Sveriges Riksbank

Statutes

THE RIKSBANK IS AN AUTHORITY UNDER PARLIAMENT as stated in the Constitution Act. This means that its activities are governed by laws enacted by Parliament, in particular the "Sveriges Riksbank Act". The Riksbank may only conduct or participate in those activities authorised by Swedish law.

As an authority under Parliament, the Riksbank is legally independent of the government. It must consult the government before taking any major decisions regarding monetary and exchange rate policy, but the government has no power to stop or delay such decisions, even if it objects to them.

The Governing Board

The Riksbank is administered by the governing board. The board has eight members altogether, seven of whom are elected by the Parliament for the duration of the electoral term, thereby reflecting the political composition of Parliament. The eighth board member is the Governor, who is elected by the other seven board members to serve a five-year term.

The reason for electing a Governor for a longer period than the other board members is to ensure continuity and political independence. The governing board must meet at least once a fortnight.

Responsibilities

Both the Constitution Act and the "Sveriges Riksbank Act" state that the Riksbank alone has the right to issue bank notes and coins. Furthermore, these acts specify that the Riksbank is responsible for exchange rate and credit policies, and that the Riksbank must promote a safe and efficient payment system. In order to fulfil its tasks, the Riksbank Act states that the central bank may grant credit to and receive loans from banking institutions and participate in clearing balances between banks.

Every year the Governing Board submits an annual report to Parlia ment covering the Riksbank's operations for the preceding year and a proposal concerning the distribution of its profit for Parliamentary approval.

The Organisation

The different departments of the bank are organised under the supervision of the Governor and the Deputy Governors ( see organisational chart) .

The Monetary and Exchange Rate Policy Department enforces the monetary and exchange rate policy, while the Cashiers' Department provides the means of payments for the country. The Economics Department makes economic analyses and recommendations on monetary policy. The Financial Markets Department monitors the financial markets, while the Balance of Payments Department produces and analyses the balance of payments statistics.

The Riksbank is situated in the heart of Stockholln. In addition, it has branches in a number of cities throughout Sweden. The main task of the branch offices is to circulate money in the various regions.

In the middle of 1994, the Riksbank had a staff of around 930: half of these were employed in the head office, while the others worked in the Riksbank's branch offices.

Monetary and Exchange Rate Policy

LOW INFLATION PROVIDES AN IMPORTANT FOUNDATION for sllsLlirled economic growth and low unemployment, and the Riksballk has therefore defined the ultimate goal for monetary policy as price stability. In effect this means an inflation target of two per cerlt (I)llls or minus one percentage point) from 1995 onwards.

On 19 November 1992 the Riksbank abandoned the fixed exchallge rate and allowed the krona to float. The move to a flexible exchange rate regime has not entailed any change in the objective or the instrumellts of monetary policy. With a flexible exchange rate, monetary policy does not have an intermediate target in the form of a fixed exchange rate. Decisions about the monetary stance are based on a comprehensive assessment of the economic situation and the outlook for inflation in the somewhat longer run.

Indicators

In pursuing its monetary policy, the Riksbank monitors a number of economic variables which act as indicators of inflationary pressure. Based on this information, the Riksbank assesses whether it needs to change the instrument interest rates. Different indicators provide information on present and future inflation (see Table 1).

Interest Rate Policy Instruments

The Riksbank uses the repo rate to move short money rates inside a corridor bordered by the Riksbank's policy-determined rates for lending to, and borrowing from, the banking sector.

In order to obtain a certain repo rate, the Riksbank influences the aggregate liquidity of the banks. The extent to which the banking system deposits money with the Riksbank or borrows from it depends on a variety of factors. The main factors that can influence bank liquidity are currency inflows and outflows, the Riksbank's transactions in treasury papers and mortgage institution bonds, variations in the volume of banknotes in circulation and the Riksbank's annual transfer of profit to the Government. Together, these factors determine whether there is a surplus or a deficit in central bank money, and therefore the need for the Riksbank to withdraw or supply funds in order to establish the desired repo rate.

Deposits and Lending Interest Terms

By controlling the demand for central bank money, the Riksbank can either create deposits with - or borrowings from - the aggregated banking system corresponding to the desired repo rate.

