The Banking Regulation Review: Poland
In the past year, the main factor impacting the Polish banking sector was the coronavirus pandemic. In earlier years, the Polish banking sector underwent a significant consolidation, with the number of commercial banks falling from 49 to 30 in one decade.
As at the end of January 2021, assets in the Polish banking sector stood at 2,370,095 million zloty.2 In terms of the value of assets, the largest commercial banks in Poland are PKO Bank Polski SA (partly state-owned), Bank Pekao SA (partly state-owned), Santander Bank Polska SA, ING Bank Śląski SA and mBank SA (a subsidiary of Commerzbank AG). Their assets represent almost 50 per cent of the Polish banking sector. These banks have been classified by the Polish Financial Supervision Authority (PFSA), the authority supervising the banking system, as other systemically important institutions (O-SIIs).
The Polish banking sector is characterised by the large share of state and foreign capital. About 50 per cent of commercial banks in Poland are banks with predominantly foreign capital and 25 per cent have predominantly state capital. The two largest Polish banks in terms of assets – PKO Bank Polski and, indirectly, Bank Pekao – are subsidiaries of the Polish State Treasury, a legal entity that has rights and obligations in terms of state property.
A characteristic feature of the Polish banking sector is also the large number (around 530) of small cooperative banks (i.e., banks set up in the form of cooperatives to which more relaxed requirements apply, such as in terms of share capital). These banks operate within associations.
Due to the pandemic, there was a rise in the value of credit risk write-downs, which may continue in subsequent quarters. According to data from the National Bank of Poland (NBP), this was the main reason for the approximately 50 per cent decline in the banking sector's financial results and profitability compared to 2019. Profitability was also affected by impairment losses on other assets, provisions for legal risk relating to foreign currency loans, lower dividend income and falling interest income (due to record low interest rates). Due to the pandemic, up to December 2020 there was a 30 per cent rise in the number of banks incurring losses; this mainly affected small and medium-sized entities.3
Poland has not adopted the euro as its currency and is not a member of the Eurosystem or the Banking Union.
The regulatory regime applicable to banks
As Poland is an EU Member State, its legal system reflects the legal solutions in force across the EU. EU regulations, including the Capital Requirements Regulation (CRR) and the Single Resolution Mechanism Regulation, are directly applicable in Poland. The Capital Requirements Directive (CRD) IV and the Bank Recovery and Resolution Directive (BRRD) were implemented into Polish law at the beginning of March 2021. CRD V, CRR II and BRRD II will be implemented after the President's signature and the upper house of parliament's approval is obtained.
The Polish legislator's tendency is generally to gold-plate these regulations and directives (i.e., to implement more restrictive solutions if national options are provided for in EU directives or if only a minimum scope of regulation is specified).
i Banking law and the rules on which banks (credit institutions) operate in Poland
The most important piece of legislation regulating banks is the Banking Law of 29 August 1997, which lays down the principles on which banks operate, on the establishment and organisation of banks, branches and representative offices of foreign banks and credit institutions, on banking supervision, and on the resolution, liquidation and bankruptcy of banks. Cooperative banks are regulated by the Act on the Functioning of Cooperative Banks, their Associations and Associate Banks of 7 December 2000.
As a rule, banks may be established in Poland as state banks, cooperative banks or banks in the form of joint-stock companies (known as commercial banks) with PFSA authorisation. There is only one state-owned bank in Poland – Bank Gospodarstwa Krajowego (BGK) – whose primary task is to support Poland's socio-economic development and the public finance sector in carrying out its tasks. For example, as part of the government's anti-crisis shield to counteract the economic effects of covid-19, BGK set up a Liquidity Guarantee Fund under which certain banks grant businesses guarantees for part of their working capital loans or credit lines.
The Banking Law includes the significant bank category, which is governed by stricter rules. Significant banks are those whose shares are traded on a regulated market, whose share of banking sector assets is a minimum of 2 per cent, whose share of banking sector deposits is a minimum of 2 per cent or whose share of the banking sector's own funds is a minimum of 2 per cent. Other banks may also be considered significant by the PFSA.
Foreign credit institutions may operate in Poland through a branch, or cross-border, to the extent specified in the authorisation received from the competent supervisory authority of the credit institution's home country, provided that the PFSA is notified accordingly by this supervisory authority. Foreign banks (banks not established in an EU Member State) may only operate in the form of a branch with PFSA authorisation issued on the request of the bank concerned.
Based on the PFSA's authorisation, foreign banks and credit institutions may open representative offices in Poland. A representative office can only advertise and promote the foreign bank or credit institution as specified in the authorisation provided by the competent supervisory authority of the credit institution's home country.
A bank clearing house was set up under the Banking Law for the purpose of exchanging payment orders and establishing mutual receivables under payment orders. Krajowa Izba Rozliczeniowa SA organises the Polish Elixir clearing system, which enables payments to be made efficiently between banks participating in the system.
ii Other regulations
In Poland, para-banking is conducted by cooperative savings and credit unions (as at the end of February 2021, there were 25 such unions). Their aim is to collect funds solely from their members, grant them loans and credits, carry out financial settlements on their behalf and distribute insurance. A PFSA authorisation is required to establish a credit union. Due to irregularities in the operations of many credit unions and the bankruptcy of nearly 11 of them since 2012, they are now an increasingly rare form of entity.
