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13 October 2000
Types of Banks
Monetary Policy Council
Regulation of Banking Activity
Banking Supervisory Commission
Bank Guarantee Fund
Acquiring Shares in an Existing Bank
European Union Impact
This overview provides an introduction to Polish banking laws and examines the following:
On January 1 1998 significant changes were made to domestic banking law. On that date the following statutes came into force:
These statutes constitute a sweeping change to the regulation of banks and to financing techniques for banks and commercial borrowers. This overview examines the first three statutes.
Three legal entities are permitted to undertake banking activities. They are:
There are approximately 819 cooperative banks and 79 commercial banks (ie, banks operating as joint stock companies, state banks and branches of foreign banks). Although cooperative banks are dominant in number, commercial banks are of greater importance. Of the 79 commercial banks, around 40 have a majority of Polish capital (of which six have the Treasury as their majority shareholder and one operates as a state bank). Foreign capital constitutes a majority in approximately 39 banks, of which 36 are joint stock companies and three operate as branches of foreign banks.
The National Bank is regulated by the National Bank of Poland Act that came into force in 1998. The act introduced new reforms concerning the bank's structure and activities, for example, banking supervision is now entrusted to the Banking Supervisory Commission which is chaired by the bank's president. The commission's powers have been extended considerably.
The statutory bodies of the bank include:
The bank's president is appointed for 6 years at the request of the president of the country. He represents the bank before third parties.
The bank's management board executes the resolutions of the Monetary Policy Council and makes all decisions that are not reserved by the act for other bodies of the bank. Important competencies include authorizing banks to execute foreign exchange operations and supervising open-market operations. The board also exercises activities relating to internal affairs (eg, organizational, financial and employment matters).
The Monetary Policy Council was established by the National Bank of Poland Act and has taken over some of the competencies of the bank's president. It consists of persons not belonging to the bank's management (except for the chairman).
The council establishes the following:
The council consists of 10 members including the chairman. The other nine members are financial specialists appointed by Parliament and the bank's president. All members are appointed for six years.
Commercial banks are principally regulated by the Banking Law and the Commercial Code. Other relevant laws are:
Article 2 of the Banking Law provides that a bank may only conduct operations and activities specified, subject to the restrictions contained in its banking permit.
Pursuant to Article 5(1) of the Banking Law, banking operations consist of the following activities:
Also, Article 5(2) of the Banking Law provides that the following additional activities constitute banking operations if they are performed by banks:
Article 6(1) of the Banking Law provides a list of other activities that banks may conduct. This list provides that banks may:
Polish law does not provide a definition of 'financial services' although various statutes contain references to such services. Despite this lack of clarity the range of financial services offered by commercial banks is growing rapidly, for example, they are heavily involved in leasing activities.
Article 6(1) of the Banking Law restricts purchases of shares by banks. A bank may not acquire shares that would result in it holding shares exceeding 15% of its own funds. Moreover, Article 6(3) provides that the aggregate financial means spent by a bank for purposes set out in Article 6(1) may not exceed 60% of its own funds. These limitations do not apply if the acquisition involves bank shares or shares in other specified entities (eg, insurance companies).
Although banks may grant unsecured loans and credits, Article 70 provides that banks shall make the granting of loans and credits contingent upon a borrower's creditworthiness, that is, the capability of repaying credit with interest within the contract's specified time limits. At a bank's request borrowers should provide documents and information necessary to evaluate such capability. In certain circumstances, however, banks may grant loans and credits to borrowers who are not creditworthy (eg, newly established entities), provided that (i) special security is established for repayment and (ii) a satisfactory plan for economic recovery is presented to the bank.
Article 71(1) provides that the following may not exceed 25% of the bank's own funds:
Pursuant to Article 71(3), this provision does not apply if the bank's debtor is one of the following:
Article 128 of the Banking Law establishes capital adequacy rules that are similar to the Basle requirements. A bank must maintain funds of no less than 8% of its risk-weighted assets and off-balance sheet liabilities. The Banking Supervisory Commission determines the way in which this solvency ratio is calculated and the risk-weight percentage ascribed to each asset and liability. Banks are obliged to maintain a solvency ratio at least 15% for the first 12 months of activity and for a further 12 months of at least 12%.
Mandatory and special reserves
In accordance with the National Bank of Poland Act and Executive Order 10/98 (Official Journal 12(23) as amended) banks are obliged to collect and maintain mandatory reserves, defined as "a percentage of the bank's deposits in Polish zloty and foreign currencies in a bank account held in the National Bank of Poland".
The mandatory reserves ratio may not exceed 30% of the balance of deposits payable on request and 20% of the balance of term deposits. Cash reserves held by a bank are recognized as forming part of the mandatory reserve, to a maximum of 10% of the total amount of reserve to be maintained.
Banks are obliged to offset the effects of risk by creating and maintaining special reserves for receivables and guarantees. Special reserves are based on an evaluation of receivables' portfolio quality and securities granted.
