(Bloomberg) — Sweden’s Riksbank is turning out to be a test case for the challenges of liquidity management in the post-2008 world, as its latest auction to banks has showed once again.
(Bloomberg) — Sweden’s Riksbank is turning out to be a test case for the challenges of liquidity management in the post-2008 world, as its latest auction to banks has showed once again.
On Monday, European Central Bank official Isabel Schnabel cited her Nordic counterpart’s recent experience as a cautionary tale on the difficulty in steering short-term interest rates. The problem is, she said, that banks might want or need more liquidity than they used to.
That’s what officials in Stockholm have seen. Since they decided in February to reduce asset holdings at a faster pace, and to remove all excess liquidity from the banking system, they struggled to get lenders fully on board.
Ever since then, total bids for 7-day debt certificates, with which the Riksbank attempts to absorb cash, have undershot the volume on offer.
In the latest demonstration of that, the weekly auction on Tuesday saw officials trying to drain 1,123 billion kronor ($109 billion). Banks only bid for some 85% of that amount.
“This points to banks’ strong preference for reserves, which may affect the ability of central banks to effectively steer short-term rates in a large corridor system, such as the one we had before 2008,” Schnabel, the ECB’s Executive Board member in charge of markets, said in a speech on Monday.
Banks’ habit of using excess reserves to meet tougher regulatory requirements, and efforts to guard against liquidity risks, mean there might be demand for “much higher” buffers than in the past, she added.
The ECB is set to conclude a review of its strategy by the end of the year. Schnabel’s initial observation is that the Bank of England’s approach of allowing banks to determine how much liquidity they want to hold may be a good fit for the 20-nation euro zone.
–With assistance from Niclas Rolander.
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