What Drives the POLONIA Spread in Poland?

IMF Working Papers, August 1, 2012

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What Drives the POLONIA Spread in Poland?

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Bibliographic details

• Authors: Miss Yinqiu Lu
• Published: August 1, 2012
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781475505658.001

Summary

• Since the start of the 2008 - 09 financial crisis, the Polish Overnight Index Average (POLONIA) has persistently been below the policy rate, suggesting a limited influence of the NBP’s open market operations on the short-term interbank rate.
• The paper analyzes the behavior of the POLONIA spread and explores several potential factors that could influence the spread.
• Empirical analysis confirms that the negative POLONIA spread is related to a few factors: the existence of structural liquidity in the banking system; banks’ unwillingness to lock up liquidity in the NBP bills; the frontloading of banks’ fulfillment of the reserve requirements; and external market sentiment.
• The analysis also shows the effectiveness of the NBP’s responses to the financial crisis and structural liquidity surplus.

Empirical Determinants of the POLONIA Spread

• Structural liquidity in the banking system relates to a persistent negative POLONIA spread.
• Bank behavior factors:
  • Unwillingness to lock up liquidity in the NBP bills.
  • Frontloading of banks’ fulfillment of the reserve requirements.
• External factors:
  • External market sentiment influences the POLONIA spread.
• Methodology note:
  • The study employs empirical analysis to link the negative POLONIA spread to the factors listed above.

Policy Analysis and Implications

• The negative POLONIA spread indicates a limited transmission of NBP’s open market operations to the short-term interbank rate.
• NBP responses to the financial crisis and to the structural liquidity surplus were found to be effective according to the analysis.
• Implicit policy considerations based on findings:
  • Addressing structural liquidity surplus may be necessary to restore closer alignment between POLONIA and the policy rate.
  • Consideration of banks’ preferences regarding NBP bills when designing liquidity absorption instruments.
  • Monitoring and managing the timing of reserve requirement fulfillment to reduce frontloading effects.
  • Surveillance of external market sentiment as a factor affecting short-term rates.

Content in this bundle

• What Drives the POLONIA Spread in Poland?; by Yinqiu Lu; IMF Working Paper 12/215; August 1, 2012
  • What Drives the POLONIA Spread in Poland?; by Yinqiu Lu; IMF Working Paper 12/215; August 1, 2012 (Markdown version)
  • What Drives the POLONIA Spread in Poland?; by Yinqiu Lu; IMF Working Paper 12/215; August 1, 2012 (PDF)