Tag Archives: Swiss National Bank

SNB Losses in the News

My written statement for 20minuten:

Anlageverluste der SNB sind schlecht für den Schweizer Steuerzahler, denn ihm gehört die SNB. Sie können aber auch Entwicklungen widerspiegeln, die ihre guten Seiten haben. Jetzt zum Beispiel führt die Frankenstärke zu Anlageverlusten, bremst aber auch die importierte Inflation.

Die Diskussion um die Höhe der SNB-Ausschüttungen ist vielfach fehlgeleitet. In der Debatte geht vergessen, dass Gewinnausschüttungen das Reinvermögen von Bund und Kantonen nicht verändern. Denn Ausschüttungen sind keine Transfers von Dritten an Bund oder Kantone – sie tauschen lediglich eine Aktivposition in der Bilanz von Bund oder Kantonen gegen eine andere aus, wie bei einer Dividendenausschüttung eines Unternehmens. Die Hauptwirkung von Ausschüttungen ist, dass sie Beschränkungen wie die Schuldenbremse vorübergehend lockern. Das mag der Grund dafür sein, dass manche Politiker und Wähler sie mögen.

And the resulting publication.

SRF website and SRF Echo der Zeit (interview taken on 26 July).

The SNB’s Financial Result, Currency Reserves, and Distribution Reserve

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.

Allocation Rules

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.

Discussion

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.

Details

  • 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.

“Digitales Notenbankgeld – und nun? (CBDC—What Next?),” FuW, 2021

Finanz und Wirtschaft, December 8, 2021. PDF.

  • I draw some conclusions from the CEPR eBook on CBDC, namely:
  • Banks will change, whatever happens to CBDC.
  • The main risk of retail CBDC is not bank disintermediation.
  • CBDC may not be the best option even if it has net benefits.
  • It should be for parliaments and voters, not central banks, to decide about the introduction of CBDC.

“CBDC: Considerations, Projects, Outlook,” CEPR/VoxEU, 2021

CEPR eBook, November 24, 2021. HTML.

VoxEU, November 24, 2021. HTML.

Retail central bank digital currency has morphed from an obscure fascination of technophiles and monetary theorists into a major preoccupation of central bankers. Pilot projects abound and research on the topic has exploded as private sector initiatives such as Libra/Diem have focused policymakers’ minds and taken the status quo option off the table. In this eBook, academics and policymakers review what we know about the economic, legal, and political implications of CBDC, discuss current projects, and look ahead.

“Die Nationalbank ist an vielen Fronten gefordert (Challenges for the Swiss National Bank),” NZZ, 2021

NZZ, August 10, 2021. PDF (title changed by NZZ). Related article in Ökonomenstimme. HTML.

Should the SNB follow the Fed and the ECB and rework its strategy? There is a case for rethinking the broad inflation target, the monetary policy concept, and the communication strategy. Equally important is a strategy review outside of the SNB: The SNB cannot and must not decide about the framework within which it operates.

Conclusion:

Daher ist eine Strategieüberprüfung inner- und ausserhalb der SNB sinnvoll. Geldpolitisch prüfenswert sind das Inflationszielband, die Zentralität des Zinsinstruments und die Kommunikation. Die Glaubwürdigkeit der SNB verbietet ein Auseinanderklaffen von Theorie und Praxis, aber auch allzu häufiges und detailversessenes Feilen an der Strategie, und sie verlangt Konzentration auf das Wesentliche. Gleichzeitig sollte die SNB ihre Bindung an den – gegebenenfalls sich wandelnden – Willen des Gesetzgebers betonen. Bei Fragen, die nicht allein in ihre Zuständigkeit fallen, muss sie klarstellen, dass sie Partei und nicht Schiedsrichterin ist. Damit die SNB auch in Zukunft zu den grossen Schweizer Erfolgsgeschichten zählt, muss sie von Zeit zu Zeit über die Bücher gehen. Doch alleine kann sie die Verantwortung in Geld- und Währungsfragen nicht tragen.

