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The information included in this section is of a general nature and describes the legal environment and the changes proposed thereto as of the date of this Base Prospectus.

Regulatory Environment

Banking operations are highly regulated. EU and Polish laws, regulations, policies and interpretations of laws relating to the banking sector and financial institutions are continually evolving and changing. Among the most important regulations are capital adequacy requirements and consumer protection-related regulations.

The conducting of banking activity in Poland requires a permit and is subject to a range of regulatory requirements. Banks are also required to protect banking secrets; the regulations concerning personal data protection are especially important in the retail operations of banks in Poland.

Agreements between banks and their customers are subject to detailed regulations. The relevant provisions protecting consumer rights impose on the banks numerous obligations connected with the signing of agreements with customers (i.e. with natural persons who do not engage in business or professional activity on their own behalf).

Banks must also comply with the regulations concerning assets which come to the financial market from illegal or undisclosed sources and the counteracting of the financing of terrorism (widely referred to as “money laundering” regulations).

Certain restrictions also apply to intermediary dealings of third parties in performing banking activities for and on behalf of a bank and to engaging in any activities related to banking operations (i.e. outsourcing).

Banks also enjoy several privileges relating to their business. Banking Supervision

Banking supervision in Poland is exercised by the PFSA, which has extensive competencies and legal instruments at its disposal to exercise its supervision over banks.

The competencies of the PFSA include, in particular:

- granting permits for:

 the establishment of a bank and the commencement of its operational activity,

 amendments to a bank’s statute, and

 the appointment of two members to a bank’s management board, including the president;

- issuing objections to the purchase of or subscription for shares or rights to shares or becoming a

domestic bank’s parent company in the case of exceeding or reaching certain percentage thresholds of total voting rights;

- supervision of banks as far as compliance with applicable law (including, in particular, with banking

regulations) and the regulations stated in a given bank’s statute and with the permit issued for the establishment of a given bank;

- monitoring the financial condition of banks and the establishment of liquidity ratios and other standards

of permitted risk in a given bank’s operations which are binding on that bank;

- issuance of recommendations concerning the best practices in terms of the prudent and stable

management of banks;

- issuance of guidelines to banks concerning taking or refraining from taking any specific actions;

- imposing penalties and designating recovery measures in case of a breach of any banking regulations,

including cash penalties, suspension of management board members from their duties, restriction of the bank’s business or revocation of banking permits; and

- appointment of trustee management (zarząd komisaryczny) for banks.

Other Polish Authorities which Exercise Material Supervision over the Activities of Banks

Specific areas of banking operations are also subject to the supervision of other administrative authorities, including, in particular:

- the President of the Antimonopoly Office, within the scope of the law of competition and consumer

- the General Inspector for the Protection of Personal Data, within the scope of collecting, processing, administration and protection of personal data; and

- the Minister competent to oversee issues related to financial institutions and the General Inspector of

Financial Information, within the scope of preventing money laundering and the financing of terrorism. European Supervision Authorities

As a part of the reform of the European financial supervision system, in January 2011 the EU’s Committee of European Banking Supervisors was replaced by the European Banking Authority, which constitutes a part of a European System of Financial Supervisors. The European Banking Authority and the European System of Financial Supervision were created to improve the co-operation between banking supervisors within the EU. The main objective of the European System of Financial Supervisors is to ensure that the rules applicable to the financial sector are adequately implemented so as to preserve financial stability and to ensure confidence in the financial system as a whole and sufficient protection for customers of financial services. To achieve its tasks, the European Banking Authority is entitled to, inter alia: develop draft regulatory and technical standards in relation to the specific cases referred to in Regulation 1093/2010; develop drafts implementing such technical standards; issue guidelines and recommendations in certain cases; and take individual decisions addressed to the competent authorities of the Member States in relation to the specific cases referred to in Regulation 1093/2010.

