Speech
Embargo
30 April 2021, 10.00 am
SNB distributions - not a matter of course even when profits
are high
113th Ordinary General Meeting of Shareholders
of the Swiss National Bank
Thomas J. Jordan
Chairman of the Governing Board
Swiss National Bank
Zurich, 30 April 2021
© Swiss National Bank (speech given in German)
Madam President of the Bank Council
Dear Shareholders
Dear Guests
A warm welcome to you all to our Annual General Meeting. The pandemic has brought great
suffering for many people. At the same time, coronavirus has posed unexpected challenges for
the economy and politics in Switzerland. It has also placed a heavy burden on the finances of
many households and companies, and on the public sector as well. Our sympathy goes to all
those who have been affected by the disease or have lost people dear to them. From a
professional perspective, our efforts are focused on the contribution that the Swiss National
Bank can make within its mandate towards reducing the economic impact of the pandemic on
our country.
In the past months, we have used every means at our disposal to perform our mandate as well
as we possibly can, even in adverse circumstances. Our policy is aimed at helping the people
in Switzerland to get through these difficult times. By curbing the strong upward pressure on
the Swiss franc through extensive foreign exchange market interventions, and by providing
financing for COVID-19 loans on favourable terms via our new SNB COVID-19 refinancing
facility, we have made an important contribution to stabilising the Swiss economy in this
once-in-a-century crisis.
Nevertheless, we are still frequently confronted with demands that the SNB should do more.
And what is meant by 'more' is above all increased distributions. I would therefore like to use
my speech today to discuss the SNB's profit distributions.
Who owns the SNB's profits and how are they generated?
The profits generated by the SNB and the distributions it makes were the subject of discussion
in Switzerland long before the coronavirus pandemic broke out. There was already heated
debate on this more than 100 years ago, as the rules governing the distribution of profits were
one of the most contentious issues in the run-up to the creation of the SNB. The cantonal
banks had to cede the right to issue banknotes to the newly established central bank, and the
cantons wanted compensation in return. The fundamental question of how the profits
generated by the SNB were to be distributed already had to be addressed back then. The
following principles were set: the profits should first be used to build up the SNB's equity
capital and pay a modest dividend to shareholders; and any remaining profit would go to the
public sector, with at least two-thirds accruing to the cantons. While this still essentially
applies today, the modalities regarding distributions and building up equity capital have been
adjusted over time. I will look at the current solution in more detail presently.
The reason why the dividend payments to shareholders are limited, and why the profit
distributions accrue to the confederation and the cantons, is that the SNB's profits are not the
result of how its share capital is used. Instead they stem much more from its monopoly on
issuing legal tender. The SNB generally incurs only minor costs in issuing banknotes and
handling sight deposits, since manufacturing notes costs only a fraction of their nominal value
and sight deposits ordinarily do not bear interest. Conversely, the SNB for its part mostly does
achieve a positive return on the assets it receives in exchange for the banknotes and sight
deposits. The SNB thus generates profits on average over the long term. However, against the
backdrop of very low yields and high upward pressure on the Swiss franc, it cannot be taken
for granted that the SNB will achieve a profit. I will come back to this point in due course.
Generating profits is in any case not our aim. The Federal Constitution and the National Bank
Act are quite clear in this respect. They state that we must as an independent central bank
pursue a monetary policy that serves the overall interests of the country. Conducting a
monetary policy that ensures price stability while taking due account of economic
developments is therefore our goal, rather than generating a profit or making it possible to pay
a distribution. The SNB's monetary policy mandate always takes precedence. And there can
also be times when we have to accept losses to perform this mandate.
The SNB's total assets have multiplied since the outbreak of the financial crisis in 2008
(Slide 1). With this larger balance sheet, the earnings potential has increased in absolute
terms, but so too has the risk of loss. In fact, given that a large part of the balance sheet
growth is attributable to foreign exchange market interventions, the increase in risk exposure
has been particularly strong. Let me briefly explain why. When expressed in Swiss franc
terms, our foreign currency investments are subject to pronounced fluctuations in value. Such
fluctuations can result not just from changes in share and bond prices in local currency terms,
but also from exchange-rate movements. Because our transparent accounting approach books
assets at their market value, any valuation changes are directly reflected in the income
statement.
To illustrate what this means in concrete terms given the current size of our balance sheet, I
would like to give two examples. First, assuming nothing else changes, a 1% appreciation of
the Swiss franc against the major currencies would immediately lead to a loss of CHF 10
billion. Second, a 5% rally on the equity markets would result in a profit of CHF 10 billion.
