Interview: Juliusz Jabłecki

Joasia E. Popowicz spoke with the director of the financial risk management department at the National Bank of Poland on March 14, 2025.

In the last decade, the National Bank of Poland’s foreign exchange reserves have more than doubled, and are among the top 20 highest in the world. They stood at $229.2 billion in February. Governor Adam Glapiński said in an NBP book published last year that the central bank for years had been preparing “analytically, operationally and legally” for a potential crisis like that of 2008–09 developing in Europe or globally. In what ways has the investment strategy and strategic asset allocation behind the NBP’s reserves accumulation evolved over the last 10 years?

When you go back a decade to 2014–15, we were in a completely different world. Looking at traditional reserve assets, core euro government bond yields were negative for much of the period. The five-year German Bund, for example, traded at about 40 basis points, on average, between 2015 and 2021 – first on account of the response to the global financial crisis, then the euro sovereign debt crisis, and then there was no chance to normalise rates when Covid struck. And so, for much of that period, rates were effectively zero or negative, and for some of our senior management, negative yields seemed incompatible with capital preservation. So, we gradually diversified away from Europe, and that was one theme of our changes in allocation over that time.

To give you some sense of the numbers, in 2014, we were still at 30% [euros as a share of reserves], and we came down eventually to about 20% by 2019. Most of it went into the US dollar, which I am happy to say, has served us quite well throughout the decade.

You mentioned that our reserves portfolio grew over that time. And as we were looking at our growing portfolio, there was this gradual recognition that more reserves mean more firepower to react to shocks. At the same time, there was also this acknowledgement that reserves were growing more quickly than any underlying vulnerabilities or liquidity needs in the economy. So, in a sense, the growth in our reserves portfolio increased our risk-taking capacity. We could take more risk in the short term to generate more return in the long run, even though return, per se, is not the key goal of a central bank and of the NBP, in particular. But that was the thinking, and the common denominator was to accept a little bit more volatility in the short term to generate a higher return in the long run. And that played out across a couple of dimensions.

How did you change your positions?

First, we extended duration. So again, to give you a sense of the numbers: in 2015 the duration of our US$ and euro portfolios was about 1–1.5 years. Now it is twice that. There is a little bit of buyer’s remorse, I would say, and timing risk in that decision. Because part of the implementation came in the period of what came to be known as ‘lower for longer’, which turned out, incidentally, not to be that long after all. But we did cushion the impact of rising rates a little bit by setting up a held-to-maturity portfolio. Going forward, we believe that over time any valuation losses we may have taken will be more than offset by higher income, improving our overall return profile.

We also became a little bit more active, and we allocated to dollar-denominated corporate bonds, setting their weight at 2% of the total US$ portfolio – and that was obviously financed out of our US Treasury portfolio. The corporate bond portfolio was managed internally against a customised index benchmark.

Then, last – but not least – we added equity exposure about which I am particularly proud. We did so initially through futures and then through exchange-traded funds [ETFs]. We are currently at 10% in terms of the share of equities in our reserves portfolio, which, when you consider the size of our reserves, is not that small a number.

Was the move into equities done internally, as well? Did you use external managers for any of the diversification processes?

No, that was all internal. You see, we had the brokerage accounts, we had the relationships, we had the know-how – because we had been using bond futures for a while. When we finally got the board to greenlight the decision to permit [equities] exposure, we really wanted the quickest, fastest way to get exposure to the asset class and the returns that already then seemed remarkable. So, speed was of the essence. We knew the fastest way we could do that was by buying and rolling futures on the main equity indexes: S&P 500 futures, Euro Stoxx 50 futures and FTSE futures. That was the initial move.

When we decided we gradually wanted to grow our exposure, we realised that we wanted to do this on a cash basis. Futures are a leveraged instrument, and we feared that could raise some communication issues in the future. Then came an internal debate on how to go about this. As you mentioned, there are a couple of ways you can do this. You can manage a portfolio internally. You can outsource it to an external manager, or you can go through ETFs. And, I think, had we been pondering this 10 or 15 years ago, the outcome might have been different. But in 2021, which is right around the time we were making the decision, it seemed pretty clear to us that the most efficient way we could do this on a cash basis was with ETFs – which, by the way, I personally consider one of the most remarkable innovations in financial markets. The approach has worked out very well for us. The reason why we did not want an external manager is that it would take time. It would be operationally much more complex because you would have to reconcile the books of the manager with our own internal records. Before that, you would have to work out the agreement, negotiate it and sign it. Ultimately, we concluded that there is no premium in markets for doing things the hard way.

