Passive liquidity management challenges Riksbank policy goals
The Riksbank has found that Swedish banks exhibit passive liquidity management, hindering the effective redistribution of central bank liquidity. This necessitates banks to adopt more active strategies as the Riksbank reduces its asset holdings.
Reserves preferred over active market engagement
The Riksbank observes that banks are holding substantial liquidity buffers in central bank reserves rather than actively utilizing certificates or the overnight market for redistribution.
This trend persists despite the Riksbank reducing its asset holdings and the banking system's structural liquidity surplus diminishing.
Many monetary policy counterparties, particularly smaller banks that joined since 2015, have never participated in the overnight market or borrowed from the Riksbank's lending facility.
This indicates a lack of active liquidity management, with banks primarily placing funds in certificates and reserves.
The liquidity surplus is also unevenly distributed, with the five largest banks holding approximately 80 percent.
While quantitative tightening has reduced liquidity for these larger banks, smaller institutions remain largely passive, affecting overall overnight market activity.
Incentives, stigma, and operational gaps
The Riksbank's operational framework uses standing facilities and market operations to steer short-term market rates.
An interest-rate corridor aims to incentivize interbank lending, but current incentives for market-based liquidity management are deemed too weak.
The opportunity cost of holding reserves, a 10 basis point difference from certificates, may be insufficient.
Some banks are also reluctant to use the Riksbank's standing lending facility, fearing it could be perceived as a sign of weakness.
Operational capacity limitations further contribute to passive management, particularly among smaller banks.
These factors collectively hinder efficient liquidity redistribution and can lead to undesirable volatility in short-term interest rates.