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17 Jan 2010
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Response regarding the report “The Riksbank’s Financial Independence” (SOU 2007:51)
The Riksbank welcomes the commission of inquiry into the Riksbank’s financial independence. The purpose of the financial independence is to ensure that the Riksbank should have adequate financial resources to carry out its tasks independently and, moreover, that it follows the requirements of EC law. In accordance with the commission’s proposals the financial independence should be strengthened by regulating by law the provision as to the size of the Riksbank’s own capital and its allocation of profits.
One starting point for the Riksbank’s deliberation in this response is that the size of the own capital is ultimately a question as to the safety margins the Riksdag wishes to give the Riksbank in order to guarantee its financial independence. An independent central bank should be adequately capitalised in order for the Riksbank to meet various kinds of risk. The own capital should be of such a size that it is less likely that the Riksbank’s assets will fall below its liabilities, i.e. that the Riksbank’s own capital could become negative. The commission terms this capital as a primary capital, while the Riksbank here uses the term targeted own capital as a description of the desired level of own capital.  The reason is that there should be primary capital amounting to a fixed sum and a targeted own capital that is expected to increase over time.
Some of the risks a central bank is exposed to can be calculated using scenario analyses and Value-at-Risk analyses in the way that is done in this response (Value-at-Risk, VaR, is a measure of risks in connection with asset management). These methods of calculation do, however, only give an indication of the risks. Other non-quantifiable risks and confidence risks are also important. At the same time, there is of course no reason to hold more capital in the Riksbank than can be justified by the task and the need for substantial safety margins.
Given the above-mentioned bases, the Riksbank sees some difficulties with the alternatives proposed by the commission. This is especially the case of Alternative 1, in which the Riksbank’s own capital would initially amount to SEK 10 billion. This means there is a risk that the Riksbank’s own capital could become negative in the future, which the Riksbank considers inappropriate and which should be avoided. In addition, it is possible that the supply of banknotes may decrease markedly in future, and thus the earnings, the seigniorage, the Riksbank has of the assets that correspond to the volume of notes.
The Riksbank also has certain misgivings about the commission’s Alternative 2, whereby own capital would initially amount to SEK 60 billion. In the Bank’s opinion adjustment of own capital is inadequate and the proposal about the supply of banknotes as a debt to central government for which an annual fee should be paid is not a good solution given EU regulations, among other things.  The Riksbank therefore proposes a modified form of the commission’s alternative 2.
With regard to the adjustment in the size of the targeted own capital, the Riksbank proposes that this should be adjusted in line with the gross domestic product (GDP) at current prices instead of the consumer price index (CPI), as the commission suggests. The Riksbank’s own capital should be in reasonable proportion to the Swedish economy’s and the financial sector’s size. An adjustment in line with GDP takes into account both the Swedish economy’s real growth and inflation, as well as taking more consideration to the financial sector’s rapid development. With an adjustment in line with the CPI, the Riksbank’s own capital would gradually decline as a share of GDP and in relation to the financial sector.
The Riksbank’s own capital has decreased in relation to GDP since the beginning of the 1990s. At the end of 1990, it amounted to the same nominal amount as at the end of 2007. Previously the fixed exchange rate required considerable resources while the promotion of financial stability has now come to the fore.  The Swedish economy has growth twofold, measured in terms of GDP and the financial sector has grown many times over. The Riksbank considers that a continued decline in the size of own capital in relation to the economy as a whole is not desirable. The Riksbank therefore considers that the Riksbank’s own capital should be adjusted in line with GDP at current prices.
With regard to the supply of banknotes, the Riksbank considers that it should be treated, as at present, as a debt to the general public. The commission proposes in alternative 2 that the supply of banknotes should form the basis for an annual fee that will be paid by the Riksbank to the central government. In order to be compatible with EU regulations on monetary financing, such a fee must be supplemented with a rule that means it should not be paid if the own capital is insufficient.   The same purpose can be achieved in a simpler way with the alternative proposed in this response. In this respect one can see the Riksbank’s proposal as a variation of the commission’s proposal, in which conditions are placed on the fee and it is only paid to the central government if the Riksbank’s earnings after deductions for the build-up of the own capital are sufficiently large. At the same time, the build-up of the Riksbank’s own capital to the targeted level after a loss will be quicker if, in such a situation, the fee does not have to be paid to the central government. In order to clarify the size of the seigniorage, an estimate of this should be stated in the Annual Report.
