## Republic of Poland: FSAP 2018 — Executive Summary (cr1939) ## Source details **Canonical URL:** [Republic of Poland: FSAP 2018 — Executive Summary (cr1939)](https://www.imf.org/-/media/files/publications/cr/2019/cr1939.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2019/cr1939.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2019/cr1939.pdf.json) --- ### Macroeconomic outlook and growth - Near-term growth expected to slow to "3 to 3½ percent" in 2019–20, with low unemployment. - Real GDP growth accelerated from "3.1 percent (year-on-year) in 2016" to more than "5 percent" during the first three quarters of 2018. - Wage growth was "7.6 percent in Q3:2018". - Headline inflation was "1.2 percent in November 2018", below the NBP’s inflation target of "2.5 percent". ### Banking system resilience and stress-test outcomes - Aggregate system resilient but some medium-sized banks appear weak; banks generally resilient to short-term liquidity risks in local currency. - Solvency stress-test results (commercial banks, 34 banks; covers "92 percent" of banking sector assets): - Baseline: aggregate CET1 stabilizes at around "15.2 percent"; leverage ratio around "10 percent". - Adverse: CET1 declines from "16.2 percent" to "12.9 percent". - Leverage ratio declines from "10.2 percent" to "8.3 percent", with "5 banks" falling below the "3 percent" level. - "9 out of 34 banks" do not meet the regulatory minimum for one of the three capital ratios in the adverse scenario. - Asset share of undercapitalized banks would be "20 percent" of the commercial banking system. - Necessary recapitalization of about "0.5 percent of GDP". - CET1 ratio of medium sized banks declines from "13 percent" to "7 percent" in the adverse scenario, with "6 out of 14" such banks not meeting regulatory minimums. - "Four OSIIs are found to be relatively weak." - Drivers of capital declines (three-year horizon): - Credit risk: "550 basis point" decline. - Funding and interest rate risks: "170 basis points" decline. - Valuation losses on debt portfolios: "90 basis points" decline in the first year; sovereign bond spread rise of "280 basis points" stressed AFS sovereign holdings. - Liquidity stress-testing (LCR and stress events): - System-wide LCR under baseline: "149 percent" (most banks between "100 percent" and "200 percent"); one bank failed by a small margin. - Retail event: two medium-sized banks failed. - Wholesale event: eight banks failed, including two large banks. - Combined event: eleven banks failed including three large ones; total shortfall of "3.6 percent of GDP". - LCR by currency: resilient in local currency but not in foreign currency; all banks showed an FX shortfall in stress events. - Sensitivity analyses: - "30 percent" Zloty depreciation against the Swiss Franc: Tier 1 capital ratio declined by "120 basis points" in combined shocks; all banks still meet Tier 1 ratio. - A "200 bps" increase in funding and a "500 bps" rise in sovereign bond yield could lead to the failure of one bank. - Simultaneous default of the five largest borrowers for each bank would decline CET1 by "2.8 percentage point" and lead to failure of "eight banks". - Cooperative banking sector stress: - Sharp deterioration in quality of "10 percent" of loans could breach minimum capital ratios for "30 percent" of cooperatives. - Simultaneous default of the five largest borrowers for each cooperative could breach minimum capital ratios for "61 percent" of this sector (which represents "5 percent" of total banking system assets). ### Sovereign–financial institution linkages and FX mortgage exposures - State control of the financial sector is "36 percent". - Increased sovereign linkages due to more state ownership and an asset tax that incentivizes holding government securities. - FX mortgage exposures have declined because of repayments: FX mortgages peaked at "11 percent of GDP" by end-2008 and fell to "6½ percent of GDP" by end-2017. - FSAP view on FX mortgages: - Risks have declined; no systemic policy response warranted. - Distressed FX mortgages should be restructured via bilateral negotiations, not mandatory centralized approaches or legislative changes. - Legislative proposals, if passed, would negatively impact bank earnings. - Stress-test of conversion or restructuring options (selected quantified results): - Under main adverse scenario: three-year cumulative cost between "7.3 and 8.1 billion zloty" ("0.2–0.3 percent of RWAs annually"). - Cumulative amount “at risk” after shocks ~ "26 percent" of end-2017 FX mortgage stock (could take "4½ years" to convert). - Significant haircuts ("25–30 percent") needed to equalize monthly installments pre- and post-conversion. - Under a "30 percent" depreciation scenario: one-year cost between "3 and 3.3 billion zloty" ("22–25 percent of net profits and other comprehensive income"); total amount at risk ~ "75 percent" of end-2017 stock (could take "11½ years" to convert); haircut of "29 percent" needed to equalize installments. ### Prudential oversight, PFSA resourcing, and independence - Important shortcomings in prudential oversight due to budgetary constraints and governance framework that compromises operational independence. - PFSA staffing levels increased from "949 to 1017" (and from "895 to 958 staff in post") over five years to end-2017 but remain insufficient. - PFSA financing: costs borne by regulated institutions through levies; expenditure must be approved by the Minister of Finance. - New law (coming into force early 2019) will establish PFSA as a state legal entity and change governance in ways that raise independence concerns: - Board expansion increases government representation; potential for majority voting control by government-related members (details preserved in source). - Provision for third-party opinion on insolvency assessments remains a constraint; recommendation that PFSA be empowered to undertake insolvency assessments without third-party opinion. - Key legal and operational gaps: - PFSA lacks direct powers to dismiss management or supervisory board members, to fine them effectively, or to require change of external auditor without additional legal steps. - Procedural rigidities from the Code of Administrative Procedures constrain prompt corrective action. - PFSA should be given missing enforcement powers and operational independence, including budgetary autonomy and authority over remuneration and internal organization. ### Macroprudential policy and systemic risk monitoring - Macroprudential framework is sound though untested; mandate assigned to the Financial Stability Committee—Macroprudential (FSC-M) with the NBP leading systemic risk monitoring. - Authorities have activated capital buffers: OSII buffers, Systemic Risk buffer, and the permanent Capital Conservation buffer. - Recommendations and notes: - Close monitoring of growing consumer credit exposures; consider re-introducing DSTI limits. - Ensure FSC-M timely and substantive vetting of macroprudential instrument use and confirm sufficiency of the toolkit. - Expand Financial Stability Report (FSR) to include payment and settlement systems vulnerability assessments. - PFSA proposal to foster fixed-rate mortgages would reduce household interest-rate risk; proposals for caps on mortgage maturity and minimum down-payments complement LTV limits. ### Crisis management, recovery and resolution, and safety nets - Legal and institutional arrangements generally sound; BRRD implementation enhanced powers of BGF and PFSA. - Findings: - BGF is sole resolution authority for banks (including cooperative banks), credit unions, and investment firms; deposit guarantee payout process is efficient and well-tested. - New SRR tools have yet to be used. - Legal conditions for using resolution funds are stringent: prior bail-in of "8 percent" of liabilities plus own funds required; use of deposit insurance funds for resolution requires prior bail-in of uninsured depositors. - Concerns over BGF independence and Board composition; BGF independence not assured in law or practice; MoF can dismiss Board members. - Recommendations: - Strengthen BGF independence and PFSA powers. - Improve bankruptcy framework to allow more timely action and harmonize triggers for bankruptcy and resolution powers. - PFSA should be empowered to perform its own asset valuations without requiring third-party opinion. - Current exemptions from recovery plan requirements for banks subject to rehabilitation plans and for two affiliating banks are inappropriate; require recovery plans for affiliating banks, significant credit unions, and banks undergoing rehabilitation. - Where viable, conduct P&A (purchase and assumption) transactions in lieu of deposit payout to limit spillovers. ### Cooperative banks and credit unions - Cooperative banks: - "553" cooperative banks service about one quarter of the population and hold "8 percent" of financial system assets; non-systemic but highly interconnected. - Focus on lending to agriculture (around half of total) and SMEs. - Most cooperatives affiliate with one of two networks that each own an affiliating commercial bank; affiliating banks are OSIIs. - Elevated risks: - Uncertainty over how "40–45" cooperatives will affiliate within a network. - About "12" cooperatives likely to remain outside a network and may need strengthening. - Affiliating banks have legacy issues of weak asset quality and capital. - Recommendations: - Strengthen supplementary internal control models aligned with PFSA requirements. - Revisit scope of affiliating bank activities and consider limiting credit activity. - Promote greater integration/consolidation among network cooperative banks. - Harmonize liquidity and solvency support across IPSs. - Where viability weakens, PFSA, IPSs, and BGF should undertake resolution activities using purchase and assumption to limit spillovers. - Credit unions: - About "35" credit unions; small sector with overall capital inadequate: sector capital adequacy at end-January 2018 is less than "3 percent" (relative to a "5 percent" requirement). - Of the "5 largest credit unions", only "1" has capital ratio above the "5 percent" minimum. - Recommendations: - Resolve non-viable credit unions through exit; consider consolidation or transformation into cooperatives for viable ones. - Decide whether a standalone credit union sector remains appropriate. ### Financial sector structure, markets, and pension (PPK) implications - Insurance sector small relative to most EU markets; largest domestic insurance group accounts for "one third" of total premiums. - Equity market: Warsaw Stock Exchange (regulated) and a smaller alternative trading system. - Corporate bond market remains modest with limited liquidity relative to sovereign market. - Government bond market expanded from "PLN533 billion" in 2013 to "PLN621 billion" in 2017. - PPK (voluntary funded pension scheme) expected to start in July 2019; planned rapid implementation raises operational risks: - Key preparatory needs: IT systems, settlement system at PFR, licensing of pension fund managers, secondary regulation, new PFSA supervisory framework, communication campaign. - Recommendation for PPK: "setting up annuities as a default option to improve the welfare of participants and create a new set of institutional investors with long term horizons; and greater attention to the PPK’s payout phase is needed, so individuals have better pensions and longevity risk protection." ### Key recommendations (selected from Table 1 excerpt) - Address weaknesses in medium-sized banks, including affiliating banks for cooperative banks — Agency: PFSA — Time: I-NT. - Replace the asset tax on financial institutions with a tax on profits and/or remuneration — Agency: MoF — Time: I-NT. - Pursue bilateral negotiations to restructure distressed FX loans instead of law changes — Agencies: PFSA, MoF — Time: I. - Close data gaps; improve data for credit risk and interconnectedness analysis — Agency: PSFA — Time: I-NT. - Reform and strengthen supervision so PFSA has (i) sufficient staffing and resources, (ii) operational independence, (iii) effective governance, and (iv) formal status in setting regulatory priorities — Agencies: MoF, PFSA, NBP — Time: I. - Provide missing enforcement powers including power to ease procedural rigidities and to dismiss management and supervisory board members — Agencies: MoF, PFSA — Time: NT. - Increase loan sampling across supervisory and business cycles — Agency: PFSA — Time: NT. - Strengthen supplementary internal control and resolution arrangements for cooperative banks and develop integration/consolidation strategies — Agencies: PFSA, MoF, ABs, IPS — Time: I. - For credit unions: develop and implement restructuring strategy to consolidate viable and resolve non-viable credit unions through exit — Agencies: PFSA, MoF — Time: I. ### Macroeconomic stress-test scenarios (selected table values) - Adverse Scenario (2018, 2019, 2020): - Real GDP (2017=100): "98.6", "97.0", "99.0" - Real GDP growth: "-1.4", "-1.6", "2.0" - Inflation (CPI): "2.0", "0.0", "-1.0" - Monetary Policy rate: "1.0", "0.8", "0.1" - Long term government bond yield: "6.2", "7.0", "7.2" - Unemployment rate: "5.7", "6.7", "6.5" - Exchange rate (Zloty/SF): "4.2", "4.3", "4.3" - Nominal GDP growth: "0.6", "-1.6", "1.1" - Baseline Scenario (2018, 2019, 2020): - Real GDP (2017=100): "103.9", "107.3", "110.5" - Real GDP growth: "3.9", "3.3", "3.0" - Inflation (CPI): "2.6", "2.5", "2.5" - Monetary Policy rate: "1.9", "2.9", "3.9" - Long term government bond yield: "3.8", "4.2", "4.5" - Unemployment rate: "4.0", "3.9", "3.8" - Exchange rate (Zloty/SF): "3.8", "3.8", "3.8" - Nominal GDP growth: "5.9", "5.8", "5.3" - Scenario severity benchmarked against neighboring countries' crisis episodes using IMF WEO database and IMF staff calculations. ### Data gaps, supervisory process, and recommended supervisory improvements - Data gaps across several areas impede systemic risk monitoring; recommendations include creating a full Credit Risk Register and enhancing NB300 attributes (e.g., renewal/refinancing, forbearance flags). - Supervisory process improvements: - Recalibrate BION/SREP to be more forward-looking with stressed KRIs and qualitative benchmarks. - Increase onsite inspection frequency for smaller banks and cooperatives; increase loan sampling and attribute sampling. - Empower PFSA with formal status in regulatory priority determination and the necessary enforcement powers and resources. - Improve coordination and information sharing for recovery and resolution planning among PFSA, NBP, MoF, and BGF. ### Selected economic and financial statistics (Appendix I & II highlights) - GDP growth series (2015–2023): "3.8 3.1 4.8 5.1 3.6 3.0 2.8 2.8 2.8" (annual percent changes as presented). - CPI inflation (average): "-0.9 -0.6 2.0 1.7 2.3 2.6 2.5 2.5 2.5". - Unemployment rate (average, LFS): "7.5 6.2 4.9 3.7 3.5 3.4 3.4 3.4 3.4". - General government debt (percent of GDP): "51.3 54.2 50.6 48.6 46.1 44.7 44.1 43.7 43.6". - Banking sector FSIs (selected, commercial banks, quarterly 2015Q1–2017Q4): - NPLs to total loans series ending 2017Q4: "6.8 ... 