Accession to the European Union has been the key driving force behind Poland's financial sector development because it contributed to improvements in the regulatory framework, according to the International Monetary Fund's (IMF) 2006 Article IV Consultation report. Moreover, the U.S. Department of Commerce, in its 2008 Country Commercial Guide, states that the Polish banking system is among the best in Central and Eastern Europe in terms of regulation and supervision. In 2001, the IMF conducted a Financial Sector Assessment Program (FSAP) of Poland's observance of the Basel Core Principles (BCPs) for Effective Banking Supervision, and reported its findings in its 2001 Financial System Stability Assessment. The IMF report concluded that the Commission for Banking Supervision had adopted and effectively implemented a clear set of goals and objectives through supervisory strategies and through on-site and off-site examinations. While most of the essential prudential regulations and requirements were in place, the assessment found that compliance with the regulatory framework was not complete. The Act on Financial Market Supervision was adopted in September 2006, establishing the new integrated financial supervision authority - the Polish Financial Supervisory Authority (PFSA) - for the insurance, securities market, and pension fund sectors. Starting from January 1, 2008, banking supervision is also carried out by the PFSA. Subsequent to this change in the supervisory and regulatory authority, there is little information publicly available regarding Poland's compliance with the BCPs.

General Overview

The International Monetary Fund (IMF) conducted a Financial Sector Assessment Program (FSAP) in February 2001, covering Poland's observance of the Basel Core Principles (BCPs) for Effective Banking Supervision. The IMF's findings were reported in its 2001 Financial System Stability Assessment (FSSA). The IMF report concluded that the Commission for Banking Supervision (Komisja Nadzoru Finansowego, or CBS) had adopted and effectively implemented a clear set of goals and objectives through supervisory strategies, as well as on-site and off-site monitoring. Moreover, it had made progress in building staff, and developing its internal process. While most of the essential prudential regulations and requirements were in place, the assessment found that compliance with the regulatory framework was not complete. Weaknesses were also identified with regard to consolidated supervision, intervention and enforcement powers, corporate governance, and independence from the government. In its 2001 FSSA, the IMF recommended giving explicit powers to the supervisory authority to make its actions more effective. It further advised defining clear criteria for the protection of supervisors and enhancing staffing and remuneration of the General Inspectorate for Banking Supervision (GIBS) - the executive arm of the CBS. The IMF expressed the urgent need to require reporting and supervision on a consolidated basis, and to clearly define the level of responsibility and accountability of the banks' management and supervisory boards. The lack of consolidated supervision and reporting was addressed through amendments to the Banking Act in August 2001.

The legal framework for banking supervision in Poland is mainly comprised of the 1997 Banking Act, which was last amended in 2007, and the 1997 Act on the National Bank of Poland. The new Act on Financial Market Supervision was adopted in September 2006. It establishes a new, integrated financial supervision authority, the Polish Financial Supervisory Authority (Komisja Nadzoru Finansowego, or PFSA) - merging the Securities and Exchange Commission (Komisja Papierów Wartoœciowych i Gie³d, or SEC) and the Insurance and Pension Funds Supervisory Commission (Komisja Nadzoru Ubezpieczen i Funduszy Emerytalnych, or KNUiFE). Starting from January 1, 2008, the CBS was also integrated into the new regulator. According to the article by M Furtek i Wspólnicy in the 2006 International Financial Law Review (IFLR), the PFSA is a collegial body with a chairman appointed by the prime minister, to which the PFSA is accountable and submits annual reports. In its 2006 Article IV Consultation report, the IMF expressed concern regarding the scope for political interference under the new legal framework for financial sector supervision, and noted that "the governance provisions for the new unified supervisory agency were little improved in terms of legislative process and continue to fall short of best practice" (p. 44). Given the change in the supervisory and regulatory authority since the 2001 FSAP, there is insufficient information publicly available regarding Poland's compliance with the BCPs.

