SPEECH
SVERIGES RIKSBANK
DATE:
18 January 2024
SE-103 37 Stockholm
SPEAKER: (Brunkebergstorg 11)
Governor Erik Thedéen
VENUE:
Stockholm Centre for Commercial Law, Stockholm University
Tel +46 8 787 00 00
Fax +46 8 21 05 31
registratorn@riksbank.se
www.riksbank.se
A year with the new Riksbank Act*
First, a warm thank you to the Stockholm Centre for Commercial Law for giving
me the opportunity to speak about the new Riksbank Act, a substantial and
important topic.
The new act - formally the Sveriges Riksbank Act (2022:1568) - has now been in
force for a year. This is, of course, too short a time to draw any definitive
conclusions about how the act is working. But at the Riksbank, we have now had some
experience of applying the provisions of the act, and we have been able to analyse
the legal requirements in more depth.
The great merit of the new Riksbank Act is that it clarifies a number of conditions
relating to tasks, roles and responsibilities, but in my view it also has the
weakness of being too detailed in some respects.
Today, I would like to focus on three important topics based on the new act.
Above all, I want to talk about the Riksbank's independence, what it means and
why it is important, but perhaps also to correct some misunderstandings about
what independence means. From our independence, there is then a clear link to
the two other questions I would like to address: first, cooperation and dialogue
with other authorities and the Government in the areas of financial stability,
emergency preparedness and monetary policy respectively. And after that, I would like
to discuss the consequences of independence for the Riksbank's need for earnings
and equity.
But before going into these topics, I would like to touch on some aspects of the
structure of the new act and the Riksbank's mandate.
The Riksbank's objectives, tasks and powers
The new Riksbank Act in some respects expands and clarifies, but it also adds new
tasks for the Riksbank. The latter applies in particular to cash management and
civil preparedness for payments. I will return to these tasks, but first I would like
to address two key areas where the basic task has not changed in relation to the
Riksbank Act that was in force until 2023.1 This concerns monetary policy, where
the task follows on from EU regulations that were introduced into the Riksbank
Act in 1999. But in practice, it also applies to financial stability. Although the
previous Riksbank Act did not explicitly state the Riksbank's mandate in the field of
financial stability, it was undisputed that the Riksbank had important tasks in this
area. The new Riksbank Act gives us an explicit responsibility to contribute to
financial stability. This responsibility is shared with Finansinspektionen and the
Swedish National Debt Office. The three stability-focused authorities each have
distinct tasks for safeguarding financial stability.
The Riksbank Act has a structure that sets out tasks and powers for monetary
policy, financial stability and the other areas of responsibility. This includes a list of
the tools allocated to the Riksbank for the respective task and a description of
when and how they may be used. The fact that a specific toolbox is linked to each
area of responsibility is a central part of the act's structure and aims to increase
insight into the Riksbank's activities. The various toolboxes shall be sufficient for
the Riksbank to fulfil the specific tasks. But the legislator's intention is also to keep
monetary policy and financial stability separate.
To give an overall assessment of the new act, I will start by saying that I think the
division between financial stability and monetary policy is basically good. It means
that the Riksbank must state more clearly the main purpose of various measures,
and it facilitates external evaluation of our measures. In addition, it provides the
prerequisites for cooperation with other stability-focused authorities regarding
financial stability and preparedness. But at the same time, it must be remembered
that virtually all possible measures by the Riksbank have an impact on both
financial stability and monetary policy - even if the emphasis varies. It would therefore
have been preferable if the tools available to the Riksbank had been the same for
both monetary policy and financial stability.
Let me now elaborate on these different aspects.
Boundaries facilitate cooperation
The new Riksbank Act draws a clear boundary between the Riksbank's tasks
regarding monetary policy and financial stability. Such a division is good, because
monetary policy is an area where the requirement for the Riksbank's
independence is strong, while financial stability is an area where responsibility is shared
between several authorities. According to the act, the Riksbank's task is to
contribute to the stability and efficiency of the financial system and to cooperate with
the other two stability-focused authorities and ultimately also with the
Government, so that this objective can be achieved. I believe that the joint work is
facilitated by the fact that financial stability is now explicitly mentioned and dealt with
in a separate chapter in the Riksbank Act. It can even be seen as a prerequisite for
effective cooperation in times of crisis.
