Krzysztof Kowalczyk (Fot. NBP)
ObserwatorFinansowy.pl: In 2020, cash has been in high demand. Early in the third quarter, there was nearly PLN 300 billion in circulation. Is the upward trend continuing?
Krzysztof Kowalczyk: Yes, in mid-November 2020, the value of banknotes and coins in circulation amounted to PLN 318.4 billion. It is 80 billion more than at the end of the previous year – one third more, that is to say. We anticipated that such growth would take about four years, and it was achieved within ten months.
How do you explain this?
A clue may be found in the time of the particularly dynamic growth of cash – at first, in March and April, and then in October and November. In the former period, we associate it with the onset of the COVID-19 epidemic in Poland and with the anxiety accompanying the first lockdown. In the latter, a discussion about the national quarantine was going on in the public sphere. In addition, seasonal factors occurred, that is, 1 and 11 November, the two days off before which we always note a rise in the demand for cash.
Let us start with March – what was going on back then? Telephones from commercial banks? Queues of bank armoured vehicles? How is the sudden demand for cash met?
In normal times, our attention is captured when the value of cash withdrawals by commercial banks from their accounts held with NBP exceeds PLN 1.5 billion for several days in a row. Meanwhile, as of 13 March we issued over PLN 6 billion to banks, over PLN 5.8 billion as of 16 March, and PLN 3.9 billion as of 17 March. Then, a slight reassurance followed, which lasted until a series of nonsense rumours started that there were plans to tax bank deposits, among others. Representatives of commercial banks signalled that customers showed up at their branches to request withdrawals of large sums of cash. The record holder made a one-off withdrawal of PLN 1.5 million.
You mean that we ourselves storming bank cash desks or ATMs are the source of demand for cash?
Yes, we ourselves decide how much cash is in circulation, since we create demand by making withdrawals from ATMs or at bank cash desks. Banks are obliged to meet the demand, and in order to do so, they need to buy cash from NBP, paying with electronic money. It also works the other way round – if a customer pays cash into a bank account, and the bank has a cash surplus, then the bank sells the cash to NBP and receives electronic money into its account.
The value of cash in circulation is thus the sum of decisions made by all cash holders. If we all decided not to use banknotes and coins and to pay them into bank accounts, we would have zero cash in circulation. And if we withdrew the savings accumulated on bank accounts, we would have several times more cash circulating than we do today. So, it is not true, as the media oftentimes report, that NBP prints additional banknotes at its discretion. It is us – money users – that decide about it when we make larger withdrawals from banks. A question, of course, arises why we need to convert electronic money into cash at all.
“We ourselves decide how much cash is in circulation, since we create demand by making withdrawals from ATMs or at bank cash desks. Banks are obliged to meet the demand.”
For precautionary reasons. If I have a certain amount in banknotes, then I can effect a transaction, even when a payment card reader breaks somewhere, or when a bank branch is closed. Money physically issued by the central bank of a stable state just gives us a sense of security. There is also the purely pragmatic factor. In times of low interest rates, when bank account interest rates oftentimes amount to zero, it does not matter to many people whether they hold their money on an account or in cash.
Do we keep money on zero-interest bank accounts for convenience only?
For convenience and security. To avoid theft. Money held with a bank is more secure, as the schemes of deposit guarantees up to the equivalent of EUR 100,000 operate and the money we hold with a bank may not be stolen physically, which may happen if you keep a large sum at home. It is also easy to invest electronic money in any kind of assets or dispose of it otherwise by transferring it by a bank transfer.
Was the surge in demand for cash in March surprising?
All central banks hold strategic ‘rainy day’ stocks of banknotes. NBP also keeps such stocks in its vaults at the regional branches. Adequate cash reserves are also held in the vaults of commercial banks. What is more, the system of supplying banks with cash is autonomous to a certain extent. It relies on cooperation between the employees of the NBP regional branches and individuals responsible for cash at commercial banks, who – on the basis of ongoing monitoring of cash reserves – make necessary decisions on their own. Authorisations from individuals systemically managing cash circulation are not needed.
It is only that the system is calibrated to the standard demand for cash, considering the forecast growing demand, resulting, for instance, from seasonality, though not on the scale that we saw during the pandemic. So, it required further decisions adopted centrally. We started to make the decisions in February, when the epidemic was hardly spoken of in Poland, though we could follow reports on the pandemic in China and Southeast Asia at first, and then see the disturbing images from Iran. It was when we realised that the virus would likely reach us too, which would also be reflected in a growing demand for cash. And – we began to act.
