V. The National Bank of Poland Today
- Piero Ugolini
- Published Date:
- November 1996
The progress made by the National Bank in its modernization process for 1990–95 has been remarkable. In a few years, it has virtually completed its transition from a monobank system to a modern, market-based central bank.21 This progress is even more remarkable when one considers the internal political problems and slow pace of reforms during more than a year when the bank lacked a President.
From a small basis and with serious and numerous issues to address, the National Bank has admirably managed to place itself as one of the first central banks of the old Soviet bloc capable of conducting open market operations in a market-based system by utilizing indirect instruments of monetary policy. However, the modernization of the Bank is not entirely over. Issues are still pending, and projects started in the early 1990s are to be completed. As in all market-based monetary systems, the Bank is in a continuous state of transformation and modernization to keep up with the changing environment and new developments in banking practices and technology. However, it is fair to say that it has recently graduated as a full-fledged central bank in a modern environment and market-based monetary system.
The rest of this chapter will describe the status of the main operational activities of the National Bank in 1995/96.
The National Bank of Poland has built from scratch in about five years a market-based monetary system where indirect instruments of monetary policy are used as the main policy tool of intervention. In retrospect, it is clear that the creation of the market-based system of monetary policy in Poland was the result of the concurrent development and progress in all departments of the National Bank and the restructuring and cooperation of the financial sector.
The development of the interbank market has enabled the National Bank to implement open market operations as the main indirect instrument of monetary policy. The current main objective of the National Bank is to monitor “bank reserves or to calibrate the level of market interest rate.” This is done in line with, and in the context of, the main macro-economic targets established by the Polish authorities for growth, inflation, and balance of payments outcome. The first National Bank market interventions began in December 1992 with the issuance of regulations by the Bank on open market operations activities. The first open market operations focused on repurchase agreements. They were very small and not very successful owing to the excess liquidity in the banking sector. In addition, it became clear that an efficient payments system to ensure safe and fast settlement was essential to the implementation of their operations. Thus, the beginning of full-fledged, open market operations could only start after the establishment of the national clearinghouse in 1993.
Since the beginning of 1993, the National Bank has begun open market operations—repo and reserve repo—with a group of primary dealers (commercial banks with a current account in the National Bank). The number of the primary dealers has increased in 1995 from 21 to 28. Open-market operations have grown in size and importance throughout the period. Except for a brief period in mid-1993, National Bank operations have mostly concentrated on reverse repo operations in an effort to reduce the excess liquidity in the banking sector, largely generated by capital inflows and government deficits. At the beginning, and particularly in 1994, the National Bank encountered some difficulties in implementing effectively its open market operations. The main problems were related to the size of the interventions and the lack of an appropriate portfolio of government securities for outright operations. Owing to seasonal factors, such as the bunching up of the National Bank financing of the government deficit, excess liquidity in the financial sector reached, at times, very high levels. Since the face value of the collateral securities issued by the Government in physical form (by the law) used to be of a large amount and could not be divided into smaller amounts, the Bank was handicapped in its outright sales operations. As a result, the National Bank’s initial open market operations were concentrated on the very short term (one to three days and occasionally up to two weeks) and could not affect significantly the shape of the yield curve. To address the inability of being capable to withdraw excess liquidity for longer periods of time, it complemented its open market operations with outright sales of central bank bills (National Bank bills). The first outright auction took place in July 1994.
Open Market Operations Target
According to Article 5.1 of the National Bank of Poland Act, the main objective of the National Bank is to promote price stability. The intermediate target of monetary policy is the total money supply, including currency outside banks and all types of current deposits denominated in domestic and foreign currencies. The money supply target is specified in nominal terms as a percentage increase during the year.
Before initiating open market operations, the Bank had to choose a short-term target for its monetary policy. In view of the rapid changes in the economy and the volatile relationships between economic variables, the National Bank chose both reserve money and short-term interest rates as the operational targets of its monetary policy. The practical advantage derived from choosing short-term interest rates for this purpose was that market rate reactions provided the central bank with immediate information on the behavior of the market. In actual practice, the overnight interbank rate is playing the role of such a target. In January 1996, the National Bank coordinating committee has shifted to reserve money as the only operating target in view of the trend and stability of the money multiplier. Controlling inflation (as measured by the CPI) remains the final goal and total money supply is the intermediate target. The change was necessary owing to the rather unstable relation between short-term interest rates and broad money.
