A. Principle 1: Willingness to Act

11. The macroprudential mandate has been clearly assigned to the FSC-M. The 2015 Act established the FSC-M as the competent authority responsible for macroprudential supervision. Such supervision covers the identification, assessment, and monitoring of systemic risk arising in the financial system or its environment, and actions aimed at eliminating or reducing this risk with the use of macroprudential instruments.

12. Overall and intermediate objectives of macroprudential supervision are well-defined. The overall objective contained in the 2015 Act emphasizes the aim to strengthen the resilience of the financial system in the event of materialization of systemic risk, and in consequence, to support long-term and sustainable economic growth in Poland. The intermediate objectives agreed by the FSC-M closely follow the recommendations set out by the ESRB. They include mitigation of risk arising from (i) excessive growth or size of debt or leverage; (ii) excessive maturity mismatch of assets and liabilities of financial institutions or of the risk of illiquidity of financial markets; (iii) excessive concentration of exposures or their similarity, and the interconnectedness between financial system entities; (iv) misaligned incentives influencing the behavior of financial institutions or their clients; and (v) ensuring the adequate resilience of the financial infrastructure.

13. The FSC-M’s tasks are specified in law. It follows from the 2015 Act that the committee’s tasks in macroprudential oversight include: (i) application of macroprudential instruments by issuing recommendations directed at its member institutions; (ii) presenting statements to a broader public regarding identified sources of systemic risk; (iii) identification of institutions posing a significant risk to the financial system; (iv) ensuring appropriate cooperation in the area of macroprudential supervision at a domestic, international, and particularly European level; and (v) ensuring the proper flow of information between the committee’s members to allow them to fulfill their duties.

14. The FSC-M operates as a collegial body. Decisions are taken by majority vote. The meetings are chaired by the President of NBP or his representative, who also has a casting vote in the event of a tie. In practice there is a strong tendency to strive for consensus within the Committee, and so far all resolutions have been passed unanimously. Within this collegial framework, the 2015 Act specifically assigns to NBP the task of providing the FSC-M with (i) information and data, analysis, and research necessary for the assessment of systemic risk; and (ii) organizational and administrative support, including the running of its secretariat. FSC-M meetings are not normally attended by external experts, although non-members can be invited for specific topics.

15. The accountability arrangements in Poland include a legal requirement for the FSC-M’s Chairman to present annual information to Parliament on the activities undertaken by the Committee in implementing its tasks. The presentation takes the form of an extensive written report that describes the FSC-M’s approach to macroprudential oversight, its assessment of systemic risks, its recommendations regarding the use of macroprudential instruments, and its cooperation with the ESRB. The report is published on the websites of Parliament and the FSC-M.¹⁵

16. Press releases, and other information and documents related to its activities are published by the FSC-M on its dedicated website. The press releases after FSC-M meetings mention the possible sources of systemic risk that were identified by the Committee, mention the topics that were discussed at the meeting and the decisions taken. They do not provide detailed information on the FSC-M’s deliberations or on the positions taken by its individual members. Other information posted on the website include resolutions issued by the Committee and background analysis that informed the discussions.

B. Principle 2: Ability to Act

17. The FSC-M is the macroprudential authority, but it does not have direct powers to implement its decisions. The FSC-M is confined to indirect powers due to provisions in the Polish constitution, which define the catalogue of institutions authorized to issue normative acts, among which the FSC-M is not mentioned. The Committee can issue recommendations to one or more of its member institutions to indicate the need to take measures aimed at mitigating an identified systemic risk. It can also present statements to a wide range of addressees in the public and private sector. Such statements are made when a high level of systemic risk is identified, and the FSC-M considers it necessary to inform recipients about the source of this risk and the possible consequences for the financial system.

