Q&A - The Riksbank's income statement and balance sheet

What are interest-free deposits?

If equity falls below the target level, the Riksbank is able to require credit institutions to hold deposits in the Riksbank. The deposits shall be interest-free as a base case. The total deposit volume may not exceed the amount at which the sum of the Riksbank’s equity and the received deposit (plus the value of any reserve requirement) corresponds to the target level for equity (read more about The framework for the Riksbank’s equity in the Sveriges Riksbank Act).

The deposit requirement means that part of the Riksbank’s liabilities will become interest-free. In other words, there is a reallocation of items on the liability side of the balance sheet – the so-called monetary policy deposits on which we pay interest is replaced by interest-free deposits – but the Riksbank’s balance sheet remains unchanged in size. The deposit requirement leads to the proportion of interest-free debt increasing in a situation in which the Riksbank’s equity (which is also interest-free) is low. This contributes to improving the Riksbank’s net interest income and thus our financial result. In this way, the deposit requirement can improve the Riksbank’s earnings and help to build up equity at a faster pace.

According to the Sveriges Riksbank Act, the deposit requirement shall apply to all Swedish credit institutions and branches of foreign credit institutions and shall be proportionate in relation to the institution’s or branch’s liabilities.

Will the changes to the Sveriges Riksbank Act contribute to better earnings for the Riksbank?

The new legislation means that the Riksbank will be able to decide to take in interest-free deposits from credit institutions if the Riksbank’s equity is below the target level for equity. The deposit requirement means that the Riksbank can receive interest-free funding of its assets in a situation where equity (which is also interest-free) is low. In this way, the interest-free deposits improve the Riksbank’s net interest income, which is the basis for the Riksbank to be self-financing.

How much do you expect to raise through the interest-free deposit requirement?

Earnings will vary depending on the size of the Riksbank’s equity, the target level of equity and the policy rate. It is therefore difficult to say what interest-free deposits might generate once they are implemented. Assuming that the Riksbank can withdraw interest-free deposits equivalent to around SEK 40 billion and the policy rate is 2.5 per cent, this would mean a cost saving of about SEK 1 billion in one year. Read more about how the requirement for interest-free deposits can contribute to the Riksbank’s earnings in the annex to the Riksbank’s consultation response.

When will interest-free deposits from credit institutions enter into force?

The new legislation will enter into force on 1 January 2025. The Riksbank intends to introduce the deposit requirement in the second half of 2025. Among other things, this requires that systems be adapted and that the Riksbank obtains the information required to calculate the deposits that all credit institutions must hold with the Riksbank. The Riksbank will conduct a dialogue with the relevant trade associations and the credit institutions that will be subject to the deposit requirement.

What happens to the Riksbank’s balance sheet when the deposit requirement is introduced?

In simple terms, the deposit requirement means that some of the Riksbank’s liabilities will be interest-free instead of subject to interest. The size of the Riksbank’s balance sheet will remain unchanged, but there will be a change between the various items on the liabilities side of the balance sheet. At present, monetary policy counterparties can choose to invest in Riksbank Certificates or in the Riksbank’s standing deposit facility. They then receive the policy rate or the policy rate minus 10 basis points on their investments. When the deposit requirement is introduced, the credit institutions affected by the requirement will invest in the new deposit requirement, on which the Riksbank will not pay interest. This means that part of the total claim that the credit institutions have on the Riksbank will be interest-free.

Why does the Riksbank need better earnings?

The Riksbank’s financial independence means that, over the long term, the Riksbank independently finances its own operating costs, costs for monetary policy and costs for ensuring financial stability. Financial independence is achieved primarily through the Riksbank’s net interest income, meaning the difference between interest income and interest expenses, covering operating costs and creating scope for financial risk provisions that create buffers to manage risks. The Riksbank can achieve positive net interest income by having access to interest-free debt, meaning sources of financing on which the bank does not pay interest. This includes equity and banknotes and coins in circulation. Demand for banknotes and coins has long been declining and the new interest-free deposits give the Riksbank the opportunity to create a new type of interest-free debt that can help the Riksbank improve its net interest income, thereby strengthening its ability to fund itself.

You said earlier that you would investigate long-term earnings. What happened to that investigation? What alternative sources of income are available?