The major factors behind the setting of the basic level of National Bank repo rate are the preannounced pace of the downward crawl of the zloty, the short-term interest rates prevailing in the countries included in the basket for the calculation of the zloty rate, and current developments in the domestic money market.
Open Market Operations Programming
The program of daily open market operations interventions is based on a daily forecasting exercise of change in reserve market liquidity. Essentially, the National Bank forecasts three main flows, “independent liquidity,” “free reserve net,” and “maturing open market operations,” in order to arrive at the estimated change in reserve market liquidity in a day. On that basis, a decision is made on the type and volume of intervention in the market. Clearly, the National Bank has no direct control over the first flow comprising growth in (a) official reserves, (b) net credit to the budget, and (c) currency in circulation. Instead, the Bank can influence the “free reserves net” of the commercial banks and estimate the maturing open market operations.
Open Market Operations Decision-Making Process
The functioning of the open market operations system requires a developed interbank money market, an adequate interbank settlement system, and an internal open market operations structure within the central bank. In 1990–91 these preconditions for the functioning of the open market operations system were not fulfilled. Nonetheless, from the very start, the National Bank management aimed at developing open market operations into a primary instrument of monetary policy.
In 1992, the National Bank established a special three-level decision-making structure to design open market operations. The strategic decisions are taken by the open market operations coordinating committee headed by the First Deputy President of National Bank.22 The committee is composed of the directors of the departments, whose activities are related to the conduct of open market operations, and the deputy director of the Money and Credit Policy Department, who is directly responsible for open market operations. The committee usually meets twice a month. The members of the committee discuss the general economic situation to formulate the objectives of monetary policy for the near-term future. The Money and Credit Policy Department presents its forecasts on the liquidity of the banking system. The committee provides operating guides for the director of the Money and Credit Policy Department on the directions of open market operations and on the target repo rate level for the next two or three weeks.
The operational decisions are taken by the open market operations committee located within the Money and Credit Policy Department. The committee is composed of the director of the department, his deputies, and the heads of the divisions responsible for the instruments being used in exercising National Bank monetary policy. The committee meets every Monday and decides on the size of open market operations during that week. The decisions are based on the liquidity forecasts prepared by the open-market operations planning and dealing operations division. The decisions on daily operations are taken by the director of the Money and Credit Policy Department supported by his deputies and specialists from open market operations planning and dealing operations divisions.
Conduct of Open Market Operations
The National Bank of Poland is carrying out open market operations through its money market dealers. As of October 1996 there were 29 banks fulfilling this role. In actual practice, National Bank dealers are the most active market players. The National Bank money market dealers are required to be active in the primary and secondary markets in treasury bills, to quote bid and offered prices for treasury bills, and to meet special requirements on supplying the bank with relevant information. The open market operations consist of repo and reverse repo operations and outright sales and purchases of treasury bills.
The first type of open market operation is carried out during special auctions organized practically every day. The time span of operations ranges from 1 to 14 days. The open market operations are exercised in three ways (depending on the situation prevailing in the market).
The National Bank specifies the type and size of open market operations. During the auction, banks specify their bid or offered rates. The Bank decides on the cut rate (minimum for reverse repo and maximum for repo) and accepts every deal at this rate.
The National Bank specifies the type of open market operations and the rate at which it accepts bank offers. The Bank accepts every bid at this rate.
The National Bank specifies the type of open market operations, its size, and the interest rate. The Bank accepts every bid at this rate. If the amount of bids exceeds the size of the planned operation, the bids are reduced proportionally.
The second instrument of open market operations is outright sales or purchases of Treasury bills from or to a central bank portfolio.
The efficient functioning of the emerging Polish money market demanded the creation of a new clearing settlement system to enable banks to enter short-term transactions. The development of the Polish interbank money market was possible owing to the changes that took place in the payment system.
