SPEECH
SVERIGES RIKSBANK
DATE:
31/05/2021
SE-103 37 Stockholm
SPEAKER: (Brunkebergstorg 11)
Governor Stefan Ingves
VENUE:
Swedish Economics Association
Tel +46 8 787 00 00
Fax +46 8 21 05 31
registratorn@riksbank.se
www.riksbank.se
New financial environment - how is the
Riksbank meeting the new challenges?1
Thank you for inviting me here to the Swedish Economics Association to speak
again this year. I always enjoy coming to speak to you as it gives me the
opportunity to discuss a subject in greater depth. But this year I intend to take a
somewhat broader perspective and talk about the Riksbank's three main business
areas: payments, monetary policy and financial stability.
In the public debate, there is often a tendency to focus on one area at a time.
Recently, for instance, payments have been in focus as a lot is happening in the
payments market. Monetary policy is almost always in focus, but often without
mentioning that financial stability is a necessary condition for price stability. But it is
fairly natural that this is the case, if only because it is difficult to be an expert in all
of these areas at the same time.
During my professional life, I have had the privilege of being responsible for each
of these areas at some point. I have also experienced what it is like when one of
them is not functioning, and how this affects the other areas. This has helped me
to better understand how the different areas are inter-dependent. If we do not
have financial stability, then monetary policy will not function as it should and the
payment system risks failing. If the payment system does not function, this leads
to risks for both financial stability and monetary policy. If we do not have price
stability, there will be consequences for both financial stability and payments.
1
I would like to thank Hanna Armelius and Magnus Jonsson for their help in writing this speech and Elizabeth
Nilsson for help in translating it into English. I would also like to thank Emma Bylund and Petra Frid for help with
data and diagrams and also Meredith Beechey, Frida Fallan, David Farelius, Gabriela Guibourg, Jesper Hansson,
Iida Häkkinen Skans, Jens Iversen, Stefan Laséen, Pernilla Meyersson, Cecilia Roos-Isaksson, Åsa Olli Segendorf,
Marianne Sterner, Ulf Söderström and Anders Vredin for their valuable comments.
1 [35]
Over the past 10-20 years, technological developments, globalisation and various
reforms have changed the financial environment. The financial sector has become
an increasingly important part of the economy. New actors and new services have
emerged. FinTech companies have contributed new financial innovations. The
changes are essentially positive and contribute to a favourable economic
development. But the new environment also entails new risks and challenges for society.
New challenges in a new financial environment.
The Riksbank's task is to promote a smoothly-functioning financial system and this
means maintaining price stability and promoting a safe and efficient payment
system. We therefore need to adapt our activities when the financial markets change
and develop. The new financial environment has implications for payments, as
well as monetary policy and financial stability. I therefore intend to discuss both
how the financial environment has changed in recent decades, and how the
Riksbank is dealing with the challenges that this entails.
The payment market is currently undergoing a phase of major changes in Sweden
and abroad. Digital methods of payment are becoming increasingly common, at
the cost of cash, and new technology enables payment services to be offered
increasingly by companies other than banks, such as FinTech companies.
Digitalisation and increased competition make payments simpler and smoother, but also
create new risks to which the Riksbank needs to react. For instance, we need to
modernise the system we provide for interbank payments. We also need to
supplement cash with "digital" cash - what we are calling the e-krona. However, I
would like to emphasise that it is important that Swedes can continue to pay with
physical cash.
An increasingly rapid integration of the financial markets has led to financial
capital being able to move rapidly and freely between countries and regions.
Conducting an independent monetary policy thus becomes more difficult. The national
financial markets policy has also had less room for manoeuvre; the more the
financial markets integrate with one another, the more difficult it becomes for national
financial market policy to maintain financial stability. Quite simply, in a world with
well-integrated financial markets, more cooperation is needed at a supranational
level. I therefore think that Sweden, with its large cross-border banks, should
consider membership of the Banking Union.
To enable the Riksbank to carry out its tasks and deal with the challenges offered
by the changes in the financial system, the monetary policy instruments need to
be fit-for-purpose and flexible. The coronavirus pandemic has shown that a
combination of several instruments - not just the policy rate - may be needed to
stabilise the economy in a crisis situation. The Government has in its proposal for a
new Sveriges Riksbank Act suggested several restrictions to practical monetary
policy. I think this is unfortunate, as it makes it more difficult for the Riksbank to
safeguard an efficient and stable financial system, if the proposals are put into
practice.
