sou · GVB351 · 2008-01-01 00:00:00 — The reason for this is that the risk of losses due to changes in the foreign exchange reserve is considered acceptable in the short-term within the framework of the cost-free capital set off against foreign exchange intervention losses. The Commissions proposal means that the Riksbank will become a substantial investor in assets in Swedish krona. This will have two important consequences. It will mean an increased demand for Swedish government securities. This could be handled if the Debt Office were to be tasked with reducing its currency debt, so that the effect of the Riksbank reducing its currency position was neutralised. Also the conflict of interest arising from the Riksbank becoming a substantial investor in Swedish government securities, and at the same time regulating the short-term fixed income market, will need to be managed. Statutory proposal for the Commissions alternative 1 Draft act on amending Riksbank Act (1988:1385) Regarding the Riksbank Act (1988:1385) the following changes are prescribed in part that the heading of Chapter 8 shall be worded Asset management and other tasks and the heading of Chapter 10 shall be worded Fund assets, allocation of profit, budget and discharge from liability in part that Chapter 10, section 4 shall be repealed, in part that the current Chapter 8, section 1 shall be designated Chapter 8, section 4, the current Chapter 8, section 2 shall be designated Chapter 8, section 5, the current Chapter 8, section 3 shall be designated Chapter 8, section 6, the current Chapter 8, section 4 shall be designated Chapter 8, section 7, the current Chapter 8, section 5 shall be designated Chapter 8, section 8, the current Chapter 8, section 6 shall be designated Chapter 8, section 9, the current Chapter 10, section 1 a shall be designated Chapter 10, section 6, the current Chapter 10, section 2 shall be designated Chapter 10, section 7, the current Chapter 10, section 3 shall be designated Chapter 10, section 8, the current Chapter 10, section 5 shall be designated Chapter 10, Section 9, in part that the new Chapter 10, section 1 shall have the following wording, in part that seven new paragraphs shall be inserted into the Act, Chapter 8, sections 1-3, Chapter 10, sections 2-5 with the following wording 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. 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. establish guidelines for the management of financial assets. Section 1 The Riksbank shall have capital in an amount of one thousand million kronor, a reserve fund of and a contingency fund. 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. 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. Section 3 Should primary capital be less than that set out in Sections 1 and 2 no transfer to central government may take place. 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. 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. This Act shall enter into force on 1 January 2009. Statutory proposal for the Commissions alternative 2 Draft act on amending Riksbank Act (1988:1385) Regarding the Riksbank Act (1988:1385) the following changes are prescribed in part that the heading of Chapter 8 shall be worded Asset management and other tasks and the heading of Chapter 10 shall be worded Fund assets, contribution, allocation of profit, budget and discharge from liability in part that Chapter 10, section 4 shall be repealed, in part that the current Chapter 8, section 1 shall be designated Chapter 8, section 4, the current Chapter 8, section 2 shall be designated Chapter 8, section 5, the current Chapter 8, section 3 shall be designated Chapter 8, section 6, the current Chapter 8, section 4 shall be designated Chapter 8, section 7, the current Chapter 8, section 5 shall be designated Chapter 8, section 8, the current Chapter 8, section 6 shall be designated Chapter 8, section 9, the current Chapter 10, section 1 a shall be designated Chapter 10, section 7, the current Chapter 10, section 2 shall be designated Chapter 10, section 8, the current Chapter 10, section 3 shall be designated Chapter 10, section 9, the current Chapter 10, section 5 shall be designated Chapter 10, Section 10, in part that the new Chapter 10, section 1 shall have the following wording, in part that eight new paragraphs shall be inserted into the Act, Chapter 8, sections 1-3, Chapter 10, sections 2-6 with the following wording 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. 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. Section 3 shall establish guidelines for the management of financial assets. Section 1 The Riksbank shall have capital in an amount of one thousand million kronor, a reserve fund of and a contingency fund. Section 1 The Riksbank shall have a primary capital amounting to at least billion. 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. 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. Section 4 Should primary capital be less than that set out in Sections 1 and 2 no transfer to central government may take place. 