Oftentimes, when you talk about asset management or reserve management, people focus on portfolio management when, in fact, it is the operations that are the most complex, most challenging, and where there is the greatest potential for any mishap. When that gets messed up, you really get into trouble. Managing an internal equities portfolio would probably be quite challenging on the operational side. The back-office operations would be much, much more resource-intensive. With an ETF, you have just one line item and that’s it.

Speaking of operations, after the start of the war in Ukraine, what did the first hours and weeks look like in the reserve management department?

Some of the things we did I cannot speak publicly about. But what I will say is that we felt there were essentially two priorities.

First was to make sure we stabilised the markets and keep confidence in … the Polish currency. Shortly after the war broke out, the zloty sank by about 9%. It wasn’t a severe market meltdown, but there was some volatility. We didn’t experience any significant capital outflows, and, luckily, the FX dislocation proved to be very short-lived. We did intervene in the FX market, but with rather symbolic amounts. So that got resolved more quickly than perhaps everybody thought initially.

Our second priority was to do as much as legally possible to support our Ukrainian colleagues. Again, some of the things I cannot speak about, but this involved setting up an FX swap line to the tune of $1 billion. We did this on the very first day. I think of this as a gesture of solidarity, but also as a backstop for them. Of course, nobody knew how it was going to play out. Back then, most people, myself included, feared that the war may end very quickly – that perhaps in two weeks, Russians would be in Kyiv. So, nobody knew what was going to happen, but we were the first ones to come out publicly and say: “Here’s a swap line.” I remember negotiating the terms of the agreement with Ukrainian colleagues who were working under extreme stress. It was all quite remarkable. We also acted with a local commercial bank to facilitate the conversion of Ukrainian currency brought to Poland by hundreds of thousands of refugees. Those people escaped Ukraine and oftentimes they brought with them what they had on them at the time, which meant hryvnia, the Ukrainian currency. It was very difficult for them to exchange that in Poland because, ultimately, the currency needs to find its way back to Ukraine. Given the circumstances, typical exchange offices were not willing to take hryvnia because of the threat of war and because of the extreme aversion to travelling back to Ukraine or shipping the currency. Nobody really knew what was going to happen. So, we stepped in. We mobilised a local commercial bank, and, acting together with the Ukrainian central bank, we facilitated this conversion of the Ukrainian currency. I think this was a template for other central banks in the region and Europe more broadly.

Did the war in Ukraine change your reserve allocations?

Despite the war raging across the border, we never felt it directly driving our asset allocation decisions, except maybe for solidifying our commitment and strategic shift towards gold. Part of the reason for that was that there was simply so much going on in markets at the time. Of course, 2022 will be remembered as the year of the breakout of this full-scale war in Europe, but it will also be remembered, more broadly, as the year when Treasury securities and equities tanked together for the first time in decades.

It was not something we have seen in our collective memories as financial market participants for years. You would be hard-pressed to find another episode in modern history when a double-digit fall in Treasury securities coincided with a massive equity drawdown. So, there was a lot going on. There was also heightened inflation and a lot of uncertainty about how that would affect markets. All in all, we were faced with a massive challenge. My greatest source of pride and satisfaction, when I look back on that time, is that we did not flinch. We stayed the course. We were a newcomer to equities as an asset class, but we did not adjust our positioning. Actually, we rebalanced and added to our equity exposure over time, which has served us well.

What have been key decisions operationally and strategically since the breakout of the war? How has the increased risk of cyber attacks affected reserve management? As Ukraine’s neighbour, what else has been particularly challenging?

On the cyber threats, we have a cyber security department and we have an IT department, and it speaks to their professionalism that my team and others involved in reserve management have never experienced any problems. Which is not to say that there weren’t any threats. But I am not involved in these processes.

The undercurrent of your question, I think, is: how do geopolitical risks affect or drive our reserve management and our allocation decisions? Our job is to protect the value of the FX portfolio to support the economy, the currency and ultimately the credibility of the government of Poland. You come to realise that, as a central bank, as a reserve manager, there is some risk that you simply cannot hedge against, that you cannot avoid, and that you maybe cannot even plan for. I think the best you can do when faced with these ‘unknown unknowns’ is diversify, to try to make sure that you spread your bets across different markets and instruments, and make sure you have an allocation to those asset classes which you believe should perform well in difficult times. Now, our house view is that gold is just that asset class, which explains our decisions over the past several years. The overriding principle, however, is to try to find diversification wherever you can, and that is ultimately the best hedge, even if an imperfect one.