The total amount of reserves is calculated by multiplying the total amount of receivables and off balance-sheet liabilities by the percentage rate of a given category of receivables and liabilities (the rates differ from 1% to 100% in the case of unrecoverable receivables). Risk-weighting is applied against receivables and liabilities after deducting the value of qualifying security held by a bank.
According to the Banking Law, the scope of banking supervision includes an examination of:
The Banking Supervisory Commission's powers are wide-ranging. The commission may order a bank to:
Also, the commission may in certain situations:
All banks are obliged to annually provide the commission with the following:
The commission may order an examination of the accuracy and reliability of all financial statements conducted at the expense of the National Bank or the relevant bank, if any irregularities are found during an audit. Detailed principles on reporting requirements are also included in executive orders issued by the commission and statutory authorities of the National Bank.
Banks are obliged to maintain accounts and prepare financial statements in accordance with the Accounting Act. In addition, banks have reporting obligations (specified under separate regulations) towards the National Bank and, if they are listed on the Warsaw Stock Exchange, towards the Securities and Stock Exchange Commission. Further regulations are provided in Executive Order 99/96.
Executive Order 11/98 of the Banking Supervisory Commission determines the norms of admissible foreign currency risk in a banks' operations. It stipulates limits for open foreign currency items. For each particular foreign convertible currency, the limit is 15% of the bank's own funds. The limit for a global foreign currency item is 5% of the bank's own funds in relation to all foreign unconvertible currencies and 30% of the bank's own funds in relation to all foreign convertible currencies.
Pursuant to the Banking Law, a bank may be established as a state bank, cooperative bank or a joint stock company. The latter must be established by at least three founders. There are no restrictions regarding founders.
A banking licence is necessary in order to offer banking services. The Banking Law states that banks acting as joint stock companies require two permits issued by the Banking Supervisory Commission. The first permit (issued by the commission in cooperation with the Ministry of Finance) relates to the creation of a bank. The second (issued by the commission alone) is required to commence banking activity.
The following documents must be filed in order to obtain the first permit:
The commission must issue its decision no later than three months after receiving the application or its supplementation. In order to commence banking activity, an existing bank must obtain a second permit that is issued following an application presented by the management board of a bank. A permit may be issued once the commission is satisfied that the bank:
Both permits become ineffective if the bank does not commence banking activity within one year from the date of issuance of the first permit.
The initial capital which has to be contributed by the founders of a bank should amount to at least €5 million calculated in its Polish zloty equivalent.
The initial capital of a bank cannot come from a loan, credit or undocumented sources. Part of the initial capital of a bank may be contributed in the form of non-cash contributions (eg, equipment or real estate) if they are directly useful to the banking activity. However, the initial capital contributed in cash cannot be lower than €5million and the value of non-cash contributions cannot exceed 15% of the bank's basic funds.
In order for a foreign bank to establish a branch office in Poland, it must obtain a permit from the Banking Supervisory Commission. The foreign bank branch may conduct only the banking activities described in the permit. Branches of foreign banks are subject to registration in the Polish Commercial Register and must comply with Polish regulations.
According to the Bank Guarantee Fund Act, banks (except cooperative banks) are obliged to make annual payments to the Bank Guarantee Fund to provide deposit insurance for savers. The amount of these payments depends on the value of the banks' assets and off balance-sheet liabilities. Payments have two components (i) a fee of up to 0.4% of the sum of the risk-weighted balance-sheet assets, guarantees and sureties granted by the relevant bank and (ii) a fee of up to 0.2% of all risk-weighted off balance-sheet assets.
The Bank Guarantee Fund scheme provides full coverage in relation to deposits of €1,000 and 90% in relation to the surplus equivalent (currently up to €11,000). The system of guarantees of the Bank Guarantee Fund relates to all banks in Poland, regardless of their capitals' origin. Banks should create internal guarantee funds to protect their savers' deposits. To cover the funds, banks are obliged to invest assets in treasury securities and the National Bank's monetary bills which should be deposited in a separate account in the bank itself or the National Securities Depository.
The Mortgage Bonds and Mortgage Banks Act creates a regulatory framework for banks to attract long-term finance by issuing debt instruments secured by mortgage portfolios. Only joint stock companies may obtain a mortgage bank licence. According to Article 10 of the Mortgage Banks Act, the Banking Law and regulations of the National Bank apply to the establishment, organization and operation of mortgage banks.
Only three banks currently hold mortgage bank licences:
Only the first two have begun conducting business. At the time of writing, PEKAO Bank Hipoteczny SA only held a permit to establish a mortgage bank and was waiting to commence operation. Three further banks are awaiting licences:
The intention to establish a mortgage bank has been also declared by Bank Gospodarstwa Krajowego.
Article 12 of the Mortgage Banks Act permits a mortgage bank to do the following:
Article 15 of the Mortgage Banks Act provides that mortgage banks may:
Restrictions and safeguards
Only mortgage banks are entitled to issue pledged bonds. The Mortgage Banks Act specifies two types of pledged bonds: (i) mortgage pledged bonds that are secured by a specific portfolio of mortgages, and (ii) public pledged bonds that are guaranteed by, or originate from the Treasury, the National Bank of Poland, the European Bank for Reconstruction and Development, the European Investment Bank, the World Bank, the European Community or one or more of its member states.