Under the former system, banks’ operational branches held their current accounts with National Bank regional branches. Consequently, bank reserves were dispersed. A settlement between banks took from 3 days to as long as 14 days. This was too long to facilitate money market operations. In 1992 the National Bank started to consolidate banks’ current accounts. Only the headquarters of banks held reserve balances with National Bank regional branches. This enabled short-term transactions among banks holding their reserves with the same National Bank regional branch. Nonetheless, the market was still fragmented.
The key elements of the payment system reform were the establishment of the national clearinghouse in 1993 and the consolidation of bank reserve balances at the National Bank headquarters in Warsaw from April 1993 to June 1994. Under the new system, all commercial banks keep their reserve balances either with the National Bank or with a correspondent bank that is a member of the national clearinghouse. The new payment system facilitates immediate interbank payments in the form of shifting funds among banks’ current accounts held at the National Bank headquarters. The selling bank notifies the National Bank to debit its account and wire the funds to the buying bank. Overnight operations are possible countrywide. The previously fragmented interbank money market has become fully integrated. Since the second half of 1994 banks have been authorized to use their obligatory reserves to make current settlements and to combine reserves bearing no interest and current accounts. This has clearly hastened the further development of the domestic money market (Table 2).
|Treasury bills in the market||17.89||24.64||28.82|
|NBP bills outstanding||1.96||2.06||5.75|
|Treasury bills in NBP portfolio||9.64||4.19||0.03|
The multilateral netting system of the national clearinghouse allows the exchange of claims and the calculation of mutual positions within the banking system. The settlement institution for commercial banks is the National Bank. There are two settlement systems: the paper-based SYBIR, started in April 1993, and book-entry-based ELIXIR, launched in 1994. Currently, ELIXIR is designed for large wholesale transactions.
Under the SYBIR system a settlement among banks takes two days. Bank branches send payment documents to regional clearinghouses, which then exchange orders to debit or credit each bank’s customer accounts. On the same day regional clearinghouses send the information to the national clearinghouse, which then nets the banks’ positions. Banks receive information concerning their positions by the end of the day. The next day two settlement sessions take place in the Interbank Settlements Department of the National Bank. The session for credit documents (widely used in Poland) starts at 10:30 a.m., and the session for debit documents takes place at 7:00 p.m. Settlement of the ELIXIR results is made at the National Bank during three settlement sessions (morning and evening session, together with SYBIR results, and an afternoon session since September 1995). Introducing a third session for the ELIXIR system enables complete settlements between a bank’s customers in one day.
On July 1, 1995, the National Bank of Poland implemented a book-entry securities system called the SKARB-net. This system is a custody and transfer system, which supports primary and secondary market transactions in treasury bills issued by the Ministry of Finance. Since implementation of the system, five treasury bills of different maturities have been issued each week on this system. In addition, a small number of secondary market transactions have been cleared and settled each day.
This system was developed and is supported by National Bank technical staff from the Information Technology Department according to user requirements specified by the Monetary and Credit Policy Department and by representatives of the Ministry of Finance. The SKARB-net was developed in a client-server environment and operates on a local area network (LAN). The LAN system is the National Bank’s strategic automation platform. The terminals used to access the SKARB-net are located in the Monetary and Credit Policy Department of the Bank. The hours of operation are 8:00 a.m. to 3:00 p.m. All activity in the system is formed off line, that is, no participants have direct access to the system.
All banks in Poland are required to have a book-entry custody account on the SKARB-net. However, only 43 banks are currently authorized to be primary participants (to submit bids directly) in the primary market auction for the purchase of treasury bills in book-entry form. The remaining banks have access to the primary market through banks that are primary participants. In addition, 17 nonbanking institutions have been designated by the Ministry of Finance as primary market participants, with accounts on SKARB-net. Other nonbanking institutions have access to the primary market through their banking institutions.
Each banking participant has two SKARB-net subaccounts, one for its own investments and one for its clients’ securities. Nonbanking participants have only one account, which is for their own investments.
Treasury bills of 8-, 13-, 16-, 39-, and 52-week maturities are sold at auction each Monday. Primary market participants submit an unlimited number of competitive bids for one or more maturities either by fax or in person to the designated staff in the Monetary and Credit Policy Department. Bidders must specify whether the bids are being made for their own accounts or on behalf of their clients. Client bids are further designated as domestic banking, domestic nonbanking, or foreign. Bids are received until 11:00 a.m. The treasury bill auction operations staff at the National Bank review each bid for completeness, verify the authentication of the faxed bids by a comparison of signatures to a signature card file, and make a callback to the submitter to confirm the receipt and details of the bid.
Secondary Market Functionality
Secondary market transactions between banks are settled on a delivery-versus-payment basis. However, secondary market transactions involving nonbank participants are settled outside of the SKARB-net, and the securities movements for these transactions are effected free of payment within the SKARB-net.
In an interbank secondary market transaction, the seller and buyer fax instructions to the book-entry unit of the National Bank’s Monetary and Credit Policy Department; the buyer also faxes a payment order. Instructions are authenticated and verified by signature comparison and callback and then entered into the SKARB-net by an operator.
The SKARB-net transmits electronically the SORB23 payment information along with the control number for each matched transaction. The hardcopy payment order is forwarded to the Interbank Settlement Department. Staff from this department manually verify the information on the hardcopy of the payment order with the information passed electronically from the SKARB-net. If the information matches, the payment order is authorized for processing within SORB. On the settlement date noted on the instruction, which may be the trade T+0, T+1, or T+2, SORB records the buyer’s payment, and automatically sends a message to the SKARB-net to release the transaction. The securities are then, and only then, moved from the seller’s account to the buyer’s without further manual intervention.
If the seller or the buyer is a nonbank participant, the transaction is handled in a different manner. From a SKARB-net system point of view, no payment accompanies the transaction. The nonbank participant must make payment outside SORB, since only banks are allowed to have current accounts at the National Bank. The nonbank participant either makes or receives the payment through its clearing bank, which utilizes the national clearinghouse. These payments made through national clearinghouses are on a next-day, rather than same-day, basis. Instructions concerning the securities movement are not forwarded to the National Bank until the seller’s/buyer’s clearing bank has confirmed payment.
Book-entry securities may be designated on the SKARB-net as collateral for a Lombard credit, for a repurchase agreement with the National Bank or another SKARB-net participant, or for other unspecified purposes.
After the establishment of temporary prudential regulations and conducting surveys to assess the soundness of the financial sector, the inspectorate quickly moved during 1993–95 to build on this foundation. The main benchmarks established during this period are summarized below.
Commercial Bank Audits
In accordance with the agreement of 1993, renewed in 1994, for on-call audit services, 19 diagnostic audits were conducted for banks in crisis or threatened by bankruptcy or liquidation.
The inspectorate obtained wide-spectrum audits that were used by the courts during liquidation or bankruptcy proceedings and were vital in negotiations with potential buyers of crisis banks. During the 19 audits, 24 inspectors of banking supervision underwent training in financial inspection of banks, methodology of outside audits, and international accounting standards.
Banking Inspection Textbook
The inspectorate is finalizing an on-site inspection manual. The manual encompasses almost all fields of banking and commercial banking risks. It will be distributed to banks, so that they may gain knowledge of the inspection techniques and procedures, and be familiar with the inspectorate requirements as well. The manual will facilitate on-site inspections in the future and introduce a certain standardization in mutual demands and expectations.
Bank Liquidation Textbooks
The inspectorate has formulated a procedure manual for bank liquidations. The manual introduces a standard set of instructions for proceedings in cases of a bank collapse, as well as a plan for bid offers for liquidators, bankruptcy trustees, and investors of banks in crisis. Standardization in the form of a matrix of principal financial data and other information pertaining to a bank will improve the central bank’s action in liquidation and sale of banks in crisis. The manual uses the experience of the Federal Deposit Insurance Corporation in the United States and the experience gained in restructuring and liquidation of cooperative and private banks in Poland.
Performance Reporting for Bank Supervision
The inspectorate has been conducting studies for reforming currency control reporting and developing an adequate computer processing infrastructure (programming and database, information reporting system) as well as for preparation of a standard analysis sheet modeled after the uniform report regarding bank performance. The new reporting standard, which will become obligatory before the end of 1996, will satisfy the goals and needs of several National Bank departments, including the inspectorate and the Money and Credit Policy Department. Research in this matter is being conducted by a special interdepartmental team.
