sou · GVB351 · 2008-01-01 00:00:00 — One fundamental difference between alternative 1 and alternative 2 is that alternative 1 proposes a one-off dividend which reduces the Riksbanks own capital to billion. Based on the 2006 financial statement a one-off payment would amount to around billion (billion to be more exact). Thus alternative 1 leaves a balance sheet forming a much smaller basis than alternative 2 for the profits that central government can expect from the Riksbank (this is illustrated in Figure 11 in Section 7.4). In alternative 1 the balance sheet amounts to billion while in alternative 2 it amounts to billionTPF FPT. 44TP PT For this calculation we have assumed that own capital will be and 60 billion respectively for the two alternatives, gold will be sold at the same rate and to the same value as in 2006 and that other balance sheet items (currency in circulation, other assets, revaluation account and other liabilities) will be unchanged over the year. In alternative 1 the yield bearing position in Swedish krona will amount to billion, while in alternative 2 it will be billion. This gives rise to differences in the expected transfers (see Figure 12). Transfers from the Riksbank to the treasury using the current forecast and the two alternatives. Current forecast of transfers from the Riksbank Total transfers according to alternative 1 Total transfers according to alternative 2 Interest payment according to alternative 2 Dividend according to alternative 2 Note: These calculations are based on the current Swedish forecast for transfers, and for the two alternatives on an expected return of 4 percent and an expected repo rate of 3.5 percent. The current forecast for the transfer is about billion per year, about billion for alternative 1 and over billion for alternative 2. What makes the current forecast lower is that it implies an interest rate level lower than the 4 percent basis of these calculations, and also that it contains expectations regarding rising long-term interest rates which lead to negative changes in value. If the assumptions were the same, the difference between alternative 2 and the current principle for transfers would be marginal. The difference between alternatives 1 and 2 is due to the interest-bearing position in Swedish krona being lower in alternative 1. In addition to this there is naturally a significant difference in the extra payment of billion contained in alternative 1, which is taken as having been made immediately. However, from a purely financial perspective the two proposals are generally identical. 9.2.Size of central government debt Judgement of the Commission: The Commissions alternative 1 reduces central government debt by billion, or 1.7 percent of GDP. Alternative 2 does not affect the size of central government debt. The previous section showed that the treasury with the Commissions proposal can expect to receive an annual dividend from the Riksbank of a level that is equivalent to that of today. For alternative 1 this can be in the order of magnitude billion and for alternative 2 in the order of magnitude billion. In alternative 1 there is an added transfer of billion which is made immediately on transition to the new capital structure. Because this reduces the interest costs of central government debt by approximately the same amount the total impact on central government finance is the same. One consequence of the capital being transferred from the Riksbank is that central government debt decreases. The central government debt is usually reported in two ways; either in the form of the Debt Offices borrowingTPF FPT or as the gross consolidated public sector debt. The latter is the calculation of debt used in EU Commission calculations for meeting the Euro participation criteria. The main difference is that the consolidated gross debt also contains public sector debt on the credit market and the premium pension system claims on the Debt Office (central government), and also deductions are made for the holdings of the public sector and in government securities and public authority debt. According to the spring budget at the end of 2006 central government debt amounted to billion (43.0 percent of GDP) and the consolidated gross debt was billion (46.9 percent). A repayment of billion means that central government debt will fall to 41.3 percent of GDP and the consolidated gross debt to 45.2 percent of GDP, provided that the repayment was made at the end of 2006. In the coming years central government debt is expected to fall which means that these proportions will change in the future. However, this reduction in central government debt will approximate 1.7 percent of GDP. With the Commissions alternative 2 the size of central government debt is not affected either in the short-term or long-term. The annual dividend will be greater but central government will pay more in interest because the central government debt is greater than in alternative 1. 45TP PT When central government debt is reported in the Spring Budget , a deduction is made for the state authorities holdings in government securities from the amount that the Debt Office has borrowed. It is this level of central government debt used here as well. The exchange-rate exposure of central government finance Judgement of the Commission: The aggregated exposure of central government finance to changes in the exchange rate will be changed by the proposal. The size of this change will depend on central governments management of its aggregated currency position, i.e. the extent to which the Debt Office currency debt is adjusted when the Riksbank neutralises its currency assets. Central government finance is also affected by the aggregated currency exposure to which the central government finance is exposed. Currently the Debt Office currency borrowing and the Riksbanks currency assets neutralise each other to a certain extent. When the Swedish krona strengthens the value of the