Dr Marek Porzycki Chair for Economic Policy Monetary Law and Monetary Policy 5b. Current matters – the "KNF affair": issues of relevance for the stability of the banking sector Dr Marek Porzycki Chair for Economic Policy

Background Since a few years Getin Noble Bank and Idea Bank struggled with decreasing profits followed by losses and were trying to re-orient their business models. In March 2018, Mr LC, the main shareholder of both banks, met with Mr MC, head of the Financial Supervision Commission (KNF), Poland's supervisory authority. He secretly recorded the meeting. On 7 November 2018 Mr LC made a crime report to the public attorney alleging that Mr MC demanded an illegal favour worth ca. 40 million PLN in return for blocking a plan for a compulsory takeover of Getin Noble Bank On 13 November 2018 details of the case, including a transcript of the recorded conversation, were published by "Gazeta Wyborcza", a leading Polish daily, and the affair was also reported by "Financial Times" On the same day Mr MC, after a few hours of hesitation, resigned from the post of KNF head

Context Compulsory takeover of a bank "failing or likely to fail" is one of the resolution tools used to avoid the need for recapitalisation of failed banks at the expense of public funds. However, Getin Noble Bank was (and still is) far from insolvency. In fact its Tier 1 capital ratio (core equity capital vs. total risk- weighted assets) was above 9% while the requirement resulting from the EU law is 4.5% (the requirements under Polish are higher). Bank resolution procedures existing in Polish law mirror the EU legislation and allow for compulsory takeover under a bank resolution plan according to EU rules. In early November 2018, an amendment has been suddenly introduced into a proposed law on strengthening the financial supervision, currently in Parliament, that would allow the KNF to issue a decision on compulsory takeover of a bank subject to much less stringent requirements, justified only by a threat of failing to meet the capital requirements.    

Situation since 13 November 2018 A sharp drop in share prices of Getin Holding, Getin Noble and Idea Bank (respectively by 52%, 61% and 40% in the week of 13-20 Nov) A "slow-motion" bank run? According to press reports there is a spike in deposit withdrawals from both banks. At the same time they try to attract deposits by offering unusually high interest rates on new deposits (respectively 3,3% and 3,9% as compared to up to 2,5-3% offered by other banks).

Reaction of the authorities In the night of 18/19 November 2018, the Financial Stability Committee, KSF (composed by the Governor of the NBP, the Minister of Finance, the [acting] head of KNF and the head of the BFG [deposit guarantee scheme and resolution authority]) met and issued an announcement.

Content of the KSF announcement The representatives of Getin Noble Bank and Idea Bank confirmed to the KSF that both banks are solvent and continue to meet their obligations. The National Bank of Poland confirms that it is ready to grant liquidity assistance to both banks in order to ensure they continue to meet obligations towards their customers (apparently as a "refinancing loan" under Art.. 42 of Law on the NBP) --> function of "lender of last resort" to banks in distress (facing temporary liquidity problems) but still solvent

Content of the KSF announcement The KSF reiterates that both banks are covered by the deposit guarantee scheme operated by the Bank Guarantee Fund. The scheme covers deposits up to the amount of 100.000 EUR. The KSF confirms that the Polish financial system is stable. The situation is being monitored on the ongoing basis and all institutions constituting the KSF are ready to take necessary steps within their respective areas of competence to support the stability of the banking system.

Reaction of the authorities The NBP temporarily reduced the reserve requirement for Idea Bank by 50% of the mandatory reserve for the perion of 19.11.2018 until the end of 2021. Getin Noble Bank was given a 55% reduction of the reserve requirement already from January 2018. This reduction has been extended until the end of 2019. Aim  to improve the liquidity position of both banks

Issues at stake Credibility of the KNF as Poland’s financial supervision authority Credibility of any potential bank resolution measures to be taken in the future in case of distress or threat of insolvency of any bank Survival of both banks in question Financial condition of the banking sector  Getin Noble, the larger of both banks, has ca. 45 bn PLN of deposits while the BFG (deposit guarantee scheme) has only 12 bn PLN of liquidity. Should deposit guarantee be activated, the resulting gap would need to be covered jointly by other banks. Political links between the KNF, the NBP and the governing majority  integrity of Poland’s financial system

Disclaimer This presentation has been prepared on 20 November 2018 on the basis of information publicly available until that date.