It is leaning toward an abrupt end to the annual dividend that the state usually receives from the Riksbank.
Stefan Ingves and his staff look rather like going back tens of billions this year after a tidal wave of losses in the Riksbank's portfolio of securities.
The Riksbank has long been a stable profit machine for the central government. Annual dividends have commuted between SEK 2.3 billion and SEK 6.8 billion per year over the past ten years – a total of SEK 42 billion over the period 2012–2021.
However, the conditions have been radically changed by the unexpectedly rapid rise in interest rates in the wake of inflation.The rise in interest rates is hitting the value of all the securities The Riksbank has been buying support since 2015. It also raises the Riksbank's interest costs for commercial banks' deposits, which have increased due to the support purchases.
May end up with capital injections
At the moment, it looks like that 2022's interest losses for the Riksbank can end with the Riksbank's Board requesting capital injections from the Riksdag – although this may be formally postponed up to 2024.
The magnitude of the Riksbank's losses is unclear. Interest losses should be weighed against the effects of the weaker krona on the value of the Riksbank's gold and currency reserve and other unrealised gains and losses.
However, in a calculation example from last summer by David Kjellberg and Magnus Åhl – two Riksbank officials – the loss is estimated for the Riksbank in 2022 to 65 billion. If it should become a reality, it basically eats up all of its own capital, which at the end of 2021 was 66 billion.
Fredrik N.G. Andersson, Associate Professor of Economics at Lund University, sees minus 65 billion as a fairly reasonable scenario.
"But it's probably not at the top. On the contrary, rather at the bottom", he says and refers to the fact that interest rates seem to rise more than the levels on which the calculation is based.
He calls for new calculations with different interest rate scenarios from the Riksbank.
"A central bank can always pay for itself"
How the losses are to be managed is a rather difficult accounting history. It is determined by how to periodicise the losses, but also by new provisions in the Riksbank Act that will be clubd this week and enter into force at the end of the year.
The target level for the Riksbank's own capital is according to the bill of SEK 60 billion. There is also a requirement for the Riksbank – if equity falls below SEK 20 billion – to request capital injections at least up to what is called the base level of SEK 40 billion.
But to the point is that the new Act's wording on the Riksbank's obligation to request capital injections if equity falls will not be applied until 2024. Moreover, the level of equity actually lacks practical significance for the Riksbank's ability to conduct monetary policy and to be the last outpost on the Swedish financial market, according to Kjellberg and Åhl:
"A central bank can always pay for itself in its own currency and the central bank can, for a period of time, even have an equity capital that is negative and still functions almost as usual," they write.
Peder Beck-Friis, asset manager at the American Pimco, makes the same assessment, and he also reminds us that many other central banks around the world are also making huge losses on supported bonds right now.
"If you put the Riksbank's and the state's balance sheets together into a consolidated balance sheet, this does not matter much. You take money from one hand and give to another", he says.
Can create resistance to support purchases
Although he does not rule out that losses can create problems of trust and political resistance to new aid purchases in the future.
"At the moment, it doesn't matter much", says Beck-Friis. But it may appear politically problematic that the Riksbank is making losses.
"I think that the public and politics are now getting their eye on this. I think that will limit this type of action in the future", he says.
"Other countries used support purchases as a crisis tool. We did, but only at the beginning of the corona pandemic. During the years 2015–2019 we had a boom and it started before the support purchases," he adds.
Facts: Support purchase portfolio valued at SEK 862 billion
The Riksbank's support purchases have been used as a crisis tool in acute phases, when there were problems in the interest market at the beginning of the corona pandemic. However, since 2015, the Riksbank has also made large amounts of support purchases for long periods without a crisis – in order to increase the amount of money in the economy, together with zero and minus interest rates, and thus boost the previously low inflation rate.
The latest program for support purchases expired on 31 December 2021 and the Riksbank is in the process of reducing holdings of securities during 2022. At the end of October, the Riksbank's holdings of supported securities were valued at a total of SEK 862 billion, divided into:
Government bonds: 337 billion
Treasury bills: 5 billion
Covered bonds (residential bonds): 385 billion
Municipal bonds: 123 billion
Corporate bonds: 12 billion
Source: The Riksbank