Even small movements on the financial and foreign exchange markets can thus bring about a
marked change in the SNB's annual result, and this on the upside and downside alike.
However, at neither of these points in time would a loss or profit actually be realised. A profit
is only realised when we sell assets in the amount of the profit and convert the proceeds into
Swiss francs. Book gains and losses therefore have a strong impact on the SNB's annual
result.
Given the volatile developments on the international financial markets, substantial gains can
be followed by substantial losses (Slide 2). With the greater size of our balance sheet, the
range of fluctuations in our annual results has also increased. Every annual financial statement
and the latest equity capital position must therefore always be regarded as simply a snapshot
of the SNB's financial situation at that moment in time.
Finely balanced approach to distributions
Allow me to now explain in more detail how the SNB goes about distributing the profits it
generates. The law at present makes two key stipulations in this respect: first, that building
provisions - i.e. equity capital - is to take precedence over any distributions; and second, that
distributions are to be smoothed over time.
The SNB builds up equity capital from retained earnings. To this end, we make an allocation
to the provisions for currency reserves every year, irrespective of whether we record a profit
or loss. The amount of this annual allocation to the provisions is based on a set rule. We
review this rule from time to time, and then usually apply it unchanged for five years. The
rule is based on the growth in equity capital regarded as being necessary over that period. The
amount of the provisions for currency reserves on a given balance sheet date therefore
corresponds to the amount of equity the SNB seeks to have at that point in time. By applying
a rule-based approach, the SNB also transparently communicates to the general public how
much of its earnings are being used to build up equity capital. This is important given that the
allocation to the provisions reduces the potential for distributions.
How much equity capital does the SNB need over the course of time? It is difficult to define
the ideal amount of equity for a central bank. However, the following basic principle applies:
the larger the balance sheet and the higher the proportion of foreign currencies, the greater the
risks and the more equity capital is required. In the current circumstances, it is clear which
direction we have to take: we have to continue to build up capital. Since the outbreak of the
financial crisis nearly 15 years ago, the provisions have no longer kept pace with the marked
increase in our balance sheet (Slide 3). With a view to ensuring that the ratio between the
desired level of equity capital and the currency reserves can be increased again somewhat, the
SNB recently decided to adjust its rule on allocations to the provisions for the coming years.
For the financial years through to 2025, the annual allocation to the provisions will be at least
10% of the preceding year's provisions, compared with 8% per annum previously. A
persistent erosion of the SNB's equity base would undermine the credibility of our institution
over the long term and would fuel doubts regarding our ability to act.1 Ongoing allocations to
the provisions are therefore essential for the SNB.
The amount remaining after the allocation to provisions is referred to as the distributable
profit. However, since a profit in any given year can be followed by a loss the next, the SNB
does not pay out all of the distributable profit at once. Instead we seek to smooth the
distributions to ensure that they are less dependent on variable annual results. This smoothing
was introduced to facilitate better planning for the Confederation and the cantons. However,
maintaining distributions at a steady level is also of pivotal importance for the SNB. The
reason for this is an underlying asymmetry: the SNB can distribute profits, but it cannot
reclaim any money if it makes a loss. If the SNB were to always distribute its profits in their
entirety, its equity capital would automatically fall below the targeted level in the event of a
loss. The SNB would then have to operate with too little equity.
We implement this desired smoothing by creating a profit/loss carry forward, known as the
distribution reserve. In 'good years', any undistributed profit is transferred to this reserve. In
'bad years', i.e. when there is a small profit or a loss, the reserve can then be used to make up
the shortfall in the allocation to the provisions, as well as for the payment of the dividend and
the distribution to the Confederation and the cantons.
The distribution reserve contains the amount of equity capital that exceeds the provisions for
currency reserves - in other words, the portion deemed to be distributable. If the equity capital
falls below the level of the provisions as a result of a loss, the distribution reserve is negative.
The distributions will then be stopped until the equity capital is sufficiently stocked again
from future earnings. This clearly demonstrates that the robustness of the balance sheet takes
precedence over profit distributions at all times. A well-stocked distribution reserve also helps
smooth the distributions, serving as a buffer and ensuring that the Confederation and the
cantons are seldom faced with years in which we cannot make any distribution.