18. Recommendations issued by the FSC-M are coupled with a “comply or explain” mechanism. The recommendations issued by the FSC-M to one or more of its member institutions are not legally binding, but the addressees are obliged to comply or explain their reasons for non-compliance. All decisions on recommendations issued by the FSC-M since it became the macroprudential authority in November 2015, were reached by consensus.¹⁶ The recommendations were published through press releases following the FSC-M meetings. Press releases also provided confirmation that the recommendations would be followed, or, gave an update on the process of implementation. So far, the FSC-M has not identified sources of systemic risk that it considered would require issuing a statement.

19. Macroprudential measures are applied by the relevant authorities in line with their competences. The 2015 Act indicates that, taking into account the recommendations by the FSC-M, the MoF is authorized to determine through regulation the levels of the countercyclical capital buffer (CCB) rate, the systemic risk buffer (SRB) rate, and the national measures contained in Article 458 of the EU Capital Requirements Regulation (CRR).¹⁷ The 2015 Act furthermore authorizes the PFSA, after obtaining the opinion of the FSC-M, to issue administrative decisions on the determination of Global Systemically Important Institutions (G-SII’s) and Other Systemically Important Institutions (O-SII’s).

20. The activation of macroprudential tools is subject to prior consultation of the FSC-M. Mandatory FSC-M involvement is envisaged for those instruments explicitly mentioned in the 2015 Act.¹⁸ For other instruments, the Banking Act requires the PFSA to consult the FSC-M on recommendations that relate to issues that may be relevant for macroprudential supervision.¹⁹ This would imply that, even though the activation of an instrument is not recommended by the FSC-M itself, the committee would still have an opportunity to express its views. This is particularly important in cases where there can be ambiguity whether a tool is activated primarily for microprudential or macroprudential purposes, for instance when considering the use of LTV, DTI or DSTI ratios.

C. Principle 3: Effective Coordination and Cooperation

21. The FSC-M by its nature provides a coordinating mechanism with regard to macroprudential policy. The FSC-M is required by law to ensure the proper flow of information between its members needed for it to complete its tasks. It plays a central coordinating role throughout the cycle of macroprudential policymaking, including the identification of systemic risk, the selection and calibration of instruments, the implementation of instruments, and the monitoring of risk. In doing so, the FSC-M brings together the contributions of all its member authorities. The FSC-M’s identical membership to that of the FSC-C furthermore ensures that the macroprudential authority is fully aware of measures considered in the context of crisis management.

22. Coordination and cooperation between FSC-M member institutions are facilitated through working groups. The FSC-M has formed a Permanent Working Group (PWG) that helps prepare its deliberations. The PWG is chaired by the Director of the Financial Stability Department (FSD) of NBP and comprises two representatives of each institution represented in the FSC-M. It plays an important role in exchanging opinions concerning systemic risk assessments and developing proposals for macroprudential measures and instruments. The FSC-M can also create temporary working groups to look at specific issues. Such a group was tasked with preparing the FSC-M’s discussions regarding FX housing loans.

23. Experience with the PWG seems very positive. All parties consider it a highly effective forum for cooperation, that helps mobilize the respective competences of its members in assessing systemic risk, while taking into account their diverse perspectives. Even though NBP is the main supplier of analysis to the PWG and the FSC-M and devotes by far the greater part of the resources needed, considerable effort is made to include the views of the other members in the preparatory process. The main vehicle in capturing the views of all members is a questionnaire survey that is held among them ahead of every regular FSC-M meeting.

24. The quarterly questionnaire survey gives each FSC-M member the opportunity to highlight its own assessment of systemic risk in the Polish financial system. NBP coordinates the survey, which collects the input from all members regarding potential risk sources, the nature and intensity of the risk, and possible measures that could be taken to mitigate it. The results thus provide a comprehensive overview that is presented to the PWG and the FSC-M for each regular meeting. While NBP has dedicated staff to prepare financial stability analysis and to support the functioning of the PWG/FSC-M, the other member institutions have less resources available for this purpose. Under these circumstances, the survey has the added advantage of serving as an encouraging and disciplinary device, forcing all members on a regular and structured basis to consider the systemic dimension of risks in the financial system and making sure that all views are heard.

