Covid-19: Financial Stability Committee - Macro-prudential Supervision Authority in Poland - what is it and what it can do?

All opinions are solely mine and not institutions I am affiliated to.

In recent years we could observe numerous changes in the macro-prudential institutional frameworks. Many countries, in particular in the European Union, created new authorities or changed scope of tasks of existing ones. European Systemic Risk Board (“ESRB”) is becoming more and more efficient and engaged in the macro-prudential supervision in the European Union (or financial stability so to speak) and pretending to be a good example for the Member States` authorities[1]. The reason for such development in the macro-prudential approach is not only fear of the repetition of the financial crisis but also compliance with the EU’s regulations.

Why it is so important? Covid-19 is (was?) a big surprise for all of us. While it is relatively easy (trust me or not but we have early indicators) to predict a new financial crisis or economic slowdown, epidemic of virus seems to something 'astonishing'. Bodies like Financial Stability Committee (FSC) will not (probably) rule the roots as we have KNF (with PIN) and NBP (with quantitative easing), however, as a 'shadow' will collectively guide its members who will be 'band leaders' in the upcoming months (two weeks ago FSC adopted a recommendation to completely consume Systemic Risk Buffer). Let's take a look at the composition of the FSC and smoothly move to its tasks and powers (in next article).

Genesis

In 2011 the European Systemic Risk Board has decided to issue a non-binding recommendation on the macro-prudential mandate of national authorities[2]. This act emphasized among other things that the Member States should “designate in the national legislation an authority entrusted with the conduct of macro-prudential policy, generally either as a single institution or as a board composed of the authorities whose actions have a material impact on financial stability”. Soon after that the European Union decided to make a further step. In 2013 upon adoption of Capital Requirements Directive (“CRD IV”)[3]requirement for establishment of designated authority (responsible for macro-prudential instruments) became binding for all the Members States in the European Union. 

In some countries it was a rapid and simple process, but in a few – due to political and constitutional constraints – long and complicated as it was in Poland. First discussions about the model of macro-prudential supervision were difficult as the National Bank of Poland proposed to establish a separate entity – Systemic Risk Board – following its EU-wide example – European Systemic Risk Board. Unfortunately, due to aforementioned factors and other constraints, this model had been abandoned during the political discussion. According to my research that I made during my stay at the IMF in 2016 such model was reflected only in a few countries around the globe (based on the FSAP information available).

Luckily, in August 2015 the Upper Chamber of the Parliament (Senat) adopted project of the act on macro-prudential supervision over the financial system and crisis management in financial system (Act) (available in English). Act came into force in October 2015. 

Newly created authority generally fulfils requirements frequently excerpted by the IMF[4] in its 'guidelines'.

Financial Stability Committee as a new designated authority – tasks and organization

Financial Stability Committee is not a completely new body in the Polish legal framework. Such body existed before the adoption of the Act[6] in a bit different form. This body was more a forum for discussions on financial stability and included the President of the National Bank of Poland, Minister of Finance, Chairman of the Financial Supervision Authority and President of the Bank Guarantee Fund. No major (with one exception) changes were introduced by the Act.

In the “old” model only the Minister of Finance could be a chairman of the FSC. Nowadays, such “leadership” depends on the tasks performed by the FSC and is divided between President of the National Bank of Poland (macro-prudential supervision) and the Minister of Finance (crisis management). If the FSC would have to discuss important macro-prudential issues, the President of the National Bank of Poland as its chairman has a right to call a meeting of the FSC. By contrast, if the aim of the meeting is to “manage” crisis (event of a direct threat to this stability) in the financial system, the Minister of Finance shall be a proper chairman.  

How to balance macro and micro? And coordinate...

