sou · GVB351 · 2008-01-01 00:00:00 — Commission directive (dir. 2006:50) Summary of the terms of reference A special Investigator shall investigate issues related to the Riksbanks balance sheet structure, capital structure and its profit allocation. The Special Investigator shall submit proposals for the statutory regulation of the principles for allocating the Riksbanks financial result. These proposals shall be founded on an analysis of: the amount of own capital needed by the Riksbank to fulfil its tasks the profit allocation and balance sheet systems applied by a selection of other central banks both in and outside the EU The future balance sheet structure, capital structure and profit allocation of the Riksbank the effects on both the Riksbank and the Treasury of different profit allocation systems. The Investigator shall report at the latest on . The Riksbanks independent position The Riksbank is an authority answering to Parliament and independently responsible for monetary policy and other tasks related to participation in System of Central Banks (ESCB), such as carrying out foreign exchange transactions, maintaining and administering a foreign exchange reserve and encouraging a secure and effective payment system. The objective of the Riksbank's activities is to maintain price stability. The formal and actual autonomy of the Riksbank was strengthened by the amendments made to the Riksbank Act (1988:1385) in 1989 and 1999. The latter amendments were made as a result of undertaking to increase the Riksbanks independence with accession to Union (EU) and the Riksbanks participation in the ESCB. The provisions regarding the independence of central banks in the ESCB (which covers the national central banks of all EU countries, regardless of whether the country has accepted the Euro as its currency or not) can be found in article 108 in the and article 7 in the Statute of System of Central Banks and of . In brief the amendments were the following (prop.1997/98:40 p. 48 f): A statutory objective for monetary policy was introduced; maintaining price stability (functional independence). A prohibition on giving the Riksbank instructions on monetary policy issues, and also, according to the preparatory work on the act, other ESCB related issues, was introduced (institutional independence). Monetary policy decision-makers were given long mandates. They are covered by strict rules of disqualification and can only be dismissed for reasons set out in the ESCB statute (personal independence). Another aspect of independence is financial independence, i.e. that the Riksbank shall be able to fulfil their obligations without being dependent on appropriations from Parliament. In the above legislation the government and Parliament considered that the Riksbank already had a high degree of financial independence, which is why no rules were introduced with regard to this (prop. 1997/98:40 p. The Riksbanks current accounting policies The Riksbanks revenues are principally interest income and the net income from financial transactions. In 2005 interest income amounted to billion (and interest costs to billion). The net income from financial transactions that year was negative, 1.1 billion. Because the financial result is to a great extent determined by changes in foreign currency exchange rates, it varies considerably from year to year. The net income from financial transactions includes a price effect (i.e. realised profits and losses from securities transactions and unrealised securities losses), a foreign exchange effect (realised profits and losses from foreign exchange transactions and unrealised exchange rate losses) and a gold valuation effect (realised profits and losses from transactions with gold and unrealised gold price losses). Other revenues consist of fees, commissions and dividends received and are insignificant in the circumstances. unrealised profit is not included in the Riksbank's financial result in its annual report. Instead they are entered in a revaluation account in the balance sheet. The Riksbanks administrative costs and the cost of producing banknotes and coin are deducted from the net interest income. In 2005 the Riksbank made a profit of billion (compared with a loss of billion in 2004). Current profit allocation principles Pursuant to Chapter 10, section 3, second paragraph of the Riksbank Act, each year, before 15 February, shall submit an Annual Report to Parliament, the Audit Office and the . shall make proposals to the Riksdag and the Audit Office on the allocation of the profit of the Riksbank. Parliament shall then, pursuant to Chapter 10, section 4 of the Riksbank Act settle on a profit allocation. The principles of the allocation of the Riksbanks profit are at present not regulated by law. However, the guidelines for profit allocation on objective grounds were set by in 1988 and were approved by Parliament in the following year (Report 1988/89:FiU27). According to these guidelines the Riksbank marked all its assets and liabilities, apart from gold, to market, which meant that the financial result in any particular year could be greatly affected by interest and exchange rate fluctuations. In order to achieve stability in its transfers to the Treasury the past five years average financial result before allocation to general reserves were used to calculate profit allocation. An increase or devaluation in the value of the Swedish krona would not be allowed to affect the financial result as these effects were be equalised using the contingency fund. These guidelines were applied in this form up to and including