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The Warsaw Voice » Special Sections » November 30, 2010
National Bank of Poland: Safeguarding the Zloty
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National Bank of Poland: Safeguarding the Zloty
November 30, 2010   
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As Poland’s central bank, the National Bank of Poland (NBP) has a legal monopoly on the issuance of the Polish currency and is responsible for its value. But the bank’s role in the Polish economy is much broader. Thanks in large part to its policies, the Polish banking system has emerged unscathed from the global financial crisis.

During the turbulence on financial markets in 2008 and 2009, the banking sector remained stable. No bank in Poland was threatened with bankruptcy or needed support from public sources. The Polish Financial Supervision Authority regularly monitored the situation of Polish banks and threats resulting from the problems of their foreign owners. It also prevented the transfer of assets abroad by the mother companies. Additionally, the supervisory agency and the National Bank of Poland strengthened the banks’ capital by, for example, allowing them to retain promised dividends. A capital buffer was created, which enabled banks to expand their activities. And when the financial crisis began undermining confidence in the banking system, which led to a drop in the volume of transactions among banks, in October 2008 the NBP unveiled a “confidence package” designed to restore trust on the interbank market. The package had four main goals: to restore the proper operation of the financial market, improve liquidity on the domestic currency market, improve liquidity in foreign currencies, and strengthen cooperation between banks and the central bank.

Ensuring the stability of the financial system is an important goal of the Polish central bank, though not the only one. The primary objective is to maintain price stability, which means counteracting inflation. Monetary policy, issuing activity, the development of the payment system, the management of Poland’s currency reserves, services for the State Treasury and education and information roles constitute the main activities of the Polish central bank.

History
The National Bank of Poland is a modern institution. It tries to adhere to the best world standards, but also relies on a strong tradition of Polish banking.

The Polish central banking system, like the central banking systems of many other European countries, originated in the first half of the 19th century. The first Polish issuing bank, which also was the central bank, was the Bank of Poland set up in the Kingdom of Poland in 1828. It operated for almost 60 years. The bank was closed down in 1886, a decade after it had lost the right to issue notes when the separate currency of the Kingdom of Poland was abolished. Only the central banks of the countries which occupied Poland had the right to issue currencies used in their Polish provinces.

The Polish central banking system was restored in 1924. In January of that year, the Polish parliament adopted a currency reform bill that enabled the country to overcome disastrous hyperinflation and economic chaos. In April, the Polish mark was replaced by a new currency—the zloty, the predecessor of Poland’s present monetary unit. The Bank of Poland set up at that time was responsible for putting the new currency into circulation. The person behind these important developments was Władysław Grabski, an outstanding politician and economist who was prime minister and Treasury minister in that period.

In accordance with the best standards of that time, the Polish central bank was set up as a private joint stock company, a move that was supposed to ensure its independence. The state held only 1 percent of the shares in the bank. The Bank of Poland started its activity in April 1924. Its first operation was the replacement of the Polish mark with the zloty. The value of the zloty was equal to the Swiss franc. Initially, the strong budget and balance of payments position, coupled with the country’s gold and currency reserves, provided a sense of stability and encouraged the success of the reform.

But this success was short-lived. The zloty weakened sharply following a very poor grain harvest and a deep industrial crisis in 1924, and a balance-of-payments collapse in 1925. Currency interventions by the Bank of Poland were ineffective and the bank decided to abandon efforts to defend the zloty in order to protect its modest gold and currency reserves. That led to the resignation of Prime Minister Grabski, the architect of the currency reform, in November 1925. A budget deficit reappeared as a result of the poor economic situation. The government financed its expenditures by printing more money, and inflation returned. It was only after an improvement in the economic climate that the budget and the balance-of-payments positions strengthened and the exchange rate of the zloty began to stabilize. Its stability was finally restored in 1927 thanks to an international loan.

The zloty remained a stable and strong currency until World War II. Although its monetary policy was sometimes criticized, the Bank of Poland was an important institution in the Second Polish Republic.

