After reporting a record loss last year, the Swiss National Bank will move to reduce its balance sheet quickly.

Last year was an eventful one for the Swiss National Bank which ended its policy of negative interest rates by raising them to counter inflationary pressures. It also posted a record loss, with the upshot that the cantons and governments would not receive a dividend from its profits.

The SNB lost 132 billion Swiss francs last year, in stark contrast to profits of 26 billion and 20 billion francs in 2021 and 2020, respectively, as finews.com reported. At the same time, the central bank had 885 billion francs on its balance sheet at the end of November. Although down from a high of 1.07 trillion in May of last year, it remains a troublesome number.

In an interview with «Bloomberg» (behind paywall) Citigroup deputy chief European economist Christian Schulz said the loss «clearly highlights the risk large balance sheets pose.» 

The governments are likely not very pleased to be missing out on profit distribution for 2022, particularly since they received the maximum payout for 2021 of 6 billion Swiss francs. Moreover, UBS analysts say the profit distribution is also in jeopardy for 2024. Before the SNB can make a distribution in 2024, it must make up for the loss in distribution reserves this year and earn sufficient funds to replenish provisions for currency fluctuations. To do so, the SNB needs to book a profit of over 50 billion francs.

Monetary Policy Issues

But those are political considerations and for the SNB, monetary policy is more their concern. With the end of negative interest rates, banks with large deposits are now once again earning money which acts as economic stimulus, Schulz says, which can boost inflation, and exactly what the SNB is trying to fight.

As a result, the SNB will now move to reduce the size of its balance sheet. «We think that they are going to try to reduce the balance sheet swiftly, by about 15 billion francs per month, or 180 billion per year. That's a very rapid pace,» Schulz told «Bloomberg.»

SNB Not Alone

This dynamic also applies to other central banks and «could be very meaningful.» Schulz estimates that it might result in a stimulus to the eurozone economy of 1 to 1.5 percent of GDP.

The solution? «The only thing they can do is reduce the balance sheet» he concluded in the «Bloomberg» interview.