the financial statement for 1992. After the Swedish krona was floated adjusted the guidelines so that transfers to the Treasury would be made up of the five past years average financial result before allocation to general reserves excluding the effects of exchange rate fluctuations. In the 1998 financial statement the guidelines were adjusted in one further regard. The Riksbanks holdings in gold were marked to market and their unrealised appreciation was treated in practice as a foreign exchange rate effect. Consequently, after the latest revision the basis for calculating transfers to the Treasury was the past five years average financial result, including realised and unrealised price effects on securities holdings, before allocation to general reserves, after the deduction of exchange rate effects and gold valuation effects (Report 2001/02:FiU23). In the allocation of the financial result an amount equivalent to 80 percent of the above basis for calculation is transferred to the Treasury. This means that the present accounting policies include unrealised profits in the basis for calculation and thus the financial result as well. An amount equivalent to 10 percent of the same basis for calculation shall then be set aside to the contingency fund, provided the remainder of the financial result is at least this amount. If this is not the case the provision to the contingency fund is limited to an amount equivalent to the remainder of the financial result after a deduction for the transfer to the Treasury. That remaining of the financial result after these two allocations to general reserves shall be set aside to the balancing account. Application of profit allocation guidelines The profit allocation guidelines approved by Parliament were applied consistently from 1989 to the financial year 1999. However, for the financial year 2000 proposed that an amount of billion be transferred to the Treasury over and above the regular transfer for that year. The proposed extra transfer was based on the assessment of how large the Riksbanks own capital should be. In evaluating the proposal for profit allocation, agreed that it would be possible to make the extra transfer to the Treasury. emphasized that it was a logical for the Riksbank to have an amount of own capital large enough for the bank to be able to fulfil its monetary policy and foreign exchange policy commitments credibly and independently. And also that the own capital should guarantee stable transfers and allow the Riksbank to cope with sizeable fluctuations in its financial results. made the judgement that the Riksbank had a good capital strength balance both from an international perspective and in the light of its monetary policy and foreign exchange policy commitments. In addition, credit risk in the Riksbanks operational activities was considered lower than it had been ten years previously. In view of this the Committee felt that there was scope for a further extraordinary transfer to central government the next year. therefore proposed that should submit a proposal for the final level of this extra transfer (Report 2000/01:FiU23 p. However, this decision was not unanimous. In the financial year 2001 the later judged that there was scope for billion to be utilised for an extra transfer to the Treasury over and above the transfer made in accordance with the profit allocation criteria. shared the opinion and maintained that after this transfer the Riksbank would have achieved a well balanced long-term consolidation level. Taking this into account there would be no need to consider further extraordinary transfers in the future. also felt that there was no current need to call into question the applicable profit allocation principles, and that they should continue the be applied (Report 2001/02:FiU23 p. For the financial year 2002/03 therefore proposed that the annual profit allocation should follow the current principles (Prop. 2002/03:RB2), which was supported by (Report 2002/03:FiU23 p. Sources of the Riksbanks profit The Riksbanks assets provide a return. The Riksbank Act does not contain provisions regarding how the banks assets are managed, but the Riksbank manages its assets so that its return is as good as possible. The Riksbanks monetary policy, foreign exchange policy and other tasks mean that its potential for investing assets to maximise profit is limited. The return from assets comes mainly from securities administration. The Riksbank holds assets in Swedish krona in order to carry out the monetary policy operations necessary to control the interest rate level. The Riksbank also holds assets in foreign currency in order to maintain its ability to take foreign exchange policy measures. Much of the Riksbanks profit originates from the management of the assets held in foreign currency because these are many times greater than assets in Swedish krona. The amount of the Riksbanks revenue generating assets is determined by how large the banks own capital and other liabilities are. Essentially the Riksbanks other liabilities consist of currency in circulation. At the end of 2005 the Riksbanks own capital was billion and liabilities billion (of which banknotes and coin amounted to billion) and its unrealised profits booked in the revaluation account were billion. National central banks often have substantial seigniorage income, i.e. revenue from the issuing of banknotes and coin. Seigniorage arises because those holding banknotes and coin - on the debit side of the Riksbanks balance sheet - do not receive interest, while the assets held by the Riksbank do not give