Philipp Hildebrand: The new investment policy of the Swiss National Bank
Introductory remarks by Mr Philipp Hildebrand, Member of the Governing Board of the Swiss National
Bank, at the half-yearly media news conference, Geneva, 17 June 2004.
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1. The evolution of the new investment policy
The new National Bank Act has been in force since 1 May 2004. The management of monetary
reserves is explicitly mentioned in the NBA as part of the Swiss National Bank's mandate for the first
time. The management of these reserves is subject to the primacy of monetary policy and
implemented according to the criteria of liquidity, security and return. In so doing, the National Bank
must guarantee professional, modern asset management and risk management.
Until the mid-1990s, the National Bank only had limited possibilities for managing its assets. Monetary
reserves were mainly held in the form of gold and foreign-currency government bonds with a maturity
of less than one year. Accounting for approximately 80%, the US dollar was the main reserve
currency. An easing of investment regulations came about in 1997 when the legally prescribed
maximum term for bonds was repealed and repo and gold lending business was introduced. At the
same time, the National Bank began to diversify currency risks on its investments to a greater degree
and gradually reduced the US dollar portion. The new Act takes this a step further and leaves the
permissible investment universe completely open.
2. Implementation of the investment policy
Our investment policy has not fundamentally changed with the new Act. The monetary reserves
continue to constitute core assets for monetary policy. They allow the National Bank to exert an
influence on the Swiss franc exchange rate in exceptional situations and are available as an
internationally accepted means of payment in a crisis situation. This presupposes a minimum degree
of liquidity of these assets. Moreover, monetary reserves enhance the credibility of monetary policy
and foster confidence in the Swiss franc. The security of these investments and growth of the
monetary reserves in step with the development of the Swiss economy is an important consideration in
this context. This is why monetary reserves ought to provide an adequate return, while taking into
account the monetary policy restrictions. It is the aim of our investment policy to strike an optimal
balance between the criteria of liquidity, security, and return.
We assess and regularly review the National Bank's liquidity requirements - i.e. its need for easily
realisable and hence easily accessible assets - on the basis of our experience and taking due account
of the current situation. Given the Bank's large portfolio holdings in US dollar and euro government
bonds, the liquidity requirements are currently more than met. This creates a certain amount of leeway
for investing in instruments that are less liquid but generate a higher return.
The investment criterion "security" must be seen in the context of the monetary reserves as a whole.
The National Bank incurs risks on its investments that cannot be hedged based on monetary policy
concerns. Losses from gold and foreign currencies in particular can be significant. An adequate
volume of reserves allows the National Bank to bear these risks, especially since such fluctuating
values tend to correct themselves over the long term. Greater diversification of both the currencies and
the investment instruments can bring about the necessary growth of monetary reserves. Diversification
effects permit investments in higher-yielding and - from an individual perspective - riskier investments
such as equities and corporate bonds without substantially increasing the overall risk.
The return potential of monetary reserves depends on the liquidity and security requirements of the
investments in terms of monetary policy considerations. Pursuing an efficient investment policy for the
National Bank means achieving a return potential that is as high as possible within the existing
restrictions. Under the new Act, the National Bank will pursue a broader diversification of its
investments and, in particular, also invest in equities and corporate bonds.
Because of the National Bank's special position as a central bank, the exposure to equities and
corporate bonds is subject to some specific considerations: first, a conflict of interest may arise
between monetary policy and investment policy. For instance, interest rate hikes by the National Bank
can have a negative impact on a company's profits. Second, owing to its responsibilities in the area of
system stability, the National Bank has insider information in the financial sector. And third, the
National Bank's investments in equities and corporate bonds can have a noticeable impact on risk
premiums on the capital markets, especially in illiquid markets.
These considerations primarily concern equities and bonds issued by Swiss firms. They are therefore
excluded from the National Bank's investment universe. Holdings of foreign equities and corporate
bonds do not present a problem in this regard.
A passive management strategy based on indices with liquid, listed securities is followed for equities
portfolios. Consequently, we do not engage in stock picking or sector picking. As a rule, we do not
exercise our voting right at annual general meetings. In the case of corporate bonds, attention is given
to broad diversification from issuer-specific risk. Despite active management, therefore, the corporate
bond portfolio cannot deviate from the market index to any considerable degree.
3. The new investment process: different functions largely separated
The market and credit risks of individual transactions increase as the investment spectrum becomes
broader. Operational risks, including conflicts of interest and the problem of insider know-how, also
gain in importance as asset management strategy becomes more active. We have therefore evaluated
the investment process with a view to the requirements of good governance. Important changes in this
process include the following: investment and monetary policy decisions have been largely uncoupled,
the definition and implementation of strategy have been segregated, controlling has been made an
autonomous function, and the National Bank's Bank Council has been tasked with integral monitoring
of the investment and risk processes.
The Governing Board of the National Bank decides on the medium-term investment strategy for the
monetary reserves. Taking into consideration the criteria of security and liquidity, an appropriate
risk/return profile is targeted. In addition to the strategic allocation to the individual currencies and
investment categories, the Governing Board defines the permissible range for implementation.
Department III implements the strategy. Within the defined bandwidths, an internal investment
committee decides on positions which deviate from the strategy.
In the risk controlling process, compliance with the strategy guidelines and the operative limits as well
as the quality of the debtor categories are monitored. Performance is also measured. With the
expansion of the investment spectrum to include issuers with lower credit ratings, risk monitoring is
gaining in importance. The Governing Board and the Bank Council's Risk Committee are regularly
informed about the results of the risk controlling process. The Bank Council's Risk Committee
assesses risk control and also oversees adherence to the principles of the investment process.
4. Transparency: a further element of good governance
The National Bank has an accountability and information obligation not only to the bank authorities but
also to the public. Since the monetary reserves ultimately constitute national assets, this obligation
also applies to the investment policy. The accountability obligation includes regular reporting on our
investment activities.
The National Bank already provides information on the structure of its assets in its Annual Report,
including details on currency allocation, holdings of individual investment categories, and on the major
risk and return indicators. The Investment Policy Guidelines of the Swiss National Bank, which have
just been published for the first time, contain additional information on the investment and risk control
process and on the investment universe. They define the principles of investment policy and the
investment categories underlying the strategy, and describe the areas of responsibility. The
quantitative information already published in the Annual Report will also be published on a quarterly
basis in the future, thus providing the public with even more comprehensive information on our
investment activities.
5. Conclusion
The management of the monetary reserves has gained in importance. The National Bank Act requires
the National Bank to manage its monetary reserves professionally, subject to the primacy of monetary
policy. After the new Act entered into force, we began to further optimise the investment structure. The
increased leeway for investment is used for greater diversification. The structure of the National
Bank's investments is thus becoming more efficient overall, yet without compromising monetary policy
requirements in terms of the liquidity and security of these investments. We will also take advantage of
the extended legal scope with regard to the free assets, i.e. the proceeds from the sale of gold
reserves no longer required.
Investment Policy Guidelines of the Swiss National Bank (235 kb)