Could the SNB go bankrupt?

The Swiss National Bank (SNB) flies from one negative record to the next: after minus 32.8 billion in the first quarter and 62.4 billion in the second, the SNB calculates that another 47.2 billion will be added in the third quarter. This means a loss of CHF 142.4 billion from January to September 2022. This is the biggest loss in SNB’s 115-year history.

Loss of registration seriously jeopardizes distributions to the federal government and cantons. And it raises numerous questions about the financial stability of the Central Bank. Blick provides the most important answers.

How is such a high loss possible?

This is mainly due to the huge mountain of currency held by the Swiss National Bank. At the end of the third quarter, foreign currency investments exceeded CHF 800 billion. A balance sheet this big could mean big profits – or a big loss just as quickly as it did this year. For example, if the franc gained one percent against the major foreign currencies, this would immediately result in a loss of over eight billion francs.

What were the main causes of the misery of billions?

Several negative factors are colliding right now: inflation, the Ukraine war, and recession fears have hit stock markets. Rising interest rates around the world led to high valuation losses in bond markets. Also, the appreciation of the Swiss franc against the euro has resulted in huge losses for the SNB.

In which areas did SNB lose the most?

SNB suffered a loss of CHF 141 billion in foreign exchange positions. Of this, CHF 70.9 billion can be attributed to price losses in interest-bearing securities and instruments. Interest-bearing securities, like bonds, are those whose income usually accrues as interest rather than changes in price. However, the current stock market plunge hasn’t stopped in stocks and instruments, nor in these investments. Here the loss amounted to 54.2 billion Swiss francs.

Has the SNB failed to reduce its total assets in a timely manner and minimize the risk of loss?

Making a profit is not one of the duties of the SNB. It should use its monetary policy in a way that ensures price stability and takes into account economic developments. For this purpose, it follows a target range of 0 to 2 percent for inflation. “Since the SNB has been below this target for years, it has overextended its balance sheet, thereby stimulating the economy. Says Yvan Lengwiler, 58, a professor of economics at the University of Basel. But meanwhile, Switzerland’s 3.3 percent inflation in September is well above target, and the SNB has cut its balance sheet total since the beginning of the year from CHF 1.057 billion to CHF 889 billion.

Is the SNB threatened with bankruptcy?

The SNB cannot go bankrupt. If the SNB’s equity slips into the red, it will not have an immediate impact on the bank. In this case, the distribution reserve will simply fall into negative territory. However, it is recommended that a central bank not report negative equity for too long. Otherwise, their credibility in the markets will suffer. And in the worst case, it could mean that monetary policy can no longer fully fulfill its mandate.

Is the extra burden on the cantons and the federal government now on the verge?

You are in acute danger. The more profits the SNB makes, the more money it can distribute to the cantons and the federal government. Last year, no more than six billion Swiss Francs flowed, two-thirds of which went to the cantons. The expected failure “is very painful for the cantons, but not a surprise given the developments this year,” said Ernst Stocker (67), Chairman of the Finance Directors Conference (FDK) and Finance Director of the Canton of Zurich. But he still doesn’t want to sound the alarm. In 2013 there was already no SNB distribution, but the following year it was very high. It is clear that some cantons will have a hard time with the anticipated gap in the budget, while others will do well without the extra share of SNB.

Do cantons have to raise taxes if billions of SNB are lost?

In recent years, cantons have benefited greatly from SNB dividends. Upon request, the canton of Zurich announced that neither an austerity package nor a tax increase was pending. No concrete measures have yet been taken in Bern, but an increase in taxes has not yet been considered. st. Gallen also assured: there is no need to adjust taxes or cut benefits in the short run. The Geneva canton expects a budget change for 2023 in the next ten days, after which the canton’s financial situation will be better evaluated. An increase in taxes is also out of the question in Geneva.

Can the central bank make distributions despite billions in losses?

Theoretically yes. In addition to distribution reserves of CHF 102 billion, the central bank also has provisions for foreign exchange reserves of CHF 96 billion. Thus, the total reserves far exceed the loss: the central bank can leverage its reserves for currency reserves and have enough money for distributions to the cantons and the federal government, says economics professor Yvan Lengwiler: “If the SNB doesn’t distribute any money, it’s not because it doesn’t want to,” says economics professor Yvan Lengwiler. Not because he couldn’t.” Still, he doesn’t expect the SNB to pay off this year. While a reduction in these provisions is unproblematic, as Lengwiler says: “For example, the US Federal Reserve does not have these provisions at all.”