Losiewicz-Dniestrzanska E Liquidity of Banking

Uniwersytet Ekonomiczny we
Wrocławiu
Wroclaw University of Economics
and Business
https://www.wir.ue.wroc.pl
Liquidity of Banking Sector in Poland – Determinants and Consequences,

Publikacja / Publication
Łosiewicz-Dniestrzańska Ewa
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Jan 29, 2021
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Łosiewicz-Dniestrzańska Ewa: Liquidity of Banking Sector in Poland –
Determinants and Consequences, In: Vision 2025: Education Excellence and
Management of Innovations through Sustainable Economic Competitive
Cytuj tę wersję / Cite this version Advantage. Proceedings of the 34th International Business Information
Management Association Conference (IBIMA) / Soliman Khalid S. (eds.), 2019,
International Business Information Management Association, ISBN
9780999855133, pp. 12222-12231
Vision 2025: Education Excellence and Management of Innovations through Sustainable Economic Competitive Advantage
Liquidity of Banking Sector in Poland –

Determinants and Consequences
Ewa LOSIEWICZ-DNIESTRZANSKA
Wroclaw University of Economics and Business, Wroclaw, Poland

ewa.losiewicz@ue.wroc.pl
Abstract
Liquidity is particularly important both for commercial activities of every bank, as well as for the
functioning of the banking sector. The author of this paper presents the definitions of liquidity of
commercial bank and of banking sector, proving that application of aggregate liquidity for the entire
banking sector is relevant. An important phenomenon which describes banking sectors in most
countries worldwide is excess liquidity which has been typically high, also in Poland, for many years.
This situation is a result of many reasons and has different consequences. The main goal of this paper
Pobrano z https://www.wir.ue.wroc.pl / Downloaded from Repository of Wroclaw University of Economics and Business 2023-07-28
is to identify factors of liquidity and excess liquidity, their consequences for the banking sector and to
indicate those which exert the strongest impact on liquidity of the banking sector in Poland.
Keywords: Banking Sector, Liquidity, Determinants of Liquidity, Excess Liquidity.
Introduction
The consequences of the global financial crisis which were negative for banking sector forced the
development of new prudential norms aimed at increasing the safety of credit institutions and stability
of the entire financial system. Activities of banks being the institutions of public confidence bear
responsibility for their decisions with respect of their customers. As a result, banking sectors have been
covered by special supervision, but also by protection of central banks, that was responded by increased
criticism after the crisis. Banking sectors, due to some peculiarities of their countries, are more or less
vulnerable to some factors influencing liquidity of individual banks and eventually, liquidity of the
entire sector.
The main goal of the article is to identify the determinants of liquidity and excess liquidity, and to
indicate those factors which exert the strongest impact on liquidity of the banking sector in Poland.
Section 1 presents the definitions of a bank’s liquidity and banking sector’s liquidity, with an emphasis
on the relevance of applying such separation. The role of central bank is also presented because banking
sector is strongly connected with central bank and can count on its assistance in need of providing
supplementary liquidity. Section 2 focuses on factors determining liquidity of banking, sector which
are divided into various categories. The significance of currency in circulation as autonomous factor is
emphasized as well as the role of interest rates as the factor mostly determined by monetary policy of
central bank. Section 3 deals with liquidity situation of banking sector as regards Poland. The banking
sector in Poland has been characterized by excess liquidity for many years, nevertheless there have
been recently circumstances when instead of absorbing liquidity the NBP has to intervene by means of
injecting liquidity. This section describes the most important factors which currently exert prevailing
influence on liquidity of Polish banking sector and the consequences brought by these factors.
A bank’s liquidity vs. liquidity of a banking sector

The fundamental activity of modern banks consists in taking deposits and making loans/credits. This
activity is related to risks of many types, with liquidity risk being one of the most severe and followed
by immediate consequences. Hence, all banks need to maintain liquidity at any moment of their
activity.
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Pobrano z https://wir.ue.wroc.pl / Downloaded from Repository of Wroclaw University of Economics and Business 2022-01-11
According to the Polish Financial Supervision Authority (KNF), in a document Recommendation P

