Don’t Exaggerate Significance Of SNB’s Loss

Earlier today the Swiss National Bank reported a record CHF50.1 bln loss. It has got the chins wagging, but the real implications are minor. The losses are not realized and are unlikely to be repeated. In fact, if the SNB’s report had covered the month of July, the loss would likely have been smaller.  

More of the SNB’s loss stemmed from the valuation of its foreign currency holdings in the face of franc appreciation, especially after the cap was abandoned in mid-January. Here in July the franc fell nearly 3% against the US dollar and about 1.3% against the euro. These two currencies account for nearly 3/4 of the SNB’s reserves. The franc fell 2% against sterling and 1.5% against the yen. These four currencies together account for nearly 90% of the reserves.  

It addition to the currency valuation markdown, the SNB reported a CHF3.2 bln euro loss on its gold holdings. Gold lost another 5% in July in franc terms. These losses reduce the SNB’s equity to CHF3.425 bln, which amounts to just shy of 6% of its assets. 

There are two implications, and they have nothing to do with the solvency of the Swiss National Bank. The first implication, and one that central banks are sensitive to is reputational risk. If the central bank losses money, doesn’t it undermine its credibility to manage the country’s economy? While it is difficult to show that the SNB’s reputation has been harmed, its performance provides its critics with fodder. 

 Switzerland’s parliamentary election will be held in mid-October. These losses allow for a politicalization of monetary policy that may not be particularly helpful. A couple of parliamentarians are pressing the SNB to adopt a new cap for the franc (euro floor) at CHF1.15.  While this is highly unlikely to be implemented, it illustrates the frustration with the franc’s appreciation. 

The SNB appears to have been given a free pass on its effort to stem the rise of the franc. In 2013, Switzerland’s current account surplus was 10.7% of GDP. Last  year, it fell back to 7%. The OECD expects its to be 10.1% of GDP this year and 10.5% next year. Countries with such substantial surpluses often come under international pressure to reduce the imbalance.