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For the past three decades, the Polish economy has astonished the world with its growth and resilience to crises. This would not be possible without a secure financial system. Even during recent extreme threats like COVID-19 or the war in Ukraine, the lifeblood of the economy has not experienced a heart attack or even a blood clot.
Reality, however, has not spared the economy in recent years. Just as it was recovering its strength from two crises – the financial one of 2008 and the subsequent euro area crisis – and was beginning to slowly recover, it was hit by further powerful blows. The first was the COVID-19 pandemic, when, with lockdowns to counter the spread of the epidemic, economies around the world froze and had to contend with the collapse of supply chains. The second blow was the economic fallout from Russia’s invasion of Ukraine, including the energy and economic crisis and the effects of escalating sanctions.
This turbulence naturally did not, and could not, bypass Poland. And yet it has come through these difficult times almost unscathed, avoiding major company bankruptcies and rising unemployment. This is due, in part, to the fact that our financial system is robust and the economy has been able to rely on continuous financing even in the face of the most trying external conditions.
No Shocks
Narodowy Bank Polski, the Polish Financial Supervision Authority and the Bank Guarantee Fund have managed to safeguard the financial system against shocks and preserve trust, an essential ingredient for its smooth operation. Companies have been able to count on financing and bank customers have always been assured that their savings will not be threatened.
Despite the extremely unfavourable macroeconomic environment, unchecked bank failures have been avoided. In the four cases recorded in recent years, the problems were ended by the smooth operation of the Bank Guarantee Fund. In the first half of 2020, Bank Spółdzielczy in Przemków came under the wings of SGB-Bank and Podkarpacki Bank Spółdzielczy in Sanok was restructured with a bridging bank.
Idea Bank and Getin Noble Bank have disappeared from the Polish banking sector, but their troubles were caused less by external factors and more by the policy of the main shareholder. Resolution processes (introduced at EU level after the 2008 financial crisis), resulted in one bank being taken over by Bank Pekao, another by the Bank Guarantee Fund and a consortium of eight commercial banks to be transformed into VeloBank. Confidence in the financial system was maintained.
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No Shortage of Cash
In a special edition of the Financial System Stability Report on the impact of the coronavirus outbreak (‚Financial System Stability Report. Special issue: the impact of the COVID-19 pandemic’), NBP showed how Poles reacted–at the start of the pandemic there was a surge in demand for cash with people withdrawing their savings from banks and investment funds. It was at its worst in mid-March 2020, then the situation stabilised from week to week, the mood calmed down and, from about mid-May onwards, everything returned to normal. The behaviour of Poles presented in the report in the face of pandemic-induced uncertainty and the monetary authorities’ reactions to the figures were impressive. From the beginning of March to the end of May, PLN 54 billion in cash came into circulation. “In March, we found a huge increase in market participants’ demand for cash. We had a “run” on ATMs and at bank windows. Demand for tangible money increased by 24 per cent. We met this demand”, Professor Adam Glapiński, Governor of NBP, told the Polish parliament presenting the report on the activities of the central bank. His remarks made clear that the central bank had responded flexibly to the crisis. “In particular, there was demand for PLN 100 and PLN 200 notes. Due to their temporary shortage, we started to introduce the 500 zloty note”, Professor Glapiński added.
Although the banking sector experienced a temporary decrease in liquidity, NBP determined that this did not pose a threat to the stability of the system or any individual institutions. “Some bank branches and ATMs experienced temporary operational problems due to delays in the delivery of cash from the banks’ logistics centres and cash handling companies. The situation stabilised after a few days and withdrawal amounts decreased, but still remained at higher levels”, NBP communicated.
NBP noted that it foresaw the problem and promptly took measures to keep ATM services running smoothly. The banks themselves increased appropriate amounts held in accounts with NBP. This brought the situation under control.
A similar phenomenon occurred two years later, when on 24 February 2022 Russian troops entered Ukraine. The war just across the eastern border once again prompted Poles to withdraw cash. Although initially concerning, this time around the worry was not as severe and subsided after a shorter period of time. On 28 February 2022, banks drew a record PLN 12.5 billion from NBP, more than double that on 13 March 2020, a few days after the first case of COVID-19 occurred in Poland, which was the peak of cash demand to date.
“Due to the increased demand for cash, NBP informs that it has stocks fully able to cover the cash requirements of bank customers. All bank orders are executed without value limits, in the full denomination structure, throughout the country”, NBP reassured.
