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What the Swiss National Bank (SNB) does is not very clear for many people in Switzerland. So, I thought it would be interesting to research this subject and write about my findings.
The Swiss National Bank is quite famous, even abroad, but what does it really do? It is because of it that we do not have any interest rate in our bank accounts?
Let’s see in detail what this central bank is doing. We will also see that the Swiss National Bank has several unique characteristics.
The Swiss National Bank
The Swiss National Bank (SNB) is the central bank of Switzerland. It is the bank responsible for creating notes and bills for the Swiss Francs. They are only responsible for the monetary policy of the country. Their main goal is to keep prices stable (inflation) and help the country’s economy thrive. They are required by law to control price stability. The SNB needs to avoid both hyperinflation and strong deflation.
The SNB was founded in 1906 only. Before that, many banks could issue banknotes, and the federal council was responsible for the monetary policy. Now, the Swiss National Bank is an independent entity that is responsible for these two things. So, they have to maintain enough banknotes in circulation and make sure they are secured enough. They are responsible for updating the banknotes over time.
The Swiss National Bank has two head offices. The first one is in Bern, the capital of Switzerland. And the second one is Zurich, the unofficial economic capital of the country.
The Swiss National Bank has other responsibilities. For instance, It manages the gold reserve of Switzerland. At the time of this writing, it is worth about 30B CHF. Interestingly, we do not know for sure where this reserve is. However, the majority of this gold is thought to be under the federal plaza in Bern. The SNB is also responsible for managing the currency reserves of the country. It is also investing its reserves on the stock market, with a portfolio worth about 150B CHF. Many people are following the trade operations of the SNB.
When the SNB makes profits, it distributes its profits to the confederation and to the cantons. In recent years, the Swiss National Bank has done really well on both its gold reserves and its investment portfolio.
It is interesting to note that the balance sheet of the SNB as of 2020 was about 850 billion CHF. This is more than the GDP of the country. In fact, this makes the SNB the central bank with the largest balance in the world in relation to GDP.
Contrary to many other countries, the SNB is a private entity. It is mostly owned by public shareholders like cantons and cantonal banks. Indeed, public entities have more than 77% of the shares. The rest of the shares are in the hands of private investors or publicly traded in the stock exchange. That is right. The Swiss National Bank is listed on the Swiss Stock Exchange. However, the publicly traded shares have no voting rights.
A governing board leads the SNB. This board takes decisions on the monetary policy of the country. For this, they assess the economy and the forecast of inflation in Switzerland. They do quarterly assessments. Currently, the board is governed by Thomas Jordan. This balance sheet is mostly in foreign currencies, gold and stocks.
Tools of the SNB
To enforce its monetary policies, the Swiss National bank has several tools.
The main tool that is used is in regards to the liquidity that the SNB is making available to banks. It can lower or increase the liquidity they provide to the banks by changing the interest rate of these loans. Banks, in turn, can lend this money to their customers. Availability of loans can have a great impact on the economy.
In case of turmoil, the SNB is also able to bail out banks. They did this during the financial crisis of 2008-2009 to bail out UBS, the largest bank of Switzerland. For this, they have bought 54 billion CHF of bad assets from UBS so that UBS would have enough liquidities. After a few years, the SNB managed to sell back these assets, even making a profit.
The SNB can also buy and sell Swiss Francs against other foreign currencies. This helps keep the Swiss Franc exchange rate reasonable for the Swiss economy to thrive.
The SNB also works hand in hand with the FINMA (the regulators of banks). Indeed, banks are forced to deposit money in the Swiss National Bank. Swiss Banks have minimum reserves requirements. These reserves must be kept in the SNB to be as liquid as possible. After the financial crisis of 2008, FINMA bumped up the minimum reserves requirements to avoid another bailout.
The Swiss National Bank can also use some more advanced techniques such as Quantitative Easing (QE). QE is a technique where they would buy bonds to inject liquidity directly into the market. However, this is outside of the scope of this article.
Negative Interest Rate
As mentioned before, keeping inflation at a reasonable level is one of the primary roles of the Swiss National Bank. Currently, it has a goal of keeping inflation in Switzerland at 2%.
One of its tools to fight inflation is to change the interest rate that it asks from banks. Banks are forced to deposit large amounts of money into the Swiss National Bank. And for this money, the SNB has a fixed interest rate. Currently, this interest rate is negative, at -0.75%. This means that Swiss banks are paying the Swiss National Bank to keep their money in its safes.
In return for that, Swiss banks need to find a way to pay for these large expenses. However, since most banks do not want to set a negative interest rate for their customers, they are introducing fees instead. This is why there are very few free banks left in Switzerland. And this is why these Swiss banks have zero interest rates for their customers.
Should we blame the Swiss National Bank for that? Not really. Having negative inflation is not necessarily good in the long term for the economy. So, keeping inflation at a healthy level is a good thing. Once inflation is back to a higher level, we can expect interest rates to rise again. But this will take many years before we see that again.
The euro currency peg
You probably have about the 1.2 CHF to 1 EUR limit that the Swiss National Bank kept for a while. Naturally, such a currency peg made a lot of noise both in Switzerland and abroad.
In 2011, the SNB decided to peg the Swiss Franc to the Euros at a rate of 1 EUR for 1.2 CHF. The reasoning behind this peg was to help exports from Switzerland. Indeed, if the Swiss franc is too strong, it is challenging to export anything from Switzerland since our goods are too expensive for foreign countries. So, the SNB decided to help the economy by introducing this peg.
But in 2015, the SNB stopped its currency peg. This was becoming unsustainable for the Swiss National Bank to maintain the peg. It is indeed costly and complicated to peg a currency against another.
If you are interested in the Swiss Economy and the Swiss banks, it is interesting to learn about the role of the Swiss National Bank. Compared to the other central banks, the Swiss National Bank is quite unique. Indeed, most central banks are managed by the state while the SNB is owned by the cantons, completely independent from the confederation, and even listed on the Swiss Stock Exchange.
The main role of the SNB is to keep prices stable in Switzerland, avoiding both high inflation and significant deflation. For this, it manages the liquidities offered to the banks to influence the economy. Currently, the interest rates of these liquidities are negative to boost inflation that was very low these last few years.
It is important to know that while inflation in Switzerland is low, the Swiss inflation numbers may not be entirely accurate.
While it is for the good of the economy, the SNB indirectly caused the prices of the Swiss banks to increase significantly this last decade. This makes it difficult to find free banks in Switzerland. If you are looking for one, here are the best Swiss banks.
What do you think about the Swiss National Bank?
If you want to follow the SNB, you can read its press releases. And, if you want to learn more, you can watch this video done by the Swiss National Bank itself: