How much can a central bank lose before bankruptcy looms?

One of the features of the “new normal” of the credit crunch era is that central banks bestride the economic and financial stages like colossi as they dispense both cash and claimed wisdom. Many are in thrall to our central banking overlords but not here as it was only yesterday I discussed their inconsistencies and fudges when setting interest-rates. This morning has brought news of yet another set back for the theory that central banks are omnipotent and it has come from the often sleepy small country of Switzerland. Indeed Swiss citizens are likely to get something of a shock when they read the news and discover what has been done in their name and with their money.

The Swiss National Bank (SNB)

The latest release from the SNB is not for those of a nervous disposition especially if you happen to be a Swiss taxpayer.

The Swiss National Bank (SNB) is reporting a loss of CHF 50.1 billion for the first half of 2015.

If we convert into UK Pound’s then this is £33.3 billion. So how did this happen?

On 15 January 2015, the SNB decided to discontinue the minimum exchange rate of CHF 1.20 per euro with immediate effect. The subsequent appreciation of the Swiss franc led to exchange rate-related losses on all investment currencies. For the first half of 2015, these amounted to a total of CHF 52.2 billion.

Thus we see that it was not only private investors, currency and spread trading companies (some went bust back then) and hedge funds which were hit as a modern version of King Canute finally submitted to the tide. Added to this were problems with bond markets which if you recall have followed the surge of early 2015 with declines since and remember due to the size of its foreign currency intervention and reserves the SNB is a large holder of Euro area bonds.

A loss of CHF 3.9 billion was recorded on interest-bearing paper and instruments.

The SNB must think that it never rains but it pours as it note that it has been a bad 2015 so far for something which it is famous for holding which is of course gold.

A valuation loss of CHF 3.2 billion was recorded on gold holdings.

So far we have too many losses so let me factor in something which is immediately obvious when you think about it. The SNB makes a profit out of its negative interest-rate of -0.75%.

The profit on Swiss franc positions totalled CHF 571 million. It was essentially made up of CHF 530 million of negative interest charged on sight deposit account balances since 22 January 2015,

Also the SNB received some interest payments on its various bond holdings.

Interest income provided a positive contribution, at CHF 3.5 billion,

Thrown into the mix is something that does not get the publicity it deserves outside of on here anyway as the SNB is an equity market punter, excuse me investor. Like the Bank of Japan which owns nearly 7 trillion Yen of equities the SNB has spread its wings into this area. As the early part of 2015 was good for equities the SNB can breathe a small sigh of relief and publish this.

By contrast, equity securities and instruments benefited from the favourable stock market environment and contributed CHF 4.1 billion to the net result……. as did dividend income, at CHF 1.2 billion.

What about Apple?

Some wry entertainment has been found in this development described by Bloomberg on the 6th of May.

Switzerland’s central bank owned 8.9 million shares in the iPhone maker on March 31, according to a regulatory filing made to the U.S. Securities and Exchange Commission. That’s up from 5.6 million shares at the end of 2014, a 60 percent increase, according to Bloomberg calculations.

We do not know the exact state of play here but we do know as Apple’s share price peaked at around 132 and was 122.35 at last night’s close that it is no longer solely a one way trade. Should it not work out then I imagine that the Swiss watchmaking industry will be particularly underwhelmed by their central bank investing in the maker of the Apple Watch.

Balance Sheet Alert

As of the 30th of June the SNB owned some 529.5 billion Swiss Francs of foreign currency assets and some 36.4 billion Swiss Francs of gold. If we look at the investment percentages then we see  it held some 90 billion Swiss Francs worth of equities with the vast majority of the rest in other countries government bonds.

This is an awkward consequence of the foreign currency intervention undertaken by the SNB and if you have heard people describe central banks as hedge funds these days well here is the prima facie case of it.

Is the SNB bust?

The answer to this is not yet as the capital has shrunk for obvious reasons as we note a fall in capital from 86.3 billion Swiss Francs to 34.3 billion. If it was a listed company then we might be heading to the panic zone but of course it is not. Swiss taxpayers may be getting nervous at this point because they via the Swiss Treasury back the SNB. Also as pointed out a few years back by Willem Buiter central banks do have access to a large source of funds.

As long as central banks don’t have significant foreign exchange-denominated liabilities or index-linked liabilities, it will always be possible for the central bank to ensure its solvency though monetary issuance (seigniorage).

