The foreign exchange reserve
Most of the day-to-day management of the Riksbank’s financial assets concerns the foreign exchange reserve.
The foreign exchange reserve serves two purposes. Primarily, it should be used to fulfil the Riksbank’s commitments. The reserve can be used to provide temporary liquidity assistance to solvent Swedish banks, to cover Sweden’s share of the international lending of the International Monetary Fund (IMF), and to intervene in the foreign exchange market, if need be. These commitments impose restrictions on how the foreign exchange reserve may be invested. A large portion of the foreign exchange reserve should be maintained in those currencies in which liquidity assistance may be relevant. In addition, the reserve should be maintained in assets with a low liquidity risk – that is, in assets that can quickly be converted into ready cash.
A secondary aim of the foreign exchange reserve is to generate a healthy return for the Riksbank and ultimately for central government, in relation to the risk taken. This means that the foreign exchange reserve can be allocated in a different way than would be justified solely by the Riksbank’s commitments. However, the foreign exchange reserve may not be invested in such a manner as to jeopardise the Riksbank’s mandate.
The composition of the foreign exchange reserve
Each year, the Executive Board decides on the guidelines for asset management – the investment policy. Among other guidelines, this specifies the restrictions placed on the allocation of currencies and assets in the foreign exchange reserve, with the aim being that the Riksbank should always be able to fulfil its commitments. The investment policy also specifies an interval for the foreign exchange reserve’s interest rate risk.
For policy reasons, the foreign exchange reserve is concentrated on assets in euros and US dollars, which, together, make up at least 70 per cent of the foreign exchange reserve. These assets are in the form of government bonds and consist of a roughly equal amount of euros and US dollars.
The fact that the foreign exchange reserve is invested in foreign currencies creates a currency risk that affects the Riksbank's net income. In order to reduce this currency risk, the Riksbank invests in a number of different currencies, beyond those included under policy requirements. In addition to euros (EUR) and US dollars (USD), the Riksbank invests in British pounds (GBP), Norwegian kronor (NOK), Australian dollars (AUD) and Canadian dollars (CAD).
The Riksbank has a currency exposure to Norwegian kronor but does not own any Norwegian securities, as the market for Norwegian government bonds is relatively small and has a low turnover. The Riksbank instead invests in US dollars, whose currency risk is converted to Norwegian kronor on the foreign exchange derivatives market. Otherwise, the Riksbank’s asset allocation is in line with the currency allocation.
The Riksbank’s foreign exchange reserve is mainly invested in government bonds. The Riksbank may also invest in bonds issued by other parties than governments. The justification for this is improving the foreign exchange reserve’s risk-adjusted return. No more than 30 per cent of the foreign exchange reserve may be invested in assets issued by government-guaranteed and international organisations, local and regional authorities and US agencies.
In 2009, the Riksbank's foreign exchange reserve was reinforced in both EUR and USD. These securities consist solely of government bonds and treasury bills. However, the interest rate risk is significantly lower than it is for the rest of the foreign exchange reserve. The reinforced part of the foreign exchange reserve has no currency exposure as it is financed in EUR and USD.
