Swedish banks' perception of Riksbank's Unconventional Monetary Policies

Abstract: This study is among the first to provide insight into the assessment of the Swedish central bank’s (Riksbank) three unconventional monetary policies (UMPs) and their influence on Swedish commercial banks. The three UMPs include forward guidance (FG), quantitative easing (QE) and negative interest rate policy (repo rate). Riksbank introduced the UMPs in order to revive inflation and support Sweden’s economic recovery. The banks’ ability to certainly forecast their operations is highly dependent on the communication availed by the Riksbank on its expected future monetary policies through FG. QE is paramount because this is when commercial banks sell government bonds to the Riksbank. Repo rate determines interest rates set by banks. Four indicators (uncertainty, government bond yields, bank interest rates, borrowing and lending) were used in this study to investigate the perception of the commercial banks on the three UMPs. There are limited studies on Swedish banks’ perception of the UMPs which leaves a research gap in this area.Previous studies indicate that dominant banks in terms of asset shares and deposits are more sensitive to monetary policy shocks. The four dominant commercial banks studied include: Nordea, Handelsbanken, Swedbank and Skandinaviska Enskilda Banken. This thesis considers the evidence of the results from previous empirical studies. Empirical material for this study was collected through semi-structured interviews from respondents by the Riksbank and the four commercial banks. A deductive approach was used to interpret the information collected.Our results presents various perceptions of the dominant commercial banks on the three UMPs in relation to the four indicators. Some commercial banks perceived the increased transparency and clarity during the increased FG to have reduced their uncertainty. Other banks perceived that FG had increased their uncertainty. They questioned the credibility of the FG since they could not predict Riksbank’s monetary policies with the FG availed. In regards to the perception of QE on uncertainty, an increased signalling channel during QE implementation had resulted in a decline of their uncertainty since they were experiencing a surplus of liquidity in the banking sector. However, they stated other factors that increased market volatility during QE. The increased market volatility during QE increased their uncertainty. The four commercial banks agreed that the demand for government bonds increased while the yields of the government bonds declined. They perceived these changes to have been influenced by QE. The commercial banks’ lending, deposit and interbank interest rates have declined systematically correlating the trend of the declining repo rate. The four banks experienced a decline in their average net interest income, an improved flow of credit through higher lending volumes and stable lending margins to households and firms. Commercial banks perceived these changes to have resulted from the declining market interest rates because of the negative repo rate.Riksbank can use this study to assess the effectiveness of its UMPs on commercial banks based on the perception of the employees from these respective banks. This study discusses implications of the findings for commercial banks and the Riksbank, as well as academics in the realm of implementations and influences of UMPs.