Thedéen: The banks need to have more active liquidity management

In recent years, there has been considerably more central bank liquidity in the system than the banks actually need. As the Riksbank reduces its holdings of Swedish securities, the amount of central bank liquidity in the banking system, i.e. the banks' total claims on the Riksbank, will decrease. This will place greater demands on the banks in the future to actively borrow from and lend to other banks, for example via overnight loans, according to Mr Thedéen.

“My message to you, our monetary policy counterparties, is to review your operational capacity now, to be active and to borrow and lend reserves among yourselves. In this way, you will be prepared when the liquidity surplus in the banking system continues to decrease.”

If necessary, the Riksbank may also adjust the interest rates on its deposit and lending facilities to make it more favourable for the banks to turn to one another instead of depositing with the Riksbank overnight.

“If the banks are to conserve central bank reserves and not demand more than they need, the interest rate cannot be too favourable when banks place reserves with the central bank overnight. Conversely, it must not be too cheap for banks to borrow from the central bank. But Mr Thedéen observed that it remains to be seen how high the opportunity cost needs to be.”

He also stressed that the banks should make use of the Riksbank's lending facilities when they need to. The Riksbank is therefore considering lowering the interest rate on the Supplementary Liquidity Facility to make it slightly cheaper to borrow from the Riksbank against collateral such as covered bonds and municipal securities. Tests may also be required to ensure that banks are able to borrow quickly and efficiently from the Riksbank against collateral when necessary.

Here, however, Mr Thedéen saw that the fear of being perceived as weak could prevent banks from using the Riksbank's loan facilities, even though this would be economically rational. There is sometimes mention of stigma. But he firmly rejects that mindset.

“This reluctance to borrow from our facilities has been evident in times of money market volatility. But the facilities are there to make it easier for the banks. Their very purpose is to be utilised so that the banks can lend demanded volumes on the short money market at attractive rates even in periods of tight liquidity.

It should be natural to borrow from the Riksbank to cover temporary liquidity shortages. This is how the operational framework is supposed to function,” he concluded.