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. 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. This Act shall enter into force on 1 January 2009. 1.The terms of reference and work of the Commission 1.1.The terms of reference of the Commission While the Riksbank is a government authority, it is different in many respects to other authorities. The Riksbank is separated from central government in several ways. This is reflected in the Riksbank being an authority responsible to Parliament; by its operations being governed by the Riksbank Act instead of by instructions and by letter of appropriation; and by it being a legal entity in its own right with its own assets. The unique position of the Riksbank among authorities is because there are economic and political reasons for it to have substantial independence. This independence was significantly strengthened by the comprehensive reform of the Riksbank undertaken in 1999. This independence has several dimensions. We can identify a functional, an institutional and a personal independence, all of which are supported by current legislation. Functional independence relates to the statutory target that the Riksbank has for monetary policy. Institutional independence means a prohibition on giving the Riksbank instructions related to monetary policy issues. Personal independence means that members of have long terms of office; are covered by strict rules of disqualification; and have far-reaching protection against dismissal. In addition there is financial independence; this means that the Riksbank should be able to finance its ongoing operations by administering assets which provide a return and should not be dependent on appropriations from central government. With the current balance sheet this financial independence is well provided for, however, it is not regulated by law in the same way as the other forms of independence. time the Riksbanks assets have generated a return which has proved fully adequate to finance its ongoing operations. When the Riksbanks independence was strengthened in conjunction with the 1999 Riksbank reform, financial independence was not a widely discussed issue. There was a greater awareness of this financial independence for the first time when Parliament decided on extraordinary dividends from the Riksbank for the fiscal years 2000 and 2001. Critics of these decisions, among them the Riksbank (), were of the opinion that its financial independence could be called into question if Parliament, through extraordinary parliamentary resolutions, could require funds from the Riksbank in this way. The critics felt that the law should state how the Riksbanks profit should be allocated and the optimum size of the Riksbanks own capital. Financial independence is not a Swedish invention; it is also a constituent part of EU cooperation in that there is a requirement in the for national central banks to be independent. This independence is monitored within the framework of the convergence reports issued by () and the EU Commission every other These reports track whether countries are meeting the conditions of the aimed at creating independent central banks etc. In the 2002 and 2004 convergence reports the Commission and the ECB joined with critics of the special dividends, stating that the Riksbanks financial independence should be reflected in the Riksbank Act. This Commission of Inquiry originates from the criticism aimed at the absence of regulations guaranteeing the financial independence of the Riksbank. Even if this evaluation of financial independence is mainly targeted at participation in the Euro, there are grounds for ensuring that the Riksbank is financially independent in a way that cannot be called into question. In addition to this, guaranteed financial independence also strengthens the credibility of the Riksbank in the current foreign exchange and monetary policy regime. The directives highlight the formal and actual autonomy of the Riksbank, stressing financial independence as an aspect of independence and defining it as the Riksbank having the ability to meet its obligations without being dependent on appropriations from Parliament. The governments directive to the Commission (Dir. 2006:50) states that the Special Investigator shall submit proposals for the statutory regulation of the principles related to the allocation of 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 1.2.Work of the Commission Work was started in 2006. The Commission has held 11 meetings with its special advisors and experts. To obtain an international understanding, and information about how issues associated with the capital structure and profit allocation of central banks are handled in other countries, a questionnaire was sent to the central banks in , , , the , , the , and . In the Commission reported on its work and presented its key conclusions in meetings with , with . In the spring of 2007 there were further consultations with the Riksbank. While officials have been given the opportunity to submit