The SNB's mandate is to ensure monetary stability, not turn a profit. It's been clear the SNB's purchases of foreign currencies in recent years to weaken the Swiss franc entailed risks. Those fears have been realized.
The Swiss federal government and the cantons became accustomed to regular profit distributions from the Swiss National Bank (SNB). Now withdrawal symptoms are looming. Since 1991, the SNB has made distributions with the regularity of the Swiss rail service. In the past 30 years, there were only two years without distributions, 1995 and 2013.
With the now-reported loss of 142 billion francs during the first nine months of the year, a payout is becoming highly unlikely. In 2021, the SNB distributed the maximum amount of 6 billion francs, with two-thirds going to the cantons and one-third to the federal government.
A minor miracle is needed for the SNB to close the year with a profit with a strong year-end rally on the stock markets and a simultaneously strong depreciation of the Swiss franc against the euro and the dollar. Signs of this were absent in October, effectively leaving two months left to at least narrow the mega-loss.
Accepting Losses
Some commentators are raising the specter of bankruptcy, but those should be regarded as unfounded. In fact, in the event of massive losses, the SNB's equity capital would become negative and be reflected in the balance sheet as a negative distribution reserve. Moreover, the capacity to create money in its currency means it will always be solvent and able to act.
To be sure, the problem of ever-increasing foreign currency positions has been known for a long time. SNB President Thomas Jordan never made a secret of the fact that monetary stability is the primary goal of central bank policy, not making profits. The SNB's monetary policy mandate always takes precedence, and there may also be times when fulfilling this mandate means accepting losses, he said in April of last year.
Major Investors
The SNB is not alone in registering investment losses. The Norwegian sovereign wealth fund NBIM, with assets of around $1.15 trillion, reported a loss of the equivalent of around $43.5 billion for the third quarter, corresponding to a book loss of 4.4 percent.
By comparison, SNB's quarterly loss of 43.6 billion francs on around 808 billion francs in foreign exchange assets at the end of September translates into a 5.6 percent loss.
Interest Margins Weigh
Euro area central banks are also feeling the effects of rapidly and sharply rising interest rates. Unlike the SNB, the problem here is not investments in foreign currency positions, but rather primarily the interest rates on deposits and the conditions of long-term lending transactions of the European Central Bank (ECB) that are causing burdens.
Massive bond-buying programs have been underway in the eurozone since 2015, first to support the economy, then to cushion the blow of the Corona crisis. The problem is that central banks now have to pay a higher fee on bank deposits, while interest income on the bonds the ECB purchased remains the same or is increasing slowly.
Balance Sheet Losses
In the Netherlands and Belgium, monetary watchdogs recently warned significant balance sheet losses are to be expected in the wake of the interest rate turnaround. Germany's Bundesbank is unlikely to distribute a profit. In 2019, 5.9 billion euros were transferred to the finance ministry and in 2020, the payment was omitted due to Corona.
Banks can still benefit from low interest rates on TLTRO long-term loans (targeted longer-term refinancing operations) issued during the crisis. When banks deposit money with the central bank, they receive more money than they have to pay in interest.
Of the estimated 4.6 trillion euros in bank deposits with eurozone central banks, around 2.1 trillion euros are expected to come from these emergency loans. This means that the banks will have to pay around 35 billion euros in annual interest payments. If interest rates in the eurozone continue to rise, this could rise to 93 billion euros, according to a Citigroup analysis. To counter this, at its last interest rate meeting the ECB levied the average key interest rate on the loans under the TLTRO program.