The Riksbank's balance sheet is currently very large, and this is mainly due to the
extensive purchases of government bonds we began making at the beginning of
2015, and to the measures taken during the pandemic. I believe that our balance
sheet will remain large for some time to come. There are several reasons for this.
In particular, the generally low interest rates mean that it will become more
difficult to use the policy rate in monetary policy, but many of the changes in the
financial environment are also important reasons. My assessment is therefore that
the bond purchases and holdings of bonds will play a larger role than before.
I would like to discuss the changes in the financial environment and how they
affect our different areas of operation, but before I do so I shall talk about the
Riksbank's main role in the financial system, namely to provide the Swedish economy
with safe money that is easy and efficient to use.
The Riksbank provides the economy with
money that safe and simple to use
Money is needed so that we can buy and sell goods and services. If we are to have
confidence in money, and want to use it, it needs to be both safe and easy to use.
This requires in turn financial stability, price stability and smoothly-functioning
payment systems. Let me describe how the Riksbank tries to create the right
conditions.
If we start with money being safe, this means that one can rely on money
representing a particular value in goods and services, and that it will retain this value
until the day one wants to redeem it for goods and services. The pieces of paper
that we issue have no value in themselves, but function as a form of evidence that
someone has produced something of value.2
In the academic literature there is, for instance, a branch known as 'monetary
economics' or in its modern form, 'new monetarist economics'3, which looks into
why money arises and under what conditions it retains its value. The basic idea
behind monetary theory is that money is essential because the economy is so
large that we cannot rely on everyone always keeping their promises. Another
way of expressing this is that there is no easy way of writing perfect contracts
with everyone else in the economy.
On a small scale we could explain it with an example. Pelle works as a teacher and
he wants food. Anna works as a farmer and wants her children to go to school. If
Anna could promise Pelle that he could have food when she harvests in the
autumn, Pelle could teach the children all year and then receive food when Anna
harvests. But if Anna's children have already received their schooling, there is no
incentive for her to give Pelle food afterwards. Anna and Pelle could, however,
sign a contract that ensures they each keep their side of the agreement. If we
imagine that this type of contract were to be signed with everyone from whom we
want goods and services, we soon realise that it would become very complicated
2
Money is a broader concept than just cash. Most of the money in Sweden today is electronic money issued by
the banks.
3
See, for instance, Williamson and Wright (2010) or Lagos et al. (2,017).
to write all of these contracts, and that some form of further guarantee was
needed to ensure the contracts were complied with. This is where money comes
in and makes things easier for everyone; in that we agree what we will use as
means of payment and store of value, Anna can give Pelle money for his work that
represents the value of her harvest. The money is a representation of the work
someone has done.4
But for this to work, everyone must trust that it will be possible to buy what they
want for the money, and that it must be easy and cheap to use money. This is
where the central banks and other public authorities come in. The Riksbank's role
is to add efficiency and reliability for Swedish kronor and this is how we do it:
• By ensuring that money retains its value. It is via monetary policy that
the Riksbank holds inflation low and stable.
•
By ensuring that one can rely on payments in Sweden. We need to know
for certain when a payment has been finally executed, otherwise we
would not be able to trade with one another. It is also possible that major
risks could arise to the financial system if many participants had claims on
one another. By supplying a payment system so that the banks manage
their payments via the Riksbank we ensure that the payments are running
smoothly.
• By ensuring that one can rely on the banking system where money is
stored and created. In times of crisis, central banks shall be able to lend
money to banks that are considered systemically important and solvent,
but which have liquidity problems. This is known as being 'lender of last
resort', and it has been shown that central banks strengthen confidence in
the banking sector in this way, which reduces financial stress and the risk
of financial crises.5 Another important way of building confidence in the
banking sector is to ensure that the banks are under sufficiently strict
financial regulation and supervision - a responsibility that is divided
between different authorities in Sweden. This ensures that the banks have
sufficient capital and liquidity and that they limit their risk-taking.6
•
By ensuring that one can rely on the Swedish krona in all its forms. As
bank deposits are redeemable for central bank money, one can rely on
one krona always being one krona. In earlier times, when private banks
could issue their own banknotes, it was sometimes the case that
banknote from different banks were traded at different values.7
• By ensuring there is sufficient safe money. The Riksbank supplies as
much cash as is in demand and contributes to the stability of the banking
system's supply of other means of payment. In future, the Riksbank may
need to supplement cash with an e-krona, to secure the general public's
access to central bank money.
