Eurozone: Central Bank Repo to Poland, 2008

The NBP reached out to the ECB to be prepared for any troubles in the Polish banking sector arising from foreign currency financing (NBP 2008a). As was the case with Hungary, the ECB agreed to a repo agreement rather than a swap line. The stated purpose was to provide “euro liquidity assistance to the Polish banking sector.” The ECB’s agreement with the NBP was based on the previous repurchase agreement with the MNB (ECB 2008b)

In the case of the repo agreement, the NBP could request euros in exchange for high-quality euro-denominated securities, thus exchanging euro securities for euro cash. As can be seen in Appendixes A and B, the ECB’s liquidity-providing agreements with the NBP were not reciprocal (ECB 2022c).

Between October 2008 and December 2008, the ECB carried out a series of liquidity management actions for euro area countries, including streamlining rates on standing facilities,^FECB’s Governing Council in 2007 launched two three-month operations to support the normalization of the money markets (ECB 2009, 99). conducting long-term refinancing operations (LTROs), reducing the credit threshold for eligible collateral, and providing US dollar and Swiss franc liquidity through swap agreements with the Federal Reserve and the Swiss National Bank, respectively (ECB 2009). Poland was initially excluded from the ECB’s liquidity facilities and later was given access to a repo line to provide foreign exchange to its domestic banking sector.

The NBP introduced the “Confidence Pact” to restore the smooth functioning of markets in 2008 (NBP 2009a). This pact had three primary goals: (1) enable Polish banks to obtain long-term financing, (2) enable banks to obtain foreign financing, and (3) increase funding opportunities for banks in the zloty by widening the list of eligible collateral (NBP 2009a). On October 17, 2008, the NBP also started conducting repo operations to provide liquidity to Polish banks via this Confidence Pact. The NBP was injecting liquidity into the banking sector via repo transactions of maturities up to three months, while retaining the issuance of seven-day maturity NBP bills to absorb banking sector liquidity (NBP 2008e).

Beyond FX swaps, the NBP carried out open market operations with a maturity of three months, extending the list of eligible collateral on loans, and reducing the haircut on loan collateral (NBP 2008c). The NBP had lowered reference rates by 100 basis points to 5.0% in the fourth quarter of 2008, while the ECB had lowered rates by 175 basis points to 2.5% in the same period. The NBP also had standing facilities to provide liquidity or allow banks to deposit overnight funds at the central bank. The total overnight deposits placed with the NBP in 2008 was PLN 520.1 billion and represented a 250% increase from 2007 (NBP 2009a). On October 13, 2008, Poland’s Ministry of Finance (MoF) and the NBP introduced regulatory initiatives to restore market functioning as a response to the Global Financial Crisis (NBP 2008e).

The NBP also had an agreement with the Swiss National Bank (SNB) to obtain Swiss francs via swap transactions for an unspecified limit (NBP 2009a). The NBP was still in advanced stages of negotiating its swap line with the Swiss National Bank when the ECB was considering a repo agreement with the NBP (ECB 2008a). In the fourth quarter of 2008, the NBP had initiated FX swap transactions that allowed banks to swap zloty for US dollars, euros, and Swiss francs (NBP 2009a). The SNB’s swap agreement with the NBP ended in January 2010 (SNB 2011).

The NBP also established a flexible credit line with the IMF for USD 20.6 billion in April 2009, which was not drawn on by the end of August 2009 (BIS 2010). The NBP reported in June 2009 that it had not drawn on its ECB repo facility but used euro reserves to obtain Swiss francs from the SNB (NBP 2009b).

The ECB was able to provide the repo facility as per power established in an annexure to the treaty establishing the European Community, called the Protocol on the Statute of the European System of Central Banks (ESCB) and the European Central Bank. The ECB may conduct foreign exchange operations in accordance with Article 111 of this treaty (EC 2002). Article 23 of this treaty also allows the ECB to buy or sell any spot or forward of a foreign exchange asset, which is defined as the assets, currency, or securities, in the other country’s currency for external operations (EC 2002).

The Banking Federation of the European Union (FBE) published a Master Agreement for Financial Transactions in 2004 to list out the General Provisions to govern financial transactions. Section 11.1 of the General Provisions document specifies the Governing Law for each agreement to be specified in the Special Provisions document or to follow the law of the country in which both central bank offices are located (EMA 2004). The repo agreement signed between the ECB and NBP comprised a Special Provisions agreement, along with the FBE’s General Provisions 2004 edition, Margin Maintenance Annex 2004 edition, and Product Annex for Repurchase Transactions 2001 edition. The Special Provisions document provided amendments to the General Provision clauses such as default and collateral requirements edition (ECB and NBP 2008).

