Swedish Banks Face a New Era of Liquidity Management

Sweden’s central bank, the Riksbank, is moving to normalize its balance sheet after a prolonged period of unprecedented central bank liquidity, signaling a major shift for the nation’s banking sector. This transition marks the end of an era where excess reserves provided an ample cushion for banks, and ushers in a more market-oriented approach to short-term funding and liquidity management.

For several years, central banks worldwide—including the Riksbank—flooded financial systems with liquidity through large-scale asset purchases and policy-driven interventions. As a result, Swedish banks had access to high levels of central bank reserves, which many held far in excess of their operational requirements. This environment now shifts as the Riksbank, in line with global peers, begins to reduce its securities holdings through quantitative tightening. Projections indicate that central bank liquidity in the Swedish banking system could fall significantly by 2030.

In this shrinking liquidity landscape, Swedish banks face new demands on how they manage their day-to-day funding needs. No longer able to rely on abundant reserves, they must become more active participants in the overnight market, borrowing and lending among themselves to balance liquidity positions. The Riksbank’s operational framework, which uses an interest rate corridor system, is designed to encourage such market-based interactions. However, the central bank is also considering adjustments—including widening the interest rate corridor and reducing the cost of collateralized borrowing—to sharpen incentives and ensure resilience in times of market stress.

One key challenge highlighted is the risk of “stigma”—the reluctance of banks to use central bank lending facilities out of concern that doing so signals weakness. The Riksbank stresses that its facilities are designed to be used without hesitation and that efficient, stigma-free access is essential for system stability. In addition, the central bank notes that some smaller and newer banking counterparties lack operational experience in both market trading and utilizing central bank facilities, leaving the system as a whole more vulnerable if they do not adapt swiftly.

This transition is not unique to Sweden, as other major central banks are also rethinking their frameworks for liquidity provision and market rate steering. While some retain so-called “floor systems” with a focus on supply-driven abundant reserves, others—including the Riksbank—are increasingly looking to demand-driven frameworks that rely more on open market operations and active participation by banks. Regardless of the chosen model, the lesson from past crises is clear: robust systems depend on both efficient infrastructure and banks’ willingness to balance liquidity among themselves.

As the cushion of excess central bank reserves diminishes, Swedish banks must upgrade their operational capacity and embrace more proactive liquidity management to ensure smooth market functioning. These evolving practices are vital, not only for monetary policy transmission, but also for the ongoing stability of Sweden’s financial system as it navigates a new era of financial normalcy.

The Riksbank’s push for more active and agile liquidity management among banks is a critical step in safeguarding monetary policy effectiveness and financial stability amid a changing economic landscape.