Per Åsberg Sommar on the State of the Riksbank and Operating Systems Around the World

Episode Summary

Executive Summary: The episode explores the Riksbank’s long evolution from the world’s oldest central bank to a modern, demand-driven operating framework. Per Åsberg Sommar explains how Sweden uses a narrow corridor system, certificates of deposit, and standing facilities to control overnight rates while keeping reserves scarce by default. The discussion also covers the Riksbank’s recapitalization tool—0% required deposits from banks—and what it implies for central bank balance-sheet management, independence, and the future of demand-driven systems globally.

Main Topics: Riksbank history and institutional evolution (Priority: 5/5): Sommar traces the Riksbank from its 17th-century origins, including the collapse of Stockholm Banco, to its status as the oldest central bank still operating. The discussion highlights how historical experiences shaped the bank’s institutional design and note issuance powers. Inflation targeting and price-level targeting history (Priority: 4/5): The conversation reviews Sweden’s price-level targeting episode in the 1930s and the Riksbank’s adoption of inflation targeting in the 1990s. Beckworth links this to broader debates about makeup policies and level targeting. Demand-driven corridor operating system (Priority: 5/5): Sommar explains the Riksbank’s operating framework: a corridor system with narrow bounds, certificates of deposit, fine-tuning operations, and standing facilities. The goal is reliable control of overnight rates in both scarce and ample liquidity environments. Quantitative easing, QT, and reserve scarcity (Priority: 5/5): The episode details how QE created a liquidity surplus and how the Riksbank responded with active bond sales and maturities to shrink the balance sheet. The discussion emphasizes that reserve scarcity is about demand and pricing, not just balance-sheet size. Recapitalization and zero-interest required deposits (Priority: 5/5): The Riksbank’s new legal tool requires banks to hold 0% deposits to help rebuild the bank’s capital after valuation losses and the decline of cash-based seigniorage. Sommar frames it as outside monetary policy, but still liquidity-relevant. Global shift toward demand-driven systems (Priority: 4/5): The hosts discuss how the RBA, ECB, Bank of England, and others are moving toward demand-driven or full-allotment systems, motivated by balance-sheet risk reduction, operational robustness, and post-QE liquidity management. Operational readiness, stigma, and payments infrastructure (Priority: 4/5): Sommar stresses that bank participation, collateral readiness, and instant-payment interoperability are essential for corridor systems to work smoothly. The Riksbank wants banks to treat its facilities as normal tools rather than emergency backstops.

Key Arguments: The Riksbank’s operating framework is designed to control overnight rates through incentives, pricing, collateral, and facilities, not through a fixed balance-sheet size alone. Scarce reserves are preferable in normal times because they preserve market-based liquidity management and interbank price discovery, while still allowing the central bank to maintain rate control. A narrow corridor can support rate control in either scarce or ample reserve regimes, because the marginal cost of liquidity is defined by the facility rates. QE can create a structurally ample system, but the Riksbank’s framework allows it to return to scarcity through certificates of deposit and regular market operations. Central bank losses from asset purchases can weaken capital, and recapitalization is necessary to preserve credibility and independence. The required-deposit tool is not part of monetary policy implementation, but it reduces liquidity and effectively substitutes for lost seigniorage from cash. Demand-driven operating systems are spreading because central banks want flexibility to manage interest rates, reduce balance-sheet risk, and adapt to different reserve environments. A robust standing facility must be operationally easy, collateralized, and stigma-free for the corridor system to function in practice. Instant payment systems and overnight liquidity facilities need to be integrated so banks can access central bank money efficiently around the clock.

Data Points: Riksbank founding year: 1668 - The bank was established after the Stockholm Banco episode and is described as the oldest central bank still operating. Stockholm Banco founding year: 1656 - Predecessor institution that issued notes backed by deposits of heavy copper coins. Price-level targeting period: 1931-1937 - Sweden used a price-level target after the gold standard broke down. Inflation-target adoption: 1995 - The Riksbank formally adopted an inflation target after the krona floated. Inflation target: 2% - The Riksbank’s formal target, later without the earlier band. Former inflation band: 2% ± 1% - Initial inflation-target interval later abolished in 2010. Initial corridor width: 200 basis points - The 1994 operating framework used a wide interest rate band. Fine-tuning transaction spread: 10 basis points above/below policy rate - Banks could place or borrow net positions from the Riksbank within the corridor. Current corridor width: ±10 basis points - The framework was later narrowed to sharpen rate control. Liquidity surplus start of QE era: 2015 - The Riksbank began QE purchases of government bonds, increasing reserves. Corona-crisis QE expansion: 2020 - Bond purchases expanded further during the pandemic. Government bond portfolio target: around 20 billion Swedish crowns - The Riksbank plans to retain a smaller portfolio for market operations. Required capital under new law: 60 billion Swedish crowns - The new Riksbank Act sets a target capital level to ensure financing independence. Required capital indexed level: 63 billion Swedish crowns - Target capital updated with CPI inflation as mentioned in the discussion. Actual capital after recapitalization: about 23 billion Swedish crowns - Sommar says the bank’s capital remained well below target even after a capital addition. Zero-interest required deposits: about 40 billion Swedish crowns - Banks and credit institutions must hold deposits at 0% to help rebuild the Riksbank’s capital. Monetary policy counterparties: 30 - These institutions can use the Riksbank’s monetary policy instruments. Institutions subject to required deposits: around 150 credit institutions/banks - This broader set holds the zero-interest deposits with the Riksbank. Counterparties in 2015 vs. now: about 15 to 30 - Sommar notes the number of monetary policy counterparties roughly doubled. Liquidity surplus reduction pace: rapid - The governor’s speech referenced fast-falling excess liquidity. Overnight rate tolerance: within a narrow corridor - The bank aimed to make the exact position within the corridor less important than staying inside it.

Pivotal Quotes: "The Riksbank is open for business." — Per Åsberg Sommar: Used to describe a system where standing facilities are intended to be a normal, usable part of bank liquidity management. "We actually leave it to the banks to decide to what extent the system should be ample or scarce." — Per Åsberg Sommar: Explaining the demand-driven design of the Riksbank’s operational framework. "So it's a way of creating a senior in another way." — Per Åsberg Sommar: Describing the zero-interest deposit requirement as a substitute for lost seigniorage.

Implications: The episode shows how central banks are rethinking balance-sheet design, reserve scarcity, and liquidity tools after QE and declining cash usage. It suggests future operating systems will be more demand-driven, more collateral-aware, and more reliant on robust standing facilities and payment-system integration.