VI. Lessons to Learn from the Polish Experience
- Piero Ugolini
- Published Date:
- November 1996
The previous chapter provided information on the process followed by the National Bank of Poland to move from a monobank to a market-based system of monetary policy intervention. As indicated earlier, the National Bank has not entirely completed its job. Several projects are still ongoing and, additionally, the central bank is continuously in a process of modernizing its functions to keep pace with the evolution and innovations in the financial sector and in the world economy at large. An ex-post analysis of the Polish experience, the path followed by the National Bank during the last five years, is a useful exercise because it provides information and insight into crucial operational areas of the Bank, which could be used by other countries undergoing a similar transformation.
This last chapter analyzes the major factors that contributed to the modernization of the National Bank of Poland, as well as those that delayed its process, and provides the conclusion and challenges ahead.
Willingness of the Polish Authorities
There is no doubt that one of the major factors behind the transformation of the National Bank of Poland into a market-based central bank has been the willingness and desire of the Polish authorities to establish such a central bank. In line with Poland’s general trend of moving toward a market-oriented economy, the unified goal of the Polish authorities was the main force beyond the modernization of the Bank. Compared with some other countries, where the issue of a market-based system and central bank independence is sometimes controversial and subject of lengthy discussion, in the case of Poland there was no such hesitation in 1989—90.
National Bank of Poland Act
The willingness of the Polish authorities to move toward a market-based system was demonstrated and enshrined in the January 1990 National Bank of Poland Act, which gave the Bank the broad powers to execute an independent monetary policy and laid the foundation for a “divorce-type” relation between the National Bank and the Ministry of Finance. Clearly, appropriate legislation is the foundation for a modern financial sector. In the case of Poland, the National Bank of Poland Act was crucial and well timed, being enacted at the very beginning of the transformation process.27
Establishment of Infrastructures
As discussed in the previous chapter, the development of the interbank money market and the conduct of open market operations through the money market dealers was the final result of a long process during which two major infrastructures had to be created: (1) the financial sector and (2) the open market operations system in the National Bank.
The development of the interbank market in Poland was an example of good cooperation between the commercial banks and the National Bank. The early creation of the Union of Polish Banks in 1991 was a major step toward creating a self-governing body with the authority of representing the banking community. The Union of Polish Banks was instrumental in conveying the views of the banking sector to the National Bank about new rules and innovations; in publishing banking information, such as the almanac of Polish banks in 1992 and other relevant information; and in working with the National Bank in the establishment and functioning of a joint telecommunications company (Telbank) and the first clearinghouse. While the divestiture of commercial activities from the National Bank gave the impetus to the creation of new banks that could compete in the Polish market, the Union of Polish Banks and the National Bank have worked closely in establishing a modern financial sector when open market operations are conducted by the National Bank. The intervention of the Ministry of Finance in the recapitalization of banks, based on the portfolio’s survey, and in the privatization process has also been crucial.
Internally, the National Bank of Poland had to build its own infrastructure. As discussed earlier in the report, the creation of a clearinghouse and of an efficient payments system were necessary to conduct same-day or next-day settlement between market participants and the National Bank. At the same time, an efficient and modern Accounting Department had to provide the daily information to the National Bank concerning its position vis-à-vis the financial sector; and the Research Department had to work with the Monetary and Credit Policy Department in the daily liquidity forecast to assess the need for intervention by the Bank. The banking supervision had to be built to monitor the soundness of the financial sector and avoid systemic default risks. Other departments in the National Bank had to be built to provide the technical, computer, and human resources to the central bank for the conduct of its daily operations.
Sequence of Reforms
Internally, the National Bank had to plan its reforms. The sequence of the implementation of the modernization action plan has been crucial for the final success of the plan. The implementation of its institutional reform was well sequenced so as to provide an immediate impact with short-term measures while working on a longer-term horizon.
National Bank of Poland Interventions
Even though market forces have played an important role in developing the current monetary system, the National Bank at times had to intervene to stimulate the private sector and market forces. Two clear cases were the creation of the first clearinghouse and the interdealer brokerage system. In the first case, it became clear in 1990–91 that the commercial banks were lacking initiative in creating a “private” clearinghouse, although they agreed on the importance of such an establishment. Thus, it had to take the lead in this area to create the clearinghouse, where the Bank is still one of the shareholders.
To stimulate brokerage activities and interbank transactions, the National Bank provided a screen-based interdealer brokerage system—called Tele-gazette in 1992—for central bank bills and treasury bills with supporting facilities to clear and settle government securities transactions. Dealers appointed by the National Bank could telephone to the Bank their buying and selling interest. National Bank personnel would display bids and offers to the other dealers in possession of the screen display system. After establishing a functioning market, the Bank has all but closed its facility; currently, there is one private sector interdealer broker functioning in the market.