Normal operations of the Bank of Poland were halted after the outbreak of the war. The bank authorities, exiled in London, continued some limited activity, which involved financing expenditures of the Polish government and managing Polish assets deposited in foreign banks. In addition, financial assistance was provided to bank staff serving in the army or held in POW camps. Preparations were also made for resuming the bank’s activity after the war. For example, new notes were printed to be put into circulation. At the end of 1939, the German authorities set up the Issuing Bank in Cracow, in the part of the Nazi-occupied territory of Poland called the General Government. That meant at the end of the war there were two issuing institutions: the Bank of Poland and the Issuing Bank.

The National Bank of Poland was set up in 1945 as a state-owned bank supervised by the Treasury minister. Initially, the NBP operated according to rules copied from the statutes of the Bank of Poland. It was assumed that the NBP would be an issuing bank and would not be involved in directly providing finance to businesses. But the role of the NBP and money changed quickly under the influence of the country’s command and control economy. At the beginning of 1946, the NBP was made responsible for the financial control over the mining, steel and textile industries and for the direct financing of these industries.

The NBP was turning into a monobank, which had a monopoly not only on the issuance of currency, but also on granting loans and collecting savings. It was becoming a colossus, but one dependent on external political and administrative decisions. Meanwhile, the zloty became a shadow of what it was supposed to be; it was solely an internal currency, inconvertible into other currencies. It wasn’t of much use to buy goods either, because an intrinsic feature of the centrally planned economy was the constant shortages of goods on the market. It comes as no surprise that the zloty was being squeezed out by the dollar and other foreign currencies.

However, even under the system of government in which the role of the central bank was limited, the NBP performed tasks that contributed to streamlining economic processes. These activities included organizing non-cash settlements, handling the national budget accounts, managing the country’s modest currency reserves, and drawing up the balance of payments and other composite balances of the national economy.

It was not until the late 1980s that the zloty started to return to the world of real money. Thanks to reforms, the zloty regained its role as a national currency while the NBP was made responsible for the value of the Polish currency. Important changes occurred after 1997. The new constitution ensured a strong position for the NBP in the system of public institutions. Responsibility for monetary policy was given to the Monetary Policy Council, a new institution within the NBP. As a result, guarding the zloty and the stability of the financial system became the main objectives in the operation of Poland’s central bank. After many years, the NBP became a central bank based on the highest standards.

The bank of banks
As the central bank of Poland, the NBP performs the tasks defined by the Polish constitution, the law on the National Bank of Poland, and the banking law. These acts guarantee the independence of the NBP from other institutions of the state. The NBP performs three basic functions—an issuing bank, bank of banks and central bank. The NBP has the exclusive right to issue currency notes and coins that are Poland’s legal tender. The NBP decides on the issue size and the time when the money is put into circulation. It is responsible for ensuring liquidity. Additionally, it organizes the circulation of money and regulates the amount of money in circulation.

The NBP has no direct impact on inflation, but influences it indirectly through the monetary transmission mechanism. The first element of this mechanism is the system of interest rates at which banks lend to each other. Since the NBP has a monopoly on the issuance of money, it is able to control these rates. The NBP tries to make sure that short-term interest rates on the interbank market are close to the reference rate set by the Monetary Policy Council.

The NBP organizes the monetary clearing system, clears interbank payments and takes an active part in the interbank money market. Commercial banks maintain accounts with the NBP and use them for settling their transactions. If a commercial bank does not have enough money on its account, it may ask the NBP for an overnight Lombard credit against securities. If a bank has an excess of money on its account, it may make an overnight deposit with the NBP.

The NBP manages Polish currency reserves, which are supposed to guarantee the financial security of the state. The reserves are invested in securities across the world in a way designed ]to ensure not only their security and liquidity, but also maximum returns. Having considerable means, the central bank is able to influence the exchange rate of the Polish currency. But NBP President Marek Belka is in principle opposed to currency interventions designed to maintain the zloty exchange rate at a specific level because it is not the NBP’s responsibility to suggest the target exchange rate. However, he does not rule out interventions as an instrument to counteract excessive exchange rate fluctuations, because such fluctuations hamper the activity of Polish businesses on the international market.

The NBP also handles national budget accounts, carries accounts of the government and state institutions, state special-purpose funds and public sector units, and processes their payment orders. And the central bank collects and publishes statistical data on Poland’s balance of payments and money supply.


This article is based on information provided on the www.nbp.pl website, including Cecylia Leszczyńska’s publication entitled An Outline History of Polish Central Banking
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