New proposed bill hinders the Riksbank's crisis management
News, Consultation responses The ongoing coronavirus pandemic shows that Sweden needs a Riksbank that is capable of taking action to support the Government and Riksdag (parliament) in the work on alleviating the economic consequences of a crisis. However, the Riksbank Inquiry’s legislative proposals reduce the Riksbank's capacity to take action in a crisis and thus increase the risks to the Swedish economy. The Riksbank would have less capacity to decide over and use all of its tools and this would reduce the Riksbank's capacity to act quickly, flexibly and effectively. These comments are made by the Executive Board of the Riksbank in the consultation response presented to the Ministry of Finance.
The Executive Board of the Riksbank supports the overall objectives for monetary policy in the Inquiry's proposal and also that the Riksbank’s responsibility for financial stability is confirmed in law. Further, the Executive Board supports the proposal to give the Riksbank extended responsibility for cash management and crisis preparedness. The Executive Board’s main objections to the Inquiry’s proposals concern the divisions and demarcation made between monetary policy and financial stability, which limits the monetary policy toolbox. To also limit the Riksbank’s financial independence by, among other things, setting an upper limit for the size of its equity will make it difficult for the Riksbank to implement measures quickly, flexibly and effectively when needed. This increases the risks to the Swedish economy, especially in a crisis.
The monetary policy toolbox is limited
If a central bank is to carry out its statutory tasks, it is not sufficient to merely decide on adjusting interest rates. It also needs to be able to sell various securities, give credit to the banking system and buy or sell foreign currency. The proposed bill limits the Riksbank's capacity to act, for instance by not allowing the Riksbank to purchase other securities than government papers, unless there are special reasons, or making lending to the banks conditional on them increasing their lending to companies. If this bill had applied now during the coronavirus pandemic, it would have limited the Riksbank's monetary policy toolbox and it would have been unclear what the Riksbank was allowed to do. The proposals mean it will take longer for the Riksbank to implement measures, and in a crisis time is of the essence. If the Riksbank is not able to act quickly, the risks to the Swedish economy will increase, in terms of more jobs lost, a greater number of companies going bankrupt and a general deterioration in economic activity.
Financial independence is necessary for confidence
The Executive Board also does not support the proposed model for the Riksbank’s equity. The Inquiry proposes, among other things, an upper limit for the size of the equity. The Riksbank’s balance sheet mirrors economic developments in Sweden and the Riksbank’s contribution to them. Less prosperous periods usually coincide with periods linked to high risk in the economy, combined with low economic activity. To alleviate the damaging effects of such periods, it is necessary for the Riksbank to take on risk that others are unwilling or unable to bear. And then it is necessary to have, from the start, sufficient equity to enable the Riksbank to take on this risk. If the Riksbank is to be regarded as financially independent, its equity and its earnings capacity must be sufficiently large for the Riksbank to carry out its task and thereby uphold confidence in its capacity both under normal circumstances and in the event of a financial crisis.
Microregulation of cash management risks leading to inefficiency
It is reasonable that the Riksbank’s responsibility for cash management is clarified, but the task should not be subjected to microregulation. The Executive Board considers it inappropriate to legislate on the number of cash depots and where these should be situated in Sweden, as this could have a negative effect on the efficiency of these operations.
All in all, the proposed bill makes it more difficult for the Riksbank to implement measures quickly, flexibly and efficiently when needed, and this increases the risks to the Swedish economy. The aim of modernising and clarifying the Sveriges Riksbank Act is not attained. The Riksbank should be allowed to use its toolbox and balance sheet in the way that is most effective and best benefits the Swedish economy. The final legislative proposal should therefore contain more regulations of principle and reasoning and less microregulation.