Ladies and gentlemen,

I.

I am happy to have this opportunity to appear before you at the European Financial Congress (EFC). I would like to express my heartfelt thanks to Prime Minister Jan Krzysztof Bielecki and Professor Leszek Pawłowicz for the opportunity and the honour to deliver, for the third time already, the opening speech at the EFC. 

Delivering the EFC opening speech is not only an honour, however, but also an obligation to measure up to the expectations. It is also a commitment to the EFC participants or, more generally, to our entire financial market community. I consider it to be a commitment to share my view, the supervisory perspective, on the challenges of our present times or challenges of the future, and, in a sense, to outline our plan. It is also an occasion for me to share the vision I have of the supervisory authority and my expectations in regard to persons that, together with me, make up the financial supervision authority. There is a special occasion to do that. Being at the beginning of my second term I have, on one hand, the sum of experience from the last five years, and, on the other hand, a planning perspective long enough to have the determination to translate the lessons learnt from this experience into a preferable direction of development of the financial supervision authority.

I would also like, however, for my words to be interpreted in the context which determines the tone and directions of discussions which persons involved in the financial market are currently having in the Polish and international fora. The watchword most often used in this context – as the main factor shaping the rules of operation of both the entire economies and their specific sectors, including the financial sector, and, finally, of individual institutions, commercial and public alike – is uncertainty. 

Therefore, combining the earlier mentioned perspectives – the perspective of the supervisor but also the perspective of all persons interested in the financial market – I would like to share with you my reflection concerning the financial supervision authority in an uncertain world. Hence the title of my speech: ‘Financial supervisor in a world of uncertainty’. 

II.

The recent years, including my first term in the office, were dominated precisely by black swans, or events that somewhat inherently forced the need for a flexible response and action to cope with phenomena which surprised everyone. 

We live in an uncertain world: pandemic, geopolitical tensions, armed conflicts, artificial intelligence revolution, climate change, migration, instability of global supply chains, changing cultural norms. Uncertainty also affects the financial system: what may be the impact of the introduction of central bank digital currencies (CBDCs)? How will AI solutions and ongoing digitisation affect the economy, including its financial bloodstream? There are no easy answers to these questions, and anyway such questions can easily be multiplied, and what is more, there are certainly questions that we do not know yet – the so-called unknown unknowns. So how should a financial supervision authority work in such a world? How not to get surprised by black swans that may appear out of the blue? How should a financial supervisor cope with uncertainty?

Nassim Taleb writes: ‘Black Swan corresponds mainly to an incomplete map of the world’¹. In order not to get surprised by potential crises and to correctly identify the risks to the financial system, the supervisory authority must therefore fill in those blank areas on the ‘map of the financial world’ it uses. 

Hence, it is worth considering how the incomplete areas on the ‘map of the financial world’ can be reduced and how financial supervisors can prepare for the unknown and perhaps sometimes even the unpredictable. 

I would like to share with you my observations in this respect. They can be summarised in several points which are the concept of the functioning of the supervisory authority in times of increasing uncertainty. They also stem from a reflection on over five years of leading the Polish supervisory authority.

1. First of all, from a macro perspective, we need to know more – or even as much as possible – so to have the fullest possible knowledge on the operation of the financial system. Activities performed by the Office of Komisja Nadzoru Finansowego, the Polish financial supervision authority, and information obtained from supervised entities serve exactly that purpose. Reporting and collecting data is done in accordance with the principle of proportionality and the risk-based approach (higher risk means broader set of data and higher frequency) and flexibility (possibility to respond promptly and, if needs and new risks emerge, to obtain data and information on an ad hoc basis). With regard to the stability of the financial sector it is also about preparing stress scenarios and verifying how their materialisation may impact supervised entities (stress tests). Such activities help the supervisory authority acquire knowledge on the level of resilience of the financial sector and of individual supervised entities to stress and, based on this knowledge, to take supervisory actions in order to at least minimise potential losses.  

But collecting information is only the beginning. What is key is for the supervisory authority to understand the complex interplay in the financial sector itself but also between different policies including macro-prudential, monetary and fiscal policies. 

In other words, for the supervision to be effective it is important not only to have the most precise possible ‘snapshot’ of the financial system but also the understanding of the processes that have led to the situation visible in the snapshot. 

Having the data – as a certain snapshot of the situation – is of little use without the knowledge of the causes of that situation and the processes that have led to it but also the processes that are likely to shape that situation in the future. 

