Harmonization of instruments of National Bank of Poland with standards in euro zone standing facilities

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1 Harmonization of instruments of National Bank of Poland with standards in euro zone standing facilities Ilona Pietryka Nicolaus Copernicus University Faculty of Economic Science and Management Torun, Poland Abstract The idea if EMU requires countries entering the euro zone to have a homogeneous system of monetary policy instruments including standing facilities. This paper presents comparative analysis of Polish and European zone solutions in the range of standing facilities. Conclusions present the degree of harmonization of those solutions and the suggested directions of changes. Key words monetary policy instruments, standing facilities, euro zone Introduction Standing facilities beside minimum reserves and open market operations create the classic triad of instruments used by monetary authority. They emerged from the connection of two kinds of operations, i.e. the operation on credit and depositary. The operation on credit is one of the first instruments of monetary policy and is based on the fact that banks have capability to take out credit in a central bank, usually overnight, pledged by bank s securities, on strictly definite conditions and at the highest market cost. The deposit operation has been introduced to the central bank instruments relatively recently (and is used in few countries) and idea comes down to enabling banks to folding of deposits overnight forward investment in central bank at the lowest market cost (Cendal, 2008). The most essential feature of standing facilities is the fact that they are always used on the initiative of commercial banks. The central bank enables banks take out a loan or deposit their money on strictly definite conditions, and banks are free to use this capability or not. Another characteristic feature of this instrument is generality, which means that banks and financial institutions can use the facility on equal conditions (Cendal 2008). Primarily, this instrument served to adjust liquidity and was used to shape market interest rates. These tasks, to a larger extent, started performing open market operations and presently the standing facilities act as: safety valves in the baking system as they are used by banks sporadically in case of shortterm surpluses or deficiency of liquidity, not as a constant source of liquidity or a way to invest their surpluses (Tymoczko, 2000). corridor of variability of short-term interbank market rates (mainly overnight) if the central bank provides both standing facilities. The deposit facility rate is the bottom, and marginal lending facility rate is the ceiling of changeability of overnight interbank rates, The idea if EMU requires countries entering the euro zone to have a homogeneous system of monetary policy instruments including standing facilities. The adjustment requires the harmonization of the type, technical forms, even the interest, in relation to the market interest rates, of standing facilities (Przybylska-Kapuścińska, 2007).

2 This paper presents comparative analysis of Polish and European zone solutions in the range of standing facilities. The purpose of this analysis is to determine the degree of adjustment of the instruments discussed, used by the National Bank of Poland to the standards, norms and procedures of the ECB. The first part outlines the essence, construction and manner of operation of standing facilities in euro zone. The second part present their current shape and functioning in Poland. Conclusions present the degree of harmonization of those solutions and the suggested directions of changes. Standing facility European solution marginal lending facility Institutions entitled to marginal lending facility must fulfill general eligibility criteria: institutions subject to the Eurosystem s minimum reserve system according to Article 19.1 of the Statute of the ESCB, must be financially sound, must fulfill any operational criteria specified by individual national central banks (ECB, 2008). From operating side, access to the marginal lending facility is granted through the national central bank and only on days when TARGET2 system is operational. Moreover the accessibility of the credit in the central bank is granted only on the fulfilllment of the conditions concerning the infrastructure of the payment system in RTGS. A central bank operating in the European System of Central Banks lends credit to an institution, which has transitional deficiency of liquidity automatically or on request. The first case concerns the situation when at the end of each business day an institution has a debit position on their settlement account and this is automatically considered to be a request for marginal lending facility. Banks have capability of using marginal lending facility voluntarily by sending a request to the national central bank in a member state in which it is established (K. Białous, A. Orlińska, M. Zarosińska, 2004). The application must specify the amount of credit and assets securing this transaction (if the collateral has not already been deposited in the national central bank). The request must be received at the latest 15 minutes following the TARGET2 closing time, that is 6.15 p.m ECB time. On the last day of a reserve maintenance period the deadline is postponed by an additional 15 minutes (ECB, 2008). Every operation on credit in Eurosystem, also the credit at the end of the day must be properly secured. Since the 1 st of January 2007 a homogeneous system of collateralization has been binding on all the members and is called a single list. It includes market and nonmarket assets, which fulfill general eligibility criteria in euro zone, specified by the ECB. No distinction is made between the two asset classes with regard to the quality of the assets and their eligibility for the various types of Eurosystem monetary policy operations, except that non-market assets are not used by the Eurosystem for outright transactions. The assets eligible for Eurosystem monetary policy operations can also be used in cross-border operations, and in case of market assets by proper coherence among the EU system of securities settlement (Proczek, 2008). Apart from the requirement to present sufficient underlying eligible assets, there is no limit to the amount of funds that can be advanced under the marginal lending facility (Grzesiak, 2004). The credit is repaid on the next business day on which TARGET2 and the relevant SSS are operational, at the time at which those systems open (ECB, 2008). The interest rate is announced by Governing Council of the EBC. The ECB may change the interest rate at any time, effective, at the earliest, from the following Eurosystem business day. Interest under the facility is payable with the repayment of the credit (Przybylska- Kapuścińska, 2007). Standing facility European solution deposit facility

