Sweden’s Central Bank Needs More Than $7 Billion to Cover Losses

Niclas Rolander
·4 min read

(Bloomberg) -- Sweden’s central bank will need more than $7 billion to cover losses stemming from its quantitative easing programs, the governor of the Riksbank told lawmakers on Tuesday.

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The bank needs a capital injection of almost 80 billion Swedish kronor ($7.3 billion) just to restore its equity to a basic level, according to preliminary results of an analysis of its financial position, Erik Thedeen told the parliament’s Committee on Finance, according to a statement.

Officials intend to submit a petition to parliament in March 2024 based on Riksbank’s equity and reported results for 2023, including both a request for additional capital and “an opportunity for additional earnings.”

The Riksbank’s recapitalization announcement comes as central banks around the world have seen the assets amassed during a period of low inflation lose value. The development has led to soul-searching among policymakers as the cost of large asset purchases that had limited success in spurring price increases is becoming clear.

Read More: Central Banks Search for Lessons From Great Inflation Outbreak

In the euro area, QE-driven losses are most notably felt at Germany’s Bundesbank. Still, officials across the euro area are resisting the need for cash injections, highlighting how such shortfalls are likely to be temporary.

Research released by International Monetary Fund staff in July suggested that such short-run losses shouldn’t necessitate capital injections from governments. Agustin Carstens, chief of the Bank for International Settlements, spoke out earlier this year to insist that central banks “can and have operated effectively” even with negative equity.

The Riksbank started buying government bonds in 2015 to fuel inflation, and added other asset classes to its purchases to support the economy during the pandemic. At the peak, in early 2022, it held bonds and treasury bills with a nominal value of close to 1,000 billion kronor ($91 billion). The bank stopped purchases at the end of 2022 and started selling government bonds in April.

The Riksbank made a loss of 81 billion kronor in the financial year 2022, pushing its equity to a negative 18 billion kronor. That’s far below both the target level of 60 billion kronor as well as the 20 billion-krona threshold under which the central bank must ask parliament for a recapitalization.

“A negative equity does not affect the Riksbank’s ability to conduct monetary policy in the short term,” Thedeen said in the statement. “But to maintain confidence in an independent monetary policy in the long term, it is necessary that the Riksbank is financially independent, that is, has sufficient equity and earnings to cover its costs.”

The losses have also fueled a domestic debate about the Riksbank’s policies during a period of low inflation in which it held its benchmark rate below zero for five years and bought government bonds to spur price increases. Some critics blame an overly loose monetary policy for a decline in the value of the krona that has seen the currency drop to record lows this year, while others say that it might have been a better option for the Riksbank to take rates deeper into negative territory instead of buying bonds.

Cashless Society

Sweden’s dwindling use of notes and coins also presents problems for the Riksbank as the traditional way of central bank financing is via seigniorage from issuing cash. Seigniorage refers to the interest a central bank makes on deposits made in exchange for notes.

The Riksbank may need new revenue streams as that source is drying up, Thedeen said.

“It’s clear that in the long run, this is not a sustainable financing solution for us,” he told reporters after the committee meeting. “That means you can either have a large amount of equity that will generate interest income, or have a little less capital and supplement it with some other type of earnings.”

While it remains unclear what those alternative financing solutions may be, Thedeen mentioned fees paid by the financial sector or reserve requirements as possibilities.

Riksbank Deputy Governor Martin Floden said in a speech last year that while there was little evidence that the initial asset purchases lowered financing costs for companies and households, the bank’s expanded QE during the Covid crisis helped bring about a rapid economic recovery and avoid a prolonged recession.

--With assistance from Craig Stirling.

(Updates with Thedeen comments from 11th paragraph)

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