Sveriges Riksbank, or simply Riksbanken, is the central bank of Sweden. It is the world's oldest central bank and the world's 3rd oldest bank still in operation. It is sometimes called the Swedish National Bank or the Bank of Sweden (not to be confused with Swedbank, a regular bank).
History
The Riksbank began its operations in 1668, its antecedent being Stockholms Banco (also known as the Bank of Palmstruch), which was founded by Johan Palmstruch in 1656. Although the bank was private, it was the king who chose its management: in a letter to Palmstruch, he gave permission to its operations according to stated regulations.
However, Stockholms Banco, the world's oldest note-issuing bank, collapsed as a result of the issuing of too many notes without the necessary collateral. Palmstruch, who was considered responsible for the bank's losses, was condemned to death, but later received clemency. On 17 September 1668, the privilege of Palmstruch to operate a bank was transferred to the Riksens Ständers Bank (translation: Bank of the Estates of the Realm) and was run under the auspices of the parliament of the day. Due to the failure of Stockholm Banco, the new bank was managed under the direct control of the Riksdag of the Estates to prevent the interference of the king. When a new Riksdag was instituted in 1866, the name of the bank was changed to Sveriges Riksbank.
Having learnt the lesson of the Stockholms Banco experience, the Riksbank was not permitted to issue bank-notes. Nevertheless, in 1701, permission was granted to issue so called credit-notes. Some time in the middle of the 18th century, counterfeit notes began appearing, which caused serious problems. To prevent forgeries, it was decided that the Riksbank should produce its own paper for bank-notes and a paper-mill, Tumba Bruk, was founded in Tumba, on the outskirts of Stockholm.
A few years later, the first commercial banks were founded and these were also allowed to issue bank-notes. The bank-notes represented a claim to the bank without interest paid, and thus became a considerable source of income to the banks. Nonetheless, security in the form of a deposit at the Riksbank was required to cover the value of all notes issued.
During the 19th century, the Riksbank maintained a dominant position as a credit institution and issuer of bank-notes. The bank also managed national trade transactions as well as continuing to provide credit to the general public. The first branch-office was opened in 1824, later followed with subsidiary branches opening in each county (län). The present operational activities as a central bank differ from those during the 19th century. For example, no interest-rate related activities were conducted.
The position of the Riksbank as a central bank dates back to 1897, when the first Riksbank Act was accepted concurrently with a law giving the Riksbank the exclusive right of issuing bank-notes. This copyright concluded its role and importance regarding monetary policy in a modern sense, as the exclusive right to issue notes is a condition when conducting monetary policy and defending the value of a
currency. Behind the decision were repeated demands that the private banks should cease to issue notes as it was considered that the ensuing profits should befall the general public.
The Swedish currency was until 1931 backed by gold and the paper-certificates could be exchanged for gold coins. The bank was obligated until 1975 by the Swedish constitution to exchange the paper certificates for gold, but in 1931 a specialized temporary law was written to free the bank from this obligation. This law was renewed every year until the new constitution was ratified 1975 which split the bank from the government into a stand-alone organization not obligated to exchange notes for gold.
In November 1992, the fixed
exchange rate regime of the
Swedish Krona collapsed. A few months later, in January 1993, the Governing Board of the Riksbank developed a new monetary policy regime based on a floating exchange rate and an inflation target. These policies were extensively influenced by assistance from the
Bank of Canada, which had extensive previous experience controlling inflation, while similarly being a small open economy, heavily subject to
foreign exchange rate swings.
From 1991–93, Sweden experienced the most severe recession since the 1930s. The recession in the early 1990s forced inflation down to around 2%. The rate of inflation continued to be low during the subsequent years of strong growth in the late 1990s.
During the 2000s, the operations and administrative departments were down-sized on behalf of the policy departments Financial Stability Department and Monetary Policy Department. A direct consequence of the changing times was that the Riksbank closed down all its branches in Sweden and outsourced the handling of coins and bills to a private company. Today the policy departments are the core of the central bank and they employ about half of the bank's 350 full-time posts.
In July 2009, the Riksbank was the first central bank to use a negative interest rate, lowering its deposit rate to −0.25%, a policy advocated by deputy governor Lars E. O. Svensson.
Role of the Riksbank
- Maintaining the value of money – price stability;
Under the Sveriges Riksbank Act, the Riksbank shall maintain price stability, which means that inflation should be low and stable. The Riksbank has specified an inflation target, according to which the annual change in the consumer price index (CPI) is to be 2 per cent. The Riksbank's monetary policy is aimed at attaining the inflation target, and at the same time it is to support the objectives of general economic policy with a view to achieving sustainable growth and high employment.
The Riksbank determines the level of its policy rate, the repo rate, to influence inflation and economic developments. The repo rate is the interest rate charged to banks who borrow from or deposit money with the Riksbank. The repo rate affects other interest rates in the economy and ultimately economic activity and inflation.
