Republic of Poland
Detailed Assessment of Observance of Basel Core Principles for Effective Banking Supervision

The 2008 transition to the new banking supervisory framework in Poland has been relatively smooth, and the banking system has proven effective in weathering the financial crisis. This assessment focuses on the working of the Polish Financial Supervision Commission (KNF), which is responsible for banking supervision in Poland. KNF has undertaken numerous proactive measures to preserve financial sector stability during the crisis. As a priority, KNF’s interaction with bank auditors as well as with supervisory board members should also be strengthened.

Abstract

The 2008 transition to the new banking supervisory framework in Poland has been relatively smooth, and the banking system has proven effective in weathering the financial crisis. This assessment focuses on the working of the Polish Financial Supervision Commission (KNF), which is responsible for banking supervision in Poland. KNF has undertaken numerous proactive measures to preserve financial sector stability during the crisis. As a priority, KNF’s interaction with bank auditors as well as with supervisory board members should also be strengthened.

I. Summary, Key Findings, and Recommendations

1. The 2008 transition to the new banking supervisory architecture in Poland has been relatively smooth and the banking system has proven effective in weathering the financial crisis. The Polish Financial Supervision Commission (KNF), in charge of banking supervision since 2008, has successfully managed the transfer of responsibilities from the Commission for Banking Supervision, which operated under the auspices of the National Bank of Poland (NBP). The agency’s staff is highly professional and dedicated, the regulatory framework is comprehensive and aligned with emerging risks, and the KNF has well-developed supervisory methodologies and processes. The KNF has undertaken numerous proactive measures to preserve financial sector stability during the crisis, including successfully persuading banks to retain the 2009 profits and tightening prudential standards.

2. Despite its strong performance during the financial crisis, the supervisory architecture needs to be strengthened to grant the KNF full independence. The KNF’s independence is subject to significant operational and financial constraints. The agency does not have the authority to amend its organizational structure, to make key staffing decisions, or to set its own budget. Moreover, the KNF’s regulatory powers are constrained by the overly prescriptive requirements of the Banking Act which only allows it to issue binding resolutions in a limited number of areas. Finally, there is room to strengthen the legal protection of the persons involved in banking supervision and the governance arrangements for the KNF external commissioners. The assessors note that some of the recommended reforms require legislative changes and thus will need time to be implemented.

3. Moreover, onsite supervision needs to become more frequent and better streamlined with the offsite supervisory processes. The KNF should also intensify its dialogue with auditors, supervisory Board members, and home supervisors. The current supervisory cycle for commercial banks ranges from two to four years. During this period, the KNF performs a relatively limited number of targeted inspections. This supervisory approach is characterized by a rather high degree of reliance on the offsite monitoring process, which may hamper early identification of problems in banks. The assessors also identified opportunities for the streamlining of onsite-offsite coordination processes to make them more rigorous, timely, and forward looking. As a priority, KNF’s dialogue with the banks’ internal and external auditors, as well as with the supervisory Boards’ members should also be strengthened. Similarly, given the predominately foreign ownership structure of the banking sector, KNF should step up its engagement with home supervisors.

4. The KNF should also increase its staff to cope with the widening of its oversight perimeter and the upcoming regulatory developments. The assessors recommend increasing the supervisory resources of the KNF to cope with additional pressures stemming from the pending enlargement of the scope of oversight and new regulatory developments (i.e., bringing credit unions under the KNF’s supervision, putting in place Basel III); increasing the frequency of onsite inspections, and implementing more sophisticated supervisory methods (i.e., the new risk-based SREP process for offsite bank supervision).

5. The legal framework has to be improved, among others, in the areas of corporate governance, bank resolution, and major acquisitions. The Banking Act is silent regarding fit-and-proper criteria for members of the banks’ supervisory Boards and, moreover, the KNF does not have the power to remove them. The resolution framework is underdeveloped, and the assessors note that the number of KNF’s enforcement actions is relatively low. Finally, major acquisitions by domestic banks require only 30-day ex ante notification to the KNF, and the agency has no adequate power to influence the banking group structures. In sum, the legal framework needs to be improved in a number of key dimensions to ensure sound and consistent requirements in the above-mentioned areas.

