How will Swiss National Bank distribute its record profits?

SNB made record profits for 2017.

Jean Studer President of the Bank Council at Swiss National Bank gives an overview of balance sheet and profit distribution.

First, let me address the question of why the SNB has been able to post record high profits of CHF 54 billion for 2017. As you know, our foreign exchange reserves have grown substantially in recent years in the wake of monetary policy measures taken to combat the strong Swiss franc, specifically as a result of foreign currency purchases. At the end of 2017, these foreign exchange reserves stood at approximately CHF 744 billion. The SNB invests its foreign currency in broadly diversified asset classes and currencies. In the past year, the Swiss franc weakened markedly, particularly against the euro, and global stock markets boomed. 

We benefited from these favourable developments, with exchange rate and share price gains contributing CHF 43 billion to our result. In addition, interest and dividend income totalled CHF 13 billion. Taking into account price movements in bonds, which produced a loss of CHF 6 billion on the back of rising interest rates, foreign currency positions posted a profit of almost CHF 50 billion. A CHF 3 billion valuation gain on gold holdings and CHF 2 billion income from negative interest on sight deposits held at the SNB also contributed to the result. This shows that the reported profit is largely a valuation gain on investments at the end of the financial year.

On distributing these profits, it shall be done as per the Act…

The National Bank Act (NBA) specifies clearly and conclusively how the profits are to be allocated. The purpose of these provisions is to preserve the SNB’s capacity to act in the long term. The current environment shows just how important this is. The fulfilment of its monetary policy mandate has led, as I mentioned earlier, to a huge expansion in the balance sheet, which increases risk exposure. The SNB must be able to bear these risks, now and in the future.

This is why the annual result is used, first, to top up the provisions for currency reserves. The provisions are the most important component of the SNB’s equity capital and must be maintained at the level required by monetary policy considerations. The allocation to the provisions is based on the performance of the Swiss economy, with the level being determined by the nominal GDP growth rate. However, the allocation must correspond to a minimum of 8% of total provisions at the end of the previous year, in order to ensure that the balance sheet is strengthened even in periods of low nominal GDP growth. Just such a minimum allocation was applied in 2017, boosting the provisions by CHF 5 billion.

The portion of the annual result remaining after allocation to the provisions for currency reserves represents the distributable profit. Together with the distribution reserve (that is the earnings or losses of the previous year brought forward), it constitutes the net profit/net loss. If a net profit has been achieved, a dividend not exceeding 6% of the share capital is paid out in accordance with the NBA. For the 2017 financial year, the maximum dividend of CHF 15 per share will be paid out.

One-third of any net profit remaining after the distribution accrues to the Confederation, and two-thirds to the cantons. On the basis of the current agreement between the Federal Department of Finance and the SNB, the Confederation and the cantons receive a total of CHF 2 billion for 2017. The remainder of the profit is allocated to the distribution reserve. The distribution reserve, which now stands at CHF 68 billion, serves as a buffer to help smooth the SNB’s profit distributions to the Confederation and the cantons from year to year.

Always nice to learn and relearn about central bank accounts..

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