The granting of loans is generally reserved for banks; the basic rules on which loans are granted are laid down in the Banking Law. However, there are also consumer loans, which are in fact loans or other forms of financial support that are granted to consumers by entities authorised to do so under the Consumer Credit Act of 12 May 2011 (i.e., creditors that are commercial companies subject to PFSA registration); for example, banks, cooperative savings and credit unions, and lending institutions.
There are also mortgage banks (as at the end of February 2021, there were approximately five), established under the Act on Mortgage Bonds and Mortgage Banks of 29 August 1997. These banks grant mortgages from the proceeds of mortgage bonds, by issuing mortgage-backed bonds, which reduces loan financing costs. The Act provides for the granting of mortgage-secured or unsecured loans, the purchase of other banks' debts from loans granted by these banks and the issuance of mortgage bonds and public mortgage bonds.
The rules for the operation of the deposit guarantee scheme, the write-down or conversion of capital instruments, preparing and carrying out compulsory resolution of banks and the performance of other tasks assigned to the Bank Guarantee Fund (BGF) as the entity responsible for the deposit guarantee system, are set out in the Act on the Bank Guarantee Fund and the Deposit Guarantee and Compulsory Resolution System of 10 June 2016, which implements the BRRD. The rules for macroprudential supervision and crisis management are set out in the Act on Macroprudential Supervision of and Crisis Management in the Financial System of 5 August 2015 (the Macroprudential Supervision Act), which has partially implemented CRD IV.
As regards brokerage activity and the provision of payment services by banks, the provisions governing these sectors, the Act on Trading in Financial Instruments of 29 July 2005 (implementing the second Markets in Financial Instruments Directive) and the Payment Services Act of 19 August 2011 (implementing the second Payment Services Directive), apply to them accordingly. It should be noted that, as of March 2021, investment firms must keep shareholder registers in Poland when shares in document form no longer exist.
iii Bank supervisory authorities
Banks, branches and representative offices of foreign banks and credit institutions are supervised by the PFSA. The primary tool used for this purpose is the annual supervisory review and evaluation of the bank.
The PFSA supervises the entire capital, insurance, pensions and financial institutions market. At European level, both the PFSA and Polish banks are obliged to follow the guidelines and recommendations of the European Banking Authority (EBA).
The PFSA's main control tool is the power to carry out control activities at banks, either in inspections (the main purpose of which is to examine the bank's individual risk management process) or investigations. Control activities were carried out in a total of 21 commercial banks in 2019. During its control activities, the PFSA examines areas that require close scrutiny from a business risk perspective. If irregularities are identified, the PFSA issues appropriate post-inspection recommendations to bring the activities of banks or other supervised entities into line with the applicable law.
The PFSA also issues decisions; for example, appointing presidents of the management board of commercial and cooperative banks and appointing management board members to oversee the management of material risks in banks' operations.
If an entity fails to comply with PFSA recommendations, the PFSA sometimes imposes administrative penalties on the entity. In 2010, a commercial bank had to pay a fine for failing to implement post-inspection recommendations, mainly involving the implementation of risk management support systems.
The PFSA has created a type of soft law in the form of recommendations (i.e., documents providing guidance to banks on best practices for prudent and stable bank management). Nineteen such recommendations have been issued to date concerning, inter alia, risk mitigation in banks' investments, management of mortgage-backed credit exposures and best practices in bancassurance.
Another entity with significant influence on the sector is the BGF, which guarantees bank deposits and is responsible for the resolution of financial institutions at risk of bankruptcy. Macroprudential supervision in Poland is carried out by the Financial Stability Committee, while the central bank (the NBP) supervises the payment system. Its task is primarily to support the security and efficiency of the payment system infrastructure in Poland. Banks' operations are also affected by the Polish Competition and Consumer Protection Office, which, inter alia, gives clearance for concentrations, and inspects and issues decisions on abusive clauses in consumer relations.
Consolidated supervision in Poland
The authority competent for consolidated supervision is the PFSA. As regards foreign groups, the PFSA may enter into agreements with the competent authorities of other countries to cooperate in the exercise of supervision on a consolidated basis or, if necessary, delegate its tasks to, or assume the tasks of, the competent authority of another country. The PFSA also keeps lists of holding companies: domestic bank holding companies, hybrid bank holding companies, foreign bank holding companies or financial holding companies in which a domestic bank operates.
Consolidated supervision is based on:
- the provision by domestic banks operating in holding companies, depending on the holding structure of, for example, own consolidated financial statements and the financial statements of subsidiaries or entities closely linked to a domestic bank, or the consolidated financial statements of the original parent company in the holding company or those drawn up at the highest consolidation level;
- the PFSA carrying out control activities in entities operating in holdings or in ancillary service undertakings that provide services to companies in these holding companies; or
- in particular cases, recommending a review of the financial situation of subsidiaries or entities with close links to a domestic bank operating in a holding company.
