With the Swiss National Bank likely to post further losses this year, the times when the federal and cantonal governments benefitted from the bank's profits could be over.
What was foreshadowed a few weeks ago is now increasingly becoming a grim reality. Distributions of the Swiss National Bank's (SNB) profits to the federal and cantonal governments are in limbo. Following a record first-half loss this year of around 95 billion Swiss francs ($99.5 billion), the second half is also not shaping up so favorable due to rising interest rates and the appreciation of the franc, according to an analysis by UBS economists.
The only positive, and highly unlikely, scenario making a profit distribution possible would be a significant recovery of the stock markets and a depreciation of the franc. Even if that were to transpire, a maximum payout still would not be possible and threatens budgetary holes, according to the analysis from the UBS Chief Investment Office Global Wealth Management.
Regular Income
With the reliability of a Swiss chronometer, the SNB in recent years has been a consistent provider of highly welcome additional income for the federal and cantonal governments. As a result of its monetary policy, the SNB's balance sheet expanded massively, and income from reinvested funds sprouted abundantly, part of which was distributed to the public sector.
Two-thirds of the SNB profits are distributed among the cantons according to the population. With a maximum of 6 billion francs, which was the case for the past two years, accounting for between 2 and 6 percent of total earnings, depending on the canton.
For the short-term, however, discontinuation of the SNB funds would not seriously affect the cantons in the short term because the majority posted significant financial surpluses over the past two years.
The Money Machine
Distributions have been made regularly since 1991, with the total amount increasing over time, something to which the governments have grown accustomed. In the past 30 years, the SNB only failed to distribute profits in 1995 and 2013.
Still, it is unlikely governments will have to worry the SNB's money spigot will have been closed forever. Taking into account the asset classes in which the SNB is invested, UBS calculates the long-term potential for SNB annual gains between 7 to 10 billion francs per annum.
Regional Differences
The distributed amount would largely depend on the SNB's provisioning policy. If it were also to reduce its foreign exchange reserves significantly in the future, balance sheet profits would probably decline.
In general terms, cantons in central Switzlerand are faring better in terms of budgetary health than their cousins in the western part of the country and Ticino and will be better able to cope with potential shortfalls in revenue.
