Skingsley: The central bank in an innovative and fast-paced world
“The Riksbank's foreign currency reserve is part of Sweden's economic defence. But there is a proposal to the Government that could mean halving the reserve. Allowing this to happen in a situation where the banking sector is growing and its dependence on foreign currency is also increasing is to say the least a risky venture.” This is the opinion expressed by Cecilia Skingsley in her speech at SEB on Wednesday. It is an opinion also shared by both the International Monetary Fund and the European Central Bank, which have recently advised Sweden not to reduce the size of its foreign currency reserve below the current level.
Date: 31/05/2017 14:00
Speaker: Deputy Governor Cecilia Skingsley
Place: SEB Bankers’ Day, Stockholm
State to the rescue in financial crises
In Sweden alone, there have been serious banking crises on average once every 30 years. When financial crises have arisen, the state has often had to rush to the rescue in one way or another. A problem in one bank can very quickly have serious domino effects on the rest of the financial system, which can in turn be expensive for the economy as a whole.
This is why we need requirements, regulations and supervision that contribute to making the system robust. "But the Riksbank also needs a foreign currency reserve that is sufficiently large to cover at least the needs that may arise in the short term in a situation of financial stress," says Ms Skingsley.
The banks should bear the cost of the foreign currency reserve
The natural thing is for the banks themselves to manage their own liquidity risks, that is, insure themselves by having sufficient liquidity reserves and stable funding in foreign currency. This reduces the risk that the government will have to intervene in the event of a crisis.
Even if the banks were to have strong self-insurance, it is not certain that this would be enough in a crisis situation, said Ms Skingsley. Particularly in an urgent situation where the foreign exchange markets are not functioning normally, the central bank reserve can be an important insurance. The foreign currency reserve makes it possible for the Riksbank to provide rapid liquidity assistance to the banks in foreign currency if necessary. "The cost of the foreign currency reserve could appropriately be transferred to the banks, which have the most to gain from the insurance the reserve entails," said Ms Skingsley.
E-money as complement to cash
Ms Skingsley also took up the consequences of the substantial decline in cash management, which is to a large extent due to new technology which provides new means of payment.
"One can say that the Riksbank's banknote monopoly has almost had its day, as a number of rapid and simple electronic means of payment are being supplied by private agencies," commented Ms Skingsley.
If the printing press made it possible to print banknotes in its time, then our current technology enables electronic payments. It is therefore reasonable to try to find out whether the Riksbank can issue money in a digital form, e-money, which is guaranteed by the Riksbank in the same way as banknotes and coins, concluded Ms Skingsley.