Thomas Jordan: The Swiss National Bank's monetary policy and the
Swiss financial centre
Speech by Mr Thomas Jordan, Chairman of the Governing Board of the Swiss National
Bank, at the first meeting of the "Rencontres économiques de Genève", organized by
Fondation Genève Place Financière, Institut National Genevois, Investment Strategists
Association of Geneva, Geneva, 3 November 2015.
* * *
The speaker would like to thank Samuel Reynard and Rina Rosenblatt for their valuable support in preparing this
speech, and Katrin Assenmacher, Petra Gerlach and Rita Kobel for their helpful comments.
Introduction
It is a great pleasure for me to be here with you tonight in Geneva, a key pillar of the Swiss
financial sector. I also feel very honoured to be addressing you at the very first meeting of the
"Rencontres économiques de Genève". Indeed, the financial centre of Geneva is also
important from an international point of view. Its roots as a financial centre go back several
hundred years. In the early 18th century, the minute Republic of Geneva was one of six
major international financial centres, together with London, Paris, Amsterdam, Frankfurt and
Brussels. It owed its ascent to its cosmopolitanism. Several factors bear witness to this,
including the city's political neutrality and the fact that it welcomed protestant Huguenots who
had been persecuted in France. In the 18th century, close personal relationships were
established with the leading Parisian banks and the French court. In this way, Geneva
bankers were eventually among the main financiers of France. Jacques Necker, who had
been born in Geneva, was Minister of Finance under Louis XVI. After the French Revolution,
Geneva began to evolve into an important wealth management centre.1 In 1857, the first
Swiss stock market was founded in Geneva, before those in Zurich and Basel. The Geneva
stock market soon ranked fifth among European stock markets. Geneva remains one of the
major world financial centres today, particularly when it comes to private wealth
management.2
The financial sector in Geneva is an engine for the regional economy. In 2014, around
120 banks were based in Geneva. The financial sector creates a significant part of cantonal
value added and is a major employer.3
A strong financial sector, such as that in Geneva, makes a substantial contribution to
economic growth. It is therefore a crucial foundation, both for the regional economy and for
the Swiss economy as a whole. A robust financial sector is also very important for the Swiss
National Bank (SNB). The SNB interacts closely with the financial sector, and in particular
with the banking sector. I will talk about this later.
In my presentation, I will begin by explaining how the SNB and the financial sector are
interlinked. Then I will discuss the importance of an independent monetary policy in providing
stability as a long-term asset. However, in the short term, this long-term stability may
generate costs. I will then explain the SNB's current monetary policy and our reaction to
international developments. Finally, I will place the challenges that face us within a long-term
perspective.
Close interactions between the SNB and the Swiss financial sector
As an independent central bank, the SNB's mandate is to ensure price stability, while taking
due account of economic developments in Switzerland. It also has the task of contributing to
the stability of the financial system.
Banks, and the financial sector in general, contribute to the prosperity of our nation. On the
one hand, financial intermediation, wealth management and the various other financial
services provided by the financial sector are vital for an efficient economic environment. On
the other hand, the same activities create employment and value added, both directly and
indirectly. They are thus a source of economic prosperity.
The activities and goals of the SNB and the financial sector, apparently unrelated, are
however closely interlinked. The connections between the two were particularly apparent
during the recent financial and European debt crises. The SNB and the financial sector need
one another, as I will now show (cf. chart 1).
Banks need the SNB to conduct their various business activities, since the SNB acts as the
bank of banks. First, banks use the currency issued by the SNB as the numeraire in their
daily business. The credibility that the SNB has acquired over decades guarantees a stable
currency. This constitutes a perfect numeraire for banking activities. Second, the money
issued by the SNB, i.e. deposits that banks hold at the SNB and banknotes, is the Swiss
legal tender. It represents the anchor of the Swiss monetary system. If their customers wish,
banks exchange the money in customers' deposits against banknotes issued by the SNB.
Third, banks use the SNB's infrastructure, the Swiss Interbank Clearing system, for their
payment transactions. And fourth, the SNB provides liquidity to the banks, which they hold in
the form of deposit accounts or banknotes. In this way, the SNB ensures that the payment
system functions well and the demand for banknotes can be satisfied. By fulfilling its
mandate, the SNB thus provides fundamental services for the operations of banks and the
financial sector.
At the same time, the SNB needs the financial sector in order to fulfil its mandate. The
financial sector transmits the SNB's monetary policy actions to the Swiss economy through
its lending and borrowing decisions. Based on short-term money market conditions set by the
SNB, banks adjust the cost of borrowing for households and firms. Through their core
business, banks thus contribute to monetary policy transmission.