(2015) liquidity is generally defined as “the ability to meet obligations as they come due, i.e. the ability
to make all the contractual payments as well as to make funds available to borrowers in amounts and
at dates provided in the credit contracts”.
Intra-day liquidity of banks in time of cashless transactions, as Oleszko and Mogilnicki (2010)
mentioned, is dependent on the meeting of some conditions, among others on:
− accurate measurement of expected inflows and outflows of funds,

− ensuring funds to conduct intraday transactions,
− managing the time it takes to complete intraday transactions.
According to the data of the National Clearing House (KIR) in Poland, as Settlement systems (2019)
reports, the number of transactions processed through the Elixir system is being systematically
increased. In October 2019, the Elixir system was used to settle 171 million transactions including
credits (ordering money transfers among others) and debits (ordering payments among others) with the
total value of PLN 515.3 billion. Ensuring the sufficient intraday liquidity is significant for all banks.
Central bank in its capacity as a supervisor and also as a guardian can supplement temporary deficit of
intraday liquidity, but its focus is on short-term liquidity.
The latest financial crisis “2007 plus” brought some negative consequences for the financial system,
which compelled the establishment of new prudential norms so as to increase the safety of financial
institutions. As a consequence, the Basel Committee on Banking Supervision (BCBS) standardized the
regulations on the European level and focused the supervisory norms in the area of liquidity risk on
two fundamental ratios:
− Liquidity Coverage Ratio (LCR (2019)) and

− Net Stable Funding Ratio (NSFR (2019)).
The LCR concentrates on short-term liquidity whereas the NSFR on long-term liquidity. The LCR aims
to analyze a bank’s short-term resilience to liquidity shocks and “to ensure that banks hold a sufficient
reserve of high-quality assets to allow them to survive a period of significant liquidity stress lasting 30
calendar days”. In a researches by Wójcik-Mazur (2011), Bučková and Reuse (2011), the indicator of
long-term liquidity position NSFR should ensure a stable funding structure of banks that helps them to
function safely over the course of one year.
On the one hand, the functioning of an individual bank can be equated to activities of any business
enterprise, but on the other hand, due to the assumed role of banks as institutions of public confidence,
their activities are “supported” by a strongly developed system of supervision of banks and protection of
customers in case of financial distress of their banks. Banking sector can count on ultimate provision of
liquidity from the central bank and banks’ customers are safeguarded against the loss of their banking
deposits by special guarantee (government) funds; in Poland it is the Bank Guarantee Fund (BFG). Even
under the threat of crisis, investors who withdraw their funds from the securities market are inclined to
deposit them at a bank. However, the problem of insufficient liquidity looks different when an expected
crisis develops and embraces the entire financial system. In that case, incoming deposits are reduced in
aggregate terms, when the whole banking sector is affected. Acquisition of liquidity by banks becomes
possible only thanks to clear, massive support from the government / the central bank as Acharya and
Mora (2015) report. In connection with this peculiarity the analysis of liquidity is justified as regards the
entire banking sector while aggregate liquidity risk of banking sector is typically smaller than aggregate
liquidity risk in nonbanking sector.
The above-mentioned support from central bank plays a major role in the mechanism of liquidity
provision relating the concept of liquidity to the entire banking sector and treating it, in a sense, as one
organism. In Poland, likewise in other modern banking systems, the the Polish National Central Bank
(NBP) measures aggregate liquidity of banking sector with respect to short-term liquidity – up to 1
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month. It is measured by the balance on account of money bills issued by the NBP and deposit-credit
operations (Annual Reports (2018)).
The problem of liquidity of banking sector is strongly related to monetary policy pursued by the NBP
and deals with determining the target level of short-term interest rate. Next, open market operations are
exploited so as to reach an adequate level of liquidity by banking sector that ensures the maintenance
of the target interest rate. When banking sector is confronted with the massive outflow of short-term
funds, the central bank provides the sector with additional liquidity in order to prevent the short-term
interest rate from increase above the target level of monetary policy. In case of a stable financial system,
as Mink (2016) reports, additional liquidity for banks is limited, but the aftermath of the failure by
Lehman Brothers demonstrated that when in need, central banks are inclined to provide much greater
amounts in order to maintain the interest rates on levels of target values.
The most recent example of the support to interbank market liquidity is the intervention of the Federal
Reserve System. In the mid-September 2019, the interbank market in the US experienced a sudden
liquidity shock. The reason for this problem was reported as liquidation of money market funds by
businesses and individual persons because of the need to perform quarter tax payments and the sales
of large volumes of treasury securities offered in auction. The consequence of the liquidity shortfall in
interbank market was the increase of the overnight interest rate finally up to 10 percent. Although this
event was assessed as temporary and technical in nature, the Fed decided to intervene and applied the
repo operations for the first time after more than 10 years (Scaggs (2019)). Such action of central bank
is coherent with the principle that liquidity should be provided exclusively by means of open market
operations, without launching government support.
On the other hand though, according to Goodhart (1999), the role of central bank as the lender of last
resort is debatable when the provision of help is considered to a bank which experiences prolonging
difficulties with its liquidity and is challenged by the threat to its solvency. As Acharya and Mora
(2015) note, such banks are trying One can observe then that such banks try to attract deposits by
offering higher interest rates, but private financing acquired in this way can be insufficient to cover
deficits and restraints the capability to extend new credits. In those circumstances banks can typically
benefit from financing by central bank in the form of traditional refinancing loan “of last resort” or –
that is the case of Poland’s banking system – the central bank can extend a special refinancing loan to
banks with the purpose “to implement a bank’s recovery plan”, regulated by the Act on NBP (2017).
Factors influencing liquidity of banking sector

