How are SNB profits and losses distributed and what issues are debated?
Annual Result Funds two “Reserves”
The annual result (Jahresergebnis) of the Swiss National Bank (SNB) is split into two parts. The first part funds “provisions for currency reserves” (Zuweisungen an Rückstellungen für Währungsreserven) which are meant to provide a buffer against future losses on the SNB’s asset positions. The second part funds current and future profit distributions to the Confederation and cantons (Ausschüttungen an Bund und Kantone) and dividend payments to SNB shareholders. The ad hoc announcement regarding the SNB’s 2021 annual result (English, German) provides an overview.
The SNB decides how the annual result is split, subject to some guidance in the National Bank Law (NBG, English, German, e.g., Art. 30 (1) and Art. 42 (2d) NBG). In practice the SNB follows a mechanical rule to determine the provisions for currency reserves. This rule operates “on the basis of double the average nominal GDP growth rate over the previous five years” or “10% of the provisions at the end of the previous year,” whatever yields higher provisions (source).
How the second part of the annual result is split between current and future distributions is governed by an agreement between the SNB and the Federal Department of Finance (English, German). The law prescribes that the “[t]he Department and the National Bank shall, for a specified period of time, agree on the amount of the annual profit distribution with the aim of smoothing these distributions in the medium term” (31(2) NBG). In practice the SNB and the Federal Department of Finance have frequently revised the agreement. This reflected the SNB’s rapidly growing balance sheet and larger profits.
The current agreement determines the profit distributions and dividends to shareholders as follows: Define the “distributable annual result” (Ausschüttbares Jahresergebnis) as the annual result net of the allocation to provisions for currency reserves. The distribution reserve (Ausschüttungsreserve), a liability item in the SNB’s balance sheet, amounts to the cumulative past distributable annual results, net of the payments to Confederation, cantons and shareholders. The sum of distribution reserve and distributable annual result yields the “net profit” (Bilanzgewinn). When the net profit is negative the agreement prescribes zero distributions to the Confederation and the cantons. When it is positive the agreement prescribes distributions that rise up to CHF 6 billion, depending on the size of net profits. Under no circumstances must distributions be so high as to directly imply that the distribution reserve becomes negative.
That the SNB determines how the annual result is split certainly makes sense. After all the SNB bears responsibility for monetary policy and thus needs to be able to employ its balance sheet as far as this has current and future monetary policy implications. It is doubtful, however, that the mechanical rule the SNB follows adequately reflects foreign exchange and investment risks as well as monetary policy needs going forward. Preferably, the SNB should determine the adequate provisions based on an analysis of risks and monetary policy needs and communicate its analysis and conclusions to the public (see my proposal from February 2021). In June 2021 the SNB Observatory made a similar proposal, arguing that the SNB should “[d]etermine a target ratio of provisions-to-balance sheet or provisions-to-foreign investments. Provisions should not be accumulated beyond this point.” More specifically, the SNB Observatory criticized that the SNB never actually uses the provisions to cover losses when they occur; it proposed that the SNB “[u]se the provisions for foreign investments to cover losses when they occur. Replenish provisions with profits of subsequent years.”
The procedure to determine the split between current and future distributions is rather inflexible and thus requires frequent adjustment if the SNB’s balance sheet changes. The fact that the SNB smoothes payouts from the distribution reserve (at too low a rate according to the SNB Observatory) suggests a lack of trust in the ability of decision makers at the federal and cantonal level to responsibly manage the funds received from the SNB. I find this questionable (see my comments from February 2021) but I realize that the law does require some degree of smoothing.
Finally, many of the political discussions surrounding the amount of SNB distributions are misguided. The debate neglects that profit distributions do not significantly alter the net worth of the Confederation or the cantons. After all, SNB profit distributions are not transfers from a third party—they just swap one asset item in the balance sheets of the Confederation and cantons against another one, like dividend payouts of a firm. The main effect of distributions is to temporarily relax restrictions such as the debt brake (see my explanations with links to further analysis); that might be the reason why some politicians and voters like them.
- The agreement between the SNB and the Federal Department of Finance states that “[t]he non-distributed amount of the annual result is allocated to this [distribution] reserve, and any shortfall for a distribution is drawn from it.” I think it should read “[t]he non-distributed amount of the annual result net of provisions for currency reserves is allocated …”
- Per January 2022 the provisions for currency reserves amounted to CHF 95 billion. The distribution reserve amounted to CHF 103 billion.
- Between 2005 and 2020 the return rates on SNB investments never fell below -6% (source).
- As of mid 2022 the return rate appears to be on the order of -8% (balance sheet length approximately CHF 1 000 billion, first-quarter loss CHF 33 billion (source), prospective second-quarter loss 50 billion).
- Swiss net foreign assets amount to roughly CHF 600 billion.
Updates: Minor editorial changes, 29 July.