The Swiss central bank shocked financial markets two weeks ago by axing a cap on the franc. (Reuters Photo/Dado Ruvic)

SNB Faces Costly Choice for Sizable Reserves Hoard


JANUARY 29, 2015

Thomas Jordan’s move to scrap the Swiss currency ceiling has left him working out what to do with the half-a-trillion-dollar legacy in its wake.

As the dust settles two weeks after the market earthquake unleashed by that decision, the Swiss National Bank president and his officials face a choice on how to manage a mass of reserves accumulated during years of market interventions.

The total is about 495 billion francs ($546 billion), including a sizable chunk in euro-area sovereign debt.

For Jordan, the least costly option all round may be to accept a burden of negative yields on that hoard of euro- denominated bonds as existing holdings mature.

The alternative, however, is even tougher: selling out or moving into other currencies and exposing the SNB to a loss, potentially boosting the franc at an uncertain time for the economy and risking a backlash in a country where the central bank has previously found itself in the crossfire of party politics.

“I think they’ll keep sitting on them for a while,” said Ursina Kubli, an economist at Bank J. Safra Sarasin in Zurich.

“They won’t do anything that will weaken the euro versus the franc further,” she added.

Data on Friday will show how the SNB had its foreign-currency holdings invested as of the end of December. The institution, based in Bern and Zurich, held 45 percent of its reserves in euros and 29 percent in dollars at the end of the third quarter, little changed from previous periods.

The majority was in highly rated bonds, with 16 percent in equities.

Negative yields Yields on more than $4 trillion of the developed world’s sovereign debt have turned negative, pressured by European Central Bank stimulus.

While the SNB manages its reserves to serve monetary-policy aims rather than generating a profit, it does want their value to remain intact. Governing Board member Fritz Zurbruegg said last year that officials want to ensure their purchasing power “at least is maintained over time.”

That would seem to rule out holding a negative yielding asset. The amount of cash the SNB holds with other central banks has dropped precipitously since June, when the ECB enacted a negative deposit rate. SNB spokesman Walter Meier declined to comment on the effects of negative bond yields on the central bank’s reserves.

While the SNB’s stunning policy shift was condemned by some international investors, it was met with widespread domestic approval, despite threatening to undermine the economy and exacerbate a decline in prices.

At a Jan. 15 evening event just hours after the 1.20 per euro cap was abandoned, Jordan was welcomed with two rounds of applause, according to

The reception was co-hosted by the euro-skeptic, fiscally conservative Swiss People’s Party. Its most high-profile member, Christoph Blocher, was a vocal critic of former SNB President Philipp Hildebrand and called on him to resign after the bank ran up a 21 billion-franc loss in 2010 due to the franc’s appreciation.

Along with the government, Switzerland’s 26 cantons receive an annual payment of 1 billion francs if the SNB’s finances allow. The SNB scrapped its dividend in 2013, incurring complaints from cantonal budget directors, and it could face a further backlash if negative returns mean it has to cancel another payout.

“The winning back of sovereignty is being celebrated,” said Felix Brill, senior economist at Wellershoff & Partners in Zurich. “The problem will be the profit distribution to the cantons.”

Riskier debt In recent years, the SNB broadened the basket it invests in, including adding the Korean won.

Yet selling euro assets and buying in other currencies such as the dollar could also prove loss-making. The euro has declined more than 6 percent against the dollar so far this year.

The franc was flat at 1.02753 per euro on Thursday, while against the dollar it stood at 90.95 centimes.

“They won’t change anything,” said Thomas Stucki, chief investment officer at St. Galler Kantonalbank, adding that the SNB’s allotment among currencies was based on Switzerland’s trade in goods.

The euro area is Switzerland’s biggest export destination.

Shifting its holdings from core euro-area countries to those on the periphery to lessen the impact of negative yields probably isn’t an option.

The SNB invested chiefly in A-rated securities in the third quarter, according to its website. That would exclude the debt of countries such as Spain, Greece, and Italy.

“The challenge is decreasing yields in core markets in a world of low interest rates,” said Mark Dowding, co-head of investment-grade bonds and partner at BlueBay Asset Management in London. “That’s issue number one in the forefront of people’s minds.”