Riksbank follows up the banks’ adjustment to smaller liquidity surplus

The amount of liquidity in the Swedish banking system is falling as the Riksbank’s holdings of Swedish securities continue to decline. The Riksbank’s operational framework for monetary policy has a narrow interest rate corridor and is adapted to function with different amounts of central bank liquidity. The Riksbank’s corridor system gives the banks incentives to lend to and from one another on the overnight market. Banks can borrow from one another via overnight loans, both secured and unsecured, or in the form of repos. How they do this is up to them, based on their needs and preferences. However, when the liquidity surplus decreases, this puts greater demands on the banks’ ability and willingness to borrow from and lend to one another on the overnight market and, if necessary, to borrow from the Riksbank’s lending facilities. The Riksbank is now holding meetings with its monetary policy counterparties to follow up that they are taking the necessary measures to adapt to the reduced liquidity in the banking system. 

To make it easier for the banks to adjust to a smaller liquidity surplus, the Riksbank has taken several measures. For example, the Riksbank has increased the transparency of the banks’ resales of Riksbank Certificates, improved the information on the development of the liquidity surplus, and lowered the interest rate in the supplementary liquidity facility. In addition, the limit as to how large a share of the collateral pledged for loans from the Riksbank may consist of covered bonds has been removed.

As the amount of central bank liquidity decreases, questions have been raised as to whether the Riksbank should limit the volume of Riksbank Certificates issued. The Riksbank’s weekly issues of Riksbank Certificates play a central role in how the Riksbank stabilises short-term market rates close to the policy rate. As the banks invest more of their excess liquidity in Riksbank Certificates, there will be fewer reserves left in the banking system. It will then be up to the banks to allocate the reserves among themselves in the overnight market. Limiting the issuance volume for Riksbank Certificates would leave more reserves in the banking system. At the same time, it reduces the banks’ incentives to allocate reserves among themselves, which is why the Riksbank does not see this as helping to facilitate the banks’ adjustment. The banks themselves decide how much of their surplus liquidity they wish to invest in Riksbank Certificates. If a bank that has invested in Riksbank Certificates needs more reserves than the overnight market can offer on reasonable terms, the bank can borrow from the Riksbank’s lending facilities or sell back Riksbank Certificates to the Riksbank.