The Swiss National Bank is sitting on almost 100 billion Swiss francs in idle profits. It is time to consider doubling the 4 billion francs distributed last year. The counter-arguments are unconvincing.
It is one of those divisive debates. Should the Swiss National Bank (SNB) help the Swiss economy? At a time when Swiss retailers, restaurants, small businesses, fitness clubs, taxis, and hairdressers are struggling more than ever, the SNB is making bigger profits than ever. Its cumulated profits now have reached 98 billion Swiss francs. In 2019 and 2020, it paid 4 bn francs in dividends to the Swiss Confederation and cantons.
In previous years, it paid between 1 and 2,5 bn francs per year. The 98 bn francs are the investment gains the SNB accumulated over the years as its invested currency reserves now reach 980 bn francs. This figure is eight times larger than in 2007, when it stood at 127 bn.
The SNB never intended to become this huge an investment fund. It only aimed at weakening the Swiss franc in order to help the Swiss exporters. This has required massive selling of Swiss francs against euros and dollars over the years. These record amounts of currency had to be invested in assets of the same currency, such as European sovereign bonds, and increasingly, U.S. stocks.
The SNB now holds a stock portfolio worth 175 bn francs, of which 100 bn are invested in US equities, 15 bn of which are placed in the GAFA stocks (Google, Amazon, Facebook, Apple) alone. That makes the Swiss National Bank one of the biggest foreign institutions investing in US technology stocks. Generally, the SNB appears quite tilted towards the US market. At a certain point in 2015, the SNB had 2 bn CHF invested in US small cap shale oil and gas stocks. It had practically bought the whole universe. How did that happen?
The investments in GAFA stocks paid off in 2019
The SNB never answered that question to the press. It was thanks to the US Securities and Exchange Commission (SEC) filings that Swiss journalists and bloggers noticed this fact. Some of those shale stocks corrected sharply, incurring losses for the SNB. But the investments in Apple, Google, Amazon and Facebook have considerably lifted the SNB's dollar portfolio, as did the higher gold price, taking the central bank’s profits to record levels. Such a level of profits is unprecendented in the SNB history, because the institution never had a portfolio this large.
Its 2020 market gain was 21 bn francs, owing 14 bn to financial markets and 7 bn to gold. But that was small compared to the phenomenal 49 bn francs gained by the SNB in 2019, again thanks to markets, forex and gold.
So the question that is now debated is the following: what do we do with these accumulated gains of almost 100 bn Swiss francs, at a time when the Swiss economy is facing its biggest challenges in decades? Some politicians have suggested that the SNB distribute more money to the Confederation and to the cantons. For a certain period of time, annual distributions could be increased to 6 or 8 bn francs.
The distributions are regulated by a convention between the SNB and the Federal Department of Finances (Eidgenössisches Finanzdepartement, EFD). The 2016-2020 Convention has to be renewed. The one that just expired provided that at least 1 bn francs had to be distributed, and 2 bn if reserves exceeded 20 bn francs. In practice and due to the high profits, 4 bn francs were distributed in the last two years.
Now the SNB and EFD are renegotiating the agreement for the 2021-2025 period. Some economists forecast that a rise in distributions could be in the cards, given the drop in Switzerland's economic activity.
It is an old debate whether the SNB should help the economy more. In the liberal Swiss tradition, this option has never been favored, and the SNB has been opposed to such interventions. Trade unions have for instance asked that part of the profits be allocated to refinance the old-age insurance system AHV or improve the returns of pension funds, which are undermined by negative interest rates.
But now the politician Christian Lüscher (FDP) has called on Swiss TV for additional distributions by the SNB in order to help independent businesses, restaurants and struggling retailers, suggesting an extra 4 bn francs could be distributed in 2021 (bringing the total to 8 bn francs), and an extra 2 bn be added in the two following years in order to help redress the economy.
Before this extraordinary situation hit us, there has been a general refusal by the SNB to «mix monetary policy with social policy». «I believe that the SNB should distribute 10 or 20 bn Swiss francs this year», says Michael Malquarti, Chief Risk Officer at Quaero Capital, a long-time promoter of distributing central-bank money directly to the Swiss population and author of a book titled «For a New Monetary Order».
«Distributing more would help the SNB reverse, or at least put a brake, on the continuous expansion of its balance sheet and would be in line with its purpose of serving the general interests of the country». The amounts distributed, he believes, should be conditional on the inflation rate. «If inflation were to rise, no distributions would be made».
One of the opponents’ main arguments is to say that distributing more dividends to the Swiss economy would entail realizing profits by selling foreign-currency assets against Swiss francs, which would strengthen the Swiss currency.
This argument is wrong, answers Malquarti : «When the SNB distributes money, it creates those francs ex-nihilo, which modifies the structure of its liabilities (more francs, less equity), but doesn’t change anything to its assets». In other words, he goes on, «buying or selling assets is totally independent from distributions. The SNB can distribute francs even while it increases its buying of currencies, as it did last year».
Indeed, we can see that the SNB has been distributing up to 4 bn francs to the confederation and cantons last year, and it didn’t affect the level of the Swiss franc, as it kept buying currencies. By the way, even if the franc did rise, would it be worse than the whole economy suffering as it is?
The truth is, the franc hasn’t even weakened that much after all this buying of euros. The Swiss franc remains high at 1.08 to the euro, compared to 1.66 in 2007. Its highest point was reached six years ago when it shot to 0.99 per euro. Parity is never far despite all the effort to weaken the franc. Some will argue that, absent this policy, the Swiss franc would have been even higher. But the point remains that the franc never dropped anywhere near its pre-2008 crisis levels, because the euro has been weak ever since and will remain this way due to ECB policies.
Another argument is to say that these 98 bn francs in capital gains are investments, and that their value changes over time, so they shouldn’t be relied upon. Well, to be fair, 100 bn francs is not likely to drop to zero after one market correction. Especially since the SNB portfolio is invested in a range of assets (US equities, European bonds, gold).
One interesting argument is to say that it is better to increase the national debt. Many call for Switzerland to increase its debt, as it has a very low debt level. Thanks to a very strict debt brake, the Swiss national debt came down from 50% to 33% of GDP in recent years. Moreover, negative interest rates would be quite profitable, as the country would earn tens of millions of francs by raising additional debt, which is one positive aspect of the negative-rate absurdity.
True, this is a reasonable alternative that deserves consideration. There is a huge margin for leveraging the high-quality national balance sheet. One just has to keep in mind that indebting the country can decrease the sovereign credit rating. True, the Confederation recently borrowed 6 bn francs without any change to its bond rating. But it would be the beginning of the end of the Swiss exception, the only best-in class economy in Europe in terms of debt ratio.
The cost of credit would be bound to rise: the 10-year rate on the Swiss government bond wouldn’t stay at –0.75%, it would go up. In a world of negative interest rates driven by massive bond buying by central banks, everything goes. Even a high Swiss debt-to-GDP-ratio. But this context can change overnight, and Switzerland would have downgraded its finances and sacrificed its gold-like Swiss franc status, sought after by private banking and institutional clients from all over the world.
Conversely, there is no pain in tapping the SNB profit reserve. It made such a high excess return on its portfolio that it can be reduced without any harm. Why borrow, when so much is sitting idle? As Elvis would sing: «It’s Now or Never»