4
Kocherlakota (1996) has written an essay called "Money is memory".
5
Walter Bagehot wrote about this as early as 1873.
6
I would also like to mention that the deposit guarantee, which is managed by the Swedish National Debt Office,
is also important in avoiding bank runs.
7
See, for instance, Söderberg (2018).
One can say that the Riksbank functions as the hub of the Swedish financial
system. We can also note that the financial system that has grown up around the
world is based on countries or currency areas having state money and state
control over the payment system. Quite simply, state institutions are needed to
guarantee that the requirements in these points are met.8
Payment markets are changing - motives for
an e-krona
Almost all economic activity is linked to some form of payment, so without
functioning payment systems the economy would grind to a halt. It is therefore
important that the central banks adapt to the technical innovations that are now
rapidly changing the payment market. There must be transactional efficiency in
Swedish and by that I mean that they should be cheap and easy to use for both
domestic and international payments. This is also what households, quite rightly,
expect in today's digital society. By keeping apace with technological
developments, we ensure that the safety net I mentioned earlier, which preserves the
value of money and ensures it is easy and cheap to use, remains in place.
For the Riksbank's part, this means that we need to continue our work on
modernising our money so that it is better suited to a digital economy, that is, to
continue our work with the e-krona. We also need to update the infrastructure for
payments. One should not have to wait several days for a payment to be
executed. We will therefore offer what are known as 'instant payments', that is,
payments that are executed directly, 24/7. We also need to invest more resources in
cyber security and crisis preparedness so that the payment system can withstand
shocks. It is important not least to continue the international collaboration we
have with other central banks and with the Bank for International Settlements
(BIS). There we are working on simplifying cross-currency payments and analysing
digital central bank money (also known as CBDC, Central Bank Digital Currency). It
is therefore very pleasing that the BIS' new Innovation Hub will soon open in
Stockholm. These hubs are a means of ensuring that the central banks have good
cooperation with one another and keep up to date with the rapid technological
developments currently taking place.
New participants entering the payment market
This development is clearly visible in the payment market. New technology and
new legislation has made it easier for other types of company than banks to
compete in mediating payments. Consumption patterns are also changing, for
instance, in that it is becoming increasingly common to shop online rather than in
physical shops. It may seem as though competition and efficiency will only
increase as digitalisation increases. But the payment market is distinguished by
positive network effects. This means that when new users connect to a payment
solution, there is increased benefit for all participants. This means that the market
could ultimately be dominated by one or a couple of large companies that attain
8
It is of course also important to have a stable fiscal policy to ensure there is confidence in the currency.
monopoly status. It is therefore important that the state takes responsibility and
regulates the market, but as new products are positive for consumers, the state
also needs to implement measures to benefit competition and innovation.9
These new types of company that have begun competing on the payment market
often have as business concept to gather and analyse data, which means they can
offer cheap services. This so-called FinTech sector has grown rapidly and is now
challenging the banks. In general, increased competition is positive, as it leads to
lower prices for companies and customers. However, it is important that the same
rules apply to all players on the market, and that the legislation also stays apace
of the emergence of new phenomena, which can be difficult to classify and to
scrutinise.
Sometimes the changes on the payment market occur very quickly. In China, it
didn't take long before companies like Alipay and WeChat Pay had taken a
dominant position. This is where network effects come in. Big tech companies like
Apple and Google have begun to show an interest in payments. Some big tech
companies already have a lot of customers on their platforms. If they add payments
with some auxiliary services that make them attractive, such as discount offers, it
may not take long to achieve a critical mass of users. If the really large
international big tech companies begin to seriously offer bank-like services or own
currencies, this could entail a major change in the financial system.