More generally, the financial sector transmits changes in the short-term policy interest rate to
other assets of different maturities. The resulting change in overall yields on Swiss assets
influences their relative attractiveness. This also affects Swiss franc exchange rates. Both
exchange rates and interest rates then determine monetary conditions in Switzerland, and
thus eventually output and inflation.
Although short-term interest rates are the main monetary policy instrument, the SNB has, in
recent years, been using exchange rate interventions as an additional tool. Due to the
safehaven status of the Swiss franc, the SNB has been active on the foreign exchange market.
We are also willing to intervene, as required, as part of our current monetary policy. Once
again, banks have been at the heart of monetary policy transmission. They have acted as
intermediaries of the SNB's foreign exchange interventions.4
With depressed international demand and a strong Swiss franc weighing on GDP, credit
availability has been crucial for the domestic economy. Low interest rates and ample liquidity
provision by the SNB have facilitated banks' intermediation activities. In short, the SNB's
policy has supported the banks' provision of credit to the real economy. The banking sector,
which is traditionally procyclical, has in turn benefited from improved economic conditions.
In order to fulfil our mandate we need a stable banking system. Financial stability is key, both
for the SNB and the whole economy. Without it, Switzerland as a financial centre and a
leader in wealth management would lose its attractiveness. Moreover, only a stable and
healthy banking sector can transmit the SNB's monetary policy to domestic monetary
conditions effectively. Overall, our economy could not prosper with impaired financial
intermediation.
That is why, in addition to being responsible for monetary policy, the SNB also has the task
of contributing to the stability of the financial system. The financial system itself should not be
a source of excessive risk for the rest of the economy. Failures resulting from excessive
risktaking can affect the whole financial system and prove extremely costly for the economy.
Stringent capital and liquidity requirements and self-regulation by the banking industry are
essential for enhancing financial stability.
There is also a broad consensus that macroprudential tools are required to address systemic
risk. We therefore analyse sources of risk to the financial system continuously, and identify
areas where action is needed.5 In addition, we help design and implement a regulatory
framework for the financial sector. We also oversee systemically important financial market
infrastructures.
Our aim is to increase the resilience of the financial sector by mitigating systemic risk. To
ensure this, we work closely with the Financial Market Supervisory Authority (FINMA), the
Federal Department of Finance and various international standard-setting bodies. The
adjustment of the "too big to fail" regulations approved by the Federal Council on 21 October
is an example of such cooperation. The new capital requirements will strengthen the
resilience of the Swiss banking system considerably. In a crisis there should not be any need
for systemically important banks to be bailed out by the state.
Monetary policy and macroprudential measures are closely linked. Sometimes monetary
policy demands a low policy interest rate in order to ensure price stability and support
economic activity, especially if the Swiss franc is overvalued. However, low interest rates can
translate into a build-up of imbalances on the mortgage and real estate markets. To increase
banks' resilience to the correction of these imbalances, macroprudential measures are
needed. The countercyclical capital buffer, for which the SNB may propose changes, is one
such measure.
Stability: a long-term asset with potential short-term costs
Ladies and Gentlemen, price stability and financial stability are indeed important long-term
assets for the financial sector and the entire economy. As an independent central bank with
its own currency, the SNB has been successful in providing long-term stability. Switzerland
has had significantly lower and more stable inflation rates than most other countries
(cf. chart 2). Our long history of price stability, a reliable political and legal environment, and
efficient institutions have resulted in an interest rate bonus. This is more pronounced for the
long-term part of the yield curve than for the short-term part. Ten-year government bond
yields have typically been lower in Switzerland than in Europe and the US.
In addition, having its own currency plays an important role in Switzerland's attractiveness. It
makes it possible for us to conduct our own monetary policy, with monetary conditions
adapted to the Swiss economy. It enables us to create long-term stability. And this in turn is
an asset for the whole economy and the financial sector in particular.
Due to Switzerland's stability, domestic and foreign investors find it attractive to invest or
have their wealth managed here. Of course, high-quality services provided by banks are an
additional factor making Switzerland attractive for investors. Price stability is also an
advantage. It makes the future more predictable and decreases the uncertainty of
investments. Customers of Swiss banks are not investing exclusively in Swiss assets or
Swiss francs. But part of the reason why they want to have their wealth managed here is
because of the stable political, economic and monetary conditions.
