How undistributed profits help in central banking: Case of Swiss National Bank

One is trying to learn how other central banks manage their reserves and profits business.

Swiss National Bank released annual results for 2018. SNB is unique as it is a shareholder central bank. Government owns 58% of the bank but that is by the Canton (States)! The central government does not own any shares but the SNB is accountable to it.

The Swiss National Bank (SNB) reports a loss of CHF 14.9 billion for the year 2018 (2017: profit of CHF 54.4 billion).

The loss on foreign currency positions amounted to CHF 16.3 billion. A valuation loss of CHF 0.3 billion was recorded on gold holdings. The profit on Swiss franc positions was CHF 2.0 billion.

For the financial year just ended, the SNB has set the allocation to the provisions for currency reserves at CHF 5.4 billion. After taking into account the distribution reserve of CHF 67.3 billion, the net profit comes to CHF 47.0 billion. This will allow a dividend payment of CHF 15 per share, which corresponds to the legally stipulated maximum amount, as well as a profit distribution to the Confederation and the cantons of CHF 1 billion. The Confederation and
the cantons are also entitled to a supplementary distribution of CHF 1 billion as the distribution reserve after appropriation of profit exceeds CHF 20 billion. Of the total amount to be distributed (CHF 2 billion), one-third goes to the Confederation and two-thirds to the cantons. After these payments, the distribution reserve will amount to CHF 45.0 billion.

Basically, SNB has made losses. Yet it is able to make allotment towards currency reserves. This is because of surplus position in Distribution Reserves. What are Distribution reserves?:

With the exception of the dividend, which – pursuant to the NBA – may not exceed 6% of the share capital, the Confederation and the cantons are
entitled to the SNB’s remaining profit after adequate provisions for currency reserves have been set aside.

To achieve a steady flow of payments in the medium term, the annual profit distributions are fixed in advance for a certain period in an agreement concluded between the Federal Department of Finance and the SNB.

The distribution reserve contains profits that have not yet been distributed. It is offset against losses and can therefore also be negative. 

Hmm..Lately the fortunes of the central bank have swinged dramatically. The Distribution reserve is useful to manage the swings.

Central Bank accounting is so interesting. But it is barely taught in most economics and finance programs. At most some balance sheet entries are taught to show money supply. But detailed perspective is missing. One discovers its vale mostly while researching…

 

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