The Swiss National Bank is the central bank of Switzerland. It is the institution responsible for regulating the country’s monetary policy and controlling inflation by issuing its currency and controlling interest rates.
The Swiss National Bank is responsible for the price stability and economic growth of the whole country. It should be able to intervene in case of a shortage of money supply from commercial banks. The major role of the Swiss National Bank is to prevent the country’s banking and economic systems from failing. Nevertheless, unlike many other central banks, the SNB is a private company. In 2017, individual shareholders owned about 23.6% of the bank. State-owned banks and cantons owned around 55% of the SNB’s total shares. The remaining shares are publicly traded on Switzerland’s primary stock exchange, the SIX Swiss Exchange.
The SNB is the sole provider and printer of all the Swiss franc notes and coins in circulation. In addition to actual money, the SNB is also responsible for storing and managing Switzerland’s gold reserves.
What is a central bank?
A central bank has been widely described as the “lender of last resort”. Its main role is to maintain financial stability within the country by hindering the development of inflation.
During the late 1800s, maintaining price stability was relatively easy. Most of the gold currencies were pegged to the gold standard and since reserves of gold were finite/limited, governments had a lot more control. During this period, central banks were mostly responsible for maintaining the convertibility of gold into currency. Basically, if a country had large reserves of gold, then its central bank could issue large quantities of banknotes. At the outbreak of World War I, governments faced budget deficits for which they needed to print more money but in doing so, they eventually faced inflation and for this reason, the Gold Standard was abandoned.
History of the SNB:
The Swiss National Bank was founded in 1905 following “The National Bank Act”. This law entered into force a year later. The Swiss National Bank opened its doors for business in June 1906 with offices in major Swiss cities like Geneva, Zurich, Bern, Basel ,and St Gallen. However, its two main head offices are in Zurich and Bern.
The bank was initially formed to reduce the number of issuing banks and it was given the sole rights to issue banknotes by the Federal Constitution. In 1910, the SNB became the sole issuer of banknotes in Switzerland. The confederation administered and supervised the SNB which was described as a joint-stock company back in 1994 meaning that shares of the SNB could be bought and sold by shareholders.
However, by May 2004, the National Bank achieved formal independence.
In 1991, the Swiss National Bank received permission to be a member of the International Monetary Fund (IMF). The IMF is an international organization whose goal is to promote global economic growth, international trade, and financial stability
Role and Responsibility:
The Swiss National Bank conducts Switzerland’s monetary policy as an independent central bank with the ultimate goal to create a sound environment for economic growth. It is obliged to act following the interest of the whole country.
The SNB’s primary responsibility is the control of the price stability, by the regulation of the level of inflation. Inflation is defined by a general increase in prices resulting in a decrease in the purchasing power of a nation’s currency. For example, a consumer can buy a meal and a drink with 20 CHF, the next day, because of the surge of prices for consumption goods, the consumer can only buy a meal with no drink with the same amount of money. Also, because of the increase in prices with no increase in wages, inflation can impair economic activity. Consumers can buy less with the same revenue, which results in the economy slowing down. As we can see, price stability is an important variable in the equation for economic growth and prosperity.
From a macroeconomic perspective, the SNB can either inject liquidity into the market or absorb it which in turn will directly affect the inflation level of the economy. These types of transactions are called “open market operations”, they are essential to a central bank as they are the key means to control money supply into the market, price levels and inflation. The Swiss National Bank ensures the financial stability of the country by having the utmost authority over monetary policies. It oversees payment settlement systems, analyses the different sources of risk to the financial system and promotes a more secure environment for the financial sector.
From a microeconomic perspective, the SNB acts as a “lender of last resort” by lending additional funds to commercial banks when these banks do not have enough liquidity to meet their clients’ demands. The rate at which commercial banks borrow from central banks is called the “discount rate”. This discount rate is an interest rate that could be set in way to avoid perpetual borrowing. Indeed, when commercial banks borrow too much, more money is in circulation which could lead to market disruptions by decreasing the efficiency of open market operations and increasing the risk of inflation. Therefore, the discount rate could be set unfavorably for commercial banks which ensures Switzerland’s financial stability.
The Swiss National Bank also acts as a banker to the Swiss Confederation. Some of its responsibilities include handling the safekeeping of securities, ensuring the functionality of foreign exchange market transactions and processing payments on behalf of the Confederation.
As the manager of the official gold reserves of Switzerland, the Swiss National Bank holds around 1040 tons of gold; placing Switzerland on the top 10 list of countries holding the largest gold reserves according to the 2020 World Gold Council.
Policies and Governance
The Swiss National Bank is composed of three main Departments. The main business areas of the first Department include economic affairs, international affairs, legal services, communications and statistics which is mostly located in Zurich. The organizational units of the second Department is located in Bern with its main scope of business axed towards finance, risk management, financial stability, cash and security. finally, the third Department operates on the asset management, banking operations, money market and foreign exchange and information technology.
The Bank Council is also a part of the SNB whose role is to set up four committees in order to oversee and control the conduct of business by the Swiss National Bank. These committees include a Risk Committee, an Audit Committee, a Remuneration Committee, and an Appointment Committee. The Bank Council consists of 11 members from which 6 members are appointed by the Federal Council (including the President and Vice-President) and 5 by the Shareholders’ Meeting. The internal auditors unit reports to the Audit Committee.
The Swiss National Bank invests its assets in the stock market. According to its guidelines, the SNB avoids any investments in companies violating human rights, companies producing internationally banned weapons or companies causing severe environmental damages. In 2018, its share portfolio mounted at around 153 billion Swiss francs.
SNB and Europe
After the European sovereign debt crisis, many investors sought refuge in the Swiss Franc as a safe heaven. Switzerland’s currency is widely viewed as a financial refuge thanks to the strong stability of the Swiss financial system. However, the more investors bought the Swiss franc and it appreciated leading to a so-called “too strong” currency against the Euro which in turn could hurt Switzerland’s economy by hindering its exports.
In 2011, the Swiss National Bank decided to peg the Swiss franc to the euro at the exchange rate of 1.20 CHF per 1 EUR which helped the Eurozone and Swiss exporters by increasing their odds of profitability. A currency peg is a policy in which a specific fixed exchange rate is set between two currencies. Pegging a currency could stabilize the exchange rate between two countries, promote trade and boost incomes. Nonetheless, if a currency peg is too far from the natural market price, it could be challenging to maintain. An overly low currency peg could create tensions with trading country partners while an overly high currency peg could inflation when the peg collapses.
When the Swiss National Bank announced in 2015 that it would scrap its currency peg to the euro, the Swiss franc immediately skyrocketed by about 20%. This increase in value primarily hurt Swiss exporters which had difficulty in delivering profits due to their lost comparative advantage. Despite the removal of this currency peg, the Swiss National Bank has stated its willingness to intervene in the foreign exchange market again if necessary. Nevertheless, the Swiss franc remains a haven for investors.