- A safe and efficient payment mechanism – financial stability;
The Riksbank has the Riksdag's mandate to promote a safe and efficient payment mechanism. This means that the Riksbank shall act to promote stability in the Swedish financial system as a whole. The mandate also includes issuing banknotes and coins. In addition, the Riksbank provides an electronic payment system, RIX, which handles large value payments between banks and other actors in a safe and efficient way.
The Riksbank analyses the stability of the financial system on a continuous basis in order to detect, at an early stage, changes and vulnerabilities that could lead to disruptions. The analysis focuses primarily on the major Swedish banking groups, the functioning of the financial markets and the financial infrastructure required for the payments and the financial markets in Sweden to function smoothly. In a crisis situation, the Riksbank may in certain circumstances provide temporary liquidity assistance to banks.
- The Riksbank's independence;
The Riksbank is a public authority under the Riksdag. The Riksdag appoints the members of the Riksbank's General Council. The General Council in turn appoints the members of the Riksbank's Executive Board. The General Council also supervises and scrutinises the work of the Executive Board.
The Riksdag has given the Riksbank an independent status. This means that the Executive Board of the Riksbank makes the monetary policy decisions without instruction from any other parties. By delegating the task of maintaining inflation at a low and stable level to the Riksbank, the Riksdag has ensured that monetary policy is based on a long-term perspective and that there is a sound basis for the credibility of the inflation target.
The Riksbank’s asset management
The Riksbank primarily manages financial assets as a means of achieving its statutory objectives. In order to safeguard financial stability, it should be ready and able to provide temporary liquidity assistance to banks in both Swedish kronor and foreign currencies. For monetary policy purposes, the Riksbank should be able to buy or sell foreign currency so that it can influence the exchange rate for the krona. The Riksbank also provides loans to the International Monetary Fund (IMF), which in turn lends money to emerging countries and countries experiencing a financial crisis.
The Riksbank's financial assets consist of the gold reserve and the foreign currency reserve, including receivables from the IMF, assets relating to the Riksbank's monetary policy activities and other financial assets. The gold and foreign exchange reserves are normally the largest asset items and are subject to asset management.
The assets in the gold and foreign currency reserves are managed so that the Riksbank can always fulfill its commitments. This sets clear guidelines for asset management, but, within these guidelines, the assets are managed in precisely the same way as any other asset manager would do: that is, with the aim of providing the highest possible return in relation to the risk taken.
Each year, the Riksbank decides on the guidelines for asset management – an investment policy. Among other guidelines, this specifies the restrictions placed on the allocation of currencies and assets in the foreign exchange reserve, with the aim being that the Riksbank should always be able to fulfill its commitments. The investment policy also specifies an interval for the foreign exchange reserve’s average interest rate risk.
Structure
The Riksbank is an authority under the Riksdag, the Swedish parliament. Representatives from the Riksdag are members of the Riksbank's General Council and they appoint the Executive Board members who lead the Bank.
The Riksbank consists of seven departments:
- The Administration Department;
- The Financial Stability Department;
- The Asset Management Department;
- The Monetary Policy Department;
- The Internal Audit Department;
- The IT Department;
- The General Secretariat.
All heads of department, apart from the head of the Internal Audit Department, participate in the Riksbank's Management Group. The Group coordinates the Riksbank's activities and is led by the head of the General Secretariat.
Monetary Policy
According to the Sveriges Riksbank Act, the objective of monetary policy is to "maintain price stability". The Riksbank has interpreted this objective to mean a low, stable rate of inflation. More precisely, the Riksbank's objective is to keep inflation around 2 per cent per year.
Financial Stability
One of the Riksbank's core functions is to promote a safe and efficient payment system. The payment system is important for all economic activities and is a central component of the financial system. For that reason the Riksbank regularly analyses the risks and threats to the stability of the Swedish financial system. The purpose of this analysis is to detect changes and vulnerabilities that could lead to a serious crisis. The major Swedish banks have particular significance in the analysis. The Riksbank's assessment of stability is published twice yearly in the Financial Stability Report.
International Cooperation
International Monetary Fund, IMF
Sweden is a member of the IMF since 1951. The Riksbank is Swedish liaison body vis-à-vis the Fund, and has provided Sweden’s contribution to the Fund’s general resources, as well as supporting financial arrangements. The Riksbank governor is Governor for Sweden in the IMF. Within Sweden, the Riksbank coordinates national positions with the Ministry of Finance and, as appropriate, other ministries.
Much of the IMF-related work takes place within the framework of the Nordic-Baltic constituency, which consists of all the five Nordic countries and the three Baltic countries. The constituency takes common positions on key policy issues to be considered by the International Monetary and Financial Committee (IMFC) and the IMF Executive Board. The representation of the constituency at meetings with those bodies is determined by a preset rotation scheme. The highest policy making body of the constituency is the Nordic-Baltic Monetary and Financial Committee (NBMFC), which is comprised of deputy central bank governors and state secretaries from the Nordic and Baltic countries. These delegates meet ahead of the IMFC meetings. Also the chair of the NBMFC rotates within the constituency, and the current incumbent for the 2010-2012 period is Norwegian State Secretary Tore Eriksen.
