The main risk to the assets is market risk, in particular risks related to exchange rates, the gold price, share prices and interest rates. In addition, investments are exposed to liquidity risk and, to a lesser extent, credit risk.
Market risk of currency reserves
The gold price and exchange rates were the most important risk factors for the currency reserves. The growth in foreign currency investments caused exchange rate risk to rise sharply. As a result, even minor changes in the Swiss franc exchange rate can lead to substantial fluctuations in investment income, and thus in the SNB’s equity. By contrast, given a 12% proportion of shares and an average duration of over three years for fixed-interest investments, the contribution of share price risk and interest rate risk to total risk was small.
Credit risk of currency reserves
The SNB was exposed to credit risk through bond investments relating to various borrowers and borrower categories. These included bonds issued by public and supranational borrowers as well as covered bonds and similar instruments. In addition, corporate bonds totalling some CHF 12 billion were held in the foreign currency investments. Credit risk arising from nontradable instruments with respect to banks was very low. Replacement values of derivatives were hedged with counterparties, in accordance with the ISDA (International Swaps and Derivatives Association) agreements in force. Investments mainly take the form of government bonds or holdings at central banks; the bulk of these are in highly liquid bonds issued by euro area core countries and by the US. The large majority of fixed-income investments (78%) bore the highest rating (AAA). Investments with central banks are generally awarded the same rating as that of the country concerned. In all, over 95% of bonds were rated AA or higher.
Liquidity risk of currency reserves
The SNB has high standards with regard to the liquidity of its investments. At the end of 2012, 77% of foreign currency investments were denominated in the two major currencies, the euro and the US dollar, with liquid government bonds accounting for a large proportion of these.
Risk profile of Swiss franc bonds
The Swiss franc bond portfolio contained first and foremost bonds issued by the Confederation, the cantons and foreign borrowers, as well as Swiss Pfandbriefe. The duration of the portfolio was six-and-a-half years. The Swiss franc portfolio is managed passively.