Riksbanks currency assets falls, but at the same time the value (in Swedish krona) of the currency debt of the Debt Office also falls. From a budget perspective the transfers from the Riksbank decrease, at the same time as the costs of the currency swap also decrease. This matching effect is far from perfect today, because the different currency compositions of the Debt Offices foreign borrowing and the Riksbanks currency assets, and also because transfers from the Riksbank are governed by specific rules. However, at an outline level it is relevant to take the effect into account. As discussed in Chapter 8 the Riksbanks currency assets amount to approximately SEK 150 billionTPF FPT and the Debt Office´s currency debt to about billion, which means a net position of billion. Of course central government has other currency positions in its aggregated balance sheet, but these are disregarded here. But the Commissions proposal regarding a neutralisation of the currency position in the Riksbank increases central governments open currency exposure from to 260 billion. As discussed this effect can be neutralised if central government wishes it. If it does not, total central government finance will be more exposed to variations in the exchange rate. An appropriate view on aggregated central government currency exposure is outside the terms of reference of this Commission, and is something that must be taken into account when the government provides guidelines for the administration of public debt. The purpose of this discussion is to point out these consequences. 46TP PT Gold excluded and with deductions for repo transactions on the debit side. Proposals for the wording of and commentaries on legislation: The reasons behind the proposals have been developed in Section 7.1. Chapter 10, Fund assets, allocation of profit, budget and discharge from liability Section 1 The financial independence of the Riksbank is guaranteed by it having the right to issue banknotes and coins, and in addition having primary capital amounting to at least billion. This paragraph expresses the Commissions underlying views on how the Riksbanks financial independence is to be achieved. The Chapters heading has been amended in accordance with this. The concept primary capital has a different meaning than before, this is developed in Section 7.4. Previously primary capital was set as a nominal amount. The Commissions proposal allows primary capital to be a varying amount. The ECBs convergence reports have commented that there are no regulations that exclusively govern how the transfer of funds from the Riksbank to central government shall take place. The provisions in this paragraph and the other regulations in the chapter now meet the ECB requirements regarding capital strength and protection against the transfer of funds. Section 2 The requisite amount of primary capital pursuant to Section 1 shall be adjusted upwards annually by a factor corresponding to the change in the consumer price index, calculated as the ratio between the consumer price index for the month of October in the year before the current financial year and the consumer price index for the month of October 1992. The costs of financing the operation of the Riksbank can be expected to rise in line with general price trends. The amount of primary capital should therefore be adjusted upwards in accordance with this and linked to the trend of the consumer price index. The wording of this provision makes clear that it is the original amount of primary capital which is to be adjusted upwards year by year and not the actual primary capital in a specific year. If the consumer price index decreases it does not mean that the requisite amount of primary capital is reduced. Section 3 Should primary capital be less than that set out in Sections 1 and 2 no transfer to central government may take place. The provision in this paragraph makes clear that the Riksbanks capital strength must be built up as quickly as possible after losses which have affected the amount of primary capital pursuant to Sections 1 and 2. This means that it is the adjusted amount of primary capital pursuant to Section 2 which determines whether profit distribution may take place. The same result should be achieved by Section 4, but this provision makes clear this prohibition against distribution. Section 4 The profit for the year shall be allocated as follows. 1.Provision shall be made to the primary capital so that it amounts to that contained in Sections 1 and 2. 2.That remaining after any provision pursuant to point 1 may be distributed to central government. These provisions specify how profit for the year is to be allocated. As stated in Section 2, the requisite amount of primary capital each year is adjusted upwards in relation to the increase in the consumer price index. The first point specifies that provision shall be made so that primary capital is the requisite amount pursuant to Section 2. This means that if in previous years it has not been possible to make sufficient provision, then this must be corrected in the current year. When provision has been made pursuant to the first point, the remainder of the profit can be distributed to central government. The primary rule is that the entire profit is distributed to central government, but Parliament can decide that only part of the profit be distributed, for example if it believes that the Riksbanks financial position should be strengthened or if it is considered unsuitable for the entire extraordinary dividend made possible in this alternative to be allocated. Parliament can decide that only part of the profit be distributed, regardless of whether this has been proposed by the or not. Pursuant to Sections 3 and 4, in the event that the Riksbank makes a loss neither provision to primary capital nor distribution shall take place. Section 5 The Riksbank's Profit and Loss Account and Balance Sheet are approved by the Riksdag, which