However, it isn't always the case that the new participants compete with the
banks. They often cooperate with the banks.10 A large part of the innovation
process is with the banks. Swish and Bank ID are a couple of Swedish examples that
the banks have initiated. However, it is possible that the banks will be inspired by
new, innovative companies and that they will be forced to invest greater
resources on development when there is external pressure to change. One possible
development is that the boundaries between banks, payment service providers
and FinTech companies will be erased in the future.
A further challenge on the market is cryptoassets (or cryptocurrencies as they are
sometimes called), such as bitcoin. These are private currencies that have no state
backing. In the case of bitcoin, one has tried to replace the state's function as
guarantor for money with technology that limits the supply. But this technology
means at the same time that bitcoin is very ineffective to use, as each payment
requires large amounts of time and energy. Nor is there anything to limit the
supply of copies of bitcoins in the form of other cryptocurrencies. So-called
stablecoins are instead based on borrowing credibility from state money by promising
full back-up in a state currency.11 However, it is very difficult for a totally private
currency to gain the same credibility as state money enjoys.
What do all of these challenges and changes mean for us central banks? Well, we
must also adapt our activities to the new environment. This is nothing new for an
9
This has also been done at EU level, for instance through the PSD2 legislation, which enables payment service
providers, which do not have their own deposit accounts, to offer payment solutions initiated from bank
accounts. This increases the circle of companies that can offer payment products.
10
For further information on this, see the CPMI report "Non-banks in retail payments" (2014).
11
For more information on stablecoins, see Arner et al. (2020).
institution like the Riksbank, which has existed for more than 350 years. It is
difficult to survive for so long without being able to adapt. But what is new this time is
how quickly we may need to adapt. When it comes to the payment market, I think
the ambition should be for the Riksbank to promote harmonisation and
competition on equal terms by offering attractive platforms for banks and others to make
their final payments. This also increases security in that the liquidity risks in the
system decline.
One could of course imagine that the banks would have their own system to
regulate payments with each other. But if a private player were to run such a system,
all participating banks would have large claims on that player, just as they have on
the Riksbank at present. And if such a private player were to go bankrupt, this
money would be lost if a payment had not gone through. That risk does not exist
when the central bank runs the settlement system. Moreover, there could be
large volumes of payments so that costs become low, especially if a lot of
countries collaborate, as is now the case on the ECB's TIPS platform12. By ensuring that
there is transactional efficiency in Swedish krona, we also reduce the risk of any
other type of currency taking over parts of the economy.
New payment methods emerging
Changes in the payment market are not only about new companies coming in to
compete for business. The way that households and companies make their
payments is also changing. For instance, they more often make direct payments to
other countries, as online trade is increasing. The central banks need to ensure
that these flows are also stable and efficient. At present, cross-border payments
are often slower and more expensive than domestic payments.13 There is
therefore a large-scale international cooperation within the frameworks for the G20,
FSB and BIS to improve international payments. Although Sweden is not a
member of the G20, we play an active role in this work, and one of the working groups
is led by First Deputy Governor Cecilia Skingsley.
In addition to this, the Riksbank is also working more locally on making it easier
for Swedish households and companies that want to make cross-currency
payments. We have begun to investigate, together with the ECB, whether it would
also be possible to use the TIPS platform for cross-currency payments. As I
mentioned earlier, the Riksbank will have its RIX-INST service for instant payments in
SEK there. If we succeed with this type of standardisation, it might also work as an
example for other countries and regions to follow.
Another change that is under way in Sweden in particular, is the continuing
decline in the use of cash. According to the Riksbank's most recent survey, less than
one in ten purchases in Sweden is made with cash now, see Figure 1, and last year
Swish was for the first time used more than cash.
12
The Riksbank has signed an agreement with the ECB on the settlement of Swedish krona in TIPS. For further
information on this, see link on Riksbank's website.
13
This applies primarily to payments outside of the EU. For an arithmetical example, see the report Payments in
Sweden.
There are many reasons why Swedes are choosing to abandon cash.14 One
example is the rapid emergence of the Swish mobile app. Even if we welcome
technological developments and the increased competition on the payment market,
there is a risk that developments will move too fast. There are many people who
have problems in using digital methods of payment, and when fewer and fewer
businesses and restaurants accept cash, some people will experience problems.