Furthermore, as part of the reform of the European financial supervision system of the European Union, the concept of an integrated banking union is being contemplated. Pursuant to the proposals of the European Commission, such potential banking union is to comprise four pillars: (i) more integrated banking supervision; (iii) a single rulebook in the form of capital requirements (in particular, CRD 4 regulations, as defined below); (iii) common deposit protection schemes (as indicated in the European Commission legislative proposal dated 12 July 2010 for a thorough revision of Directive 94/19/EC on deposit guarantee schemes); and (iv) a European recovery and resolution mechanism (based on the proposal for a directive dated 6 June 2012 establishing a framework for the recovery and resolution of credit institutions and investment firms).

To implement the first pillar, on 12 September 2012 the European Commission proposed a single supervisory mechanism (“SSM”) for banks led by the ECB in order to strengthen the Economic and Monetary Union. The proposals presented by the European Commission on 12 September 2012 concern: (i) a regulation conferring specific tasks on the European Central Bank (“ECB”) concerning policies related to the prudential supervision of credit institutions; (ii) a regulation amending Regulation (EU) No. 1093/2010 establishing the European Supervisory Authority (the European Banking Authority) as regards its interaction with the regulation specified in point (i) above; and (iii) the communication from the European Commission to the European Parliament and the Council of a roadmap towards a banking union.

Based on the proposals, the ECB will be exclusively competent for key supervisory tasks that are indispensable for detecting risks with regard to the viability of banks and will be authorised to require such banks to take the necessary actions. The ECB will be, inter alia, the competent authority for licensing and authorizing credit institutions, assessing qualifying holdings, ensuring compliance with minimum capital requirements, ensuring the adequacy of internal capital in relation to the risk profile of a credit institution, conducting supervision on a consolidated basis, and overseeing supervisory tasks in relation to financial conglomerates. Furthermore, the ECB will also ensure compliance with the provisions on leverage and liquidity, apply capital buffers and carry out, in co-ordination with resolution authorities, early intervention measures when a bank is in breach of, or is about to breach, regulatory capital requirements. The ECB will also co-ordinate and express the common position of the representatives from the competent authorities of the participating Member States in relation to the above-mentioned tasks.

Therefore, pursuant to the current proposals the above-mentioned material supervision powers will be removed from the level of national authorities from the Eurozone and transferred to the ECB. However, all tasks not conferred on the ECB will remain with national supervisors. For example, national supervisors will remain in charge of consumer protection, anti-money laundering initiatives and the supervision of third-country credit institutions establishing branches or providing cross-border services within a Member State. Additionally, despite the number of tasks conferred on the ECB, most day-to-day verifications and other supervisory activities necessary to prepare and implement the ECB’s acts can be exercised by national supervisors operating as an integral part of the SSM.

On 12 September 2013, the European Parliament and the ECB signed a declaration committing both institutions to formally conclude an Inter-institutional Agreement on the practical aspects of the exercise of democratic accountability and oversight of the tasks conferred on the ECB within the framework of the SSM. The comprehensive assessment of the banks that are likely to be deemed significant (and will hence be subject to direct supervision by the ECB) was publicly launched in October 2013. The SSM Regulation entered into force

on 3 November 2013 and the Inter-institutional Agreement on 7 November 2013. The implementation date was set for 4 November 2014.

Starting from 4 November 2014, the ECB was granted a supervisory role to monitor the financial stability of banks based in participating states. Eurozone states are required to participate, while member states of the European Union outside the eurozone can voluntarily participate. As of 3 November 2014, none of the non- eurozone member states had opted to join, although the ECB reported that some of them had expressed an interest in joining, and that talks were being held with each of them to map which changes to national legislation need to be adopted in order to become an SSM member.

Member States outside the Eurozone cannot fully be a part of the Single Supervisory Mechanism. Nevertheless, such countries may notify the ECB of their intention to join the SSM by establishing close co-operation between their competent authorities and the ECB. For that purpose, they will have to take all the necessary measures to ensure that their competent national authorities will abide by and implement the relevant ECB acts. On 31 January 2014, the ECB undertook to closely cooperate with the national competent authorities of participating Member States whose currency is not the euro, specifying procedures related to: (i) requests by non-euro area Member States to enter into close co-operation with the ECB; (ii) the ECB’s assessment of those requests; (iii) the ECB’s decision on establishing close co-operation; and (iv) suspension or termination of close co-operation. According to a statement made by the Prime Minister of Poland, a decision on Poland joining the SSM will be made following internal consultations with the Minister of Finance, the NBP, the PFSA and the Bank Guarantee Fund.

