The SNB's investment policy and its distinctive features
Andréa M. Maechler, Member of the Governing Board of the Swiss National Bank
Money Market Event, Zurich, 23.03.2017
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Since the discontinuation of the minimum exchange rate against the euro at the beginning of 2015, the Swiss National Bank's (SNB) monetary policy has been based on the negative interest rate and a willingness to intervene in the foreign exchange market as necessary. These measures are aimed at countering upward pressure on the Swiss franc and the associated undesired tightening of monetary conditions. The past year has seen a significant rise in economic policy uncertainty at international level, which has increased demand among investors in Switzerland and abroad for safe investments such as the Swiss franc. During 2016, the SNB backed up its words with actions and made foreign currency purchases totalling some CHF 67 billion.
These foreign currency purchases have resulted in an expansion of the foreign exchange reserves. The SNB's investment process is built on principles similar to those applied by large institutional asset managers. Yet the SNB's investment policy has some distinctive features which mark it out from other central banks and other institutional investors. Since the Swiss franc is an exceptionally strong currency, the SNB is able to hold a higher share of its foreign exchange reserves in equities than is deemed appropriate for most other central banks. The main difference between the SNB and institutional investors such as pension funds is that the SNB is unable to hedge the biggest risk factor for its investments - currency risk - because doing so would conflict with its monetary policy goals. Furthermore, the SNB keeps equity exposure much lower than the average pension fund, because increasing it would lead to a relatively rapid rise in volatility. Equities also have favourable characteristics, however: they enhance the probability of preserving the real value of the foreign exchange reserves and help to limit the maximum 12-month loss.
For some 20 years now, the SNB, acting within the framework of its monetary policy mandate, has been taking advantage of diversification opportunities to optimise the risk/return profile of its foreign exchange reserves. The amendment to the National Bank Act in 1997 allowed the SNB, for the first time, to purchase investments with a residual maturity of more than one year. The new National Bank Act, which came into force in 2004, defines investment policy as a core task and considerably expanded the SNB's room for manoeuvre. Ongoing diversification efforts through the addition of new asset classes and currencies have proved their worth. The SNB has steadily improved its risk/return profile - even with the substantial balance sheet expansion of recent years. Going forward, the SNB will continue to optimise its investment policy.