The foreign currency reserve

Most of the day-to-day asset management at the Riksbank concerns the management of the foreign exchange reserve. The foreign exchange reserve serves two purposes.

The primary purpose is to ensure that the Riksbank is able to carry out its tasks with regard to monetary policy and financial stability. For monetary policy purposes the foreign exchange reserve may be used for currency interventions, that is to say, to buy or sell Swedish krona with the aim of influencing the exchange rate vis-à-vis other currencies.

In order to promote financial stability, the foreign exchange reserve may be used to provide emergency liquidity assistance to Swedish financial institutions with liquidity problems. In addition to this, the foreign exchange reserve may also be used for other commitments, such as loans to developing countries via the International Monetary Fund (IMF).

The Riksbank’s tasks and commitments requires there to be adequate liquidity in the foreign exchange reserve, which means that it could be converted into a cash balance at short notice, as well as placing restrictions on the currencies and amounts thereof that should be included in the reserve.

The second purpose of the foreign exchange reserve is to generate a good return for the Riksbank and ultimately for the central government and thus for tax payers. This provides scope to design the foreign exchange reserve in a less conservative manner than is justified solely by the Riksbank’s tasks and commitments. However, the risk in the foreign exchange reserve may not be so great that a substantial part of own capital is put at risk, thus potentially undermining the Riksbank's financial independence and the general public’s confidence in the Bank.

The composition of the foreign exchange reserve

The Executive Board makes decisions about the way in which the foreign exchange reserve is to be shaped seen from a long-term strategic perspective, and about the extent to which short-term tactical deviations from the strategic aims may be made. 
 

Strategic asset management

At a strategic level the Executive Board decides how the foreign exchange reserve is to be exposed to various foreign currencies in the long-term and its compilation of assets in various foreign currencies. The Executive Board also decides the foreign currency reserve’s composition of asset classes and the average duration of the underlying bonds.

The Riksbank’s foreign exchange reserve comprises foreign currency securities that are easily converted and which carry a low risk; mainly (some 90 per cent) government bonds. The remaining portion is made up of bonds issued by certain US institutions, so-called US agencies, and by certain Australian states. These bonds normally generate a somewhat higher return than corresponding government bonds.

The strategic composition of the foreign exchange reserve,
per cent

Since the market for Norwegian government bonds is relatively small and illiquid, the Riksbank has chosen not to create a currency exposure to Norwegian krona by directly investing in Norwegian government bonds. Exposure to the Norwegian krona is instead achieved by investing in US bonds, whose currency risk is converted to Norwegian krona on what is known as the foreign exchange derivatives market. Otherwise, the Riksbank’s asset allocation is in line with the currency allocation.

Tactical asset management

To further increase the return on the foreign currency reserve, the Riksbank engages in tactical management. Tactical management means that conscious departures are made from the strategic portfolio with the aim of increasing the return. 

The Executive Board decides how large the tactical deviation may be, that is to say how far the portfolio managers may deviate from the strategic benchmark portfolio in order to obtain a higher return. The deviation mandate is linked to an earnings target for the tactical management.