The Governing Board of the SNB is unusually small by international standards, is not subject to term limits and provides little transparency about its decision-making.
In 2016 the Federal Council of Switzerland published a report on the SNB’s monetary policy. It covers many important issues that the SNB Observatory has already commented on, but also governance issues that we have not considered. Much has happened in central banking in the last few years.
Today we release a new commentary in which we focus on the governance of the SNB, using the Federal Council’s Report as a guide.
The Federal Council’s Report compares the SNB with other central banks to assess the extent to which it follows best practice in central banking. This is a useful benchmarking exercise, and our approach is similar. Looking at independence, we confirm the Report’s finding that the SNB is an exceptionally independent central bank. That is essential for good monetary policy.
But we also find that the SNB is one of the least transparent central banks and that while other central banks have over time raised their transparency, the SNB has not. That may seem odd as the SNB publishes plenty of reports, data, policy decisions and speeches. However, it does not publish the most important information necessary for judging how it sets policy.
For instance, while it releases its policy decisions, it does not reveal the full range of policy options that the Governing Board considered, and why it selected one and rejected the others. Nor does it reveal the balance of opinion within the Governing Board. Did all members agree with its various decisions or were there dissenting opinions?
This deviates from international best practice. Other central banks publish minutes from meetings and much of this information would also be revealed in newspaper interviews and speeches. In contrast, the minutes of the meetings of the SNB’s Governing Board are available upon request for public viewing after 30 years. This is absurd.
Furthermore, apart from a single forecast of inflation, it provides little information about its outlook for the economy. What did it expect would happen to economic activity and unemployment when it abandoned the exchange rate floor in 2015? Other central banks publish a much fuller range of forecasts.
This combination of high independence and poor transparency makes it difficult for the public and parliament to hold the SNB accountable. True, the SNB does meet with parliamentary committees, but the records of those meetings are secret. In other countries such meetings would be public, as they should be in a democracy.
The poor transparency allows the SNB to avoid public accountability.
The Federal Council’s Report also analyses the size of the SNB’s Governing Board that sets policy. With three members, it is very small in international comparison. Almost all central banks set policy through a committee. Apart from the Fed and the ECB, both very large economies for which regional considerations matter, international central bank practice is to have at least 5-7 members.
Despite recognizing the issue, the Report makes several arguments against expanding the Governing Board. It argues that the three members of the Extended Governing Board participate in policy discussions and that staff are invited to contribute to the deliberations. The effective size of the decision-making body is therefore larger than three.
This is misleading. All central banks involve their senior staff and experts from the economics area in setting policy. According to the minutes published on 6 April, the Federal Open Market Committee meeting on 15-16 March was attended by 94 persons.
The Report goes on to assert that since each Governing Board member is the head of a department, changing the size of the board would require a fundamental reorganization of the SNB. This argument is spurious. Linking policy responsibility to management responsibility is neither necessary nor advisable. Many central banks appoint external members who have no executive function within the bank to their policy committees.
Finally, the Report claims that it is difficult to find enough qualified potential members of the Governing Board in a small country such as Switzerland. It does not explain how this is possible in Israel or Sweden that have about as large a population, or in Iceland whose population is much smaller.
An important point that the Report does not discuss concerns whether the arrangement whereby the President of the Governing Board is the head of the first department that prepares the policy decisions gives him (or her) disproportional influence over policy. A robust internal debate is necessary to ensure that the three members of the Governing Board play an equal role as envisaged by the National Bank Act and the SNB’s internal regulations.
Finally, while the Report discusses the length of appointment of members of the policy making committees at other central banks, it does not analyse the situation in Switzerland. Looking at the Governing Board members during the last forty years, we note that the average tenure is more than 10 years, which is long. The practice of automatically reappointing board members until they reach retirement therefore warrants review.
Overall, the Federal Council’s report is very useful because it compares the SNB with central banks in other countries. While that benchmarking exercise shows the strengths and weaknesses of the SNB’s governance, the Report fails to see any reason to change the current set-up. That robs the Report of credibility.
The report is a rare example of an external review of the SNB. Other central banks regularly commission such reports, but the SNB does not. That is a practice that parliament should insist it adopts.
This article is co-authored by Stefan Gerlach (Chef Economist at EFG Bank), Yvan Lengwiler (Professor of Economics at the University of Basel) and Charles Wyplosz (Professor Emeritus of Economics at The Graduate Institute, Geneva). They are the founders of the SNB Observatory.