a return. Theoretically seigniorage could be called the return from the assets corresponding to currency in circulation. However, a central banks debit side consists of more items than just banknotes and coin, primarily own capital. Because the Riksbank has not in advance linked certain assets to the item banknotes and coin, it is not possible to directly calculate how large seigniorage is. The truest method to calculating seigniorage is by multiplying the proportion of the balance sheet total made up by the stock of banknotes and coin by the realised return on all assets. In this case the seigniorage for 2005 would be billion. As long as banknotes and coin are used as a means of payment the Riksbank will have substantial revenue, this is because the assets corresponding to the liability item for banknotes and coin will provide a return. Should the demand for banknotes and coin decrease in the future because the use of other forms of payment, e.g. various types of debit cards or other payment services, increases – which cannot be ruled out – this will mean that the Riksbank revenue will be less. Proposals of for the structure of the Riksbanks own capital In the spring of 2002 submitted a report on the Riksbanks own capital. This was submitted in conjunction with the proposal regarding the allocation of the 2001 financial result (2001/02:RB2). In the memorandum proposed that in future the own capital in the balance sheet should be divided into several funds. One fund guaranteeing the Riksbank sufficient revenue to meet the banks normally operational costs, excluding the cost of printing banknotes and coin. One fund for guaranteeing the Riksbanks ability to cover losses in its operation, primarily related to providing emergency liquidity assistance in the event of instability in the financial system. And also reservations to meet ongoing unrealised value changes, based on their marking to market, of the Riksbanks assets. The profit remaining after provisions for unrealised profits, and after guaranteeing the realisable value of the Riksbanks provisions, would then, in the view of , be distributable. In addition, it was proposed that the provisions related to reservations should be introduced into the Riksbank Act. It was also proposed that a provision, preventing the Riksbanks profit being allocated in such a way that risked overriding the banks ability to independently carry out its statutory duties, be inserted into the same Act. The need for a Commission of Inquiry How well meets the requirements of the EC treaty and ESCB Statute on the independence of central banks is followed up every other year in the convergence reports. are compiled by the Commission and (). This requirement is binding for all member states, regardless of whether the country is a member of the currency union or not. In the convergence report for 1998 () pointed out that should consider introducing a safeguard to govern profit distribution from the Riksbank. The purpose of such a provision would be to protect the Riksbanks financial independence so as not to hinder its ESCB related work. However the expected this shortcoming to be resolved with a preliminary draft ruling within the framework of the ongoing revision of the Riksbank Act. During the overhaul of the Riksbank Act in 1997 the government felt that profit allocation had, after the 1989 parliamentary resolution, had an objective basis and anticipated that this would continue to be the case. the government considered that there was no reason to introduce a provision guaranteeing that Parliament, when determining the allocation of the Riksbanks profit, would take account of the Riksbanks ability to fulfil its ESCB related tasks, as have been proposed by the , (Prop. 1997/98:40 p. In the convergence report for 2000 neither the Commission not the ECB mentioned financial independence as an issue. However, in the convergence reports for 2002 and 2004 financial independence was again taken up by both the Commission and the ECB. In the 2002 convergence report the Commission wrote that developments in 2001 and 2002 in had made evident the consequences of the absence of detailed legislation on profit allocation and extraordinary payments to the Treasury. The absence of legislation ensuring that the Riksbank retained the financial means necessary for the implementation of all ESCB-related tasks was particularly highlighted. The ECB and Commission considered that this absence of legislation was incompatible with the principle of financial independence. The ECB likewise pointed out that in the light of recent developments, i.e. the extraordinary payments from the Riksbank to central government of a total of billion, it was necessary to legislate on the Riksbank's profit allocation. According to the ECB such legislation should contain clear rules about the decision making framework in order to ensure the Riksbanks financial independence. Both the Commission and ECB tool up the issue of the Riksbanks financial independence again in the 2004 convergence report. The Commission noted that Swedish legislation was still in conflict with the EC treaty with regards to the Riksbanks financial independence etc. The ECB maintained that with regard to the financial independence of the Riksbank, certain legal rules concerning the Riksbanks financial accounts and the regime for profit allocation will require to be further adapted and that the present arrangements on profit distribution are incompatible with the Treaty and the ESCB Statute. The ECB stated that the statutory framework should contain clear provisions as