According to the International Institute of Bankers' 2007 Global Survey, the financial system in Poland is dominated by banks, with assets in the banking sector amounting to 69.9% of total financial assets. As of 2007, per the same report, the banking sector was composed of 51 commercial banks and 584 cooperative banks, with total estimated assets of over $270 billion. Moreover, the foreign share in the capital of the banking sector reached 66.6%, and foreign investors, mainly from Italy, Germany, the Netherlands, and the USA, controlled 40 commercial banks. The 2006 IMF report notes that accession to the European Union (EU) has been the key driving force behind Poland's financial sector development, as it has contributed to improvements in the regulatory framework The 2008 U.S. Department of Commerce (DoC) Country Commercial Guide further states that the Polish banking system is among the best in Central and Eastern Europe in terms of regulation and supervision. While the banking sector is dominated by 11 large banks, the rapid development of small and medium-sized banks reduced concentration in the banking sector. The U.S. DoC report also noted that the National Bank of Poland (NBP) reported a decrease in non-performing loans at the end of June 2007.

The Principles

1. (1) Clear responsibilities and objectives for each supervisory agency.

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At the time of the IMF's 2001 FSSA, supervision of the banking sector was conducted by the CBS, which was set up under the 1997 National Bank Act. The CBS had the sole authority to license new institutions and withdraw licenses and was governed by the president of the NBP. Furthermore, its executive arm, the GIBS, acted as an autonomous entity. The new, integrated financial supervision authority, the PFSA, was established in 2006 under the Act on Financial Market Supervision, merging the SEC and the KNUiFE. The integration of the CBS into the new regulator was planned for January 1, 2008, as noted in the IMF's 2006 Article IV Consultation report. Nevertheless, there is insufficient information publicly available regarding Poland's compliance with this principle subsequent to the change in the supervisory authority.

1.(2) Operational independence and adequate resources.

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At the time of the IMF's 2001 FSSA, the structure of the CBS needed to be revised to avoid political interference. The IMF report recommended enhancing the staffing and enforcement powers of the supervisory agency. The new, integrated financial supervision authority, the PFSA, was established in 2006 under the Act on Financial Market Supervision. According to M Furtek i Wspólnicy's 2006 IFLR article, the PFSA is a collegial body. Its chairman is appointed by the prime minister, to which it is accountable and submits annual reports. Per the same article, while in theory "the new commission will be an independent authority exercising supervisory powers over the financial market in an autonomous way," its effective independence seems uncertain. In its 2006 Article IV Consultation report, the IMF expressed concern regarding the scope for political interference under the new legal framework for financial sector supervision, and noted that "the governance provisions for the new unified supervisory agency were little improved in terms of legislative process and continue to fall short of best practice" (p. 44). The IMF report added that the independence of the PFSA was insufficiently established in legislation. The implementation of the 2006 Act on Financial Market Supervision was expected to determine the effectiveness of the PFSA. Nevertheless, there is insufficient information publicly available regarding Poland's compliance with this principle subsequent to the change in the supervisory authority.

1.(3) A suitable legal framework for authorization and ongoing supervision.

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The legal framework for banking supervision in Poland is mainly comprised of the 1997 Banking Act, which was last amended in 2007, and the 1997 Act on the National Bank of Poland. According to the IMF's 2001 FSSA, "the 1997 Banking Act provides for the establishment and organization of banks and of branches and representative offices of banks" (p. 46). The law further includes provisions on "deals with bank accounts, bank settlements, guarantees, issue of bank securities, rights and duties of banks, association and amalgamation of banks, bank capital, banking supervision and bank rehabilitation proceedings, liquidations and bankruptcies" (p. 46). The new Act on Financial Market Supervision, adopted in September 2006, establishes a new integrated financial supervision authority, the PFSA. Nevertheless, there is insufficient information publicly available regarding Poland's compliance with this principle subsequent to the change in the supervisory authority.

1.(4) A suitable legal framework to address compliance with laws as well as safety and soundness concerns.