In 2020, further to the entry into force of the CRR II/CRD V package, the implementation of provisions on the approval of financial holding companies under the new Article 21a of CRD IV and of these being covered by consolidated supervision is also envisaged. The law is expected to be signed by the President of Poland (which is a condition for its publication and entry into force) later in 2021.
i Relationship with the prudential regulator
In general, the PFSA is a rather restrictive and active regulator not only in the banking sector, but in all areas that fall under its supervision. The largest number of recent penalties imposed were for breaching the rules governing public offerings and the financial instruments trading and payment services sector. Due to the broad scope of their operations (e.g., depositaries of investment funds or operating under an authorisation to carry on investment activity), banks have also received such penalties. The PFSA has also issued numerous recommendations and guidelines, including on crypto-asset trading, the regulatory cloud and the outsourcing of banking operations.
The PFSA has indicated that it places particular emphasis on banks maintaining good quality and adequate levels of equity. The PFSA's powers include recommending the amount of dividends that can be paid by banks or issuing recommendations imposing additional capital requirements on banks.4 The PFSA has also conducted numerous recovery proceedings; as at the end of 2019, six commercial banks and 60 cooperative banks had undergone recovery.5
The basic tool for regular control is the ongoing monitoring and quarterly analysis of banks' economic and financial situation and at least an annual supervisory review and evaluation process. A review involves the identification of the size and nature of the risks to which the bank is exposed, an evaluation of the quality of the risk management process, an evaluation of the level of capital covering the risk arising from the bank's operations, and bank management. At the end of the review, each institution receives an evaluation and, potentially, additional recommendations. In addition, the PFSA conducts annual stress tests on supervised banks. Tests carried out in November 2018 indicated the strong resilience of Polish banks to adverse macroeconomic scenarios.6
ii Management of banks
Rules for management boards of commercial banks
The work of the management board of a bank in Poland is led by the president of the board. The board itself should be composed of at least three individuals appointed and recalled by the supervisory board. The appointment of the president of the bank's management board and the management board member overseeing the management of the bank's material risks requires PFSA approval.
The president of the management board may not combine his or her function with supervision of the management of material risks in the bank's operations. In addition, neither the president of the board nor the management board member supervising the management of material risk in the bank's operations may be entrusted with supervision of an area of the bank's operations that poses a material risk to the bank's operations.
Different board members should be appointed to manage the risk of the bank's operations failing to comply with the law, internal rules and market standards, and accounting and financial reporting issues, including financial controls.
Members of the bank's management board and supervisory board should have knowledge, ability and experience appropriate for their functions and responsibilities, and should give adequate assurance that they will duly discharge these responsibilities. Assurance particularly concerns the reputation, honesty and integrity of the person concerned and his or her ability to manage the bank's affairs in a prudent and stable manner.
A member of the management board or the supervisory board of a significant bank may hold no more than one management board member position and two supervisory board member positions or four supervisory board member positions at the same time. According to regulations, the functions of a management or supervisory board member performed in entities belonging to the same group or entities covered by the same institutional protection scheme within the meaning of the CRR, or entities in which the bank holds a qualified holding within the meaning of the CRR, will be deemed one function.
According to the Code of Commercial Companies of 15 September 2000, the management boards of Polish joint-stock companies are independent (neither the general meeting nor the supervisory board can give the management board binding instructions on running the company's affairs). Members of the bank's management board have a legal obligation to perform their functions honestly and fairly and to exercise independent judgement. As regards assessment of their performance, it is possible that, inter alia, the discharge of duties may not be acknowledged or they may be recalled from office.
Banks must have in their structures: (1) independent control functions to ensure compliance with control mechanisms relating particularly to the bank's risk management; (2) a compliance function to identify, assess, control and monitor the risk of the bank's operations failing to comply with laws, internal regulations and market standards, and to report in this respect; and (3) an independent internal audit function to examine and assess, in an independent and objective manner, the adequacy and effectiveness of the risk management system and the internal control system, excluding an internal audit function.
Bonus payments to management and employees of banking groups
The management boards of banks in Poland are required to draw up and apply remuneration policies for individual categories of persons whose professional activities have a material impact on the bank's risk profile. The remuneration of the bank's management board and other persons whose professional activity has a material impact on the bank's risk profile is generally divided into fixed and variable components. Once a year, banks are required to send the PFSA data on the number of persons whose professional activities have a material impact on the bank's risk profile and whose total remuneration in the previous year was a minimum of the equivalent of €1 million.
The rules for setting remuneration are laid down in a Minister of Development and Finance regulation (the latest has been in force since 2017). In terms of variable remuneration components, banks should apply, inter alia, the following rules:
- the bank's performance based on which the variable part of the remuneration is set should be reviewed over a period of at least three years so that the amount of performance-based remuneration takes account of the bank's business cycle and the risks related to its operations;
- guaranteed variable components of the remuneration should be exceptional;
- fixed components of the remuneration should represent a sufficiently high proportion of the remuneration to allow a flexible policy on variable components of the remuneration, with a maximum ratio of 100 per cent between variable and fixed components of the remuneration per person, which may be increased to a maximum ratio of 200 per cent with the approval of the bank's general meeting; and
- at least 50 per cent of the variable remuneration component should comprise shares or share-linked financial instruments or other instruments within the meaning of the CRR that are fully convertible into Common Equity Tier 1 (CET1) instruments or that may be written down, as an incentive to take special care of the bank's long-term well-being.