25. In addition to the quarterly survey results, the FSC-M receives NBP’s bi-annual Financial Stability Report (FSR) and its annual Report on Macroeconomic Stability of the Polish Economy. It is thus ensured that the FSC-M is fully aware of NBP’s extensive assessment of financial stability and of macroeconomic imbalances and can draw on this information when making its own assessment with regard to potential sources of systemic risk.

26. International coordination in the area of macroprudential policy primarily occurs through the ESRB, which is responsible for pursuing oversight at the EU level. The Polish macroprudential policy framework is fully compliant with ESRB recommendations, including its crucial recommendations on the macroprudential mandate of national authorities and on intermediate objectives and instruments of macroprudential policy. In 2016 the FSC-M also implemented the recommendations on (i) the assessment of cross-border effects of and voluntary reciprocity for macroprudential policy measures, and (ii) recognizing and setting CCB rates for exposures to third countries. Both recommendations foster coordination between EU member countries regarding the application of macroprudential measures.

27. National macroprudential authorities in the EU are required to notify EU authorities, of the application of instruments under the Capital Requirements Directive (CRD) and Regulation (CRR). In the case of Poland, the FSC-M notifies the ESRB of the mandatory quarterly setting of the level of the CCB.²⁰ The annual identification of G-SIIs and O-SIIs requires notification to the EC, ESRB and EBA,²¹ as does the application of the SRB,²² and national measures provided for in the CRDIV/CRR (including the conservation buffer and higher risk weights on real estate exposures that are applied in Poland).²³ An EU member state is also expected to notify the European Parliament, the Council of the European Union, the EC, the ESRB, and the EBA in case of identification of systemic risk that can have serious negative consequences for the financial system or national economy.

28. The notifications provide the ESRB with a comprehensive overview of macroprudential measures adopted by national authorities in the EU. This allows the ESRB to function as platform for cross-border coordination and cooperation within the EU, by monitoring the use of macroprudential measures, their potential cross-border effects, and the applicability of reciprocity arrangements. The ESRB is also responsible for the development of the macroprudential policy framework. Through their membership of the ESRB, the Polish authorities are part of this international collaborative effort.

D. Recommendations

29. Initial experience with Poland’s institutional framework for macroprudential policy has been favorable, but it still remains to be tested under more challenging circumstances. The clearly defined mandate and tasks of the FSC-M, as well as the formulated objectives, provide a sound basis for an appropriate conduct of macroprudential policy. Going forward, an important test for the FSC-M will be whether it can insulate itself from undue political interference. To pass that test, it will be crucial that the FSC-M remains fully committed to its established macroprudential objectives and maintains its willingness to act decisively in order to pursue these.

30. Building on the strengths of the existing framework, the following steps could be taken to further solidify the position of the FSC-M as an independent and decisive macroprudential authority:

• Develop a clear communication strategy aimed at greater transparency and accountability in order to further underpin the FSC-M’s reputation and visibility as macroprudential authority. Greater transparency will help enhance the reputation of the FSC-M, strengthen public understanding for its actions, and provide greater accountability for its decisions. In particular, expanding the press releases after FSC-M meetings to include more detail of the deliberations, including the positions taken by individual members, would give valuable insight in the considerations of the authorities involved. The greater detail on meeting proceedings does not require publication of full minutes, which might make meeting participants more reluctant to speak freely.

