Management of the gold and foreign currency reserve
Like most other central banks, the Riksbank has gold and foreign exchange reserves. First and foremost, the gold and foreign exchange reserves guarantee that the Riksbank can perform its statutory tasks, namely keeping inflation low and stable and promoting financial stability. The Riksbank’s gold and foreign exchange reserves are worth around SEK 500 billion.
As Sweden’s central bank, the Riksbank basically has unlimited scope for increasing the amount of Swedish kronor (SEK) as and when necessary. But in order to provide liquidity assistance in foreign currency, gold and foreign exchange reserves are required.
The gold and foreign exchange reserves enable the Riksbank to buy and sell currency for monetary and foreign exchange policy purposes and provide contingency to provide the financial system with liquidity in foreign currency. Furthermore, they allow the Riksbank to fulfil various international commitments, including to the IMF and other central banks.
A secondary aim of the gold and foreign exchange reserves is to generate a healthy return for the Riksbank, and ultimately for central government, in relation to the risk taken in the management of the reserve. A healthy return also strengthens the Riksbank’s financial independence.
The gold and foreign exchange reserves can mitigate the effects of a crisis
The risks in the Swedish financial system have gradually increased. This is because Swedish banks have grown substantially. The banking sector has become large in relation to the Swedish economy, which means that a financial crisis could be very costly for Swedish households and companies. Furthermore, banks have become increasingly dependent on having access to foreign currency as they have increased their operations in other countries.
Thanks to the gold and foreign exchange reserves, the Riksbank can, in a crisis situation, offer loans in foreign currency to the banks. This can mitigate the effects of a financial crisis and prevent it from spreading to society at large.
Safe assets with a healthy return
For the Riksbank to be able to maintain a high level of preparedness, the assets in the gold and foreign exchange reserves must have good liquidity; it should, in other words, be possible to convert them into liquid funds at very short notice. For this reason, the foreign exchange reserves mainly contain currencies that can be required for liquidity support and assets that are quickly convertible to liquid funds, for example. The assets must also be very safe, which limits the scope for taking risks in the investments. This is why the foreign exchange reserves mainly contain government bonds issued by states with high credit ratings. On condition that the foreign exchange reserves meet the requirements for preparedness entailed in the Riksbank’s commitments, the Riksbank shall also take into account sustainability aspects in managing the foreign exchange reserves. It is also important for the gold and foreign exchange reserves to be large enough for the Riksbank to be able to fulfil its commitments.
Regulatory framework for asset management
The Riksbank has a regulatory framework for asset management: a financial risk and investment policy and regulations following on from the policy. Through annual decisions, the Executive Board sets the framework for the composition of the gold and foreign exchange reserves and what risks may be taken in their management. It also details how the Riksbank is to identify, measure, manage, monitor and report these risks.