Training of Bank Supervision Personnel
In 1994–95, intensive training was provided for the inspectorate personnel and the staff of 39 National Bank branches for supervising cooperative banks. After training, inspectors controlling cooperative banks gradually began to participate in commercial bank inspections. In 1994 a total of 388 out of 468 workers employed within the entire inspectorate structure received training.
Of fundamental importance is the theoretical and practical training program dedicated to on-site inspections. Conducted since May 1993, the training program is a part of a program created at the National Bank to produce an inspection manual. In February 1994, a second training session was held for 27 supervision inspectors (25 were trained during the first session). An International Monetary Fund/Monetary and Exchange Affairs Department expert has been providing training seminars on the standard plan of accounts since 1993.
Publishing Activities of the Inspectorate
In order to acquaint the supervision inspectors with the protective regulations of the foreign countries, the methods of supervising banks in crisis, and the principles of cooperation with outside auditors and internal controls, the inspectorate issued a total of 25 publications during 1993 and 1994. Some of those publications have been distributed to banks and other institutions.
Standard Plan of Bank Accounts
In 1994, the inspectorate developed a standard plan of bank accounts with the help of experts from the International Monetary Fund. The final version was published on February 2, 1995.
On-Site Bank Inspections
Following the initial period of building up standard monthly reports and off-site analysis, the inspectorate began on-site inspections with the assistance of external auditor firms in 1992. Gradually, the inspectorate has built up its capacity and increased the number of inspectors. On-site inspections are critical for proper identification of activities and risks of a bank. The number of workdays committed to commercial bank inspections has significantly increased in recent years.
At the same time, the number of inspections also increased from 221 in 1993 to 296 in 1994 and 317 in 1995 (an increase of more than 40 percent over three years). National Bank inspectors also conducted a number of inspections in cooperative banks (1,146 in 1995). Comprehensive and problem-solving inspections in cooperative banks are part of the framework established by the National Bank. Again, it should be emphasized that the audits also include commercial banks.
In 1993—95 restructuring of the banking industry was marked by the following activities.
Eleven stock company banks lost their independent legal status. The activities of these banks were absorbed without loss of deposits and without disturbing the system of settlements. In seven cases, financial assistance was granted to the absorbing banks by the National Bank in the form of low-interest, preferential loans (1 percent).
Ten banks that found themselves in crisis relinquished the control of capital to other banks. In four of these cases the same form of financial assistance was granted by the National Bank. The National Bank assumed full control (in excess of 90 percent) of the capital in two of the cases.
Eleven cooperative banks were liquidated through sales to other banks, and nine banks took advantage of the financial assistance from the National Bank.
Thirty-seven cooperative banks were absorbed by other cooperative banks—31 received financial assistance from the National Bank.
A total of 48 cooperative banks have been absorbed by other banks, and 40 have received financial assistance from the National Bank.
Table 3 lists the legal acts of the President of the National Bank of Poland concerning banking supervision, published in the Official Journal of the Bank.
