Recommendation WFD on the Long-Term Funding Indicator

Financial Supervision Authority

Recommendation WFD regarding
Long-Term Funding Indicator
Warsaw, July 2024

Introduction
This Recommendation (hereinafter: Recommendation, Recommendation WFD) is issued pursuant to Article 137(1)(5) of the Act of 29 August 1997 – Banking Law (Journal of Laws of 2023, item 2488, as amended, hereinafter: Banking Law Act), and Article 11(1) of the Act of 21 July 2006 on the supervision of the financial market (Journal of Laws of 2024, item 135). The purpose of issuing Recommendation WFD is to reduce risks associated with the current structure of mortgage loan funding. Currently, most of this funding relies on retail deposits, particularly current deposits, assuming the permanence of so-called deposit "float". However, under extreme conditions, a sudden outflow of deposits (even those considered the most stable under normal conditions) may occur, which the bank may not be able to retain by raising interest rates. The introduction of the Recommendation aims to ensure an increase in the funding of long-term mortgage loans primarily through long-term debt instruments that cannot be redeemed for at least one year. To achieve the aforementioned goal, the Recommendation defines the WFD, in which weights dependent on the residual maturity of the financing instrument have been introduced (highest weight for terms of at least 5 years). Additionally, to support banks' activities related to granting mortgage loans with fixed or periodically fixed interest rates, a preferential weight has been applied to such loans, and to support banks' activities related to the issuance of green financing instruments, a preferential weight has been applied to green debt instruments meeting the ICMA Green Bond Principles (ICMA GBP) or EU Green Bond Standard (EU GBS). Recommendation WFD is addressed to domestic banks, excluding cooperative banks that are participants in the institutional protection scheme referred to in Article 113(7) of Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and amending Regulation (EU) No 648/2012 (OJ EU 2013, L 176 of 27.6.2013, p. 1, as amended, hereinafter: CRR Regulation). Recommendation WFD does not apply to:

• banks with an implemented recovery plan, in the event of circumstances referred to in Article 142(2) of the Banking Law Act,
• banks in restructuring, within the meaning of Article 2(2) of the Act of 10 June 2016 on the Bank Guarantee Fund, deposit guarantee system and compulsory restructuring (Journal of Laws of 2024, item 487, hereinafter: BFG Act) – for a period of two years from the date of the decision referred to in Article 101(7) of the BFG Act,
• bridge institutions within the meaning of Article 2(26) of the BFG Act,
• banks regarding which the activity of a bridge institution has been terminated – for a period of two years from the date referred to in Article 195(2) of the BFG Act,
• banks regarding which the activity of a bridge institution has been terminated due to the sale of shares, referred to in Article 181(3)(1) of the BFG Act – for a period of two years from the sale of the bridge institution's shares.
  A bank should observe and implement the provisions of this Recommendation in accordance with applicable regulations, in particular:
• the Banking Law Act,
• the CRR Regulation.

This Recommendation is a supervisory action within the scope of the powers granted to it under the so-called Pillar 2. The Financial Supervision Authority (hereinafter: KNF) will assess whether banks maintain the WFD at the expected level and, if necessary, will take appropriate supervisory actions. KNF will monitor the implementation process of the Recommendation. Starting from December 31, 2027, KNF may make changes to the expected level of WFD in subsequent years, taking into account both the situation of individual banks and the macroeconomic situation. Recommendation WFD, constituting an annex to Resolution No. 243/2024 of the Financial Supervision Authority of July 15, 2024 (KNF Journal of Acts item 14), enters into force on the day following the publication of the resolution.