to the limitations applicable to such decisions in order to safeguard Riksbanks financial independence. submitted in its proposal to Parliament 2004/05:RB2 that the amended accounting policies used by the Riksbank would make possible the transition to a model for profit allocation in which the Riksbanks own capital would be linked with the banks various tasks in a much more transparent way than was the case at present. Entry into the EU has meant that has undertaken to meet the requirements set out in the and ESCB Statute. A special Investigator shall evaluate whether changes to legislation are necessary to ensure that the legislation covering the Riksbanks financial independence agree with these requirements. If a change to the legislation is deemed necessary the Investigator shall study and analyse the Riksbanks balance sheet structure, capital structure and its profit allocation in more detail, drawing up proposals for the statutory regulation of the principles related to the allocation of the Riksbanks profit. How much own capital is needed by the Riksbank to fulfil its task? The requirement for financial independence means that the Riksbank should have assets that generate a return sufficient to fund its operational activities to a reasonable level. Because these assets may decrease in the future due to a reduced use of banknotes and coin, the Riksbanks own capital must be sufficient to guarantee the necessary return. The Riksbank's task – to encourage a reliable and effective payment system – also includes its role as lender of last resort. I this role the Riksbank must be able to grant solvent credit institutions, which are in an acute liquidity crisis, credit on special terms, i.e. emergency liquidity assistance, or provide security so that the institution can borrow money on the market. Because, in the event of a liquidity crisis, it is difficult to decide if the institution will eventually be able to repay this loan, the risk of losses in the provision of emergency liquidity assistance is great. The assets that the Riksbank manages normally generate a positive return. However, asset management is associated with the risk of losses in some years. Because the greater part of the debit side in the Riksbanks balance sheet is either made up of currency in circulation or own capital, and most of its assets are in the gold reserve and foreign exchange reserve, in principle the entire exposure to risk in the Riksbanks asset management is unmatched. This means that losses in ongoing management, when asset prices change, are not matched by a corresponding change in liabilities, which means that such losses must be balanced against the Riksbanks own capital. The Investigator must analyse which balance sheet structure would be best suited to the Riksbanks operation and how large an own capital the Riksbank needs to fulfil its tasks and maintain financial independence from its principal, and also how the own capital is to be adapted to changed conditions in the Swedish economy over time. The profit allocation and balance sheet systems applied by other central banks within and outside the EU The Investigator must analyse and survey the profit allocation and balance sheet systems applied by a selection of other central banks within and outside the EU. The aim is to collect the experience and ideas of other countries. The future capital structure and profit allocation of the Riksbank In order to ensure that the Riksbank can maintain its financial independence from Parliament, it must have resources at its disposal sufficient for it to be able to carry out its tasks in a satisfactory way. The Riksbank must be able to autonomously carry on is operational activities and fulfil its obligations without needing to request a capital infusion from Parliament. On the other hand, there is no reason for the Riksbank to be overcapitalised. The Investigator must draw up a regulatory framework which means that the Riksbank remains financially independent from Parliament and that it has sufficient own capital to fulfil its obligations and functions. The legislative proposal must contain principles for the allocation of the Riksbanks financial result. The rules shall prevent an unjustified build up of capital in the Riksbank. The Investigator shall set an appropriate level for own capital and propose a profit allocation rule which ensures that this level is maintained and that its realisable value is safeguarded. The profit allocation rule shall be straightforward, and in as far as possible, shall minimise the scope for the arbitrary handling of future surpluses in the Riksbanks operation. The Investigator may need to consider whether the proposals related to the balance sheet structure and capital structure require changes to the rules governing the Riksbanks asset management. The effects on the Riksbank and the Treasury of different profit allocation systems The Investigator must calculate the aggregated impact of different possible profit allocation systems. The current system must be elucidated, regarding the rolling five year calculations of the basis for profit allocation etc. The Investigator must explain the consequences for central government revenue and the effect on public sector savings. transitional issues between the present and potential profit allocation systems must be explained. If transitional issues are identified, proposals for resolving them must be presented. The Investigator must consult with the Riksbank. If the proposals have economic consequences, these must be reported. The Investigator shall report at the latest on .