Simultaneous Technical Assistance in All Areas
The Polish experience has been unique in several aspects, particularly regarding the format of the modernization plan. The National Bank of Poland with the support of the International Monetary Fund and other multilateral institutions, such as the World Bank, European Union, European Bank for Reconstruction and Development, and bilateral sources, has been the first country leaving the Soviet bloc that has successfully attempted to modernize simultaneously all its main central bank functional departments. This was necessary as a result of the great emphasis placed by the Polish authorities in establishing a market-oriented system in a very short period of time. As previously explained, the transition from direct controls to indirect monetary management requires a wide range of reforms in the financial sector and in the central bank.
In view of the close links existing between operational areas of any central bank in a market-oriented system, progress has to be made simultaneously in all key functional areas in order to avoid undue delays. It is very clear in the case of the National Bank of Poland that an interbank market could not have developed without a sound financial sector, thus, the need for the recapitalization of banks and the strengthening of the Banking Supervision Department. The use of indirect instruments required, among all other things, an efficient payments system to ensure quick and safe settlements, with small float, an effective accounting system, and a modern Research Department and liquidity forecast management unit. From there, a clearinghouse and an Interbank Settlement Department, a consolidation of commercial bank and central bank accounts, and the creation of a research unit to monitor and forecast daily, weekly, monthly, and cyclical variations in economic variables were needed. The modernization of the National Bank dealing rooms for the domestic and foreign market supported by a modern Computer Department were also essential. And, ultimately, the management of human resources to hire, train, and retain the appropriate staff for the institution was also an essential component of the National Bank modernization process, which had to be developed at the very early stage of the plan.
What Went Wrong?
It is very difficult in a case of a success story to identify what went wrong. However, it is possible to analyze expost what the actions/nonactions are that should/could have been avoided, and that, to some extent, delayed the modernization process.
The National Bank of Poland Act of 1990 had several shortcomings that have required continuous amendments to facilitate the operation of the National Bank. In particular, the act was in some respects too specific and rigid, and it did not provide the Bank with the needed flexibility to issue regulations to change the modalities of its operations. In many instances, the law has required the Bank to seek parliamentary approval for the conduct of its monetary policy intervention or other operations, such as change in the reserve requirement, credit activity, and provision for the creation of an interbank market in foreign exchange. The act was also complicated by the existence of other legislation, such as the Foreign Exchange Law and the Commercial Law, which had, at times, conflicting articles. Nevertheless, the act opened the door to the process of ensuing adequate autonomous independence and autonomy for the National Bank in formulating and implementing monetary policy and other complementary central banking functions, while balancing such autonomy through institutional arrangements for the accountability of the Bank for its actions to the Parliament.
Licensing of Too Many Banks
The nine state-owned commercial banks were created on February 1, 1989. By the end of 1990 there were already 75 banks operating in Poland, in addition to 1,562 small cooperatives. Clearly, the large number of banks created a considerable problem and a tremendous task for the Supervision Department of the National Bank, particularly considering that these banks were licensed at the very beginning when the Supervision Department was in the process of building up its capacity and bank branch accounts were not consolidated into an account at the Bank.
The lesson to learn is that strict licensing rules should be adopted during the transition period to ensure that the Supervision Department of the central bank is in a position to effectively perform its functions. In the case of Poland, international auditors were hired to complement the work of the inspectorate and to train its staff.
Providing Appropriate Remuneration to Staff
The National Bank learned, the hard way, that during the transition period, when new commercial banks began their activities in Poland, a strong demand for qualified staff attracted its well-qualified staff to the private sector. Because of the higher salary and benefits, a number of staff, particularly from the bank supervision area, left the Bank for the newly established commercial banks. This created some serious problems for the National Bank, since some departments lost their best staff and new people had to be hired and trained. Also the Bank incurred considerable financial losses since most of the staff had been trained at its expense. Ultimately, the Bank managed to establish its own policy, separated from the public sector, and now provides salaries and benefits that compete with those of the commercial banking sector. This was a key change to attract and retain its qualified staff and ensured that the resources invested in training its staff are not lost to other sectors of the economy.
Reshuffling Senior Management
Ex post, it is clear that the reshuffling and the period during which no formal President was appointed in the National Bank delayed the modernization process of the central bank. Stability in the senior management position is important in providing continuity to the modernization process and in reducing disruptions during the transition period.
Extending Credit Facilities
The Art-B scam provides a clear case for introducing tight control over credit facilities at the early stage when the payments system is inefficient and when float occurs, supervision is precarious, and appropriate account procedures are not in place. The basic rule in interbank transactions should be that banks should first be debited before being credited. This will avoid systemic risks of fraud and lack of confidence in the banking system.
