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Questions and answers on equity capital and profit appropriation

What is the SNB's equity capital made up of?

As with any other corporation, the SNB's equity capital consists of share capital and retained earnings. The share capital, which has been fixed at CHF 25 million by the National Bank Act (NBA), makes up only a small part of the equity capital. The most important component is the provisions for currency reserves, to which a certain amount from the annual result is allocated each year. These provisions function as a general reserve and a buffer against all forms of risk of loss, in particular the risk of valuation losses on currency reserves. They basically serve to maintain the currency reserves at the level required by monetary policy considerations (Questions and answers on the SNB's balance sheet). The third component of the SNB's equity capital is the distribution reserve, in other words the retained earnings. It may, at certain times, be negative.

How does the SNB determine the allocation to provisions for currency reserves?

As required by the NBA, the SNB takes into account economic developments in Switzerland when determining the amount to be allocated. The associated calculation is based on the average growth of nominal GDP over the previous five years. The Bank Council is responsible for approving the level of provisions. It may, out of risk considerations, at times decide on allocations at variance with the determined level.

How have the provisions for currency reserves developed recently?

The increase in currency reserves for monetary policy reasons has led to a corresponding growth of the SNB's balance sheet and to changes in its composition. A few years ago, in order to take account of the consequent rise in the risk of loss and to gradually strengthen the SNB's equity capital, the SNB adjusted the rule on allocations to the provisions for currency reserves. Thus where previously the calculation of the provisions was based on the average growth of nominal GDP over the preceding five years, the calculation is now twice that.

What happens with the part of the annual result that is not allocated to the provisions for currency reserves?

The portion of the annual result remaining after the allocation to the provisions for currency reserves is the distributable profit (art. 30 para. 2 NBA). Together with the distribution reserve, this makes up the net profit/net loss (art. 31 NBA). If a net profit is achieved, it is used for distributions. The NBA specifies that a dividend not exceeding 6% of the share capital is to be paid from the net profit. The decision on this matter is taken by the General Meeting of Shareholders on the basis of a Bank Council proposal (Questions and answers on the SNB as a company). Insofar as the net profit exceeds the dividend total, it is basically available for distribution to the Confederation and the cantons. One-third of any such distribution goes to the Confederation and two-thirds to the cantons. The amount of the annual profit distribution to the Confederation and the cantons is laid down in an agreement between the Federal Department of Finance (FDF) and the SNB. Given the considerable fluctuations in the SNB's earnings, the NBA stipulates that profit distribution be maintained at a steady level. Consequently, a constant flow of payments over several years is provided for in the agreement and a distribution reserve carried on the balance sheet.

Is it possible that no dividend is paid?

Dividends are paid on condition that a distributable profit is available. In the 2013 financial year, this was not the case. Therefore, for the first time in its history, the SNB did not pay a dividend.

Why are the Confederation and cantons entitled to the SNB's net profit?

The SNB has a public mandate. This mandate includes the note-issuing privilege, due to which the SNB earns profits on average in the long run. Insofar as the profits are not needed for provisions for currency reserves, it is the public sector that is entitled to the amount remaining after dividend payment. Article 99 of the Federal Constitution specifies that at least two-thirds of this net profit is to go to the cantons.

How is distribution to the Confederation and the cantons regulated in detail?

The NBA specifies that the FDF and the SNB are to agree on the annual amount of profit distribution to the Confederation and cantons over a certain period of time. The cantons are to be informed in advance. The profit distribution agreement for the financial years 2016 to 2020 provides for an annual distribution of CHF 1 billion. The rest of the distributable annual profit is allocated to the distribution reserve and remains available for distributions at a later date.

Is it possible that the amount distributed to the Confederation and the cantons is raised?

Yes, it is. The profit distribution agreement 2016 to 2020 specifies that the distribution for the financial year in question is raised to a maximum of CHF 2 billion if the distribution reserve exceeds CHF 20 billion after the appropriation of profit, i.e. after the arranged CHF 1 billion has been distributed to the Confederation and the cantons.