• Consider a more active use of “statements” as a policy instrument. The FSC-M should consider a more active use of its power to issue statements regarding potential threats to financial stability, rather than relying only on “comply or explain recommendations” to its own members. It has until now not felt the need to issue such statements, possibly because they are presumed to be general in nature and aimed at a broad audience. A more active and targeted use of statements could enhance the effectiveness and profile of the FSC-M as macroprudential authority. The statements could, for instance, be addressed at public authorities that are not members of the FSC-M, but whose actions can have important implications for financial stability, such as competition or consumer protection authorities.²⁴

• Ensure the timely and substantive vetting of all use of macroprudential instruments by the FSC-M. The 2015 Act requires involvement of the FSC-M in the activation of specified macroprudential instruments. The use of other instruments by the PFSA that may concern macroprudential policy issues is subject to prior consultation of the FSC-M.²⁵ It is important to ensure that such vetting by the FSC-M takes place in a timely and substantive fashion for all macroprudential instruments, whether the initiative is taken by the FSC-M itself or not. The vetting should include cases where there may be ambiguity whether a tool is activated primarily for microprudential or macroprudential purposes, for instance, when considering the introduction or amendment of LTV, DTI or DSTI limits on housing loans. Such a prominent role for the FSC-M in vetting the use of all macroprudential instruments would confirm its overall responsibility for this policy area and would allow it to formulate its considered recommendation to the authority proposing the use of a macroprudential instrument.

A. Assessment

31. Mutual exchange of information between the members of the FSC-M, necessary for the proper implementation of macroprudential policies, is required by law. NBP, which has a leading role in the monitoring of systemic risk, has in place two agreements with respectively the PFSA and the BGF on cooperation and information sharing. The information shared includes risk assessments of individual institutions, reports on risk analysis in the banking sector, and reports on supervisory reviews held by the PFSA.²⁶ Outside the FSC-M, NBP has an agreement with the Central Statistical Office (GUS) that allows it to receive individual anonymized financial data of non-financial corporations and on incomes and expenditures of households. NBP also receives random samples of anonymized individual data under an agreement with the Credit Information Bureau (BIK), which provide basic demographic characteristics of natural persons and on their loan records. It conducts a household wealth survey in cooperation with GUS, which allows for more detailed analysis of household indebtedness.

32. Effective microprudential supervision is essential for macroprudential policy to function well.²⁷ By assuring the soundness of individual elements of the financial system and the proper functioning of financial markets, the PFSA directly contributes to limiting systemic risk in the Polish financial system.²⁸ As microprudential supervisor, the PFSA interacts most directly with financial firms in the system. It should also be in a position to detect forms of financial innovation developed by firms that may become a source of systemic risk. The contributions made by the PFSA thus form an indispensable complement to the financial stability analysis performed by NBP.

33. Concerns have been raised about the adequacy of resources available to the PFSA to fully perform its tasks. From a macroprudential perspective it is particularly important that the PFSA is fully equipped not only to properly supervise systemically important financial institutions, but also smaller institutions that may collectively pose a risk to financial stability.²⁹ It should also be capable to fully engage in necessary data gathering and sharing and the monitoring of relevant financial innovations.

34. Further effort will be needed to address evolving data needs. The creation of the FSC-M provided a framework that has encouraged a more structured sharing of information among its participants on the basis of existing MoU’s. Even so, resource constraints have limited the ability to respond to changing needs for the purpose of macroprudential analysis. Areas that require further attention include the need for greater granularity in credit data, to allow better identification of risk concentrations, and the lack of data on activities by non-regulated financial institutions, such as credit extension by leasing companies and other non-banks. Given present resource constraints, there are concerns whether these challenges can be adequately addressed. In any case, close collaboration between NBP and PFSA will be needed in order to maximize potential efficiency gains. Serious consideration should also be given to participation in international initiatives, such as the AnaCredit project initiated by the ECB, aimed at setting up a harmonized database containing detailed information on individual bank loans.

