Swiss National Bank (SNB) Investment risk profile

Investment risk profile

Risk factors

The main risk to the assets is market risk, i.e. gold price, exchange rate, share price and interest rate risks. Market risk is managed primarily through diversification. The SNB counters liquidity risk by holding a considerable part of its investments in the world’s most liquid currencies and bond markets. To a limited extent, it also takes on credit risk.

Market risk of currency reserves

At the end of 2010, the gold price and exchange rates continued to be the most important risk factors for the currency reserves, with the share of exchange rate risk in total risk rising markedly owing to the increase in foreign currency investments. Exchange rate risk on foreign currency investments is not hedged against Swiss francs as a matter of principle. First, such hedging could reduce the effectiveness of foreign exchange operations undertaken for monetary policy purposes and, second, it could restrict the SNB’s overall freedom of action. Changes in the value of the Swiss franc, therefore, have a direct impact on the value of foreign currency investments. Given an average duration of four years for fixed rate investments and a share quota of 11%, interest rate risk and share price risk, by contrast, contributed very little to total risk. The absolute risk increased substantially due to the increase in the overall level of currency reserves.

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 4 billion were held in the foreign exchange reserves at the end of 2010. Credit risk arising from non-negotiable instruments with respect to banks took the form of short-term deposits and replacement values of derivatives. Gold lending did not entail any significant credit risk, as these operations were secured by bonds with above-average credit ratings.

Overall, credit risk was relatively low, since most of the investments were held in the form of top-quality government bonds. An overwhelming proportion of the investments (end of 2010: 82%) bore the highest rating (AAA).

Liquidity risk of currency reserves

The SNB has high standards with regard to the liquidity of its investments. At the end of 2010, around 80% of foreign exchange reserves were denominated in the two major currencies, the euro and the US dollar, with highly 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 just under six years.