As of the date of this Base Prospectus, Poland hasn’t joined the SSM. Capital Adequacy and Risk Management Requirements

Banks must comply with a number of regulatory requirements related to their operations. The crucial ones include the requirement for banks to manage their finances in a strictly regulated fashion and all the requirements concerning equity, capital adequacy ratio, concentration of exposures, liquidity and risk management systems. Polish Law Requirements

All the resolutions and recommendations issued by the PFSA are also of material importance for the banks. Presented below are selected and material recommendations, resolutions and letters recently issued by the PFSA. In February 2010, the PFSA issued Recommendation T, which is intended to improve risk management at banks, including preventing retail borrowers from becoming excessively in debt. The PFSA stated that the maximum ratio of debt servicing expense to the average income generated by a given debtor should not be greater than 50% for retail customers with an income lower than or equal to the average remuneration in the economy, and for other customers not greater than 65% of their remuneration.

In February 2013, the PFSA issued a new Recommendation T. The objective of the new recommendation is to introduce certain legal solutions which will allow for an increase in the activity of the banking sector in the area of extending loans compared with the activity of non-banking entities which extend loans, while ensuring the standards required for the purposes of the management of the risk of retail credit exposures. One of the changes involves the exclusion of mortgage-secured credit exposures from the scope of Recommendation T, meaning that the recommendations regarding retail credit exposures (Recommendation T) are separated from mortgage- secured credit exposures (Recommendation S). Additionally, pursuant to the new recommendation, the PFSA simplified the terms of assessment of credit compliance with respect to low-value retail credit exposures (defined as an assessment of the amount and stability of the sources for repayment of the exposures and assessment of some features of the customer material from the perspective of the repayment). Such simplified terms may be applied to assessments of credit compliance of the following exposures by banks, provided that such banks satisfy the criteria indicated in the new recommendation: (i) instalment exposures of a maximum exposure equal to four times the average monthly remuneration in the business sector (Polish: średnie mięsięczne wynagrodzenie

w sektorze przedsiębiorstw); (ii) other exposures where the given debtor has been the bank’s customer (satisfying

the criteria specified in the new Recommendation T) for at least six months (then the maximum value of the exposure is six times the average monthly remuneration in the business sector) or when the given debtor has been the bank’s customer (satisfying the criteria specified in the new Recommendation T) for at least 12 months (then the maximum value of the exposure is twelve times the average monthly remuneration in the business sector) or any other exposures where a given debtor has been the bank’s customer (satisfying the criteria specified in the new Recommendation T) (then the maximum value of the exposure is not higher than the average monthly remuneration in the business sector).

In January 2011, the PFSA amended Recommendation S, which imposed limitations on Polish banks in respect of granting foreign currency mortgage loans. According to detailed recommendations concerning the financing of mortgage-secured loan exposures: (i) the bank should aim to limit the borrower’s exposure to currency risks,

specifically by ensuring that the exposure is in the same currency as the borrower’s income; (ii) when assessing the creditworthiness of a borrower, the bank should assume a maximum repayment term of 25 years; (iii) in the assessment of creditworthiness, the bank should take into account the likely change in the borrower’s income after retirement, if the repayment term goes past the age of retirement, (iv) in the case of foreign currency retail real-estate-financing loan exposures and foreign currency retail mortgage-secured loan exposures, the maximum ratio of the loan service expenditure to the average net income earned by individuals required to repay the debt should not exceed 42%.

On 18 June 2013 the PFSA announced the issuance of the new Recommendation S (III) containing guidelines for banks on how they should manage their mortgage exposure, lowering the loan-to-value ratio on mortgage loans to 80-90% for apartments and to 75-80% for commercial properties, most of the provisions of which were planned to be implemented by banks by 1 January 2014.

