NBP urged to cut bank reserve obligations
The commercial banking sector will struggle to compete once Poland joins the European Union (EU) if the central bank does not reduce banks reserve obligations from 5% to the EU required 2%, according to the Polish Banking Association (ZBP).
The ZBP, a bank lobby, last week reopened its call for the National Bank of Poland (NBP) and the new Democratic Left Alliance (SLD)-led government to reduce the monthly obligations of banks to pass on 5% of all deposits in złotys or other currencies to the NBP without interest. These losses are then passed on to customers in the form of lower interest on deposits or higher interest on credit. The ZBP estimates that banks lose zł. 2.54 billion ($600 million) annually because of the reserve obligations. Commercial banks reserve obligations to the NBP total about zł. 10.5 billion ($2.5 billion).
This is in a certain sense a tax on clients deposits, said Andrzej Wolski, ZBP deputy managing director. We want the market rate to be more fairly reflected in the banks reserve obligations.
Analysts said a cut in the reserve obligations would increase interest rates for customer deposits and boost Poles inclination to save. Lower reserves would also make the banks themselves more profitable and free up more credit for Polish firms.
Banks with large retail deposits would benefit most from any cut, for example PKO BP (Powszechna Kasa Oszczędnoci Bank Polski) and Bank Pekao, which has a relatively high level of foreign currency deposits, said Dariusz Gorski, an analyst at ING Bank in Warsaw.
Wolski said that by law NBP has the power to change the terms of the reserve obligations. But to reduce the fear of higher inflation as a consequence of over-liquidity in the banking sector, the NBP has two options: No. 1, to keep these higher reserves, which cost it nothing; No. 2, it could step into the market and mop up the oversupply that way, Wolski said. The latter option has a cost and the NBP obviously sees the advantages of the former.
After years of discussion, the NBP cut the reserve obligations two years ago from more than 10%, but imposed other obligations on banks, such as buying bonds to control the money supply. The ZBP said that whenever monthly reserve payments fall, for whatever reason, the NBP can oblige commercial banks to buy NBP bonds at lower interest rates than the commercial rate.
Both the ZBP and analysts said they doubted the new government would introduce any real changes. We are not terribly optimistic, Wolski said. The large budget deficit may mean that the new government will be looking for tighter rather than looser monetary policy.
This despite indications in the central banks Monetary Policy Councils (RPP) monetary policy assumptions report for 2002 published Oct. 1 that suggests a possible change in the NBPs policy on the reserve obligations. The RPP may decide to cut the obligations to 3% in 2002 and then to 2% thereafter, but most of the cuts would be meaningless if they excluded cash reserves, which make up between 1.2-2% of the 5%, Gorski said. And that is what is likely.