The mortgage bank undertakes to redeem pledged bonds after a specific time and pay the accrued interest. Both mortgage and public pledged bonds may be denominated in local or foreign currencies.
Holders of pledged bonds are provided with a high standard of protection. This is achieved through the obligation of mortgage banks to maintain registers of securities of pledged bonds and prepare a report setting out principles regarding valuation of the real estate over which mortgages are established. Other methods include limitations relating to the value of pledged bonds that may be issued by a single mortgage bank. In this regard, the Mortgage Banks Act provides the following:
Other measures protect pledged bond holders:
An independent custodian and deputy are appointed by the Banking Supervisory Commission for each mortgage bank. A custodian is entitled to inspect accounting records, registers, plans and other relevant documents. If irregularities are discovered, the custodian instructs the mortgage bank to take appropriate steps. The commission is notified if the bank does not follow instructions.
A considerable practical difficulty results from the fact that mortgage banks may only make credits secured by a registered mortgage. The registration of mortgages does not take place immediately on applying for registration; there are considerable delays between the application for registration and registration itself. Consequently, a mortgage bank cannot immediately make a mortgage credit. A solution to this problem is cooperation between mortgage and universal banks, with the latter granting bridging credits - although then it would be necessary for mortgage banks to arrange bridge financing for prospective borrowers, pending registration of the mortgage.
Pension and investment funds and insurance companies may not invest in pledged bonds. On October 20 1999 a draft act amending the current Mortgage Banks Act recommended that insurance companies, investment funds, pension funds and cooperative savings-credits funds be entitled to purchase pledged bonds. Also, pledged bonds will be issued on the basis of receivables from local government units or those guaranteed by such units. This will enable (i) both local government units and entities holding their guarantees to contract mortgage credits without establishing security and (ii) mortgage banks to issue publicly pledged bonds on the basis of receivables which are guaranteed by, or originate from local government units.
The Banking Law contains the following restrictions on any entity intending to acquire shares of a bank:
The acquisition of shares in an existing bank will often require other permits to be obtained. The first permit results from the Counteracting Antimonopoly Practices and Protection of Consumers Act (published in the Journal of Law 49(318)/1997) and states that if the acquirer intends to acquire shares in a bank whose aggregate funds exceed €50million (at the end of the year preceding the year in which such acquisition is to be made) and any such shares acquired would give at least 25%, 33% or 50% of the voting rights at a general meeting of shareholders of the bank.
The second permit results from the Acquisition of Real Estate by Foreign Entities Act
(Journal of Law 54(245)/1996) and is required if a foreign entity wishes to obtain control of a Polish bank when the owner of real estate is located in Poland.
Finally, a permit from the Securities and Stock Exchange Commission is required where the acquirer intends to acquire at least 25%, 33% or 50% of the voting rights attaching to shares of a publicly listed bank.
Changes have been made in light of the Association Treaty of December 16 1991. However, the current Banking Law does not completely harmonize domestic banking law with EU law and further changes are necessary.
A discrepancy exists in connection with the definition of 'banking institution'. According to the Banking Law, banking operations may only be undertaken by entities having the status of a bank. In the European Union, however, banking operations may be carried out by institutions that are not banks but have a licence to undertake specific banking activities. Therefore, provisions must be introduced allowing the performance of banking operations by entities that are not banks, such as credit or investment institutions.
It has been stressed that the banking supervision should in no way restrict the development of banks and that excessively strict supervision adversely affects the profitability of banks. A consolidated supervision system will be introduced by 2002 concerning the operation of a capital group as a whole. A capital group would cover both banks and other entities operating on the financial market (eg, leasing companies and pension funds).
A new law on consumer protection was recently passed to conform consumer protection laws to EU legislation (see New Consumer Protection Law's Effect on Banking Agreements).
It is expected that legislative work in the area of capital adequacy will start soon with the aim of implementing the provisions of European Council Directive 93/6/EEC. It seems that Poland will negotiate for the following:
The implementation of EU legislation concerning economic and monetary union will require the National Bank of Poland Act to be amended. Amendments will address the independence of the central bank from the government, and the National Bank's finances and audit.
Concerning the free flow of capital, the Banking Law will require amendment. The current requirement that a permit from the minister of finance be obtained for a Polish bank or a branch of a Polish bank to be set up abroad will be abolished. The foreign exchange law will also require modification. In this context, it will be necessary to solve the problem of liberalization of the flow of short-term capital that was originally planned for 1999.
Harmonization will also concern legal regulations on the following:
For further information on this topic please contact Artur Sidor at CMS Cameron McKenna by telephone (+48 22 520 5555) or by fax (+48 22 520 5556) or by e-mail (Artur.Sidor@cmck.com).
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