|(1)||Order No. 11/92 of the President of the National Bank of Poland dated August 7, 1992, regarding the organization of bank supervision and methods of its execution (Official Journal of the National Bank, No. 11, item 21).|
|(2)||Order No. 16/92 of the President of National Bank of Poland dated October 1, 1992, regarding procedures in the event of circumstances indicating that the financial means or other assets came from or are related to criminal activity, or exceed a certain amount (Official Journal of the National Bank, No. 9, item 20).|
|(3)||Order No. 4/93 of the President of the National Bank of Poland dated March 19, 1993, regarding establishment of the norms for acceptable risks in connection with foreign exchange operations in banks (Official Journal of the National Bank, No. 4, item 7, and in 1994, No. 13).|
|(4)||Order No. 5/93 of the President of the National Bank of Poland dated March 30, 1993, regarding the principles for announcing the verified balance statements and statements of profits and losses (Official Journal of the National Bank, No. 4, item 8, and in 1994 No. 8, item 13).|
|(5)||Order No. 7/93 of the President of the National Bank of Poland dated May 20, 1993, regarding the norms for covering bank assets out of own funds (Official Journal of the National Bank, No. 6, item 11).|
|(6)||Order No. 13/94 of the President of the National Bank of Poland dated December 10, 1994, regarding the principles for creation of the reserves for operational risks of banks (Official Journal of the National Bank, No. 23, item 36).|
|(7)||Order No. 1/95 of the President of the National Bank of Poland dated February 16, 1995, regarding the particular principles of accounting and supply of supplemental information (Official Journal of the National Bank, No. 4, item 8, and No. 11item 20).|
|(8)||Order No. 4/95 of the President of the National Bank of Poland dated February 22, 1995, regarding the establishment of a standard plan of bank accounts (Official Journal of the National Bank, No. 6, item 11)|
|The list of regulations relating to the activities of bank supervision in banks, aside from the National Accounting Plan—91, should also include the following recommendations issued by the President of the National Bank of Poland:|
|- Recommendation No. 5 of September 18, 1990, regarding an assessment of the financial liquidity of banks and recommendations of the President of the National Bank of Poland from 1993 and 1994 (unpublished).|
|- Recommendation of August 2, 1993, concerning the procedures for granting credit, loans, guarantees, and similar obligations on behalf of shareholders and persons performing functions of the administration and the Board of Directors, and other entities possessing capital or personal ties with banks.|
|- Recommendation dated September 9, 1994, regarding the methods and terms of delivering appendix B, form No. 3, and form No. 7 to the General Inspectorate of Bank Supervision of the National Bank of Poland.|
Between July 1994 and April 1995, the inspectorate drafted a number of important regulations after being delegated to legislative duties by the authority of the Accounting Act of April 29, 1994, as well as the Bank Guarantee Fund Act of December 14, 1994. As far as the accounting question is concerned, the National Bank, as authorized by the Accounting Act, issued Order No. 1/95 by the President of the National Bank of Poland dated February 16, 1995, concerning specific methods of accounting for banks and preparation of supplemental information. The order defines the scope of the term “bookkeeping,” provides the required principles for keeping the account books in banks and describes principles of inventory methods, valuation of assets and liabilities, and calculating profits. In addition, it describes the scope and principles for preparation of financial statements and general principles for examining financial statements and safekeeping of data.
The inspectorate also drafted a proposal for an order of the President of the National Bank regarding consolidated balance statements for commercial banks under the universal banking system.
The Bank Guarantee Fund
In 1993, the National Bank initiated work toward a proposal for a Bank Guarantee Fund Act. The development of the proposal took many months of work and was preceded by extensive comparative studies on the subject of the systems of protection and safety of deposits and the systems of protecting the stability of banking system through the guarantee fund. The Bank used the experience of Spain, the Scandinavian countries, and France in preparation for the project, and conducted an analysis of the cost to the banking system by burdening the banks with contributions on behalf of the fund. During the negotiations between the governmental departments and the legislative sessions of parliamentary committees, the proposal underwent significant modifications. The Bank Guarantee Fund came into force on February 17, 1995. It comprises two main bodies: the supervisory board and the management board. The former consists of nine members appointed by the Minister of Finance, the President of the National Bank of Poland, and the Polish Banks’ Union (three members each). The chairman of the supervisory board is appointed by the Prime Minister upon motion by the Minister of Finance and the President of the National Bank, and in consultation with the Sejm committee. The Bank Guarantee Fund’s supervisory board appoints the five members of the management board. The financial institutions covered by the Bank Guarantee Fund are expected to pay obligatory charges in the amount not exceeding 0.4 percent of the sum of risk-weighted assets. The financial institutions covered are “banks which do business in the Republic of Poland under the Banking Act of January 31, 1989 with the exception of cooperative banks participants of regional associations mentioned in the Act of June 24, 1994 on Restructuring Cooperative Banks and the Bank for Food Economy.”24 The Bank Guarantee Fund scheme covers 100 percent of the zloty equivalent of ECU 1,000 and 90 percent in excess of the zloty equivalent of ECU 1,000, but not in excess of the zloty equivalent of ECU 3,000.
