Erik Thedéen: Good Riksbank Act, but the level of detail has limitations

“The new Riksbank Act makes a distinction between financial stability and monetary policy, which is basically good, but it is too detailed in some respects.” These were the words of Governor Erik Thedéen when he spoke today at the Stockholm Centre for Commercial Law at Stockholm University.

Date: 18/01/2024 16:30

Speaker: Governor Erik Thedéen

Place: Stockholm Centre for Commercial Law, Stockholm University

For example, the governance is too strong regarding the strengthening of the foreign exchange reserves and the purchase of securities for financial stability purposes. The Riksbank would also have had better freedom to act if the prerequisites for the tools available had been the same for both monetary policy and financial stability.

Important to cooperate with other authorities

The act has other advantages, however. Among other things, it means that the Riksbank must more clearly justify its measures and describe their purpose, which makes it easier to evaluate the Riksbank's work. In addition, the division between monetary policy and stability issues also creates the prerequisites for cooperation with other stability-focused authorities regarding financial stability and preparedness. Especially in the area of preparedness, cooperation is very important in today’s security policy situation. However, a clearer division of responsibilities between the Riksbank and Finansinspektionen may also be needed here.

Independence of the Riksbank a key issue

In monetary policy issues, however, there must be no cooperation with other authorities. The independence of the Riksbank is a key principle under EU and Swedish law and is ultimately about maintaining the credibility of the monetary policy’s price stability objective. The independence of the Riksbank has been decided by the Riksdag and is thereby democratically anchored. The requirements for transparency and scrutiny expressed in the new act create a good counterbalance and our independence does not prevent a necessary dialogue between the Riksbank and the Ministry of Finance.

The Riksbank will request a capital injection

For its independence, it is also important for the Riksbank to have sufficient equity and earnings capacity to be self-financing. When interest rates rose in 2022, the Riksbank made losses on the bond purchases it had previously made to support the economy. These losses have left the bank with insufficient equity. The new Riksbank Act now requires us to request the equity be strengthened. “In the act, the main rule is that equity shall be restored to the base level of roughly SEK 40 billion. This will be the starting point when the Riksbank submits its petition to the Riksdag in March, said the Governor.

Financing is a greater challenge in Sweden than in many other countries where central banks receive large amounts of interest-free funding due to the greater use of cash (seigniorage). “In the longer term, the Riksbank needs to strengthen its earnings, as funding via outstanding cash has decreased and, in addition, our operations are now more extensive and resource-intensive than before. It is important that the Riksbank does not end up in a situation where we regularly need to go to the Riksdag to ask for more capital. This would go against the principle of financial independence", Thedéen concluded.

Updated 18/01/2024