ZURICH, Switzerland – One year after posting a record 54 billion franc ($55 billion) profit, the Swiss National Bank swung to a 15 billion franc loss in 2018, as a double whammy of weaker global equity markets and a stronger Swiss franc eroded the value of its massive holdings of foreign stocks and bonds.
The valuation loss reported on Wednesday by the SNB underscores the interplay between central banks and markets. Usually, it is central bank decisions, or hints of changes in interest rates and other policies, that cause stock and bond markets to fluctuate. But this has worked in reverse for Switzerland’s central bank, whose finances are largely at the mercy of financial markets beyond its borders.
What sets Switzerland apart is that after years of currency interventions by the SNB – creating francs to purchase foreign stocks and bonds in a bid to weaken the franc – the bank has amassed over 700 billion francs worth of foreign assets, an amount that exceeds the country’s entire gross domestic product.
This included over $3.5 billion in Apple shares at the end of the third quarter, according to Securities and Exchange Commission filings, $2.6 billion in Amazon stock and $2.7 billion in Microsoft. The SNB’s equity investments – which comprise 20percent of its foreign assets – replicate broad indexes. The rest of the SNB’s foreign-reserve portfolio is in foreign bonds. Euro assets comprise the largest share, followed by the dollar.
When equity markers rise, and when bond yields are low, the market value of the SNB’s portfolio rises. A weaker franc amplifies those gains. These forces combined to push the bank’s profit sharply higher in 2017. But they went in reverse in 2018.
The euro fell 4 percent against the franc last year, as economic and political uncertainties lifted demand for the Swiss currency, which is typically seen as a haven in times of global stress. The dollar was little changed against the franc over 2018, but has weakened in the past month.
Other central banks like the Federal Reserve and European Central Bank also have amassed large portfolios consisting primarily of bonds. But those assets are denominated in their own currencies, giving them a steady source of interest income without the foreign-exchange risk.
The good news for the SNB is that it can ride out market volatility, and its loss doesn’t affect its ability to carry out monetary policy. Annual Swiss inflation was just 0.7 percent in December and with the franc still strong by historical measures, the SNB isn’t under pressure to sell its foreign assets to strengthen its currency. It is expected by analysts to keep its key policy rate at minus 0.75 percent at least until late 2019.
The danger would come if Switzerland faced a sudden inflation shock that forced the SNB to sell its foreign assets at a loss. Repeated valuation losses could also damage the SNB’s reputation at home.
Despite the 2018 loss, the SNB said it would still disperse two billion francs to the federal government and Swiss states, known as Cantons, under a profit-sharing agreement that runs through 2020. Because the SNB held on to the vast majority of its 2017 profit, it had a significant cushion to absorb last year’s loss.
Unlike most central banks, the SNB has publicly-listed shares and it pays a small, legally-capped dividend to those shareholders, who have no say in how the bank is run or how it conducts monetary policy. The SNB itself has played down the importance of its shares.
The bank’s share price attracted global attention in 2017 and 2018 when it rose more than fourfold and approached 10,000 francs a share last April. However, it has retreated since then and one share fetched just over 4,200 francs on Wednesday.