This composition may bring to a conclusion that the FSC is purely coordinating body no formal powers. This setup prima facie may be regarded as inefficient. It is obvious that the macro-prudential and micro-prudential should work ‘hand in glove’[7] to achieve the main objective as the financial stability is. We cannot, however, miss the fact that both policies are focused on different intermediate objectives. Usually micro-prudential authorities are focused on stability of a single institution sacrificing systemic sustainability. As we can see from current perspective - 'everything depends'.

The FSC may have similar problems. We have to bear in mind that the Polish banking system is of specific nature. First important fact is that it is the largest banking market in the Central and Eastern Europe[8] and thereby - quite significant. For the KNF it is important to ensure the adequate level of capital of every credit institution (maintained at all times). With strong capital foundations the Polish banks should be less reliant on their mother-banks.  

So where is the potential conflict? Just for argument's sake, FSA may focus (too 'intensive') on individuals (banks) giving less attention to the stability of the whole system (stability of the market is, however, its task as well) - as we can see it shouldn't be a case nowadays. Potentially, while deciding on macro-prudential issues first conflict may appear while looking for a balanced solution. Releasing capital buffers may not always be beneficial for institution's stability and credibility. Everything depends on how big potential financial stability issue is and whether we have other tools to manage it.

What IMF says?

The IMF “guidelines” on macro-prudential framework are rather terse, not going into deep details of each institutional model. The only hint of preferred model can be found under the part on inter-agency coordination. The IMF emphasizes that “the legal framework will need to ensure both ‘the ability’ and ‘the willingness’ to act”[9]. In our example prima facie only the latter condition is met. We can say that the FSC is willing to act as a new designated authority while the first condition may be limited due to constitutional boundaries (not constraints). The FSC has limited (soft) powers (recommendations and positions that in rare but not completely unrealistic situations may not be followed (I will explain why in the second part).

As a result only bodies (authorities) pointed out in the Constitution are entitled to issue legally-binding acts, in particular regulations which are of technical and executive nature (similar to regulatory technical standards). Regulation seems to be the only sufficient and effective measure to impose a buffer rate (increase capital) on all or selected (group of) credit institutions within the financial system (we will discuss it later on a specific example of Systemic Risk Buffer).

Alternatively the FSA could issue a number of individual decisions addressed to each bank. This process would be, however, expensive, burdensome and time-consuming and in turn might be ineffective. Thereby only the Minister of Finance has a power to implement macro-prudential measures (based on the FSC's recommendations). Most of, if not all, provisions of the Act urge the Minister of Finance to “consider” the recommendations of the FSC on specific matters (e.g. CCyB rate) while undertaking specific decision or to explain reasons for inaction (comply or explain mechanism). This mechanism could be rather illusory since there is no mechanism for accountability.

To be continued...

[1] Fedorowicz, M. (2014): W sprawie przysz?ej organizacji nadzoru makroostro?no?ciowego w Polsce, Bezpieczny Bank no 4/2014. 

[2] Recommendation of the European Systemic Risk Board of 22 December 2011 on the macro-prudential mandate of national authorities (ESRB/2011/3) (O.J. EU 2012/C 41/01).

[3] Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC) (O.J. EU 2013/L 176/338).

[4] e.g. IMF (2013): Implementing Macroprudential Policy – Selected Legal Issues, June 17, 2013, s. 15. 

[5] Eilis, F., Kern A. (2011): Can Soft Law Bodies be Effective? Soft Systemic Risk Oversight Bodies and the Special Case of the European Systemic Risk Board, Cambridge, Legal Studies Research Paper Series No. 36/2011, p. 3.

[6] The FSC was established by the Act of 7th November 2008 on Financial Stability Committee, J. of L. of 2008, No. 209, pos. 1317. 

[7] IMF, Key Aspects of Macroprudential Policy, June 10, 2013, p. 13. 

[8] https://www.thomaswhite.com/global-perspectives/banking-sector-in-poland/ (access: 9 May 2016). 

[9] IMF (2013): Implementing Macroprudential…, op.cit., p. 16.

[10] Article 87 of the Constitution.