With regard to the capital requirement, the Riksbank noted that the assessment of the size of the targeted own capital is very uncertain. At the end of 2007 own capital amounted to some SEK 58 billion. In addition, there is the revaluation account of some SEK 20 billion.  The calculations made by the Riksbank result in broad intervals for the capital requirement. These calculations are made up of a number of components, each of which is difficult to calculate and, moreover, their mutual connections are difficult to determine. The targeted own capital must, therefore, be based on an overall assessment of these factors and of the safety margins required.
The two significant risks associated with the Riksbank's activities are the risk of a huge appreciation of the krona, which would lead to large currency losses for the bank, and the risk that one or more major banks are unable to meet their obligations, despite receiving large amounts of emergency liquidity assistance from the Riksbank. It is unlikely that both these events can occur at the same time.
The Riksbank considers that the present size of own capital of some SEK 60 billion (excluding the revaluation account) corresponding to 2 per cent of GDP can meet significant risks. However, even with an adjustment of own capital by GDP at current prices it is impossible to rule out the possibility that the financial markets can develop so that the risks increase. In order to further reduce the risk that confidence in the Riksbank weakens in a vulnerable situation, the Riksbank’s own capital should, therefore, for a number of years be adjusted in addition to what follows of an adjustment by GDP.
The Riksbank therefore proposes that for four years, as of spring 2009, own capital be adjusted in addition to what follows of an adjustment of GDP at current prices, by the annual dividends transferred being set to 25 per cent of the respective year's profits. This would mean that the Riksbank is equipped against reasonably large risks.
The Riksbank’s assessment is that the bank’s own proposal regarding own capital together with a regulation in the law of the provisions regarding the dividend payment provides strong guarantees that the Riksbank will be able to implement its tasks. In the same way as at present, decisions regarding profit sharing should be made by the Riksdag following a proposal from the General Council of the Riksbank.
With regard to the commission’s assessment that there is reason to look into the size of the foreign exchange reserve and the degree of currency risk in the Riksbank’s financial assets, the Riksbank agrees with this. The Riksbank will continue to work with these issues in connection with a general review of the guidelines for the Riksbank’s asset management. The commission’s proposal to an amendment of the Sveriges Riksbank Act in these parts corresponds with the Riksbank’s perception of the way in which the Act should be formed to enable an effective focus of asset management. There is probably reason to invest some of the Bank’s assets in Swedish assets henceforth. Therefore, the present limitation in the Sveriges Riksbank Act that the Bank – for the purpose of conducting exchange rate policy – may only invest its assets in foreign instruments should be removed in order to allow the Riksbank to also invest in Swedish assets. The Bank will review the guidelines for its capital management and intends to report the results of its activities to the Riksdag no later than in the annual report for 2009. The inquiry will clarify a suitable distribution of assets in the future management and it may also influence views as to how much capital the Riksbank requires.
Finally, the Riksbank wishes to emphasise that in normal circumstances it is fully possible to pursue monetary policy with completely different capital base levels. Above all, the response is about which safety margins are desirable with regard to safeguarding the stability of the financial system and to the management of the Riksbank’s financial assets. 
An appendix is attached to this response, in which the Riksbank illustrates in greater detail the issues the Bank considers significant to the continued preparation. 

On behalf of the General Council:          On behalf of the Executive Board:
Johan Gernandt                                     Stefan Ingves
        Maria Svalfors                                        Eva Cory
Taking part in the decision:
General Council: Johan Gernandt (chairman), Leif Pagrotsky, Sinikka Bohlin, Peter Egardt, Susanne Eberstein, Bo Bernhardsson, Elizabeth Nyström, Anders Flanking, Kjell Nordström, Ebba Lindsö och Johan Pehrson.
Executive Board: Stefan Ingves (chairman), Irma Rosenberg, Lars Nyberg, Lars E.O. Svensson, Barbro Wickman-Parak och Svante Öberg.

Svante Öberg submitted the draft consultation response.
Appendix to the Response regarding the report “The Riksbank’s Financial Independence” (SOU 2007:51) | 862 Kb
Response regarding the report “The Riksbank’s Financial Independence” (SOU 2007:51) | 165 Kb

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