Thomas Jordan: Challenges for the SNB in extraordinary times
Introductory remarks by Mr Thomas Jordan, Member of the Governing Board of the Swiss
National Bank, at the half-yearly media news conference, Berne, 20 June 2008.
* * *
Around the world, the effects of the financial crisis on the implementation of monetary policy
and the composition of central banks' balance sheets are becoming more and more
apparent. On the one hand, conventional monetary policy has all but exhausted its options,
and unconventional measures are being increasingly used. On the other hand, some central
banks are having to manage the illiquid assets which they took over in an effort to stabilise
the banking system. Both of these situations also apply to the Swiss National Bank.
Therefore, after giving a brief assessment of the developments in the international financial
markets, I will turn my attention to the unconventional monetary policy measures being taken
by the SNB. I will then move on to discuss the SNB StabFund. To conclude, I will look at the
risks facing the SNB that are associated with these activities.
Situation in the international financial markets
Although the first few weeks of the year saw stock markets around the globe experiencing
their lowest levels in many years, the surprisingly positive results from the US banking sector
in mid-March prompted a turnaround in market sentiment. Stock markets have since been
recording strong price gains. Other financial market segments also saw a significant
recovery.
As a result, the downward spiral, which was triggered by the collapse of Lehman Brothers
last September and which, for a short while, even threatened to bring the global financial
system crashing down, has come to halt. After having climbed to unsustainable highs in
recent years, the prices of many investments fell to extremely low levels during the turmoil
this past winter. The rapid recovery in the financial markets since March must also be partly
regarded as a correction of previous excesses. Furthermore, the extremely expansionary
monetary policy being pursued worldwide is likely to have also contributed to calming the
situation.
However, the recovery in the financial markets should not conceal the fact that uncertainty is
still high. How sustainable the shift in market sentiment really is remains to be seen. The risk
of suffering a setback remains correspondingly high.
The SNB's unconventional monetary policy measures
At our quarterly assessment in March, we were confronted by the need to once again
significantly expand our monetary policy. Since the repo rates were already practically at
zero, we had to resort to unconventional monetary policy measures. We decided to conclude
longer-term repo transactions on the one hand, and to purchase foreign currencies and
Swiss franc bonds on the other. By simultaneously intervening in the money, foreign
exchange and capital markets when necessary, a strong and broad-based monetary policy
impact can be generated, without leading to any major distortions in the markets concerned.
Allow me here to add a few remarks on our foreign currency and bond purchases.
Purchase of foreign currency
The aim of our buying foreign currency is to prevent an appreciation of the Swiss franc
against the euro. This is the key component of our unconventional monetary policy. It is
important to emphasise that we do not engage in foreign exchange interventions in order to
bring about a depreciation of the Swiss franc, but to prevent any further appreciation of the
franc in its role as a safe haven currency. Therefore, the reproach we occasionally hear that
the SNB's policy is encouraging an international depreciation race is unjustified. A look at
exchange rate movements shows a clear appreciation of the Swiss franc during the course of
the financial market crisis (cf. chart 1). So there can be no question of the SNB conducting a
beggar-thy-neighbour policy.
We give ourselves a great deal of latitude with regard to our foreign exchange interventions.
There is no fixed threshold beyond which we become active; we simply decide in accordance
with the situation at hand. And markets should not become used to a certain level of
intervention. We feel that this approach promises the highest possible impact, which in turn
will allow us to phase out the strategy more easily when the time comes. Furthermore, we do
not comment on the volume of our foreign currency purchases.
The purchases of foreign currency have fulfilled their purpose - and with these I am referring
to our first unilateral interventions in the foreign exchange market since 1992. The
appreciation of the Swiss franc against the euro, which is particularly dangerous for the
Swiss real economy in this crisis, has been halted, and the volatility of the EUR/CHF
exchange rate has eased considerably (cf. chart 2).
If necessary, we will continue to intervene in the foreign exchange market to prevent an
appreciation of the Swiss franc against the euro. The SNB occupies a strong position in this
regard. With interest rates at the zero bound and our policy of quantitative easing, we have
an advantage over market participants who are expecting an appreciation of the Swiss franc.
For our interventions, we neither have to take a specific rate of interest into account nor
neutralise the expansion of money supply.
Purchase of Swiss franc bonds
With the purchase of Swiss franc bonds issued by private domestic borrowers, we want to
lower the risk premia in the capital market and, in so doing, make it easier for private issuers
to raise capital. Depending on the situation, we try to achieve the greatest possible impact on
risk premia and capital market liquidity while deploying the least amount of capital. We do not
want to give individual companies preferential treatment, instead we wish to ease the
refinancing of companies in Switzerland overall.
By also purchasing in the primary market, we are directly promoting the raising of new
capital. Initially, we restricted our purchases to mortgage bonds (Pfandbriefe). Since the
beginning of April, however, we have also been buying corporate bonds. In both of these
segments, we hope to achieve the greatest impact on the market as a whole. In principle, we
buy only marketable bonds and pay market prices. Apart from the mortgage bonds, we did
not buy any bonds issued by financial institutes. As of mid-June, our total purchases
amounted to around CHF 2.5 billion in mortgage bonds and roughly CHF 300 million in
corporate bonds. For the time being, we plan to continue purchasing selectively. As regards
volume, we have set no restrictions.
The bond purchases also seem to have fulfilled their purpose. Risk premia have come down
significantly (cf. chart 3). That said, we were able to benefit from the favourable mood in the
financial markets. The fact that, in the past few weeks, several issuers found their way back
to the issues market for the first time in a long time is further proof of the effectiveness of our
strategy.
