It’s true. The #Swiss National Bank (SNB) lost CHF 141 billion in the first 9 months of 2022. This equals to 17% of Swiss GDP (around CHF 800 billion):

How could this happen?

Around half of losses (CHF 70 billion) came from fixed income securities (as global bond prices fell). CHF 54 billion were losses in equities, among them US technology stocks, and 24 billion in exchange rate losses.

Of course there were massive gains in previous years, as bond and stock prices rose. The #SNB still has some reserves from those times, so it still has some equity left. But the larger question is: should a central bank even have a portfolio in excess of 100% of GDP?

How did we get here? The SNB bought billions of Euros (at much higher prices) to stop the rise of the CHF. With those Euros German government bonds were purchased. This helped drive their yields into negative territory. What does it mean if the SNB purchases German government bonds with a negative yield? It means a transfer of wealth from the SNB (or Swiss citizens) to the German government (or German tax payer). In order words, a gift. That’s why the SNB then ‘had’ to venture into other foreign currencies, and, by extension, into stocks.

But should a central bank even do that?

A central bank generates seigniorage gains by pushing zero-yielding currency into circulation while investing the proceeds in stuff that has a positive return. If you do that with domestic counterparts it ‘stays within the country’. Some income is being transferred from those domestic counterparts to the central bank. Central bank makes a profit, pays big bonuses, transfers the rest to government. It’s kind of a tax.

But now you do the same with non-domestic counterparties. So now you are ‘taxing’ other countries’ citizens. You become a leech. Maybe you even contributed to the bubble in technology stocks, digging your own grave. Softbank’s Vision Fund (mostly recycled petro-dollars) bought billions of call options on US technology companies, driving up their share price, too. When price-insensitive buyers (because they ‘have’ to buy something with the money they printed) enter markets, prices are being distorted. When an individual distorts markets, he will go to jail.

The Swiss Franc’s share of world currency reserves is less than 3% (IMF, Q2 2022). It was pure hubris to think that the SNB could manipulate the exchange rate of the Swiss Franc given how much bigger the Euro (20%) and US Dollar (60%) are. David versus Goliath went well as long as stocks and bonds rose, but there is no happy ending.

Suppose the SNB wanted to exit its Euro and Dollar positions. It would sell Euros and Dollars against Swiss Francs, thereby shrinking the amount of Swiss Francs in circulation. This would have the effect of monetary tightening, possibly at a time when the economy is suffering from a global energy crisis.

CONCLUSION: A central bank should never run a balance sheet of this size, especially not in relation to GDP. Unforeseen losses threaten its independence and credibility.