5.9". - Tier 1 capital ratio at end-2017: "16.2" (series shows "16.5 16.5 16.2"). - FX loans to total loans declined to "23.5" by 2017Q4. - Cooperative banks (Dec-17): - NPLs to Loans: "8.3" - Provision to NPLs: "42.3" - Capital to Asset Ratio: "8.3" *International Monetary Fund — Republic of Poland: FSAP 2018 — Executive Summary* ### EXECUTIVE SUMMARY ___________________________________________________________________________ 5 ### EXECUTIVE SUMMARY ### Macroeconomic outlook and growth - Near-term growth is expected to slow to a still robust "3 to 3½ percent" in 2019–20, with low unemployment. - Real GDP growth accelerated from "3.1 percent (year-on-year) in 2016" to more than "5 percent" during the first three quarters of 2018. - Wage growth was "7.6 percent in Q3:2018". - Headline inflation was "1.2 percent in November 2018", below the NBP’s inflation target of "2.5 percent". ### Banking system resilience and stress-test outcomes - Aggregate banking system shows resilience to adverse shocks, although some medium-sized banks appear weak. - Stress tests suggest in an adverse scenario the solvency ratio for the system of commercial banks (common equity tier one (CET1)) declines from "16 to 13 percent" of risk-weighted assets, driven by loan loss provisions, valuation losses on debt securities, and funding and interest rate risks. - Some medium-sized banks would come under solvency pressure with a small recapitalization need of around "0.5 percent of GDP". - Banks appear resilient to short-term liquidity risks in local currency. - Limited domestic and cross-border contagion risks except for cooperatives that are exposed to their network affiliating bank. - Cooperative banks are exposed to credit and concentration risks. ### Sovereign–financial institution linkages and FX mortgage exposures - State control of the financial sector is "36 percent". - Increased sovereign linkages reflect more state ownership and control through acquisition of controlling stakes in previously foreign-controlled banks and changes to the tax regime (an asset tax) that incentivize holding of government securities. - Exposures to foreign-exchange (FX) mortgages have declined because of repayments. - Policy recommendation: the asset tax should be redesigned on grounds of both financial stability and efficiency. - Policy recommendation: restructuring of FX mortgages should be pursued through bilateral negotiations rather than legislative changes. ### Prudential oversight and supervisory independence - Important shortcomings identified in prudential oversight reflecting budgetary constraints and a governance framework that compromises operational independence. - Under-resourcing of the Polish Financial Supervision Authority (PFSA) raises concerns about preparedness for a turn in the financial cycle and for dealing with troubled institutions. - A new law to be in force in early 2019 may make additional financial resources more likely but includes governance changes that will further weaken the PFSA’s independence; reform is still incomplete relative to the need for independent supervision and regulation functions. - The PFSA should be empowered to undertake insolvency assessments without the need for a third-party opinion. ### Macroprudential policy - The macroprudential policy framework is sound, though untested. - Authorities have activated capital buffers for Other Systemically Important Institutions (OSIIs) and Systemic Risk, in addition to the permanent Capital Conservation buffer. - Emerging challenges include a rising share of nonbank activity in the overall financial sector and growing consumer credit exposures that may merit deployment of the macroprudential toolkit. ### Crisis management and safety nets - Arrangements for crisis management are generally sound, and the recent implementation of the Bank Recovery and Resolution Directive (BRRD) enhanced the Bank Guarantee Fund’s (BGF) and the PFSA’s powers to deal with failing banks. - Measures required: strengthen the independence of the BGF and powers of the PFSA; improve the bankruptcy framework to allow for timelier action. - Current exemptions from the requirement to prepare recovery plans for banks subject to rehabilitation plans and for the two affiliating banks are inappropriate. - Recommendation: conduct P&A transactions in lieu of a deposit payout (see full recommendations). ### Cooperative banks and credit unions - About "553" cooperative banks service about one quarter of the population but hold only "8 percent" of financial system assets; they are non-systemic but highly interconnected. - Cooperative banks focus on lending to agriculture (providing around half the total) and SMEs. - Most cooperatives are affiliated with one of two networks that each own an affiliating commercial bank; these affiliating banks are designated as OSIIs. - The supervisory arrangement is evolving to a “supplementary” supervision model involving affiliating commercial banks and an Institutional Protection Scheme (IPS); the PFSA needs to intensify supervision through the transition. - Elevated risks: uncertainty over how "40–45" cooperatives will affiliate within a network; about "12" cooperatives likely to remain outside a network and may need strengthening; affiliating banks have legacy issues of weak asset quality and capital. - Credit union sector (about "35" credit unions) is small; overall capital is inadequate due to some larger, weak credit unions. - Recommendation: implement a strategy focused on resolving non-viable credit unions through exit, and determine whether a standalone credit union sector remains appropriate; for viable credit unions consider consolidation and/or transformation into cooperatives. ### Financial sector structure and markets - Insurance sector is small by comparison with most EU markets though large relative to other CEE countries; penetration rates, especially in life insurance, remain well below more developed EU markets. - The largest domestic insurance group accounts for one third of total premiums. - Equity markets trade through the regulated Warsaw Stock Exchange and a smaller alternative trading system. - Corporate bond markets remain modest in size with limited liquidity relative to sovereign debt market. --- ### Key recommendations (Table 1 excerpt — Poland FSAP 2018) - 1. Address weaknesses in medium-sized banks, including the affiliating banks for cooperative banks, given their systemic importance in the banking system ¶12 — Agency: PFSA — Time: I-NT - 2. Replace the asset tax on financial institutions with a tax on profits and/or remuneration ¶8 — Agency: MoF — Time: I-NT - 3. Pursue bilateral negotiations to restructure distressed FX loans instead of law changes ¶9 — Agency: PFSA, MoF — Time: I - 4. Close data gaps and improve data for credit risk and interconnectedness analysis ¶10 — Agency: PSFA — Time: I-NT - 5. Reform and strengthen arrangements for supervision, based on principles that the PFSA should have (i) sufficient staffing and resources, (ii) operational independence, (iii) effective governance, and (iv) appropriate formal status in the determination of regulatory priorities ¶23 to ¶32 — Agencies: MoF, PFSA, NBP — Time: I - 6. Provide missing essential enforcement powers including (i) those to ease rigidities constraining prompt corrective action due to Administrative Code procedures; and (ii) power to dismiss both management and supervisory board members ¶34 — Agencies: MoF, PFSA — Time: NT - 7. Increase sampling of loans across the supervisory and business cycle ¶36 — Agency: PFSA — Time: NT - 8. Implement approach to supervision of the insurance-led financial conglomerate ¶40 — Agency: PFSA — Time: I - 9. Review approach to insurance conduct of business supervision across the relevant agencies to increase preventative work, especially by the PFSA ¶41 — Agencies: MoF, PFSA — Time: NT - 10. Review and clarify regulations on private placements, market conduct supervision ¶44 — Agencies: MoF, PFSA — Time: I - 11. Conduct periodic assessments of the enforcement functions ¶45 — Agency: PFSA — Time: I - 12. Strengthen criminal law enforcement ¶46 — Agency: criminal law enforcement — Time: NT-MT - 13. Include vulnerability assessments of payment and settlement systems in the FSR and overall systemic risk monitoring ¶47 — Agency: NBP — Time: I - 14. Ensure the timely and substantive vetting of all use of macroprudential instruments by the FSC-M, to confirm the FSC-M’s overall responsibility, including sufficiency of the toolkit ¶48 — Agency: Members of the FSC-M — Time: I - 15. Propose legal amendments to provide for (i) more timely petitions for bank bankruptcy ¶53; (ii) harmonize the triggers for bankruptcy and use of resolution powers ¶53; (iii) address the need for third-party opinion on solvency ¶53; (iv) conduct P&A transactions in lieu of a deposit payout ¶63 & ¶66; and (v) BGF independence ¶52 — Agencies: MOF with PFSA & BGF — Time: NT - 16. Require recovery plans for affiliating banks, significant credit unions, and banks undergoing rehabilitation ¶54 — Agency: PFSA — Time: I - 17. Strengthen the supplementary internal control and resolution arrangements to address elevated risk and develop strategies to promote further integration/consolidation ¶62-¶63, & ¶66 — Agencies: PFSA, MoF, ABs, IPS — Time: I - 18. For credit unions, develop and implement a restructuring strategy to (i) consolidate viable and resolve non-viable credit unions through exit ¶66; (ii) revisit whether a stand-alone credit union sector remains appropriate ¶67 — Agencies: PFSA, MoF — Time: I *International Monetary Fund — Republic of Poland: FSAP 2018 — Executive Summary* ### 9. Risks associated with FX mortgage exposures have declined, though legislative ### 9. Risks associated with FX mortgage exposures have declined, though legislative proposals, if passed, would negatively impact bank earnings (Appendix III) ### FX mortgage exposures — assessment and recommendations - Distressed FX mortgages should be restructured based on bilateral negotiations rather than mandatory centralized approaches. - Reasons FX mortgage concerns have declined: - Mortgage loans in general are performing well relative to other types of loans. - FX-denominated mortgages are of generally higher quality than zloty-denominated mortgages. - Banks and borrowers exposed to FX mortgages have been building buffers due to the tightening in prudential regulations since 2006. - Robust growth in household income supports debt servicing capacity. - Legislative proposals, if passed, would negatively impact bank earnings (see Appendix III). ### State ownership in the financial sector: recent developments and implications - Policy evolution and state interest: - The government which took office in 2015 is limiting further privatization and focusing on strategic management and maximizing the value of core state assets, including its interests in the largest banks and insurer. - State ownership supervision has been reformed, with new arrangements in the Prime Minister’s office for managing key decisions and making appointments to supervisory boards based on skills and expertise. - A state-controlled large insurer has acquired controlling interests in two banks from foreign owners. - Key policy challenges from state control: - Maintaining clarity over objectives: - No evidence from FSAP discussions that the government uses state control to direct or influence institutions (e.g., by prescribing lending targets) or seeks payment of excessive dividends. - Rigorously separating state ownership supervision from other government policy: - Centralizing ownership supervision appears supportive of separation. - There are no special provisions in regulation in respect of state-owned institutions. - The lead department for regulation (MoF) has no role in ownership supervision. - Supervision and enforcement (by the PFSA) is carried out in the same way for all institutions regardless of ownership. - Ensuring effective governance is not compromised by politically driven appointments: - New arrangements provide a check on political appointments but have not eliminated them (e.g., at least one state-owned financial institution has experienced significant turnover in senior management). - Overall assessment: - Risks from significant state ownership were assessed to be mitigated though there are new reasons for concern. - The PFSA has resisted appointment of management board members, imposed financial penalties, and restricted dividend payments by state-controlled banks without interference. - WSE-listed status of large state-controlled institutions contributes to corporate governance and transparency. - A new law coming into force in early 2019 provides the government (including the offices of the Prime Minister and President) with majority voting control over the PFSA, including decisions on enforcement, dividends, capital, and other policies — these changes call into question whether risks from state-ownership will remain sufficiently mitigated. ### Resilience and stress testing — scope and data gaps - Analyses conducted: - Solvency, liquidity and domestic and cross-border spillover analyses. - Role of sovereign-bank linkages and financial stability implications of FX mortgage exposures assessed. - Data gaps were noted across several areas and should be addressed for monitoring systemic risks. ### Solvency stress test — coverage, scenarios, and outcomes - Coverage: - The solvency stress test and sensitivity analysis covered 92 percent of banking sector assets. - Adverse scenario: - Comparable to EU experience during the Global Financial Crisis. - Potential drivers: external financial market stress, slowdown in systemic economies, heightened uncertainty, loss of confidence in Europe and the United States, macrofinancial impact of domestic policy uncertainty. - Output declines to around 11.5 percentage points below the baseline by 2020. - Results and key figures: - Baseline scenario: - Aggregate CET1 ratio for the 34 commercial banks stabilizes at around 15.2 percent. - Leverage ratio (Tier 1 to total assets ratio) remains at around 10 percent. - Adverse scenario: - CET1 for commercial banks declines from 16.2 percent to 12.9 percent. - 9 out of 34 banks do not meet the regulatory minimum for one of the three capital ratios (total capital, Tier 1 capital or CET1 capital ratios). - Leverage ratio declines from 10.2 percent to 8.3 percent, with 5 banks falling below the 3 percent level. - Asset share of undercapitalized banks would be 20 percent of the commercial banking system. - Necessary recapitalization of about 0.5 percent of GDP. - Contagion: - Second-round impact from contagion in the interbank market due to initial failures is negligible. - Supervisory implications: - Continued supervisory vigilance needed for some medium-sized banks and OSIIs (other systemically important institutions). - CET1 ratio of medium sized banks declines from 13 percent to 7 percent in the adverse scenario, with 6 out of 14 such banks not meeting regulatory minimum capital requirement. - Four OSIIs are found to be relatively weak. ### Drivers of capital ratio declines (three-year horizon) - Credit risk: - Dominant driver; accounts for a 550 basis point decline in capital ratios. - Funding and interest rate risks: - Contributed a 170 basis points decline in capital. - Funding shocks triggered a decline in net interest rate margins; margins further compressed because new NPLs did not generate interest income in the adverse scenario. - Valuation losses on debt portfolios: - Led to a decline in capital by 90 basis points in the first year. - Large share of sovereign debt (mostly AFS) stressed due to a rise of sovereign bond spread of 280 basis points. ### Sensitivity analysis outcomes - Exchange rate shock: - A 30 percent depreciation of the Zloty against the Swiss Franc applied to net open positions and mortgage loan portfolios for NPL ratios. - Tier 1 capital ratio declined by 120 basis points in the combined shocks; all banks still meet their Tier 1 capital ratio. - Interest rate shocks: - Parallel upward (200 bps) and downward (100 bps) shifts have limited impact on Tier 1 capital ratio. - A 200 bps increase in funding and a 500 bps rise in sovereign bond yield (conservative assumption applied to all HFT, AFS, and HTM portfolios) could lead to the failure of one bank. - Concentration risk shocks: - Simultaneous default of the five largest borrowers for each bank would decline CET1 ratio by 2.8 percentage