The reservation of a particular tool for a particular area of responsibility affects
how and when it can be used. The Riksbank conducts monetary policy on a daily
basis, so these tools must be constantly available (except in a case where
exceptional circumstances are required). With regard to financial stability, although the
Riksbank must also regularly assess threats to stability and identify risks, but the
actual tools, such as liquidity support, may only be used if a "serious shock" has
occurred or is likely to occur.
The toolbox for both monetary policy and financial stability includes "providing
credit in Swedish kronor and foreign currency against adequate collateral", but
the legislator's idea is that the credit should be designed in different ways
depending on its purpose. In the case of loans in Swedish kronor motivated by
monetary policy, there is a tool for interest-rate management to facilitate the
passthrough of the current policy rate. If the loan is needed to counteract a serious
shock in the financial system, it is primarily a question of what is known as general
liquidity assistance (in either Swedish kronor or foreign currency), and the
conditions may then be different.2
The purpose of the measures must be stated
The division between monetary policy and financial stability in the act also means
that the Riksbank needs to state the primary purpose of a measure. This is a
reasonable requirement, but it is not always easy to fulfil.
I can give a few examples. If the Riksbank injects liquidity into the financial system
in a situation where the supply of credit is threatened as the result of, for
example, a pandemic, is this then a measure aimed at safeguarding the so-called
monetary policy transmission mechanism, or is it intended to reduce the risk of shocks
that could threaten financial stability? Or if the krona exchange rate plummets
and the Riksbank intervenes to make purchases to support the krona, is the aim to
counteract the risk of increased inflation, i.e. monetary policy, or is it to prevent
shocks in the financial system, i.e. financial stability?
The answer to the question in these examples is of course: both. Our experience is
that the measures the Riksbank takes or considers taking often have both a
monetary policy purpose and a financial stability purpose. While changes in the policy
rate can be purely monetary policy, various forms of liquidity support or
purchases of securities or currency can be both monetary policy and financial stability
measures, especially in terms of their effects. The requirement of the Riksbank
Act is that the Riksbank must be able to state the main purpose of a measure;
whether the intervention has primarily a monetary policy or a financial stability
purpose. In our communication, we will then also describe what effects a measure
can be expected to have in other areas.
The act is a little too detailed
A somewhat larger problem is that the new Riksbank Act prescribes which tools
may be used for monetary policy and financial stability respectively, despite the
tools - providing credit, entering into repo agreements and buying/selling
financial instruments - overlapping the two areas. In several respects, the act goes too
far in prescribing in detail the conditions under which, and how, the Riksbank may
use certain tools.
So why are these legal rules problematic?
Well, in both monetary policy and financial stability, it is essential that the
Riksbank has a high level of preparedness to act and considerable freedom to act
within its area of responsibility. The same applies to other relevant authorities in
the area of financial stability.
Experience has taught us that it is difficult to anticipate the forms in which threats
to price stability and financial stability may emerge. It is possible to identify some
vulnerabilities in advance and to endeavour, as far as possible, to strengthen the
resilience of the economy and the financial system. But once the danger is there,
the Riksbank and other authorities must be able to react quickly and decisively
within their respective mandates. The Riksbank Act is based on the idea that it is
possible to predict which tools the bank may need to use for which purpose. We
think this makes the act difficult to apply. Allow me to give a few concrete
examples.
 The Riksbank's possibilities to finance the foreign exchange reserves
differ, depending on whether the purpose of the measure concerns
monetary policy or financial stability. In both cases, the Riksbank may borrow
foreign currency from the Swedish National Debt Office up to an amount
equivalent to five per cent of GDP. The Riksbank may also finance the
foreign exchange reserves itself by buying and selling foreign currency in the
market, but only to finance financial stability measures (general and
emergency liquidity assistance). If the foreign exchange reserves have
shrunk after being used and it is a question of restoring them, the
Riksbank may borrow the corresponding amount in foreign currency only if
the reserves have been utilised for financial stability measures. However,
this is not permitted if the foreign exchange reserves have been used for
monetary policy measures (e.g. foreign exchange interventions). This
limitation is unfortunate, and here I believe that the act may need to be
amended to ensure the Riksbank is fully prepared to act.

