ZURICH: Switzerland’s central bank posted its heaviest ever annual loss in 2015, a byproduct of the bank’s decision one year ago to scrap a long-standing policy aimed at keeping the overvalued Swiss franc in check here the other day.
The 23 billion Swiss franc loss ($23.05 billion) highlights the challenges facing central bankers in Switzerland and elsewhere who are trying to prop up their economies and guard against deflation risks by purchasing bonds and other assets or intervening in currency markets.
The Swiss National Bank was active in foreign exchange markets during 2015, trying to weaken the franc after it soared in value against the euro when the SNB scrapped its three-year policy of limiting the currency to 1.20 against the single currency last January.
SNB officials have said they had no choice but to abandon the cap, which was imposed in September 2011, because it would have had to spend enormous amounts to continue defending it.
The subsequent rise in the franc eroded the value of the SNB’s massive foreign currency holdings that accumulated during the bank’s bid to weaken the franc. Foreign reserves totaled 560 billion francs in December, or nearly 90% of the Alpine economy’s gross domestic product.
“A big loss was expected and it is no surprise given the exchange rate volatility over the last year,” said Karsten Junius, chief economist at J. Safra Sarasin, a Swiss bank. “But losses like this put pressure on central bankers who need support from the general public to keep their independence.”
Practically speaking, the SNB’s shortfall doesn’t affect the SNB’s ability to conduct monetary policy, said Alexander Koch, economist at Raiffeisen Schweiz in Zurich.
Central banks are unlike commercial financial institutions because they have the power to print money, meaning that can function effectively if they make or lose money. “It is more a confidence issue,” said Mr. Koch.
“The public don’t like central banks that make losses, which could then be forced to be recapitalized by the central government,” said Mr. Junius. “This result should persuade [SNB Chairman Thomas Jordan] to be more cautious about intervening in the markets in future.”
The loss is the biggest since the Zurich-based bank was founded in 1907 and is likely to heap pressure on the SNB, which has come under fire from industrialists concerned that the currency’s strength is hurting Swiss exports, which have become more expensive in the neighboring eurozone.
It also reflects the large size of the central bank’s balance sheet and volatile nature of currency markets. Other central banks, such as the Federal Reserve, have purchased large amounts of bonds but in their own currencies. The Fed has made large profits in recent years and returned nearly $100 billion in 2014 profits to the U.S. Treasury.
The franc, which is currently trading around 1.087 to the euro, has been particularly attractive to investors seeking a safe-haven investment. The euro has also weakened following a massive bond buying spree launched by the European Central Bank to stimulate Europe’s moribund economy and boost inflation.
‘A big loss was expected and it is no surprise given the exchange rate volatility over the last year. But losses like this put pressure on central bankers who need support from the general public to keep their independence.’
The SNB said it expected losses of around 20 billion francs from its foreign currency positions, largely reflecting a decline in the value of its euro holdings. The euro, which has depreciated from 1.20 to the franc before the currency floor was abandoned to currently around 1.09, makes up the biggest chunk of the SNB’s foreign currency investments.
At the end of September, the euro accounted for 42% of its foreign currency investments, followed by the dollar at 33%.
The SNB said it also expected a valuation loss of 4 billion francs from its gold holdings, although the bank made a profit of 1 billion francs from the increased value in the Swiss franc it holds.
The bank said it would use its reserves to pay a dividend of 15 francs a share to its shareholders. It would also make its ordinary profit 1 billion francs distribution to the Swiss government and the country’s 26 cantons, which are similar to U.S. states.
The SNB will give detailed figures about its 2015 performance on March 4.