point and lead to the failure of eight banks. ### Cooperative banking sector stress results - Interest rate risk: - Generally resilient to interest rate risks. - Credit risk: - Increasing provisioning coverage ratio to commercial bank levels has limited impact. - A sharp deterioration in the quality of 10 percent of loans (from performing to nonperforming) could breach minimum capital ratios for 30 percent of the cooperative banking sector. - Concentration risk: - Simultaneous default of the five largest borrowers for each cooperative bank could breach minimum capital ratios for 61 percent of this sector (5 percent of total banking system assets), reflecting relatively undiversified client bases. ### Profitability drivers - Bank profits driven by structural and cyclical factors including efficiency and interest rates. - Cost-to-income ratio and excess capacity (number of bank branches per capita) are negatively associated with profitability. - Branch density appears relatively high compared with several other European countries. - Short-term interest rate is positively related to profitability (ROAA); low interest rate environment pressures bank profitability. ### Liquidity stress testing — LCR and stress events - System-wide LCR under baseline: - 149 percent, with most banks between 100 percent and 200 percent. - One bank failed by a small margin. - Some banks applied assumptions (e.g., deposit run-off rates) outside Basel III defined parameters; PFSA should address this. - Stress events: - Retail liquidity event: - System resilient in aggregate; two medium-sized banks failed the retail event. - Wholesale event: - Eight banks failed, including two large banks with sizable operational deposits. - Combined event: - Eleven banks failed including three large ones. - Total shortfall (compared to 100 percent coverage) of 3.6 percent of GDP. - Currency breakdown: - LCR stress tests by currency indicate resilience in local currency but not in foreign currency. - All banks showed an FX shortfall per the stress events; the retail event had stronger consequences on banks’ liquidity than the wholesale event. - Cooperative banks: - NBP LCR stress tests resulted in higher LCR levels than commercial banks due to more deposits over loans. - Banks not belonging to a network held higher liquidity buffers in NBP bills and/or government bonds. - Some cooperatives fell below 100 percent threshold but are exempt from complying with the LCR given participation in an IPS. ### Interconnectedness analysis - Spill-over vulnerabilities generally limited with material exceptions. - Interbank: - Destabilization to affiliating banks could cause distress to affiliated cooperative banks; addressing weaknesses in affiliating banks is important. - Cross-border: - Polish banks have limited exposures on the asset side. - Despite significant presence of foreign banks (mainly EU) operating through subsidiaries, exposures and spillover risks are generally contained. ### Prudential oversight — PFSA independence and resourcing - Resource constraints: - Supervisory resource limitations relative to high demands noted across banking, insurance, and capital markets supervision. - Budgeted staff increased from 949 to 1017 (and from 895 to 958 staff in post) over five years to end-2017, but remains insufficient. - Financing and budgetary independence: - PFSA’s costs are borne by regulated financial institutions through levies. - PFSA’s expenditure must be approved by the Minister of Finance because it is subject to central government budgetary process. - Recently enacted legislation would establish the PFSA as a state legal entity and appear to grant greater budgetary independence while relying on the same levies. - Governance and independence concerns: - Existing law requires the PFSA to report administratively to the Prime Minister, who has appointment powers for the Chairman and, on the Chairman’s recommendation, the Vice-Chairmen, and sets the framework for internal administrative matters. - PFSA board composition issues: - Eight board members, with four representing government (one represents the President and three represent relevant ministers). - Concern PFSA may not have sufficient independence from government. - Other four members (PFSA’s chairman and two vice chairmen and a representative of the NBP) do not represent government; in event of split vote, chairman decides. - Recent legislation (coming into force in early 2019) will: - Expand PFSA’s board from 8 to 12 by adding one more voting member representing the Prime Minister (providing government with five of nine voting members) and three non-voting members representing the security services, consumer protection, and the bank guarantee fund. - Risks include increased political influence, broadened access to confidential supervisory information, and added inefficiencies. - Operational governance concerns: - Successive changes to the Act on Financial Markets Supervision Act 2006 have restricted decisions that can be delegated to the Chair and staff, increasing board workload on decisions that could be delegated elsewhere. - External board members lack available time and required expertise; representatives of ministries are not required by law to have pertinent skills or experience. - Absence of an explicit position on risk tolerance to bank failure limits the PFSA board’s ability to oversee resource allocation and ensure supervision intensity is proportionate to risks and priorities. *Source: REPUBLIC OF POLAND — INTERNATIONAL MONETARY FUND (excerpt).* ### 29. Important aspects of the new law are contrary to FSAP recommendations regarding ### Important aspects of the new law are contrary to FSAP recommendations regarding ### PFSA governance and institutional arrangements - The supervisory authority should be independent in all decision-taking on the use of its supervisory and enforcement powers. - The PFSA should have budgetary autonomy, within an overall framework of accountability for its expenditure and for the levies raised from industry; the authority should be explicitly autonomous in the setting of remuneration policy and internal organization. - Governance arrangements should not include any role for government beyond appointment to the governing body (and dismissal for cause); if government oversight of administrative matters is necessary, it could be carried out through an advisory or separate administrative oversight body. - Governing body members should be selected for expertise and experience, with appropriate levels of delegation from board to staff, responsibility for oversight of management and resources, providing strategic direction and evaluating supervisory effectiveness against a defined risk tolerance. - The supervisory authority should be given some formal status in the determination of regulatory needs and priorities; options include administrative arrangements for the MoF to work together with the supervisor or an explicit right for the supervisory authority to request regulatory change and have its requests made public. - The FSAP discussed an earlier NBP proposal to merge the PFSA with the NBP (a draft law prepared but not taken up by parliament); appropriating to supervision the NBP’s extensive autonomy for its budget and decision making would help address PFSA independence concerns. - Merging prudential supervision into the central bank could be complementary to the NBP’s responsibility for overall stability and yield cost savings from combining administrative functions. - Challenges of combining price and financial stability objectives: central bank responsibilities would be enlarged; central banks with full scope (prudential, market conduct, and consumer protection) responsibilities are rare. - A “twin peaks” approach (separation of prudential and business conduct) could be considered, provided both peaks meet the independence and expertise principles; the “business-conduct” peak would need full empowerment and sufficient resources. ### Banking supervision and regulation - Banking regulation and supervision are largely in line with the Basel Core Principles (BCP), with a need to enhance the approach in some areas (Annex I). - The EU Single Rule Book including the capital requirement package is in place; the Single Supervisory Mechanism (SSM) and the European Banking Authority (EBA) are key partners of the PFSA. - PFSA’s supervisory approach is anchored to a robust onsite inspection culture that has evolved to become more risk-based; resource constraints have required the PFSA to give priority to the largest systemic banks at the expense of work on smaller entities. - Legal framework gaps and undue procedural constraints: - PFSA lacks direct powers to dismiss members of a bank’s management or supervisory boards, to fine them, or to require a change in the external auditor. - PFSA may issue recommendations for remediation, but further legal measures are then necessary to deliver the required outcome. - PFSA is required to send a warning notice to the relevant person regardless of the seriousness of the breach and to seek a third-party opinion to support its assessment of insolvency. - Procedural rigidities stemming from the Code of Administrative Procedures increase scope for extended litigation and constrain prompt corrective action and early intervention. - PFSA and the PFIU use sanctioning powers relatively infrequently in practice. - Supervision improvements needed: - Risk assessment should be more forward looking. - Coverage of loan review should be expanded. - Supervision of credit and concentration risks should be enhanced. - An enhanced process for escalating supervisory responses and taking more forceful action in case of recurrent breaches is desirable, with a public regime to determine severity of breaches. - Onsite inspections: - The 15 large commercial banks are now being inspected annually. - Cycle of inspection for smaller banks and cooperatives is too long. - For all banks, the level of periodic loan review is low––in number of loans and coverage of the loan books. - Attribute sampling would assist in assessing reliability and effectiveness of credit risk management. - A shorter inspection cycle and wider scope of loan reviews would evidence a more realistic level of resource needs across the business cycle and provide timely assurance of front and back-loan book performance. - Off-site supervision is sound and built on well-designed internal processes and information, but further improvements are needed: - Risk assessment under the BION (aka Supervisory Review and Evaluation Process (SREP)) needs recalibration to refine its ability to discriminate among different risk profiles. - BION should be made more forward-looking by including key indicators that anticipate risk, such as stressed risk indicators and qualitative benchmarks. - Creation of a credit bureau would support banks’ credit risk analysis, monitoring of credit risk concentrations, and more effective credit risk supervision. ### Insurance and financial conglomerates supervision - Except for issues relating to independence and resources, most recommendations of the 2012 insurance assessment have been implemented. - Implementation of the EU Solvency II Directive in 2016 has strengthened regulation and supervision, including new risk-based capital standards and comprehensive group supervision. - Solvency II changes appear well-embedded, without significant exemptions or transitional arrangements; implementation was thorough and proportionate; some additional requirements were added to the EU minimum standards. - No insurer has had an internal model approved for use under PFSA rules, although several have started discussions; some foreign-owned insurers have had group-level models covering Polish business approved by the home supervisor. - Emergence of the first Polish financial conglomerate, headed by an insurer, poses supervisory challenges: - PFSA carries out Solvency II-based group supervision but needs to complete application of comprehensive “supplementary supervision” and strengthen internal coordination amongst sectoral supervisors. - International supervisory college arrangements, led by the PFSA, have been used to trigger conglomerate-wide recovery planning. - Other findings and scope for development: - Supervision framework is sound, with a particularly thorough process for off-site review and a comprehensive risk assessment framework; scope exists to sharpen key supervisory messages to insurers’ management, especially in examination reports, and to increase focus on key strategic challenges and adequacy of governance for larger insurers. - Instances of customer mistreatment have been met by coordinated responses and business conduct regulation has been strengthened; PFSA could develop a stronger preventative supervisory approach requiring enhanced processes, stronger cooperation with other agencies, potential internal organizational change, and increased resources. - Market-wide risk monitoring is carried out, including annual stress testing; insurance sector issues are considered within the financial sector macroprudential supervisory framework (the FSC-M). - Policyholders benefit from a compensation scheme that is comprehensive for compulsory business (such as motor third party liability insurance), but which could be strengthened in life insurance. ### Capital markets supervision and regulation - Capital markets oversight is broadly aligned with the IOSCO Principles, though resource constraints are evident. - Conduct supervision needs to be enhanced, including: - Strengthen conduct supervision of banks in the performance of MiFID investment services. - Make selective improvements to off-site supervision (some already underway). - Increase the frequency of inspections for the largest participants and make more extensive use of thematic inspections to address conduct issues in smaller firms. - PFSA should strengthen ability to identify emerging and systemic risk: - In the short term, add a market trends report and run market intelligence meetings to strengthen risk identification. - In the medium term, develop a more structured process for risk identification and monitoring supported by tools (like a risk dashboard) to assess impact of environmental changes. - All measures should enhance PFSA’s ability to monitor the perimeter of regulation. - PFSA should verify whether there are gaps in regulation and/or supervision vis-à-vis the conditions of private placement; consider a notification requirement to allow PFSA to monitor whether exemptions are used consistent with law and regulations. - PFSA should actively use its enforcement authority; questions remain whether sanctioning tools are used consistently and timely enough to produce desired effect. - Strategic use of criminal enforcement is limited; PFSA has been actively referring cases to the prosecutor’s office but use of criminal enforcement is limited (especially for crimes different from market manipulation) and, when used, sanctions rarely apply imprisonment. ### Macroprudential policy - Macroprudential mandate is assigned to the Financial Stability Committee—Macroprudential (FSC-M), with the NBP taking the lead role in systemic risk monitoring. - The FSC-M has representation from the NBP, MoF, PFSA, and BGF and fosters close collaboration. - Due to the constitutional order, the FSC-M does not have direct powers but can issue “comply or explain” recommendations to its members to act. - Systemic risk monitoring is primarily performed by NBP, which bi-annually produces the Financial Stability Report (FSR); the FSR should be expanded to cover assessment of potential vulnerabilities emanating from payment and settlement systems. - Steps to underpin FSC-M’s preeminent position: - FSC-M has identified a non-exhaustive