“Schuldenbremse — Licht und Schatten (Debt Brake—Merits and Risks),” FuW, 2021

Finanz und Wirtschaft, June 5, 2021. PDF.

  • The debt brake addresses some political economy frictions, but not others.
  • Focusing too narrowly on explicit government debt it provides incentives to accumulate implicit debt, sell assets, or engage in creative accounting.
  • The political pressure to raise SNB profit disbursements is a symptom of these incentives.

Banks’ Response to Reserve Tiering

In a CEPR discussion paper, Andreas Fuster, Tan Schelling, and Pascal Towbin analyze how banks respond to changes in the threshold level above which reserves held at the central bank are charged negative interest:

… exploiting an unexpected decision by the Swiss National Bank in September 2019 to change the threshold calculation without taking any other policy actions. This change led to a large increase in overall exemptions, but with variation across banks. Using a difference-in-differences approach, we find that banks that experience a larger increase in their exemption threshold tend to raise their SNB sight deposit holdings, funded through more interbank borrowing and more customer deposits. The interbank market is important for the funding choice: banks with low collateral holdings (a proxy for market access) use less interbank borrowing and instead grow their customer deposits; they also pass on negative rates on a smaller share of their deposits. Effects on bank lending behavior are moderate; if anything, banks that benefit from a larger increase in the exemption threshold tend to charge higher spreads and take less risk.

“Die Schattenseiten von Schuldenbremsen (The Dark Side of Debt Limits),” ifoSD, 2021

ifo Schnelldienst 4/2021, April 14, 2021. PDF.

Was Schuldengrenzen aus politökonomischer Sicht besonders attraktiv erscheinen lässt – ihre vermeintliche Einfachheit und Klarheit – birgt also auch Risiken. Es führt dazu, dass Politiker und ihre Wähler die Solidität der Staatsfinanzen über Gebühr an expliziten Bruttoschulden messen. Was aber zählt, wenn es um unerwünschte Umverteilung zulasten künftiger Generationen geht, ist staatliches Nettovermögen in einer umfassenden Gesamtschau.

SNB Profit Distributions

The Federal Department of Finance and the SNB have agreed on a new scheme for the distribution of SNB profits. Agreement for the period 2020-2025, Explanations. Some comments in German (also available as PDF):

Profitieren Bund und Kantone finanziell von den höheren SNB-Ausschüttungen?

  • Höhere Gewinnausschüttungen in der Gegenwart bedingen tiefere in der Zukunft.
  • In erster Näherung bleibt das Nettovermögen von Bund und Kantonen unverändert, denn es berücksichtigt auch den Wert der zukünftigen Ansprüche gegenüber der SNB.
  • Siehe z.B. „Die Volkswirtschaft“ 8-9 2020, HTML.

Warum dann die positiven Reaktionen bei Vertretern von Bund und Kantonen?

  • Politiker/Wähler orientieren sich an den ausgewiesenen Schulden des Staates. Höhere Ausschüttungen ermöglichen eine tiefere Schuldenaufnahme. Daher die Reaktionen.
  • Relevanter als ausgewiesene Schulden ist das Nettovermögen. Dieses wird von Ausschüttungen (in erster Näherung) nicht beeinflusst.

Was ist die primäre Wirkung höherer Ausschüttungen?

  • Die Schuldenbremse wird in der Gegenwart gelockert und in der Zukunft angezogen.
  • Falls die Schuldenbremse bindet, erhöhen frühere, höhere Ausschüttungen den Spielraum für staatliche Ausgaben in der Gegenwart, aber nicht in der Zukunft.
  • Hohe Ausschüttungen könnten über ihre Wirkung auf das Eigenkapital der SNB auch deren geldpolitische Entscheide beeinflussen.

Wie ist die neue Gewinnausschüttungsformel ökonomisch zu bewerten?

  • Ausschüttungen sollten die Geldpolitik nicht konterkarieren.
  • Die Geldpolitik setzt Bilanzlänge und -struktur der SNB als Instrumente ein. Ihre Glaubwürdigkeit kann vom Eigenkapital der SNB abhängen.
  • Demnach müssten Ausschüttungen von Bilanzlänge, -struktur und Eigenkapital der SNB abhängen. Nicht vom Gewinn des Vorjahres.