their views to the draft report the Commission has given an account of its findings and proposals to . has decided to await the submission of the report until presenting its views. Throughout the Inquiry the secretary to the Commission has also gathered information from the Riksbank. The material to which the Commission has had access includes an internal model for calculating risk in the Riksbank balance sheet. The Commission requested an extension to its assignment in . This extension was granted. Current regulation of the Riksbanks own capital is contained in Chapter 10, section 1 of the Riksbank Act (1988:1385) and reads: The Riksbank shall have capital in an amount of one thousand million kronor, a reserve fund of and a contingency fund.TP F1FPT This regulation does not mean in practice that the size of the Riksbanks total own capital is set, as the contingency fund can vary in size significantly. Current legislation related to the allocation of the Riksbanks profit contains no material rules; it only says that each year Parliament must determine how the Riksbanks profit is to be allocated, following proposals from . In order to create predictability in this process drew up profit distribution guidelines in 1989, guidelines that were approved by Parliament. The last time these guidelines were revised was in conjunction with the financial statement for 1999 (Report 2001/02:FiU23). According to these guidelines, each year 80 percent of the average of the past five years financial results, excluding the exchange rate effect and gold valuation effect and before allocation to general reserves, should be paid to central government. Between 1988 and 2005 this had meant payments to the treasury of between and 10 billion per year, which fell for the first time in 2006 to just under billion (see Figure 1). 1TP PT Latest wording 1998:1412. TP PT Contained in Chapter 10, sections 3 and 4 of the Riksbank Act (1988:1385). Transfers to the treasury and amounts on which transfers are based for the Riksbank -5 Amounts on which transfers are based With two exceptions has followed these guidelines in their proposals to Parliament for allocating the Riksbanks financial result. For each of the fiscal years 2000 and 2001 proposed dividends of billion over and above the amount to be paid according to the guidelines. In conjunction with the adoption by Parliament of the profit allocation for the fiscal year 2001, made it clear that, after this dividend, a long-term, balanced consolidation level had been achieved, and that the applicable guidelines for profit allocation should be applied in future.TPF FPT This was also the case. 2.2.EU criticism of the current rules The Convergence Reports, published every other year by the ECB (, , prior to 2000) and the EU Commission, have on three occasions remarked on legislation related to the financial independence of the Riksbank. In the EMIs convergence report of 1998 it was pointed out that if Parliament were to deviate from the objective criteria to which it has adhered in the past, this could affect the Banks financial independence. A statutory safeguard should therefore be considered in order to ensure that Parliaments power may not impede the proper performance of the Banks ESCB-related tasks. However, the predicted that this could be resolved through the revision of the Riksbank Act which was underway. 3TP report 2001/02:FiU 23 Monetary policy and the administration of the Riksbank 2001 The Convergence Reports for 2000 contained no remarks on the subject. However, the 2002 Convergence Report from the commission (like that from the ECB) raised the issue once more, referring to the extraordinary payments for the fiscal years 2000 and 2001: Developments in 2001 and 2002 have made evident the absence of detailed legislation on profit allocation and extraordinary payments of the Riksbank to the Treasury, safeguarding that the Riksbank retains the financial means necessary for implementing all ESCB-related tasks. The issue is brought up again in the 2004 Convergence Reports of the Commission and the ECB. The ECB writes: Certain provisions of the Riksbank Act are still not in line with the Treaty and the Statute; in particular: provisions on financial independence. (---) The ECB notes that the Treaty has obliged to adopt national legislation for this purpose since 1 1998, and that over the past few years no legislative action has been taken by the Swedish authorities to remedy the incompatibilities described in this and previous reports. This criticism is repeated in the Convergence Report for 2006. The provision in the Treaty on which the criticism is based is Article 108, which reads as follows: When exercising the powers and carrying out the tasks and duties conferred upon them by this Treaty and the Statute of the ESCB, neither the ECB, nor a national central bank, nor any member of their decision making bodies shall seek or take instructions from Community institutions or bodies, from any government of a or from any other body. The Community institutions and bodies and the governments of the Member States undertake to respect this principle and not to seek to influence the members of the decision making bodies of the ECB or of the national central banks in the performance of their tasks. Many other countries within the ESCB do not have a statutory safeguard to guarantee financial independence. It is reasonable to assume that it was the extraordinary payments of 2001 and 2002 which gave rise to the criticism from EU organisations. Had the current profit allocation rule been applied without these dividends, the EU organisations had in all probability not criticised the Swedish legislation. 