Q&A about hedging of the Riksbank’s foreign exchange reserves
Why has the Riksbank decided to investigate the issue of hedging part of the foreign exchange reserves?
The FX reserves currently amount to around SEK 410 billion. Changes in exchange rates affect the value of the foreign exchange reserves. The Riksbank’s assessment is that the krona will appreciate in the period ahead, which would lead to exchange losses. This means that the currency risks on the Riksbank’s balance sheet are considerable. This is why we want to examine the prerequisites for reducing the currency risk in our foreign exchange reserves.
What does currency risk in the foreign exchange reserves entail?
The foreign exchange reserves consist largely of assets in currencies that banks may need in a financial crisis. The assets can quickly be converted into liquid funds, and consist largely of government bonds in US dollars and euros. The value of the foreign exchange reserves expressed in SEK is therefore affected by changes in exchange rates and interest rates. If the krona appreciates, the foreign exchange reserves decrease in value calculated in SEK, and vice versa. This means that the Riksbank is exposed to currency risk and this currency risk makes up a large share of the Riksbank’s total financial risks.
How much of the foreign exchange reserves will the Riksbank hedge?
The starting point for the investigation that has been initiated is to hedge about a quarter of the foreign exchange reserves. This corresponds to just over SEK 100 billion, which is deemed reasonable given that the transactions will be spread out over an appropriate period of time. The investigation will decide on the more exact details.
How will the hedging be done?
One measure that can be taken to reduce currency risk is to hedge part of the foreign exchange reserves with the help of foreign exchange forwards and foreign exchange swaps. But any measures must be designed with conditions on the market as a basis. The Riksbank will therefore open a dialogue with relevant market participants and make certain practical preparations.
How do exchange gains and losses affect the Riksbank's profit and loss and balance sheet?
Some foreign exchange gains and losses are continuously realised in the management of the foreign exchange reserves when the Riksbank makes changes to them and when bonds mature. However, the gains made by the Riksbank on assets it still holds are unrealised and are booked against so-called revaluation accounts. At the turn of 2022/2023, the balance on the revaluation account for exchange gains was just over SEK 48 billion.
Will you stop hedging when inflation has come down and/or the krona has appreciated to a desirable level?
The Riksbank has no desirable level for the krona and this measure is not linked to the inflation target. However, it is important to constantly evaluate risk management, including financial risks.
Are you doing this to strengthen the krona?
No, the purpose is not to influence the krona exchange rate but to investigate the prerequisites for reducing the Riksbank’s financial risks. The decision is based on our assessment that the krona will eventually appreciate, but any measures will be implemented in a way that manages the financial risks while at the same time minimising the impact on the market.
When is the investigation expected to be concluded?
The Riksbank’s investigation is expected to be finished in early autumn 2023.
Why does the Riksbank have gold and foreign exchange reserves?
The Riksbank has gold and foreign exchange reserves to be able to, if necessary, provide liquidity support to banks, fulfil Sweden's commitment to the IMF’s international lending and intervene in the foreign exchange market. In addition, the Riksbank’s financial asset management, including the foreign exchange reserves, shall generate enough return to finance the Riksbank’s operations.
How large are the gold and foreign exchange reserves?
On 30 April 2023, the value of the gold and foreign exchange reserves amounted to SEK 495.2 billion. The gold was worth SEK 82.5 billion and the foreign exchange reserves were worth SEK 412.7 billion.
What assets do the foreign exchange reserves consist of?
Under the Sveriges Riksbank Act, the assets in the foreign exchange reserves shall be managed with low risk and taking into account the Riksbank’s status as a central bank and the purpose of the asset holdings. The Executive Board decides on the composition of the foreign exchange reserves – for example, how the assets shall be distributed across different currencies.
The Riksbank’s preparedness to be able to use the foreign exchange reserves at short notice places considerable demands on their composition. The foreign exchange reserves therefore consist mainly of assets in currencies requested by banks if they require liquidity support and assets that can be quickly converted into liquid funds, mostly government bonds in US dollars and euros.