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).
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 1st 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 (PrzybylskaKapuścińska, 2007).
Standing facility – European solution – deposit facility
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 4th 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 27th 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
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 ⋅ i LOMB ⋅
365
where:
O
– interest,
KLOMB – amount of credit,
iLOMB – 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 21st of December
2001. 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.
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.
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