Recent PFSA communications are consistent with statements and recommendations made by the EBA and the European Insurance and Occupational Pensions Authority. The PFSA has indicated that it is necessary for banks to maintain a sound capital base to ensure that they can respond effectively to the economic impact of the coronavirus pandemic and, therefore, that remuneration and bonus policies and practices should be reviewed. In the case of banks, the PFSA indicated that this is particularly important to properly utilise capital released as a result of the repeal of the systemic risk buffer, which was intended to prevent a decline in the availability of credit to the economy. Thus, according to the supervisory authority, the variable part of the remuneration should be set by banks at a conservative level. The PFSA suggested that a large part of the variable remuneration could be deferred for a period longer than originally planned, and a larger than planned part of it could be paid in equity instruments.7
iii Regulatory capital and liquidity
Banks operating in Poland are generally required to maintain own funds within the meaning of the CRR at a level adapted to the size of their operations, while the sum may not be less than the value required by the CRR and the possible amount estimated by the bank required to cover all identified material risks occurring in the bank's operations and changes in the economic environment (known as 'add-on'; see below).
The main regulations concerning a bank's own funds are the Banking Law and the CRR. On this basis, banks are required to maintain minimum capital ratios at the regulatory Tier 1 level specified in Article 92 of the CRR and the Tier 2 level (add-on) laid down in the Banking Law. Add-on means the requirement to maintain own funds above the value resulting from requirements calculated in accordance with the principles set out in the CRR in the case of:
- negative findings from supervisory activities, including those relating to the performance of the risk management and internal control system or to the identification, monitoring and control of concentrations of exposures, including large exposures;
- a finding that internal capital is inadequate to the extent of the risk inherent in the bank's operations and significant irregularities in risk management; and
- a finding that a bank poses a systemic risk.
In addition, under the Macroprudential Supervision Act, banks must meet the combined buffer requirement. The combined buffer requirement is the sum of existing buffers (capital conservation buffer of 2.5 per cent, countercyclical buffer and O-SII buffer) set by way of an individual decision issued by the PFSA (varying for different banks from 0.1 per cent to 1 per cent), and systemic risk buffer, which, pursuant to the above-mentioned Minister of Development and Finance regulation, has not applied since March 2020.
Consequently, banks are required to maintain:
- a total capital ratio (TCR) of 8 per cent plus add-on plus combined buffer requirement;
- a Tier 1 capital ratio of 6 per cent, plus 75 per cent of the add-on plus combined buffer requirement; and
- a CET1 capital ratio of 4.5 per cent, plus 56 per cent of the add-on plus combined buffer requirement.8
In certain situations the PFSA increases the banks' capital buffer requirement. In recent years, this instrument has been of particular importance in situations requiring the hedging of risks arising from the provision of foreign currency mortgages to households.
The PFSA also makes annual announcements regarding the payment of dividends by commercial banks. In both 2020 and 2021, the PFSA considered it necessary, due to the situation caused by covid-19, for commercial banks to refrain from paying dividends, at least until the end of the first half of 2021. Due to the economic situation caused by covid-19, the PFSA has recently indicated that it is considering reducing the O-SII buffer and has permitted a change in the structure of the additional own funds requirement (add-on) and for this requirement to be covered to a lesser extent by CET1 capital.9
Data from the PFSA show that, at the end of 2019, two commercial banks and four cooperative banks, with a 1.1 per cent share of banking sector assets, did not meet regulatory minimum capital ratio levels. Four commercial banks and 17 cooperative banks (with a 5.5 per cent share of banking sector assets) did not meet the regulatory minimum plus the combined buffer. TCR at the end of 2019 was 19.12 per cent for the entire banking sector.10
The measures used for liquidity risk management in commercial banks are available net liquidity (ANL) and the measures defined by the PFSA (M1, M2, M3, M4), as well as liquidity coverage ratio (LCR) and net stable funding ratio (NSFR) under the CRR. The ANL measure reflects the projected gap between future cash flows from a bank's assets, liabilities and off-balance sheet items.
The general requirement for short-term liquidity is the LCR, which is the amount of unencumbered high-quality assets relative to net cash outflows for 30 days under stressed conditions. As at the end of 2019, all banks met the applicable short-term liquidity standard, and its average value in Poland is above the required minimum of 100 per cent.11 This measure is reported to the NBP. Banks should also comply with PFSA resolutions and recommendations on setting liquidity standards that are binding on banks and best practices in this respect (e.g., PFSA Recommendation P on bank liquidity monitoring systems).