The new Recommendation S (III) introduced the following changes: (i) the exclusion of exposures financing real property which are not mortgage-secured credit exposures from the scope of Recommendation S, meaning that the new Recommendation S would regard only mortgage-secured credit exposures; (ii) foreign currency mortgage loans should be a niche product offered exclusively to borrowers who generate consistent income in the currency of the loan; (iii) a bank should not finance the entire value of the real property which constitutes the collateral and should determine internal thresholds of the minimum down payments required and such thresholds should be approved by the supervisory board; (iv) the extension of the maximum period assumed for the purposes of the analysis of creditworthiness from a 25-year period to 30-year period, the designation of a 25-year period as a period recommended by the PFSA for the maximum duration of a facility period and the designation of a 35-year period as the maximum permitted duration of a facility period; and (v) a departure from the strict rules regarding the establishment by the PFSA of the maximum level of the maximum ratio of debt servicing expense to the average income generated by a given debtor.

In June 2011, the PFSA amended Recommendation R, under which the PFSA introduced rules regarding depreciated balance sheet credit exposures, selecting impairment losses for balance sheet credit exposure and provisions for off-balance sheet credit exposure. Pursuant to this recommendation, banks are required to follow certain procedures to identify and manage the risk referred to in the preceding sentence, the aim of which is to limit the discrepancies in the previous practice of banks in the presentation of credit exposure which have lost value, impairment loss in view of the lost value of balance credit exposure and reserves for off-balance credit exposure in their financial statements.

In June 2011, the PFSA increased the risk weighting of retail and mortgage loans denominated in foreign currencies from 75% to 100% (Resolution 153/2011 amending resolution No. 76/2010 regarding the manner of and the detailed rules for defining equity requirements in light of specific types of risk), such resolution has been in force since 30 June 2012. Risk weighting applies to the calculation of the value of risk-weighted assets which are the basis for the calculation of banks’ capital adequacy ratios. Increasing the risk weighting of a given type of asset increases the regulatory capital requirement for banks holding assets of such type.

Additionally, the PFSA, in its letter dated 24 January 2012 addressed to Polish banks, expressed an expectation that banks in Poland maintain a capital adequacy ratio of at least 12% and a Tier 1 ratio of at least 9%. However, the expectation of the PFSA as to the level of the capital adequacy ratio (CAR) and the Tier 1 capital ratio was reiterated in a letter from the PFSA dated 21 March 2014.

On 11 September 2012, the PFSA adopted a new Recommendation J addressed to banks and regulating the collection and processing by banks of data regarding real estate (“Recommendation J”). The major changes introduced in Recommendation J include the application of Recommendation J by banks in which the share of exposure to loans secured by a mortgage in their own loan portfolios exceeds 10%, the recommending of harmonised standards of collection, the processing and disclosure of data regarding the real estate market through reliable databases, a description of a set of features that identify the type of real estate that should be collected in the database, and the recommending of statistical models for the assessment of the risk of a change in the value of collateral in the form of real estate in the case of banks materially involved in loans secured by such collateral. The new Recommendation J came into force on 1 October 2013 (the exceptions being recommendations 11 and 12, which came into force on 1 April 2014).

In addition, each year since 2012, the PFSA has adopted a stance on the rules regarding the dividend policy of financial institutions, including banks. On 2 December 2014, the PFSA adopted its most recent stance on the rules regarding the 2015 dividend policy of banks for the year 2014. According to the PFSA’s stance, dividends for the year 2014 in the amount up to 100% of the net profit for 2014 may only be paid by banks with a significant share in non-financial sector deposits and which meet all of the following criteria: (i) are not subject to pending rehabilitation proceedings; (ii) have a Tier 1 (CET1) core equity capital ratio of over 12% (9% + 3% systemic risk buffer); (iii) have a total capital ratio (TCR) of over 15.5% (12.5% + 3% systemic risk buffer); (iv)

have a final BION assessment rating equal to 1 (good) or 2 (satisfactory); and (vii) have a BION assessment of capital level risk not worse than 2 (satisfactory).

Banks with a significant share in non-financial sector deposits which have a total capital ratio (TCR) of 12.5% to 15.5% may dispose of up to 50% of their profit earned in 2014, provided they meet all other criteria.