I. Introduction and Summary

Piero Ugolini
Published Date:
November 1996
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The National Bank Act and the Banking Law for commercial banks of January 31, 1989, formalized the initial steps toward transforming the National Bank of Poland and the Polish financial sector into a market-oriented banking system.1 This event was one among many dramatic changes that took place in Poland during that period. With the creation of a Solidarity-led government in September 1989, radical changes began in all economic sectors.

Poland was the first centrally planned economy to adopt such changes in its economic structure and to implement an economic program to halt its deterioration. This program was strongly supported by various countries, the International Monetary Fund, and other multilateral and bilateral institutions.

In support of Poland’s economic reform, restructuring and reforming the National Bank of Poland and the entire financial sector into a market-oriented system became urgent. In this context, an action plan for the modernization of the National Bank was implemented by the National Bank beginning in early 1990,2 which served as a catalistic force in the overall reforms of the financial sector.

Five years later, as of 1995, the National Bank of Poland had virtually completed its initial modernization phase (Table 1). Its final modernization, however, is not complete. Work still remains to be done, particularly in the payments system and in the further development of a secondary market for government securities. In addition, the National Bank will have to continue to upgrade its operations to cope with change and innovation in the financial sector. Among the challenges ahead, the Bank will have to protect and strengthen its independence from politics through continuing modernization and adaptation of its operations.