A. Introduction

6. This assessment of the current state of compliance with the BCPs in Poland has been undertaken as part of a joint IMF-World Bank Report on the Observance of Standards and Codes (ROSC) mission. The mission was led by Messrs. Fernando Montes-Negret (IMF) and Michael Edwards (World Bank). The assessment was conducted by Mmes. Oana Nedelescu (IMF) and Katia D'Hulster (World Bank). The assessment was conducted from February 22 to March 10, 2011. It reflects the banking supervision practices of the KNF as of the end of January 2011.

B. Information and Methodology Used for the Assessment

7. The assessment is based on several sources: (i) a complete self-assessment prepared by the KNF; (ii) detailed interviews with the KNF staff; (iii) review of laws, regulations, inspection reports, and other documentation on the supervisory framework and on the structure and development of the Polish financial sector; and (iv) meetings with individual banks; the Polish Banking Association; the NBP; the Bank Guarantee Fund (BGF); Ministry of Finance (MoF); two external auditors; and the Credit Information Bureau (BIK).

8. The assessment was performed in accordance with the guidelines set out in the Core Principles (CPs) Methodology.1 It assessed compliance with both the “essential” and the “additional” criteria, but the ratings assigned were based on compliance with the “essential” criteria only. The methodology requires that the assessment be based on the legal and other documentary evidence in combination with the work of the supervisory authority as well as its implementation in the banking sector. The assessment of compliance with the CPs is not, and is not intended to be, an exact science. Banking systems differ from one country to the next, as do their domestic circumstances. Furthermore, banking activities are changing rapidly around the world, and theories, policies, and best practices of supervision are swiftly evolving. Nevertheless, it is internationally acknowledged that the CPs set minimum standards.

9. This assessment is based solely on the laws, supervisory requirements, and practices that were in place at the time it was conducted. However, where applicable, the assessors made note of regulatory and supervisory initiatives, which have yet to be completed or implemented. In this respect, the KNF introduced a new supervisory methodology called Supervisory Review and Evaluation Process (SREP or ‘BION’ in Polish language) in December 2010. Each bank is required to complete a comprehensive SREP questionnaire on a yearly basis. The KNF prioritized the large and more risky banks for review. A first wave of banks has submitted their SREP questionnaire with reference date December 31, 2010 and will be assessed by July 2011. All banks are expected to be assessed by end-2011. The assessors believe that the SREP, if properly implemented, has the potential to contribute to sound supervisory outcomes, but as the methodology is not yet in place and all assessments remain to be finalized, the SREP process cannot be taken into account in this Basel Core Principles assessment.

10. The assessment team enjoyed excellent cooperation with its counterparts and, within the time available to perform its work, reviewed all the information provided. The assessors only received translations of the inspection reports in the last two days of the mission. Hence, the verification of findings and the discussion with onsite examiners on specific supervisory issues of the examinations were limited in time. That said, a general impression with regard to the form and content of inspection reports is included in the assessment. The team extends its thanks to the management and staff of the KNF, in particular, for their openness and participation in the process. The authorities provided comments on a draft version of this assessment, which are reflected in the final assessment.

C. Institutional and Macro-prudential Setting, Market Structure Overview

11. The KNF, which was established on September 19, 2006, is still in its infancy.2 The agency is responsible for supervising most segments of the Polish financial market. During phase one of the integration, the new supervisory agency took over the tasks of the Insurance and Pension Funds Supervisory Commission and of the Securities and Exchange Commission. The integration process concluded on January 1, 2008, when the KNF took over the tasks performed by the Commission for Banking Supervision, which functioned under the auspices of the NBP. Among other activities, the KNF is responsible for ensuring the regular operation of the financial market; developing financial market and its competitiveness; participating in the drafting of legal acts related to financial market supervision; and creating the opportunities for amicable and conciliatory settlement of disputes that may arise between financial market actors. The KNF is supervised by the President of the Council of Ministers or the prime minister.