The Riksbank's possibilities to buy and sell securities for financial stability
purposes to temporarily support systemically important financial markets
are unnecessarily limited. If there are exceptional reasons, the Riksbank
may buy and sell securities for this purpose. It is good that this possibility
is explicitly provided, but it is unnecessarily complicated that the
transactions must take place at predetermined prices. Moreover, there is a risk
that it will be more expensive to carry out the transactions in this way
without achieving any other benefit.
What I am talking about here concerns the conditions for when and how various
tools that the Riksbank itself has at its disposal can be used. The Riksbank's
criticism of the law thus concerns what we perceive as unnecessary restrictions on the
use of tools that only the Riksbank has. With regard to financial stability, it is not a
question of the Riksbank acting entirely on its own, but in cooperation with other
relevant authorities. On the contrary, I want to emphasise once again the
desirability of cooperation in the area of financial stability.
The Riksbank's measures shall always be proportionate
In this context, I would also like to emphasise the principle of proportionality
contained in Chapter 1, Section 8 of the Riksbank Act. According to this, the Riksbank
may take a measure only if it can be assumed to lead to the intended result, if the
measures is not more far-reaching than necessary, and if the intended result
stands in reasonable proportion to the costs and risks that the measure entails for
the finances of the Riksbank and the state.3
It is also highly reasonable that the Riksbank should be able to justify and take
responsibility for its actions, both with regard to monetary policy and to financial
stability. Chapter 11, Section 6, of the Riksbank Act states that: "The Riksbank's
decisions shall, to an appropriate extent, contain an explanation." The reasons
stated for a decision will include the result the Riksbank intends to achieve, and
reference to the provision under which the measure is taken. In concrete terms,
as I mentioned earlier, this may involve the Riksbank stating what the main
purpose is, for example when purchasing government securities or corporate bonds.
It is a good system that forces the Riksbank to be clear. It also makes it easier to
evaluate the Riksbank's actions later on.
It is obvious that in retrospect the Riksbank can be criticised both in terms of the
clarity of its motives and the effects achieved. We must of course tolerate this,
and the debate on the Riksbank's measures contributes to the development of
our activities. But we also need full freedom to act to fulfil our statutory tasks.
Cooperation with other authorities
As I have already mentioned, financial stability is the joint responsibility of several
authorities: The Riksbank, Finansinspektionen, the Swedish National Debt Office
and the Government, mainly in the form of the Ministry of Finance. The contents
of the toolbox designated by the Riksbank Act show that the Riksbank's primary
contribution consists of providing various types of liquidity support in crisis
situations, both to individual credit institutions and to the financial system as a whole.
However, the need for liquidity support does not arise in a vacuum but is often
due to the risk of financial losses for the institutions concerned. This requires
cooperation and exchange of information, perhaps primarily between the Riksbank
and Finansinspektionen, but also with the Swedish National Debt Office and the
Government. This interaction, for example in the assessment of financial stability
risks, is important even under normal circumstances, as a large part of the work
on financial stability is about identifying and preventing risks.
Peacetime crisis situations and heightened preparedness
increase the need for cooperation
Cooperation with other authorities is also needed in other areas. Chapter 5 of the
Riksbank Act gives the Riksbank extended tasks and powers to prepare for
peacetime crisis situations and heightened preparedness. These are extremely
important tasks, not least in the new geopolitical environment. The Riksbank is not
only responsible for maintaining its own operations during peacetime crisis
situations and times of heightened preparedness, but also for ensuring that the
general public can make payments under such conditions. According to Chapter 5.
Section 4 of the Riksbank Act, the Riksbank shall also oversee that companies that
are of particular importance for the execution of payments plan and prepare to be
able to continue their payment operations during peacetime crisis situations and
times of heightened preparedness.
The Riksbank plays a central role in the Swedish payments system. The Riksbank's
tasks include providing systems for the settlement of payments by financial
companies and authorities and overseeing payment and clearing systems. Given this
responsibility, it is natural that the Riksbank also has a contingency responsibility,
although some problems have arisen with the division of responsibility because
the Government, which is responsible for civil defence, has at the same time
wanted to organise authorities under the Government for the same purpose.
