Asset Management at Central Banks – A Special Case?

Philipp Hildebrand, Member of the Governing Board

University of St. Gallen, St. Gallen, 5 December 2003, 05.12.2003

The management of international reserves is a further important task, in addition to monetary policy, of the Swiss National Bank (SNB). An exact determination of the optimal level of a country’s monetary reserves is not possible as e.g. its liabilities cannot be defined precisely. According to the buffer stock model the optimal level of international reserves should be determined, similar to the choice of insurance, as a function of the likelihood of a crisis, of their contribution to managing or avoiding a crisis and of the opportunity costs implied in holding reserves. Both the insights derived from the buffer stock model and from international comparisons show that Switzerland holds a reasonable level of international reserves. The long-term development of these reserves should be guided by a clear target, as is the case in Switzerland where the reserves should grow at the same rate as the nominal GDP.

The investment policy of the SNB is based on three criteria: liquidity, safety and performance. The new National Bank Act will enlarge the possible investment universe of the SNB. Thereby, the SNB will be able to better adapt its investment profile to its needs. This should lead to lower opportunity costs of holding international reserves. With the increasing complexity of investment activity, the demands of corporate governance are growing as well. The SNB has therefore adapted its investment and risk control processes and improved its accountability toward the public. This is in line with the general trend towards more ambitious corporate governance standards in the private sector as well as for central banks. As a result of applying the mark-to-market principle to its assets, published earnings of the SNB are more volatile than in the past. It is important that in the long run, the SNB’s annually distributed profits remain a variable residual amount. In order to safeguard the independence of monetary policy and not to restrict investment policy, they must not be tied to any specific purpose. This has already been stressed in the message of the Federal Council on the new National Bank Law.