Marcin Mikołajczyk, Deputy Chair of the KNF

When proposing amendments to Recommendation WFD, the UKNF has not changed its supervisory perspective or overarching assumption. The purpose of Recommendation WFD remains to mitigate the risk associated with the structure of mortgage loan funding. The risk is mitigated by increasing the share of long-term funding in the banks’ equity and liabilities in relation to the value of mortgage loans granted. The amendments proposed by the supervisory authority have not lowered supervisory expectations, but they stem from a modified WFD calculation method. 

The purpose of Recommendation WFD remains to mitigate the risk associated with the structure of mortgage loan funding. In mitigating the risk, banks should seek to increase the share of long-term funding in their equity and liabilities in relation to the value of mortgage loans granted. From the supervisory perspective, mitigating liquidity and interest rate risks that accompany banking operations is the primary goal. The proposed amendments to Recommendation WFD do not change the direction of our expectations but take into account more than a six-month market observation period and reflect the conclusions of that analysis. The key amendment from the market perspective is related to the treatment of own funds surplus and, consequently, a change in the level of the recommended long-term funding ratio (PL: wskaźnik finansowania długoterminowego – WFD). What could be interesting to bank customers, though, is the potentially more attractive bank offer of fixed-interest-rate mortgage loans and – what’s equally important – term deposits we want to add permanently to the landscape of the new regulation.

The planned amendments to Recommendation WFD on the long-term funding ratio will provide banks with extra space and conditions for extending the time horizon of deposits offered to retail customers, which should also stimulate inter-bank competition. Therefore, more attractive interest rates on such deposits can be expected. In other words, saving money at banks will become more profitable for depositors and the time horizon of deposits will be extended. 

Yet, it should be stressed that the proposed amendments will not reverse the positive trends in the development of the covered bond market. The covered bond market is growing thanks to, among other things, consistent actions of the KNF. Mortgage banks have recently had successes in placing new issues, including on the retail market. The planned changes to the design of the long-term funding ratio do not upset the foundations for the development of that market. On the contrary: covered bonds remain an essential element considered in the long-term funding ratio, and the expected increase in the size of the covered bond market will reduce the mismatch in the maturity structure of banks’ assets and their equity and liabilities. We believe that both long-term deposits and covered bonds can function within a system that is cohesive, well-balanced and conducive to the parallel safe development of the two markets. Meanwhile, employing stable and long-term funding sources will enable banks to offer fixed-rate or periodically fixed-rate mortgage loans on a wider scale. Thus, these changes strengthen the security of the sector, help customers and solidify the regulatory successes in the area of covered bonds achieved so far. 

One of the features of Recommendation WFD is that since its adoption by the KNF, we have implemented a detailed process of monitoring and reviewing its implementation. This is done both at the level of individual banks and at the level of the whole sector. The findings of our review have led us to the conclusion that some modifications are needed: they will not change the direction of supervisory expectations, but they will give a coherent view of the reality of raising funding for lending activity. The reasons concerning interactions with the macroprudential supervision toolkit were also important. We believe that the proposed amendments to Recommendation WFD will make it more efficient, thereby enabling it to stimulate, even better, mortgage loan funding with long-term debt instruments. 

The first change is that instead of own funds surplus over the overall capital requirement, it is proposed to take into account the value of instruments classified in AT1 and Tier 2 capital and MREL instruments other than own funds. This approach means that only long-term debt instruments and long-term loans are to be included in this category. Under the current approach (in a transitional period of several years), the own funds surplus over the overall capital requirement also includes share capital. The elimination of shares from the WFD numerator increases, to a greater extent, the impact on the issue of debt instruments, which is a good direction in terms of the objective of Recommendation WFD. This way we also remove the interrelation between macroprudential supervision instruments and the ‘shape’ of Recommendation WFD. The current method of determining the WFD numerator temporarily combines the level of the WFD with the level of capital buffers imposed, which means that any change in them may have affected this recommended supervisory rate.  

The natural consequence of the above proposal, i.e. the exclusion of share capital from the catalogue of mortgage loan funding instruments, is the need to recalibrate the expected level of the WFD. The analyses carried out by bank supervisors have shown that, under similar market conditions, the average WFD determined under the current methodology is almost twice as high as its equivalent determined in accordance with the proposed modifications. Therefore, the new WFD level retains the assumed degree of effective stimulation of structural transformations in banks’ balance sheets through the provisions of the Recommendation.  

Another proposed change is a new treatment of long-term deposits with a maturity of at least two years. Under the current approach, such deposits were to be treated as mortgage loan funding instruments only temporarily, while according to the proposed methodology this type of liability is to be permanently present in the WFD calculation methodology. However, this does not release banks from the obligation to obtain other forms of long-term funding, in particular debt securities, including covered bonds. We therefore introduce a limit on the use of long-term deposits to cover WFD-related requirements. This is reflected in the indication that the WFD numerator may only include 50% of the value of those liabilities, but at the same time they may account for not more than one fourth of the expected level of the long-term funding ratio. 

Banks will therefore have to perform an in-depth analysis of their business models. If they consider it useful to offer mortgage loans to households on a broader scale (Recommendation WFD applies to banks where the share of such loans in the balance-sheet total is above 10%), they must ensure an appropriate value of long-term liabilities. As the supervisor, we expect banks to turn to debt securities as the first step. Covered bonds are the ones that involve the lowest investment risk, which in turn may mean a relatively low cost of issue on the part of banks. Recourse to funds from retail depositors will still be possible, but to a limited extent in terms of value. The narrowing of this channel of implementation of the requirements under Recommendation WFD to long-term deposits should stimulate banks to create an appropriate product offer. The minimum two years’ duration of a deposit as agreed with the retail customer is combined with bonus interest. Therefore, the provisions of Recommendation WFD should be regarded as potential stimulants to the growth of interest rates of deposits which are stable (thanks to the longest maturity) and still benefit from the full guarantee provided by the BFG.  

When proposing a modification of Recommendation WFD, the UKNF did not change the supervisory perspective or the overarching assumption that the main funding source for the portfolio of housing loans should be appropriately long-term components of the equity and liabilities structure. Debt instruments should prevail in this respect, especially in the form of capital market instruments. Due to preferable qualitative features, which are also related to the costs of issuance, we can see indisputable value of covered bonds. The development of this segment of the Polish financial market will help to achieve the preferable level of the long-term funding ratio, while increasing the stability of the entire banking sector. However, we do not limit the recommended catalogue of funding sources to covered bonds only. The permanent indication of AT1 and Tier 2 categories is nothing else than an incentive to offer these types of debt securities to investors. Finally, highlighting long-term retail deposits stimulates their development and makes them more attractive to non-professional clients. 

The amendments to Recommendation WFD as proposed by the UKNF are therefore favourable in terms of enhancing the resilience of the Polish banking sector to unexpected shocks. We are creating a regulatory environment which will improve the offer addressed to customers of individual banks. In this regard, what should be mentioned are not only deposits but also issues of covered bonds, which will become available to retail investors. The expanding investment opportunities and offer of advantageous forms of saving are factors that need to be perceived as positive changes from the perspective of customers, the financial market, and the economy as a whole.