also determines the allocation of the Riksbank's profit. The Riksdag determines whether the shall be discharged from liability for its activities and management of the Riksbank. Discharge from liability may only be denied if there are reasons to make claims of financial liability against a member of the or , or if the member should be prosecuted for criminal actions in connection with his assignment or employment. The first sentence specifies that it is Parliament that establishes the Riksbanks profit and loss and balance sheets, and by doing so decides the extent to which provision is made to In making such a decision Parliament applies sections 1 – 4 §§. Furthermore it is Parliament that decides how the Riksbanks profit is to be allocated. The profit can either be distributed entirely to central government or all or part of it can be left in the Riksbank. The provisions on freedom from responsibility are unchanged. Current Section 1a becomes 6, 2 becomes 7, 3 becomes 8, 5 becomes 9. Proposals for the wording of and commentaries on legislation: An account of the reasons behind the proposals has been given in Section 7.2. Chapter 10, Fund assets, contribution, allocation of profit, budget and discharge from liability Section 1 The Riksbank shall have a primary capital amounting to at least billion. This paragraph expresses the Commissions underlying views on how the Riksbanks independence is to be achieved. The Chapters heading has been amended in accordance with this. The concept primary capital has a different meaning than before, this is developed in Section 7.4. Previously primary capital was set as a nominal amount. The Commissions proposal allows primary capital to be a varying amount. The ECBs convergence reports have commented that there are no regulations that exclusively govern how the transfer of funds from the Riksbank to central government shall take place. The provisions in this paragraph and the other regulations in the chapter now meet the ECB requirements regarding capital strength and protection against the transfer of funds. Section 2 The requisite amount of primary capital pursuant to Section 1 shall be adjusted upwards annually by a factor corresponding to the change in the consumer price index, calculated as the ratio between the consumer price index for the month of October in the year before the current financial year and the consumer price index for the month of October 1992. The costs of financing the operation of the Riksbank can be expected to rise in line with general price trends. The amount of primary capital should therefore be adjusted upwards in accordance with this and linked to the trend of the consumer price index. The wording of this provision makes clear that it is the original amount of primary capital which is to be adjusted upwards year by year and not the actual primary capital in a specific year. If the consumer price index decreases it does not mean that the requisite amount of primary capital is reduced. Section 3 Each year the Riksbank shall pay a contribution to central government calculated in accordance with an interest rate corresponding to the repo rate on the nominal amount of currency in circulation. This provision makes clear that the liability item corresponding to currency in circulation constitutes loan capital. This is primarily manifested in that the Riksbank must pay an annual contribution corresponding to the repo rate for currency in circulation. It is not appropriate in the statute to indicate what technical method will be used to calculate the contribution in more detail. It should be assumed that this calculation will be made using the most exact methods available. Section 4 Should primary capital be less than that set out in Sections 1 and 2 no transfer to central government may take place. The provision in this paragraph makes clear that the Riksbanks capital strength must be built up as quickly as possible after losses which have affected the amount of primary capital pursuant to Sections 1 and 2. This means that it is the adjusted amount of primary capital pursuant to Section 2 which determines whether distribution may take place. The same result should be achieved by Section 4, but this provision makes clear this prohibition against distribution. Section 5 The profit for the year shall be allocated as follows. 1.Provision shall be made to the primary capital so that it amounts to that contained in Sections 1 and 2. 2.That remaining after any provision pursuant to point 1 may be distributed to central government. These provisions specify how profit for the year is to be allocated. As stated in Section 2, the requisite amount of primary capital each year is adjusted upwards with regard to the increase in the consumer price index. The first point specifies that provision shall be made so that primary capital is the requisite amount pursuant to Section 2. This means that if in previous years it has not been possible to make sufficient provision, then this must be corrected in the current year. When provision has been made pursuant to the first point, the remainder of the profit can be distributed to central government. The primary rule is that the entire profit is distributed to central government, but Parliament can decide that only part of the profit be distributed, if it believes that the Riksbanks financial position should be strengthened. Parliament can decide that only part of the profit be distributed, regardless of whether this has been proposed by the or not. Pursuant to Sections 3 and 4, in the event that the Riksbank makes a loss neither provision to primary capital nor distribution shall take place. Section 6 The Riksbank's Profit and Loss Account and Balance Sheet are approved by the Riksdag, which also determines the allocation of the Riksbank's profit. The Riksdag determines whether the shall be discharged from liability for its activities and management of the Riksbank. Discharge from liability may