The long-term measure of liquidity is the NSFR, which reflects the relationship between stable own and third-party funds and illiquid assets and assets with restricted liquidity, calculated under conditions of extended stress. As at the end of 2019, this ratio reached 125 per cent in the banking sector.12
iv Recovery and resolution
Regulations on recovery are broadly convergent with EU rules, as early intervention provisions have been implemented in the Banking Law. First, banks draw up recovery plans outlining measures to be taken in the event of a significant deterioration in financial situation in the case of threats to financial stability, macroeconomic stress or other events adversely affecting the financial market or the bank. A bank updates the recovery plan at least once a year and in the event of significant changes in the bank or its environment. The PFSA approves both the recovery plan and its updates.
A bank's recovery plan should include measures to maintain or restore the bank's solvency or earning capacity, targets for quantitative or qualitative indicators of the bank's financial situation, measures to reduce risk and financial leverage, and rules on the bank's information policy during recovery plan implementation.
If a bank breaches or risks breaching, inter alia, the capital requirements under the CRR and the Banking Law, or the requirement to cover net outflows for credit institutions taking into account national liquidity coverage requirements or supervisory liquidity measures, the management board of a domestic bank must immediately notify the PFSA and the BGF and ensure that a recovery plan is implemented.
The only Polish intervention instrument not resulting from the harmonisation of EU regulations and not synchronised with the resolution procedure, is a bank acquisition. If a bank's total own funds fall below the levels laid down in the CRR and the Banking Law, the PFSA may decide that the bank will be acquired by another bank with the acquiring bank's consent, if this does not jeopardise the security of the funds held on accounts at the acquiring bank and does not result in the acquiring bank's own funds falling below the level specified in the CRR (having regard to applicable buffers).
The PFSA has the power to request that an extraordinary general meeting of the bank's shareholders be convened to consider the bank's situation, to decide on covering balance sheet losses or to pass other resolutions, including an increase in own funds. If, six months after this meeting, the bank's losses exceed half of its own funds, the PFSA may issue a decision to revoke the authorisation to establish the bank and to liquidate it. This decision may also be issued where there is a risk of the bank becoming insolvent or the sum of the bank's own funds being reduced to such an extent that the requirements applicable to the establishment of the bank would not be met.
If, according to the balance sheet drawn up at the end of the reporting period, the bank's assets are insufficient to meet its liabilities, the bank's management board, the forced administrator or the liquidator will immediately notify the PFSA, which will issue a decision to suspend the bank's operations and appoint a forced administrator, if one has not already been appointed. The PFSA also decides that the bank will either be acquired by another bank, with the acquiring bank's consent, or apply to the competent court for a declaration of bankruptcy. The same decision can be issued by the PFSA if the bank, for reasons directly related to its own financial situation, does not meet its obligations to pay depositors and no compulsory resolution proceedings have been initiated against it.
In addition to the above-mentioned early intervention measures available to the PFSA, there is a resolution procedure in Poland. The authority competent for resolution matters is the BGF. The BGF is empowered, inter alia, to write-off or convert capital instruments within or outside the resolution procedure. Provisions on resolution were introduced through implementation of the BRRD into Polish law. The first resolution took place in Poland in early 2020 and, to date, a total of three resolutions have been carried out: at two cooperative banks and one smaller commercial bank. One resolution involved the creation of a bridge institution and the other two involved the acquisition of undertakings.
Conduct of business
Polish courts take the stance that banks have a special position in the economy and are public trust institutions, subject to special supervision. It is estimated that a breach of obligations by a public trust institution should be treated much more severely than in the case of an entity without this status.13 For this reason, banks are subject to detailed rules on maintaining capital and liquidity and on having a specific management and internal control system in place (i.e., a set of mechanisms for decision-making processes and for assessing banking operations).
The Code of Banking Ethics is another type of soft law adopted by banks and prepared by the Polish Bank Association (an organisation of banks in Poland, membership of which is voluntary). According to the Code, in relations with clients, banks must act in accordance with the special trust placed in them and high requirements in terms of reliability, solidity and trustworthiness, treating all their clients with due care. Additionally, in its relations with clients, a bank should be guided by integrity, responsibility, professionalism and innovation.
i Administrative liability of banks
Banks are subject to severe criminal, civil and administrative liability. A bank's administrative liability arises mainly from the PFSA's ability to take measures under the Banking Law or other laws regulating business activity, including regulated credit, investment or insurance activity. In terms of supervising banks' compliance with capital requirements, the PFSA can make recommendations to banks to maintain liquidity and own capital or to apply restrictions to address risks arising at the bank. If a bank fails to comply with recommendations or orders, or if the PFSA considers that a bank's operations are carried out in breach of the law governing the bank's operations or pose a risk to the interests of bank account holders or participants in trading in financial instruments, the PFSA, after a prior written warning, may, inter alia, apply to the bank's competent authority to recall the bank's president, vice-president or other member of the management board, restrict the operations of the bank or its organisational units, impose a fine on the bank, or even revoke the authorisation to establish the bank and decide to liquidate it.
ii Civil liability of banks
The civil liability of banks is generally governed by the general principles laid down in the Civil Code of 23 April 1964. The Polish legal system distinguishes between tort liability (liability for damage caused (e.g., as a result of a criminal offence committed by a bank employee)) and contract liability (the obligation to redress damage resulting from non-performance or improper performance of an obligation).