In 2022, the Government decided to introduce an emergency preparedness
regulation,4 which entails a new structure for civil defence in Sweden where 60
authorities under the Government were designated as so-called preparedness
authorities.
These authorities are organised by function into preparedness sectors, each of
which is led by an authority with responsibility for the sector. Finansinspektionen
has been designated as the authority with responsibility for the financial services
preparedness sector, which includes the important societal functions of payment
intermediation, financial stability, funding and savings, and insurance. A key task
of the preparedness sector is to ensure that these societal functions can be
maintained as far as possible even in a peacetime crisis or time of heightened
preparedness.
Finansinspektionen, as the lead authority, heads up the sector's work on
coordinating measures prior to and during peacetime crisis situations and times of
heightened preparedness. Finansinspektionen shall also drive forward the work in
the preparedness sector, support the preparedness authorities and promote the
clarification of tasks and roles in the sector. In addition to Finansinspektionen, the
Swedish National Debt Office is included in the financial services preparedness
sector.
The essence of the provisions of the Riksbank Act and the emergency
preparedness regulation's rules on sectoral responsibility is that payment activities are
within the areas of responsibility of both the Riksbank and Finansinspektionen. As
the Riksbank is an authority that does not report to the Government but to the
Riksdag, it has not been considered possible to give the bank the task of being the
authority with responsibility for the sector in civil defence, which would otherwise
have been natural. Neither can the Riksbank be formally included in a
preparedness sector and subordinated to a sector authority such as Finansinspektionen, as
this authority reports to the Government. There is thus an overlap of
responsibilities and a risk of work duplication and confusion over which authority should do
what in the area of preparedness. It is a good thing that the Government's
Payment Inquiry5 recently proposed that the division of responsibilities between the
two authorities should be clarified in this respect.
The Defence Commission has also observed the overlapping responsibilities
between the Riksbank and Finansinspektionen and recently emphasised the
importance of there being a functioning structure for planning and preparing for
high preparedness and war in the area of payments, and that it is clear how
management should be conducted. The Defence Committee said that parallel
structures for identical tasks are not efficient and stressed the importance of an urgent
solution to the issue.6
In any case, very close cooperation between the Riksbank and Finansinspektionen
is required to achieve effective and comprehensive preparedness work. A first
step in this direction was taken in the agreement on cooperation and preparation
for peacetime crisis situations and heightened preparedness concluded between
the two authorities in June 2023.
I began my speech by saying that it is a little too early to draw firm conclusions
about the new Riksbank Act. I have expressed some views here on the act. To
some extent, my judgements are based on practical experience. For example, we
have started to build new forms of coordination in the area of financial stability,
relying on the new act. Our new and clear preparedness mandate also provides us
with a clear legal basis for cooperation and specifying requirements. When it
comes to how the act and our tools function in a crisis situation, we - thankfully -
do not have any experience and our conclusions remain based on analytical
reasoning.
In an overall assessment, I see no need for a review of the act at present, but I
think there may be reason to monitor some of the aspects of the act that I have
mentioned today and possibly return to them in future reviews
The Riksbank's independence
I would now like to turn to the major topic of the Riksbank's independence.
Independence is a principle based on Sweden's commitments under EU law and
therefore also features in the new Riksbank Act.
In order to properly discuss what independence means, it is worth briefly
reviewing why it exists in the first place. The Riksbank and other central banks have not
always been independent, but over the years, it has become more common to
separate monetary policy from direct political influence. Extensive empirical
studies and theoretical analyses have shown that independent central banks are
better at maintaining low inflation. If governments had direct control over central
banks, politicians might be tempted to change interest rates to create short-term
economic upturns or use central bank money to finance popular political
measures. This could seriously damage the economy in the long term.
The amendment to the Instrument of Government making the Riksbank formally
independent entered into force on 1 January 1999. At the time, the Government
justified independence on the grounds that it would give monetary policy a
longterm perspective that improved the credibility of the price stability objective. It is
perhaps worth recalling that the decision on the independence of the Riksbank
was taken by the Riksdag and is therefore democratically anchored.
Based on EU law, central bank independence can be said to consist of four
different aspects: functional, institutional, personal and financial independence. I want
to pay particular attention to two of these aspects, namely financial and
institutional independence.