list of national macroprudential instruments that could be used. - To strengthen accountability, there should be timely and substantive vetting of instrument use by the FSC-M, whether the initiative to activate or adjust the instrument is taken by the FSC-M itself or not (Art. 137 (2) of the amended Banking Law of 29 August 1997 provides scope for such vetting). - FSC-M should be involved in all important financial stability matters; a strong commitment is needed from members and could involve agreement on ex-ante thresholds for certain indicators to determine when developments require FSC-M attention. - FSC-M should pay close attention to non-bank developments and periodically assess whether the toolkit is sufficient to address potential systemic risks from non-banks. - Current macroprudential settings appear commensurate with perceived systemic risks, though continued vigilance and possible action is warranted for consumer exposures: - Overall risks are considered low, though growing consumer credit (consumer loans and mortgages) merits monitoring. - FSC-M could consider timely re-introduction of debt-service-to-income (DSTI) limits to help ensure borrowers have sufficient buffers in case of a rise in interest rates. - PFSA’s recent proposal to foster development of fixed-rate mortgages will help limit interest rate risks on household balance sheets. - Proposals to introduce caps on mortgage maturity and minimum down-payment requirements will further limit mortgage risks, in addition to the LTV limit. ### AML/CFT - AML/CFT framework was upgraded through legislation implementing the 4th EU AML Directive passed earlier in 2018, addressing many recommendations made by MONEYVAL for improving technical compliance in its last evaluation. - The law appears to address deficiencies with criminalization of terrorist financing, customer due diligence, and beneficial ownership in line with the FATF standard. - Authorities should complete the National Risk Assessment (NRA) and address remaining deficiencies: - Develop an action plan and implement measures to mitigate the ML/TF risks identified in the NRA, including an increase in supervisory resources to ensure effectiveness. ### Crisis management and safety nets - Legal and institutional arrangements for recovery and resolution planning, and executing resolutions are generally sound, although legal amendments are needed to ensure Bank Guarantee Fund (BGF) independence. - BRRD measures enhanced the BGF’s and the PFSA’s powers to deal with failing banks; BGF is the sole resolution authority for banks (including cooperative banks), credit unions and investment firms and exercises resolution powers along with responsibilities as deposit insurer. - Deposit guarantee payout process is efficient and well-tested; new resolution tools have yet to be used. - Concerns remain over composition of the BGF Board and BGF’s independence, which is neither stipulated in law nor assured in practice, allowing for the dismissal of Board Members by a decision of one institution (the MoF). - Other authorities have broadly sufficient powers and cooperation is effective, but scope exists for increased coordination in some areas: - PFSA is responsible for supervising recovery planning, early intervention measures, and deciding if an entity is failing or likely to fail or filing a motion for insolvency to Court. - NBP acts as provider of emergency liquidity assistance. - Institutional arrangements among the NBP, PFSA, MoF, and BGF provide for adequate information sharing and cooperation in normal and crisis times, but coordination on recovery and resolution planning could improve, particularly in having a shared view of bank critical functions. - PFSA should be empowered to undertake its own valuation of assets, including in assessing a bank’s prospective insolvency, without being required to seek a third-party opinion or audit. - Bankruptcy framework should be improved by widening available tools and allowing for timelier action. *Source: cr1939 - 29. Important aspects of the new law are contrary to FSAP recommendations regarding* ### 54. Satisfactory progress has been made on recovery and resolution planning. However, ### 54. Satisfactory progress has been made on recovery and resolution planning. However, ### Recovery and resolution planning: findings - Satisfactory progress has been made on recovery and resolution planning. - Current exemptions from the requirement to prepare recovery plans for banks subject to rehabilitation plans and for the two affiliating banks are inappropriate. - Initial resolution plans have been prepared by the BGF. - Preferred resolution strategies have been determined and impediments to execution identified and are being addressed. - Greater loss-absorbing capacity is needed, including specifying quality and quantity of eligible instruments; efforts to have it in place should be accelerated. - The BGF should adopt policies and procedures to manage and mitigate potential conflicts of interest that arise in use of bridge bank tool, where the BGF would become an owner of a bank. ### Resolution funding, tools, and smaller banks - For smaller cooperative banks and credit unions the deposit guarantee payout process is efficient and well-tested. - New SRR resolution tools have yet to be used. - Adequate resolution funding arrangements are in place, including deposit guarantee and resolution funds. - Legal conditions for using funds, in application of EU rules, are set very high: - use of the resolution fund requires prior bail-in of 8 percent of the failing bank’s total liabilities plus own funds; - use of deposit insurance funds for resolution purposes requires prior bail-in of uninsured depositors. - EC-approved programs for dealing with potentially failing credit unions and small banks are prepared in case of need. ### Systemic crisis preparedness and interagency arrangements - Authorities have taken appropriate steps to be prepared to deal with systemic distress and crisis. - The Financial Stability Committee’s role in ensuring interagency cooperation and coordination in the event of a potential threat to financial stability are well defined. - The National Contingency Plan updated by the committee is supported by individual plans in each authority that have been or are being also updated. - Recommendation: Authorities should consider further addressing cross-border cooperation in the next update to the national plan, and periodically testing the plan by means of crisis simulation exercises. ### Liquidity framework and market functioning - The NBP has a coherent framework to manage liquidity in normal and stressed times, and markets generally function well. - Procedural arrangements for the provision of Emergency Liquidity Assistance (ELA) are well-developed with an MOF backstop in place. - Legal constraints on the liquidation of collateral in the event of a bank default need to be addressed. - The NBP cannot lend directly in foreign currencies, which may inhibit its ability to address stability risks arising from impairment in offshore funding markets, given 22 percent of bank assets are denominated in foreign currencies. - The NBP can provide foreign currency liquidity through the FX swaps market. - Most financial markets (the exception is corporate bonds) function well and are supported by good infrastructure; further development is slowed by the FIAT. ### Cooperative banks: structure, risks, and recommended reforms - Supervisory arrangement evolving to a “supplementary” supervision model; since 2015 authorities promoted that cooperative banks be part of an Institutional Protection Scheme (IPS) that includes an affiliating commercial bank. - Currently, there are two IPS networks. - All cooperative banks not part of the existing two IPS confront challenges to complete successfully their transition into the desired new models of operation. - Two cooperatives are independent in line with Article 1 of the CRR (e.g., capital over EUR 5 million, other prudential requirements). - IPSs perform internal control functions that complement PFSA supervision but are in transition; reliance on the PFSA is still necessary. - Elevated risk sources for the cooperative banks’ sector: - (i) about 40-45 cooperative banks that were seeking to establish their own affiliating bank and network will now need to affiliate back within an existing network; - (ii) approximately 12 cooperative banks still appear as likely to remain outside a cooperative bank network/IPS as they are viewed as either too large, and/or too weak to join an existing IPS; - (iii) for the existing 2 networks, their affiliating banks have legacy issues of weak asset quality and capital that in the past has required that their member cooperative banks provide support. - Key reforms to strengthen the two existing IPSs: - (i) make supplementary internal control models robust and aligned with PFSA requirements; - (ii) revisit scope of affiliating bank activities — consider limiting activities to supporting their owners/members and limiting credit activity; - (iii) promote greater integration of the networks, including through actual and operational consolidation among network cooperative banks; - (iv) harmonize liquidity and solvency support arrangements across the schemes in relative size, capacity, and accessibility. - Where individual cooperative banks’ viability weakens, PFSA, the IPSs (as applicable), and the BGF should undertake resolution activities that limit spillovers, namely the use of purchase and assumption. ### Credit unions: performance, capital, and restructuring options - Performance and quality of financial information in credit unions improved since PFSA supervision began, but remain unsatisfactory. - Capital adequacy of the credit union sector at end-January 2018 is less than 3 percent (relative to a 5 percent requirement), reflecting the troubled situation of larger credit unions. - Of the 5 largest credit unions, only 1 has a capital ratio that exceeds the minimum 5 percent requirement. - The source of low capital adequacy has been losses from poor loan underwriting and a series of past mergers allowed without addressing viability issues. - Restructuring strategy options: - (i) merger of weak but solvent credit unions with other viable credit unions or with banks (including eligible cooperative banks); - (ii) resolution and exit through application of the purchase and assumption tool to transfer franchise value to a successor entity. - Restructuring should emphasize recovery of overdue loan portfolios due to faulty loan management and collection practices. - Policy-makers need to decide whether a standalone credit union sector remains appropriate; alternatives include: - phasing out credit unions; - consolidation and transition of viable credit unions into cooperative banks or consolidation with a commercial bank. ### Financial sector development: government and corporate bond markets, and PPK - Government bond market expanded from PLN533 billion in 2013 to PLN621 billion in 2017; market infrastructure improved and investor interest was sustained. - Corporate bond market remains shallow due to low liquidity, under-developed infrastructure (including regulatory arrangements for issuance), and lack of harmonization in the design of debt instruments. - A comprehensive action plan is needed to address reforms in money markets, trading platforms, regulations of private placement, and taxation of corporate bonds (including covered bonds). - The forthcoming voluntary funded pension scheme (PPK) will contribute to capital markets development but planned implementation in the near term raises operational risks and leaves little room for preparatory work. - PPK is expected to start in July 2019 (or just a few months after the law was enacted). - Key preparatory areas include: developing and testing IT systems; putting in place the settlement system at the Polish Development Fund (PFR); licensing of pension fund managers; enacting secondary regulation for participants (including investment rules); setting up the new supervisory framework at the PFSA; and launching a communication campaign. *cr1939 - 54.* ### 70. Areas for improvement to make the PPK system more functional include: setting up ### cr1939 - 70. Areas for improvement to make the PPK system more functional include: setting up ### PPK system: areas for improvement - "setting up annuities as a default option to improve the welfare of participants and create a new set of institutional investors with long term horizons; and greater attention to the PPK’s payout phase is needed, so individuals have better pensions and longevity risk protection." ### Macroeconomic scenarios for stress tests (Table 2) - Scenarios presented: Adverse Scenario and Baseline Scenario for 2018, 2019, 2020. - Adverse Scenario (values by year shown in table): - Real GDP (2017=100): 98.6, 97.0, 99.0 - Real GDP growth: -1.4, -1.6, 2.0 - Inflation (CPI): 2.0, 0.0, -1.0 - Monetary Policy rate: 1.0, 0.8, 0.1 - Short-term money market rate: 2.0, 2.0, 1.3 - Long term government bond yield: 6.2, 7.0, 7.2 - Unemployment rate: 5.7, 6.7, 6.5 - Exchange rate (Zloty/SF): 4.2, 4.3, 4.3 - Nominal GDP growth: 0.6, -1.6, 1.1 - Baseline Scenario (values by year shown in table): - Real GDP (2017=100): 103.9, 107.3, 110.5 - Real GDP growth: 3.9, 3.3, 3.0 - Inflation (CPI): 2.6, 2.5, 2.5 - Monetary Policy rate: 1.9, 2.9, 3.9 - Short-term money market rate: 1.9, 2.9, 3.9 - Long term government bond yield: 3.8, 4.2, 4.5 - Unemployment rate: 4.0, 3.9, 3.8 - Exchange rate (Zloty/SF): 3.8, 3.8, 3.8 - Nominal GDP growth: 5.9, 5.8, 5.3 - "Source: IMF staff calculations." ### Scenario severity benchmarking - Figure note: "The severity of the scenarios was benchmarked using neighboring countries' (European Union) crisis episodes, since Poland has not experienced a severe contraction since 1990." - Data sources: "IMF’s WEO database; IMF staff calculations." ### Macroeconomic baseline and adverse scenario indicators (Figure 3) - Indicators shown over 2005–2020: Real GDP Growth (In Percent), Unemployment Rate (In Percent), Zloty / Swiss Franc Exchange Rate (in CHF/PLN), Short‐Term Money Market Rate (In Percent), Long‐Term Government Bond Yield (In Percent), CPI Inflation Rate (In Percent). - Series shown: Historical, Baseline, Adverse. - "Source: Haver Analytics, IMF Staff Estimates." ### Solvency stress testing and LCR results (Figures 4–6) - "Source: IMF staff calculations." - LCR results overview (Figure 5): - Baseline Event: "Healthy System LCR, one bank already failing" - Retail Event: "Two medium banks fail. System LCR still healthy" - Wholesale Event: "System LCR falls below 100, 2 large banks, 5 medium banks and one small bank fail" - Combined Event: "System LCR falls further, another large, another medium and another small bank fail" - System LCR under Event 1 = 149% - System LCR under Event 2 = 120% - System LCR under Event 3 = 94% - System LCR under Event 4 = 88% - Charts reflect distribution of banks by LCR buckets and number of banks affected. - LCR by currency (Figure 6): - "While system LCR in domestic currency remains above 100% in most stress scenarios...." - "... banks struggle to meet LCR requirements in foreign currency in all three stress scenarios." - Note: "Event 1 refers to the baseline scenario, and events 2, 3 and 4 refer to the adverse retail, wholesale and combined stress scenarios, respectively." - Charts show System LCR and "Banks with PLN LCR under 100 (Percent of commercial banks assets)" and "Banks with FX LCR under 100 (Percent of commercial banks assets)." - "Source: IMF staff estimates" ### Interbank and cross-sectoral analysis (Figure 7) - Network analysis results: - Results of network analysis: Commercial banks only (in number of induced failures). Source: NBP. - Results of interbank network analysis: Commercial and cooperative banks (in number of induced failures). Source: National Bank of Poland. - Ownership structure, 2017 (by percent of total assets): "Source: PFSA and Bankers’ Almanac." - Note: "The arrows point from the owner. The arrow size reflects ownership in percent of total sector assets. As a reference the largest arrow goes from 'Foreign' to 'IC life' representing 57 percent of the assets in the insurance life sector. The 'other' category predominantly includes non-financial corporations and physical persons." - Sovereign debt, end-2017 (in percent): sources include NBP Monetary and financial statistics, IFS, IMF Financial Soundness Indicators, Financial Stability Report of the Romanian Central Bank, and IMF WEO database. - Note: "World Economic Outlook GDP projections were used where public figures on 2017 GDP had not yet been published." ### Cross-border analysis (Figure 8) - Exposures reported on the ultimate risk basis and include both on-balance and off-balance positions. - Components shown: - External Assets and Liabilities of Other MFI (Percent of total assets) over Dec-96 to Jan-18. - Polish Banks’ Consolidated Total Foreign Risk Gross Exposures, end-2017 (Percent of Tier 1 capital) by country (FRA, GBR, DEU, LUX, USA, NLD, BEL, ITA, IRL, CZE, SWE, ESP, NOR, UKR, CYP). - Index of Connectedness (Percent) computed based on Diebold and Yilmaz (2010) approach using two-day average equity returns; series: Total connectedness, Poland, net connectedness. - Sources: "NBP and Datastream." ### Status of key recommendations from the 2013 FSAP (Table 3) - Addressing impaired loans (paras. 