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The Swiss National Bank pays out 2 billion Swiss francs to the federal and cantonal governments. The funds available have whet an appetite for more – which is inappropriate, writes Christoph Sax on finews.first.

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A bad performance on the stock markets and a weak euro: 2018 was a lean year for investors – including the Swiss National Bank, or SNB. The bank had a valuation loss of about 16 billion Swiss francs ($16.54 billion) on foreign currency positions. In all, the SNB expects a loss for the year in the region of 15 billion francs (see the release of March 9).

And yet, the federal and regional governments have reason to rejoice: despite the loss and the allocation to the provisions for currency reserves of 5.4 billion francs, the SNB will give an amount of 2 billion francs to the public sector, unchanged from last year. The high distribution reserve that had augmented to 67.3 billion francs thanks to good investment results in previous years is the reason for this. In the current year, the reserve will likely be about 45 billion francs. The distribution to the public sector will be cut should the reserve fall below a threshold of 20 billion francs.

«These demands are problematic for two reasons»

Despite all this, there are increasing calls for cross-funding of the state by taking money from the currency reserves – for instance in favor of the state pension system (AHV) or infrastructure projects. These demands are problematic for two reasons:

First of all, the SNB's future investment returns tend to be overstated. In the long run, a further appreciation of the franc vis-à-vis the euro and the dollar is foreseeable, given the high political stability of Switzerland, low inflation and the current account surplus – and this in turn will lead to valuation losses on foreign currency investments. They will obliterate the return on bond investments, a big proportion of the invested capital, over the course of the years.

And secondly, foreign currency reserves of the SNB are – despite their big volume of some 750 billion francs – no common national wealth and hence no hidden treasure. They were mostly financed by borrowing in a foreign currency – and were unlike in the cases of state funds not generated with the revenue from the sale of commodities.

«A misuse of those assets isn’t on the cards»

The SNB is buying securities (assets) from banks and is paying with new base money (liabilities), crediting banks with the amount purchased on their sight deposits held at the central bank. Banks thus exchanged securities for sight deposits. They are – as the expression shows – assets of the banks at the SNB or debt of the SNB vis-à-vis the banks. They are part and parcel of the monetary base. This, the narrowest definition of money supply, has increased by a factor of 12 through the purchase of foreign currency since 2008.