One speculation in the blogosphere – for example in Gawyn Davies’ FT blog – is that the peculiar ownership structure of the Swiss National Bank is behind its decision to abandon the exchange rate cap last week.
Modern central banks are invariably wholly owned by their Treasuries. They may be incorporated as corporate entities, but are no different, practically, from Government departments. The Swiss National Bank, however, is 50% owned by private individuals, and 50% owned by the Swiss Cantons, [either directly, or via banks owned by the Cantons] regional, political entities that comprise the Swiss confederate nation.
The conjecture is that these owners, unlike a conventional Treasury owner, would be more concerned about ‘losses’ on a ballooning foreign exchange reserve account, the bi-product of creating new reserves of Swiss francs to buy foreign exchange in defence of the cap, only for these reserves to depreciate in value.
Recapping on my last post, and on the other various pieces on the internet, the ‘loss’ would come at the point where the SNB decided it was appropriate to reverse the creation of reserves in order to pursue its macroeconomic policy objectives. For a complete reversal it would need an injection of funds from the Government to supplement the foreign exchange which it bought which now buys fewer francs. If it turned out that its price stability policy did not necessitate a reversal of the money-creation, there would be no need for any ‘loss’ to be made up.
The idea is not a total non-starter, because of the way Swiss central bank accounting is performed, the ‘dividends’ that would normally be paid out to SNB shareholders on account of seigniorage, are not, if such ‘losses’ are incurred. Surely, shareholders want to protect those dividend flows?
I don’t buy this.
First, the SNB governance, strange though it is, has delivered behaviour over the medium term that is – so far as our imprecise macro-finance toolkit could tell – reasonably sound up to now. If that policy was distorted by concern about short-term dividends from seigniorage, then Switzerland would have been a high inflation, or even a hyper-inflationary country.
If anything, one might wonder at the extra influence wealthy private individuals might have via their stereotypical concern for ‘sound money’ [stereotypical, though contradictory, since the rich are normally well indexed] and antipathy for public intervention to counter the business cycle.
As for the influence of ‘The Cantons’, I don’t see why they should behave differently from traditional finance minstry owners. They are, constitutionally, the units from which taxation and spending powers derive, some of which are ‘delegated’ to Federal authorities.
And both the Cantons and private shareholders are restrained by the Swiss constitution itself, which constrains the SNB to pursue macroeconomic policies in the wider public interest.
To the extent that any discretion to warp SNB policies to ends that would not be achievable in normal central banks exists, I suspect that this is limited by the guess that if this institution was seen to be broken, it would be fixed constitutionally. Ie although it’s privately owned, there are little rents extracted for fear of provoking full nationalisation.
This said, private ownership of the SNB itself is surely anachronistic. Even if it’s influence is undetectable, just the perception that SNB policy might be hijacked by private interests are damaging. Surely time for a change.