Why does the SNB hold billions worth of assets and how does it manage these assets?
The SNB has a balance sheet worth several hundreds of billions of Swiss francs. Why is the balance sheet so big and what does the SNB have to bear in mind when investing its assets?
The largest share of the SNB’s assets comprises its currency reserves, which it holds as a consequence of implementing its monetary policy. The currency reserves consist mainly of foreign currency bonds and equities and gold. The SNB’s assets also include Swiss franc bonds, although these make up a comparatively small share.
Why is the SNB’s balance sheet so big?
In the wake of the financial and debt crisis, the Swiss franc was exposed to strong upward pressure from 2007. This was because the franc was regarded by international investors as a ‘safe haven’ and was therefore in high demand. In order to curb this upward pressure and thereby counter a further fall in inflation from its already very low level, the SNB made extensive purchases of foreign currency over several years. This slowed the Swiss franc’s appreciation, which helped prevent inflation from becoming more negative. However, the purchases expanded the SNB’s balance sheet many times over. While the currency reserves amounted to CHF 85 billion at the end of 2007, by the end of 2021 they had risen to CHF 1,015 billion.
On the other hand, the SNB used its currency reserves in 2022 and 2023 to counter a rise in inflationary pressure. By selling foreign exchange and thus increasing the demand for Swiss francs, the SNB allowed the franc to appreciate to a certain degree, which curbed the price rises in imported goods and services and thus reduced inflation. Foreign exchange sales conducted with the aim of ensuring price stability helped to decrease the SNB’s balance sheet total during this period. These two time periods show how the SNB can use its balance sheet in different ways to ensure price stability.
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The SNB is not the only central bank whose balance sheet total has grown significantly since the financial and debt crisis. The sizes of the balance sheets at the US Fed and the ECB, for instance, also multiplied during this period. While the SNB purchased foreign currency financial assets, the balance sheet growth at the Fed and the ECB was attributable to the purchase of assets (particularly bonds) in their own respective currencies.
How exactly does the SNB invest its assets?
Since its assets have to be available for monetary policy at all times, the SNB ensures that a large proportion is invested in highly liquid securities. This means that even large purchases or sales of a security can be made without triggering significant price movements in the market. Specifically, the SNB invests a substantial portion of its currency reserves in foreign government bonds denominated in US dollars, euros and a whole range of other currencies.
Moreover, with its investment policy the SNB aims to preserve the value of its currency reserves in the long term. It pursues this objective through a broad diversification of currencies, debtors and maturities. Furthermore, it complements the government bonds with equities and corporate bonds, which also aids diversification and, in particular, improves the long-term risk/return ratio and is aimed at offsetting the Swiss franc’s upward trend.
The SNB holds a part of its currency reserves in gold. It is obliged to do so under the Federal Constitution. Moreover, gold contributes to diversifying the SNB’s investment portfolio. The SNB’s gold holdings have remained unchanged for several years at 1,040 tonnes. Approximately 70% of this is stored in Switzerland, some 20% at the Bank of England, and around 10% at the Bank of Canada. This decentralised storage of gold holdings in Switzerland and abroad ensures that the SNB can access its gold reserves even in the event of a crisis.
In its equity portfolios, the SNB primarily holds shares of mid-cap and large-cap companies and, to a lesser extent, shares of small-cap companies in advanced economies and shares of companies in emerging economies. In its equity investments, the SNB tracks market-weighted indices and thus does not engage in stock picking. The principle of broadly replicating the market ensures that the portfolio’s exposure to different risks is roughly the same as that of the global universe of listed companies, and that structural changes in the global economy are also reflected in the SNB’s portfolio.
The SNB manages most of its investments in-house. It uses external asset managers as benchmarks for its in-house portfolio management and in order to obtain efficient access to new asset classes.
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Besides the principles described, the SNB also observes other rules when managing its assets. For instance, owing to its special role as a central bank, the SNB refrains from investing in shares of systemically important banks worldwide. This ensures that no privileged information from within the SNB can influence investment activity and that no unintentional signalling effects are created. The SNB also generally does not purchase shares or bonds issued by Swiss companies.
Furthermore, it does not invest in shares and bonds of companies whose products or production processes grossly violate values that are broadly accepted at a societal level. It does not purchase securities issued by companies that seriously violate fundamental human rights, systematically cause severe environmental damage, or are involved in the production of internationally condemned weapons. Lastly, the SNB refrains from hedging currency risks in its investments against the Swiss franc. Such hedging would constitute demand for Swiss francs and thus generate upward pressure on the currency.
Investment performance is not relevant for the fulfilment of the SNB’s mandate
Although the SNB’s balance sheet has declined from its peak at the end of 2021, it is still very large. This offers potential for high returns but also increases the risk of sizeable losses. Fluctuations in exchange rates and changes in bond and share prices can have a strong influence on the SNB’s investment performance, because with a large balance sheet, even a small percentage gain or loss corresponds to a significant amount of Swiss francs in absolute terms.
However, the decisive factor in assessing the SNB’s success is not its financial result for the year. The SNB should only be judged on whether it fulfils its mandate of ensuring price stability while taking due account of economic developments.