3 Institutions fulfilling the general counterparty eligibility criteria may access the deposit facility. Access to the deposit facility is granted through the national central bank in the Member State in which the institution is established. Access to the deposit facility is granted only on days when TARGET2 is open. For the national central bank to process the request on the same day in TARGET2, the request must be received by the national central bank at the latest 15 minutes following the TARGET2 closing time, which is, as a general rule, 6 p.m. ECB time. On the last business day of a reserve maintenance period, the deadline for requesting access is postponed by an additional 15 minutes. Minimum and maximum amount to be deposited under the facility is not specified. The institution does not receive any collateral for the deposit. The maturity of deposits under the facility is overnight, within the working hours. The interest rate is announced by the Governing Council of the EBC. The ECB may change the interest rate at any time, effective, at the earliest, from the next business day in the euro area. Interest on the deposits is payable on maturity of the deposit. Standing facility Polish solution lombard credit The central bank can grant a lombard credit to a bank which (NBP, 2008): owns a current account in the Payment System Department in the National Bank of Poland, is a participant of Register of Securities held in the Domestic Operations Department (DOD) in NBP or National Depositary of Securities, has concluded an agreement on lombard credit, grants a power of attorney to the central bank, will provide DOD with a specimen signatures form, not later than in day of covenanting. commercial bank may be granted access to lombard credit in each business day by sending a declaration of utilization and repayment of this credit to the Central Bank of Poland. To process the request, declaration must be received by the national bank from 8.00 a.m. to 5.30 p.m. (at the latest 30 minutes before the SORBNET closing time), on the last business day of reserve maintenance period the deadline for declaration access to the lombard credit is postponed by an additional 30 minutes. here is another procedure to obtain lombard credit from the central bank, i.e. automatically when the commercial bank does not repay technical credit before the end of a business day, until 6 p.m. If technical credit will be repaid before that deadline, it is not interest-bearing, but collateral is the same like in case of lombard credit. ince the 4 th of March the collateral of lombard credit may be a pledge, an assignment or a charge granted over relevant assets such as Treasury bills, Treasury bonds or monetary bills and bonds issued by National Bank of Poland, since the 27 th of October 2008 even other securities deposited in National Depositary of Securities. Accidentally, the pledge granted over assets which are not announced by the National Bank of Poland requires special agreement between the central bank and institution drawing a debt (NBP, 2008). A long list of securities which are accepted as a collateral for a lombard credit makes this instrument easier to use and trims down the increases of market overnight interest rates over the lombard rate. Registration of monetary bonds on a list of eligible securities simplifies the access to this instrument from the technical point of view. The Register of Securities deals with the registration of monetary bills and Treasury bills, therefore the pledge is made automatically by the transfer of collateralized assets on blocked account in Register of Securities. The collateral on Treasury bonds or bonds issued by the central bank is a more complicated operation, because of the fact that they are registered on deposit accounts and securities accounts in National Depositary of Securities. Rules and procedures of establishing the pledge on those assets is defined by an agreement signed between the central bank and National

4 Depositary of Securities. The commercial bank orders the transfer of the bonds to the account of pledged securities and a bank statement must be delivered to the central bank as a confirmation this operation (NBP, 2008). A particular asset may be a collateral many times in one business day. An institution may be granted access to lombard credit, on the condition the repayment of credit, which was granted on a previous day. If The National Bank of Poland assesses there is a threat that the objectives, set out in the Guidelines of Monetary Policy, will not be met it may suspend granting the lombard credit or limit its value at any time. In this way the central bank curbs the excessive outflow of money in crisis situations (NBP, 2008). The lombard rate is the highest market rate and in Poland it fulfills a role of a ceiling of changeability of overnight interbank rates. In a standard situation there is no limit to the amount of funds that can be advanced under the credit (the value of the owned assets is the only limit), so the rate of interest is the most important element of the central bank impact on commercial banks. Due to the fact that this instrument is expensive and has short-time nature, it is quite seldom used. The interest under the facility is payable for the days of utilization according to the equation (1): (1) t O= K LOMB ilomb 365 where: O interest, K LOMB amount of credit, i LOMB lombard credit rate, t number of days, on which lombard credit has been granted (frequently one day). Payment System Department takes the interest from the bank account on last business day of a month. The maturity of credit extended under the facility is overnight. The central bank, on special request, may establish other period of utilization of credit, and then, the deadline of repayment expires on its last day of utilization. Repayment of credit is made by sending the payment order to the Payment System Department from 7.30 a.m. to 5.30 p.m (NBP, 2008). The amount of credit which is not repaid on time is an outstanding debt and the interest bearing is a double lombard rate established by monetary authority. If this debts is not repaid, central bank on the base of the power of attorney given, immediately sells the pledged Treasury bonds and bills at a market price on day of sale. The financial means obtained are assigned to the repayment of credit and collateralized monetary bills and bonds are discontinued (NBP, 2008). Standing facilities Polish solution End-of-day deposit Commercial banks have benefited from the deposit operations since 21 st of December The deposit rate is the lowest market rate and in Poland and provides a floor of changeability of overnight interbank rates. If rates are quoted below depositary ratio, there is a signal showing surplus of liquidity on market and lack of alternative capability for attractive investing. Deposit operation enabling banks to folding of deposits overnight forward investment in central bank. It is not profitable, but out of risk, and because of economic reasons inclines to searching more advantageous way to allocate their money. That leads development of interbank market. According to Act of National Bank of Poland central bank is able to open forward investment account. Institutions can use the deposit facility to fold of overnight deposits in central banks if they have their own current account and forward investment account.