Let me return here to the main theme, which is uncertainty, since the abilities to carry out such modelling – going beyond the simple collection and empirical analysis of data – are particularly important precisely in order for the supervisory authority to be able to cope with rare events, including the ones lying in ‘the tails’ of probability distribution which are known as black swans. Such an approach is also in line with a recent suggestion of the IMF researchers: ‘In addition, supervisors need to consider how the macroeconomic environment, business trends, and the build-up and concentration of risk inside and outside the banking sector may affect the risk to which individual banks are exposed.’²   

2. Secondly, from the micro perspective, in the conditions of uncertainty, what is vital for the stability of each financial institution is healthy nature and adaptability of their business models. 

Supervisors in multiple jurisdictions are now having a closer look at business models of financial institutions in terms of their resilience to potential shocks and risks. This is also in line with the recommendations of the European Banking Authority (EBA)³. It is often better to influence ex ante how those institutions operate rather than take action only when it can already be seen that certain business models lead to adverse events. Also, the fact that today the situation of the banking sector is good – high profits, stable capital and liquidity position – does not mean that it will always remain so in the future. Adaptability of business models is crucial, in my opinion.

In the present world of dynamic changes and uncertainty, the supervisory authority should constantly update its knowledge of the world and its understanding of business models adopted by supervised entities. Current and full knowledge on business models of entities is a prerequisite for the possibility of independent monitoring of their situation by the supervisor, both from the perspective of the existing, as well as potential weaknesses and threats resulting from the models and it enables the supervisor to focus more (by adjusting the supervisory techniques and actions) on risks of individual entities, and, in consequence, also more broadly, i.e. from the perspective of the sector. For those reasons, the financial supervision authority should remain in constant contact with supervised entities, including not only their management boards, but also representatives of their supervisory boards and committees operating in those entities. This ongoing, perhaps even operational, flow of information provides an opportunity to identify ahead of time the threats that may potentially affect an entity’s security. 

As far as business models of financial institutions are concerned, in my opinion the following issues are worth a closer look:

(a) As the experience shows, business entities which maximise their current profits often turn out to be less effective in the long term than those that allocate a part of their current profits to build resilience, including a potential or a buffer necessary to be able to adapt to the changing circumstances. Entities need to be effective but, most of all, effective in terms of their ability to adapt. 

(b) Having a strategy is not enough, they should have a portfolio of strategies. Managers need to build and update constantly evolving  portfolios of strategies and assess on an ongoing basis which ones are appropriate in given market circumstances⁴. Managers’ attention should focus not as much on anticipating the future – since this may prove prone to failure – as on preparing for any number of possible future scenarios. 

(c) With regard to banks, the supervisor must boost the process of building their balance sheet strength but also take into account the need to ensure the capacity of the sector to finance the economy in the long term. 

This is one of the reasons for our determination to implement a recommendation concerning the long-term financing ratio (PL: wskaźnik finansowania długoterminowego). The recommendation is to support an increase in importance of long-term debt instruments in the bank balance sheets, which will, in particular, increase the possibility of having fixed rate mortgage loans offered on a large scale. This approach is consistent with the recent suggestions of the Basel Committee on Banking Supervision, according to which supervisors should take into account the characteristics of business models of banks or the structure of their assets/liabilities. We take both into account. 

So you can see that in our work we combine the micro and macro perspectives because we are aware of the complex relationships between them but also of the fact that the financial system is more than the sum of its components.

The question of the role and tasks of the financial supervision authority in relation to business models of supervised entities is, in my opinion, a key question but still an open one. What can be the range of expectations towards the supervisory authority when it comes, for example, to interfering with business models that are not, in the broadest sense of the word, ‘sustainable’? On the one hand, it is traditionally considered to be a managers’ or owners’ domain. On the other hand, experience has shown that having a supervisory response only ex post can be costly. 

I hope that having exchanges with you – both public, panel discussions and a number of direct contacts – will be an opportunity to further clarify our views on this issue and, ultimately, perhaps, to reach a consensus.

3. Thirdly, in the context of regulatory challenges, an approach which implies an understanding of the nature and causes of the studied phenomena – rather than their picture or description – is very important in the era of a snowball increase in volume and detail of regulation. 

In view of the widening range of social and economic relations subject to regulation – like in the digital and technology field – we are dealing not only with the widening scope of regulations, but also with a rapid increase in their level of detail. We sometimes say that we don’t see the forest for the trees. Unfortunately, the pace of legislative work in many areas – coupled with its broad scope – sometimes even leads to inconsistencies between subsequent regulatory packages. The volume of regulations and their level of detail, with the resulting inconsistencies between subsequent regulatory packages, may even lead to a new risk factor emerging for the financial market. Paradoxically, the regulatory maze is becoming a risk factor for financial institutions. What does it mean for the financial supervisor? 