And these were not idle declarations. There was again no shortage of money at ATMs, although in February and March the value of cash in circulation (not including bank counters) increased by almost PLN 34 billion. Poles maintained their confidence that their savings were unthreatened and would always be available to them.
Multiple Instruments
The central bank also monitored the situation of banks on an ongoing basis, realising that the troubles of one institution could result in the undermining of confidence in the entire system, which, in an extreme case, could lead to panic and a run on the banks, a phenomenon that even the strongest financial system might not survive.
During the pandemic period, in order to mitigate the risk of a reduction in bank liquidity, NBP reinstated repo operations to supply banks with money, reduced the reserve requirement rate by 300 basis points, from 3.5 per cent to 0.5 per cent, and bought Treasury bonds and debt securities guaranteed by the Treasury from banks on the secondary market as part of structural open market operations.
It made it possible for banks that would not have had excess liquidity to raise funds in the form of promissory note loans for business lending purposes. The goal was to improve these banks’ ability to generate working capital credit and to help them secure funding with a longer maturity than what was currently available on the market. Ultimately, the idea was to ensure that during such a difficult and uncertain period as the COVID-19 pandemic, businesses had access to bank financing for their day-to-day operations.
As it turned out, this was a bit of a ‚belt and braces’ measure, which is not a reproach, for it is better to be cautious with reserves than to be reckless, because as it turned out at the end of 2020 only one commercial bank used a bill of exchange loan.
The stability of the financial system during the crises was not the result of extraordinary measures, but the earlier many years of daily concern for the stability of the system. Polish financial institutions entered the crisis with strong foundations built up over the years, which is why they came through the turbulence without major problems.
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Analyses and Decisions
After the financial crisis in 2008, a global trend of assigning central banks a greater role in ensuring the stability of the financial system has emerged. NBP Act passed in December 2008 was amended to add the task of acting to promote the stability of the financial system. NBP publishes reports on the stability of the financial system, in which it presents analyses and assessments of risks and recommendations for risk mitigation measures.
The central bank, economists agree, has the best analytical capabilities in Poland. This is crucial because correct preemptive action depends on an accurate assessment of the situation. Therefore, NBP’s analytical activity is a crucial part of its overall mission to safeguard the financial system.
In Poland, the competent authority for macro-prudential supervision is the Financial Stability Committee. It is made up of four institutions: The Ministry of Finance, NBP, the Polish Financial Supervision Commission and the Bank Guarantee Fund. A special role has been assigned to the central bank, which provides analysis and research as well as legal and organisational support. Since 2015, the Financial Stability Committee has been operating in two formulas: as a macroprudential body (KSF-M) and as a body responsible for crisis management in the financial system (KSF-K). In the macroprudential area, the Committee is chaired by the Governor of NBP, while crisis management is chaired by the Minister of Finance.
The analyses carried out by NBP for the Financial Stability Committee cover the entire process – from identifying sources of risk, through measuring and assessing, to proposing measures to reduce or eliminate it. Because of this, the central bank has a lot of leeway in shaping macro-prudential policy, but the KSF-M is a collegial body, and as part of its strategy it aims to make decisions through consensus. The coordinated action of these institutions has maintained confidence in the Polish financial sector and protected its stability. Already in March 2020, that is, at the very beginning of the pandemic, the Committee recommended the immediate repeal of the requirement for banks to maintain a systemic risk buffer, which had previously amounted to 3 per cent. Following the decision of the Ministry of Finance in response to this recommendation, banks could use previously ‚frozen’ capital. The freed up funds of approximately PLN 30 billion could be used by banks for lending or to cover potential losses expected as a result of the pandemic.
Of course, problems are identified in the bi-annual financial system stability reports. The latest one, from June, like the others for several years now, identifies the financial and legal consequences resulting from banks’ exposure to foreign currency housing loans as the main risk factor, independent of national supervisory institutions. Banks have had to make multi-billion zloty provisions against these risks. However, this did not threaten the stability of the entire system, due to the staggering of the process over time, the high level of capital of the banks and the rational financial policy of systematically retaining profits in financial institutions and not paying dividends). In line with the recommendations of the Financial Supervision Commission, the Financial Stability Committee and NBP itself, banks are also offering settlements to customers in an effort to finally resolve the issue. Thus, we observe that despite the high costs of the legal risk that comes from foreign currency loans, the banking system is coping with this problem. Albeit, this may have some negative effects in the future, related, for example, to a reduction in the sector’s ability to finance the economy. But this does not threaten its development. And this is, after all, what is at stake if we think about stability and a sense of security.