Central Bank Accounting
The major achievement of the Accounting Department was reached in mid-1994 with the daily consolidation of the National Bank account from its 49 branches. As of April 1994 the Accounting Department receives a daily balance sheet in the new modern format from each of the 49 branches and is in a position to provide the Monetary and Credit Policy Department on a daily basis with the balances it needs, above all for the assessment of the liquidity situation of the banking system. After a three-month start-up phase, the data were transmitted by both e-mail and fax. Since July 1994 the daily transaction transmission has been effected using just the e-mail system, to which only the National Bank has access. The process allows for initial data reconciliation at the computer center and afterwards in the Accounting Department. Using modern display screens, the Accounting Department is able to verify that the transactions are entered in the summary accounts of the new chart of accounts that has been under development since 1991.
While the daily consolidation of the National Bank accounts remains the major landmark, other benchmarks were established by the Accounting Department during the last four years. The most important one remains the divestiture from commercial bank type activity, which was completed in May 1993 with the creation of the Polish Investment Bank, which inherited more than 600,000 commercial accounts.25 In addition, the Accounting Department has also modernized existing accounting and has applied new accounting techniques related to intraduction of obligatory reserves, system of securities circulation, implementation of new monetary policy instruments, and adjustment of foreign securities valuation to international standards. A new chart of accounts, profit and loss account statements, revision of the accounting arrangements for central and local budgets, and new organization of the Accounting Department were also introduced.
Foreign Exchange Operations
On May 16, 1995, a new exchange system was introduced permitting the zloty to fluctuate within a band of ± 7 percent around the central rate and reverting the bid-ask spread to its previous margin. The central rate continued to crawl against the basket by 1.2 percent a month. On December 21, 1995, the band was moved upward by 6 percent, and the monthly rate of crawl was reduced to 1 percent on January 8, 1996. All transactions are taking place at the market-determined rate. The currency band system should be able, at least on the basis of other countries’ experience, to help the Polish authorities to ease external inflow pressures via the appreciation of the currency, but it would also reduce the usefulness of the exchange rate as a nominal anchor. In the short run, the appreciation of the zloty should help alleviate inflation, and could also allow for a marginal reduction in domestic interest rates. Within the existing arrangements, an interbank market in foreign exchange is now functioning in Poland under the supervision of the Bank. A major step for the development was the introduction of the prudential regulations and limits on foreign exchange exposure by the commercial banks introduced in mid-April 1993.26 The regulation envisaged an initial grace period of about four months to allow the banks to adjust their balance sheets to the new regulation. The commercial banks report monthly to the inspectorate and every ten days (with daily positions) to the Foreign Exchange Control Department of the National Bank. As a result, commercial banks with a license for dealing in foreign exchange were authorized to trade with each other without passing through the National Bank, as was done in the past. The National Bank has a very sophisticated trading desk through which it monitors daily activities in the market and provides on-screen quotations for buying/selling foreign exchange with the National Bank, after the daily fixing session at 2:00 p.m. About 60 banks trade in the foreign interbank market. The volume of transactions varies every day; occasionally it reaches about US$0.5 billion.
In support of the above exchange arrangements and in line with the process of trade liberalization and full convertibility, Poland notified the International Monetary Fund that as of June 1, 1995, the country has accepted the obligations of Article VIII, Sections 2, 3, and 4, of the Fund’s Articles of Agreement. This important step was greatly facilitated by the passage of a new Foreign Exchange Law, and supporting regulations.
Monetary Research and Analysis
The Research Department is now a well-organized modern unit providing useful support to policy determination and implementation of the National Bank. Modern econometric techniques and research tools are utilized by the department, supported by a modern computer LAN. Virtually all objectives set by the Research Department have been achieved: an accelerated information system was created; a summary monetary survey based on a ten-day reporting by a sample of banks plus all the Bank’s branches monthly reporting system for the commercial banks was set up in close collaboration with the inspectorate in order to collect information for monetary statistics and analysis as well as banking supervision; a monthly National Bank statistical bulletin has been regularly published since 1991, comprising coherent monetary statistics for the Bank, the commercial banks, and the integrated monetary survey; and a framework for monetary programming was set up in conjunction with the weekly liquidity forecast exercise in April 1991.