35. Systemic risk monitoring in the Polish financial system is primarily performed by NBP. NBP’s main mechanism for delivering regular comprehensive financial stability assessments is through the bi-annual preparation of its FSR.³⁰ After approval by the Board of NBP, the FSR is published and presented to the FSC-M. NBP is furthermore tasked by law to provide the FSC-M with analytical and research support, as well as organizational support. These responsibilities are performed by NBP’s FSD, drawing on information and analysis from other departments.³¹

36. The macroeconomic outlook forms an integral part of systemic risk monitoring and assessment. The domestic and global macroeconomic outlook forms the backdrop against which the functioning of the financial system and possible vulnerabilities and triggers are assessed. The analysis of current macroeconomic trends and the preparation of macroeconomic forecasts and projections is performed by NBP’s Economic Analysis Department. The FSD draws on this work when performing its financial stability analysis, including the preparation of the FSR. There is also close coordination between the two departments in the use of NBP’s main macro forecasting model to simulate stress scenarios for macro stress tests.³² NBP annually submits to the FSC-M a Report on Macroeconomic Stability of the Polish Economy. Recent versions of this report have not been published.

37. The FSR provides a thorough and systematic financial stability assessment. It considers the domestic and international environment in which Polish financial institutions operate, and analyzes, among others, potential vulnerabilities associated with the credit cycle, credit exposures, and liquidity mismatches. The FSR also covers potential risks of concentrated exposures, such as the banks’ portfolio of foreign currency loans; linkages between financial institutions, such as resulting from the financing needs of the deposit guarantee and resolution funds; and inadequate incentives resulting from institutions being “too big to fail.” The Report identifies possible risk triggers and assesses the resilience of financial institutions to shocks. In the case of the banking system this is done through stress tests.

38. Coverage of potential systemic vulnerabilities and risks that may emanate from payment and settlement systems is notably absent from the FSR. While the systemic risk analysis in the FSR is based on four of the five intermediate objectives of macroprudential oversight, it does not cover the fifth: “ensuring the adequate resilience of the financial infrastructure.” Within NBP the Payments Systems Department is responsible for oversight of payment systems, and, in cooperation with PFSA, assesses the functioning of securities clearing and settlement systems. Even though the result of this work is shared with other departments within NBP and published, there appears to be little to no interaction with the FSD to incorporate it into NBP’s overall assessment of systemic vulnerabilities and risks.³³ The inclusion in the FSR of an occasional assessment of potential vulnerabilities of the Polish FMI and its resilience to possible shocks would extend the Report’s analysis to full coverage of all the objectives of macroprudential oversight. It would also ensure that the FSC-M is kept abreast of important developments in this field.

39. Reflecting the country’s bank-dominated financial system, the FSR tends to focus primarily on the banking sector.³⁴ The Report also covers activities of non-credit financial institutions, but in less detail. At present, this would seem justified, as these parts of the financial system do not appear to generate significant risk for financial stability in the Polish context. Going forward, it will be important that NBP is able to comprehensively monitor the financial system, including notably also the non-bank sector, in order to capture significant new developments in a timely fashion.

40. NBP prepares a quarterly “Systemic Risk Assessment by Institutions of the Safety Net” for every regular FSC-M meeting. The assessment is based on a quarterly questionnaire survey held among the members of the FSC-M. Unlike NBP, the other members of the FSC-M do not have dedicated resources available for the sole purpose of systemic risk monitoring. The survey mechanism helps ensure that their opinions are nevertheless collected in an orderly fashion and taken into full consideration when the FSC-M discusses potential vulnerabilities and triggers that may be sources of systemic risk. NBP’s views are thus complemented with perspectives and insights from the other members of the Polish safety net to form a collective assessment. The FSC-M’s PWG plays an essential role part in creating the conditions needed for such close cooperation between the institutions.

41. The member institutions regularly present ad-hoc analyses on specific topics to the FSC-M. A prominent example is the work prepared by a special working group that was formed to develop recommendations on the safe restructuring of foreign exchange housing loans. Other topics that have been presented include the pros and cons of lending against fixed interest rates, the role of covered bond markets in the EU, and a cost analysis of the anticipated introduction of minimum requirements for own funds and eligible liabilities (MREL) to absorb losses and facilitate the recapitalization of a bank in resolution.