12. Besides the KNF, the MoF and the NBP are also indirectly involved in some aspects of banking supervision. The MoF has taken an active role in the regulatory process in the area of prudential accounting for provisioning. Going forward, it is expected that the MoF will assume more prominent responsibility in the regulatory rule-making process. Similarly, through its General Inspectorate for Financial Institutions (GIFI), the MoF also shares responsibilities with the KNF in the field of AML/CFT. In practice, the MoF receives information from banks, performs onsite inspections, and imposes penalties relating to AML/CFT legislation violations identified by the controls, while the KNF performs onsite inspections and general AML/CFT oversight. The NBP collects the prudential returns (FINREP/COREP) from the banks and shares the information with the KNF on a real time basis.

13. Poland has 49 commercial banks, of which 39 are foreign owned, 4 have majority public interest, and 6 are domestically owned. In addition, there are 576 cooperative banks and 61 credit unions. Poland’s banking sector is relatively concentrated, but less than other comparable countries in the region, with the largest 3 banks and the 10 largest banks controlling about one-third and two-thirds of total bank assets, respectively. The share in total bank assets of the five largest banks in Poland was 45 percent in 2008, compared to 62 percent and 72 percent for the Czech Republic and Hungary, respectively. Poland’s banking concentration is lower than for the countries in the Euro area (57 percent) and the group of countries in Central and Eastern Europe (58.3 percent). Banking competition in Poland is intense, putting pressure on the smaller commercial banks, cooperative banks, and credit unions to consolidate. Nonetheless, the informational advantages and local knowledge and ties of the last two groups of institutions might delay the consolidation process.

Republic of Poland: Ownership Structure of Banking Sector

December 31, 2010

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14. The financial system remains stable. Banks’ profits have increased further in 2011, leading to a rise in capital adequacy ratios (CARs) to about 14 percent. While nonperforming loans have crept up—at 12.2 percent and 7.2 percent for loans to corporates and households, respectively, at end-September, 2010—their growth rate has slowed. Underpinned by improving domestic liquidity, credit growth is showing signs of revival, especially in mortgage lending. For consumer loans, banks are tightening standards following the introduction of KNF Recommendation T. Growth in corporate loans also remains subdued, due to weak demand, the overhang of NPLs, and still relatively tight lending standards.

15. Poland’s banking system has remained liquid, well capitalized, and profitable. There are no apparent bank problems that could pose a threat of a systemic banking crisis. Direct exposure to banks in Europe’s periphery is very limited, though Poland is highly exposed to banks in Europe’s core, which could be a potential source of contagion risk. Finally, periodic top-down and bottom-up stress tests undertaken by the NBP and the KNF continue to show that overall the system remains resilient to adverse macroeconomic shocks.

D. Preconditions for Effective Banking Supervision

The assessment included the following findings in regard to preconditions:

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).

E. Main Findings

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

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II. Detailed Assessment

60. The assessment of compliance of each principle is made based on the following four-grade scale: compliant, largely compliant, materially noncompliant, and noncompliant.

61. To achieve a “compliant” assessment with a principle, all essential criteria generally must be met without any significant deficiencies. A “largely compliant” assessment is given if only minor shortcomings are observed, and these are not seen as sufficient to raise serious doubts about the authority’s ability to achieve the objective of that principle. Under the BCP methodology a “materially noncompliant” assessment is given whenever there are severe shortcomings, despite the existence of formal rules, regulations and procedures, and there is evidence that supervision has clearly not been effective, that practical implementation is weak, or that the shortcomings are sufficient to raise doubts about the authority’s ability to achieve compliance. A “noncompliant” grade indicates that no substantive progress toward compliance has been achieved. No Principle, however, has been assessed as noncompliant in Poland. In interpreting the grading, it is also important to note that for some Principles the assessment takes into account both compliance at banks and compliance of the supervisors.

Table 2 offers the detailed Principle-by-Principle assessment. It provides a “description” of the system with regard to a particular Principle, a grading or “assessment,” and “comments.”

Table 2.

Republic of Poland: Principle-by-Principle Assessment

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Per Art. 138(3)., from dismissal and suspension of management, to imposing penalties, limiting activities and revoking the license.

Per Article 142, a net loss, the threat of a net loss and a danger of insolvency.

The triggers provide ample powers to KNF, but may not delimit well the risk of forbearance. The first trigger are losses exceeding half of the bank’s capital after 6 months of the date of an extraordinary meeting of shareholders, the other two triggers are general: (i) circumstances that threaten the viability of the bank; and (ii) fall of own funds below minimum requirements.