The ECB’s Governing Council had determined principles for liquidity assistance to non-euro area EU countries on October 20, 2008 (ECB 2008a). These principles are summarized in the Agreement on Emergency Liquidity Assistance (ELA), published on November 9, 2020. This emergency assistance document will be reviewed in 2023 (ECB 2020a). The repo agreement was governed by German law, since the Deutsche Bundesbank, the German central bank, would be responsible for securities settlement and collateral management for the ECB in the repo agreement (ECB and NBP 2008). The broader guidelines for monetary policy instruments and procedures of the Eurosystem were presented by the ECB in August 2000 (ECB 2000).

The ECB’s guiding principles, rules, and procedures have been provided in an Emergency Liquidity Assistance (ELA) agreement, which also provides for the role of the Governing Council as per Article 14.4 of the Statute of the ESCB. The agreement assigns the main responsibility of the costs and risks from the ELA to the central bank of the country concerned or by a third-party guarantor. The borrowing central bank has mandatory reporting requirements to the ECB, such as providing all details of an ELA operation within two business days of the operation taking place, sharing a funding plan within two months of receiving assistance, and sending monthly updates on regulatory capital ratios (ECB 2020a). The Executive Board has the ability to extend a liquidity agreement with a central bank if the borrowing threshold exceeds EUR 500 million. If the borrowing threshold exceeds EUR 2 billion, the Executive Board can refer the matter to the Governing Council and ask for a response at short notice. The duration of an ELA may exceed 12 months following only a non-objection notice from the ECB Governing Council. In terms of the pricing, the ELA agreement specifies a penalty interest rate for the borrowing central bank, a minimum rate that equals the Eurosystem’s marginal lending rate plus 100 basis points, and a minimum 1% rate per year on intraday transactions. The Governing Council also reserves the right to object to a central bank’s communication plan in order to maintain broader financial stability within the eurozone (ECB 2020a).

The responsibilities of the NBP are stated in the Act on the National Bank of Poland (Act on the NBP), the Banking Act, the treaty establishing the European Community, and statutes of the ESCB and ECB (NBP 2009a). As per Article 3, section 2, para 6 of the Act on the NBP, creating the conditions for development of the banking sector is a responsibility of the central bank of Poland (NBP 2009a). The NBP is a member of the European System of Central Banks (ESCB^FThe ESCB comprises the ECB and the central banks of member states, with the goal of maintaining price stability and conducting tasks involving monetary policy, foreign exchange operations, and reserve management (EC 2002).) and participates in the Banking Supervisory Committee at the ESCB (NBP 2009a).

The ECB Governing Council made the final decision regarding the repo agreement with the NBP, while the signature and implementation of the agreements were delegated to the ECB Executive Board.

The ECB-NBP repo agreement was based on the principles established by the Governing Council regarding euro liquidity assistance to non-euro EU central banks and the ECB MNB repo agreement, which embodied those principles (ECB 2008a). The ECB’s agreement with Hungary had set a precedent for the ECB providing liquidity assistance to central banks of non-euro EU countries, as stated by President Trichet in his letter to NBP President Skrzypek (ECB 2008b).

The NBP president wrote to the ECB’s president on October 10, 2008, requesting help with the foreign currency financing issue in the Polish banking system (NBP 2008a). The ECB president replied on October 24, 2008, offering the NBP a repo agreement based on the same principles as the ECB-MNB agreement (ECB 2008b). The NBP accepted the ECB’s offer in writing on October 30, 2008, while stating the other market programs being carried by the NBP and proposing a size of EUR 10 billion for the repo line (NBP 2008c). The ECB’s Executive Board prepared a memo to the Governing Council on November 3, 2008, detailing the request by the NBP, the communication between the two central banks, and its recommendations to the council (ECB 2008a).

The proposed ECB-NBP repo agreement was based on the previously signed ECB-MNB repo agreement and drafted on the principles of liquidity assistance to non-euro EU countries confirmed on October 20, 2008, by the Governing Council. The Governing Council was invited to then determine if NBP fulfilled the pre-condition criteria for the swap (details of which were redacted from the document) (ECB and NBP 2008).