42. The role of external experts in the monitoring of systemic risks is limited. Neither the FSC-M nor the PWG meetings are attended on a regular basis by external experts. Non-members can be invited occasionally for specific topics. There may be merit in considering a more structural involvement of external experts, at least in the meetings of the PWG. Opening the non-confidential part of such meetings to participation by selected academics and market participants would contribute to an independent and broad perspective. It could also help to make the PWG (and thus the FSC-M) aware at an earlier stage of developments that may become of systemic significance.

43. Commitment is needed to ensure that the agenda of the FSC-M reflects all issues of potential systemic concern. Apart from certain fixed items required by law (such as the quarterly setting of the CCB level), the agenda of the FSC-M varies depending on issues that surface in the monitoring process. It is crucial that this process results in a timely discussion of all important financial stability issues, including those that may be considered controversial or politically sensitive in nature. Postponement or avoidance of such discussions would be detrimental to the functioning of the FSC-M and to its ability to achieve its objectives. Also, in cases where consensus is unlikely, it is important that the arguments are heard, and the formal positions taken by the FSC-M members are known. Agreement among the members on ex ante thresholds for certain indicators may help ensure that developments are brought to the FSC-M’s agenda in a timely fashion, while a more active involvement of external experts may also help strengthen the resolve to address sensitive issues.

B. Recommendations

44. NBP conducts high quality monitoring of systemic risk. However, a number of challenges remain. These include a full integration of potential risks from FMIs in the overall systemic risk assessment, greater involvement of external experts in the monitoring process, and ensuring the timely involvement of the FSC-M in assessing the monitoring outcome. It will also be important to ensure that resource constraints, in particular at the PFSA, do not impede the effectiveness of the macroprudential policy framework. The following steps should be considered:

• Include vulnerability assessments of Polish payment and settlement systems in the overall systemic risk monitoring. NBP’s FSD, in close collaboration with the Payments Systems Department, should be given the responsibility to incorporate in its overall financial stability analysis an assessment of potential systemic risks emanating from the Polish payment and settlement systems. At present, the oversight of these systems is not included in the Financial Stability Report. Doing so would complete the coverage in the report and through its presentation to the FSC-M would inform the latter more fully of potential risks in essential parts of the financial infrastructure.

• More actively involve external experts in the preparation of FSC-M meetings. External experts can already be invited by the FSC-M Chairman to attend parts of the meetings of the Committee or its Permanent Working Group (PWG), but this is done only on rare occasions. A more regular participation in the PWG by selected experts can help reduce the potential risk of groupthink and inject an independent perspective. The external experts could be invited to open sessions of the PWG, allowing it to have confidential discussions behind closed doors. Greater involvement of outside expertise can also help to make the PWG (and thus the FSC-M) aware at an earlier stage of emerging developments that could threaten financial stability.

• Commit to timely involvement of the FSC-M in all important financial stability matters in order to strengthen its effectiveness and underpin its position as preeminent forum for macroprudential policy. Temptation to postpone or avoid discussion in the FSC-M of politically sensitive items, where consensus may not be easily reached, should be resisted. This also applies to diverting discussions to settings outside the FSC-M.³⁵ A strong commitment by its members is essential to fully establish the FSC-M’s preeminent role. Part of this commitment could be to agree on ex-ante thresholds for certain indicators, which can help avoid delays in placing topics on the FSC-M agenda.³⁶ For instance, a rapid growth of mortgage debt beyond certain levels could automatically be reason for the Committee to discuss the potential risks involved and consider possible policy options, such as activation or adjustment of LTV, DTI or DSTI limits on housing loans. A more active involvement of external experts in the preparations of the FSC-M, for instance by allowing regular participation in the PWG, can also help to strengthen the resolve to address issues by injecting an independent perspective into the deliberations.

• Further strengthen data collection capacity. Potential efficiency gains in the gathering and sharing of information through closer collaboration between PFSA and NBP should also be explored. Data needs that require attention include information on activities by non-regulated financial institutions and greater granularity in existing credit data. Where possible, opportunities to participate in international initiatives in this field, such as the AnaCredit project initiated by the ECB, should be taken.