The financial supervision authority must be the centre of competence in the area of financial market regulation. Primarily, because working with and monitoring compliance with those regulations, as well as their enforcement, is our daily bread. But also because of the expectations and needs of the market. In this respect, the market has a legitimate expectation that the supervisory authority will be a kind of a signpost for financial institutions, allowing them to safely navigate the meanders of detailed and not always consistent regulations. 

We can perform this role only if we build a proper understanding of the nature of regulated phenomena and the logic behind their regulation. Understanding the essence of the phenomena subject to regulation and the objectives of the regulation itself is more important than knowing the wording of legislative provisions and even than navigating them efficiently at the technical level. So let us look at the essence of the regulated phenomena and the fundamental objectives behind their regulation and we will find it easier to answer most of the detailed questions how to interpret and apply them rationally. If, however, such an approach and understanding are lacking, we, the supervisor and the financial market, may turn out to be helpless in the face of the multitude, the defects and the not always coordinated growth of the regulations.

4. Fourthly, in the context of challenges which are generically new, we need to look broadly, learning to manage a broad spectrum of risk factors. We need to learn how to manage risks that are difficult to fit into the traditional risk matrix comprising risks we have traditionally managed. 

An example worth pointing out in this context is the costs of credit repayment holidays, which, in my opinion, are a kind of deferred cost of the monoculture of variable interest rate. They have shown that inertia-related persistence in pursuing certain business models (which might have even worked well for many years) can involve risks or costs of a different kind than those we have traditionally learned to manage. Credit repayment holidays are not a materialisation of credit or legal risk, and yet we must learn to take such factors into account, if only when shaping models or business lines. They also show how high the price is for maintaining the ‘why change what has always been’ approach. It is therefore worthwhile to draw more general conclusions from this lesson, as I have already mentioned in the past under the slogan ‘overcoming inertia’.

In addition, we must also learn to manage both challenges at the micro level in the financial system and systemic risk factors that are not entirely endogenous to the system but often come from outside. The supervisory authority must see this changing context of the functioning of the financial system. Particular mention should be made of sustainability regulations (ESG) and the implications of a revolution that is once again taking place before our eyes in the area of technology. It is taking place against the backdrop of geopolitical tensions, unprecedented in recent years, which also translate into the level of risks to which financial institutions and their clients are exposed. All these factors have become an important element on the map of supervisory risks.

5. Fifthly, speaking of desirable attitudes, we need to take care not only of the resilience and adaptability of the financial system, but also of the resilience and adaptability of the supervisory authority itself. 

The events of the last several years (COVID, hybrid war, etc.) have shown that the supervisory authority is resilient to external threats. 

Resilience is not only the system’s ability to survive external pressures but also the system’s ability to adapt and develop, and even to partly change the world in which this system is embedded⁵. Therefore, adaptability and proactive attitude must be a characteristic of business models of financial institutions but also must be a characteristic of a model of operation of the supervisory authority itself.  

How do I understand it in practical terms? I have seen over the past years a great harm done by inertia and by using the remit of competence, narrow mandate and formalistic approach to its implementation as an excuse and calling for new legislation as a universal remedy which would allegedly solve every doubt. At the same time – and, perhaps, luckily, from the perspective of development of the supervisory authority (as we know, every threat is also an opportunity) – the recent years have been packed with challenges which have required breaking of the set patterns, leaving the comfort zone to bravely search and propose solutions which we have considered to be right, even though formally they have not been a part of the traditional supervisory toolkit or have diverged from ‘how it’s always been done’. 

In a number of important issues we have overcome the approach of looking for competence in other authorities or bodies and instead have taken actions which we are able to carry out or support on our own. Our activity has sometimes been perceived as ‘sticking our neck out’. Do I think it was worth it? I sure do. Let us think where we would be today if it weren’t for our tendency to stick our neck out. What also comes to my mind is a question where we would be if all the institutions involved, instead of judging our actions as us ‘sticking our neck out’, had supported them appropriately. But it is not what I want to talk about today. What I want to talk about is ‘sticking our neck out’ understood properly, being guided by a principle according to which instead of looking for competence and responsibility in other persons and institutions, we should always ask ourselves: What can we do, without looking to others?

I think everyone would agree with this approach in theory, but a natural question comes up then: how to induce such attitudes among persons involved in financial supervision, at the managerial level, in particular, since it is managers who must be leaders of attitudes, but also at the level of each employee of the Office of the supervisory authority? How to ensure readiness for bold actions that we consider to be right from the point of view of the values we were put by the legislator to guard?

In my opinion, there are two conditions necessary for taking bold and decisive actions in order to fulfil our objectives. 

The first condition is competencies. Without competencies, without the understanding of the essence of the processes going on in the market and in the financial institutions themselves, and of the risk connected to them, all actions are doomed to failure and any positive effects can be achieved accidentally at most. 