Now, in a period of heightened turmoil, expectations that inflation would trend towards target are having to be revised. It seems central banks can take two approaches: ride out the market volatility and dislocation; or take a more active and nimble approach in the short term. The timeframe as to what constitutes tactical asset allocation is also open to debate. How often is your strategic asset allocation (SAA) revised? What approach does the NBP take?

As a rule, we review the SAA once a year, unless there is something very, very unusual, in which case we can go to the board sooner. I think, as you rightly point out, there is this very natural tendency to try to react to market moves, act upon some higher-frequency signals. There may be some value to it, but I am personally not convinced such considerations should drive SAA decisions.

I think it also ties up nicely with what you were saying. It is partly semantics, in that it depends on what you mean specifically by SAA, what you mean by the ‘S’ in SAA. But to us, the SAA is an anchor, an allocation that reflects our institution’s priorities, goals and long-term risk-return assessment. If you believe that, then you should probably resist the temptation to change course too often because those goals, priorities, risk-return assessments, they don’t change from month to month. At least they probably shouldn’t, if they are coherently thought out.

There is another issue, which is that these higher-frequency signals, that you may be tempted to react to, are inherently noisy. It is very difficult to say in real time whether what you’re looking at or trying to react to is a true signal, or noise, and how much of that signal is already priced in. You fairly quickly realise that there is a lot of noise in market signals, and therefore the correlation between your judgement and the outcome is probably not that high.

Related to that is this concept called the ‘fundamental theorem of active management’. It says that the ratio of return to risk is proportional to the product of skill – or correlation between your judgement and the outcome – and the square root of breadth, which is the number of independent bets you are effectively making. In other words, investment efficiency is directly proportional to the square root of the number of independent bets. When you try to change allocation and duration from quarter to quarter, I think those are relatively low-breadth bets, and so you have to operate with really high skill to sustainably improve investment outcomes.

So, instead, we try to give as much leeway and flexibility to individual desks and portfolio managers as possible. Because they engage in independent risk-taking, they generate the breadth of our strategy, which drives investment efficiency over the long run.

How many portfolio managers are there?

Around 15.

Last year, Poland was reportedly the world’s leading central bank in terms of gold accumulation, with reserves reaching around 450 tonnes, nearing that of the European Central Bank. By the end of 2024, NBP valued Poland’s gold reserves at $37.6 billion, accounting for nearly 16.7% of total reserves, close to its 20% target. The increase from 12.3% in 2023 has been driven in part by the price of gold. The price of gold is at historic highs, in part driven by central bank purchases. What does this historically high price and cyclical relationship regarding the proportion of gold in the NBP’s reserves mean for the NBP’s gold-purchasing programme and diversification?

There are three major factors behind our gold purchases. There is the positive, real long-term return, inflation protection, and then the diversification potential with respect to other assets. I think you really see this in action now. If you look at [the] numbers year-to-date, you have the S&P down around 5%, Treasuries modestly up – but only modestly – and gold is up more than 12%. Of course, we could be frustrated or irritated at this rising price. But given the broader backdrop, the rising price really reaffirms our view about the portfolio benefits of an allocation to gold. So, you see, there is a silver lining to this. Yes, the price of gold is increasing, but in a sense, it reaffirms our commitment, paradoxically enough, because of what is happening to other asset classes.

We went from the great moderation to one ‘tail event’ after another. Do you expect things to normalise? Perhaps we will never go back to where we were, but because gold is a safe-haven asset, that’s where investors are running to at the moment, and at some point, people will take on risk again.

Of course, we’re happy about the performance year-to-date, but that’s just one of the three factors I mentioned that we look at. [By investing in gold,] we were also correcting historical disparities between us and some other European central banks.

Polish gold was evacuated in the first days of the outbreak of the Second World War. The gold bars were transported through Romania, Lebanon, France, the Sahel and, ultimately, to the UK, US and Canada. It made it through the war, but unfortunately shortly thereafter, it was completely spent by the communist regime. When we entered the early ’90s, after the transition, we held virtually no gold in reserves. In the late ’90s, we increased our holdings to about 100 tonnes, and stayed at that level for nearly 20 years. Around 2018, when we reassessed, we saw our reserves portfolio [was] growing. We also looked at what the other big central banks were holding, and they all seemed to have sizeable holdings of gold. It transpired that we had matured as a reserve manager, and as a developed economy, without much gold to speak of. So, it seemed like a natural course to take.