Table 1.Reform of the National Bank of Poland, 1990–95
Beginning of the ReformArea of NBP ActivityInitial ConditionsPhase I–1990/91Phase II–1992Phase III–1993/95Current Situation Status in 1995/96
• NBP Acts: under the first Act voted on January 31, 1989, and implemented on February 1, 1989, the monobank system was converted into two-tier banking system. The first Act was revised on December 31, 1989, and implemented on January 1, 1990. Under the latter, broad powers were given to the NBP to conduct monetary policy and limit NBP advances to the government.Monetary ManagementInterest and credit controls, obligatory reserves, and loose rediscount facilities. No use of open market operations. Credit facilities available at the initiative of the banks.Objective: reduce access to short-term credit from NBP, absorb excess liquidity in the banking sector, reduce inflationary pressures, begin building a market-based monetary framework.Objective: after succeeding in reducing access to short-term bank credit, NBP concentrates on implementing open market operations and introducing interest rate flexibility.Objective: continue to absorb excess liquidity from the banking sector and fully rely on indirect instruments after abolishing credit ceilings at end-1992.• Modern central bank exercising all of the key central banking functions. The Governor forms policy decisions in consultation with the NBP Board. Senior management encourages communication and interdepartmental cooperation.
• Restructuring of refinance credit and creation of Lombard facility, credit ceilings, increasing reserve requirements to maximum legal of 30 percent.• Creation of a primary dealer system to support the market.• More intensive use of short-term OMO intervention to affect liquidity. With the introduction of a book-entry system in July 1995, the NBP began sizable outright transactions to affect long-term interest rates.• No interest and credit controls.
• Creation of a 10-day information system to assess liquidity situation.• Creation of interdealer brokerage system screen-operated by the NBP.• The functioning of the clearing house and introduction of an average system for reserve requirements in August 1994 reduced float and improved efficiency in the inter-bank settlement process.• Indirect instruments: open market operations and obligatory reserve (averaging system). Rediscount credit facilities, and book-entry system for securities.
• Creation of a Money and Credit Policy Department.• Beginning of first reverse agreements (repo-transaction).• Resumption of limited NBP bill auctions (November 1994).
• Introduction of one-and three-month NBP bill auctions (July 1990).• Establishment of a yield curve for government securities.
• New accounting plan for the NBP.• Abolition of credit ceilings (December 1992).
• Weekly liquidity forecast.• Suspension of NBP-bill auctions (January 1992).
• Introduction of treasury bill auctions (May 1991).
• Introduction new reporting system for banks.
NBP Accounting• Overburdened and decentralized among the 49 NBP branches: 650,000 forex accounts for nonbank public, and about 8,000 budget off accounts commercial activities.• Preparation of a new accounting plan for NBP.• Consolidation of accounts of commercial banks into one account per bank at NBP headquarters (September 1992).• Daily consolidation of NBP balance sheet.• Modern accounting techniques.
• Each branch/bank had a separate account with one of the regional 49 branches of the NBP.• Preparation or consolidation of bank accounts.• Publication of NBP balance sheet.
• Commercial banks did not have daily consolidation of their branch accounts.
• Monthly consolidation of NBP balance sheet.
Payments System• Inefficient and decentralized among the 49 NBP branches.• Implementation of steps to speed up both clearing and settlement of paper-based transactions, and develop a full-blown clearing and settlement system based on modern telecommunications:Creation of the Interbank Settlement Department.Official beginning of operations of the National Clearing House (KIR) in April 1993.• National Clearing House, and interbank settlement facilities–one account for bank–same-day settlement facility available.
• Large and erratic float.• Modification of accounting rules for granting credit or debit.• Development of a real-time gross settlement system for large value payments.• Clearing electronic payments.
• Adoption of an interbank transportation network to speed up clearing.• Implementation of a National Clearing House electronic payments system.
• Implementation of facilities for settlement of money market transactions and value dated transactions in foreign exchange.
Banking SupervisionNo formal supervision functions.• Establishment of preliminary prudential regulations and a new reporting and monitoring system based on the new accounting plan for banks.• Implementation of a new accounting plan for commercial banks.• Law on Financial Restructuring to recapitalize banks.Modern supervision of commercial banks: monthly reports, off-site analysis, on-site inspections, and standard prudential regulations, including exposure limits on foreign exchange.
• External audits of commercial banks to assess the quality of their portfolios.• Beginning of on-site inspections.
• Implementation of prudential regulations, including foreign exchange exposure limits.
Foreign Exchange Reserves, Operations and ManagementNo official existence.• Creation of the Foreign Operations Department.• Beginning of an interbank market.• Development of interbank market.• Interbank market—modern reserves
• Fixed exchange rate and introduction of internal convertibility of the zloty (january 1, 1990).• Shift to crawling peg within a currency band regime (May 1995).• Crawling peg within currency-band regime.
• Unification of official and parallel foreign exchange market.
• Shift from a dollar peg to a basket peg (May 1991).
• Introduction of preannounced crawling peg (October 1991).
• Building up and strengthening of the dealing and investment capabilities.
• Beginning of the creation of an interbank market: amendment of the Foreign Exchange Law to permit the use of buy and sell rates by the NBP and the commercial banks; freedom to commercial banks in establishing their customer rates.
Monetary Research and AnalysisNo official existence.• New reporting system for monetary statistics and NBP balance sheet for monetary purposes.• Improvement in short-term monitoring systems.• Publications, studies, modeling, analysis, and research developments.• Modern Research Department: liquidity, forecast, modeling, research, and monthly bulletin publication in Polish and English.
• Publication of NBP bulletin in Polish and English.• Monetary framework programming.
• Collection and centralization of data in the NBP for the compilation of BOP statistics.
AutomationVirtually nonexistent.Planning and beginning of a major automation plan.• Implementation of the common Database and Local Area Network Project.• Completion of automation process.• Modern computer department with interdepartmental LAN system. E-mail and Internet.
Management and OrganizationNBP Management overburdened with work and responsibilities, and operating with a legalistic approach and bureaucratic procedures. Policy decisions highly concentrated on the top and lack of communication between departments.Restructuring and reorganizing of NBP. Two Vice-Presidents and NBP Board. Training abroad, and English classes locally.• Disengagement of NBP from commercial activities.• Management, development, and training of NBP staff.• Modern management and organization of the NBP.
• Independent policy to set NBP’s salaries to attract and retain qualified staff.

Since Poland was the first centrally planned economy in Eastern Europe to leave the Soviet bloc and undertake an economic turnaround, the experience of the modernization of the National Bank could be valuable to other countries that are, or will be, following a similar path. The following topics are covered in the remainder of this paper. Section II surveys the economic reforms that the Polish Government undertook in the economic and financial sectors. It also describes the National Bank of Poland under the monobank system, the impact of the 1989 laws, and the splitting of the monobank system. Section III describes the status of the central bank at the beginning of its transformation. Section IV provides a description of the steps undertaken by the National Bank and analyzes the main problems encountered by the bank in its modernization. It emphasizes the planning and sequencing of reforms that enabled a rapid pace of modernization. Section V gives an overview of the status of the Polish central bank in 1995. Finally, Section VI presents the conclusion and lessons to learn from the Polish experience.

The Appendix presents the initial action plan of modernization of the bank supported by the International Monetary Fund/Monetary and Exchange Affairs Department technical assistance for 1991–92.

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