The predetermined steps for deposits and lendings are each equivalent to four per cent of the banks' aggregate base for interest calculations. The deposit and borrowing facilities are assigned between the banks in accordance with a measure of their size. Each bank accordingly has a deposit and a borrowing facility equivalent to four per cent of the base for interest calculation.

The Riksbank controls liquidity in the banking sector by using market operations such as repos or reverse repos (repurchase agreements), central bank certificates, and the interbank market for deposits. Other operations at its disposal - although used less frequently- are the direct purchase and sale of treasury bills.

Liquidity is mainly supplied or withdrawn from the system via repos and reverse repos. The maturity of the repo is normally two weeks and the repo is announced every Tuesday at 8.30 a.m. The repo interest rate at which liquidity is supplied or withdrawn can be either fixed and, in that case, determined by the Riksbank, or variable and set by tender. The choice of variable interest rate enables the Riksbank to send a less distinct monetary signal to the market and thereby also make a cautious test of the market's short-term interest expectations. A fixed repo constitutes a considerably clearer signal to the market and is particularly appropriate when the Riksbank wishes to provide a distinct indication of the desired direction of interest rate movements or when market expectatiolls of interest rate changes are to be thwarted.

Whenever the Riksbank adjusts its interest rate instruments, funding costs for the banks change, and this in turn influences the deposit and lending rates for bank customers.

Instrument Interest Rates

The key interest rates in Sweden are the deposit, lending and repo rates. Within the bounds of the interest corridor formed by the rates for deposits and lending, the repo rate is an important signal for short-term market rates. Long-term interest rates are steered by other factors such as inflation rate expectations.

Changes in the repo interest rate can be preceded or followed by changes in the deposit and/or lending rate. Such adjustmentswill send the market a clear signal of a change in the stance of monetary policy.

The official discount rate is merely a reference rate, and is of no significance when it comes to monetary policy as it only reflects the general level of market rates.

Foreign Exchange Reserves

The Riksbank can influence the value of the Swedish krona through the sale and purchase of foreign currencies. In addition, the Riksbank acts as an intermediary for interest payments and amortisation of foreign currency loans arranged by the National Debt Office. The foreign exchange reserves are placed predominantly in stateguaranteed, interest-bearing securities which can be readily used to raise cash should the need arise.

Supervision

Sveriges Riksbank authorises the primary dealers and grants the foreign exchange dealing permits.

In order to become a primary dealer, an applicant must fulfill the conditions requested by the Financial Supervisory Authority (FSA) . This means that the applicant must be a retail dealer in both the money and bond markets for the National Debt Of fice, and must play an active part in the Riksbank's market operations: in other words, a primary dealer must undertake to quote two-way prices in treasury bills and certain benchmark bonds.

In order to qualify for a Foreign Exchange Dealing Permit, institutions must meet certain requirements. They must have reliable internal systems for risk calculation in foreign exchange, and they must submit written details of their long-term foreign exchange policy, strategy, risk policy, and chain of responsibility in their foreign exchange operations. The institutions must not exceed the limits set by the Riksbank on their foreign exchange exposure.

The Financial Supervisory Authority

The Bank Inspection Board and the Insurance Inspection Board merged in 1 99 l to form the Financial SupervisoryAuthority, a government agency which has the task of granting licences, supervising and formulating regulations for the financial sector. The Authority's aim is to promote the stability, security and soundness in the financial system.

The Swedish Financial Markets

BANKS HAVE THE EXCLUSIVE RIGHT to accept deposits from households, enterprises and local authorities. Several mergers have occured in the Swedish banking sector with the result that the number of banks has fallen sharply in recent years. Five banking groups dominate the Swedish marketat present. However, by mid- 1994 several applications to start new banks had been submitted to the authorities.

The other main types of credit institutions include the mortgage institutions and the finance companies. The mortgage institutions specialise in long-term financing for households, enterprises and agriculture, and they have roughly the same share of total lending as the banks. Their lending is financed mainly in the bond market.

The finance companies specialise mainly in leasing, factoring, credit card financing and conventional lending. The number of finance companies, as well as their share of total lending, has fallen sharply, mainly as a result of losses related to the real estate sector at the beginning of the ggo's, combined with problems in raising funds.