In the meantime, we also realised that the size of our reserves portfolio was large enough such that we did not have to keep everything in very liquid cash-like instruments. We could allocate a portion to an asset class that has historically served as a monetary anchor, one way or another, despite not generating income and not having a great use outside of the financial system. Outside of jewellery-driven demand and investment demand, there’s really not much use that you can put gold to. But I think it is ingrained in our cultural psyche that there is this monetary anchor, that there is something that for centuries had been used as money and could be used as money in the future, should lights go off, so to speak. We are in this day and age where everything is digitalised. I think part of the rationale to invest in gold was also a desire to have something tangible, just in case.

You know, just the other day, I was picking up my kid from school, and I met this mother of a friend of my daughter, and she said: “I heard on the radio we have all this gold. We already have this many tonnes.” And she said: “I think this is great. It’s really good to have gold.” She was obviously very kind – but in a way, it’s amazing, I’ve never seen reserve management get so much attention before. So, I think there is also an aspect to what we’re doing of enhancing trust, enhancing accountability. We are a public institution that acts in the public’s interest. We have stakeholders – and our risk aversion, risk preferences and risk appetite probably should not be misaligned with that of the general public because, ultimately, the business of central banking is trust and credibility.

Did the NBP lend its gold to bullion banks when there was a liquidity crisis in the London gold market at the beginning of the year due to expected tariffs?

As with everything else, we try to diversify. And so, in the case of gold, this means using different storage locations. Currently, we have about 25% of our holdings stored domestically in Poland, and the rest is spread roughly equally between the Fed and the Bank of England. Now, of course, part of the rationale behind storing gold at the Bank of England is that we can lend it out because London is the epicentre of the global market for bullion. And we try to put our holdings to work as much as we can, of course, depending on market conditions. This is not the primary motive of holding gold, but we do try to put it to work because it pays the bills. There are storage costs associated with gold – investing bullion actively in the deposit market helps cover that cost.

Was this an opportunity to ramp that up?

We did see gold deposit rates climbing up. They used to be in the order of a couple of basis points. Now you can try to place a deposit at several times that, depending on the tenor. It is not that transparent a market, but the conditions for lending gold have probably improved. So, if you have gold to lend, there is an opportunity. Certainly.

Did the NBP increase its gold lending or is it the rates that improved?

The rates improved, but I don’t think we needed any additional encouragement, in the sense that we were doing it anyway. I wouldn’t connect our activity [to that period].

Central banks of the Visegrád Four countries (the Czech Republic, Hungary, Poland and Slovakia) have been increasing gold in their reserves, as well as diversifying away from traditional asset classes. Have there been any co-ordinated efforts between the Polish, Hungarian, Czech and Slovak central banks? Do V4 central banks perceive threats that other European countries do not?

I cannot speak for other central banks, but I am not aware of there being any explicit, co-ordinated efforts. I have tried to lay out our reasoning, and I can only guess that maybe similar considerations apply.

Bitcoin is a historically volatile asset and its correlation with other assets has shifted over time. Governor Glapiński categorically ruled out bitcoin as a reserve asset earlier this year due to issues around security. How do you view suggestions from other central bank officials that bitcoin be considered a reserve asset?

I do acknowledge [the] growing institutional adoption of crypto. Every now and then, we hear about another US pension fund investing in bitcoin. There is also a growing list of crypto ETFs, which make the asset class increasingly more accessible. There has been a flood of filings, especially after the November election in the US. Though, if I am allowed to be a little facetious, I’m not sure if getting crypto exposure through an ETF doesn’t involve some sort of performative contradiction – as in, you believe in the future blockchain, but you’re not moving there, just speculating on the sidelines. I’m not here to judge. But, of course, time will tell whether these moves turn out profitable or not. Of course, there have been blowup stories, as well, but you do not need me to review them for you.

What I will say is that I think it ultimately boils down to the priorities, goals, risk tolerance and mandate of an institution, and this blends with some of the themes we’ve covered before in this chat. We are a central bank, and we manage a portfolio of FX reserves, and the overriding principles are safety and liquidity, and return maximisation comes a distant third. It’s not that we do not think about it, but it’s that we think of it as a third constraint on our decision-making process. Whatever you want to say about crypto as an asset class, safety is not the first characteristic that comes to mind.

Aside from the purely economic factors, crypto is also linked to money-laundering risks and fraud. Quite a lot of the public have been scammed. We talked about trust in the central bank and public relationships. Is the human aspect a consideration?