A. Assessment

45. The Polish authorities have a range of macroprudential instruments at their disposal. These include harmonized measures, regulated at the European level in CRD IV and the CRR and that have been established in Poland through the 2015 Act The Act does not specify non-harmonized measures, which are available at the national level. A number of these have been identified in a document endorsed by the FSC-M, but the list is not exhaustive.³⁷ The authorities recognize that macroprudential supervision is a new and evolving area of regulatory policy. They point out that, as a consequence, additional instruments may have to be introduced in the future, designed especially for macroprudential purposes.

46. A number of the harmonized macroprudential instruments mentioned in the 2015 Act are being applied in Poland:

• As of January 1, 2016, a Capital Conservation Buffer of 1.25 percent became applicable to banks in Poland to be increased in steps to 2.5 percent as of January 1, 2019. Following recommendations of the FSC-M, the level of the:

  • Countercyclical Capital Buffer has been set by legal act. The level is evaluated every quarter. It has been at 0 percent since introduction on January 1, 2016.

  • Systemic Risk Buffer has been set by the MoF. The level is evaluated at least once every two years. A buffer of 3 percent applied as of January 1, 2018.³⁸

• After consulting the FSC-M, the PFSA has been authorized to identify G-SII’s and O-SII’s. Following the procedure adopted by the PFSA upon opinion received from the FSC-M, no Polish G-SII’s were identified by the PFSA. Following opinions issued by the FSC-M, the PFSA identified 11 Polish O-SIIs, which are required to maintain O-SII buffers in a range of 0 percent to 1 percent, as of August, 2018.³⁹

47. The FSC-M may also recommend the implementation of national macroprudential instruments that are not mentioned explicitly in the 2015 Act. The list of potential non-harmonized national measures is open, but the FSC-M has published a list of macroprudential instruments in relation to the intermediate objectives that they would help achieve, that contains examples of non-harmonized instruments (see Appendix I). Whereas the FSC-M can recommend the application of such measures by one of its members, this is not a requirement. The PFSA could independently consider the activation or adjustment of macroprudential instruments, such as limits on LTV or DSTI ratios, but it is required by law to consult the FSC-M first.⁴⁰

48. A variety of measures was recommended by the FSC-M in January 2017, to contain potential systemic risk associated with the FX housing loan portfolio. These measures aim to provide incentives for voluntary restructuring in order to avoid systemic risk that might result from a statutory conversion of such loans. The measures (see Appendix II) include the imposition of a 3 percent general systemic risk buffer, as well as targeted increases in capital requirements and supervisory focus on FX denominated mortgage loans. The recommendations made by the FSC-M extend beyond the use of prudential tools and include tax measures as well as changes in the rules of operation of the Borrowers’ Support Fund to alleviate potential excessive burdens resulting from voluntary restructuring. To further incentivize banks to partake in such restructuring, the FSC-M also recommended that contributions to the Bank Guarantee Fund should take into consideration the risk associated with FX housing loans. The recommendations are in the process of being implemented.

49. The FSC-M’s recommendations regarding the FX housing loan portfolio responded to a primarily political potential source of systemic risk. In its recent publications the FSC-M has stated clearly that in economic terms the FX housing loan portfolio as such does not generate significant risk to the stability of the financial system. It did, however, consider the possible effects of statutory solutions involving the mandatory conversion of loans into zloty as a potential systemic risk. The FSC-M’s recommendations aim to provide incentives for voluntary restructuring. This reduces the need for politically motivated statutory solutions, which could turn out detrimental for the stability of the banks involved. The recommended increase in capital charges for FX housing loans thus does not directly reflect a higher risk of such loans, but rather an indirect risk of destabilizing political interference.