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At the time of its 2001 FSSA, the IMF advised enhancing enforcement powers of the supervisory authority through "a set of remedial actions to effectively address banking practices that could potentially threaten the safety and soundness of the sector, and to instill and facilitate better market discipline" (p. 50). The IMF report further recommended giving explicit powers to the supervisory authority to take prompt corrective actions. Nevertheless, there is insufficient information publicly available regarding Poland's compliance with this principle subsequent to the change in the supervisory authority.

1.(5) Legal protection for supervisors.

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At the time of the IMF's 2001 FSSA, the degree of legal protection for the GIBS's staff was a concern. The IMF report recommended defining clear criteria for the protection of supervisors. It further advised amending the Banking Act "to give supervisors protection for actions performed while discharging their duties in good faith, and protection against the costs of defending their actions while discharging their duties" (p. 47). Nevertheless, there is insufficient information publicly available regarding Poland's compliance with this principle subsequent to the change in the supervisory authority.

1.(6) Arrangement for sharing of information between supervisors and protection of confidentiality of shared information.

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In its 2001 FSSA, the IMF recommended improving information sharing with foreign supervisors. However, there is insufficient information publicly available regarding Poland's compliance with this principle subsequent to the change in the supervisory authority.

2. Clearly defined permissible activities for banks and control of the use of the word 'bank'.

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At the time of the 2001 FSSA, the IMF stated that "the legal framework was clear on such essential aspects as the definition of a bank, the licensing process, the eligibility criteria for becoming a member of a bank's management board, and the role of the commission in approving such members" (p. 47-48). Furthermore, amendments to the Banking Act empowered the supervisory agency to refuse authorization for a bank to operate, and to revoke a license. Nevertheless, there is insufficient information publicly available regarding Poland's compliance with this principle subsequent to the change in the supervisory authority.

3. Criteria for structure, directors, operating plan, controls, financial condition and capital base.

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There is insufficient information publicly available regarding Poland's compliance with this principle.

4. Authority to review and reject transfer of ownership.

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At the time of the IMF's 2001 FSSA, the Banking Act did not clearly define the concept of "significant ownership." The IMF report recommended clarifying this concept in order to "enhance the transparency of the ownership structure and the authority in the supervisor" (p. 48). Nevertheless, there is insufficient information publicly available regarding Poland's compliance with this principle subsequent to the change in the supervisory authority.

5. Authority to review major acquisitions and investments.

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At the time of its 2001 FSSA, the IMF recommended amending the Banking Act "to clearly define the type and amount of investments which need supervisory approval" (p. 48). It further advised establishing clear criteria "to ensure that acquisitions and investments do not expose the bank to undue risk or hinder effective supervision" (p. 48). Nevertheless, there is insufficient information publicly available regarding Poland's compliance with this principle subsequent to the change in the supervisory authority.

6. Minimum capital adequacy requirements (meet Basle Capital Accord for internationally active banks).

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In its 2001 FSSA, the IMF stated that "further refinements and additional requirements could make the prudential regulations framework more effective and fully compliant with international standards" (p. 48). The IMF report recommended using "indicative benchmarks for triggering action on inadequate capital adequacy to prompt timely supervisory response" (p. 48). Nevertheless, there is insufficient information publicly available regarding Poland's compliance with this principle since the change in the supervisory authority.

7. A method exists for the evaluation of procedures related to loans, investments and portfolio management.

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In its 2001 FSSA, the IMF stated that "further refinements and additional requirements could make the prudential regulations framework more effective and fully compliant with international standards" (p. 48). The IMF report recommended requiring banks "to establish policies and procedures that assure adequate, periodic collateral reviews, updated valuations, and reviews of external collateral valuations" (p. 48). Nevertheless, there is insufficient information publicly available regarding Poland's compliance with this principle subsequent to the change in the supervisory authority.

8. Policies, practices and procedures for evaluating the quality of assets and the adequacy of loan loss provisions and reserves.

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See Principle 7.

