(Bloomberg) -- Sweden’s Riksbank asked lawmakers to restore its equity after the central bank posted large losses on bonds amassed during a period of slow inflation.

The central bank needs a capital injection of 43.7 billion Swedish kronor ($4.1 billion) to bring its equity to the basic level required by law, according to a proposal it submitted on Tuesday.

The need for a recapitalization comes as central banks around the world have seen assets bought as part of quantitative-easing programs lose value. While the Riksbank’s losses are mainly unrealized, they have made the bank’s equity negative, highlighting the cost of buying large amounts of assets in efforts to spur price increases. 

A report from Sweden’s National Audit Office published late last year found no evidence that the purchases, which started in 2015 and were expanded during the Covid-19 pandemic, had any tangible impact on inflation. And while the Riksbank has argued that its buying benefited the economy by lowering government funding costs, increasing tax revenue and strengthening confidence in the central bank’s inflation target, the audit office said it is impossible to quantify those effects. 

Read More: The Riksbank’s QE Was Costly and Inefficient, Watchdog Finds

While the central bank can operate with negative equity, the Riksbank must ask parliament for a replenishment if it falls below a certain level, according to a law implemented in January 2023. An additional problem for the Riksbank is that Sweden’s dwindling use of notes and coins have eroded the bank’s earnings capacity, and Governor Erik Thedeen has said the central bank will need new revenue streams to avoid future shortfalls.  

“A negative equity does not affect the Riksbank’s ability to conduct monetary policy in the short term,” Thedeen said in a statement on Tuesday. “But to maintain confidence in an independent monetary policy in the long term, it is necessary that the Riksbank is financially independent, that is, has sufficient equity and earnings to cover its costs.”

The central bank initially expected to need an injection of about 80 billion kronor, before cutting that estimate in half, following a decline in market interest rates and gains from sales of dollars and euros. The capital injection will still increase Sweden’s government debt, and the country’s national debt office has raised its estimates for 2024 borrowing needs accordingly. 

While the Riksbank has started offloading bonds, its remaining holdings entail a risk of further losses. To mitigate those risks, the bank said lawmakers could decide to restore its balance sheet in two steps, beginning this year with at least 25 billion kronor, before adding the funds needed to secure sufficient equity in 2025. 

The parliament will now study the Riksbank’s submission and expects to make a decision before the summer recess in June, Finance Committee Chairman Edward Riedl said by phone. He declined to comment further on the proposals.

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