Is it possible that the distribution to the Confederation and the cantons is reduced?

Yes, it is. The profit distribution agreement 2016 to 2020 stipulates that a distribution to the Confederation and the cantons is made only if the distribution reserve does not become negative as a result. If the distribution reserve is not positive after allocation to the provisions for currency reserves, no distribution to the Confederation and the cantons can be made. Should the distribution reserve become negative as a result of a distribution, the distribution is reduced to such an extent that the distribution reserve subsequently amounts precisely to zero. Omitted or reduced profit distribtions will be made up in subsequent years, if the distribution reserve allows it.

How is a distribution divided among the cantons and what is the money used for?

The cantons' resident population is taken into account for the division of the funds to be distributed, with the details specified in a Federal Council ordinance. The SNB has no influence on how the distributed profits are used by the Confederation and the cantons.

If the SNB ends a financial year with a loss, how does this affect allocations to the provisions for currency reserves and to the distribution reserve?

Allocations to the provisions for currency reserves are made irrespective of the annual result. In the event of a loss - or an insufficiently high profit - this allocation would have a corresponding impact on the distribution reserve. This can lead to the distribution reserve becoming negative, as was the case after the 2013 financial year.

Why are there such large fluctuations in the SNB's annual results?

The SNB is obliged by the Constitution to pursue a monetary policy that serves the overall interests of the country. It is not the purpose of the SNB to achieve and distribute profits. Monetary policy operations have a direct impact on the SNB's balance sheet. The primacy of monetary policy means that the length and structure of the balance sheet are subordinate to monetary policy goals (Questions and answers on asset management). The major part of the SNB's assets consists of investments in gold and foreign currencies, which are stated at market value. This is why the SNB's results are largely dependent on developments in the gold, foreign exchange and capital markets, and are subject to strong fluctuations. With a longer balance sheet, the fluctuations stated in absolute terms naturally become larger.

Can the SNB's equity capital become negative?

Consistent fulfilment of the monetary policy mandate may, under certain circumstances, lead to massive losses at the SNB, through which its equity capital could temporarily become negative. In the balance sheet, this would be reflected by a negative distribution reserve that, in absolute figures, would exceed the provisions for currency reserves and the share capital. However, such a state of affairs would, in all likelihood, last only for a certain period, since a central bank's structural profit potential usually ensures that, sooner or later, surpluses are again achieved.

What does 'structural profit potential' mean?

As with other companies, the SNB's assets generate income. Thanks to the SNB's banknote monopoly, however, financing its assets incurs only very low costs. In this way, it differs fundamentally from other companies. Issuing banknotes costs only a fraction of their nominal value, and sight deposit accounts at the SNB are as a rule also a very cheap form of financing. This is why the SNB achieves profits from money creation - known as seigniorage - in the long run.

A company or commercial bank with negative equity capital would have to be restructured or liquidated. Wouldn't the SNB, too, have to be wound up in such a case?

No. Thanks to its ability to create money, the SNB remains solvent in domestic currency at all times. Theoretically, it has unlimited amounts of legal tender at its disposal. Therefore the SNB fully retains its freedom to act even if its equity capital temporarily becomes negative. This means it can fulfil its legal mandate at all times. Moreover, there are no legal requirements that would trigger a restructuring or even liquidation of the SNB in the case of negative equity capital. Nor would the SNB's shareholders be under any obligation to provide additional funding.

What then does the SNB need equity capital for?

If a central bank's equity capital were negative over a long period of time, it could lose credibility in the markets, and, in extremis, no longer be in a position to fulfil its monetary policy mandate without restriction. Building up equity capital again after suffering losses would therefore be a prime concern of the SNB. The National Bank generally strives to maintain a strong equity capital base in order to be able to fulfil its mandate in the long term.