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Banks and Poland’s public deficit: how the system favours government financing
Analysis as of 9 October 2026. Holdings of domestic Treasury securities: 31 August 2026, nominal values. Numerical examples illustrate the mechanism; the assessment of its effects is the author's interpretation.
Banks' financing of the government benefits from specific tax and regulatory preferences. For Poland's bank asset tax, legislative records confirm that Treasury bonds were deliberately excluded. The combined effect matters both for the government's borrowing costs and for business financing.
1. What do banks actually finance?
A budget deficit arises when expenditure exceeds revenue. The government raises financing through instruments including Treasury bonds and bills. Gross borrowing needs also include redemption of earlier debt, while net borrowing needs incorporate other financing flows. Issuance therefore does not equal the deficit. [2]
According to the Ministry of Finance, at the end of August 2026 domestic banks, including NBP, held PLN 889.3 billion, or 53.0% of domestic Treasury securities, out of a total nominal amount of PLN 1,678.1 billion. This is a stock of outstanding debt, not their share of financing the 2026 deficit. The figures use the Ministry's variant B, which also includes securities securing budget deposits placed with banks. They cover neither all public sector liabilities nor commercial banks alone. [1]
When a bank buys a new issue, it pays the issuer and obtains a claim for interest and repayment. A secondary-market purchase pays the previous holder instead. It supports the debt's liquidity and pricing, but gives the government no new proceeds from that transaction.
The wholesale market relies partly on Treasury Securities Dealers. Institutions voluntarily accepting this status undertake to participate in auctions and achieve a minimum share of purchases. This is not a general requirement for every bank to cover the entire deficit. [3]
2. How does the money move?
A simplified example: commercial banks buy a new issue for their own account for PLN 100, after which the government spends the entire amount on private recipients. We omit taxes, interest and other operations.
Operation
Banks' reserves at NBP
Bonds held by banks
Private deposits at banks
Purchase of the issue; payment into the government's NBP account
−PLN 100
+PLN 100
0
Government spending on private recipients
+PLN 100
0
+PLN 100
Combined change for the commercial banking sector
0
+PLN 100
+PLN 100
After spending, reserves can arrive at a bank other than the bond buyer. Across the commercial banking sector, additional bonds appear as assets and deposits as liabilities. This illustrates settlement, rather than an unlimited capacity to finance the government. [4]
3. Why does government debt receive preferential treatment?
The bank asset tax creates a direct cost difference. In 2026 its rate is 0.0366% of the tax base per month. Banks calculate the base allowing for a PLN 4 billion threshold, own funds and statutory deductions. Treasury securities and securities statutorily guaranteed by the State Treasury reduce that base. An ordinary business loan generally receives no equivalent exclusion. [5]
An example covering only this tax: an additional PLN 100 million of taxable assets within a positive tax base, held at all 12 monthly assessment dates, generates PLN 439,200 in annual tax: PLN 100 million × 0.0366% × 12. Qualifying Treasury bonds do not create that charge. The advantage is approximately 0.44 percentage points a year before funding costs, risk and income tax. Enacted reductions in the rate for banks in 2027 and 2028 reduce the value of this advantage, but do not remove the exclusion itself. [5]
Prudential rules add to the tax preference:
Rule
Significance for the bank
Important limitation
CRR, Article 114(4)
An exposure to Poland's central government denominated and funded in PLN receives a 0% credit risk weight under the standardised approach
This means neither zero economic risk nor exclusion from every capital requirement [6]
LCR buffer
Qualifying Treasury bonds can be Level 1 liquid assets without a standard valuation haircut in this category
Eligibility includes availability, appropriate valuation and being unencumbered; other eligible assets can also meet the LCR [7]
Secured funding
Eligible securities can collateralise repo transactions or, under NBP rules, Lombard credit
Funding has a cost and conditions; the borrower is the bank [8]
A bank can therefore earn interest, reduce its asset tax and build a liquidity buffer at the same time. Bonds generally remain within the leverage ratio's unweighted exposure measure. The capital preference does not create unlimited balance sheet capacity. [6]
4. Was this effect intended?
There is a clear legislative record for the tax preference. At the Senate committee meeting on 30 December 2015, Barbara Bubula, representing the bill's sponsors, explained that purchases of Treasury bonds should not face the new tax. The rate was raised to offset the exclusion's effect on budget revenue. [9]
In November 2022, the Ministry of Finance justified extending the exclusion to securities statutorily guaranteed by the State Treasury by explaining that taxing guaranteed BGK and PFR bonds increases their required yield, with the government ultimately bearing the cost. This documents an intention to reduce the cost of that financing. [10]
Selected programmes of funds administered by BGK and PFR's Financial Shield were financed separately from direct Treasury issuance. The Ministry includes their liabilities in the bridge from Poland's domestic public debt definition to the EU's EDP debt measure. Placing financing outside the central budget does not remove its liabilities from the broader debt calculation. However, not every BGK bond has the same guarantees or preferences. [11]
CRR and LCR are EU prudential regulations. Their favourable effect on government debt should be distinguished from the documented purpose of Poland's tax changes.
5. What are the limits and costs?
NBP has a different role from a commercial bank. Article 220(2) of Poland's Constitution prohibits a budget law from providing for deficit financing through a liability to the central bank. Article 123 TFEU prohibits central bank credit to the public sector and direct purchases of its debt. Secondary-market purchases are subject to separate rules and must not circumvent the prohibition. [12]
The economy benefits from the government's access to domestic debt buyers and a liquid market. A potential cost is greater dependence of banks on fiscal conditions: rising yields reduce the market value of previously issued fixed-coupon bonds, and sovereign debt stress can constrain banks' capacity to finance the economy. Effects on reported earnings and capital also depend on accounting classification and hedging. [13]
Our assessment: the system's design does favour government financing. It can shift banks' choices towards bonds at the expense of some other assets, but a growing government debt portfolio alone does not establish that business lending has fallen. Credit demand, bank liquidity and capital also matter. Preferences make debt easier to sell; they do not replace durable public revenues or eliminate risk.