Conclusion and Challenges Ahead
The modernization of the National Bank of Poland has been successful. One last relevant point to be made is that it has also been able to use effectively the sizable technical assistance and training provided by several multilateral institutions, such as the International Monetary Fund and the World Bank, institutions like the European Union and European Bank for Reconstruction and Development, and other countries. The EU and U.S. technical assistance to the National Bank, in particular, has been used diligently by the Bank as a tool to learn about other countries’ experience and how to adapt their experience to the case of Poland. The Bank’s staff have effectively used external help as a “jump start” for their activities and rather than as a substitute for their temporary lack of expertise.
For the future, the National Bank of Poland has to continue building upon the existing foundation and continuously modernize its functions to keep up with changes in the economic environment, particularly the financial sector. From the original action plan laid out in early 1990, it is still in the process of achieving some of the original objectives. Further strengthening of its supervision capabilities, finding a permanent solution for the control and monitoring of the activities of the cooperatives, and completing the National Accounting Plan-91 for commercial banks are examples of these objectives. In the payments system, the National Bank has to finalize the implementation of the real-time gross-settlement system for large-value payments, and establish its legal authority to exercise primary oversight not only over monetary payments, but also over the payments systems as a whole. This will include responsibility for payments, clearing, and settlement in any form, including electronic transactions. In the area of legislation, a revised National Bank of Poland Act conferring more authority and independence on the Bank has to be approved. In the area of capital markets, development has been taking place at a fast pace, particularly with the reopening in July 1991 of the Warsaw Stock Exchange. The weekly auctions of 8-, 13-, 26-, 39-, and 52-week treasury bills and fixed, floating, and index-linked bonds provide investors with an opportunity to diversify their portfolio investments.
While much has been done to date, the authorities—the National Bank and the Ministry of Finance—recognize that further progress in developing treasury debt markets is required. Only a small percentage of the outstanding stock of treasury bills turns over during the course of a month. Furthermore, bond trading on the exchange is thin and the market is illiquid. While the Bank and the Ministry of Finance believe that the introduction of the book-entry system is a major step to facilitate secondary market trading, they are concerned that this alone will not be sufficient to guarantee liquid and efficient secondary markets.
An International Monetary Fund advisory mission of the Monetary and Exchange Affairs Department in August 1995 identified several shortcomings. The mission was of the view that by working together, the Bank and the Ministry of Finance should be able to address most of the above problems over a few years. It will require, however, some further development efforts on their part. Also, the improvement in the payments system will be instrumental in the immediate future.
Among the challenges that the National Bank could be confronting in the future from external sources is the potential erosion of its independence. In Poland, there are signs that some parties would like to diminish its role as a monetary and supervisory institution. The recent debates in December 1995 in the Parliament over the amended National Bank of Poland Act and a parliamentary draft law on banking supervision are worrisome examples. The author believes that the Bank’s independence should be strengthened even further rather than weakened. Monetary policy objectives should be consonant with the macroeconomic targets of the country but should be set by the National Bank independently of political pressures. In the area of banking supervision, the removal of the function out of the Bank and the creation of a separate governmental agency should be strongly resisted at this juncture of the modernization process of the financial sector. It is true that the experience in some industrial countries shows that the supervisory functions do not necessarily have to reside within the central bank. However, in these countries supervision capabilities are strong and well established. In the case of emerging economies, it is advisable that, at the beginning, while a central bank is building up its supervisory capabilities, the supervisory functions be placed in the central bank. The information available in a central bank and related synergies provide the best environment for a supervision department to develop and mature. In the case of the National Bank, the information and experience of all its departments have considerably helped the inspectorate to move from the embryonic stage of 1989–90 to the ongoing developing phase, which will ultimately terminate in a number of years when the inspectorate can perform its functions effectively and efficiently. Thus, it would be disruptive to remove the supervisory function out of the National Bank prematurely. Apart from the location of the supervisory function, it would be a mistake to consider a Supervision Law that also goes against the international trend toward independent supervision and close cooperation with the monetary authorities.
It would be a mistake to weaken the existing power of the National Bank over monetary policy. Experience has shown that independent and strong central banks are excellent instruments to guarantee price stability with economic growth. Thus, acceptance of a central bank’s independence by political forces is equivalent to a public declaration of commitment to fight inflation and preserve the purchasing power of the domestic currency. It is a strong signal that is well perceived and welcomed by domestic and foreign economic operators and investors.
To conclude, the National Bank of Poland should be proud of the progress made so far and should be ready to face the challenges ahead. The experience and the excellent management, dedication, and skills shown by its staff during the last five years, coupled with the political support and high levels of modernization achieved, augur well for the future.