Liquidity of banking sector is subject to many conditions which:
− depend on the kind of activities performed by individual banks of the banking sector,
− depend on activities conducted by the central bank,
− are not directly controlled by the central bank – autonomous factors.
The autonomous factors are not directly related to monetary policy conducted by the central bank and
do not result from the obligation to maintain the required reserve on accounts with the NBP. They are
a consequence of functions fulfilled by central bank such as issuing currency or collecting deposits of
public sector. Other autonomous factors described by Pietryka (2016) and Mercier (2010), are
determined by the cooperation of the central bank with other sectors except banking and government
sectors.
Major factors influencing short-term liquidity of the banking sector in Poland in 2018, presented in
Annual Report (2018), were:
− purchase and sale of foreign currency by NBP,
− currency in circulation,
− deposits of public sector with NBP.
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Currency in circulation is one of the largest items on the balance sheet of the central bank. It is money
held predominantly by people and partly by banks as cash. Currency in circulation represents a part of
currency reserve that cannot be designated to loans, in contrast to currency deposited on bank accounts.
Increased value of currency is not involved with the creation of money by lending to bank customers.
The money supply can only be increased by bank customers – holders of deposits on bank accounts
(depositors).
When banking deposits are withdrawn from commercial banks by their holders, they are transformed
into cash. Following the decrease of deposits, bank’s liquidity becomes lower and consequently, the
bank loses its power as a lender.
According to a classification of Laštůvkova (2016), the factors influencing a bank’s liquidity are
divided likewise into the three following categories:
1. specific banking factors,

2. factors on the level of the banking sector
3. macroeconomic factors.
Specific banking factors represent bank size, equity and profit together with the value of loans and
deposits, as the elements connected to the main activity of the banks.
The size of a bank is measured chiefly by the total value of assets and indicates the negative relationship
with liquidity (the bigger the bank, the lower its liquidity). Such a bank benefits from its position in the
market and if in need, it counts on more easy access to liquidity in interbank market. On the other hand,
one assumes that smaller banks create and hold more liquid assets, because they have to rely more on
themselves.
In case of total equity, there are two opposing research concepts. First one, known as “crowding out of
deposits”, maintains that total equity negatively impacts liquidity, while the other one, called “risk
absorbing hypothesis”, argues that this impact is positive. Deposits represent a significant factor of
liquidity increase, whereas bank loans reduce liquidity, and also increase liquidity risk in case of
previously extended loans or extended and unpaid.
The second category comprises factors at the level of banking sector such as interest rates and sector’s
legal regulations. Interest rate acts upon banks as a “fine” because of no access to more liquidity when
higher interest rates attract depositors. Given a low interest rate, the customers are less willing to
deposit their savings with banks, while on the other hand, banks will be offering cheaper loans.
The last group includes the macroeconomic variables such as GDP, inflation and unemployment. The
findings of research reported in Laštůvkova (2016) confirm that the increase of GDP positively results
in more liquidity. In case of increased inflation, when long-term loans prevail, holding more liquid
assets is recommended. Higher unemployment may indicate less favorable general economic
conditions, lead to lost incomes of customers and as a result, to less access to deposits, therefore banks’
liquidity is reduced.
Concerning the definition of liquidity of the entire banking sector quoted in section 2, central banks
measure the short-term liquidity up to one month by means of the balance on open market operations
and deposit-credit operations, whose size is regulated by central bank. In case of shortfall of liquidity
in banking sector, the central bank offers preferential loans or repo operations which inject additional
liquidity to the sector. In case of excess liquidity in banking sector, when liquid reserves are held at
levels higher than the reserve requirement of the central bank, it offers absorbing reverse repo
operations in open market, and furthermore, the opportunity to make use of the deposit account with
the central bank.
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Liquidity situation of banking sector in Poland