Wie ist die neue Gewinnausschüttungsformel politökonomisch zu bewerten?

  • Problematisch ist, dass der Eindruck entstehen kann, alle paar Jahre würde unter politischem Druck um eine neue Formel gefeilscht. Die Bindung an eine sinnvolle Regel würde diesem Eindruck entgegenwirken.
  • Gleichzeitig reduziert die neue Formel den politischen Druck. Sie signalisiert die Bereitschaft der SNB zur Diskussion.

Wie könnte ein alternatives Ausschüttungsmodell aussehen?

  • Die SNB erklärt periodisch, welche Bilanzlänge und -struktur sie zur Erfüllung ihrer Aufgaben benötigt. Sie stellt sich der Kritik, entscheidet aber eigenverantwortlich.
  • Ausschüttungen sind nicht zweckgebunden. Dadurch wird vermieden, dass sich Interessengruppen bilden, die systematisch auf höhere Ausschüttungen drängen.

Welches Grundproblem bliebe bestehen?

  • Eine ökonomisch begründete Ausschüttungspolitik führt zu fluktuierenden Ausschüttungen. Diese können die Schuldenbremse konterkarieren.
  • Glättet die SNB hingegen ohne geldpolitische Notwendigkeit ihre Ausschüttungen, masst sie sich eine Kontrolle der Fiskalpolitik an, die ausserhalb ihres Aufgabenbereichs liegt.

“Dirk Niepelt im swissinfo.ch-Gespräch (Interview with Dirk Niepelt),” swissinfo, 2020

Swissinfo, December 14, 2020. HTML, podcast.

We talk about CBDC, the Swiss National Bank, whether CBDC would render it easier to implement helicopter drops, and how central bank profits should be distributed.

“CBDC: State of Play, Practical Challenges, Open Issues,” SUERF Webinar, 2020

SUERF Webinar “CBDC: State of play, practical challenges, open issues” with Ulrich Bindseil (ECB) and Morten Bech (BIS). Moderated by Dirk Niepelt. December 4, 2020, 2 pm.

“Unabhängigkeit der Nationalbank (Independence of the SNB),” FuW, 2020

Finanz und Wirtschaft, July 25, 2020. PDF.

The Swiss National Bank—yes, the Swiss one—feels it must remind politicians of its independence. Parliamentarians from left to right (!) voice demands. To shrink the SNB’s balance sheet? No, for more central bank profits to be distributed sooner rather than later.

I discuss misconceptions, possible motivations, and a constructive response. «The best way to defend the independence of a central bank is never to exercise it.»

“Monetäre Staatsfinanzierung mit Folgen (Monetary Financing of Government),” Die Volkswirtschaft, 2020

Die Volkswirtschaft, July 24 2020. PDF.

Clarifying the connections between outright monetary financing, QE, the distribution of seignorage profits, the relationship between fiscal and monetary policy, and central bank independence.

Abstract:

Wenn Parlamentarier höhere Gewinnausschüttungen der Nationalbank fordern, Kritiker im
Euroraum mehr «Quantitative Easing» oder Helikoptergeld verlangen und andere Stimmen
monetäre Staatsfinanzierung monieren, dann steht die Beziehung zwischen Geld- und
Fiskalpolitik zur Debatte. Eine Auslegeordnung.

“Wenn die Notenbank den Staat finanziert (When the Central Bank Finances the State),” FAS, 2020

FAS, 31 May 2020. PDF.

Monetary deficit financing is the norm—after all, central banks distribute their profits. Monetary financing occurs in the context of regular open market operations and QE and, hyper charged, with helicopter drops. The question is not whether monetary policy should finance the government, but why it does so, and to what extent. Fiscal and monetary policy are inherently connected; what constitutes monetary policy is defined by objectives.