SNB StabFund
Developments in the market since the UBS package of measures was announced show that
the transfer of illiquid assets from UBS to the SNB StabFund was both appropriate and
absolutely necessary. Had these assets remained on UBS's books and been valued at
market price, the bank's existence would have been seriously threatened these last few
months.
The transfer of assets was concluded at the beginning of April. Ultimately, the total volume of
assets transferred amounted to USD 38.7 billion, where the purchase price was roughly USD
1 billion below the book value of the assets at UBS at the end of September 2008. In
addition, a substantial portion of the amount transferred includes liabilities in the form of
derivatives which currently do not need to be financed by the SNB. The initial financing of the
StabFund was therefore considerably lower than the purchase price. It comprised the SNB's
loan to the StabFund totalling USD 26.6 billion and UBS's equity contribution in the value of
USD 3.9 billion.
The fund's portfolio contains several thousand positions. Table 1 gives an overview of the
portfolio and the different investment segments. The portfolio management concept is based
on a long-term risk/return assessment. For assets where the cash flow is expected to exceed
the current market price, we are mainly pursuing a hold-to-maturity strategy. For assets
where this is not the case, we will sell if the opportunity arises. The objective of our portfolio
management is to repay the SNB's loan in full if at all possible.
Market developments to date have impacted strongly on the StabFund's assets. As it stands,
most of the assets do not have to be entered in the balance sheet at market value. Rather,
they only have to be written down if the balance sheet value is no longer considered
sustainable based on the results of an impairment test. However, despite this method of
stating assets in the balance sheet at amortised cost, the StabFund had already used up its
equity capital by the end of March. Up until that point, it had been necessary to make value
adjustments amounting to roughly USD 5 billion. Nonetheless, it still looks as though the
StabFund will ultimately be able to pay back the loan. This is because, on the one hand,
markets can recover; the positive turn of events in April and May corroborates this. On the
other hand, the assets have been generating relatively robust cash flows until now.
Owing to interest payments and loan repayments, the SNB loan has already been reduced
considerably. By mid-May, it came to only USD 23.7 billion. In addition, the original size of
the StabFund has declined by around USD 6.7 billion as a result of sales, maturities and the
closing out of derivatives positions. In mid-May, the size of the StabFund, as valued at
amortised cost, was just roughly USD 32 billion, of which around USD 4 billion comprised
contingent liabilities from derivatives. The performance of the stabilisation fund's assets is
due to be reassessed at the end of the second quarter.
Approximately 80% of the SNB's loan to the StabFund is denominated in US dollars.
Originally, the SNB fully refinanced the dollar loan via the existing swap facility with the
Federal Reserve. Now, less than 20% is refinanced thus, accounting at this stage for only
about USD 3 billion. By contrast, the outstanding volume in SNB USD Bills - launched in
February 2009 to refinance the SNB loan to the StabFund - is already at USD 15 billion. In
addition to these short-term financing operations, the SNB concluded long-term deposit
transactions amounting to USD 4 billion. We plan to further reduce the use of the swap
facility with the Federal Reserve.
Risks
The risks facing the SNB as a result of its commitment in the StabFund are substantial, yet
owing to the bank's strong balance sheet, these risks can be absorbed. I would particularly
like to emphasise that the SNB's commitment is actually considerably lower than the USD 60
billion which still gets quoted by the public quite often. The SNB does not consider its loan to
the stabilisation fund as a hindrance - either to its risk capability or its monetary policy
latitude. The unconventional measures also pose additional risks to the SNB's balance sheet
in the form of interest rate, currency and credit risks. However, our analyses show that, in
terms of the consolidated balance sheet, these risks are relatively low.
The SNB is well aware of the fact that the unconventional monetary policy measures pose
not only balance sheet risks, but also a whole series of other risks, including the difficulties
connected with correctly assessing the monetary policy impact and with finding the best way
to phase out the unconventional measures. As with the StabFund, we are convinced that -
here too - we must take these risks in order to be able to avert other, even greater risks.
Extraordinary times call for extraordinary measures. The financial market crisis has
confirmed our belief that the SNB must have a strong capital base and a broad range of
monetary policy instrument to ensure its capacity to act at all times.
Chart 1. Effective exchange rate for Swiss franc
Export-weighted against 24 trading partners, nominal, 1.2007=100
115
112.5
110
107.5
105
102.5
100
97.5
95
2007 2008 2009
Source: SNB Markets Analysis Platform
Chart 2. EUR/CHF and exchange rate volatility
Implied volatility EUR/CHF 3M EUR/CHF (rhs)
%
15 1.65
12.5 1.6
10 1.55
7.5 1.5
5 1.45
2.5 1.4
Jul Aug Sep Oct Nov Dec Jan 09 Feb Mar Apr May Jun
Sources: SNB Markets Analysis Platform, Bloomberg
BIS Review 77/2009
Chart 3. Swap spreads
Swap spreads Pfandbriefe Swap spreads industrial
Swap spreads financial Swap spreads utility
bp
300
250
200
150
100
50
0
-50
Jul Aug Sep Oct Nov Dec Jan 09 Feb Mar Apr May Jun
Sources: SNB Markets Analysis Platform, Credit Suisse
Table 1. StabFund investments at transfer
prices (as at 30.9.2008)
Total for US 25.5
RMBS 9.6
Residential loans 0.6
CMBS 4.4
Commercial real estate loans 2.4
ABS consumer 2.0
ABS other 1.8
CDO 3.2
Corporates 0.5
Student loans (loans and ABS) 0.9
Total for Europe 12.9
RMBS 5.4
Residential loans 0.6
CMBS 2.2
Commercial real estate loans 0.5
ABS other 1.3
CDO 2.9
Total for Japan 0.3
Commercial real estate loans 0.3
Total investments 38.7