In the book by Meshkova et al (2018), banks operating in Polish banking system are characterized by
satisfactory current liquidity measured with LCR ratio. Almost all banks met the required standard at
100 percent (on average at more than 150 percent) in the analyzed period 2015-2018. Only the group
of cooperative banks included some that did not meet the standard on the individual level, but given
the nature of those banks they were granted the Polish Financial Supervision Authority (KNF) consent
to use group LCR standard that complied with the supervisory thresholds. A high average of the LCR
ratio proves the high level of liquidity of the entire banking sector in Poland.
In a research study by Baldo et al (2017), before the global financial crisis central banks worldwide
were conducting monetary policy under so-called neutral or balanced liquidity conditions, hence they
were providing sufficient liquidity to credit institutions so as to allow them to meet the minimum
requirement of reserve held on accounts with the central bank. Money market intermediated efficiently
in transfers of money and banks did not perceive the need to accumulate excessive surplus of liquidity
but they invested any surpluses. Interest rates remained near to the main refinancing operations rate
and did not provoke central banks to actively intervene in interbank market. The beginning of financial
crisis in 2008 changed the approach of banks to the problem of liquidity and they started accumulating
significant amounts of currency surpluses on their accounts with central banks.
The phenomenon of excess liquidity measured by the amount of money bills issued by the NBP has
been occurring since 1994. Previous liquidity conditions used to fluctuate and the central bank both
injected liquidity into banking sector as well as absorbed its excess. Along with the emergence of threat
from the global crisis in the fourth quarter of 2008, Poland saw the lack of confidence among
counterparties in interbank market and as a consequence, liquidity of banking sector was limited.
During a short period beginning in October 2008, the NBP conducted operations which were providing
banking sector with domestic currency liquidity (repo operations) and with foreign currency liquidity
(FX swaps). The influence of ongoing disturbances in main global financial markets resulted in Poland
in a decreased inclination of banks to unsecured lending in interbank market. At that time banks
preferred holding free funds on current accounts with the central bank or as deposits at the end of the
day, that guaranteed safety and quick access to their funds. The consequence was the increase of excess
liquidity in banking sector, currently measured by the balance between money bills issued by the NBP
and deposit-credit operations. Such situation has been maintained until the end of 2018. Fig. 1 presents
liquidity situation of Poland’s banking sector between 2006 and 2018.
Absorption of short-term liquidity (surplus) as part of operations

executed by NBP = OVER LIQUIDITY in mln PLN (2006-2018)
150,000
100,000
50,000
0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Fig. 1: Liquidity position of banking sector in Poland in 2006-2018
Source: own elaboration based on data from NBP,
https://www.nbp.pl/homen.aspx?f=/en/publikacje/instruments/instruments.html&navid=5508.
Section 2 of this paper presented factors which determine liquidity of banking sector, whereas in case
of Poland according to the Annual Reports (2018) the strongest determinants of liquidity of domestic
banking sector were:
− purchase and sale of foreign currency by NBP,
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− deposits of public sector with NBP,

