Opinion of the European Central Bank of 23 July 2012 on a stabilisation fund for banks (CON/2012/58)

OPINION OF THE EUROPEAN CENTRAL BANK of 23 July 2012 on a stabilisation fund for banks (CON/2012/58) Introduction and legal basis

On 19 June 2012, the European Central Bank (ECB) received a request from the Polish Minister for Finance for an opinion on a draft law amending the Law on the Bank Guarantee Fund and certain other laws (hereinafter the ‘draft law’). The ECB’s competence to deliver an opinion is based on Articles 127(4) and 282(5) of the Treaty on the Functioning of the European Union 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 the 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

1.1 The draft law aims at enhancing the Polish framework for crisis management in the financial sector by establishing an industry-funded stabilisation fund for credit institutions, formed as a sub-fund under the management of the Bank Guarantee Fund (‘BFG’), the operator of the Polish deposit guarantee scheme . An existing BFG sub-fund, which is dedicated to providing assistance to the banks covered by the deposit guarantee scheme, will continue to exist in parallel to the newlycreated fund .

1.2 The proposed sources of financing of the stabilisation fund include: (a) a pre-defined proportion of

the mandatory annual contributions of institutions covered by the obligatory deposit guarantee

scheme; and (b) a one-off payment to be made by those institutions in the year of the draft law’s

entry into force. The funds in the stabilisation fund will primarily be used to finance or co-finance

recapitalisation guarantees granted in accordance with the Law on recapitalisation and will be

subject mutatis mutandis to the application of the relevant procedures and modalities laid down in

that Law . Moreover, the draft law expands the list of eligible securities in which available BFG

funds (not limited to those in the stabilisation fund) may be invested to include securities issued or

guaranteed by governments or central banks of, inter alia, Union Member States .

1.3 In addition, the draft law amends information-sharing arrangements by: (a) enabling the NBP to

effectively obtain from the BFG any information necessary for it to fulfil its financial stability

mandate and introducing reciprocity ; and (b) enabling the sharing of relevant information between

the Polish Financial Supervision Authority and the BFG . Finally, the draft law expands the

membership of the Financial Stability Committee to include the President of the BFG .

2. General observations

Assistance measures that may be offered by the BFG through the stabilisation fund are presently

defined in the Law on recapitalisation as measures aiming to address solvency problems at a failing

bank. The ECB understands that the Polish authorities contemplate further expansion of the role of

the BFG which may in the future perform functions of a resolution authority designated under a

harmonised Union framework . The ECB supports this intention to implement a fully-fledged

bank resolution regime, in which the designated authority uses resolution tools harmonised under

Union law, offering legally sound means of resolving non-viable institutions. The implementation

of such a harmonised framework would achieve the objective of ensuring financial stability while preserving a level playing field, limiting distortions to competition, and addressing stakeholder rights. At the present stage, the ECB invites the Polish authorities to adopt a flexible approach in this respect, capable to adapting to the evolving Union framework.

3. Specific observations

3.1 Financing of the BFG’s function related to deposit guarantees Directive 94/19/EC of the European Parliament and of the Council of 30 May 1994 on deposit-guarantee schemes requires that deposit guarantee schemes should be in a position to pay duly verified claims by depositors in the periods specified by this Directive .This implies that the deposit guarantee schemes should have adequate financial means at their disposal to realise this objective . A deposit guarantee scheme’s deposit guarantee role and its assistance role should be well separated. Therefore, the financial resources available for paying guaranteed deposits should be ring-fenced and, if necessary, only used to cover the part of the assistance cost that indirectly ensures the depositors’ protection . This is crucial to ensure that the objective of the deposit guarantee scheme is fully respected. In this context, the ECB welcomes the fact that the recapitalisation guarantees will be granted by the BFG at its discretion , solely on the basis of the funds explicitly allocated to the stabilisation fund in accordance with its financing regime . 3.2 Financing of the BFG’s function related to bank resolution In accordance with its previous opinions , the ECB invites the Polish authorities to consider introducing rules for replenishing the funds in the stabilisation fund where part or all of such funds are used to finance recapitalisation measures. 3.3 Compliance with the monetary financing prohibition At the same time, the ECB reiterates its position concerning the limited conditions under which central bank credit may be provided to deposit guarantee schemes without breaching the monetary financing prohibition contained in Article 123 of the Treaty in connection with Council Regulation 19 20 (EC) No 3603/93 . As pointed out in the ECB’s convergence reports and several opinions

directed to the Polish authorities, the NBP may only extend credit to the BFG where such credit is provided for a short term, addresses urgent situations, with systemic stability aspects being at stake, and with decisions remaining at NBP’s discretion . Presently the Polish law complies with those conditions as it provides for a possible extension by the NBP, under its discretion, of short-term credit to the BFG related to the financing of its deposit guarantee function, if a threat to financial 22 23 stability arises and in view of its urgent needs . In line with its previously stated position , the ECB considers that provision of central bank credit to the national deposit guarantee fund for purposes not related to pay-outs of guaranteed deposits, but related to its recapitalisation functions, would constitute central bank financing of a public sector function in breach of the monetary financing prohibition .The ECB understands that the draft law complies with the monetary financing prohibition, as the financing of assistance measures conducted through the stabilisation fund (i.e. the recapitalisation functions) is not linked to the mechanism for the activation of guaranteed deposits described in Article 16a of the Law on BFG. Therefore, the ECB understands that such assistance measures will not be financed by way of central bank credit extended to the BFG. 3.4 Information sharing arrangements In view of its previous recommendations , the ECB welcomes the proposed amendment of Article 38(4a) of the Law on BFG as this will give the NBP access to prudential information possessed, inter alia, by the BFG, which will allow the NBP to properly perform its financial stability role. 3.5 The ECB understands that the inclusion of the BFG President in the composition of the Financial Stability Committee aims to reflect the new financial stability tasks, which are explicitly assigned to the BFG under the draft law and which the BFG will perform vis-à-vis the banks covered by the obligatory deposit guarantee scheme. The ECB welcomes this development as it reflects the rising role of the BFG in the financial safety net of the Polish financial system and ensures the involvement in the Financial Stability Committee’s work of all relevant bodies, thereby facilitating effective exchange of information and coordination of financial stability activities.

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

Done at Frankfurt am Main, 23 July 2012.

[signed]

The Vice-President of the ECB

Vítor CONSTÂNCIO