Central banks shall be financially and institutionally independent
The purpose of independence is to protect the Riksbank from political or other
pressures and thus enable it to work effectively to achieve its operational
objectives.7
Financial independence means, among other things, that a central bank must have
sufficient financial resources to fulfil independently the tasks required by the
TFEU and the Statute of the European System of Central Banks (ESCB) and the
European Central Bank (ECB). Member States must not put their national central
banks in a situation where this is not possible. If a third party were to be able to
directly or indirectly exercise influence over the ability of the NCB to fulfil its tasks,
including its operational and financial capacities, this could be in conflict with
financial independence.8
Another way of expressing it is that a central bank should not be dependent on
the political authorities of the Member State to which it belongs.
Institutional independence means that no other authority may determine how the
Riksbank shall decide on matters relating to the mandate the Riksbank has under
the Instrument of Government, including formulating and implementing
monetary policy and managing the foreign exchange reserves. Neither may the
Riksbank seek or take instructions from anyone in the areas of responsibility
stipulated in the Instrument of Government. This so-called ban on instructions should
be given the same meaning as in the corresponding provisions of the TFEU I just
referred to.
Independence in monetary policy leaves room for dialogue
As I have already mentioned, the independence of the Riksbank does not impede
cooperation between authorities in the field of financial stability. But how does it
relate to monetary policy? It is important, I think, to note that the ban on
instructions does not prevent a national central bank, such as the Riksbank, and other
bodies, such as the Government via the Ministry of Finance, holding a dialogue
on, for example, the conditions for monetary policy.
However, the dialogue must not be designed in a way that affects the
independence of the members of the Executive Board. The ECB and the European
Commission have considered that an explicit statutory obligation for an NCB to consult
third parties in advance of a central bank decision gives the third party a formal
mechanism to influence the final decision. Such an arrangement is therefore
incompatible with the Treaty and the Statute. An obligation for the Riksbank to
inform the minister appointed by the Government before important monetary
policy decisions has also been considered to conflict with central bank independence
under EU law. Such a provision existed in the previous Riksbank Act but has been
amended to be in line with the requirements of the TFEU, see Chapter 2. 7 of the
Riksbank Act, which states that the Riksbank shall promptly inform the Minister
appointed by the Government of important monetary policy decisions that the
bank has taken.
The bottom line is that the ban on instructions does not prevent the Riksbank and,
for example, the Ministry of Finance from having a dialogue and an exchange of
information related to the authorities' respective areas of responsibility. The
authorities may therefore share information and assessments that facilitate or may
even be necessary in the work of the other authority. For example, this may
involve how the Riksbank and the Ministry of Finance view the most important
factors driving inflation now and in the future, or which shocks in the macroeconomy
are permanent or temporary.
The need for dialogue is probably greater when the policy rate is close to the
lower bound, when further interest rate cuts no longer stimulate demand in the
economy. In such a situation, the Riksbank has fewer effective tools to use in an
expansionary policy. Fiscal policy may then need to play a greater stabilisation
policy role to counteract economic downturns and also to maintain confidence in
the inflation target than has been the case in recent decades.
Other conditions of independence
So much for the formal requirements for the independence of the Riksbank. But
let me also say a few words on how I perceive the informal conditions for our
independence.
In general, it is extremely important that the Riksbank acts with a high degree of
transparency and that our actions are continuously scrutinised and evaluated. I
see transparency and scrutiny as crucial conditions for maintaining the confidence
of the general public and politicians in the Riksbank's independence and mandate,
and also for maximising the efficiency of our operations.
Long before the new Riksbank Act was enacted, studies considered the Riksbank
to be one of the most transparent central banks in the world.9 The new act,
including Chapter 11, contains provisions aimed at further increasing the conditions
for transparency and openness in the Riksbank's operations. These include
reports to the Riksdag's Committee on Finance on monetary policy, financial
stability and cash management, and extensive public information.
The legendary head of the Federal Reserve, Paul Volcker, once said that central
bank independence does not exist in a political vacuum. What he meant was that
independence is not a perpetual right for the central bank. Not all countries have
independent central banks and where they do exist, as in Sweden, their
independence is relatively recent. Moreover, independence can be called into question and
is sometimes too. Not least recently, a debate has arisen in Sweden about
whether it is reasonable for an institution such as the Riksbank to be able to make
interest rate decisions with very large economic effects on households and
companies without what is called democratic control.