These stable conditions have supported the development of a strong and globally attractive
financial sector. Swiss banks are global leaders in managing cross-border assets and wealth
management. At the end of 2014, roughly half of the assets under management at banks in
Switzerland were foreign customer assets.6 The Swiss franc plays an important role in the
international financial system. Measured by foreign exchange turnover, the Swiss franc was
the sixth most important currency worldwide in 2013.7
The banking sector is also an important part of the Swiss economy. The Swiss banking
sector currently generates about 6% of GDP (cf. chart 3). With close to 120,000 employees8
in 2014, the banking sector is a major employer. The size of the banking sector, as
measured by the ratio of total assets to GDP, is high by international standards.9
Macroeconomic stability is thus a long-term asset for Switzerland. Low interest rates make
borrowing conditions for firms and households cheaper. This leads to higher investment and
supports the real sector. Macroeconomic stability is not only a precondition for sustained
economic growth, but has helped to build a stable and robust financial sector. It is the
longterm stability, combined with high quality work, which has helped create 'brand Switzerland'.
The Swiss financial sector has not only benefited from this brand but also contributed to its
international propagation.
However, long-term stability can sometimes be associated with short-term costs. As a small
open economy, Switzerland can be subject to short-term exchange rate volatility resulting
from the safe-haven status of its currency. The costs of this volatility are substantial at times.
Strong fluctuations in the Swiss franc have had major effects on the Swiss economy in the
past. For example, in the early 1990s, during the European Monetary System crisis, the
Swiss franc appreciated strongly against European currencies. The entire economy had to
adjust to a strong currency.
More recently, Switzerland has been particularly heavily affected by international
disturbances since the beginning of the financial crisis. The Swiss economy and its inflation
outlook have been subject to strong downside pressures, due to massive exchange rate
appreciation, weak international demand, and volatile financial markets. The Swiss franc
remains significantly overvalued.
The financial sector has also suffered from the effects of the recent crisis on Switzerland and
its currency. For instance, the current account shows that exports of banking commissions
have diminished markedly since the financial crisis. Indeed, the entire Swiss economy has
had to adapt to new international monetary conditions. At the SNB we have geared monetary
policy towards this new and difficult situation.
Monetary policy during the financial and European debt crises
The Swiss economy is currently being hit by external shocks. In such a context, the SNB
aims to dampen short-term costs without jeopardising the long-term goals of monetary policy.
The challenge for monetary policy in recent years has been to react to sudden developments
in international markets and geopolitical risks that have endangered Switzerland's real
economy and price stability in the medium term. The goal has been to steer policy responses
in a way that reduces short-term costs while preserving the stability achieved over the past
four decades of independent monetary policy. In order to meet these challenges, we have
had to use unconventional instruments for the implementation of monetary policy.
Our current monetary policy is based on two pillars. These are designed to dampen upward
pressure on the Swiss franc. The first pillar is the negative interest rate on sight deposits at
the SNB. The second pillar is our willingness to intervene on the foreign exchange market as
required. The SNB monitors developments in the foreign exchange market and their potential
effects on the Swiss economy very carefully.
At a global level, interest rates have been on a downward trend for more than two decades
(cf. chart 4). This development reflects, on the one hand, an overall decrease in inflation. On
the other, quantitative easing programmes implemented by various central banks in
response to the financial crisis have brought global interest rates close to zero. In an
interconnected financial world, it was impossible for Swiss interest rates to diverge from this
strong and persistent downward trend. Very low global nominal yields have reduced the
interest rate differential between foreign and Swiss interest rates.
By the end of last year, the spread between short-term interest rates on assets denominated
in euros and those denominated in Swiss francs had almost vanished. As I mentioned
earlier, interest rates have traditionally been lower in Switzerland than abroad. However,
during the financial crisis, foreign interest rates decreased to a greater extent than their
Swiss counterparts. With both foreign and Swiss interest rates close to zero, the spread
between euro and Swiss interest rates disappeared.
This created upward pressure on the Swiss franc. A narrower interest rate differential acts
like a bonus on Swiss franc holdings. The appetite for Swiss franc assets increased among
both foreign and Swiss investors. In the context of a financial and debt crisis, and in a world
of high geopolitical risks, a narrower interest rate differential makes the Swiss franc
particularly attractive for investors.
At the same time it is important to recognise that the current situation cannot be compared to
that of 2011. At that time, the Swiss franc was appreciating strongly against all currencies,
and, as a response, we introduced the minimum exchange rate. Now the situation is
characterised by a general weakness in the euro. Thus, at the end of 2014 and the beginning
of 2015, the euro lost substantial value, not just against the Swiss franc but also against
other important currencies such as the US dollar and the pound sterling (cf. chart 5).