The ECB-NBP repo agreement had the same requirements for margin eligibility, transfer, and reporting as the ECB-MNB agreement (ECB and NBP 2008). As per the repo agreement, the NBP could provide only euro-denominated collateral with a minimum rating of A- by Fitch or Standard & Poor’s or A3 by Moody’s (ECB and NBP 2008).

The ECB-NBP repo agreement was signed by two ECB executive board members (Jose Paramo and Jurgen Stark) and the deputy governor and director of domestic operations of the NBP (Witold Kozinski and Krzysztof Senderowicz) (ECB and NBP 2008).

The ECB and NBP jointly announced their repo line for EUR 10 billion via a press release on the NBP’s website (NBP 2008d). The use of the repo lines was described and reported by the NBP in its annual report in 2008 (NBP 2009a).

The master repo agreement between the ECB and NBP was dated as of November 6, 2008 (ECB and NBP 2008). The NBP disclosed the agreement with the ECB on November 21, 2008, via a press release on its website. It is quoted here in its entirety:

Narodowy Bank Polski (NBP) and the European Central Bank (ECB) are jointly announcing an agreement to support the NBP's instruments of euro liquidity provision. The agreement, which was concluded on 6 November 2008, relates to repurchase transactions and will provide NBP with a facility to borrow up to EUR 10 billion in order to provide additional support to NBP's operations. (NBP 2008d).

Analysts made a distinction in the precautionary nature of Poland’s agreement with the ECB and the emergency aid sought by Hungary. It was further pointed out that Poland was providing euros from the ECB to the Polish banking sector to be able to conserve its own foreign exchange reserves (Goettig and Jaworowski 2008).

One of the criticisms of the ECB’s actions of providing repo lines was the creation of a “two-tier system” in central bank liquidity provisions at the time. It was not clear as to why the ECB could not offer a swap facility to Poland, similar to those provided to Sweden and Denmark. The ECB has been reported to state in private conversations that potential operations risks (or the foreign exchange risk) from holding zloty made it uncomfortable with offering a swap facility to Poland (Vallee 2010).

The NBP reached out to the ECB seeking assistance with its foreign currency liquidity problems (NBP 2008a). 

It appears that the NBP, like Hungary’s central bank, requested a swap line from the ECB directly (ECB 2008b; NBP 2008d). The ECB established a line with Hungary’s central bank first and then offered a similar instrument to the NBP at the Polish bank’s request. In the Executive Memo regarding the NBP’s request, it stated that,

to be consistent with the precedent set by the recent repo agreement established between the ECB and Magyar Nemzeti Bank (MNB) and the above-mentioned principles, the ECB could offer the NBP a repo agreement broadly based on the existing one with MNB. (ECB 2008a)

The ECB also did not disclose any specific criteria that it considered before agreeing to a repo line but referred to Guiding Principles regarding liquidity assistance to non-euro EU countries that had been adopted by the Governing Council (ECB and NBP 2008). The Executive Board memo regarding the NBP line does specifically mention that the Governing Council considered “the information provided by NBP to be sufficient to fulfill the pre-condition [redacted]” (ECB 2008a). The Governing Council reserved the right to approve and impose additional restrictions on any borrowing central bank seeking a liquidity limit above EUR 2 billion or an agreement longer than 12 months (ECB 2020a).

On November 6, 2008, the ECB and NBP signed a master agreement to enter into repurchase transactions (repos) for a maximum amount of EUR 10 billion (ECB and NBP 2008). The NBP had proposed a size of EUR 10 billion for the repo line with the ECB, which the ECB Executive Board commented was “consistent with amounts previously established with other non-euro area EU central banks” (ECB 2008a).

The ECB’s master agreement with the NBP comprised a Special Provisions document providing the details of the repo agreement, along with the General Provisions 2004 document, which provides the statute of the ESCB and of the ECB (ECB and MNB 2008; ECB and NBP 2008).

The ECB agreement provides guidance for confirming a repo draw, payment determination and netting, booking office designations, margin requirements, dispute resolution, pricing, and maturity. ECB also said that Deutsche Bundesbank, the German central bank, would be responsible for securities settlement and collateral management for the ECB in the repo agreement (ECB and NBP 2008).