The second condition is to create a safe space, also in terms of legal security, for those from whom we expect such courage and bold actions. I believe that persons who carry out tasks competently, honestly and in good faith in the service of the financial market in the name and on behalf of the State must feel that the State, in the broad sense, stands by them. As the head of the supervisory authority, I can provide it on behalf of the Office of the supervisory authority as an employer, which I have been trying to do since the beginning of my mission. In my opinion, however, it is necessary here to develop a broader consensus to protect persons who make difficult decisions in the public interest in good faith. Moreover, this should not be limited to the employees of the Office of the supervisory authority – or even to persons representing public institutions responsible for the condition of the financial market – but should include persons performing public service in various areas. Otherwise, we will not create the conditions for proactive, bold action but we will promote passive attitudes that imply looking to others and seeking justification for being passive rather than for being active.

6. Last but not least, sixthly, in the context of our day-to-day work, the supervisory authority must ‘do its job’, i.e. supervise the maintenance of sufficient capital buffers by supervised entities, as well as their compliance with appropriate liquidity requirements, conduct stress tests, monitor systemic risk, supervise in a specific manner the quality of risk management by financial sector entities, reduce information asymmetry in the market. 

This part of supervisory work is often the least visible externally, the least spectacular, but it is an indispensable condition for the proper functioning of supervision and, hence, of the financial market. Therefore, when talking about the need to prepare for new challenges, both known and unknown, let us not forget about the basics and our elementary know-how.

III.

The main response to uncertainty is, therefore, adaptability. Adaptability implies being open to change. We also know that it is not enough for us to change. We need to be changing faster, or at least not slower, than our environment. This concerns the financial supervision authority as well. This is what we should expect of ourselves but this is also what the financial market, both customers and professional entities, expects of us. And this is a fully justified expectation. 

Let me conclude by saying a few words about mutual expectations of the market and the supervisor. For the financial supervision authority it is very important to know and understand the needs and expectations of the market. As the supervisor we know a lot but we don’t know everything. This is why it is so important for us that market participants clearly and openly articulate their expectations of us. Just as I try to build courage in my colleagues at the Office of the supervisory authority to take bold and decisive actions, I would also like to ask you as market participants for courage in formulating your specific expectations towards the financial supervision authority. 

I mentioned in the beginning that an opportunity to deliver opening remarks at the European Financial Congress is not only an honour but also a commitment. And for me the EFC is not only about this opening address; I will be here with you for the next three days and I consider also my presence here as part of my commitment to the market. I would like any expectations that the market has of the supervisor to be articulated openly, whether during panel discussions or directly. This is how I see my role here – that is what I am here for. All substantive and constructive comments, even if critical and uncomfortable for the supervisor, will be heard. I would like you to be open and courageous in formulating them. I sometimes hear from the representatives of the market that their willingness to communicate in such manner is limited by their fear of how it will affect the supervisor’s approach to their individual cases. It is my role to build a conviction in you that such fear is unfounded and therefore to ensure that it does not hinder discussion.  It is your role to ensure that your expectations are articulated openly. Without hearing and understanding those expectations we cannot change financial supervision in such way so as to respond to them. The market will not have a supervision commensurate with its expectations if it does not courageously, substantively and constructively articulate those expectations. Hence, the need for courage on your side to formulate your expectations in an open and matter-of-fact way. 

Although our roles in the financial market are different, we have a common goal. So please treat our presence, that of my colleagues and mine, at the EFC as a time for working together to better implement our common goals and values in our different roles. Let us use this time well.

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The event transmission is available on the YT channel.

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¹N. Taleb, Czarny łabędź. Jak nieprzewidywalne zdarzenia rządzą naszym życiem, Poznań 2020, p. 539. 

²https://www.imf.org/-/media/Files/Publications/WP/2023/English/wpiea2023181-print-pdf.ashx

³EBA 2018 guidelines on common procedures and methodologies for the supervisory review and evaluation process (SREP) and supervisory stress testing: “Without undermining the responsibility of the institution’s management body for running and organising the business, or indicating preferences for specific business models, competent authorities should conduct regular business model analysis (BMA) to assess business and strategic risks and determine: ► the viability of the institution’s current business model on the basis of its ability to generate acceptable returns over the following 12 months; and ► the sustainability of the institution’s strategy on the basis of its ability to generate acceptable returns over a forward-looking period of at least 3 years, based on its strategic plans and financial forecasts”. 

⁴See: ECB (2023), ‘Banks’ business models: an uncertain environment needs agile steering’, Supervision Newsletter, https://www.bankingsupervision.europa.eu/press/publications/newsletter/2023/html/ssm.nl230215.en.html 

⁵Folke C. (2016), ‘Resilience’, Ecology and Society, vol. 21(4).