and cooperation between the onsite and offsite division is a crucial factor crucial for the assessment of the SREP. - The KNF should require sign off by the management Board, the supervisory Board or an independent review of the bank’s responses to SREP for quality assurance. The SREP methodology should not been seen as a substitute for onsite inspections or an instrument to further reduce onsite resources. Although there is clear evidence of coordination and consultation between onsite and offsite, it remains unclear to the assessors where the ultimate responsibility for the supervisory methodology and processes (onsite and offsite) sits and how the process of changing and updating the methodology are project managed.
20. Supervisory Techniques	MNC	Assessors consider that KNF has well developed onsite supervisory techniques; however, note important shortcomings regarding the length of the supervisory cycle and the mix between offsite and onsite supervision. The inspection cycle (two to four years) is much too long and not aligned to international best practices. At the minimum, KNF should be able to inspect the largest banks on an annual basis and to deploy adequate resources for a closer monitoring of riskier banks. A closer involvement of onsite supervisors in the follow up with post-examination recommendations and a larger number of targeted inspections would be necessary. The assessors note that under the new offsite BION (SREP) supervisory methodology, the onsite inspections are required only when the bank’s condition is deemed to be “bad” or “in crisis.” Such approach is very reactive and may not offer sufficient time for effective remedial action. Assessors recommend that the offsite and onsite functions are viewed as complementary and KNF fully exploits synergies between the two so as to ensure a closer monitoring and a timely intervention in banks. The assessors reviewed some examination reports and ascertain that the analysis is thorough and comprehensive. The assessors note that post-examination recommendations should be more clearly prioritized. Assessors recommend that KNF should engage more actively in a dialogue with the supervisory Board members, and with external and internal auditors. KNF could also consider implementing the good practice of other supervisors’ “tri-partite” meetings. Finally, the large amount of supervisory resources for the cooperative banks compared to the relative small importance of the sector coupled with inadequate intensity of supervisory oversight for commercial banks raises concerns regarding the effectiveness of the supervisory process.
21. Supervisory Reporting	C	Assessors note that the reporting framework for banks is adequate; however, the KNF could further strengthen it by developing a systematic program for periodic verification of supervisory returns.
22. Accounting and Disclosure	LC	The framework for accounting and disclosure is generally adequate, but improvements should be sought in the following areas: - KNF be forceful in ensuring audit quality by actively challenging external auditors and the bank’s management when understatement of provisions is identified; - KNF introduce trilateral meetings, at least once a year, with the internal auditor and external auditors to discuss issues of common interest and to serve as validation and consistent communication; - IFRS become mandatory for the solo accounts of all commercial banks; and - KNF introduce specific banking expertise and experience requirements for auditors of commercial banks.
23. Corrective & Remedial Powers of Supervisors	LC	The requirement to caution a bank should be removed from the legislation. The KNF cannot suspend a member of the supervisory Board (see CP3). The bank resolution framework is inadequate, as bank insolvencies are treated as any other corporate bankruptcies under the Commercial Code. The disposal of a trouble bank’s assets, its takeover or liquidation cannot be commenced prior to the court hearing the plaintiff’s petition, which could cause considerable delay for depositors and undermine public confidence in the Polish banking system. Finally, the assessors also recommend that KNF establishes an internal methodology establishing well defined “red flags,” firmly assigned responsibilities, and a clear ladder for proportionate supervisory intervention.
		24. Consolidated Supervision	LC	The legal framework for performing consolidated supervision is generally adequate; however, improvements are needed in the following areas: - empowering the KNF to oppose ex-ante to major acquisitions made by banks; - specifying limitations for holdings in nonfinancial entities; and - providing fit-and-proper criteria for senior management of bank’s parent companies. Further improvements are also needed in the supervisory practices for performing consolidated supervision. The supervisory methodologies across sectors (i.e., banking, insurance) should be further aligned to enable a more coordination and consistency in the supervisory actions across groups. A framework for assessing contagion risks stemming from nonfinancial entities part of banking groups should be also developed. Finally, the agency should take a more intrusive stance in respect to the supervision of foreign activities of domestic banks and consider more closely a full range of risks (i.e., reputational) that such entities can pose on parent banks. The effectiveness of performing effective consolidated supervision over financial holding companies is yet to be tested and the assessors recommend that the KNF maintain a close understanding and oversight over all financial and nonfinancial entities of the groups.
25. Home-Host Relationships	LC	There is no legal requirement for the home supervisor of banks established in Poland to practice consolidated supervision. The KNF should take a more proactive approach when foreign home supervisors inspect their subsidiaries. The assessors believe that the authorities as a home supervisor place too much emphasis on the quantitative indicators of the materiality of the group (see CP 24).