Glossary of Terms Used
Retail deposit – understood in accordance with Article 411(2) of the CRR Regulation.
Loan with a fixed interest rate – a mortgage-secured credit exposure with a fixed interest rate in accordance with Recommendation S.
Loan with a periodically fixed interest rate – a mortgage-secured credit exposure with a periodically fixed interest rate in accordance with Recommendation S.
Loans to households secured by residential real estate – loans and advances classified under the category: Loans and advances to households secured by residential real estate in accordance with FINREP reporting.
MREL – (Minimum Requirement for own Funds and Eligible Liabilities) minimum requirements for own funds and eligible liabilities determined in accordance with Chapter 4 of Part III of the BFG Act.
OCR – (Overall Capital Requirement Ratio) overall capital requirement ratio defined in Annex II of the Instructions for reporting on own funds and own funds requirements in Part II, point 1.4 C03.00 – Capital ratios and capital levels (CA3), subpoint 1.4.1. Instructions for individual items, in item 0160 of Commission Implementing Regulation (EU) 2021/451 of December 17, 2020 establishing regulatory technical standards for the application of Regulation (EU) No 575/2013 of the European Parliament and of the Council with regard to supervisory reporting of institutions and repealing Implementing Regulation (EU) No 680/2014. (OJ EU 2021 L 97 of 19.03.2021, p. 1, as amended) P2R – (Pillar 2 Requirements) for the purposes of WFD calculation, it means an additional requirement (expressed in percentage) under Pillar 2 regarding own funds in accordance with Article 138(2)(2) of the Banking Law Act. Recommendation S – Recommendation of the Financial Supervision Authority regarding good practices in the management of mortgage-secured credit exposures. TREA – (Total Risk Exposure Amount) total risk exposure amount defined in Article 92(3) of the CRR Regulation. Net book value – understood in accordance with FINREP reporting. WFD – Long-Term Funding Indicator, defined in this Recommendation. WPB – combined buffer requirement (expressed in percentage) in accordance with Article 55(4) of the Act of 5 August 2015 on macroprudential supervision of the financial system and crisis management in the financial system (Journal of Laws 2024, item 559).

Definition of WFD
Determination and Application of WFD
Expected Level of WFD
Reporting of WFD

Definition of WFD
1.1. A bank should determine the value of the Long-Term Funding Indicator in accordance with the formula:
WFD =
∑ (∑ (mi,j ∙ ni,j ∙ FDi,j) kj i=1) j=1
∑ sl ∙ Kl l=1
, where:
l – type, depending on the type of interest rate, loans to households secured by residential real estate, Kl – net book value of the l-th type of loans to households secured by residential real estate depending on the type of interest rate, sl – weight for the l-th type of loans1:
sl =
{
0.9 for loans to households
secured by residential real estate with fixed or periodically fixed interest rate1 for
1.0 for other loans to households
secured by residential real estate j – category of financing instruments (excess of own funds, instruments and items included in MREL other than own funds, other long-term financing, covered bonds), kj – number of instruments included in category j (j = 2, 3, 4); for categories 1 and 5 respectively: k1=1 and k5=1, FDi,j – value of the i-th financing instrument in category j,

1 A preferential weight for loans with fixed or periodically fixed interest rates can be applied to loans with periodically fixed interest rates, for which the residual term of the periodically fixed interest rate is at least one year. For loans with periodically fixed interest rates, where the residual term of the fixed interest rate is shorter than one year, the preferential weight may be applied only if a new fixed or periodically fixed interest rate has already been agreed with the client.

mi,j – coefficient for the i-th financing instrument from category j (j = 2, 3, 4), dependent on its residual maturity ti,j; for category 1:
coefficient dependent on value, and for category 5: constant coefficient:
(i) for category 1:
m1,1 =
{
0 if FDi,1 < 0
1.4 if FDi,1 ≥ 0
where:
the coefficient m1,1 for FDi,1 ≥ 0 starting from December 31, 2027 (in the case of cooperative banks from December 31, 2029) will be reduced by 0.2 each year until reaching a level of 0.
(ii) for category j (j = 2, 3, 4):
mi,j =
{
1.1 if ti,j ≥ 5Y
1.05 if 4Y ≤ ti,j < 5Y
1.00 if 3Y ≤ ti,j < 4Y
0.95 if 2Y ≤ ti,j < 3Y
0.90 if 1Y ≤ ti,j < 2Y
0 if ti,j < 1Y
(iii) for category 5: m1,5 = 1. ni,j – coefficient for the i-th financing instrument from category j (j = 2, 3, 4), determining preferential treatment for green debt instruments meeting ICMA Green Bond Principles (ICMA GBP) or EU Green Bond Standard (EU GBS); for categories 1 and 5 respectively: n1,1=1 and n1,5=1, ni,j = {
1.2 for green debt instruments meeting
ICMA GBP or EU GBS standards for
1.0 for other instruments
1.2. In the numerator of the formula specified in recommendation 1.1, the bank includes the following categories of financing instruments:
a) Category 1 – excess of own funds over the OCR requirement, i.e., FD1,1 = TREA ∙ (Total Capital Ratio - OCR Requirement), where OCR Requirement = 8% + P2R + WPB.