Ladies and gentlemen, allow me to illustrate the elements I have just described and the logic
behind our profit appropriation using this table (Slide 4). In 2020, the SNB recorded a profit
of nearly CHF 21 billion. We first made an allocation of around CHF 8 billion to the
provisions for currency reserves. We did so because strengthening the balance sheet takes
precedence over the distribution of profits, as I mentioned before. The remaining amount of
the annual result together with the available distribution reserve (i.e. the profit carried forward
from the 2019 financial year) gives a net profit for 2020 of just under CHF 97 billion. This
amount is then used for the payment of a dividend and the distribution to the Confederation
and the cantons. The level of the distribution is determined by the new agreement - which I
will come to in due course - and amounts to CHF 6 billion for the 2020 financial year. The
not quite CHF 91 billion remaining forms the profit carried forward to the next year, in other
words the new distribution reserve. This is how we implement both statutory requirements,
namely the precedence of building provisions over making distributions, and the smoothing of
distribution payments.
New agreement on the SNB's distribution of profits
This brings me to the new profit distribution agreement concluded between the Federal
Department of Finance (FDF) and the SNB at the beginning of this year. The new agreement
governs the amount of the annual distributions to the Confederation and cantons for the
financial years 2020 to 2025. It is based on the tried-and-tested principles of the previous
agreements, while also taking into account the more recent developments.
This new agreement takes into account not only the marked expansion of the SNB's balance
sheet and the associated increase in earnings potential, but also the pronounced growth in the
distribution reserve stemming from the extraordinary investment results in recent years (Slide
5). These two developments have made it possible to increase the maximum annual
distribution, and to already apply this to the 2020 financial year. The maximum annual
distribution is now CHF 6 billion, instead of CHF 2 billion and CHF 4 billion under the
previous agreements.2 The actual amount of the distribution depends on whether the net profit
exceeds certain thresholds (Slide 6). For the maximum distribution of CHF 6 billion to be
made, the net profit must be CHF 40 billion or higher.
Setting a maximum distribution of CHF 6 billion per year is based on carefully considered
earnings forecasts. These take into account the lower yields expected in the coming years.
Bonds make up about 80% of our foreign currency investments, and most of them are
government bonds. At present, around 50% of the bonds we hold have a negative yield to
maturity in local currency terms (Slide 7). Given that, owing to structural reasons, the general
level of interest rates is substantially lower than in the past, the vast majority of our
investments can therefore be expected to deliver only a very modest return going forward.
The development of share prices and exchange rates will therefore be determining factors
with regard to the profits in the coming years. Given that these are by their nature subject to
marked fluctuations, predicting the medium-term return on our assets is fraught with
particularly high uncertainty. The approach set out in the new profit distribution agreement
addresses this issue. Should the high earnings of recent years prove to be sustainable, the
Confederation and the cantons will participate in them. However, should the net profits
quickly dwindle, there will be an orderly reduction in the distributions based on the set
thresholds.
This brings me back to the demands for greater distributions that I mentioned at the start of
my speech. Ladies and gentlemen, the rise in the allocations to the provisions coupled with
the increase in the maximum profit distributions represent a balanced solution. On the one
hand, it contributes to the robustness of the SNB's balance sheet. On the other hand, barring
any financial market upheaval, it allows for substantial amounts to be distributed to the public
sector, in the best case totalling CHF 36 billion for the financial years 2020 to 2025. The
distributions have not been raised as a response to the coronavirus crisis or higher government
debt. Nevertheless, the increased amounts are likely to prove particularly useful for the
Confederation and the cantons at present, giving them greater latitude to support households
and companies in dealing with the current crisis.
Closing remarks
Ladies and gentlemen, I would like to remind anyone demanding 'more' from the SNB that
over the course of time, the SNB does actually distribute everything it can. If we do
temporarily retain profits, this is not at the cost of the public sector. However, it does enable
us to facilitate a more even spread of distributions to the Confederation and the cantons from
year to year, while also reducing the risk of the SNB being temporarily undercapitalised. The
SNB's long-standing practice with regard to distributing profits has proved its worth.
However, let me stress once again: the greatest contribution that the SNB can make for
society and the economy in our country is to carry out its statutory mandate. And we will
continue to do our utmost in this regard.
Thank you for your attention.
SNB distributions - not a matter of course
even when profits are high
113th Ordinary General Meeting of Shareholders of the Swiss National Bank
Thomas J. Jordan
Chairman of the Governing Board
Swiss National Bank
Zurich, 30 April 2021
Slide 1
Slide 2
Slide 3
Slide 4
SNB
Source(s):
Slide 5
Slide 6
In CHF billions
Distribution:
70
60
CHF 6 billion
50
40
CHF 5 billion
30
profit
profit
CHF 4 billion
20
Net
CHF 3 billion
Net
Slide 7
Many thanks for your attention!
© Swiss National Bank