Cash is no longer easy to use. Many shops and restaurants will no longer accept
cash, and it is difficult to deposit and withdraw cash, especially if one is
dependent on doing so over the counter and not through an ATM. I, and the Riksbank,
have long pointed out that the legal position of cash needs to be strengthened.15
Some form of activities should be obliged to always accept cash, such as the
medical sector and pharmacies. Similarly, it should be possible to deposit both
banknotes and coins, and to do so over the counter. There is currently around one
million people in Sweden who have limited access to digital technology or who have
limited capacity to use it. Many elderly people are dependent on help from a
person and therefore have no use for services based on using ATMs. This is a large
and growing problem that needs to be resolved at a political level. It is also
important for Sweden's crisis preparedness that the use of cash does not fall too
low. If cash is needed as a means of payment in a crisis, it must also be possible to
use it in normal circumstances. The Riksbank will continue to work to reinforce
the position of cash.
E-krona can complement cash without major
consequences for financial stability and monetary policy
In addition, the Riksbank has also been investigating for a few years now whether
it would be possible to offer the general public a safe electronic alternative that
could function in largely the same way as cash; an e-krona. This could be a means
of ensuring that the general public in Sweden, which has had access to central
bank money since the 17th century, can continue to do so even in a digital age.16
The model we have had, where the Riksbank's cash has co-exited with private
means of payment, such as deposits in bank accounts, has functioned well. By
introducing an e-krona, we can ensure that the function that cash has historically
had as anchor for payments can live on in a new technical form. An e-krona can,
like cash, contribute to increased competition and robustness on the market by
offering an alternative to private sector payment services. If the Riksbank is
present in the market with its own supply of money to the general public, it will also
be easier for the Riksbank to ensure that basic payment services are made
available to all, including the vulnerable groups I mentioned earlier.
It is of course important to ensure that the e-krona does not have negative
consequences for monetary policy or financial stability. As I explained at the start, all of
14
For more information on this, see Armelius et al. (2,020).
15
See, for instance, Ingves (2020). See also the Riksbank's consultation response regarding the new Sveriges
Riksbank Act (2019).
16
The banks would still have access to central bank money as they have money in accounts with the Riksbank.
these areas are interconnected and therefore we and others have analysed
them.17 This is an exciting field of research, and more analysis is needed, although
it is nevertheless possible to draw some conclusions.
With regard to monetary policy, it must be possible to distinguish between an
ekrona with or without interest. An interest-bearing e-krona would not have any
major consequences for monetary policy in Sweden. Sometimes people believe it
would be easier to set very low negative interest rates with an interest-bearing
ekrona, but this is not true. The policy rate's lower bound is currently determined
by there being cash for households to hold instead of having money in an account
with a bank. Similarly, the banks have cash as the only alternative to holding
money in accounts with the Riksbank.18 However, holding large amounts of cash
entails certain costs, such as for transport and insurance, and we therefore can
set the policy rate a little below zero. This relationship is not affected by whether
or not there is an interest-bearing e-krona, as we would not introduce an e-krona
to replace cash.
A non-interest-bearing e-krona, on the other hand, would raise the lower bound
for the policy rate to zero. This is because the e-krona would then function as cash
with regard to alternative investment, but without the costs for storage, for
instance, that large amounts of cash incur. Zero would therefore be a sharp
boundary for the policy rate if there was unlimited access to a non-interest-bearing
ekrona. But it is of course possible to implement other measures that counteract
such a sharp boundary, such as limits as to how many e-krona one can hold or
who is allowed to hold them.
The potential impact of the e-krona on financial stability is a more complex
question. A couple of years ago, it was fairly common to hear concern expressed over
the risk that bank runs would increase when there was stress on the market and
an attractive, risk-free alternative such as a digital central bank currency was
available. However, there is research that shows why this need not be the case.19
In general, I would say that within the central bank world this is no longer seen as
a particularly large risk. On the other hand, there is still potential cause for
concern if the e-krona were to become so large that in normal times it takes over
large shares of the banks' deposits from the general public. However, it is possible
to limit the demand for e-krona, for instance through interest or volume limits.