17–20): - Recommendations: "(i) intensify oversight of credit risk management and restructuring practices; (ii) standardize and enhance transparency of bank accounting practices; and (iii) standardize debt-to-income ratio calculation." - Status: "Actions included an asset quality review performed in 2014 and sustained onsite supervisory efforts focusing on credit risk management. These actions along with a strengthening economy have resulted in improved asset quality since the last FSAP." - Strengthening banking supervision (paras. 27–34): - Recommendations: "(i) expand the scope for PFSA to issue legally binding prudential regulations; (ii) allow PFSA’s Board to delegate administrative and procedural decisions to its management, increase PFSA independence, and address other governance issues; and (iii) increase PFSA flexibility to allocate budgetary and staff resources and enhance its analytical capabilities." - Status: "There is little redress of recommendations. The constitution excludes the PFSA from formal rule-making, as this power is limited to the MoF and NBP as two key agencies for the financial sector. Other recommendations to address issues of PFSA independence, and budgetary and staff resources remain unaddressed." - Strengthening credit unions (paras. 36–37): - Recommendations: "(i) eliminate the dual supervision; require a solvency ratio of 8 percent in 5 years; and clarify the governance of the stabilization fund; (ii) develop an inclusive set of SKOK regulations and apply accounting principles for financial institutions to SKOKs; and (iii) develop capital rehabilitation plans for financially weak SKOKs." - Status: "The PFSA, which already had responsibility for banks and cooperatives, was appointed as the sole supervisor of credit unions. While it has flexibility to allocate budgetary and staff resources for the agency, the envelope of available resources is insufficient." - Developing sound macroprudential policies (paras. 38–41): - Recommendations: "(i) ensure the macroprudential supervisory law provides for SRB’s independence (with a leading role for the NBP), accountability to Parliament, and power to make recommendations coupled with an “act or explain” mechanism; and (ii) develop clear macroprudential policy objectives that are distinct from those of monetary and microprudential supervisory policy." - Status: "In 2015, a law was passed that expanded and formalized the mandate of the Financial Stability Committee (FSC) to include macroprudential supervision and crisis management. The FSC’s macroprudential supervision and crisis preparedness/ management mandates are undertaken respectively by FSC-Macroprudential, meetings of which are chaired by the NBP Governor and supported by a secretariat based at the NBP, and by FSC-K (crisis management), meetings of which are chaired by the Minister and supported by a secretariat based at MOF." - Improving the bank resolution framework (paras. 48–49): - Recommendations: "(i) ensure precedence of administrative powers over corporate insolvency procedures; (ii) ensure that the creditor claims hierarchy protects BGF’s claims on resources provided for balance sheet “gap filling” measures; and (iii) include a Tier-1 capital trigger and link the “public interest” trigger to financial stability." - Status: "The key FSAP recommendations are addressed particularly with the implementation of the BRRD." - Improving the deposit insurance system (paras. 50–51): - Recommendations: "(i) remove the PBA from the BGF Council; (ii) ensure adequate funding and capacity, revise and introduce new regulations, and enhance protocols in light of expanded mandate; and (iii) amend code of conduct to restrict employment in member institutions to all employees." - Status: "As for bank resolution, key recommendations are addressed with the implementation of the BRRD. Other actions include the reconstitution of the BGF council to remove the PBA representative. Funding and capacity seem appropriate for the BGF, though resource constraints at the PFSA can slow decisions on resolution." - Strengthening pension reform and capital markets (para. 53–54): - Recommendations: "(i) allow lifecycle strategies in pension funds, and measure performance of pension funds in relation to the benchmark portfolio; (ii) amend MCB framework to allow broader issuance and adopt a legal framework for mortgage securitization; (iii) strengthen enforcement of security interests and judicial decisions." - Status: "The legal framework for MCB was amended to facilitate the issuance of covered bonds, but no legal framework for mortgage securitization was adopted." - Status: "Investment decisions for the upcoming private pension fund system (PPK) will be guided by portfolio benchmarks through targeted funds." ### Selected economic indicators (Appendix I, Table 1) - Table span: "Appendix I. Table 1. Poland: Selected Economic Indicators 2015-23" - Activity and prices (annual series 2015–2023 provided in table): - GDP (change in percent): 3.8 3.1 4.8 5.1 3.6 3.0 2.8 2.8 2.8 - Domestic demand3.3 2.3 4.9 5.9 4.4 3.5 2.7 2.7 2.7 - Private consumption growth3.0 3.9 4.9 4.3 4.0 3.5 3.0 3.0 3.0 - Public consumption growth2.3 1.9 3.5 3.0 2.7 2.7 2.6 2.4 2.2 - Domestic fixed investment growth6.1 -8.2 3.9 8.7 8.6 4.8 2.5 2.5 2.5 - Inventories (contribution to growth)-0.2 1.2 0.5 1.1 -0.2 0.0 0.0 0.0 0.0 - Net external demand (contribution to growth)0.6 0.8 0.1 -0.7 -0.6 -0.5 0.1 0.1 0.1 - Output gap-0.5 -0.5 0.2 0.5 0.5 0.3 0.1 0.0 0.0 - CPI inflation (percent) - Average -0.9 -0.6 2.0 1.7 2.3 2.6 2.5 2.5 2.5 - End of period -0.5 0.8 2.1 1.2 2.6 2.6 2.5 2.5 2.5 - Unemployment rate (average, according to LFS): 7.5 6.2 4.9 3.7 3.5 3.4 3.4 3.4 3.4 - Saving and Investment (percent of GDP) - Saving 20.5 19.3 20.1 20.7 21.0 21.0 20.7 20.5 20.2 - Investment20.5 19.5 19.7 21.1 21.6 21.8 21.7 21.7 21.6 - Saving -Investment0.1 -0.3 0.5 -0.4 -0.6 -0.8 -1.0 -1.2 -1.4 - Public finances (percent of GDP)1/ - General government revenues39.0 38.9 39.7 40.9 41.1 40.4 40.0 39.7 39.5 - General government expenditures41.7 41.1 41.1 41.4 41.9 41.7 41.6 41.6 41.6 - General government net lending/borrowing-2.7 -2.2 -1.4 -0.6 -0.8 -1.3 -1.7 -1.9 -2.1 - General government structural balance -2.4 -2.3 -2.0 -1.6 -1.7 -1.7 -1.8 -1.8 -1.9 - General government debt51.3 54.2 50.6 48.6 46.1 44.7 44.1 43.7 43.6 - Money and credit - Private credit (change in percent, end-period)3/7.5 4.9 3.4 6.2 7.4 7.4 6.4 5.9 5.5 - Credit to GDP (percent)56.9 57.8 56.0 55.5 55.8 56.6 57.3 57.7 57.9 - Deposits (change in percent, end-period)8.8 8.4 3.8 7.2 6.8 6.2 5.5 5.5 5.5 - Broad money (change in percent, end-period)9.1 9.6 4.6 7.1 6.7 6.2 5.4 5.4 5.3 - Policy Rate (percent)4/1.6 1.5 1.5 1.5 ............... - Balance of payments - Current account balance (billion U.S. dollars)-2.7 -2.5 0.6 -4.4 -5.4 -7.1 -8.8 -10.3 -12.1 - Percent of GDP-0.6 -0.5 0.1 -0.8 -0.9 -1.1 -1.3 -1.4 -1.5 - Exports of Goods (billion U.S. dollars)191.0 196.3 228.0 254.2 273.7 292.4 308.7 323.8 338.1 - Export volume growth 7.7 8.8 9.5 6.0 5.7 5.2 5.2 4.9 4.5 - Imports of Goods (billion U.S. dollars)188.6 193.1 226.5 259.6 281.3 302.5 320.6 336.6 351.3 - Import volume growth 6.6 7.6 10.0 8.0 7.4 6.5 5.2 4.8 4.3 - Terms of trade (index 1995=100)105.2 106.3 107.0 106.0 107.0 107.6 107.3 107.0 106.9 - Official reserves (billion U.S. dollars)94.9 114.4 113.3 113.7 114.0 114.6 115.3 115.9 116.5 - In percent of short-term debt plus CA deficit85.5 88.5 97.6 101.6 98.0 98.2 98.4 98.1 100.8 - In percent of IMF ARA metric 111.2 126.5 112.7 - Total external debt (billion U.S. dollars)331.1 340.1 382.0 378.0 383.0 389.9 398.8 409.5 424.6 - In percent of GDP69.4 72.2 72.8 68.2 64.6 60.5 57.5 54.8 52.7 - Exchange rate - Exchange rate regime: "Freely floating" - Zloty per USD, period average 3.8 3.9 3.8 .................. - Zloty per Euro, period average 4.2 4.4 4.3 .................. - Real effective exchange rate (INS, CPI based)5/105.5 100.9 104.3 ...... ... ...... ... - Appreciation (percent change)-3.4 -4.4 3.4 .................. - Memorandum item: - Nominal GDP (billion zloty)1800.2 1861.1 1988.7 2125.4 2270.8 2404.7 2528.4 2658.6 2795.9 - "Sources: Polish authorities; and IMF staff calculations." - Footnotes: "1/ According to ESA2010. 2/ The difference from general government debt reflects different sectoral classification of certain units. 3/ Credit defined as in IFS: 'Claims on other sectors.' 4/ NBP Reference Rate (avg). 5/ Annual average (2000=100)." ### Financial Soundness Indicators (Appendix II) - Commercial banks (Appendix II. Table 1) — selected quarterly series 2015Q1–2017Q4: - NPLs to total loans: 6.8 6.6 6.6 6.2 6.4 6.3 6.3 6.0 6.0 6.0 6.0 5.9 - Loan loss reserve to NPLs (Coverage): 55.3 55.7 56.2 56.8 57.2 57.7 57.8 56.2 56.8 57.0 57.0 57.7 - LLR to total loans: 3.7 3.7 3.7 3.5 3.7 3.6 3.6 3.4 3.4 3.4 3.4 3.4 - Prov for loan loss to total loans: 0.7 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 1.9 1.4 - Annualized loan growth: 10.3 11.7 11.4 9.2 4.2 3.0 3.0 2.6 5.5 3.2 5.0 3.0 - Texas ratio: 0.4 0.4 0.4 0.4 0.4 0.4 0.3 0.3 0.3 0.3 0.3 0.3 - Net Interest Margin: 2.5 2.4 2.4 2.5 2.6 2.5 2.6 2.5 2.7 2.7 2.8 2.7 - Efficiency (cost/income): 38.6 40.3 41.0 44.8 45.9 42.9 44.2 44.6 50.2 47.4 46.1 46.0 - ROAA: 1.2 1.1 1.1 0.9 0.9 1.1 1.0 0.9 0.7 0.8 0.9 0.8 - ROAE: 18.5 16.8 15.8 13.2 12.4 15.7 14.0 13.0 9.3 11.4 11.7 11.3 - Trading gains to income: 6.1 5.7 5.6 5.8 5.7 5.4 5.7 5.7 4.9 4.6 4.6 4.6 - Loan-to-deposit (LTD): 110.4 112.1 109.1 107.0 105.0 105.2 105.1 102.9 104.6 105.1 106.0 102.4 - Liquid assets / total assets: 20.6 21.3 21.2 21.7 22.6 22.1 21.9 22.6 21.3 21.1 20.9 22.2 - Liquid assets / short term liabilities: 22.8 23.7 23.6 24.1 25.3 24.8 24.6 25.3 23.9 23.7 23.6 25.0 - Wholesale funding: 23.7 23.9 22.7 20.5 20.2 19.4 19.1 18.6 18.8 18.3 18.4 17.6 - Capital adequacy ratio (CAR): 14.8 15.2 15.5 15.9 16.6 17.0 17.2 17.1 17.4 18.0 18.0 18.1 - Tier 1 capital ratio (Tier 1 capital to RWA): 13.5 13.9 14.2 14.6 15.1 15.3 15.6 15.5 15.8 16.5 16.5 16.2 - Financial Leverage (times): 10.0 9.8 9.8 9.7 9.4 9.3 9.2 9.4 9.2 8.9 8.9 8.8 - FX loans to total loans: 31.2 31.3 30.4 30.2 29.4 29.5 28.4 28.7 26.9 25.8 25.0 23.5 - FX deposits to total deposits: 10.7 10.8 10.7 10.7 11.1 11.3 11.9 11.8 12.6 13.0 12.7 13.4 - "Source: NBP" - Cooperative banks (Appendix II. Table 2) — selected annual/quarterly snapshot: - Dec-15 / Dec-16 / Jun-17 / Sep-17 / Dec-17 - NPLs to Loans: 6.7 7.7 7.8 8.0 8.3 - Prov to NPLs: 30.1 31.3 31.5 32.3 42.3 - Loan Growth: 7.8 4.0 6.2 6.3 3.9 - Asset Growth: 49.1 11.9 4.5 4.9 7.8 - Return on Avg Assets: 0.4 0.5 0.7 0.7 0.6 - Loan to Deposits: 68.8 63.7 65.0 65.2 60.8 - Capital to Asset Ratio: 9.0 8.4 8.7 8.6 8.3 - "Source: NBP" *International Monetary Fund — Republic of Poland mission materials in the provided content unit.* ### Appendix II. Table 3. Poland: Financial Soundness Indicators (Commercial Banks by ### Appendix II. Table 3. Poland: Financial Soundness Indicators (Commercial Banks by Ownership) (2017Q4, in percent) ### Asset Quality - NPLs to total loans: - State-controlled: 5.8 - Domestic private: 12.5 - Foreign-controlled: 4.9 - Loan loss reserve to NPLs (Coverage): - State-controlled: 59.6 - Domestic private: 42.0 - Foreign-controlled: 62.3 - LLR to total loans: - State-controlled: 3.5 - Domestic private: 5.3 - Foreign-controlled: 3.0 - Prov for loan loss to total loans: - State-controlled: 1.3 - Domestic private: 3.3 - Foreign-controlled: 1.1 - Annualized loan growth: - State-controlled: 4.9‐0.7 - Domestic private: 2.1 - Foreign-controlled: (value presented as two numbers in source; preserve as shown) 4.9‐0.72.1 - Texas ratio: - State-controlled: 0.3 - Domestic private: 0.8 - Foreign-controlled: 0.3 ### Profitability and Efficiency - Net Interest Margin: - State-controlled: 3.0 - Domestic private: 2.0 - Foreign-controlled: 2.6 - Efficiency (cost/income): - State-controlled: 45.4 - Domestic private: 121.4 - Foreign-controlled: 47.2 - ROAA: - State-controlled: 1.0 - Domestic private: -0.3 - Foreign-controlled: 0.9 - ROAE: - State-controlled: 12.9 - Domestic private: -6.4 - Foreign-controlled: 12.2 - Trading gains to income: - State-controlled: 4.0 - Domestic private: 2.0 - Foreign-controlled: 5.4 ### Liquidity and Funding - Loan-to-deposit (LTD): - State-controlled: 100.1 - Domestic private: 115.3 - Foreign-controlled: 102.5 - Liquid assets / total assets: - State-controlled: 20.5 - Domestic private: 18.9 - Foreign-controlled: 24.0 - Liquid assets / short term liabilities: - State-controlled: 23.2 - Domestic private: 20.4 - Foreign-controlled: 27.3 - Wholesale funding: - State-controlled: 12.2 - Domestic private: 36.9 - Foreign-controlled: 18.3 ### Capital Adequacy and Leverage - Capital adequacy ratio (CAR): - State-controlled: 18.4 - Domestic private: 13.1 - Foreign-controlled: 18.7 - Tier 1 capital ratio (Tier 1 capital to RWA): - State-controlled: 17.0 - Domestic private: 10.6 - Foreign-controlled: 16.5 - Financial Leverage (times): - State-controlled: 8.6 - Domestic private: 13.2 - Foreign-controlled: 8.4 ### Foreign Currency Exposures - FX loans to total loans: - State-controlled: 17.3 - Domestic private: 19.5 - Foreign-controlled: 28.9 - FX deposits to total deposits: - State-controlled: 13.4 - Domestic private: 13.4 - Foreign-controlled: 13.4 *Source: NBP* --- ### Appendix III. Risk Analysis of FX Mortgages ### Background and historical evolution - FX mortgages (mostly Swiss franc) grew from: - 2 percent of GDP (around 60 percent of total outstanding housing loans) at end-2004 - to 11 percent of GDP (around 70 percent of total outstanding housing loans) by end-2008. - At peak, FX mortgage portfolio was widespread across the banking sector with medium-sized and foreign-controlled banks most exposed. - The stock of FX mortgages started to decline from early 2012 with an average annual amortization rate of 8 percent in recent years, reaching 6½ percent of GDP by end-2017. ### Performance and resilience - FX mortgages had relatively low NPL ratios in the last decade (below 4 percent), even during stress episodes. - During the 2015 Swiss franc appreciation episode: - External mitigating factor: simultaneous reduction