This is absolutely true. Except, I try not to lock myself in this anti-crypto bubble, and I try to read as much as I can. Whenever this argument is raised, the crypto crowd would respond to this by saying: “But look at the casinos – they’re used purely for speculation – or look at how normal fiat cash is used. Look at all the drug money – it’s in cash, mostly in US dollar cash.” I think the difference is that this use of cash for drugs and crime is a bug, not a feature. Whereas with crypto, you could argue this is a feature, not a bug. The whole rationale was to hide from the government. Cash obviously serves a lot of perfectly legitimate, useful purposes. With crypto, it would be difficult [to make this argument]. Of course, there is this whole speculation about how blockchain is going to transform finance. Maybe it will. I’m not making a judgement on that.

How does the NBP use securities lending to generate returns?

We do have a dedicated sec lending programme, but we also make extensive use of repo and reverse repos. When these two transactions are bundled together, the repo and reverse repos, they work like securities lending, effectively. At any given moment, we may have a sizeable chunk of our portfolio working like this, which is a quite predictable source of excess returns that’s relatively safe and not very volatile.

Unfortunately, it does generate some operational issues. It is easy enough to do a repo trade. What is actually much more involved is all the operational legwork to keep the trade going. These trades work on the so-called GMRA [Global Master Repurchase Agreement] framework. It’s a generic agreement between the counterparties that covers everything about the way the transactions are supposed to work: things like margin collateral and valuation. Because when you do sec lending, where you do repo and reverse repo, you exchange securities. Effectively, what this means is, you take somebody else’s securities, somebody else takes your securities. So, you’re swapping your portfolio in a way. And every day, prices change, and therefore the valuation of the collateral changes, on your end, as well as on your counterparties’. Therefore, there must be constant daily co-ordination and communication between collateral teams to facilitate the valuation and transfer of collateral. Different teams work in different time zones, use different pricing sources. So, issues can arise. If you have large exposure, with dozens of counterparties, then it means a lot of operational work. It’s not a free lunch. It does cost a lot of operational work to deliver that excess return.

Almost 10 years ago, Poland became the first European country to issue government debt into China’s mainland bond market. In 2018, officials said then that a consistent theme of reserve management by the NBP over the previous decade was diversification into non-traditional currencies. What is the NBP’s current view on renminbi? What might be different about its diversification strategy looking forward and beyond 2025?

The ministry of finance has different goals when tapping different markets than we have because they’re incurring debt and we are trying to make a return on our investment – subject, of course, to meeting the safety and liquidity criteria that I mentioned before. So, we have slightly different goals and priorities.

On diversification, we’re still very much committed to it. We still believe it is the only viable way for us to manage FX risk. We have such a large FX reserves portfolio that, coupled with the chiefly zloty-denominated liabilities, we have a huge open FX position. No commercial bank would tolerate something like that. Almost 100% of our assets are FX. Almost 100% of our liabilities are zloty-denominated. So just think about the havoc that exchange rate moves wreak on our P&L [profit and loss]. Definitely, that overshadows any trading gains we can generate through our investment process. With the portfolio being this big, we can’t realistically hedge the risk. All we can do is try to diversify as much as we can.

Then the problem is, with the size we were operating at, it is difficult to access some markets because there is a paradox: the less debt a country has, the more attractive it should be from a credit risk perspective, but the harder it is for us to invest there, given liquidity considerations.

Are there any asset classes or currencies that currently are under consideration?

In terms of currencies, the bulk of our FX reserves are allocated to the US dollar, Canadian dollar, euro, sterling and the Aussie dollar. These are all generally big, liquid markets that allow us to go in in size. As I mentioned before, there are actually not that many other places for us to consider. My personal view – which doesn’t necessarily have to be shared by the board – is that small exposures, say, less than 5%, are not that useful. I’m probably spoiled by the size of our portfolio, but allocating a couple of billion [US dollars] just doesn’t seem to justify the extra legwork if you think about all the operational issues. Plus, with small exposures, it’s more difficult to see the contribution to the bottom line, which is what matters at the end of the day.

In terms of asset classes, we have recently increased our exposure to equities, and we are at 10% now. We’re re-evaluating different fixed-income categories in light of how overvalued the US stock market is or used to be. We like corporate bonds for their risk-return profile, and we may increase exposure there. That is something we’re looking at. We’re certainly keeping our eyes open. There is a lot of uncertainty.