Informal coordination of positions on more important IMF issues also takes place for the EU member states countries in the framework of the Economic and Financial Committee (EFC), and its sub-committee for IMF issues (SCIMF). Core IMF issues are also discussed within the European System of
Central Banks (ESCB) with its International Relations Committee (IRC).
European System of Central Banks, ESCB
As Sweden’s central bank, the Riksbank is part of the ESCB since its inception in 1998. The ESCB comprises the
European Central Bank (ECB) and the national central banks of all EU Member States (see Other EU co-operation).
The ECB and the national central banks of the seventeen EU countries that have so far adopted the
euro are jointly referred to as the Eurosystem. Given Sweden’s current status as a country with a derogation concerning the adoption of the single currency, the Riksbank is not part of the Eurosystem.
Central banks that are members of the ESCB but not of the Eurosystem, retain responsibility for monetary policy and other ESCB-related tasks in their respective national context. The Riksbank governor is a member of the General Council of the ECB, which meets every quarter to exchange information and promote co-operation between central banks in the EU, with a general view to permitting entry into the Eurosystem at a later stage in connection with the adoption of the euro.
The General Council inter alia adopts the ECB convergence reports, where the performance in relation to the economic convergence criteria in the Treaty and the compatibility of national legislation with the Treaty and the ESCB statute are being examined for countries with a derogation. Such reports are prepared every two years or at the request of a member state seeking to join the euro area. In recurrent such examinations, it is noted that the krona is not part of the ERM II and that Sweden does not fulfill the criterion on exchange rate stability. Furthermore, there is a need for adjustments to the legal framework for the Riksbank.
The membership of the General Council also includes contributing to certain activities of the ECB, prior to decisions on such issues taken by the Governing Council of the ECB. Furthermore, representatives of the Riksbank take part in the ESCB committees whenever they perform duties on behalf of the General Council, as well as in a number of working groups set up by these committees. All in all, the Riksbank participates in around 50 committees and groups within the ESCB.
Bank for International Settlements, BIS
Sveriges Riksbank acquired shares in the BIS when it was established in 1930, albeit not as a founding institution. Currently the Riksbank holds 17,244 shares, corresponding to approximately 3.2 per cent of the total number of issued shares and 2.9 per cent of the voting rights. Riksbank governors have been elected members of the BIS Board of Directors with few interruptions since 1937.
At the bi-monthly meetings of governors at the BIS headquarter in Basle, where gatherings are arranged in various formats, the Riksbank governor participates inter alia in the meetings of the BIS Board of Directors, the Global Economy Meeting and the Economic Consultative Committee.
In addition, the Riksbank participates in around 25 committees and working groups within the BIS field of activities. Through its representation in the Global Economy Meeting, and a special group involving also heads of supervision, the Riksbank is involved in the process of providing guidance to this work and to participate in the preparation of detailed proposals.
Organisation for Economic Co-operation and Development, OECD
As a former participant in the Organisation for European Economic Co-operation (OEEC), Sweden is a member of the OECD since its inception in 1960. The Riksbank is primarily involved in OECD committees in the area of macroeconomic and economic policy issues.
A deputy governor of the Riksbank participates in meetings with the Working Party 3 for the Promotion of Better International Payments Equilibrium (WP3), together with colleagues and finance ministry state secretaries from leading industrial countries. The working party meets three times a year to discuss topical macroeconomic policy issues. This working party is technically subordinated to the Economic Policy Committee (EPC), which comprises all OECD member states and where the Riksbank is represented at the level of Head of Department for discussions about the current economic situation.
The Riksbank is also represented in a few other EPC working parties, and in the framework of the Economic and Development Review Committee (EDRC), the Riksbank is included in the Swedish delegation, led by the Ministry of Finance, when the Swedish economy is being examined for the OECD recurrent country surveys.
Priority issues
The Riksbank actively participates in international policy discussions across its entire field of activities. It gives special priority to issues within the area of the bank’s core functions. For instance, in increasingly cross-border financial markets, the Riksbank supports the further development of analytical methods and of the regulatory framework so as to enhance efficiency and stability.
The Riksbank is also engaged in discussions with other central banks about various ways to conduct monetary policy and willingly shares its experiences of inflation-targeting procedures. In the context of the ongoing reform process in the IMF, Sweden supports efforts to promote the legitimacy of the Fund in all parts of the world and to enhance efficiency in its work, in order to enable the IMF to further foster economic and financial stability.
Useful links
- Currency of Sweden:
- Swedish krona
- List of Central Banks:
- Central Banks
- Official website of Sveriges Riksbank:
- www.riksbank.se
- Ministry of Finance of Sweden:
- www.government.se