in Swiss LIBOR rate, partially offsetting increased debt service. - Domestic mitigating factors: tightening prudential regulations since 2006, measures to raise capital requirements for banks exposed to FX mortgages, limits on offering FX mortgages to unhedged borrowers, and effective ban on new FX mortgage loans to unhedged borrowers from 2013. ### Deterioration in risk profile and public debate - Risk profile deterioration after stress episodes: - Average LTV ratios for FX mortgage loans increased considerably after the 2015 Swiss franc appreciation, especially for loans granted during 2007–08. - By end-March 2015, share of Swiss franc mortgages with LTV higher than 80 and 100 percent reached 68 and 53 percent of total Swiss franc mortgages outstanding, respectively. - Debt service burden on Swiss franc mortgages rose considerably. - NBP concluded after the 2015 Swiss franc appreciation that the FX mortgage portfolio posed no systemic risk to banking sector stability, but public concerns increased and calls for borrower protection measures intensified. ### Legislative proposals and regulatory responses - Four draft bills under Parliamentary discussion: - Two draft bills from Civic Platform and Kukiz’15 involve forms of mandatory conversion (details preserved as in source footnote). - President’s office proposals (August 2016 and August 2017): - August 2016 proposal: require banks to repay “excessive” FX spreads charged to FX mortgage borrowers; assessed to cost between 4 to 9 billion zloty (up to three-quarters of the 2016 banking sector profits). - August 2017 proposal: establish a dedicated “Restructuring Fund” with quarterly contributions from banks capped at 0.5 percent of the FX mortgage stock; contribution capped at 2¾ billion zloty for the first year with the current stock of FX mortgages. - FSC-M recommendations (released early 2017) include: - Increasing the risk weight for FX mortgages from 100 percent to 150 percent. - Imposing a 3 percent systemic risk buffer (from zero percent) regardless of banks’ FX mortgage exposure. - Requiring additional capital for banks with FX mortgage portfolios. - Most recommendations have been in effect since late 2017 or early 2018; progress in voluntary conversion has been limited. ### FSAP assessment and stress-test results - FSAP conclusion: risks associated with FX mortgage portfolio have declined and no systemic policy response is warranted. - Supporting factors for improvement: - Robust wage growth. - Favorable Swiss franc interest rates. - Income buffers of FX mortgage borrowers. - Prudential tightening following FSC recommendations. - Stress-test findings and scenario analysis (key quantified results preserved): - Methodology notes: - Two scenarios analyzed for the “Restructuring Fund”: “no conversion” (upper bound of cost) and “fast conversion” (lower bound), assuming contributions set at the maximum level throughout the scenario period. - Only FX mortgages “at risk” (i.e., with LTV above 80 percent and DSTI above 50 percent) are assumed to be converted. - Under the “fast conversion” scenario, haircut rates equalize pre- and post-conversion debt service (in zloty terms) and cumulative debt relief a bank is willing to offer each quarter equals its contribution. - Under the main adverse scenario: - Three-year cumulative cost ranges between 7.3 and 8.1 billion zloty (0.2–0.3 percent of RWAs annually). - The cumulative amount “at risk” after the shocks is around 26 percent of the end-2017 stock of FX mortgages, which could take 4½ years to convert. - Significant haircuts (25–30 percent) are needed to equalize monthly installments pre- and post-conversion. - Cost (relative to RWAs) is highest for larger medium-sized and small banks, as well as for foreign-controlled banks. - Under the 30 percent depreciation scenario: - One-year cost ranges between 3 and 3.3 billion zloty (22–25 percent of net profits and other comprehensive income). - Total amount “at risk” after the one-time shock is around 75 percent of the end-2017 stock of FX mortgages, which could take 11½ years to convert. - A haircut rate of 29 percent is needed to equalize monthly installments pre- and post-conversion. ### Conclusions and policy guidance - FSAP judgment: - Risks associated with the FX mortgage portfolio have declined and no systemic policy response is warranted. - Pockets of vulnerability exist and should be addressed case by case. - Solutions to distressed FX mortgages should be case-by-case and risk-based. - If policy actions are taken for objectives other than financial stability (e.g., consumer protection), they should aim to minimize adverse impact on bank profitability and financial stability. *Source: IMF staff compilation from Appendix II and Appendix III of the provided document.* ### Appendix V. Table 1. Poland: Str ### Appendix V. Table 1. Poland: Stress Test Matrix: Solvency Risk (Using December 2017 Data) ### 1. Institutional perimeter - Institutions included: - 34 commercial banks. - 553 cooperative banks. - Market share: - 85 percent of total banking sector assets. - 7 percent of total banking sector assets. - Data and baseline date: - European reporting templates (FINREP and COREP). - Supervisory data from the NBP, based on national reporting templates. - Macrofinancial data from Haver Analytics, Datastream and WEO. - December 2017 data. - Scope of consolidation: perimeter of individual banks (including foreign subsidiaries). - Top-down sensitivity analysis by the NBP: - Supervisory data, based on national reporting templates (more detailed than FINREP and COREP). - December 2017 data. - Scope of consolidation: perimeter of individual banks. ### 2. Channels of risk propagation / Methodology - Macroeconomic scenarios quantified using IMF Macrofinancial model (Vitek, 2016). - Detailed balance sheet stress test, covering key risk-sensitive exposures. - Based on satellite models and methodologies developed by the FSAP team. - Sensitivity analysis covering counterparty, credit and interest rate risks. - Top-down sensitivity analysis by the NBP: sensitivity analysis covering counterparty, credit and interest rate risks. ### Satellite models for macrofinancial linkages; stress horizon - Credit losses: - Nonperforming loan ratios and provisioning ratios are estimated and projected by three main sectors: mortgage, other-consumer and corporate. - Projections based on macro and financial variables, such as GDP growth, unemployment rate, interest rates, house price growth and wage growth. - NPLs assumed to not provide any accrued interest. - Funding costs: - Estimated and projected based on macrofinancial factors such as three-month Wibor and sovereign bond yields. - Stress test horizon: - Three-year horizon: 2018–20. - Instantaneous sensitivity analysis (NBP). ### 3. Tail shocks — Scenario and sensitivity analysis - Scenario analysis: - Baseline scenario based on the December 2017 World Economic Outlook (WEO) projections. - Adverse scenario features external financial market stress and growth slowdown, captures macrofinancial impact of domestic policy uncertainty, assumes financial market stress and tightening in financial conditions in systemic economies, heightened uncertainty and protectionist measures in Europe and the United States, domestic policy slippages, weakening in key institutions, and heightened uncertainty weighing on confidence and consequently consumption, investment, and output. - Sensitivity analysis (commercial banking sector): - Additional exchange rate shocks: 30 percent Zloty depreciation. - Interest rate shocks. - Counterparty risk shocks: simultaneous default of the five largest non-financial borrowers. - Sensitivity analysis (cooperative banking sector): - Counterparty risk shocks: simultaneous default of the five largest non-financial borrowers. - Credit shocks and interest rate shocks. ### 4. Risks and buffers; behavioral adjustments - Risks/factors assessed: - Credit, market (equity risks, exchange and interest rates), sovereign (repricing and spread risks), funding interest rate risk in the banking book and concentration risk (FSAP team). - Credit, interest rates and concentration risk (NBP). - Behavioral adjustments (FSAP team): - Balance sheet grows in line with nominal GDP, with a floor set at zero, and accounting for differentiated risk weights for domestic and foreign currency mortgage portfolios. - Dividends are paid out by banks that remain adequately capitalized with positive profits throughout the stress, taking into account their FX mortgage exposures, in accordance to the dividend policy of the PFSA. - Behavioral adjustments (NBP): - N/A. - Invariant assumptions: - Invariant asset allocation; no change in business models, lending standards, or investment pattern in response to shocks (over three years). ### 5. Regulatory and market-based standards and parameters - Calibration of risk parameters: - Based on credit models estimated by IMF staff. - Credit losses calculated through estimation of satellite models using NPL ratios and historical provisioning ratios. - N/A (NBP column). - Regulatory/Accounting and market-based standards: - CRD IV / CRR fully loaded levels for CET1. - Capital shortfalls measured in terms of CET1, T1, total capital and the leverage ratio. - Two sets of hurdle rates: 1) Pillar I and Pillar II requirements (main results); 2) Pillar I and Pillar II requirements and OSII buffers (robustness checks). - 150 percent risk weights for FX mortgages (reflected in end-2017 reporting data). - CRD IV / CRR fully loaded levels for CET1 (NBP). - Capital shortfalls measured in terms of CET1, T1, total capital and the leverage ratio (NBP). ### 6. Reporting format for results - Output presentation: - System-wide capital shortfall. - Number of banks and percentage of banking assets in the system that fall below certain ratios. *Appendix V. Table 1. Poland: Stress Test Matrix: Solvency Risk (Using December 2017 Data).* ### 7. The responsibilities, the objectives, and the powers of the four agencies in charge of ### 7. The responsibilities, the objectives, and the powers of the four agencies in charge of banking oversight in Poland ### Institutional framework and harmonization with EU - The responsibilities, the objectives, and the powers of the four agencies in charge of banking oversight in Poland are clearly set up by law. - The agencies coordinate through the FSC, and banking supervision is under the responsibility of the PFSA, as Competent Authority, which is an integrated financial supervisor. - Poland’s banking regulation is significantly harmonized and integrated to the EU’s regime. - Laws and regulations have been regularly updated, and the Polish regime in place has fully implemented the provisions of the CRR/CRD IV and the BRRD. - Recommendation: Consider posting more domestic legislations/regulations in English on PFSA and other relevant authorities’ websites to permit greater accessibility to the framework. ### Gaps in PFSA regulatory powers and legal constraints - Several gaps in the law restrict PFSA regulatory powers; these powers belong exclusively to the MoF, requiring PFSA to rely on MoF for law initiatives and for enacting binding regulations. - Constitutional prescription: the power to issue binding regulations is strictly prescribed by the constitution; PFSA has no explicit constitutional authorization to promulgate such regulations. - Consequences: - Slower and less flexible regulatory process, more exposed to the political cycle. - PFSA can set business standards and require observance of safe and sound banking practices, but lacks key enforcement powers. - Specific missing enforcement powers: - No power to swiftly remove managers. - No power to remove and discipline directors serving in the supervisory board. - Bound to a lengthy administrative process whose due process hinders anticipatory actions. - Market participants request more proportionality and better structured regulatory costs assessment. ### PFSA governance and operational capacity - Governance shortcomings: - PFSA board lacks reasonable independence and has not defined a clear policy framework to govern official risk tolerance or to evaluate and report on its effectiveness. - The board is subordinated to the government; the government directly or indirectly nominates and can remove a majority of members without public cause. - External members are not independent directors dedicated to serving the agency and function at the pleasure of their incumbents without specific fit and proper requirements. - Resource constraints: - Budget, salaries, and staff count levels are determined by the government, which also approves internal organization. - Office workload is under high stress; there is a lack of staff and insufficient financial resources to cover its needs in spite of these being defrayed now at about one third of its maximum level to the institutions supervised. - Requests to lessen constraints have not yet been acted upon. - Other governance needs: - Legal protection post-employment still needs enhancing. - A cooling-off framework within reasonable parameters should be established. ### Licensing, ownership, and structure (CPs 4–7) - Licensing: - PFSA has exclusive competence for granting and withdrawing the license of banks incorporated in Poland and branches of banks located outside the EU. - New provision in the Banking Act: supervisory board members should have adequate expertise, skills, and experience. - Draft Recommendation Z aims to foster conditions for banks’ due diligence on management suitability. - Missing elements in licensing regime: - Absence of formal fit and proper tests for supervisory board members at the licensing stage. - PFSA has not developed a manual for licensing. - Only a limited number of board members are subject to fit and proper tests. - Ownership and transfers: - PFSA has a detailed framework to review transfer of significant ownership. - Conditions for approving major acquisitions could be improved: major acquisitions require only notification to the PFSA while establishment of subsidiaries abroad and branches require explicit ex ante approval. - Banking Act does not restrict individual holdings in nonfinancial entities. ### Ongoing supervision (CPs 8–10, 12): risk-based approach and BION - Risk-based supervision: - PFSA risk-based approach has been tested over a supervisory cycle and seems to hold well. - PFSA operates a reasonable BION, implementing the EBA’s Guidelines (EBA/GL/2014/13) into Polish supervisory practice. - Recommendation: BION should be officially approved by the MoF to anchor the risk tolerance framework and engagement model, including supporting workload estimation to better assess resource needs. - Needed BION enhancements: - Recalibrate to augment discrimination power of risk scores by including forward-looking and stressed key risk indicators (KRIs). - Include indicators from benchmarking actual risk governance and control practices to better differentiate risk profiles across banks. - Better ingrain assessment of the macroeconomic environment along the business cycle following EBA guidelines. ### Onsite and offsite supervision, staffing, and procedural recommendations - Current practices: - PFSA deploys a broad mix of onsite and offsite supervisory tools and techniques within prevailing resource constraints. - Manuals of procedures are well detailed. - Resource-driven limitations: - Staff stress causes long inspection cycles in small banks and cooperatives, and lower than safer loan sampling review. - Cycle of inspection of cooperatives is now beyond five years and needs shortening considering official risk tolerance to failure. - Extension of loan reviews is too short and needs to be increased. - Suggested organizational changes: - Consider integrating onsite and offsite