Flodén: The Riksbank’s bond purchases affect government finances
“So far, the bond purchases have been profitable but there is every indication that they will lead to a loss in the future, and hence contribute to a period of lower or zero dividends to the government. But the aim of the Riksbank’s operations is not to deliver profits to the government. Our task is to maintain price stability, and we do that by safeguarding the credibility of the inflation target”. These are the words of Deputy Governor Martin Flodén as he addresses the West Sweden Chamber of Commerce in Göteborg.
Mr Flodén points out that the government bond purchases have increased the risks on the Riksbank's balance sheet, and that its income and dividends have become more sensitive to interest rate changes.
"Despite the increased risks, however, the Riksbank's financial position remains healthy. The Riksbank's equity currently amounts to just over SEK 120 billion. Even though it is likely that equity will shrink substantially in the coming years, it is my opinion that profit fluctuations are unlikely to be large enough to cause it to fall to worryingly low levels," Mr Flodén says.
However, he points out, the Riksbank's dividends to the government will fluctuate considerably more from year to year in the future than they have done in recent decades. The most likely outcome is that the government dividends will decrease or cease entirely for a period. But, as Mr Flodén notes in conclusion, the aim of the Riksbank's operations is not to make a profit or deliver dividends to the government. "Our task is to maintaining price stability, and we do that by safeguarding the credibility of the inflation target. In this way, we promote efficient price-setting and wage formation in the economy, which forms the basis of sustainable economic development with high employment," Mr Flodén concludes.
Read the entire speech "The Riksbank's bond purchases affect government finances".
About the Riksbank's balance sheet
Prior to the financial crisis of 2008, the Riksbank could make profits without taking any actual risks. The assets on our balance sheet mainly consisted of foreign debt securities while the main liability items were outstanding banknotes and coins and our equity. The value of the assets fluctuated, of course, depending on foreign exchange rates, but they still generated a reliable return while the liabilities were interest-free. The Riksbank was therefore able to provide secure funding for the bank's operations as well as distribute a surplus to the government.
But the picture as regards the Riksbank's financial position and risks is now entirely different. One important reason is that the decline in the use of cash and low interest rates have impaired our earning capacity. Another important change is that the Riksbank has purchased large volumes of Swedish government bonds since the beginning of 2015, which has made the balance sheet more sensitive to interest-rate adjustments.