The foundations for Sweden's security market were laid in the 1 g80's as a result of the deregulation of the credit market, the growing need for government lending and the opening of the market to foreign players. Nowadays it is a highly sophisticated market offering the whole spectrum of financial instruments. The major institutional investors in the bond market are the National Pension Fund (which manages the funds in the national supplementary pension system) and the private insurance com panies.

Deregulation and Integration

The structure of Sweden's financial markets has changed considerably since the early 19980s. At that time, the Swedish financial system was strictly regulated. Competition between financial institutions was strictly limited, and foreign-owned institutions were not allowed to operate in the Swedish market, either through Swedish-based subsidiaries or through crossborder trade.

During the 1 980s, the domestic credit market was gl adually deregu lated and opened up to foreign competition: controls on bank interest rates were lifted, credit ceilings were abolished and banks were no longer forced to hold low-yielding housing and government bonds.

In 1985 foreign-owned bank subsidiaries were allowed to start operating. Subsequently, exchange controls were abolished, foreigners were allowed to own Swedish credit institutions and to set up branches. As a result of these deregulatory steps together with the harmonisation of Swedish financial legislation in relation to that of the European Economic Area (EEA), there are virtually no regulatory barriers preventing foreign participation in the Swedish financial market today.

Turbulence in the Credit Market

Following deregulation, a number of developments took place in the Swedish credit market. Between 1985- 1990, there was a rapid growth in the lending activities of the various credit institutions. For a start, deregulation made it possible for credit institutions to increase their lending. In addition, the tax system at that time allowed individual borrowers to deduct their interest costs from income, which was subject to a high marginal tax rate, and as a result, encouraged households to increase their debt. These factors, together with the general economic expansion and an expansive fiscal policy, fuelled an acceleration in demand for credit. As a result, inflation accelerated and led to a dramatic rise in real estate prices.

However, with the onset of the economic recession in lggo and the reform of the tax system which came into effect in 199l, the expansion in credit volume came to an end. Real estate prices fell sharply, resulting in severe credit losses for the credit institutions. In order to safeguard the stability of the payments system, a State guarantee for banks and mortgage institutions was introduced in 1992. However, the credit institutions have now restructured their activities in order to improve their efficiency and profitability.

The Stability of the Payments System

The Riksbank guards the stability of the payments system and is the "lender of last resort". According to its statutes, the Riksbank may extend temporary liquidity support, but not risk capital, to solvent banks and other authorised institutions.

Although the Riksbank oversees the payments system, the general supervision of the financial institutions and markets is conducted by the Financial SupervisoryAuthority. There is a formal separation of the role as a provider of liquidity (in conducting monetary policy) conducted by the Riksbank, and the role as a supervisor of the financial institutions, which rests with the FSA. However, there is a close co-operation between the central bank and the FSA. For example, the Riksbank is represented on the governing board of the FSA.

Means of Payrnent

THE RIKSBANK-OR SPECIALLY THE CASHIERS DEPARTMENT within the bank - is responsible for the issue and supply of bank notes and coins in Sweden. While the Riksbank has the sole right to issue bank notes and coins, its affairs must be run with the responsibility attendant upon its monopoly situation and with an awareness that other forms of payment exist.

Bank Notes and Coins

Bank notes and coins have to compete effectively with othel forIlls of payment, so the Riksbank must

¥ be attentive to the wishes of the markets about notes and coin design,

¥ follow developments in the security criteria for notes and coins, and

¥ follow the development of other forms of payment.

The Riksbank uses the latest security-printing techniques for its production of bank notes: all bank notes have a watermark and a security thread. New bank notes contain a "micro text" which is impossible to reproduce perfectlywith a copying machine. In addition, fluorescent colours are used llowadays in the printing of certain details on the notes.

Bank Notes for Export

Swedish bank notes and coins are made byAB Tumba Bruk, a wholly-owned subsidiary of the Riksbank. Traditionally, Tumba Bruk has focused on the production of Swedish banknotes. However, in the beginning of the 1970's Tumba Bruk became a limited company with a commercial aim. Today, most of the company's products are sold abroad, with exports accounting for the bulk of the sales. Tumba Bruk is one of the few companies in the world which is capable of undertaking the entire production process for bank notes and other valuable documents. As a result, it can offer the complete and unbroken security chain from design and engraving to paper manufacture and printing, as well as storage and delivery.