A remarkable improvement in the payments system has taken place over the last four years. Even though the work has not been fully completed, the National Bank has created the structure and framework for the next step of expanding the limited capabilities in the current interbank settlement system and to create a large-value real-time gross settlement system that supports on-line transmission and receipt of transactions by commercial banks for their own accounts and on behalf of third-party customers.
During the last four years, the Bank has managed to improve its payments system network to facilitate the transmission mechanism of monetary policy operations. Particularly following the regulatory changes introduced to prevent reoccurrence of the Art-B scandal in 1991, the National Bank established the following benchmarks.
It implemented a communications infrastructure (Telbank) providing network connectivity between the National Bank main office in Warsaw and all regional National Bank branches. This same infrastructure is being expanded to include commercial banks in the network.
It established an interbank settlement function within the National Bank to facilitate transfers of reserve/clearing balances between accounts on its books in 1991.
It established a national clearinghouse for overnight exchange of payment orders between commercial banks throughout Poland with next-day net settlement of clearing obligations on the books of the Bank in April 1993.
It provided needed liquidity for clearinghouse application (ELIXIR), operated by the national clearinghouse with net settlement on the books of the National Bank in April 1994.
It implemented an automated book-entry securities system to provide custody for and transfer of dematerialized securities issued by the Ministry of Finance. Original issue and secondary market activities are supported by this system on July 1, 1995.
It developed for implementation in early 1996 of an automated system for on-line initiation and receipt of transactions by commercial banks to transfer reserve/clearing account balances on the books of the National Bank.
The above steps have tremendously boosted interbank transactions and shortened settlement between banks and clients to a few days. In some cases same-day settlement is also possible. An important area of data improvement has been the interbank settlement (the float). When the liquidity framework was initially constructed (April 1991) the float was very large and erratic, while the data were only available monthly. This information is now available daily. Through the introduction of the clearinghouse and interbank settlement functions the float dropped by more than 70 percent, from ZI 7.5 trillion to less than ZI 2 trillion in only a few months during mid-1993.
Under the old interbank settlement system, the commercial bank’s current account was held at a National Bank branch and settlement occurred through interbank clearing accounts on the books of the National Bank. For credit transfers, the originating bank would send a list of transfers to its National Bank branch, which would debit the originating bank and credit an interbank clearing account. When receiving branches received the credit transfers and credited customers, they sent a list to their National Bank regional branch. This branch credited the receiving branch and debited an interbank clearing account. Since the National Bank debits the sending bank before it credits the receiving bank, it has credit float on its books. Entries are reversed in the case of debit transaction and the National Bank has negative float. Credit transactions are much larger in value than debt transactions and the National Bank held large values of funds on its books (credit float) through these interbank settlement accounts, bearing no interest for banks. This old settlement system was used until the end of June 1994. Since then, all the banks have been settling their payment transactions through the national clearinghouse directly or through correspondent banks.
With the consolidations of accounts, the one current account per bank at the National Bank, introduction of the national clearinghouse and net settlement being booked directly to the Bank’s current account, funds passing through the National Bank’s interbank accounts have declined. This means that less money has to be sent to the National Bank to effect the same level of payments and the remaining funds can be used by banks.
The management of the national clearinghouse bank current accounts by the Interbank Settlement Department has facilitated the start-up of the clearing system. Interbank payment instructions can be received via fax, telex, diskettes, and paper orders delivered by couriers. Staff must follow appropriate security for verification before current accounts can be posted, resulting in posting delays. Given the “no overdraft” policy of account management, the National Bank is encouraged to proceed with automation efforts to expedite the positing of interbank entries to the current account processing system known as SORB.
On January 1, 1989, the National Bank of Poland introduced a monetary reform of the accounting unit of the zloty. A new zloty was introduced by moving the decimal four places to the left (for example, the exchange rate of the zloty vis-à-vis the U.S. dollar moved from about ZI 25,000 to ZI 2,5), This has simplified considerably statistics, bookkeeping, and accounting transactions. The old currency was allowed to circulate until December 31, 1996.