The Evolving Role of Central Banks

18 The National Bank of Poland: A Central Bank in Transition

Patrick Downes, and Reza Vaez-Zadeh
Published Date:
June 1991
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In September 1989, a government took office in Poland that was determined to move the economy as quickly as possible to a market base. The economic program launched in January 1990 was unprecedented among centrally planned economies in scope and speed. It aimed simultaneously at stabilizing the economy and setting in motion market-oriented reforms. The program assumed quite radical changes in the conduct of monetary policy and the commercial orientation of the banking system.

For two years now, it has been my privilege to be involved in this economic reform, particularly as it concerns the transformation and modernization of the National Bank of Poland. I consider it a great honor to have been invited to share with you some experiences of a central bank in transition.

My remarks are organized in three sections: the past, the present, and the future of the National Bank.

The Past

The relevant past for the purposes of these remarks starts in the late 1940s and early 1950s, when the financial system of Poland was modeled after the socialist prototype of the U.S.S.R. The outcome was a strikingly simple financial system. Despite four specialized banks, it was effectively a monobanking system dominated by the National Bank of Poland. In 1987, the National Bank operated 732 bank branches out of a country-wide total of 808 (not counting some 1,160 cooperative banks). A savings bank department in the National Bank monopolized the collection of household deposits. Money and capital markets did not exist, and the only financial instruments available were currency and deposits.

This simple structure served to facilitate the National Bank’s main function, which was to help implement the central economic plan. The National Bank was clearly subordinated to the Government, as reflected in the official title of its President, which was Deputy Minister of Finance. The National Bank extended credit as needed to enterprises to enable them to fulfill their assigned production targets. To guard against plan deviations, it monitored closely all financial transactions through the one bank account each enterprise was permitted.

The banking reform began in 1982. At that time, legislation was passed separating the National Bank from the Government. It also expanded Parliament’s influence over economic policy, giving it the right to establish a ceiling on foreign borrowing and to discuss monetary policy objectives. The new legislation further laid the basis for the two-tier banking system by introducing the possibility of establishing new banks. A council of banks, convening all bank presidents under the chairmanship of the President of the National Bank, was created as a voice for the principle of an independent banking sector. Important also was the adoption of a Bankruptcy Law, intended to strengthen the banks’ hands with their clients in enforcing credit contracts.

The first concrete change occurred in 1986 when the Export Development Bank was created, followed in 1987 by the conversion of the National Bank’s savings department into a savings bank. The most important step came in February 1989 when the monobanking system was effectively converted into a two-tier banking system. The National Bank, at that time, shifted all its dealings with enterprises, that is, credits and deposits, to nine new independent credit banks created out of the National Bank’s branch network. Retaining only the Warsaw head office plus 49 district branches, the National Bank henceforth concentrated on traditional central banking functions.

The special and independent status of the National Bank as central bank was codified in a constitutional amendment, passed in 1989, dealing with the appointment procedure for its President. Henceforth, its President was to be appointed by Parliament upon nomination by the State President, analogous to the appointment procedure for the Prime Minister. Although responsible to the State President and Parliament, and not the Government, the President of the National Bank attends cabinet sessions. As some ten other guests, he may participate in the deliberation, but he may not vote.

The coming to power of a Solidarity-led government, in the fall of 1989, gave an enormous boost to the economic reform process. For the National Bank, it presented an opportunity to plead for more independence. Drastically revised already in early 1989 to allow for the creation of the credit banks, the National Bank Act was revised again as of January 1, 1990. The National Bank was given broad powers to execute monetary policy and was protected against pressures to lend to the Government by a strict limit on such lending, equal to 2 percent of budgeted expenditures (excluding so-called central investment projects, which are eligible for special National Bank refinancing).

The Present

Turning now to the present, I would describe the National Bank as a central bank in transition. On the one hand, it has acquired all the authority normally invested in a central bank, notably for monetary policy, bank supervision, and reserve management. Indeed, it has already had to assert its monetary policy authority in order to suppress the hyperinflation that had come to prevail toward the end of 1989. On the other hand, it is also still involved in many activities that are normally the responsibility of commercial banks, such as their internal account administration. All of the National Bank’s traditional central banking functions urgently need to be modernized to meet the demands placed on them by a competitive, market-oriented financial system.

A brief description of its various current functions serves to illustrate the point about its transitional nature. Being a core central bank function, currency issue is obviously the charge of the National Bank, both notes and coins. Not obvious in a two-tier banking system is that the National Bank should also continue to be responsible for all the logistics of the currency distribution. Neither is it obvious that the National Bank should be responsible for supplying foreign currency cash to the banks and foreign exchange counters, as it does at present.