It is interesting to note that the fears expressed at present about the e-krona are
almost an echo of the debate conducted around 100 years ago when the Riksbank
was to be granted a monopoly on issuing banknotes. Even then, there were "fears
of severe disruptions in the business world".20 It was also thought that the reform
would make the Riksbank "much more powerful than before and with greater
17
For more detailed information, see the special edition about the e-krona in Economic Review No. 3 2018.
18
The money that banks have in accounts with the Riksbank can only be used for payments between banks and
not for payments in ordinary shops.
19
For example, Brunnermeier and Niepelt (2019) have shown in a theoretical model that state digital currency
need not have negative consequences fro financial stability.
20
See Fahlbeck (1900).
powers of decision over the entire Swedish economy".21 It all turned out well 100
years ago, but even if we do not consider that an e-krona would be as
revolutionary as some people seem to think, it is appropriate that the Riksdag should also
look into this question. The inquiry into the role of central government in the
payment market, which has recently started up, has been tasked with taking a stance
on whether an e-krona is needed. It is important that the e-krona is included in
this inquiry into the future payment market, and it will be interesting to see the
conclusions. I also think that the e-krona, if it is issued, should have the status of
legal tender, as cash has.
It is important to also mention here that even if cash appears to be marginalised
at a faster pace in Sweden than in other countries, Sweden is not in any way
unique with regard to ideas about issuing central bank digital currencies. The
Bahamas, for instance, has already introduced a CBDC, and in October last year we
published a report, together with the central banks in Japan, the United States,
the Eurozone, the United Kingdom, Canada and Switzerland, where we discussed
the principles on which CBDCs should be based.22 I notice that in international
discussions there is a fairly considerable insight into the fact that central banks need
to update their payment systems and their money to promote safety and
efficiency as the payment markets become increasingly multi-faceted. I would like to
say that the best thing for the economy is if the central banks can continue to play
the same role as guarantor for confidence and as hub in the system as they have
had before, but with methods that are adapted to the changing world.
Image 1. Status CBDC projects in different countries
Bahamas:
CBDC
ECCB*:
live
CBDC
Live pilot
Finished pilot
Ongoing pilot
Analysis
"Wholesale" project or pilot
No information available
*Eastern Caribbean Central Bank
Source: Updated data from BIS website from Auer et al. (2020)23
21
See Fahlbeck (1900).
22
https://www.riksbank.se/en-gb/press-and-published/notices-and-press-releases/notices/2020/the-riksbanksix-other-central-banks-and-bis-in-collaboration-on-principles-for-central-bank-digital-currency-cbdc/Riksbank,
see also Image 1.
23
The ECCB has an ongoing pilot project that is available to all, and therefore classified at "live" by the BIS.
The financial system has become more
integrated - and risky
The financial systems in Sweden and abroad have grown rapidly in recent decades
and become increasingly large parts of economies, which is often termed
financialisation. In the mid-1990s, the financial sector's assets in Sweden were six
times greater than GDP, while today they are almost 14 times greater, see Figure
2. The fact that the financial system is large and functions well benefits economic
developments. It contributes to the payment system functioning, it channels
saving to the most productive investments and it spreads out the risks in the
economy.
At the same time as the financial system has grown, the financial markets in
different countries have become increasingly integrated with one another. This is
also essentially a positive development, as it increases competition and improves
efficiency. But a larger - and more integrated and innovative financial system -
also makes new demands of monetary policy and financial market policy.24
Independent monetary policy and national financial
market policy more limited
One consequence of the financial markets having become more integrated is that
financial capital can move faster and more freely than before and this tends to
even out interest rates between countries, see Figure 3.25 This can in turn limit the
national central banks' possibilities to affect inflation and resource utilisation.
According to the theory of the so-called monetary policy trilemma, it is not possible
to combine an independent monetary policy with free movement of capital and a
stable exchange rate. Moreover, economists have recently pointed out that it
might not be possible to combine an independent monetary policy with free
movement of capital even with a floating exchange rate.26 If the financial
conditions are largely determined by the outside world, the choice in actual fact
concerns either having an independent monetary policy or free movement of capital.
The monetary policy trilemma may thus in reality be a dilemma.
According to another trilemma, the so-called financial trilemma, it is not possible
to combine national fin