− currency in circulation.
Purchase and sale of foreign currency by NBP is an autonomous factor. In 2018 purchase of foreign
currency by NBP included:
− purchase of foreign currency from the Ministry of Finance subject to limits set for 2018,
− service for budget entities and other entities whose current accounts are with the NBP,
− exchange of the European Union funds into PLN directly from respective funds accounts.
Sales of foreign currency by NBP was connected with:
− currency conversion of membership contribution paid onto the account of the European
Commission (EC),
− service for budget entities and other entities whose accounts are with the NBP.
Operations of purchase of foreign currency by the NBP exceeded those of sale, therefore purchased
currency strengthened the banking sector thus contributing to the increase of its liquidity.
Another, also autonomous, factor are deposits of public sector held in the central bank which include
currents funds and deposits of government budget in domestic currency. By depositing these funds on
account with the central bank (for the period between one to seven days) they are excluded from
circulation and from money creation.
Among autonomous factors influencing the decrease of liquidity of banking sector the strongest impact
was exerted by the increase of currency (cash) in circulation. This monetary aggregate has been
characterized by systematic increase for many years. The reason of this increase has been recently seen
in a very low level of interest rates maintained by the NBP. Another source is seen in factors of seasonal
nature, e.g. December, pre-Christmas period, regularly sees increases of cash.
Fig. 2 presents monthly changes in the amount of currency in circulation from 2004 to 2019. The
noticeable change in the value of change is clear at the end of October 2008, when the change was
equal PLN 8,143.334 million. It was connected with retail customers panicking in bank markets of
West Europe, while some depositors in Poland became concerned and withdrew their funds from banks.
The value of household deposits decreased by PLN 9,920.471 million in this period.
Monthly changes of currency and deposits in PLN mln (2004-2019)
14 000.0
9 000.0
4 000.0
-1 000.0
-6 000.0
-11 000.0
Currency in circulation Household deposits
Fig. 2: Monthly changes of currency in circulation and deposits in 2004-2019 (PLN million)
https://www.nbp.pl/home.aspx?f=/statystyka/pieniezna_i_bankowa/m3.html
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At present, according to the information by Settlement systems (2019) of the annual rate of increase of
currency in circulation equal 10.9 percent in 2019 can be seen as quite surprising while the
governmental Program of Supporting Cashless Transactions is underway. This program aims at
propagating and promoting cashless trade among Poland’s citizens. According to October 2019 data,
the number of transactions settled by the Elixir system increased annually by 3 percent, whereas the
value of transactions increased by 5 percent. Another cause of the increase of currency in circulation
presented in Wojciechowski (2019), which resulted in the decrease of value of bank deposits can be
purchases of real estate against cash. Given very low interest rates on deposits, bank customers invest
their savings by purchasing real estate – after withdrawing money from their time deposits.
In a research studies by Barik Bathaluddin et al (2012), Basten and Mariathasan (2018) and Eggertsson
et al (2019), large excess liquidity is described as an unfavorable experience for every banking system.
Excess liquidity of banks is a problem for the central bank, because it obstructs the accomplishment of
monetary policy assumptions, the achievement of assumed goals. Interbank market is the main area
where the problems resulting from excess liquidity of the banking sector are noticeable. The surplus of
free funds results in the decrease of price of money and as a consequence, there occurs the threat of
decrease of interest rate below the minimum level assumed by the central bank, near 0 percent or even
lower. Negative interest rates make transmission of monetary policy less effective, disturb the
economic development, obstruct the controlling of inflation and contribute to the formation of
speculative bubbles, e.g. in real estate market.
Central banks should lessen the level of excess liquidity through open market absorbing operations. In
spite of the high cost of this activity, it is performed as long as the interest rate is sustained on the level
assumed by the central bank. The NBP is the example of a central bank which has been regularly
conducting reverse repo operations for many years and as a result, the reference interest rate for
interbank operations has been unchanged on the level of 1.5 percent since March 2015, as presented in
Fig. 3.
Interest rates of NBP in 2015-2019