In Poland, maximum interest on loans and other pecuniary claims (as at March 2021: 7.2 per cent) and late payment interest (as at March 2021: 11.2 per cent) apply. These are variable values, depending on the reference rate (basic interest rate) set by the NBP and the formula set out in the Civil Code. If the amount of interest arising from a given agreement or activity exceeds the maximum interest rate, the maximum interest rate will be charged. Moreover, contractual provisions, even if a foreign law is chosen, cannot exclude or limit the provisions on maximum interest. The restrictions on interest do not apply in the case of a bond issue.
iii Criminal sanctions under provisions governing the banking sector
In terms of criminal sanctions, liability in the form of a fine or imprisonment is carried by, inter alia:
- conducting activity for the purpose of giving bank loans or cash loans or of encumbering these funds with risk in another manner without the required authorisation;
- breach of the bank secrecy requirement;
- failure to meet the requirement to provide information or explanations requested by the PFSA; or
- failure to provide the PFSA with consolidated financial statements or other statements related to consolidated supervision.
It should be pointed out that institutions granting consumer credit or loans must comply with the rules on the maximum level of non-interest credit costs.
Demands under, inter alia, credit agreements ('granted without any direct link to the borrower's commercial or professional activity') with interest of at least twice the maximum interest rate (7.2 per cent) or maximum late payment interest rate (11.2 per cent) and certain costs other than interest that are at least twice as high as the maximum amount of the costs specified in the relevant laws also carry criminal liability.
In addition, members of banks' management or supervisory boards may be fined if they breach their obligation to notify the PFSA that there are grounds for initiating resolution or if they fail to submit financial statements or other statements and information relating to the preparation and implementation of resolution.
iv Banking secrecy
According to Polish law, a bank, persons employed by it and persons through whom the bank carries on banking operations are bound by the obligation of banking secrecy. Banking secrecy covers all information about a banking operation obtained during negotiations or in the course of concluding and performing an agreement under which the bank carries out this operation. Banking secrecy is regulated in a very restrictive and extensive way in the Banking Law, but is subject to restrictions (e.g., when providing information to courts, law enforcement authorities, financial market supervision authorities and tax authorities, as well as (though to a limited extent) in relation to other financial sector entities). However, even taking these restrictions into account, the courts take the position that provisions allowing banking secrecy to be lifted should be interpreted strictly and any doubts must be resolved in favour of protection of data.
Banks and financial institutions may processes (with certain restrictions) customer data, information constituting banking secrets and information provided by lending institutions for the purpose of assessing creditworthiness and credit risk analyses. The institution established for the purpose of checking individuals' credit history and financial credibility in Poland is Biuro Informacji Kredytowej SA.
Banks in Poland maintain a relatively stable capital to total assets ratio of around 10 per cent to 11 per cent. A specific feature of the Polish banking sector is the dominance of non-financial sector liabilities in funding sources, which is continuing to grow. According to NBP data, non-financial sector deposits rose to over 80 per cent of total credit and deposit liabilities as at the end of 2019. In terms of the structure of non-financial sector deposits, household deposits dominate (72.3 per cent), and in terms of currency, deposits in zloty dominate (86.5 per cent). The volume of term deposits is falling due to low interest rates (in Poland the base interest rate is currently 0.1 per cent) with a simultaneous increase in inflation measured by the consumer price index, which, according to data from the Central Statistics Office, was 3 per cent year-on-year in Poland at the beginning of 2021. Banks maintain a large number of current deposits.14
A gradual decrease in the financing of banks by foreign financial institutions can also be observed in the Polish market and is due to the diminishing share of foreign currency home loans on banks' balance sheets and a relatively large increase in the volume of deposits. Although banks maintained a relatively high value of foreign currency loans until mid-2020 (16 per cent of assets), the reliance of credit institutions on derivative transactions is falling due to a faster reduction in foreign currency receivables than liabilities. This reduces the risk of hedging transactions being renewed at a higher cost.15
According to the PFSA, liquidity in the banking sector was very good, with most banks having high surplus liquidity in the form of portfolios of treasury securities and NBP money bills. Short-term liquidity coverage ratio (LCR) levels were above the supervisory minimum: as at the end of February 2020, average LCR was 158 per cent for domestic commercial banks and 446 per cent for cooperative banks required to maintain LCR.16
The NBP, as the central bank, grants, inter alia, a marginal lending facility secured by a pledge on rights in securities and intraday credit, used and repaid during the operational day, secured by a transfer of rights in securities to the NBP, to help refinance banks. Since April 2020, the NBP has made discount credit available to banks to maintain liquidity for businesses. Discount credit is intended to allow banks to refinance loans to non-financial sector companies, and the promissory notes received as collateral may be discounted at the NBP.17
Control of banks and transfers of banking business
i Control regime
Direct or indirect purchase or acquisition of shares or rights attached to shares in a bank based in Poland, and other actions taken to become the parent entity of a bank based in Poland, whereby 10 per cent, 20 per cent, one third or 50 per cent of the total number of votes at the general meeting or a share in the bank's share capital is reached or exceeded requires prior notification to the PFSA.