The disclosed Special Provisions documents only provided amendment details for managing default, automatic termination, restructuring event or other insolvency events. The Banking Federation of the European Union (FBE) published a Master Agreement for Financial Transactions in 2004 to list out the General Provisions to govern financial transactions (EMA 2004). The repo agreement signed between the ECB and NBP comprised a Special Provisions agreement, along with the FBE’s General Provisions 2004 edition, Margin Maintenance Annex 2004 edition, and Product Annex for Repurchase Transactions 2001 edition. The Special Provisions document provided amendments to the General Provision clauses such as default and collateral requirements (ECB and NBP 2008).

The NBP had reported disruptions in the zloty money markets to the ECB. It intended to use the repo agreement to provide foreign exchange liquidity to the Polish banking sector and ensuring market stability (NBP 2008b).

On October 17, 2008, the NBP also started conducting repo operations to provide liquidity to Polish banks via this Confidence Pact (NBP 2008e). The NBP was injecting liquidity into the banking sector via repo transactions of maturities up to three months while retaining the issuance of seven-day maturity NBP bills to absorb banking sector liquidity (NBP 2008e). In 2009, the NBP continued providing zloty and foreign exchange liquidity to banks to continue improving access. At peak, the NBP provided PLN 4 billion of foreign currency liquidity to Polish banks in the first quarter of 2009 (NBP 2010). In 2010, the NBP gradually withdrew measures introduced through the Confidence Pact owing to an improvement in conditions in the financial market (NBP 2011).

The ECB repo agreements with the NBP stated that the maximum maturity for all repo transactions would be one month. The repo agreements was for a fixed term and could not be terminated on demand (ECB and NBP 2008).

The ECB repos were offered as overnight facilities, with the effective exchange rate set at 110% of the prevailing market exchange rate (MNB 2008).

Information about the interest charge for late payments was not included in the agreement. The default clause in the agreement was expanded to include the failure to make a margin delivery in addition to failure to make a payment (ECB and NBP 2008).

The initial margin requirement was stipulated by Section 6.4 of Annex I to the Guideline ECB/2000/7, which required for a 1% margin for intraday and overnight transactions and 2% margin for maturities longer than one business day (ECB 2000; ECB and NBP 2008). The agreement also stipulated an additional 2% initial margin if margin calls are required and a maximum maturity of one month for all repo transactions. The agreement was signed by the ECB’s two members of the executive board and the NBP’s deputy governor and director of domestic operations (ECB and NBP 2008).

The ECB-NBP repo agreement and its collateral requirements were broadly based on the agreement between the ECB-MNB (ECB 2008a).

A blog post by members of the ECB’s Executive Council indicates a preference for using swap lines with central banks issuing major currencies, where reciprocal access to either currency is considered a low-risk transaction. Repo lines allow the ECB to provide euros by receiving euro-denominated collateral to secure repayment by the borrowing central banks—the NBP in this case. Repos are typically more expensive than swaps for the borrowing central bank, but they help limit the foreign exchange risk and counterparty default risk for the ECB as the lending central bank (ECB 2020g).

The repo agreement did not impose any downstream restrictions on the use of euros borrowed by the NBP.

The ECB Executive Board in a memo to the Governing Council on November 3, 2008, likely considered other options to provide euro liquidity support to Poland. The ECB offered a repo line to Poland to be consistent with the precedent set by its repo agreement with Hungary (ECB 2008a).

The NBP had not drawn on the ECB facility as of March 2009 (BIS 2010). The SNB’s swap agreement with the NBP ended in January 2010 (SNB 2011). There were no additional disclosures of a clear end date to the ECB’s repo agreement with the NBP in 2008.

On March 28, 2022, the ECB set up a new “precautionary” swap line with the NBP for a limit of EUR 10 billion until January 15, 2023, owing to the uncertainty created by Russia’s invasion of Ukraine (ECB 2022a). Prior to this agreement, Poland was an “outlier” as a large non-euro EU member without a special financing agreement with the ECB (Arnold and Shotter 2022). On December 15, 2022, the ECB extended its swap line with the NBP by nine months to January 15, 2024 (ECB 2022d).

As seen in Appendix A, the swap line that Poland was offered in 2022 is similar to the ECB’s agreements with Sweden and Denmark. In 2008, Poland was only offered a repo line similar to the ECB’s agreement with Hungary. The ECB’s swap line to the NBP is set to expire on January 15, 2024 (ECB 2022d).