3.5
3
2.5
2
1.5
1
0.5
0
2014 2015 2016 2017 2018 2019
Reference rate Lombard rate Deposit rate
Fig. 3: Interest rates of NBP in 2014-2019

https://www.nbp.pl/home.aspx?f=/dzienne/stopy_archiwum.htm.
In 2009-2010, as NBP reports in Annual Report (2010), when Poland’s banking sector was afraid of
the consequences of financial crisis and excess liquidity of banks increased very much while banks
were not making many loans, banks reluctantly responded to central bank’s incentives of more action
and hence, the Confidence Package turned out ineffective, because banks were not interested in the
offer of the NBP as regards more liquidity: repo operations, FX swaps, lower reserve requirement ratio
between 2009-2011. Commercial banks in Poland were creating reserves against the crisis in Poland
or against the need to support parent banks which were affected by crisis in other countries.
At present, the banking sector in Poland, characterized by the decreasing tendency as regards excess
liquidity, did not translate this surplus into making more loans. According to the most recent data and
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forecasts by the NBP for the fourth quarter of 2019 presented in Credit market situation (2019),
commercial banks expect significant tightening of their credit policy accompanied by a small increase
of demand for consumer loans.
Such a stance of banks suggests the increase of their prudence because of increased anxiety as regards
possible deterioration of their financial standing, additionally influenced by new principles as regards
liquidity which become legally binding (Basel III). Banks are obliged to hold more liquid assets.
Likewise, higher capital coefficients are required that will reduce the formation of liquidity in banks.
Bawazira et al (2018) note that as a result the implementation of Basel III package may imply less
liquidity because of higher capital requirements, followed by slower economic growth due to less funds
available for financing. This extremely significant and interesting issue from the area of liquidity will
be further investigated by the author.
Summary
Polish banking sector with its long-time high excess liquidity does not differ a lot from a majority of
modern banking sectors in other countries, with one difference that Poland did not see large-scale
monetary easing aimed at complementing or adjusting liquidity needs of banks. Nevertheless, Poland’s
central bank, the NBP, protects interest rates employing open market absorbing operations, issuing
mainly 7-day money bills, thus succeeding to maintain the interest rates on the unchanged level since
2015. Among many determinants of banks’ liquidity described in the literature, Polish banking sector
is especially sensitive to currency in circulation, the factor that is not influenced by the central bank.
This factor is important for sector’s liquidity and negatively correlated with bank deposits which bear
insignificant interest, so that depositors do not withdraw their time deposits. Declining deposits on
current accounts of customers result in less liquidity, but also slow down the dynamics of credits that
is still lower than that of 2008.
One more factor mentioned in the paper can limit liquidity potential of Polish banks in the nearest
future, although it favorably influences lower risk of bank’s insolvency. This factor results from
implementing new liquidity and capital requirements under Basel III package of regulations that will
be further investigated by the author.
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Uniwersytet Ekonomiczny we

Liquidity of Banking Sector in Poland – Determinants and Consequences,

Liquidity of Banking Sector in Poland –

Wroclaw University of Economics and Business, Wroclaw, Poland

Keywords: Banking Sector, Liquidity, Determinants of Liquidity, Excess Liquidity.

A bank’s liquidity vs. liquidity of a banking sector

According to the Polish Financial Supervision Authority (KNF), in a document Recommendation P

− accurate measurement of expected inflows and outflows of funds,

− Liquidity Coverage Ratio (LCR (2019)) and

Factors influencing liquidity of banking sector

1. specific banking factors,

Liquidity situation of banking sector in Poland

Absorption of short-term liquidity (surplus) as part of operations

− purchase and sale of foreign currency by NBP,

− deposits of public sector with NBP,

Sales of foreign currency by NBP was connected with:

Monthly changes of currency and deposits in PLN mln (2004-2019)

Currency in circulation Household deposits

Interest rates of NBP in 2015-2019

Reference rate Lombard rate Deposit rate

Fig. 3: Interest rates of NBP in 2014-2019

• Annual Reports (2006-2018), ‘Banking Sector Liquidity. Monetary Policy Instruments of

• Meshkova E., Wawrzyniak D. and Wójcik-Mazur A. (2018), ‘Risk management in banking.

• Pietryka I. (2016), ‘Płynność sektora bankowego a skuteczność polityki pieniężnej Narodowego

• Recommendation P (2015), ‘Rekomendacja P dotycząca zarządzania ryzykiem płynności

• Wojciechowski K. (2019), ‘Boom na mieszkania bez pożyczania [Residential boom without

• Wójcik-Mazur A. (2011), ‘Analiza poziomu płynności finansowej polskiego systemu bankowego

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