When calculating the value of Category 1, the bank takes into account FD1,1 from the above formula only if FD1,1 ≥ 0 (in which case m1,1 = 1.4).
If FD1,1 < 0, then the bank does not take FD1,1 into account in the calculation of the value of Category 1 (in which case m1,1 = 0).
An additional condition for including a positive value of FD1,1 in the calculation of the value of Category 1 is meeting the requirement specified in Article 92(1)(d) of the CRR Regulation increased by an additional own funds requirement, taking into account excessive leverage risk, referred to in Article 138(2b) of the Banking Law Act, and the leverage ratio buffer, referred to in Article 92(1a) of the CRR Regulation. b) Category 2 – instruments and items included in MREL other than own funds2, c) Category 3 – includes the following subcategories:
(i) issued debt securities2
(in particular bonds, bank securities, bank derivative rights, other debt instruments, debt instruments related to securitization) not included in Category 1, 2, or 4, (ii) interbank deposits accepted by the bank, collateral liabilities3, and borrowed loans/advances in the financial market (including those obtained from international financial institutions), which cannot be withdrawn before the contractual maturity date2. d) Category 4 – debt instruments in the form of covered bonds, e) Category 5 – retail deposits with a contractual maturity of at least two years and simultaneously a residual maturity of at least one year, fully4 covered by the guarantee of the Bank Guarantee Fund.

2 In the case where they have an option for the investor / financing party to request early repayment, the residual maturity is determined as the time to the earliest date of exercise of such an option permitted by the contract; early repayment options on the part of the issuer / financing provider do not affect the inclusion of the instrument in the WFD. 3 Standard collateral accepted from another bank for the valuation of a derivative transaction cannot be included in the numerator due to not meeting the requirement of non-withdrawability before contractual maturity, while collateral liabilities, which combine long-term financing and collateral (regardless of which items are secured), and also have clauses of non-withdrawability before contractual maturity (for periods ≥1Y) may be included in the specified item. In such a case, the maturity of the secured loan should be assigned to them. In the absence of the aforementioned clauses, collateral liabilities are not included in the specified item. 4 For the purposes of this calculation, the coverage of a given customer's deposits by the guarantee of the Bank Guarantee Fund is verified starting from deposits with the shortest residual maturity.