The Riksbank’s self-sufficiency depends on both costs and revenues. We aim to reduce our costs and are continuing to explore different ways to increase revenues in areas such as foreign reserve management. However, the Riksbank’s mandate always comes first. The Riksbank’s new ability to require interest-free deposits will also help to strengthen long-term earnings and our focus is currently on preparing for the implementation of this requirement as efficiently as possible.

What is the difference between interest-free deposits and a reserve requirement?

A reserve requirement is a monetary policy tool. In some countries, it can also be a financial stability tool. A reserve requirement is mainly used to manage liquidity in the financial system and need not be interest-free. The interest-free deposit requirement is similar to a reserve requirement, as both require credit institutions to hold deposits with the central bank, but the purpose of the deposit requirement is to create earnings for the Riksbank.

How can the Riksbank rebuild its equity?

Today, there are in principle two ways in which the Riksbank can rebuild its equity: by making profits or by receiving a capital injection. The new legislation for a requirement for interest-free deposits from credit institutions will improve the Riksbank’s earning potential and enable the Riksbank to build up equity at a slightly faster rate than we can today.

Why can the Riksbank not ensure its financial independence by using the seigniorage from the cash supply?

Most other countries have a large cash supply that allows the interest-free capital to generate rising and sufficient returns even if equity decreases. Sweden, on the other hand, has a small supply of cash, which has decreased as a proportion of GDP in recent decades due to a reduced demand for cash (read more about cash and payments in the Payments Report). The cash supply has also fallen as a proportion of the balance sheet, resulting in seigniorage having made an increasingly smaller contribution to the Riksbank’s financial result over a long period of time. This means that the Riksbank, unlike other central banks that have made large losses, has greater difficulty in restoring its equity under its own steam by means of a large seigniorage.

When can the Riksbank start paying out profits to the state again?

It will take a long time for the Riksbank to build up equity to the target level that will enable profits to be paid out again (see, for example, the baseline scenario presented by the Riksbank in the annex to its consultation response).

What does it mean for the Riksbank now that it is not obliged to request capital when equity is too low?

The new legislation creates flexibility for the Riksbank in that the Riksbank is no longer obliged to request a capital injection in every situation where equity has fallen below one third of the target level. In a situation where the Riksbank has large unrealised gains on revaluation accounts or where the Riksbank expects its equity only to be low temporarily and it is possible to rebuild the equity on its own, the Riksbank does not need to request further capital injections. However, the Riksbank always has the option of requesting a capital injection under the Riksdag Act if this is justified.

How do you view the fact that unrealised gains should now be taken into account when assessing a possible capital injection?

It is reasonable that unrealised gains are taken into account when requesting the restoration of equity. Unrealised gains on revaluation accounts, like equity, act as a buffer against future losses. However, their function as buffer is limited, as unrealised gains on an asset can only cover unrealised losses on the same asset. Consequently, situations may arise in which the Riksbank needs more equity to ensure that the bank has sufficient capacity to bear the risk of loss.

What happens when the Riksbank makes a profit or a loss?

When the Riksbank’s reported result is positive, i.e. when the Riksbank makes a profit, and equity is below the target level for equity, the profit is used to build up equity. When equity is at the target level, any profits will be distributed to the state. However, the Riksbank can use all or some of the profit to make what are known as financial risk provisions and thus build up buffers to cover any future losses.

This century, the Riksbank has made profits to the extent that it has distributed SEK 156 billion to the state in total.

When the Riksbank’s reported results are negative, that is when the Riksbank makes a loss, the Riksbank’s equity decreases by a corresponding amount. As equity decreases, the scope for withdrawing interest-free deposits from credit institutions increases. This scope is further widened by the target equity level simultaneously rising with the rate of inflation. In this way, the interest-free deposits help to compensate for the fact that the Riksbank’s interest-free debt decreases when equity decreases. 

Decisions on the Riksbank’s allocation of profit, meaning how any gains or losses are to be distributed, are taken by the General Council of the Riksbank. The Riksdag must then approve the General Council’s decision. How this is done is regulated by the Sveriges Riksbank Act (read more about profit distribution in chapter 8 of the Sveriges Riksbank Act).