responsibilities starting with large banks and groups to achieve synergies. - Centralize bank relationships for more frequent visitation and direct contact with bank management; integrate risk assessments and ratings. - Structure checklists from a core to an expanded assessment, leading to an impact analysis routine to graduate depth of transactional review. - Improve interface of information systems for cross-checking risk scores. ### Supervisory reporting and data systems - Data collection and reporting: - NBP collects a broad set of information and shares a data mirror with PFSA. - Almost all banks report FINREP/COREP to the NBP on IFRS solo and group bases; cooperatives report under the PAS. - PFSA prepares a Uniform Bank Performance Report (UBPR). - Office supplements UBPR with: - An annual Self-Assessment Questionnaire (SAQ) providing offsite access to internal risk governance documentation. - Use of NBP’s credit database (NB300) on client exposures, which lacks transactional information and has limited attributes. - Data improvements recommended: - NB300 should add an indicator to flag renewal and refinancing. - Migrate to a full Credit Risk Register to warehouse individual transaction data and key loan and borrower attributes. - PFSA’s investigation powers could be more clearly spelled out in case of need. ### Consolidated supervision and cross-border cooperation - Consolidated supervision: - Legal framework and procedures for consolidated supervision of banks that are subsidiaries of European banking groups found adequate. - Consolidated supervision for most groups is performed by the ECB; in some cases by national authorities from Germany and Norway. - As a host supervisor, PFSA participates in colleges organized by consolidated supervisors and obtains necessary information. - PFSA seeks to rule out existence of undeclared horizontal-parallel banking groups. ### Corrective and sanctioning powers (CP 11) - Weaknesses in enforcement regime: - PFSA recommendations or orders are not binding acts; moral suasion may be insufficient in urgent situations. - PFSA cannot directly dismiss a bank’s management board members (president, vice president, or any other member). - PFSA has no power with respect to supervisory board members. - Early intervention impeded by need for the Office to send a warning notice. - No internal guideline to assist Office in determining most adequate response in case of breach or violation. - PFSA has not developed in-house methods or criteria to guide staff on applying sanctions (e.g., determining severity of infringements or quantum for fines). - PFSA and the PFIU have low track records in using sanctions. - New early intervention and resolution powers attributed in June 2016 to the BGF and conditions of cooperation between the PFSA and the IMF remain to be tested. ### Cooperation and information sharing (CPs 3, 13) - Domestic cooperation: - Adequate information sharing arrangements are in place with all relevant domestic authorities. - Legal and institutional arrangements for recovery planning, resolution planning, and executing resolutions are generally sound. - Scope exists to improve coordination on recovery and resolution planning, particularly in having a shared view of banks’ critical functions. - Cross-border cooperation: - PFSA can exchange information and cooperate effectively with home supervisors over Poland-based subsidiaries of foreign banks through bilateral MoUs. - Majority of cooperation takes place within supervisory colleges whose operations are detailed in regulations directly applicable in all EU member states. ### Corporate governance, risk management, internal control, and audit (CPs 14, 15, 26) - Corporate governance framework: - Corpus of norms, regulations, and guidance appear broad and aligned with the EU framework. - Many provisions are new (e.g., revised 2017 MDF regulation) or not yet in force (e.g., PFSA Recommendation Z). - Effective implementation of new Polish norms remains to be tested. - PFSA oversight has relied mainly on general principles for corporate governance and Recommendation H. - Limitations in oversight: - Lack of power vis-à-vis unfit or unsuitable board members. - Limited vetting process and limited interaction with supervisory board members during onsite inspections. - Preeminent role of management in centralizing reporting of key control functions reduces supervisory board activism. - Risk management: - Prudential recommendations include detailed qualitative elements; combined with the 2017 Risk Ordinance by the MoF, they create an enforceable framework of sound practices. - Assessment of risk management occurs via inspections, thematic controls in BION, and observations to banks. - Need for more benchmarking to visualize implementation gaps and cross-industry issues. - Recommendation: Further attention to determination of risk profiles considering market and macroeconomic environment to fully embrace SREP guidelines in EBA/GL/2014/13 (Sections 7.7). - Internal control and audit: - Regime improved and now fully compliant with the BCP. - New PFSA recommendations strengthen compliance function and impose new duties, including vertical verifications and testing. - Compliance mandate extended to market abuse, AML, conflicts of interest, etc. - Recommendation H: scope and terms of cooperation between parent and subsidiaries within internal audit/compliance must be defined in a formal policy approved by the supervisory board. - MoF Ordinance of March 6, 2017, on risk management and internal control systems implements CRD IV provisions in this domain. - PFSA inspection reports and post-inspection recommendations show attention to internal control and audit. ### Capital adequacy and liquidity risk (CPs 16, 24) - Capital: - Banks report good capital levels. - 2014 AQR findings did not reveal residual asset quality issues or significant forbearance. - Capital ratios at 18.65 percent are more than 92 percent made up of Core Tier 1. - PFSA enforces conservative dividend policies and a more rigorous regime than the EU of risk weights for mortgages. - Effect: Risk weight densities are among the highest in Europe. - Banks comply with three layers of additional capital buffers. - PFSA requires a Pillar 2 add-on for mortgages in foreign currency and is refining an algorithm to factor in its BION assessment. - Leverage: banks report a robust 9.5 percent leverage ratio; leverage is taken into account in BION methodology. - Liquidity: - Liquidity requirements follow the EU (LCR) and, temporarily, Polish (long term) requirements. - Target and full scope inspections review liquidity and funding risk and the reliability and effectiveness of risk management frameworks. - BION refinements needed: - Articulate better risk appetite and strategies. - Capture intra-risk considerations. - Reinforce consistency of liquidity contingency and recovery plan triggers. - Explicitly visualize stress testing into BION using stressed KRIs. - Need to compile bank practices on implementation of outflow rates for deposits to identify outliers and instill consistency if needed. ### Credit risk and problem assets (CPs 17–18) - Credit risk supervision: - Credit risk assessments are an essential routine per risk-based policies. - Frequency of targeted inspections for large banks covers relevant aspects reasonably well within prevailing resource constraints. - Recommendation: Do attribute sampling to quantify with reasonable precision the exceptions flagged for scoring management and controls reliability. - Recalibrate credit risk scorings in BION by adding forward-looking KRIs, develop proxy benchmark indicators, and obtain additional data on behavior of front and back books. - Regulatory and data needs: - Limited scope of the Banking Act on conflicts of interest and lack of formal requirement for board approval of significant exposures should be supplemented in regulation. - A Central Credit Register to warehouse transactional information would complement NB300 obligors’ exposures. - Loan classification and provisioning: - Authorities have enhanced prudential policy regarding loan classification and provisioning since last BCP assessment. - MoF amended in 2015 its Asset Ordinance for non-IFRS reporting. - Recommendation R should be updated considering EBA/GL/2017/06 and blend in nascent IFRS 9 practice, compiling observed practices and pastoral letters since 2013 on IAS impairment. - Credit sampling needs to be increased from relatively low levels now practiced; ensure more attention to screening refinancing and forbearance practices per Commission Implementing Regulation (EU) 2017/1443. - Until a full Credit Risk Register is in place, NB300 client records should include an attribute to report all forms of forbearance including renewal. - Given PFSA’s lack of regulatory powers, MoF should set enforceable rules of collateral appraisal and provide powers to PFSA to require re-appraisals without legal challenge by bankers. ### Related-party transactions, concentration, and country risks (CPs 19–21) - Related-party regime: - Legal provisions on arm’s length credit decisions are detailed, but rules governing related parties’ transactions need strengthening. - Recommendations: - Expand definition of related parties to include close relatives or affiliations of persons identified in the Banking Act. - Envisage a more general ban for Board members with conflicts of interest to not take part in credit decisions. - Amend law to extend the list of transactions subject to the related parties’ regime. *Source: 7. The responsibilities, the objectives, and the powers of the four agencies in charge of banking oversight in Poland (cr1939).* ### 26. The regime for concentration risks is deemed satisfactory. The PFSA applies the large ### cr1939 - 26. The regime for concentration risks is deemed satisfactory. The PFSA applies the large ### Concentration risk and large exposure regime - The PFSA applies the large exposure regime set in CRR and has issued Recommendation C concerning the concentration risk management and the resolution concerning the risk management system and internal control. - These acts provide proper legal framework for the efficient identification of the significant sources of concentration risk and their implementation by banks are assessed through onsite visits and regular reporting. - Shortcomings: - The credit reporting tool (NB300) exhibits some flaws. - The long inspection cycle limits the verification of compliance with large exposure requirements. - Annex I observations (Core Principle 19): - Low sampling for loan large exposure (LLE). - Absence of a full-fledged Credit Registry in Poland preventing the PFSA from getting some business intelligence around LLE and concentration risks. - No legal requirement that all material concentrations be regularly reviewed and reported to the bank’s board. ### Country risk (CP 21) - Country risk is not significant. - Monitoring and procedures: - Periodically monitored through a combination of sources such as FINREP and the NBP’s reporting (NB300). - Individually relevant transactions are singled out for review as necessary. - Should provisioning of exposures be ever needed, the PFSA will follow the advice of statutory auditors and supplement them as seen necessary. ### Market risk, IRRBB, and Operational Risk (CPs 22, 23, 25) - Market and interest rate risk: - The risks from trading activities and interest rate risk gaps are not significant in Poland. - Banks do not hold complex instruments and most assets of longer tenor (mortgages) are variable rate instruments. - No bank is using the advanced approach for computing market risk capital charge. - The 2002 Recommendation G on interest rate risk in the banking book (IRRBB) is being updated to render it consistent with the guidelines of EBA/GL/2018/02 and the BCBS 2016 paper on IRRBB. - PFSA monitoring and tools: - PFSA monitors offsite risks and reviews them through target inspections, which are scored in BION annually and at the end of an inspection. - Operational risk (OR): - The PFSA has made important progress in fostering regulation and supervision of operational risk. - Most observations made in the 2012 BCP report have been addressed. - Improvements in staffing and expertise in ICT. - Onsite inspection reports show attention paid to OR and many resulting recommendations. - The offsite department closely monitors OR, in particular operational losses stemming from certain types of OR events. ### Financial reporting, auditing, and disclosure (CPs 26–28) - Internal control and audit: - Important progress made to foster internal control and audit in banks. - Remaining concern: fitness and propriety of the members of the supervisory board and the lack of enforcement power to suspend them. - The 2012 Recommendation H on internal control systems in banks was updated in April 2017 by PFSA Resolution 141/2017. - Resolution 141/2017 emphasizes the compliance function: staffing, independence, access to information, conflicts of interest, and the role assigned to the supervisory board; strengthens the compliance function and imposes new duties, including vertical verifications. - Financial reporting and external auditing: - Financial reporting and external auditing requirements are largely harmonized at the EU level. - Polish banks are required to prepare financial statements in compliance with IFRS and have them certified by an external auditor, which complies with international auditing standards. - Banks’ external auditors belong to the networks of the four biggest global auditing firms, except the credit cooperative network, audited mostly by domestic audit companies. - Poland adopted on April 1, 2015, the International Standards on Auditing. - A large technical assistance program was organized to enhance implementation of the EU acquis communautaire related to financial reporting, public oversight system, and quality assurance system for statutory auditors. - Further improvements needed: - Adoption of IFRS by all banks for individual financial statements. - Swift adoption of the new Recommendation L to increase PFSA powers over audit firms, including the possibility to access auditors’ working papers. - Footnote: The PFSA is of the opinion that the Polish Accounting Standards are sufficiently appropriate for cooperative and small commercial banks. - Disclosure: - Disclosure requirements follow the EU regime, including additional Polish conditions. - The last system-wide review of disclosure practices took place in 2012 and should be updated. - The Office needs a formal routine to score Pillar 3 disclosures under BION, following a more systematic approach to compile and keep updated a reasonable inventory on the lines of the BCBS’ Pillar 3 template tables. - Need for a consistent approach between the PFSA and the Komisja Nadzoru Audytowego (KNA) to ensure responsibilities are well supported in the event of write-down and capital conversion (WDCC) ordered by the BGF, providing an ex-ante consistent strategy to deal with any third-party litigation. ### Abuse of financial services / AML-CFT (CP29) - Progress: - Poland has made clear progress addressing many deficiencies from previous evaluations. - A new law was passed in 2018 that implements the 4th EU AML Directive. - The new law addresses Moneyval recommendations: obligation of banks to appoint a Money Laundering Risk Officer, a clear definition of ultimate beneficial owner, and more dissuasive pecuniary sanctions. - The new law will enter into force in July 2018. - Further supervisory improvements needed: - Increase staffing for both onsite and offsite surveillance. - Issue-specific KYC/CDD guidelines. - Instituting a periodic national risk assessment. ### Selected supervisory weaknesses and recommendations from Annex I (summary