The notification is drawn up in Polish and requires detailed information on, inter alia:
- the identification of the notifier, its managers and the notifier's intentions as regards the bank's future operations, including persons expected to become members of the management board of a domestic bank; and
- the operations of the notifier, its economic and financial situation and the group to which it belongs and information on the marketing, operational, financial, organisational and management plans of the acquired bank.
The PFSA pays particular attention to whether the entity intending to acquire shares in a bank based in Poland has demonstrated that it guarantees the exercise of its rights and obligations in a manner that duly safeguards the interests of the bank's clients and ensures the security of funds deposited in the bank, is in a good financial situation, will ensure that the bank complies with prudential requirements under the law, and that the funds associated with the acquisition of the bank do not come from illegal or undisclosed sources.
The PFSA may object to activities relating to the acquisition of a bank's shares if the intended acquirer fails to remedy deficiencies in the notification, fails to provide additional information to the PFSA on a request, or if the PFSA negatively assesses the impact of the notifier and its financial position on the acquired bank. The purchase or acquisition of shares in a bank may take place if the PFSA does not deliver an objection decision within 60 business days of the date the notification is filed.
ii Transfers of banking business
Polish law provides for the transfer of an organised part of an enterprise, including a banking enterprise. The transfer of an organised part of a banking enterprise requires the approval of the PFSA.
An organised part of an enterprise is a set of items, rights, information or data that are characterised by organisation, which are economically and functionally connected with each other, and which could be the object of separate banking activity (i.e., different banking businesses). This could encompass a separate organised unit (e.g., the retail part only) within the organisational structure of a bank, intended to cooperate with another entity in the provision of banking services.18 The Polish Supreme Court has confirmed that a bank branch, despite its legal dependence, may constitute a separate enterprise if it can be defined as an organised set of intangible and tangible components intended to carry out business activity, as long as it has financial independence.19
In 2012, the transfer of a banking enterprise took place as a result of an agreement between Getin Noble Bank SA and DnB NORD Polska SA. The agreement covered the sale of the retail part of DnB NORD Polska, which comprised 37 banking outlets serving domestic customers, small and medium-sized enterprises and individual retail clients. The agreement brought a total of almost 28,000 new clients to Getin Noble.
In transfers, the consent of each transferred account holder is required so that client migration may be carried out.
A popular way of taking over parts of banking enterprises is also the division of a bank (in the form of a joint-stock company) and the transfer of part of the assets of the divided bank to a national bank or credit institution. The division of a bank requires PFSA approval. This is how, inter alia, the retail, private and business parts of Deutsche Bank Polska SA were taken over by Bank Zachodni WBK SA and some operations (excluding mortgage operations) of Bank BPH were taken over by Alior Bank SA.
The year in review
The banking sector in 2020 was mainly shaped by covid-19. The Polish market similarly reflects trends in the global economy. To avoid potential negative economic consequences, in the first half of 2020 the Monetary Policy Council – the NBP body responsible for shaping monetary policy – reduced the required reserve ratio for banks by three percentage points to 0.5 per cent and also increased the interest rate on this reserve. As a result of this reduction, the value of funds available to banks increased by 41.3 billion zloty. Additionally, in May 2020, the base interest rate in Poland was lowered to a record level of 0.1 per cent. Moreover, in March 2020, the NBP started to purchase selected debt securities from the secondary market under structural open market operations. By the end of May 2020, the market value of treasury bonds and bonds guaranteed by the Polish State Treasury bought by the NBP was 90.7 billion zloty.
The pandemic has particularly influenced the emergence of risks in the banking sector, including from an increase in write-downs for expected credit losses related to the pandemic, banks' risk of another credit crunch, weaknesses in some institutions and their impact on the rest of the financial system, and an increase in the sovereign-bank nexus.20
Although detailed data for the whole of 2020 has not yet been published, banks are likely to post lower revenues, if only due to a significant drop in the number and value of loans granted. According to the NBP, write-downs for credit risk related to the effects of covid-19 were the main reason for the significant fall (of about 50 per cent) in financial results and profitability of the banking sector compared to 2019.
A problem faced by banks is the large share in their portfolios of home loans indexed to or denominated in a foreign currency. These are associated with a significant legal risk, highlighted by the fact that some borrowers have questioned the provisions of agreements, particularly those referring to the rules for setting the foreign currency exchange rate. The most frequently raised objection is the abusive nature of indexation clauses and exchange rate risk clauses. One such case was examined, by way of a preliminary ruling, by the Court of Justice of the European Union21 in which the Court essentially confirmed the admissibility of a court finding a loan agreement between the parties invalid after an abusive conversion clause was eliminated from it. Complete invalidation of the agreement without the obligation to repay the amount of the loan would cost the banks more than €50 billion, according to PFSA estimates.22 At the end of 2020, the PFSA chairman proposed a solution to the banks, whereby borrowers would start settling with the banks as if their loans had been zloty loans from the start. The judgment of the Polish Supreme Court,23 in terms of resolving legal issues related to loans in Swiss francs, will also be important.