We made sure that all our systems and resources were 100% operational and available. We also changed the schedule of delivery of banknotes from the manufacturer, that is Polska Wytwórnia Papierów Wartościowych SA [Polish Security Printing Works]. Deliveries of high-denomination banknotes, mainly 200-zloty and 100-zloty banknotes, were rescheduled to the earliest possible dates, and 20-zloty banknotes, for instance, which were scheduled to be delivered in April, will arrive in December. The decision was good, because at the time of increased withdrawals in March, those denominations were needed the most. Additionally, already in February, we invited the heads of cash at banks and Poczta Polska [Polish Post] and suggested taking preparatory actions, and further requested that the deposit of cash owned by NBP and held in their vaults be supplemented.
Does NBP keep cash with commercial banks?
Indeed. Some portion of the cash reserve owned by NBP is kept in the vaults of commercial banks willing to keep it. Banks interested in such a solution must meet certain requirements, and the deposit held with them is adequately supervised and controlled. Should a bank need to increase the amount of cash to meet the needs of its customers, it may purchase it from the deposit. In such a situation, it notifies NBP accordingly and transfers the equivalent amount in electronic money to NBP’s account. NBP then consents to the withdrawal of the paid amount from the deposit. The solution enhances cooperation between banks and NBP, as cash is physically withdrawn from NBP less often, but when it is, it involves higher value right away. In February, we wanted the NBP deposit to be supplemented to the full amount in case of obstacles to the collection of cash from NBP branches or to transport operations.
What was done at NBP itself?
A number of preparations, starting from trivial issues, such as additional checks of gates, banknote sorters and other devices, and ending with more significant ones like increasing the frequency of organising management information. Based on the data collected in our IT systems, we are able to determine at any time the amount of a banknote denomination located at a given branch, and the number of banknotes ordered and issued. At a key moment, such information in the form of clear reports was furnished to us every two hours. Hence we were able to react immediately to the dynamically changing circumstances by minimising the risk of a shortage of a denomination somewhere in Poland.
Was there such a shortage?
NBP was able to prevent it. In cases when the stock of a given denomination fell to an alarming level, we would decide to carry out additional, unscheduled transports and deliver the cash. But, we had cases of exhausted stocks of banknotes in some ATMs, or even at single branches of commercial banks. The stocks were replenished after a few hours and customers could make withdrawals.
I see that high denominations were the most wanted?
Yes, in March, when customers, alarmed by the rumours, stormed ATMs and branches, they did not intend to withdraw PLN 50 or 100. Since the beginning of 2020, the number of 500-zloty banknotes in circulation has increased by 77 per cent, and 200-zloty banknotes by 55 per cent. This was possible also due to the fact that we used high denominations in servicing banks to a greater extent. At first, it was not at all easy to convince commercial banks to reprogram ATM cassettes and transfer 200-zloty and 500-zloty banknotes to cash desks. I believe it was worth making the effort.
“Since the beginning of 2020, the number of 500-zloty banknotes in circulation has increased by 77 per cent, and 200-zloty banknotes by 55 per cent.”
What is the national cash security strategy, announced by the President of NBP at the Cash Handling Congress on 24 November, supposed to be?
The challenges posed by the pandemic in cash circulation, which we have discussed here, are slowly becoming a thing of the past. Now, the situation in the supply of banknotes and coins to the Polish economy is stable. Everything goes as usual, with no major disruption. And so, the time has come for new challenges. The central bank ought to act in advance and address threats yet unrecognised by others. Professor Adam Glapiński therefore announced the start of work on a new cash security strategy.
The work will relate to the broadly understood security of cash circulation, and its primary objective will be to prevent elimination of cash from trade and to defend our freedom to select payment instruments we use on a daily basis. We will strive to develop proposals for legislative modifications to guarantee the security of cash transactions, particularly since under current legislation NBP has limited powers to fulfil its supervisory function with respect to handling cash on the market.
What areas will the new strategy cover?
We will deal with seven pillars of cash circulation security, including: fighting counterfeiting, ensuring cash reserves adequate in terms of value and denomination structure, physical security of cash, stability and continuity of the operations of entities that are key to the functioning of the cash cycle, widespread acceptance, providing bank customers with convenient access to their savings in the form of cash, and, finally, cybersecurity of systems critical for cash circulation.
In all of the above mentioned areas, projects are already being implemented in order to enhance cash security. The new strategy is aimed at speeding up the work carried out and improving the coordination of initiatives taken, and the list of issues for the strategy to cover may still be expanded. The task will be of primary importance to us in the year 2021.
– Interview by Marek Pielach