of relevant Core Principles) - Supervisory approach and tools: - BION remains to be officially approved by the members of the PFSA and by the MoF to anchor its risk tolerance and engagement model. - BION needs recalibration to augment discrimination power of risk scores by including forward-looking and stressed KRIs and indicators from benchmarking risk governance and control practices. - Need an integrated risk assessment for banking groups and mixed conglomerates capturing risks from membership to a broader group and unregulated parents above the consolidation point. - Overly long inspection cycle and low loan sampling due to unbalanced workload and limited resources; cycle of inspection of cooperatives now beyond five years and needs shortening. - Need to enhance quality assurance function and to build a costing tool for workload and resource allocation planning. - Supervisory reporting and data: - The NB300 database obligor exposure should add an attribute indicator to flag renewal and refinancing of credit transactions. - Consider the NBP operating a full Credit Risk Register to warehouse individual transaction data and key loan and borrower attributes. - Corrective and sanctioning powers: - Recommendations or orders issued by the PFSA are not binding acts. - PFSA cannot directly dismiss a bank’s management board members or exercise powers with respect to supervisory board members. - Fines cannot be imposed to members of the supervisory board. - Written warning notice is a prerequisite for the PFSA to escalate sanctions under art. 138.3. - Low track record in enforcement. - Capital, credit risk, problem assets: - Need to finalize complementary Pillar 2 add-on capital procedures. - Need to recalibrate credit risk scorings in BION adding forward-looking and proxy benchmark indicators. - Lower-than-safe credit sampling; need to update PAS set by the 2015 Asset Ordinance and update Recommendation R considering EBA/GL/2017/06 and IFRS 9 practice. - Lack of an attribute in NB300 to report forbearance flags including renewal, refinancing, and restructuring. - Lack of enforceable collateral appraisal rules and PFSA powers to require re-appraisals without challenge by bankers. - Related parties and ownership transfer: - No clear definition of related party in the Banking Act. - Transactions subject to related parties’ regime not broad enough; no obligation to approve, monitor, or report transactions that later become related parties. - No PFSA power to deduct exposures exceeding the limit from capital when assessing capital adequacy, or to require collateralization of such exposures. *Source: cr1939 - 26. The regime for concentration risks is deemed satisfactory. The PFSA applies the large; material extracted from the provided PDF content.* ### 25. Operational risk ### 25. Operational risk ### Key findings - The document lists Operational risk (CP25) as a Core Principle in the BCP assessment, but no specific findings or recommended actions for CP25 are provided in the supplied content. ### Related supervisory recommendations (adjacent principles) - Internal control and audit (CP26) - Establish an explicit provision requiring the internal audit department to be advised of material changes in operations of the bank. - Develop benchmarks on the design and implementation of internal control and audit requirements at the industry level. - Perform a fit-and-proper assessment of the Head of Internal Audit and impose a notification requirement on commercial banks for the dismissal of the Head of Internal Audit. - Financial reporting and external audit (CP27) - Promote the adoption of the IFRS by all banks for individual financial statements. - Speed up the issuance of the new Recommendation L in order to increase powers of the PFSA over the audit firms, including the possibility to access auditors’ working papers. - Establish regular collaboration between auditors and supervisors at least for the systemic banks. - Arrange on a more systematic basis collective and individual dialogues with the audit firms to discuss generic issues of common interest relating to banking (and other) operations. - Establish a formal MoU between the KNA and the PFSA for cooperation and information exchange. - Disclosure and transparency (CP28) - Update the 2012 compilation of Pillar 3 disclosures and explicitly score the disclosures in BION, formally applying the EBA/2014/14 guidelines. - Adopt a common approach between the PFSA and the KNA to ensure a robust litigation defense in case of write-down and capital conversion (WDCC) by the BGF. *Source: cr1939 - 25. Operational risk (chapter text extracted from Annex I, Table 1 and Table 2).* ### Annex I. Table 2. Poland: Recommended Actions to Improve Compliance with the Basel Core ### Annex I. Table 2. Poland: Recommended Actions to Improve Compliance with the Basel Core Principles and the Effectiveness of Regulatory and Supervisory Frameworks (concluded) ### Abuse of financial services (CP29) — Recommended Actions - Increase staffing of the PFSA and the PFIU to a reasonable level; - Augment the number of onsite visits by the PFIU to complement PFSA onsite surveillance; - Introduce into law an obligation to report fraud to the PFSA when it is material to the safety, soundness, or reputation of the bank; - Impose higher sanctions using the new AML/CFT law on banks in case of AML/CFT breaches, including imposing sanctions on senior management; - Combine sanctions from both the PFIU (fines) and the PFSA in case of grave or recurrent violations of the AML/CFT Act; - GIFI to provide feedback to the PFSA on suspicious operations encountered during their onsite inspections and reported to the PFIU; and - Increase intensity of offsite surveillance as part of BION. ### Authorities’ Response to the Assessment — Overview - Polish authorities welcome the IMF’s and World Bank’s comprehensive review and appreciate the contribution of the Financial Sector Assessment Program (FSAP) to banking supervision and financial market soundness. - Authorities note significant progress since the last FSAP in 2013 through evolution of the PFSA’s supervisory approach toward a more complete and risk-based model. - The response provides detailed comments by Basel Core Principle. ### Principle 1: Responsibilities, Objectives and Powers - Main source of law is the act of Parliament; PFSA cannot be given unlimited right to set prudential standards due to the Polish Constitution. - PFSA can issue recommendations (not legally binding) which are commonly followed by banks. - Draft act UD265 (amending the act on supervision over the financial market and some other acts) would allow the PFSA to impose a financial penalty of up to 80% on a supervisory board or a bank management board member remuneration, with the minimum wage determined based on the Act of 10 November 2015 on the minimum remuneration for work, payable after three months from the date of delivery of the application referred to in art. 22d (1), if requirements in art. 22aa of the Banking Law Act are not met and the member was not dismissed or did not resign within three months. ### Principle 2: Independence, Accountability, Resourcing, and Legal Protection For Supervisors - FSAP recommended strengthening independence, resources and legal protection of the supervisor; changes require amendments to legal acts. - Act of 9 November 2018 on the amendment to some legal acts in connection with the strengthening of supervision over the financial market and protection of investors (published 30 November 2018) is cited as progress. - Key changes under the Act: - PFSA will become a State legal entity, substantially strengthening financial independence. - Fees for supervision and examinations will be revenues of the PFSA; increase of charges will be proportional to costs of supervision. - On January 1, 2019, the PFSA Office will be transformed into a state legal entity and financed directly from fees paid by supervised entities (previously via the state budget). - All employees of the PFSA will become employees of the ’new’ PFSA to ensure continuity. - PFSA Board composition extended to include four additional members: - representative of the Prime Minister (with voting rights); - representative of the Bank Guarantee Fund (BFG) [without voting rights]; - representative of the President of the Office for Competition and Consumer Protection (UOKIK) [without voting rights]; - representative of the minister competent for coordinating the activities of special services [without voting rights]. - Purpose: better cooperation between State authorities, improved identification of threats, and more effective supervision. - Ministry of Finance states no justification for including the PFSA into the NBP; NBP shares the view in the Report that moving supervision into NBP is a possible solution and views reintegration as preferential and optimal for Poland to enhance separation between ownership and supervision and to coordinate micro- and macro-prudential policy. ### Principle 11: Corrective and Sanctioning Powers of Supervisors - PFSA acknowledges impediment caused by obligation to send a warning notice before imposing a sanction; amendment to the Banking Law is proposed to allow imposing monetary sanctions without issuing a warning notice (proposal under analysis by the Ministry of Finance). - PFSA has notified the Ministry of Finance since December 2015 about need for power to directly dismiss members of the management board. - PFSA supports possibility to impose administrative sanctions on supervisory board members; proposed amendment would give PFSA power to impose pecuniary sanction when supervisory board does not comply with PFSA’s order to dismiss members. Consideration given to power to dismiss or suspend supervisory board members; proposal under analysis by the PFSA. - Sanctioning criteria: - Apart from Administrative Procedure Code criteria, Article 138(3)(c) of Banking Law requires considering gravity and duration of infringement, reasons, bank’s current financial situation, and previous infringements. - PFSA has internal regulations for examining financial situation of sanctioned bank (income, net revenue from sales, financial results, equity, and other essential information). - PFSA does not have internal guidelines setting specific quantum for fines but applies statutory criteria used in other administrative proceedings; administrative courts have valued PFSA experience in enforcement. - PFSA contests characterization that it “has no power at all with respect to any supervisory board members,” noting Article 22d of the Banking Act gives supervisory powers toward supervisory board comparable to those toward management board, i.e., possibly insufficient but not non-existent. ### Principle 16: Capital Adequacy - PFSA notes Recommendation W is universal and designed for all types of banks (commercial and cooperative) irrespective of model use; Recommendation W aims to give guidance and promote sound model risk management practices across institutions and is not for validation purposes. ### Principle 18: Problem Assets, Provisions, and Reserves - FSAP recommended adoption of comprehensive credit sampling policy; PFSA notes increasing sample size for loan audits increases inspector requirements. - Current sampling methodology accounts for bank's credit risk profile and concentration of credit exposures; inspectors increase sample above target when significant irregularities are found. - On-site examination includes detailed research of processes relating to credit risk identification, monitoring and mitigation. ### Principle 19: Concentration Risk and Large Exposure Limits - PFSA disagrees with FSAP opinion on effectiveness of on-site process regarding large exposures, noting deficiencies identified during inspections and post-examination recommendations for removal of irregularities in identification and records of groups of interrelated entities. - PFSA states on-site examination manual presents types of concentration risk banks are recommended to identify, including industry concentration, geographical concentration, same type of collateral, FX concentration. - Checklists and procedures are universal but their practical usage is adapted based on bank risk profile; risk focus is applied respectively. ### Principle 20: Transactions with Related Parties - Legal definition of related parties is not aligned with IAS 24; PFSA must operate within framework of law and cannot issue legally binding regulations to widen the definition—Ministry of Finance is best suited to follow up on legal changes. - PFSA may propose amendments to the Ministry of Finance based on experience. - National Bank of Poland (responsible for reporting framework) has started work to implement the Credit Register based on the AnaCredit concept developed by the European Central Bank; PFSA will participate and this may address reporting and analytical tool recommendations. - Recommendation to require independent verification/audit processes to monitor related-party exposures is viewed as a Pillar 1 element; Pillar 1 requirements and capital definition are specified in the directly applicable CRR (Capital Requirements Regulation), so competent authorities cannot set additional requirements not envisaged in the CRR; such a requirement cannot be implemented at the national level. - Following legal and reporting changes, onsite inspection procedures will be revised to ensure identification of unreported related parties’ transactions. ### Principle 26: Internal Control and Audit - FSAP noted no comparison between banks to establish best practices; PFSA explains: - During onsite inspection, dedicated software collects data points on every assessed area. - Implemented actions to ensure consistent approach during on-site inspections include: - Quality Assurance Expert responsible for consistent approach and post-inspection recommendations; - CAM – IT system supporting on-site inspectors enabling easy comparisons of data and findings collected during inspections; - Quality control of key post-inspection products by deputy director and director of the on-site inspections department (DIB); - Issuing, in one-year cycle, guidelines for examiners regarding risk areas and examination priorities for the year. ### Principle 27: Financial Reporting and External Audit - FSAP recommended: “Promote the adoption of IFRS by all banks for individual financial statements”. - PFSA’s view: - Polish Accounting Standards (PAS) are adequate for cooperative banks and small commercial banks. - Application of PAS does not pose problems for cooperative banks, especially as IFRS 9 is ambiguous in some areas. - Cost of adopting IFRS could be very high and not justified by benefits for those institutions; recommendation considered not appropriate in context of proportionality. ### Principle 29: Abuse of Financial Services — Response on Combining Sanctions - FSAP recommended: “Combine sanctions from both the PFIU (fines) and the PFSA in case of grave or recurrent violation of the AML/CFT Act”. - PFSA emphasises it is not legally possible to combine PFSA and PFIU sanctions. - New AML/CFT act designates PFSA as responsible for sanctioning AML/CFT breaches after on-site visits; combining FIU and PFSA sanctions is impossible due to new law and the principle “ne bis in idem” (forbids double sanctioning), reflected in Article 2 of the Polish Constitution. - Any sanction imposed by the PFSA will be final and banks cannot be sanctioned twice; if double sanctions occurred, courts could dismiss one or both sanctions. *Annex I. Table 2. Poland: Recommended Actions to Improve Compliance with the Basel Core Principles and the Effectiveness of Regulatory and Supervisory Frameworks (concluded).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2019/cr1939.pdf_