5 The central bank can open a current account in SORBNET system, or a bank account in SORBNET-EURO system or in TARGET2 system to a bank which: lead operative activity by 6 months before folding of motion about participation in those systems, have a good financial standing in central bank opinion, grant a technical requirements, which enabling electronic exchange of information. Banks halve capability to deposit his money in central bank on the strength of contained agreement. This agreement allows to sending a request inclusive a instruction of transferring means from current account on forward investment account, to the central bank on every business day before the SORBNET system closing time (Przybylska-Kapuścińska, 2007). In opposite case credit position on bank settlement account is considered as increase of amount of minimum reserves (Skopowski, Wiśniewski, 2007). In one business day bank may sent a few request. Investment is enumerated as a sum of amount of each request sending before end of business day. Funds deposited on account of forward investment are interest-bearing according to deposit rate established by Monetary Policy Council. Interest on the deposits is counted for real number of calendar day of keeping, including day of depositing and including day of returning (Przybylska-Kapuścińska, 2007). The maturity of deposits under the facility is overnight. Deposits held under the facility mature on the next day on which SORBNET is operational, at the time at which this system opens. No collateral is given to the institution in exchange for the deposit. Conclusions Credit operating system in Poland is fitted in considerable measure for requirements of euro zone standing facility. Condition, which must be fulfilled to grant lombard credit are convergent with general eligibility criteria. National Bank of Poland expand list of eligible assets. Procedure of tightening of this obligation is with it identical also, it has established that EBC. Uncomplete fitting concerns deadline of folding request and of repayment of credit. In euro zone it is longest about 45 minutes (and about 30 minutes on the last business day of a reserve maintenance period). Moreover, Central Bank of Poland can establish other than overnight deadline of utilization of credit, EBC does not forecast this solution. The maturity of payment of interest under the facility requires fitting. Introduction of such solution in Poland needs change of resolution of board of central bank, and also changes in system of counting and collecting interest. This harmonization will bring benefits for central bank, which immediately would receive percentage, and for commercial banks, which would currently incur real cost of tightened credit. End-of-day credit is used generally near the end of minimum reserve maintenance period, Which converges with end of calendar month, in present legal situation the maturity of credit extended under the facility does not differ significantly from maturity of percentage payment. Because of fact that deposit facility has been used by central bank late relatively, it is fitted instrument for standards of euro zone completely. Deposit facility in Poland was build in foothold about applicable solution in euro zone. References Białous K., Orlińska A., Jarosińska M., (2004), Instrumenty polityki pienięŝnej Europejskiego Banku Centralnego In: Pieniądz i rynek, K. Marchewka-Bartkowiak (Editor), Wydawnictwo AE w Poznaniu, Poznań, p Cendal M., (2008), Instrumenty polityki pienięŝnej. In: Współczesna polityka pienięŝna, red. W. Przybylska-Kapuścińska (Editor), Difin, Warszawa, pp Grzesiak M., (2004) Europejski Bank Centralny, Wydawnictwo Adam Marszałek, Toruń, p. 89. Proczek M., (2008) Polityka monetarna w strefie euro, Bank i Kredyt nr 6/2008, p. 24. Przybylska-Kapuścińska W., (2007), Eurosystem a instrumenty polskiej i czeskiej polityki pienięŝnej, CeDeWu, Warszawa, 87, 90, 99, 100. Skopowski M., (2007), Operacje kredytowo-depozytowe, In: Współczesna polityka pienięŝna instrumenty, M. Skopowski, M. Wiśniewski (Editors), Wydawnictwo Akademii Ekonomicznej w Poznaniu, Poznań, 49,59.

6 The implementation of monetary policy in the euro area: General Documentation on Eurosystem monetary policy instruments and procedures, EBC, Frankfurt am Main, November 2008, 12, 22-23, 43. Tymoczko D., (2000), Instrumenty interwencji banku centralnego na rynku pienięŝnym, Materiały i Studia, Zeszyt nr 102, NBP, Departament Analiz i Badań, Warszawa, p. 48. The Regulation of refinancing the banks with lombard credit by National Bank of Poland, enclosure to Resolution No 4/2008 of Management Board of the NBP from 1 st February 2008, in case of introduction The Regulation of refinancing the banks with lombard credit by National Bank of Poland, Dz.Urz. NBP 2008, No3. pos.3, 5.1, 5.2, 10.2, 7, 13, 15, 9, 16, 27. The Report from execution of foundation of monetary policy in 2001, NBP, Warsaw 2002, p. 29.