Switzerland’s First-World Problem: What to Do With $750 Billion
The Swiss central bank keeps its huge reserves in foreign assets. Some want a piece of that kept home.
By Brian Blackstone
Thanks to its efforts to weaken the franc, the Swiss central bank has amassed $750 billion in stocks, bonds and cash.
That has provoked a lively debate in Switzerland: What should the country do with all of that?
And whose money is it, anyway?
For now, the Swiss National Bank holds on to it and invests it around the world—but not in Switzerland. It held $2.7 billion in Apple Inc. stock, for instance, at the end of March. Some lawmakers and many economists think a sovereign-wealth fund created outside the SNB should invest a chunk at home.
The SNB’s profit last year was 24.5 billion francs ($25.4 billion), or about $3,000 per Swiss resident.
Switzerland’s central bank isn’t the only one generating profits. The U.S. Federal Reserve earned nearly $100 billion last year from its bond portfolio. Eurozone central banks also make profits but pass a big chunk of them to their treasuries.
The SNB’s current agreement with the government, which runs through 2020, allows for profit distribution of as much as 2 billion francs a year. The SNB has put most of its profits into buffers to guard against large paper losses, which occurred two years ago when the franc soared.
Two dozen Swiss parliamentarians want the arrangement changed. In June, they backed legislation introduced by Socialist lawmaker Susanne Leutenegger Oberholzer to use some reserves and their profits for a sovereign-wealth fund. Unlike the SNB, which invests the reserves only in non-Swiss assets, a fund could put the money to work inside Switzerland, boosting long-term growth, backers say. The SNB takes passive positions in foreign stocks to mirror broad indexes such as the S&P 500.
“Part of the currency reserves, or at least revenues that they generate, should from now on be invested for the interests of the public and future generations including infrastructure investments or in industries with strategic importance,” the bill states.
The Swiss National Bank has accumulated a massive amount in foreign assets
in a bid to weaken the franc, prompting calls for a sovereign-wealth fund
FOREIGN CURRENCY INVESTMENTS
Source: Swiss National Bank
The bill’s chances are slim for now: The SNB is skeptical of the idea, and Switzerland’s executive branch also wants to keep the money in the central bank’s hands. But the debate is likely to rage on, especially if the reserves generate even bigger profits.
The SNB makes money because so many foreigners want the safety of Swiss assets and have poured cash into Switzerland. To keep the franc from rocketing up and damaging Swiss exporters, the central bank has been printing Swiss francs and selling them.
The consequence: The central bank owns buckets of foreign assets, acquired essentially for free.
Most of the SNB reserves are stocks and bonds
in euros and dollars....
CURRENCY BREAKDOWN
The SNB declined to comment on the current bill but has objected to past ones. By having ready access to its reserves, the SNB could shrink its balance sheet if needed to tighten monetary policy. “Putting parts of these reserves into an SWF would restrict the SNB’s ability to conduct monetary policy,” an SNB spokeswoman said, referring to a potential sovereign-wealth fund.
What’s more, selling Apple stock and converting the proceeds into Swiss francs to, say, build roads or bridges, would push the franc up—the opposite of what the SNB is trying to do.
The Swiss federal council, the country’s executive branch, rejected a previous proposal in December, saying the SNB was already managing its funds appropriately. It will give its view on the latest one in the fall. The government couldn’t simply take the SNB’s reserves. It would have to reimburse the SNB, probably by issuing debt. But it could use the SNB’s future profits that are handed over to the government however it wants.
The SNB investments are weighted toward
low-yielding government bonds.
ASSET BREAKDOWN
Source: Swiss National Bank
Other countries have sovereign-wealth funds. Norway has one to manage its oil wealth. China and Singapore have them to manage foreign reserves. What sets Switzerland apart is that the franc isn’t just a currency; it behaves like a commodity similar to oil or gold. Its strength, particularly in times of global uncertainty, has proven persistent, thanks to Switzerland’s ultrarich economy and low debt.
The franc is “a kind of virtual commodity resource” whose wealth “should be shared with all citizens and a [Swiss sovereign fund] offers a natural vehicle for this,” ETH-Zurich professor Didier Sornette wrote in a 2015 paper supporting a Swiss sovereign-wealth fund.
The SNB posted a first-half profit of 1.2 billion francs, a smaller-than-usual result as a stronger euro was offset by a weaker dollar. It also earns interest and dividends. The mother lode would come if the franc weakened more broadly and the SNB did start selling its foreign stocks and bonds to prop the currency up, turning paper profits into real ones.
“They may generate 40-50 billion francs in profits [over three years], not just on the books but real profits” if the franc weakens further and the SNB can slowly unwind its balance sheet, said Daniel Kalt, chief economist for Switzerland at UBS. His idea is to take profits that may accumulate—which he says could be around 15 billion francs a year—as seed money for a fund.
The SNB is a major shareholder of
several U.S. companies.
VALUE OF HOLDINGS IN SELECTED U.S. STOCKS
Note: through 1Q 2017. 1 Swiss franc = $1.04
Source: Securities and Exchange Commission
The euro has strengthened 7.4% against the Swiss franc so far this year and fetched 1.1511 francs in late New York trading Wednesday. The dollar has weakened 4.7% against the franc this year, though it rose slightly against it in July, trading at 0.9709 francs late Wednesday.
One complication is that the SNB’s assets, being foreign, fluctuate in value along with the franc. (The Fed holds dollar-denominated Treasurys and other bonds, so its profit isn’t affected by the dollar’s value. The same holds for the eurozone.)
That worked in the Swiss’s favor in July, when the euro’s rise made the SNB’s roughly 300 billion francs of euro assets worth many billions more on paper. But big and sudden payouts are hard to manage.
“If this huge currency trade leads to a windfall gain, we should avoid distributing this gain to politicians who would spend it on one generation,” Mr. Kalt said.
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