International Monetary and Financial Co-operation

RELATIONS BETWEEN SWEDEN AND THE EUROPEAN UNION (EU) are presently in a stage of transformation. The agreement on the European Economic Area (EEA) between the EU and six EFTA countries entered into force on l January 1994. An agreement on Sweden's membership of the EU was signed in June 1994, and Swedish representatives could thereafter take part as observers in meetings with EU institutions and committees. Sveriges Riksbank has, consequently, nominated observers in the sphere of the European Monetary Institute and other relevant EU bodies. In the extent of an affirmative outcome of the referendum on Sweden's accession to the EU, to be held in November , Sweden's EU membership can enter into force on 1 January 1995.

The Riksbank is a shareholder in the Bank for International Settle ments (BIS) and has a member on its board of directors.

The Riksbank provides the Swedish contribution to the capital resour ces of the International Monetary Fund (IMF) - the so-called quota subscription. Sweden's share is SDR l ,6 1 4 million, representing about 1 percent of the number of votes.

The Governor of the Riksbank is a member of the IMF Board of Governors. On the IMF Executive Board, Sweden is represented jointly with the other Nordic and Baltic countries.

Sweden is a strong supporter of the IMF's surveillance for the promo tion of international monetary stability and the elimination of obstacles to trade and to international financial relations. The IMF's policy recommendations facilitate the achievement of consistent policies which in turn help to ensure stable exchange rates and global economic growth. This is particularly important for a small, export-oriented economy such as Sweden's.

The Riksbank occasionally provides experts for the IMF's technical assistance missions: in recent years, the Baltic countries have been recipients of such help.

The Riksbank is a party to the General Arrangements to Borrow (GAB), which were agreed for the purpose of providing additional liquidity in support of IMF initiatives. The contributing countries constitute the so-called Group of Ten and co-operate in other areas as well.

History of the Bank

SVERIGES RIKSBANK WAS FOUNDED IN 1668 and is the oldest central bank in the world. It was given the name Riksens Standers Bank meaning the Bank of the Estates of the Realm. The bank was under the sole administration of the Swedish Parliament, and has remained so ever since.

The working capital for the Bank of the Estates of the Realm came from deposits received and the profits made. In 1668, the Government ordained that the Crown's current holdings should be deposited with the Bank, with a view to increasing the Bank's working capital. In the same year, the administration of the Royal Mint was transferred to the Bank, allowing it to collect the income from minting.

From the day the Bank began operations, the Crown was an active borrower and the wartime requirements of the Crown sometimes placed the Bank in a critical situation.

In 1701 the so-called "transfer notes" were introduced. They were intended to be used as a means of payment in general circulation. In 1745 the Government decreed that the Bank's transfer notes were legal tender for all payments. Two years later, the Bank established a special noteprinting of fice within the bank building and in 1755 it started its own paper mill at Tumba.

During the 1830'S, some private banks came into existence which also issued bank notes. Theywere allowed to use funds deposited with the Bank of the Estates of the Realm as cover for their note issue: the Bank of the Estates of the Realm thus became "the Bank of the banks".

However, it was not until 1855 that a single unit - the riksdaler riksmyn t "National currency riksdaler" - was adopted for the Swedish currency.

In the middle of the nineteenth century, the idea of a Swedish central bank took shape, and in 1867, the Bank received its present name of Sveriges Riksbank. In the second half of the nineteenth century, the Riksbank established a network of branches throughout the country.

In 1873, Denmark and Sweden formed the Scandinavian monetary union with a currency unit based on gold and called the Krona. Norway joined the union in 1875. In 1897, the Riksbank became the sole note-issuing bank in Sweden, and by the turn of the century, the process of organising the Riksbank as the central bank was completed.

Between 1668 and 1680 the Bank rented premises in the Oxenstierna Palace in Stockholm. In 1680, it moved to new, purpose-built premises, and then in 1906 it moved to a building at Helgeandsholmen. Finally, in 1976, the Riksbank moved to its present location at Brunkebergstorg.

Statistics

THE RIKSBANK produces a range of statistics covering the balance of payments and the credit market, among other things. The Balance of Payments Department collects the basic data and produces the statistics for the balance of payments, the balance on current account, the capital balance, and the foreign exchange reserves.

The Financial Markets Department collects the basic data and pro duces statistics for the money supply, lending and deposits, as well as assets and liabilities of financial institutions.