9. Prudential limits and management information system on concentration of exposure.

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In its 2001 FSSA, the IMF stated that "further refinements and additional requirements could make the prudential regulations framework more effective and fully compliant with international standards" (p. 48). Per the same report, the Banking Act set limits on large exposure and on connected lending and required banks "to have internal control systems in place, to review their assets and off-balance-sheet risk exposures and classify them, and to detect and combat activities of criminal nature" (p. 48). The IMF report recommended clarifying and improving the definition of large exposures and connected lending. Nevertheless, there is insufficient information publicly available regarding Poland's compliance with this principle subsequent to the change in the supervisory authority.

10. Arm's length rule and monitoring for connected lending.

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In its 2001 FSSA, the IMF stated that "further refinements and additional requirements could make the prudential regulations framework more effective and fully compliant with international standards" (p. 48). Nevertheless, there is insufficient information publicly available regarding Poland's compliance with this principle subsequent to the change in the supervisory authority.

11. Policies and procedures for country risk and transfer risk.

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In its 2001 FSSA, the IMF stated that "further refinements and additional requirements could make the prudential regulations framework more effective and fully compliant with international standards" (p. 48). The IMF report recommended improving regulations for country and market risk. Nevertheless, there is insufficient information publicly available regarding Poland's compliance with this principle subsequent to the change in the supervisory authority.

12. Measuring and monitoring market risk. Limit and/or specific capital charge on market risk exposure.

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In its 2001 FSSA, the IMF stated that "further refinements and additional requirements could make the prudential regulations framework more effective and fully compliant with international standards" (p. 48). The IMF report advised including supervisory guidelines for market risk into legislation to ensure the full enforcement capacity of the supervisory agency. With regard to the overall risk assessment of a banking group, the IMF report recommended monitoring consolidated banking operations and related risks, including market risk and credit risk, on a more frequent basis. Nevertheless, there is insufficient information publicly available regarding Poland's compliance with this principle subsequent to the change in the supervisory authority.

13. Comprehensive risk management processes.

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In its 2001 FSSA, the IMF stated that "further refinements and additional requirements could make the prudential regulations framework more effective and fully compliant with international standards" (p. 48). Per the same report, the most urgent improvements were needed in consolidated risk assessment. Nevertheless, there is insufficient information publicly available regarding Poland's compliance with this principle subsequent to the change in the supervisory authority.

14. Adequate internal controls.

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In its 2001 FSSA, the IMF stated that "further refinements and additional requirements could make the prudential regulations framework more effective and fully compliant with international standards" (p. 48). Per the same report, the Banking Act required banks "to have internal control systems in place, to review their assets and off-balance-sheet risk exposures and classify them, and to detect and combat activities of criminal nature" (p. 48). The IMF report expressed the need to clearly define the level of responsibility and accountability of the banks' management and supervisory boards. It further advised improving corporate governance standards and practices. Nevertheless, there is insufficient information publicly available regarding Poland's compliance with this principle since the change in the supervisory authority.

15. Strict "know-your-customer" rules and high ethical and professional standards.

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In its 2001 FSSA, the IMF stated that "further refinements and additional requirements could make the prudential regulations framework more effective and fully compliant with international standards" (p. 48). According to the U.S. Department of State (DoS) 2008 International Narcotics Control Strategy Report, the 1997 Banking Act and CBS Resolutions comprise customer identification requirements. Moreover, the 2000 Act on Counteracting Introduction into Financial Circulation of Property Values Derived from Illegal or Undisclosed Sources and on Counteracting the Financing of Terrorism (hereafter referred to as "anti-money laundering (AML) and combating the financing of terrorism (CFT) law") provides for the creation of a financial intelligence unit - the General Inspector of Financial Information (Generalny Inspektor Informacji Finansowej, or GIIF) within the Ministry of Finance (Ministerstwo Finansów, or MoF). Per the same report, the AML/CFT law was revised to implement the EU's 2005 Third Money Laundering Directive. The Directive was to be transposed into Polish law in December 2007, but elections in October 2007 delayed the process. The U.S. DoS reported that although Poland put many efforts into implementing a comprehensive AML/CFT regime in line with international standards, it remained non-compliant with various Financial Action Task Force standards. However, the available sources do not directly address Poland's compliance with this principle.

