A central bank is not a profit machine

At the moment, there is little economic fit in Switzerland either: the economic prospects are becoming increasingly gloomy. Inflation remains at a level that is far too high and is affecting more and more goods and services. And the interest rate policy braking maneuvers of various central banks and the geopolitical tensions in the wake of the Ukraine war ensure that Swiss investors have recently lost a lot of money in practically all asset classes, be it equities, bonds, gold or foreign currencies.

Dangerous dependency in the cantons

This ugly situation is also leaving its mark on the Swiss National Bank (SNB). The SNB suffered a gigantic loss of CHF 142 billion in the first three quarters. The record-high amount has been announced in recent months. For the cantons – and to a limited extent also for the federal government – the news is very unpleasant. Because if another miracle doesn’t happen on the financial markets by the end of the year, they will probably have to forego profit distributions from the SNB.

Once again it is clear that cantonal financial politicians should not have to rely on money from the SNB in ​​their planning. A look at the past shows that the National Bank’s results are subject to extreme fluctuations. This is also because the SNB – unlike a normal investor – cannot hedge the currency risk of its gigantic foreign exchange reserves. If it were to make such hedges, this would have an impact on monetary policy. But that is undesirable, because monetary policy must be given priority, not investment policy.

The cantons are also aware of all this. In their spending plans, however, many financial politicians are more or less fixed with a windfall from the SNB. Because these funds are no small thing. In the past two years, when the monetary authority always paid out the maximum possible sum of 6 billion francs, they accounted for between 2 and 6 percent of the total income, depending on the canton. These are significant amounts that can sometimes determine the sign of a canton’s financial result.

Return to the essentials

In this respect, the huge loss of the SNB also has its good side. He reminds politicians that SNB profits are not a law of nature. This knowledge was recently lost in Bundesbern. In recent years, for example, political initiatives aimed at using the supposedly ever-flowing SNB funds for various government tasks have increased. There was no shortage of ideas on how to misuse the central bank balance sheet. They ranged from the financing of old-age provision to climate protection and the accumulation of a sovereign wealth fund.

But the primary goal of the SNB is not to give the cantons and the federal government financial support. The focus of the mandate is price stability. The complexity of this mandate has also been forgotten in recent years. However, the violent return of inflation now shows that a stable price level cannot be taken for granted. It is correspondingly dangerous to constantly want to impose new tasks on the central banks. Such an overload leads to conflicting goals and makes it more difficult to fulfill the primary mandate of price stability.

Those critics who have accused the SNB in ​​recent years of pursuing an overly cautious provisioning policy at the expense of the public sector have also been taught a lesson. Since the beginning of the year, equity has fallen from CHF 204 billion to just CHF 56 billion; the associated equity ratio of 6 percent is hardly very generous. And for the long-term credibility of a central bank, a solid balance sheet is far more important than distributions to the state. This may be an unpopular message in times of financial stress, but it is in the nature of prudent monetary policy.