Opinion of the European Central Bank of 2 August 2006 at the request of Poland’s Sejm Marshall on a draft law amending the Law on Narodowy Bank Polski (CON/2006/39)

OPINION OF THE EUROPEAN CENTRAL BANK of 2 August 2006 at the request of Poland’s Sejm Marshall on a draft law amending the Law on Narodowy Bank Polski (CON/2006/39) Introduction and legal basis

On 14 June 2006, the European Central Bank (ECB) received a request from Poland’s Sejm Marshall for an opinion on a draft law (hereinafter the ‘draft law’) amending the Law on Narodowy Bank Polski of 29 August 1997 (hereinafter the ‘Law on NBP’). The ECB’s competence to deliver an opinion is based on Article 105(4) of the Treaty establishing the European Community and the third and sixth indents of Article 2(1) of Council Decision 98/415/EC of 29 June 1998 on the consultation of the European Central Bank by national authorities regarding draft legislative provisions , as the draft law relates to a national central bank, namely Narodowy Bank Polski (NBP), and to rules applicable to financial institutions insofar as they materially influence the stability of financial institutions and markets. In accordance with the first sentence of Article 17.5 of the Rules of Procedure of the European Central Bank, the Governing Council has adopted this opinion.

1. Purpose of the draft law

The draft law proposes to amend the Law on NBP by modifying the composition of the Banking Supervision Commission, currently a seven-member body chaired by the President of NBP and supported by NBP staff . Following the draft law: (i) the membership of the Commission would be expanded to include, in addition to the current members, three representatives of Sejm (one of the two Parliamentary chambers) and a representative of the Council of Ministers’ President (the Prime Minister); and (ii) the chair of that Commission would be re-allocated from NBP’s President to a representative of the Prime Minister .

2. General observations

2.1 The draft law was proposed in parallel with another legislative proposal aiming at a broader

modification of the institutional set-up for banking supervision in Poland, i.e. the draft law on the

supervision of the financial market , on whose earlier version the ECB commented in ECB Opinion

CON/2006/15 . In its current version, the draft law on the supervision of the financial market

foresees the taking over of the banking supervision responsibilities from 1 January 2008 by a

consolidated financial supervisor under the name of the Financial Supervision Commission (FSC) .

In the temporary period before 1 January 2008, the Banking Supervision Commission would be

chaired by the Financial Supervision Commission’s Chair, appointed by the Prime Minister .

2.2 The ECB understands that only one of the legislative proposals in question – i.e. either the draft

law subject to current consultation or the draft law on the supervision of the financial market –

would be subject to further legislative work. Whatever the Polish legislator’s final decision, the

ECB would like to reaffirm its very positive assessment of the current institutional model for the

prudential supervision of credit institutions in Poland, which ensures effective synergies between

the Banking Supervision Commission and NBP. In concurrence with the recent comments by

international bodies , the ECB notes that any modification to the current arrangements will need to

safeguard the effectiveness of the Polish supervisory system and smooth interaction between the

relevant authorities. The on-going implementation of the recast Capital Requirements Directive is

one area where there is a particular need to ensure the continuity of supervisory activities and

macro-prudential monitoring.

2.3 In general, the ECB has consistently favoured the involvement of central banks in prudential

supervision. As already noted in the ECB Opinion CON/2006/15 and previous ECB opinions ,

maintaining close involvement of NCBs in prudential supervision is an important condition for allowing the Eurosystem to contribute adequately to monitoring the risks to financial stability in the euro area, in accordance with Article 105(5) of the Treaty, and to safeguard smooth cooperation between the central bank functions exercised at the Eurosystem’s level and the supervisory functions carried out at national level.

3. The banking supervisor’s operational independence

3.1 In the composition of the Banking Supervision Commission proposed by the draft law, only a minority of the members would exercise their function ex officio, i.e. as a result of a nomination for a specified public office (those include: NBP’s President , the General Inspector of Banking 13 14 Supervision , the Chair of the Bank Guarantee Fund , the Chair of the Securities and Exchange Commission and the Minister for Finance, if he chooses to participate directly in the Commission’s work). The remaining six members, including the Chair, would be representatives of the appointing institutions, subject to recalling of their mandate at any time . Moreover, the ECB notes that the draft law provides neither for such members’ appropriate technical expertise nor for adequate safeguards against conflicts of interest. 3.2 The ECB recommends that any legislative provisions setting out an institutional framework for prudential supervision foresee for the members of the supervisory authority the appropriate criteria for technical expertise and for the avoidance of any conflict of interests, as well as adequate safeguards for decision-making autonomy in pursuance of the supervisory mandate. The adopted legislative rules should ensure the supervisory authority’s operational independence, in compliance with international standards for the operational independence of banking supervisors .

4. The central bank’s financial stability role

4.1 Under the current provisions of the Law on NBP, NBP’s President acts both as the Chair of the Banking Supervision Commission and supervisor of the General Inspectorate of Banking

Supervision, which is an organisational unit within NBP’s structure, functioning as the Banking Supervision Commission’s executive arm and closely cooperating with other relevant NBP departments. As already noted in ECB Opinion CON/2006/15, this current structure allows NBP to properly fulfill its financial stability role and, from a more specific Eurosystem perspective, is particularly well-designed to facilitate NBP’s contribution to the prudential supervision of credit institutions and the financial system’s stability, as required, also in the future euro accession context, under Article 105(5) of the Treaty . 4.2 It is noted in this context that NBP’s financial stability role – as currently exercised on the basis of the abovementioned institutional arrangements – lacks specific legislative definition in the Law on NBP . Assuming the implementation of a supervisory reform weakening the existing institutional relationship between NBP and the banking supervisory authority, the ECB recommends amending the Law on NBP, so as to specify that NBP has a formal responsibility for contributing to financial stability by monitoring and assessing the financial system as a whole, as a separate function from hands-on supervision and financial regulation .

This opinion will be published on the ECB’s website.

Done at Frankfurt am Main, 2 August 2006.

[signed]

The President of the ECB

Jean-Claude TRICHET