only be denied if there are reasons to make claims of financial liability against a member of the or , or if the member should be prosecuted for criminal actions in connection with his assignment or employment. The first sentence specifies that it is Parliament that approves the Riksbanks profit and loss and balance sheets, and by doing so decides the extent to which provision is made to primary capital. This takes place in the same way as stipulated in current legislation, after a proposal by , which follows from the new Section 9. In making such a decision Parliament applies sections 1 – 5 §§. Furthermore it is Parliament that decides how the Riksbanks profit is to be allocated. The profit can either be distributed entirely to central government or all or part of it can be left in the Riksbank. The provisions on freedom from responsibility are unchanged. Current Section 1a becomes 7, 2 becomes 8, 3 becomes 9, 5 becomes 10. With regard to the rules on how the Riksbank manages its assets, we propose that they be inserted in Chapter 8 of the Riksbank Act. These rules are common to both alternatives. Chapter 8, Asset management and other tasks An account of the reasons behind the proposals has been given in Section 7.3. Section 1 The Riksbank holds assets in order to be able to carry on its tasks pursuant to this Act and in order to be able to finance its operational activities independently. The first part of the paragraph shows that the Riksbank holds assets in order to carry out its policy related tasks, being able to carry out monetary policy repo transactions and provide emergency liquidity assistance for example. The second part shows that holding assets, and the return generated by these assets, forms the basis of financial independence. Section 2 The Riksbanks assets shall, taking into account the various purposes of the asset holdings, be managed so that a good return is achieved while at the same time the risk inherent in this management is taken into account. This management shall also take into consideration the Riksbanks position as a central bank. An account of the proposal has been given in Section 7.3. This provision aims to indicate the framework for asset management. This is relatively broad and only indicates that a good return should be sought, and that risk must be taken into account. The reason that the purposes of management should be taken into account is that it is not always possible for the Riksbank to be guided by an assessment of return potential in relation to risks. An example is if the Riksbank provides emergency liquidity assistance, which does not give a particularly good return, at the same time as it is associated with serious risk. Another example is IMF undertakings which are not motivated by considerations regarding the potential financial return and risk. The reasons why the Riksbanks special position must be taken into account have been accounted for in Section 7.3. Section 3 shall establish guidelines for the management of financial assets. This provision obliges to draw up guidelines for overall asset management. Current Section 1 becomes 4, 2 becomes 5, 3 becomes 6, 4 becomes 7, 5 becomes 8, 6 becomes 9. Opinion of the experts and We agree with the important considerations and the proposals in general. On one point we consider the proposed legislation unsuitable. This applies to how the balance between return and risk is to be made in the Riksbanks asset management. The Commissions proposals mean that the Riksbank has a significant amount of cost- free capital at its disposal. The purpose of this capital is to give the Riksbank financial independence. In Section 6.4 How should the Riksbanks assets be invested? the Commission considers how the Riksbanks assets are to be managed when there are assets other than those in foreign currency. The Commission states that these assets should be administered in such a way that the financial risk is so low that no cost-free capital need be specifically allocated for risk-taking in asset management. In addition, it states that the Riksbank should have a high aversion to risk in its asset management and low risk preferences to guarantee its financial independence. In the Summary the Commission sums up its opinion that the Riksbanks assets should be invested at low risk. It should also be pointed out that in Section 3.4.5 Capital need for current operating costs the Commission calculates the Riksbanks capital need based on a real return of an average 1.5 to 2.0 percent being achieved. We consider this to be an expected return compatible with low risk management. We understand that the Commissions opinion is that the Riksbanks assets should be managed at a low risk. We are of the same opinion but we feel that this fundamental view is not clearly expressed in the Commission's proposed legislation. With regards to asset management the Commission has the following proposal. Section 2 The Riksbanks assets shall, taking into account the various purposes of the asset holdings, be managed so that a good return is achieved while at the same time the risk inherent in this management is taken into account. This management shall also take into consideration the Riksbanks position as a central bank. The wording proposed by the Commission means that there is almost no guidance as to how the balance between a good return and risk is to be achieved. We feel that the statute should better reflect the Commissions considerations. We also feel that it is self-evident that the Riksbanks monetary policy task must have priority over its asset management. is too weak to say that the Riksbanks position as a central bank shall be taken into consideration. In view of this we propose the following. Section 2 The management of the Riksbanks assets shall be carried out taking into account the Riksbanks position as a central bank. The assets shall, taking into account the various purposes of holding assets, be managed with low risk.