The Nobel Prize

In 1968, on the occasion of the tercentenary of the Riksbank, the Alfred Nobel Memorial Prize in Economic Sciences was instituted with funds from the Riksbank: the prize is awarded annually for work in economic sciences.

The laureates since 1969, the year of the first award, are:

1969 R. Frisch andJ. Tinbergen
1970 P. Samuelson
1971 S. Kuznets
1972 J.R. Hicks and K.J. Arrow
1973 W. Leontief
1974 G. Myrdal and F.A. von Hayek
1975 L. Kantorovich and T.C.Koopmans
1976 Milton Friedman
1977 B. Ohlin and J. Meade
1978 H.A.Simon
1979 T.W. Schultz and A. Lewis
1980 L.R. Klein
1981 J. Tobin
1982 G. Stigler
1983 G. Debreu
1984 R. Stone
1985 F. Modigliani
1986 J.M. Buchanan
1987 R.M. Solow
1988 M. Allais
1989 T. Haavelmo
1990 H. Markowitz, M. Miller and W. Sharpe
199l R. Coase
1992 G.S. Becker
1993 R.W. Fogel and D.C. North

Foundation for Science

Riksbankens Jubileumsfond - the Bank of Sweden Tercentenary Foundation -was created in 1962 when a certain amount of the 1961 profit was set aside to celebrate the tercentenary of the bank which was due in 1968. The aim of the foundation is to support research with a "Swedish link".

Publications in English

Publications puhlished on a regular basis:

ANNUAL REPORT
THE SWEDISH FINANCIAL MARKET
STATISTICAL YEARBOOK
INFLATION AND INFLATION EXPECTATIONS IN SWEDEN
QUARTERLY REVIEW
MONTHLY STATEMENT/WEEKLY STATEMENT

Publications published ad hoc:

SVERIGES RIKSBANK (BANK OF SWEDEN) 1668 - 1968- 1976
SWEDISH NOTES AND COINS- 1992
MONETARY POLICY WITH A FLEXIBLE EXCHANGE RATE-December 1992
MONETARY POLICY INDICATORS-June 1993
THE SVERIGES RIKSBANK ACT (1988: 1385) - January 1994
THE RIKSBANKS NEW SYSTEM OF INTEREST RATE POLICY INSTRUMENTS-May 1994

Occasional Papers:

EEA AND THE FlNANClAL SERVlCES SECTORS lN SWEDEN / Emil Ems,ErikBlomberg and Eva Blixt -1993 (No 9)
FINANCIAL INTEGRATION IN WESTERN EUROPE-STRUCTURAL AND REGULATORY CONSEQUENCES/ Emil Ems (Editor) - 1994 (No 10)

Working Papers:

THE STRUGGLE TO TURN THE SWEDISH KRONA INTO A HARD CURRENCY/Lars Horngren and Hans Lindberg - April 1993 (No 8)
TARGETING A EUROPEAN MONETARY AGGREGATE: REVIEW AND CURRENT Issues/christopher Sardelis-November 1993 (NO 12)
IS INFLATION BAD FOR GROWTH?/Maria Manhage-February 1994 (NO 13)
AN ANALYSIS OF TIME VARYING RISK PREMIA OF SWEDISH T-BILLS/Peter Hordahl-February1994 (No 14)
ESTIMATING THE TERM STRUCTURE OF INTEREST RATES WITH SIMPLE AND COMPLEX FUNCTIONAL FORMS: NELSON & SIEGEL VS. LONGSTAFF & SCHWARZ/Magnus Dahlquist and Lars E.o. Svensson-March 1994 (No 15)
A TIME SERIES APPROACH TO SELECTING INFLATION INDICATORS/Christian Nilsson andJonny Nilsson-April 1994 (No 16)
INTEREST RATE DETERMINATION AND MONETARY POLICY IN SWEDEN/Annika Alexius, Fredrika LindsjoandMarianneWolfbrandt-April 1994 (No 17)
FIXED EXCHANGE RATE COLLAPSES WITH STOCHASTIC PROCESS SWITCHING AND BAYESIAN UPDATlNG/HansLindberg-August 1994 (No 18)
THE EFFECTS OF STERILIZED INTERVENTIONS THROUGH THE SIGNALLING CHANNEL: SWEDEN 1986- I ggo/Hans Lindberg - September 1994 (No 19)