Reserve requirements are at the moment a key instrument of monetary policy. To combat the excess reserves in the banking system, deriving from a large balance of payments surplus among other factors, the National Bank raised the requirements almost to their legal limit of 30 percent of deposit liabilities. In addition, it has been trying to restrict access to its refinance facilities. A novel instrument to absorb excess bank reserves is the auctioning of bills, which the National Bank began to do in July 1990. These indirect monetary instruments, however, are not yet adequate to restrain the highly inelastic demand for credit on the part of loss-making state enterprises. They have been supplemented, therefore, temporarily by limits on credit growth for the major banks. Aside from a minimum rate for current accounts and some moral suasion from the National Bank as to the desirable prime lending rate, interest rates are free. The refinance rate is being adjusted on a monthly basis in line with the desired monetary policy stance.

A fixed exchange rate with the U.S. dollar has been one of the nominal anchors of the stabilization program. Formally, exchange rate policy is determined by the President of the National Bank in consultation with the Minister of Finance and the Minister of Foreign Trade. In practice, the President of the National Bank has been playing the lead role. In support of this function, the National Bank’s President has taken over from the foreign trade bank the task of managing the country’s foreign reserves. In addition, it is delegated partial control of foreign exchange, namely, the issuance of individual foreign exchange permits for transactions not covered by the general permit issued by the Minister of Finance. The general permit, it should be noted, is so broad as to cover most current account transactions.

The bank supervision function in the National Bank had to be built up more or less from the ground, starting with the introduction of a modern accounting system in the banks. Prudential guidelines are copied from the European Community (EC). In the National Bank’s head office an off-site inspection capability will be developed, while for regular on-site inspections it will have to rely on specialized staff in its branches.

Given the still underdeveloped state of the financial system, the National Bank attempts to actively promote commercial banking. For that reason, it applies a fairly liberal bank-licensing policy, requiring only a $2 million capital base ($6 million for foreign-owned banks), a business plan, and managers with a sound reputation. As a result, some 60 licenses (three for foreign banks) were issued in 1990. Most new banks are privately owned. Although, perhaps, undesirable from a bank supervision viewpoint, the liberal licensing policy was adopted because of the great public dissatisfaction with the shortage of banking services. Poland currently has more than four times the number of potential customers per bank branch than do Western European countries.

A legacy from the monobanking system is that the National Bank continues to do the account administration for the banks that once were part of it. While everyone agrees that this would be better done by the banks themselves, precisely how and how fast the National Bank should cease to offer these services remains to be decided. For the same historical reason, it provides miscellaneous other services to the banks, such as the maintenance of office equipment and alarm systems, intrabank payments, and, as was noted before, currency transportation.

When the nine credit banks were created, the National Bank did not rid itself of all operations with the nonbank public. It continued to maintain some 650,000 foreign exchange accounts for nonbanks, mostly households, as well as zloty accounts for selected enterprises. Here, too, it is only a matter of time before these functions will be shifted to the commercial banks.

Besides banking services (within the above-mentioned lending limit), the services to the Government extended by the National Bank include the compilation of the balance of payments and the maintenance of contacts with international financial institutions.

In modernizing its various functions, it is receiving a great deal of assistance from half a dozen central banks, organized and coordinated by the Central Banking Department of the International Monetary Fund. Specifically, the National Bank of Austria is assisting with central bank accounting and internal auditing; the Bank of France, with bank supervision; the Deutsche Bundesbank, with foreign exchange operations; the Netherlands Bank, with monetary and balance of payments research and analysis; the Bank of England, with monetary operations and money market development; and the U.S. Federal Reserve, with the payments system.

The Future

The challenge of the future for the National Bank will be to bring the current transition to a successful completion. I see an agenda with four main points.

First, the National Bank must disengage itself from activities that either harbor a potential conflict with its prime tasks as central bank or that simply present too great a burden and threaten to distract it from its prime tasks. Among the “conflict” category, I would include the services currently provided to nonbank customers and the involvement in on-lending loans obtained from abroad, such as those from the World Bank. Activities that overburden the National Bank include commercial bank account administration and intrabank payments clearing, providing cash and banking services to local governments, and keeping detailed accounts for the Central Government.

The second point on the agenda should be a further strengthening of the National Bank’s independence. This would involve, among other things, completing its separation from the commercial banks, creating a supervisory body to control its President and lend more authority to the institution, and defining in the National Bank Act a sufficiently long tenure for its President—there is none at the moment.

The National Bank will further need to continue to work on financial market development. Already it is issuing its own bills, and treasury bills are soon to follow, as are other financial instruments. A market for foreign exchange does not yet exist but is a prerequisite for a more flexible exchange rate policy in the future.

Finally, it will need to improve its own performance. This will mean that sufficient attention must be paid to issues of organization and staff development, including salary structure.


The author was First Deputy President of the National Bank of Poland at the time he gave this address to the Central Banking Seminar. He is currently State Secretary in the Ministry for Foreign Trade.

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