Swiss National Bank, or Swiss Private Seigniorage Machine?

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.


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5 Responses to Swiss National Bank, or Swiss Private Seigniorage Machine?

  1. maruku says:

    It’s a fairly strict definition of ‘modern’ central banks that leaves out Switzerland, Italy, and Japan..

  2. nicholasshaxson says:

    Another way they clean up (!) is by a special dispensation for the world’s criminals, via (e.g.) the 1,000 Franc note. I lived in Switzerland for 5 years and never saw one. Yet according to one recent estimate, they make up 60 percent of Swiss banknotes by value. Nice work if you can get it.

  3. MB says:

    according to the Federal Act on the Swiss National Bank (Art. 31 Distribution of profits):
    1 A dividend not exceeding six percent of the share capital shall be paid from the net profit.
    2 One-third of any net profit remaining after the distribution of a dividend shall accrue to the Confederation and two-thirds to the cantons. The Department and the National Bank shall, for a specified period of time, agree on the amount of the annual profit distribution with the aim of smoothing these distributions in the medium term. The cantons shall be informed in advance.
    3 The net profit accruing to the cantons shall be distributed in proportion to their resident population. The Federal Council shall regulate the details after having heard the cantons.

    the private shareholders are being exploited the dividend is extremely unlikely to ever be increased

    a bit different is the case of Belgium, but result is the same: private shareholders have been effectively expropriated

  4. KPMG audits the SNB. I wonder how they accounted for the SNB’s balance sheet in the past and what “fair value” they were assigning to the EUR-denominated assets. It can be tricky when the audited firm is at the same time the one that can change the market value of its main asset.

  5. Tim Young says:

    You are giving away your Anglo Saxon economist’s attitude here, Tony. If I am not misrepresenting you, your argument is that concern about SNB profits could not have motivated the decision to abandon the peg, because if seigniorage was a key concern, the SNB would be more inflationist because this would maximise seigniorage. I don’t think the Swiss (or German) culture works like that. They value stability. Inflation is the priority concern. But with price stability maintained, the SNB still manages to produce a steady flow of seigniorage profit, which the Swiss, especially the smaller cantons come to rely on. So seigniorage is perhaps the second priority.

    I repeat here a story I told on MainlyMacro, which relates to my previous comments on your blog about the BoE’s failure to anticipate the financial crisis, which to me was obvious, and about real diversity of thinking at the BoE. When worked in the BoE’s market operations area, I attended a monetary policy course at the SNB’s study centre in Gerzensee, shortly after the LTCM crisis. I was impressed by the straightforwardness and objectivity of the SNB’s few economists compared with the army of them at the BoE. By comparison with the Swiss, our economists seemed to spend much time on sophistry, both to create an impression of academic “rigour”, and to provide the monetary policymakers with intellectual arguments to do what they wanted to do anyway. I was left in no doubt that, when there was an difficult decision to make, the Swiss would make it, while the BoE or Fed would prevaricate with lots of clever excuses. That experience made me an admirer of the SNB, and, unfortunately for the SNB, like many people a holder and buyer-on-dips of the CHF. Now Anglo-Saxon economists may sneer at the likes of the SNB or Buba as prisoners of their own rectitude, but I think that their attitude is part of a wider culture of “doing the job right” that underpins their success as exporters despite their higher prices. I wish we in Britain were following their approach to economic management, rather than looking to the US.

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