I am the first to agree that the Riksbank must be able to justify its monetary policy
and withstand both scrutiny and criticism from various quarters. But it is a
misconception that independence is somehow undemocratic.
The General Council of the Riksbank, appointed by the Riksdag, monitors the work
of the Executive Board and the activities of the Riksbank. The General Council has
a supervisory function in relation to the Executive Board, which is the body
responsible for the Riksbank's activities and which thus manages its independence.
This supervisory function has been strengthened by the new Riksbank Act. The
five members of the Executive Board are appointed by the General Council of the
Riksbank. Appointments are for a period of five or six years.
Through its supervisory function and power of appointment, the decision-making
procedures of the Executive Board and the fixed-term mandates, the General
Council has instruments to hold the members of the Executive Board accountable
for the decisions taken. The power of appointment is important because it gives
the Riksbank a democratic basis and, at the same time, counteracts the risk of
independence being abused. The Riksbank Act raises the bar in terms of
accountability, and it may be possible to go even further in the future.
In addition, the Riksdag Committee on Finance has the important function of
following up and evaluating the Riksbank's activities based on the reports on
monetary policy and other activities that the bank must submit to the committee. The
Swedish National Audit Office also examines the Riksbank's activities. Last but not
least, the Riksbank is closely scrutinised by the media.
The independence of the Riksbank is thus democratically decided and protected,
among other things, by the Treaty on the Functioning of the European Union
(TFEU). But in principle, independence could be removed even if it is not
something that an individual EU Member State can decide on its own. Let me reflect a
little on how I see this risk.
I believe that the risk of independence being curtailed and ultimately lost is
greater if the central bank starts to interpret its mandate very broadly and acts
without first carefully considering whether the mandate really provides for the
measures being taken. A particular danger may lie in getting involved in areas
where there appears to be a strong consensus among politicians and the public.
You never know if and when the political winds will change and the central bank's
behaviour may be questioned afterwards.
I believe that a relatively narrow interpretation of the central bank's mandate is
reasonable in order to safeguard the independence required for a central bank to
fulfil its primary task of maintaining price stability.
Financial independence and the Riksbank's equity
Financial independence is partly expressed in the fact that the Riksbank has assets
that are separate from the assets of the state.10 The Riksbank shall also be
independent in the management of this asset base, with the idea being that it shall
generate sufficient return to finance the bank's operations. Furthermore, the
Riksbank decides on its own budget, which means that the bank decides on its own
costs. Precisely because of this financial independence, the Riksbank is not funded
by government appropriations. Its own assets and the fact that the Riksbank
decides on its own budget mean that it differs from other administrative authorities
that are essentially financed by appropriations or fees.
This financial independence is also reflected in the provisions of the Riksbank Act
on how the Riksbank is to be financed.11 According to the act, financial
independence can be achieved by the Riksbank independently financing its own operating
costs in the long term through the return generated by the management of the
assets. According to the legislator, the Riksbank's equity should be sufficiently
large to ensure this.12 Self-financing occurs when the net interest income, i.e. the
difference between the Riksbank's interest income from assets and interest
expenses for liabilities, covers the operating costs.13 Equity, as well as outstanding
banknotes and coins (so-called cash supply), provides interest-free funding of
assets that generate returns for the Riksbank.14 This cost-free capital thus makes a
positive contribution to net interest income. In case of losses or deficits, the
equity is reduced and therefore the possibility of self-financing. The cost-free capital
therefore also needs to include a buffer to absorb unforeseen losses.15
The legislator weighed the risks of too much equity against the risks of too little
and concluded that a real value-hedged target level of SEK 60 billion is
appropriate.
The Riksbank Act therefore stipulates that the Riksbank's equity may amount to a
maximum of SEK 60 billion, unless the Riksdag decides otherwise, and that this
target level shall be adjusted upwards with CPI inflation each year so that the
capital retains its real value.16 An amount corresponding to two-thirds of the target
level, i.e. SEK 40 billion, shall be the basic level of the Riksbank's equity.
If equity becomes too small, i.e. if it falls below one third of the target level, the
Riksbank shall submit a peti