2.3.The Riksbanks operational activities The tasks of the Riksbank are regulated in the Instrument of Government and in the Riksbank Act. sets out that the Riksbank a) is responsible for monetary policy (Chapter 9, section 13) and b) the Riksbank alone shall have the right to issue banknotes and coins (Chapter 9, section 14). The Riksbank Act specifies the Riksbanks responsibility for monetary policy. Here it states that the objective of the Riksbank's activities shall be to maintain price stability. (Chapter 1, section 2). It also states that the Riksbank shall follow developments on the foreign exchange and credit markets and implement necessary monetary policy measures. (Chapter 6, section 2). In addition the Act sets out a further area of responsibility, namely that c) The Riksbank shall also promote a safe and efficient payments system (Chapter 1, section 2). Within the framework of this area of responsibility is also the responsibility for issuing emergency liquidity assistance, specified in more detail below. The Riksbank may only conduct, or participate in, such activities for which it has been authorised by Swedish law (Chapter 1, section 1). The Riksbank is responsible for monetary policy and more specifically for maintaining price stability. The Riksbanks interpretation of the price stability objective is that inflation should be low and stable. The Riksbank has defined the objective of price stability as an increase in the consumer price index (CPI) of two percent annually. Around this target a range of plus or minus one percentage point has been specified. To achieve this objective the Riksbank determines a suitable level for the interest that the banks pay when they borrow from the Riksbank, i.e. the repo rate. Decisions related to the repo rate are based on the comprehensive analysis of macroeconomic conditions and developments in financial markets, in and internationally. The practical implementation of monetary policy means that the Riksbank undertakes monetary policy market operations in the form of weekly repo transactions with the banks. The Riksbank is also prepared to carry out currency interventions for monetary policy reasons. This means that the Riksbank is prepared to buy and sell currency on the market in order to affect the value of the Swedish krona relative to other currencies. However, the Riksbank does not decide whether a fixed or floating exchange rate is to be applied. This decision on the exchange rate regime is taken by the government. Previously the Riksbank made this decision. However, with the reform of the Riksbank at the end of the 1990s this task was transferred to government. Not only does the Riksbank have the right to issue banknotes and coin, it is also responsible by law for the countrys supply of banknotes and coin (Chapter 5, section 3). This responsibility is also clearly linked to the Riksbanks accountability for the payment system and can therefore be viewed as part of this area of responsibility. Much of the practical work on these issues is handled by the banks, however, the Riksbank, as the formal issuer of banknotes and coin, has certain costs for this task and can profit from the revenue that this activity brings in. The Riksbanks responsibility for encouraging a reliable and efficient payment system can be divided into two different areas of responsibility; issues of stability and the payment system. The Riksbank continuously follows developments on the financial markets and assesses the risk of problems in the major banks and in the essential financial infrastructure. The background to this is that a problem in one of the countrys major banks could pose a risk of interfering with the basic function of payment transfer services and credit supply. The Riksbank is also responsible for providing emergency liquidity assistance, i.e. acting as the Lender of Last ResortTPF FPT. To support the payment system the Riksbank provides its own real time settlement system ()TPF FPT, which is central payment system. In practice the Riksbank also on extensive asset management. This is because the liability item constituted by currency in circulation, along with own capital held by the Riksbank, must be invested in some type of assets. Currently the Riksbank invests most of its balance sheet total in currency assets. Other activities carried on by the Riksbank are international cooperation and some statistical work.