Piotr Pawłowski – Deputy Director of the Bank Licensing Department and Marek Grajek-Niśkiewicz – Team Manager at the Bank Licensing Department 

Banks play a special role in the economy: they enable the accumulation of savings and access to finance. For this role to be performed effectively, the security of deposits collected by banks must be ensured.

One of the mechanisms intended to ensure the security of deposits is the requirements that need to be fulfilled to become a significant investor of a bank (that is one that exercises influence over the bank’s activity). The requirements need to be fulfilled at the moment of establishment of a bank, acquisition of a qualifying holding¹ in a bank and throughout the entire period of the bank’s later operations.

In this blog entry we will focus on the acquisition of a qualifying holding in a bank and the assessment of such acquisition (prudential assessment) by the Komisja Nadzoru Finansowego (KNF).

In accordance with applicable law², ttrading in qualifying holdings in banks is limited in such a manner that every acquisition of such a holding must be approved by the KNF. According to the Polish Banking Act, if the investor does not meet the statutory requirements, the KNF, by way of decision, must raise an objection to a given transaction. If the investor acquires a holding in a bank without notifying the KNF or before the period for raising an objection has lapsed, they will not be allowed to exercise voting rights attached to the shares they have acquired.

Upon making the decision to acquire shares (e.g. upon making a preliminary Sale and Purchase Agreement), the investor must make a notification to the KNF, submitting the required documents and providing information on the characteristics of their operations, composition of their corporate bodies and their financial position, as well as on their business plans in relation to the bank whose shares they intend to acquire. The information will allow the KNF to assess the intended acquisition of the shares before the transaction is made (prior assessment). From the submission of a complete notification the KNF has 60 working days to assess the investor and the transaction and to raise an objection (failure to submit full documentation is one of the grounds for an objection).

When assessing the investor, the KNF verifies their reputation in respect of investments in the financial sector, financial soundness, structure of the investor’s group, and origin of funds intended for the acquisition of bank shares.

As part of the assessment of the investor’s reputation and financial soundness, the KNF analyses their track record in investing in supervised entities. To that end, the KNF contacts other supervisors in markets where the investor conducts or has conducted such activity. The KNF also verifies whether the investor has adequate funds or can obtain such funds to acquire the shares, to perform the necessary recapitalisation of the bank and develop its business. When verifying the origins of funds, the key considerations include: method of financing the investment, structure of the transaction and compliance by the investor and the investor’s group with the requirements related to the prevention of money laundering.

Another important area of assessment is the investor’s business plans for the bank’s development and for the composition of its management board and supervisory board, ensuring a sound and prudent management of the bank whose shares the investor intends to acquire. 

The key element in the process of assessment is investor’s commitments, which, as a standard, are related to the following issues: providing capital and liquidity support in a situation of need, corporate governance or the time horizon of the investment. 

Investor’s commitments are a tool developed by the banking supervisory authority to ensure proper and safe development of banks in Poland also in a situation where their ownership structure undergoes important changes. The practice of the investor providing their commitments goes back to the year 2000, and, although in the beginning they were of the nature of a gentlemen’s agreement and their fulfilment relied on the investor’s care for their own reputation, since 2010 it has been mandatory for investors to provide commitments.

The practice of taking the investor’s commitments into consideration in the supervisory assessment of acquirers of bank shares is based on  EU directives and the guidelines of the European Banking Authority (EBA). 

Failure to fulfil the commitments provided when acquiring the shares results in a statutory sanction. In such a situation the KNF can:

1. impose a fine on the investor up to the amount corresponding to the value of the acquired shares in the bank or rights attached to such shares, or
2. prohibit the investor from exercising voting rights attached to bank shares.

To sum up, in the process of assessment the investor must demonstrate to the KNF that they give adequate guarantee, of sound and prudent management of the bank and that they are sufficiently financially sound, which includes having adequate funds to execute the transaction and ensure further safe activity of the bank, also in the context of compliance with prudential requirements.

What is important, requirements related to sound and prudent management of the bank have to be met throughout the entire period of investment in the bank. The KNF monitors their fulfilment on an ongoing basis both in terms of the bank’s compliance with prudential requirements, thus ensuring the safety of deposits, and in terms of fulfilment of the investor’s commitments.

The banking system is so organised that in order to successfully undergo the prudential assessment conducted by the supervisory authority and become a significant investor in a bank, an investor has to meet the requirements described here. The investor needs to demonstrate their good reputation and present credible plans for the bank’s stable development, as well as show readiness to make financial outlays not only at the moment of acquisition of the bank’s shares but also, if necessary, after the transaction is completed. 

The common denominator of the solutions described here is ensuring the safety of the customers’ funds accumulated by the bank.