Investment policy in times of high foreign exchange reserves

Andréa M. Maechler, Member of the Governing Board

Money Market Event, Zurich, 31.03.2016

Since 2008, the Swiss National Bank's (SNB) balance sheet total has grown by a factor of six. This increase is the result of monetary policy measures taken to combat the excessive strength of the Swiss franc. Since spring 2009, these measures have included interventions in the foreign exchange market. The SNB thereby took onto its own balance sheet the currency risk which the private sector was no longer willing to bear.

The SNB manages its foreign currency investments professionally and cost effectively. The principles underlying its investment and risk processes are similar to those of large commercial asset managers. Nevertheless, monetary policy requirements always take precedence over investment policy. The SNB attaches great importance to the security and liquidity of its investments. In order to ensure that the real value of investments is preserved over the long term, it intentionally takes on certain market risks. These risks are spread as widely as possible by diversifying the investments.

Exchange rate fluctuations pose the greatest risk to foreign currency investments. For monetary policy reasons, the SNB does not hedge these investments against such risk. Given the high level of foreign exchange reserves, even small exchange rate movements can cause investment returns to fluctuate sharply. It is therefore important that the SNB set aside sufficient reserves in the years in which it records a profit.

Managing a large equity portfolio gives rise to questions on ethics and corporate governance. Based on its own set of exclusion criteria, the SNB does not invest in equities of certain companies. Last year, it exercised its voting rights at annual general meetings for the first time, focusing on mid-cap and large-cap companies in the euro area.

In the corporate bonds market, a deterioration in liquidity conditions can be observed. This has necessitated some adjustments in the way the SNB's corporate bond portfolios are managed. The markets for highly rated government bonds continue to be liquid. As an investor with a long investment horizon, the SNB is not affected by the short-term price fluctuations which have become a growing phenomenon even in the major markets.

Irrespective of the size of the investments, the low interest rate environment is a particular challenge affecting all investors. It is a challenge of global proportions and not one Switzerland can avoid. In this connection, the negative interest on sight deposits held at the SNB is an important monetary policy measure, without which the Swiss franc would be even stronger, with correspondingly negative consequences for economic growth and inflation in Switzerland. The other element in the SNB's monetary policy is its willingness to intervene in the foreign exchange market and purchase foreign currency against Swiss francs as necessary. The SNB thus continues to pursue an expansionary monetary policy.