Questions and answers on equity capital and profit appropriation

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

    As with any other joint-stock company, the SNB's equity capital consists of share capital and retained earnings. The share capital, which is fixed at CHF 25 million under 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 in accordance with the NBA. 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. This is a form of profit carried forward and 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 of the percentage increase in provisions is based on the average growth of nominal GDP over the previous five years. In 2009, the SNB increased the allocation to the provisions to double the average nominal economic growth rate in view of increased balance sheet risks. In 2016, a minimum annual allocation of 8% of the provisions at the end of the previous year was introduced. The aim was to ensure that sufficient allocations are made to the provisions and that the balance sheet is strengthened even in periods of low nominal GDP growth. In 2020, the minimum annual allocation was raised to 10%. Based on risk considerations, the SNB can adjust the rules governing the allocation to the provisions.

  • How have the provisions for currency reserves developed recently?

    The increase in currency reserves for monetary policy reasons has led to a manifold increase in the SNB's balance sheet, as well as to changes in its composition. 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 reserve in several steps. Thus, where previously the calculation of the provisions was based on the average growth of nominal GDP over the preceding five years, in 2011 the basis was changed to twice that rate. In 2016, a minimum annual allocation was decided amounting to 8% of the provisions at the end of the previous year. The minimum allocation was raised to 10% in 2020. This minimum allocation was applied in the 2016, 2017, 2018, 2019 and 2020 financial years.

  • 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, this 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). Any net profit remaining after the payment of a dividend is in principle available for distribution to the public sector. 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 the payment of a dividend. Art. 99 of the Federal Constitution specifies that at least two-thirds of this net profit is to go to the cantons. The NBA stipulates that the remaining third is to go to the Confederation.

  • How is the 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 for a specified period of time. The cantons are to be informed in advance. The profit distribution agreement for the financial years 2020 to 2025 provides for a maximum annual distribution of CHF 6 billion, provided that the SNB’s financial situation permits. The rest of the distributable annual profit is allocated to the distribution reserve and remains available for distributions at a later date.

  • Can the distribution to the Confederation and the cantons be reduced, and is it possible for no distribution to be paid?

    Yes. The profit distribution agreement for 2020 to 2025 makes the amount of the distribution to the Confederation and the cantons contingent on the net profit. The maximum amount of CHF 6 billion will be distributed only if a net profit of at least CHF 40 billion is achieved. If the net profit is between CHF 30 billion and CHF 40 billion, a distribution of CHF 5 billion will be made; between CHF 20 billion and CHF 30 billion a distribution of CHF 4 billion; and between CHF 10 billion and CHF 20 billion a distribution of CHF 3 billion. If the net profit falls below CHF 10 billion, a maximum amount of CHF 2 billion will be distributed, whereby the distribution together with the dividend may not result in a negative distribution reserve. In the event of a net loss, no distribution will be made.

  • Why not distribute the entire net profit every year?

    For one thing, as mentioned above, given the considerable fluctuations in the SNB’s earnings, the NBA stipulates that profit distribution be smoothed and maintained at a steady level. A well-stocked distribution reserve acts as a buffer, thereby ensuring that the Confederation and the cantons are seldom faced with years in which the SNB cannot make a distribution. Furthermore, while the SNB can distribute a profit to the Confederation and the cantons, it cannot reclaim any money if it makes a loss. If the entire net profit were to be distributed every year, the SNB’s equity capital would fall below the targeted level in the event of a loss.

  • 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, mean that the SNB has to accept the risk of substantial losses, 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, be only temporary 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 exclusive right to issue banknotes, 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 monetary policy mandate at all times. Moreover, there are no legal requirements that would trigger a restructuring of the SNB, let alone liquidation, 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 SNB generally strives to maintain a strong equity capital base in order to be able to fulfil its mandate in the long term.