50. In principle, the open-ended nature of the instruments that the FSC-M can recommend should allow it to respond to a wide range of financial stability threats. So far, the FSC-M’s policy response and its recommendations to apply macroprudential instruments seem to have been broadly commensurate to the perceived systemic risks in the system. For this to remain the case, it will be important that the FSC-M prepares itself for challenges that lie ahead. It has to ensure that it can readily activate through its recommendations all parts of the macroprudential toolkit if circumstances so require. One such area might be the re-introduction of DSTI limits to help ensure that borrowers have sufficient buffers to cope with a potential rise in interest rates in an environment where the consumer loans are growing strongly. The FSC-M should also be able to respond adequately to potential financial stability threats that can emerge from structural changes underway in the Polish financial sector. These include a rising share of nonbank activity in the overall financial sector, potential further pressure on bank profitability due to official policies, and increasing sovereign-bank linkages (the “sovereign-bank nexus”).

B. Recommendations

51. To be prepared for future challenges, the FSC-M needs to be capable of responding promptly to new threats and be able to identify in a timely fashion stability risks that could emerge due to structural changes in the financial sector. For this purpose, it is recommended that the FSC-M:

• Ascertains the prompt availability of identified macroprudential instruments to ensure that they can be readily mobilized by its member authorities, if needed. The members of the FSC-M should make sure that instruments in the macroprudential toolkit can readily be activated if and when the need arises.⁴¹ For instance, in cases where an instrument can serve both microprudential and macroprudential purposes, such as with LTV, DTI or DSTI ratios, there could be some ambivalence as to whether the instrument is freely available for macroprudential use. Fleshing out a clear ex-ante understanding with the microprudential supervisor (PFSA) that minimizes the constraint on the availability for macroprudential purposes can help avoid delays in applying the instrument in question. In view of the strong growth in consumer lending, a timely re-introduction of DSTI limits is recommended in order to prevent risk from building up, rather than waiting until risks and debt have already risen.

• Pays close attention to developments in the non-bank financial sector and starts developing a policy framework to address potential systemic risks that might arise from these developments. Building on the existing monitoring in the FSR, it is advisable to identify those areas of activity that are most likely to become a potential source of concern in the Polish context. It would then be important to establish what instruments are available to address these concerns if they were to arise, and what the main gaps are in the toolkit. In this respect, the strategy paper “Macroprudential Policy Beyond Banking” issued by the ESRB in 2016 provides a good frame of reference and basis for collaboration with counterparts in the EU.

• Assesses the implications of the overall cumulative impact of various policy measures for bank profitability and financial stability. Against a backdrop of steadily declining bank profitability, there is an urgent need for a comprehensive assessment of the cumulative effects on profits of rising regulatory capital requirements,⁴² the bank tax which was introduced in 2016, and a potential increase in contributions to the Bank Guarantee Fund and Borrower Support Fund. The use of models that incorporate the effects on credit and the broader economy, can help to gain a full understanding of the effects of these policy measures, and their potential implications for financial stability.

• Closely monitors the intensity of sovereign-bank linkages and assesses whether a macroprudential response may be warranted. In Poland, sovereign-bank linkages have intensified considerably in recent years due to the two-pronged increases in bank holdings of domestic sovereign debt, and state-controlled ownership of financial institutions. Such linkages can mutually reinforce fiscal and financial vulnerabilities. Large and concentrated sovereign exposures can be an important source of risk for the banks holding them, for instance when interest rates start rising. The FSC-M should carefully assess the systemic risk that may be associated with such concentrated exposures, taking into account the valuable role that holdings of government securities play in the smooth functioning of financial markets and payment and settlement systems. An appropriate response to further increases in exposure would be to bolster resilience of the banks by increasing their loss absorbing capacity, while creating disincentives against excessive concentrations of risk. The Systemic Risk Buffer would be well-suited for this purpose.⁴³ Possible measures could also include ending the bank tax exemption of government bond holdings, thus removing an artificial incentive to increase such holdings.