16. Effective supervisory system consisting of on-site and off-site supervision.

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According to the IMF's 2001 FSSA, the GIBS effectively used on-site examinations and off-site analysis to conduct banking supervision. The IMF report acknowledged that there was inadequate staff to increase the necessary frequency of on-site examinations. Nevertheless, there is insufficient information publicly available regarding Poland's compliance with this principle subsequent to the change in the supervisory authority.

17. Regular contact with bank management and understanding of bank's operations.

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At the time of the 2001 FSSA, the IMF stated that off-site analysts maintained regular contact with management of the banks they supervised. The "Uniform Bank Performance Report," which was established in 1998, helped identify risks incurred by the banks and potential problems in the future. Nevertheless, there is insufficient information publicly available regarding Poland's compliance with this principle since the change in the supervisory authority.

18. Analytical reports and statistical returns on solo and consolidated basis.

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The lack of consolidated supervision and reporting at the time of the IMF's 2001 FSAP was addressed through amendments to the Banking Act in August 2001. Nevertheless, there is insufficient information publicly available regarding Poland's compliance with this principle subsequent to the change in the supervisory authority.

19. Independent validation of supervisory information through on-site examination or external auditors.

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There is insufficient information publicly available regarding Poland's compliance with this principle.

20. Ability to supervise on a consolidated basis.

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The lack of consolidated supervision and reporting at the time of the IMF's 2001 FSAP was addressed through amendments to the Banking Act in August 2001. Nevertheless, there is insufficient information publicly available regarding Poland's compliance with this principle subsequent to the change in the supervisory authority.

21. Consistent accounting policies and practices that provide a true and fair view of the financial condition of the bank.

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According to the World Bank's 2005 report on Accounting and Auditing, financial reporting by Polish companies and banks is governed by various laws and regulations, which include very detailed accounting requirements primarily based on the Fourth EU Directive No. 78/660/EEC on the Annual Accounts of Certain Types of Companies, the Seventh EU Directive on Consolidated Accounts No. 83/349/EEC, and EU Directive on the Annual Accounts and Consolidated Accounts of Banks and Other Financial Institutions No. 86/635/EEC. As of 2005, per the same report, the Law on Accounting, which enacts the provisions set out in the Fourth and Seventh EU Company Law Directives (as amended), requires that the consolidated financial statements of listed companies and all banks comply with the International Financial Reporting Standards. However, the available sources do not directly address Poland's compliance with this principle.

22. Adequate supervisory measures to ensure timely corrective action.

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In its 2001 FSSA, the IMF recommended taking steps "to amend the full spectrum of enforcement tools, available to bank supervision, to upgrade the set of corrective measures and to introduce prompt corrective actions, so that supervisors can better follow up on their initial remedial actions and enforce them" (p. 50). Nevertheless, there is insufficient information publicly available regarding Poland's compliance with this principle subsequent to the change in the supervisory authority.

23. Banking supervisors must practice global consolidated supervision over their internationally-active banking organizations.

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At the time of the IMF's 2001 FSAP, consolidated supervision had not yet been implemented. Shortcomings remained with respect to the supervision of cross-border banking operations. In its 2001 FSSA, the IMF stated that amendments to the Banking Act in August 2001 required consolidated reporting and enabled consolidated supervision. However, there is insufficient information publicly available regarding Poland's compliance with this principle subsequent to the change in the supervisory authority.

24. International exchange of information with other supervisors.

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As noted in the IMF's 2001 FSSA, "the provisions of the Banking Act allow for the establishment of co-operation and exchange of information with foreign supervisors" (p. 50). However, there is insufficient information publicly available regarding Poland's compliance with this principle subsequent to the change in the supervisory authority.

25. Supervision of local operation of foreign banks and information sharing with home country supervisors.

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There is insufficient information publicly available regarding Poland's compliance with this principle.