1.3. Financing instruments referred to in recommendation 1.2(c)(ii) should be reduced by granted interbank placements and collateral receivables, and granted loans/advances placed by banks in the financial market with a residual maturity of at least 1 year, which cannot be withdrawn before the contractual maturity date (except for those that have an option for the financing provider to request early repayment – in which case the residual maturity is determined as the time to the earliest date of exercise of such an option permitted by the contract; early repayment options on the part of the financing receiver do not affect the inclusion of the instrument in the reduction).
1.4. The reduction referred to in recommendation 1.3 should be carried out as follows:
a) to granted interbank placements and collateral receivables, and granted loans/advances in the financial market with a maturity of at least 1 year, coefficients dependent on the residual maturity specified in recommendation 1.1 are applied; b) the total value of interbank deposits and collateral liabilities, and borrowed loans/advances in the financial market, specified in recommendation 1.2(c)(ii), after applying the appropriate coefficients (P), is reduced by the total value of interbank placements and collateral receivables, and granted loans/advances in the financial market, specified in letter a above, after applying the appropriate coefficients (A); c) in the case where A-P ≥ 0, then in the category of financing instruments specified in recommendation 1.2(c)(ii), a value of 0 is reported.
1.5. In the case of financing instruments included in the numerator containing an option for the buyer allowing early redemption of the instrument before the originally specified maturity date, the maturity date of such instruments should be determined analogously to eligible liabilities in Article 72c(2) of the CRR Regulation: in the case where the instrument contains a redemption option possible to be exercised by the holder before the originally specified maturity date of the instrument, the maturity date of the instrument is determined as the earliest date on which the holder can exercise the redemption option and order the redemption or repayment of the instrument.
1.6. In the numerator of the formula specified in recommendation 1.1, financing instruments included in Categories 2, 3, 4, and 5 should be presented by the bank in book value.
1.7. Financial instruments included in Category 5, specified in recommendation 1.2(e), may be included in the WFD calculation by the bank no later than December 31, 2027.
1.8. In the denominator of the formula specified in recommendation 1.1, the bank should present the net book value of loans to households secured by residential real estate with a residual maturity of at least 1 year, taking into account provisions for legal risks and adjustments to the gross book value due to legal risks concerning active (unpaid) loans (if the value of these provisions and the adjustment of value is not included in the net book value of unpaid loans).

1.9. Both in the numerator and denominator of the formula specified in recommendation 1.1, the bank should include all instruments, items, and products in all currencies converted to PLN at the average NBP exchange rate, applicable on the date on which the calculation is performed.
Determination and Application of WFD
2.1. A bank required to meet the requirements established in Parts II to IV, Part VII, and Part VII A of the CRR Regulation based on its consolidated situation should determine the WFD on a consolidated basis (at the highest level of consolidation in Poland), in accordance with the provisions of the CRR Regulation (prudential consolidation).
2.2. A bank that is not subject to consolidation in accordance with recommendation 2.1 should determine the WFD on an individual basis.
2.3. When calculating the WFD in accordance with recommendations 2.1 and 2.2, the bank should not include dependent entities with their seat outside the territory of Poland and its foreign branches.
2.4. Instruments, items, and products included in the WFD specified in this Recommendation should be calculated by the bank at the same level of consolidation for which the WFD is determined. However, in Category 3, the bank should include only instruments issued by the bank and its dependent entities that are banks, consolidating for the purposes of WFD calculation.
2.5. The expected level of WFD, referred to in recommendation 3.1, applies to banks referred to in recommendations 2.1 and 2.2, for which both of the following conditions are met:
a) assets exceed 2 billion PLN; b) the share of the net book value of the portfolio of loans to households secured by residential real estate in assets exceeds 10%.
Expected Level of WFD
3.1. KNF expects that starting from December 31, 2026, the bank referred to in recommendation 2.5 will maintain the WFD at a level of at least 40%.
3.2. The bank referred to in recommendation 2.5 should make every effort to ensure the maintenance of the WFD at the level specified in recommendation 3.1 at the end of each month.

Reporting of WFD
4.1. The bank should report the WFD to KNF monthly as of the last day of the month.
4.2. The bank referred to in recommendation 2.5, in the event that the WFD level falls below the expected level referred to in recommendation 3.1, should immediately notify KNF of this (along with justification) and without undue delay present to KNF a plan for rapid achievement of the expected WFD level. Upon its achievement, the bank should immediately notify KNF.
4.3. In the case of reporting referred to in recommendation 4.1, as of December 31, the bank should also report a forecast of the WFD as of December 31, taking into account the planned profit distribution.
4.4. Within two weeks from the approval by the competent authority of the profit distribution for the previous year (if it occurred), the bank should report to KNF an update of the WFD taking into account the profit distribution approved by the competent authority (calculated in accordance with EBA Q&A 2018_38225).
4.5. In the case of obtaining KNF consent to include interim profit in own funds and making their correction in accordance with EBA Q&A 2018_38225, the bank, within two weeks from the date of receiving the aforementioned consent, should report to KNF an update of the WFD taking into account the corrected own funds.

5 https://www.eba.europa.eu/single-rule-book-qa/qna/view/publicId/2018_3822