In terms of banking regulation, implementation of the CRR II/CRD V/BRRD II regulatory package has been under way since the second half of 2020. Its introduction is expected later in 2021.
In the past few years, the banking market has seen consolidation in the sector, particularly in terms of mergers and acquisitions of large commercial banks. This process has slowed somewhat since 2019, when Bank Millennium SA acquired Societe Generale's subsidiary bank, Eurobank SA. The number of commercial banks has decreased to 30 over the past decade.
An event that affected the banking market was the compulsory resolution, initiated on 31 December 2020, of one of the commercial banks, which was subsequently taken over by one of the biggest banks in Poland.
A promising sector, including in the context of banks' operations, is the financing of projects relating to renewable energy sources, in connection with the newly adopted 'Energy Policy for Poland until 2040', the aim of which is to strive for a low-carbon economy, develop renewable energy sources and improve air quality.
Outlook and conclusions
As Poland is an EU Member State, the legal system reflects the legal solutions applicable across the EU. However, in regulatory terms, the PFSA is a very restrictive supervisory body. The banking market in Poland is characterised by an increasing share of the Polish State Treasury in the sector's assets, due to mergers or acquisitions of banks or their assets by companies controlled by the Polish State Treasury.
In the coming year, both the banking sector and the Polish economy in general need to address the economic consequences of covid-19. The solvency of borrowers after the expiry of loan moratoria and the end of state support will particularly need to be monitored. The banking market in Poland will be affected in the short term by the final solution adopted for the issue of loans in Swiss francs and the potential costs of settlements or court proceedings in these cases.
In the longer term, the implementation of the CRR II/CRD V package, particularly in the area of financial holdings, will have an impact on the banking market. Further state activity on the bank mergers and acquisitions market and more progressive consolidation is also possible.
1 Andrzej Foltyn and Magdalena Skowronska are partners, Tomasz Kalicki is a senior associate and Filip Lisak is an associate at Domanski Zakrzewski Palinka spólka komandytowa.
4 In 2019, recommendations were issued to 12 banks, mainly in regard to portfolios of mortgage-backed foreign currency loans in euros and Swiss francs.
5 Polish Financial Supervision Authority (PFSA), 'Sprawozdanie z dzialalnosci Urzedu Komisji Nadzoru Finansowego oraz Komisji Nadzoru Finansowego w 2019 roku', www.knf.gov.pl/knf/pl/komponenty/img/Sprawozdanie%202019.pdf, pp. 52–56.
6 Communication from the PFSA, 'Wyniki PKO Banku Polskiego oraz Pekao SA w europejskich testach stresu', 2 November 2018, www.knf.gov.pl/knf/pl/komponenty/img/Komunikat_stress_testy_02_11_2018.pdf.
7 'Stanowisko Urzedu Komisji Nadzoru Finansowego w sprawie zmiennych skladników wynagrodzenia w bankach oraz w zakladach ubezpieczen', 17 April 2020, www.knf.gov.pl/knf/pl/komponenty/img/Stanowisko_UKNF_ws_zmiennych_skladnikow_wynagrodzenia_w_bankach_oraz_w%20_zakladach_ubezpieczen_69531.pdf.
8 PFSA, 'Komunikat dotyczacy stanowiska organu nadzoru w sprawie zalozen polityki dywidendowej banków komercyjnych, banków spóldzielczych i zrzeszajacych oraz zakladów ubezpieczen i reasekuracji w 2020 r', 3 December 2019, www.knf.gov.pl/knf/pl/komponenty/img/Komunikat_ws_polityki_dywidendowej_w_2020_67952.pdf, p. 1.
9 PFSA, 'Stanowisko KNF ws. polityki dywidendowej w 2021 r.', 16 December 2020, www.knf.gov.pl/knf/pl/komponenty/img/Stanowisko_KNF_ws_polityki_dywidendowej_w_2021_r_71933.pdf, p. 1.
10 PFSA, 'Informacja na temat sytuacji sektora bankowego', June 2020, www.knf.gov.pl/knf/pl/komponenty/img/Informacja_na_temat_sytuacji_sektora_bankowego_w_2019_r.pdf, p. 61. Data for 2020 is not yet available.
11 id., p. 53.
12 id., p. 64.
13 See Polish Supreme Court judgment of 23 October 2019, I NSK 66/18, OSNKN 2020, No. 3, item 21.
15 id., p. 58.
18 In 2014, this was executed by Alior Bank SA.
19 Supreme Court judgment of 15 March 2018, III CSK 378/16, LEX No. 2486124.
20 NBP, 'Raport o stabilnosci systemu finansowego', June 2020, p. 35 (see footnote 16).
21 Case C-260/18, Dziubak.
22 PFSA, 'Potencjalny wplyw zmian otoczenia prawnego na portfel mieszkaniowych kredytów walutowych zwiazanych z kursem CHF', 2 March 2021, www.knf.gov.pl/knf/pl/komponenty/img/Wplyw_zmian_otoczenia_prawnego_na_portfel_mieszkaniowych_kredytow_CHF_72739.pdf.