In this new environment, we introduced negative interest rates to partially restore the
traditional differential between interest rates on euro and Swiss franc assets. Monetary
conditions were adjusted, as the monetary policy stance relative to that abroad had changed.
With short-term interest rates in the euro area at zero, negative Swiss interest rates helped
restore, at least partially, the pre-crisis interest rate differential. The decrease in Swiss
interest rates makes the holding of Swiss franc assets more expensive relative to other
currencies. This makes the Swiss franc relatively less attractive and counteracts the upward
pressure.
Introducing negative interest rates on sight deposits at the SNB is designed to allow interest
rates to take on an important role in monetary policy transmission again. Since 2000, the
short-term interest rate at which banks borrow and lend liquidity to each other has been the
SNB's main policy instrument for fulfilling its mandate of price stability. Negative interest
rates on sight deposits at the SNB affect interest rates of different maturities and the
economy as a whole through financial markets and the banking sector. This change in
overall yields on Swiss assets influences their attractiveness and thus exchange rates
against the Swiss franc.
The current policy of negative interest rates differs from the exceptional measures taken by
Swiss authorities in the late 1970s. At that time, negative rates were levied directly on
deposits in Swiss francs made by non-residents. Moreover, private persons or companies
residing in Switzerland were not allowed to sell domestic securities to non-residents. These
measures and restrictions - directly targeted at foreign customers - were, however, not very
effective since too many loopholes existed. Moreover, they created serious distortions and
had a negative impact on Switzerland's position as a financial centre and on its international
wealth management. Our current negative interest rates are more effective since they impact
overall macroeconomic conditions without loopholes and because they do not interfere with
trading freedom.
Although negative interest rates may be painful for banks and investors in general, they are
important measures for guaranteeing long-term macroeconomic stability under the current
circumstances. They make the holding of Swiss assets relatively more expensive. In this
way, they dampen the upward pressure on the Swiss franc and reduce the adjustment costs
for the Swiss economy. They thereby also support the financial sector. Negative rates are
thus a fundamental pillar of our current monetary policy. It is, however, also important to
recognise that negative interest rates are a response to the current international environment
and do not represent a long-term equilibrium.
Challenges ahead and long-term perspective
Ladies and gentlemen, I am coming to my final comments. Looking ahead, a robust and
wellfunctioning financial sector will remain of utmost importance to Switzerland. It makes a major
contribution to national GDP and provides vital financial services to the economy. These
functions are also required during business cycle troughs and at times of exceptional policy
measures. It is therefore important that banks remain resilient in difficult circumstances.
It is crucial that the Swiss financial sector adapts to the new environment and meets the
current challenges. The macroeconomic cyclical headwinds in the recent crisis were followed
by changes in the regulatory environment such as Basel III, the 'too big to fail' measures for
systemically important banks and the countercyclical capital buffer. These measures are
necessary to increase resilience. Banks also need to adjust to changing customer needs and
to a more competitive and global environment.10 This process of adaptation is challenging for
the financial sector, but will be beneficial in the long term.
The SNB also faces challenges. The current significant overvaluation of the Swiss franc
implies macroeconomic costs in terms of lower growth and employment as well as negative
inflation. While these costs must be set against the long-term benefits of macroeconomic
stability, they engender painful adjustment processes in the economy. Our current monetary
policy therefore reflects this difficult economic environment. Its two pillars, i.e. negative
interest rates and foreign exchange interventions as required, serve to reduce the significant
overvaluation of the Swiss franc and to guarantee price stability in the long run.
To conclude, I would again like to emphasise that in order to achieve the goals of the
financial sector and the SNB, we both need one another. On the one hand, the SNB acts as
the bank of banks, providing a stable currency, liquidity and a payment system on which
banks rely. By ensuring price stability and contributing to financial stability, the SNB helps
create the conditions in which the financial sector can flourish. Banks benefit from a strong
economy and long-term macroeconomic stability. On the other hand, the financial sector acts
as an intermediary between monetary policy decisions and the overall economy. It
contributes to an efficient economic system and to the prosperity of our country. The SNB
thus needs a competitive and stable banking system to fulfil its mandate.
The long-term goals of the SNB and the banking sector usually go hand-in-hand. Monetary
stability and a strong financial sector are in our common interest. They represent long-term
assets for the whole economy and for Switzerland as a country.
Ladies and Gentlemen, thank you very much for your attention.
Charts
Chart 1
Source: SNB
Chart 2
Chart 3
Chart 4
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BIS central bankers' speeches
Chart 5
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BIS central bankers' speeches