Market commentary
My perspective on markets, the economy and events that matter to investors.
Banks and Poland’s public deficit: how the system favours government financing
Analysis as of 9 October 2026. Holdings of domestic Treasury securities: 31 August 2026, nominal values. Numerical examples illustrate the mechanism; the assessment of its effects is the author's interpretation.
Banks' financing of the government benefits from specific tax and regulatory preferences. For Poland's bank asset tax, legislative records confirm that Treasury bonds were deliberately excluded. The combined effect matters both for the government's borrowing costs and for business financing.
1. What do banks actually finance?
A budget deficit arises when expenditure exceeds revenue. The government raises financing through instruments including Treasury bonds and bills. Gross borrowing needs also include redemption of earlier debt, while net borrowing needs incorporate other financing flows. Issuance therefore does not equal the deficit. [2]
According to the Ministry of Finance, at the end of August 2026 domestic banks, including NBP, held PLN 889.3 billion, or 53.0% of domestic Treasury securities, out of a total nominal amount of PLN 1,678.1 billion. This is a stock of outstanding debt, not their share of financing the 2026 deficit. The figures use the Ministry's variant B, which also includes securities securing budget deposits placed with banks. They cover neither all public sector liabilities nor commercial banks alone. [1]
When a bank buys a new issue, it pays the issuer and obtains a claim for interest and repayment. A secondary-market purchase pays the previous holder instead. It supports the debt's liquidity and pricing, but gives the government no new proceeds from that transaction.
The wholesale market relies partly on Treasury Securities Dealers. Institutions voluntarily accepting this status undertake to participate in auctions and achieve a minimum share of purchases. This is not a general requirement for every bank to cover the entire deficit. [3]
2. How does the money move?
A simplified example: commercial banks buy a new issue for their own account for PLN 100, after which the government spends the entire amount on private recipients. We omit taxes, interest and other operations.
After spending, reserves can arrive at a bank other than the bond buyer. Across the commercial banking sector, additional bonds appear as assets and deposits as liabilities. This illustrates settlement, rather than an unlimited capacity to finance the government. [4]
3. Why does government debt receive preferential treatment?
The bank asset tax creates a direct cost difference. In 2026 its rate is 0.0366% of the tax base per month. Banks calculate the base allowing for a PLN 4 billion threshold, own funds and statutory deductions. Treasury securities and securities statutorily guaranteed by the State Treasury reduce that base. An ordinary business loan generally receives no equivalent exclusion. [5]
An example covering only this tax: an additional PLN 100 million of taxable assets within a positive tax base, held at all 12 monthly assessment dates, generates PLN 439,200 in annual tax: PLN 100 million × 0.0366% × 12. Qualifying Treasury bonds do not create that charge. The advantage is approximately 0.44 percentage points a year before funding costs, risk and income tax. Enacted reductions in the rate for banks in 2027 and 2028 reduce the value of this advantage, but do not remove the exclusion itself. [5]
Prudential rules add to the tax preference:
A bank can therefore earn interest, reduce its asset tax and build a liquidity buffer at the same time. Bonds generally remain within the leverage ratio's unweighted exposure measure. The capital preference does not create unlimited balance sheet capacity. [6]
4. Was this effect intended?
There is a clear legislative record for the tax preference. At the Senate committee meeting on 30 December 2015, Barbara Bubula, representing the bill's sponsors, explained that purchases of Treasury bonds should not face the new tax. The rate was raised to offset the exclusion's effect on budget revenue. [9]
In November 2022, the Ministry of Finance justified extending the exclusion to securities statutorily guaranteed by the State Treasury by explaining that taxing guaranteed BGK and PFR bonds increases their required yield, with the government ultimately bearing the cost. This documents an intention to reduce the cost of that financing. [10]
Selected programmes of funds administered by BGK and PFR's Financial Shield were financed separately from direct Treasury issuance. The Ministry includes their liabilities in the bridge from Poland's domestic public debt definition to the EU's EDP debt measure. Placing financing outside the central budget does not remove its liabilities from the broader debt calculation. However, not every BGK bond has the same guarantees or preferences. [11]
CRR and LCR are EU prudential regulations. Their favourable effect on government debt should be distinguished from the documented purpose of Poland's tax changes.
5. What are the limits and costs?
NBP has a different role from a commercial bank. Article 220(2) of Poland's Constitution prohibits a budget law from providing for deficit financing through a liability to the central bank. Article 123 TFEU prohibits central bank credit to the public sector and direct purchases of its debt. Secondary-market purchases are subject to separate rules and must not circumvent the prohibition. [12]
The economy benefits from the government's access to domestic debt buyers and a liquid market. A potential cost is greater dependence of banks on fiscal conditions: rising yields reduce the market value of previously issued fixed-coupon bonds, and sovereign debt stress can constrain banks' capacity to finance the economy. Effects on reported earnings and capital also depend on accounting classification and hedging. [13]
Our assessment: the system's design does favour government financing. It can shift banks' choices towards bonds at the expense of some other assets, but a growing government debt portfolio alone does not establish that business lending has fallen. Credit demand, bank liquidity and capital also matter. Preferences make debt easier to sell; they do not replace durable public revenues or eliminate risk.
Sources
Posts reflect the author’s personal views as of publication. They are not investment recommendations.