Switzerland Peps Up SMEs

How Switzerland peps up SMEs: Banks are encouraged to extend credit (at 0%). The treasury guarantees the loans. The SNB refinances banks and accepts the guaranteed loans as collateral. Fast and efficient. Eventually, some of these loans will turn into grants of course. But that’s ok; the first-best response to a shock with asymmetric effects does involve transfers if markets are incomplete.

Central Banks Zoom In on CBDC

According to a BIS press release, several leading central banks collaborate with the BIS on matters relating to the introduction of CBDC:

The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Sveriges Riksbank and the Swiss National Bank, together with the Bank for International Settlements (BIS), have created a group to share experiences as they assess the potential cases for central bank digital currency (CBDC) in their home jurisdictions.

The group will assess CBDC use cases; economic, functional and technical design choices, including cross-border interoperability; and the sharing of knowledge on emerging technologies. It will closely coordinate with the relevant institutions and forums – in particular, the Financial Stability Board and the Committee on Payments and Market Infrastructures (CPMI).

The group will be co-chaired by Benoît Cœuré, Head of the BIS Innovation Hub, and Jon Cunliffe, Deputy Governor of the Bank of England and Chair of the CPMI. It will include senior representatives of the participating institutions.

BIS Innovation Hub Centre in Switzerland

From the SNB’s press release regarding the newly established BIS Innovation Hub Centre in Switzerland:

The Swiss Centre will initially conduct research on two projects. The first of these will examine the integration of digital central bank money into a distributed ledger technology infrastructure. This new form of digital central bank money would be aimed at facilitating the settlement of tokenised assets between financial institutions. Tokens are digital assets that can be transferred from one party to another. The project will be carried out as part of a collaboration between the SNB and the SIX Group in the form of a proof of concept.

The second project will address the rise in requirements placed on central banks to be able to effectively track and monitor fast-paced electronic markets. These requirements are arising in particular from the greater automation and fragmentation of the financial markets, but also from the increased use of new technologies.

Thomas Jordan and Agustín Carstens signed the Operational Agreement on the BIS Innovation Hub Centre in Switzerland yesterday.

How to Prevent Cash Hoarding when Interest Rates are Strongly Negative

On swissinfo.ch, Fabio Canetg explains how the Swiss National Bank prevents banks from hoarding cash rather than holding reserves at the central bank (which pay negative interest). He points to the following sentence in the SNB’s December 2014 press release (my emphasis) and he speculates that banks could, in principle, implement similar schemes to keep depositors from withdrawing cash:

The threshold currently corresponds to 20 times the minimum reserve requirement for the reporting period 20 October 2014 to 19 November 2014 (static component), minus any increase/plus any decrease in the amount of cash held (dynamic component). The change in the amount of cash held is calculated as the difference between the average cash holdings during the most recent reporting period for which the minimum reserve requirement is determined prior to the reference date (cf. section 5 below) and the cash holdings of the corresponding reporting period in a given reference period.

“Die SNB schuldet den Pensionskassen nichts (Nothing the SNB Owes to Pension Funds),” NZZ, 2019

NZZ, March 13, 2019. PDF. Updated: Ökonomenstimme, March 22, 2019. HTML.

  • Long-term real interest rates do not reflect monetary policy.
  • In the recent past, monetary policy has contributed to lower fixed-income interest rates but also to higher returns on other asset classes.
  • Complaining about low rates but not adjusting one’s portfolio makes little sense; there is no “financial repression.”
  • If politicians want to subsidize pension funds they should contribute funds from the government budget rather than asking the central bank to contribute.
  • Larger and earlier SNB dividend payouts to the government may not be in the government’s interest.

SNB Grants Fintechs Access to SIC

In a press release the Swiss National Bank explains that it

grants access to … [fintechs] that make a significant contribution to the fulfilment
of the SNB’s statutory tasks, and whose admission does not pose any major risks. Entities with fintech licences whose business model makes them significant participants in the area of Swiss franc payment transactions will therefore be granted access to the SIC system and to sight deposit accounts.

The Swiss Financial Market Supervisory Authority is in charge of granting fintech licences.