A sort of printing response or in modern language press control and the letter P.

Also it is not that central banks cannot go bust as we review one obvious past problem and one less obvious one.

Two recent examples are the Reserve Bank of Zimbabwe (the current inflation rate in Zimbabwe is over 100,000 percent year-on-year) and the National Bank of Tajikistan.

I have written before about issues concerning the structure of the ECB (European Central Bank) partly because it is backed by 19 different treasuries which may copy their attitude to the Greek crisis and have divergent views. However the Swiss taxpayer may null the fact that 40.02 of their central bank is owned by private shareholders. I know nothing about Theo Siegert of Dusseldorf but according to the 2014 Annual Report he owns some 6.5%.

What about Switzerland?

There is an explicit issue for the shareholders in the SNB.

Last year, the SNB paid dividends to shareholders of 2 billion francs after posting 38.3 billion francs in profit but warned such hefty payouts might not continue.

We have the second half of 2015 to come but the outlook for a dividend this year is none to bright as we stand. Also there is the issue of currency strength finally being a drag on the economy. The BBC has looked at its impact on border towns.

The consequences for borders towns like Kreuzlingen were immediate. While Swiss prices have been somewhat higher than those in Germany for some years, with the franc now so high many products cost twice as much or more in Switzerland.

So why shop in Kreuzlingen when ten minutes walk away the bustling German town of Konstanz awaits?

Also Swiss cheese manufacturers are being affected.

“In May our foreign sales figures, especially for traditional cheeses, really slumped”, says Mr Hausammann. “We had a 14% reduction over the same month last year.”


This week has seen more than a few examples of central banking problems. It was  the Bank of Russia on Wednesday with the value of the Rouble and consequent inflation and yesterday it was the US Federal Reserve and the Riksbank with doppelgänger like views on economic policy. Now we see that there are costs to the “unlimited intervention” policy of the SNB which of course turned out to be very large rather than unlimited. Perhaps the Swiss taxpayer will end up  being very grateful for that!

Meanwhile back in the UK another central bank seems to have hit some choppy water. From Reuters.

New Bank of England rate-setter Gertjan Vlieghe should reassure parliament that his ongoing financial link to one of the world’s biggest hedge funds does not pose a conflict of interest, a senior MP said on Thursday.

What could go wrong?


35 thoughts on “How much can a central bank lose before bankruptcy looms?

  1. Hi Shaun

    Re central bank intervention one thing you haven’t mentioned (but may have done in the past) is the influence of ZIRP on insurance companies and pension providers. I think it was the BIS that recently questioned the continuance of ZIRP in terms that it threatened the solvency of insurance companies and pension schemes. This is the sort of effect that is under the radar for most people until their insurance premiums start rocketing and they discover what a pittance in terms of pension their savings will produce, both due to the malign effects of ZIRP. When people do wake up to this they are not going to be pleased!

    Let’s face it the CBs have dug themselves in a very large hole and they are still digging!

    • Hi Bob J

      You are right to point this out as a problem for the ZIRP/NIRP and QE era. It was highlighted when Andy Z posted the pension illustrations with a -3% return as one of the not very edifying projections. In another form I have just looked this up from the Actuarial Post.

      “In Germany, the running yield on 10-year German government bonds (1.9%) is below the current guaranteed crediting rate for newly sold life insurance policies (2.25%). The yield difference appears even more severe, relative to the average guaranteed crediting rate of a life insurance portfolio of an average company, which is around 3.3%”

      Sadly it is not dated as it is plainly from a while ago but now lets factor in the current 0.66% for the ten-year German yield and the fact that earlier this year in a bubble like frenzy it dipped below 0.1%. So German life companies how are you left?

      Is the pumping up of stock markets a way of trying to bail them out?

  2. Great column, Shaun, as usual.

    With regard to your last item, with Mr. Vlieghe, a dual citizen of Belgium and the UK, replacing David Miles on the MPC, it now has a Canadian (Carney), an American (Forbes). an Egyptian(Shafik) and a Fleming (Vlieghe) among its nine members. However, correct me if I am wrong, it doesn’t have a single Scot or Ulsterman on it, and with Mr. Miles out, it doesn’t have a Welshman either. It looks like the UK is poorly represented on its own MPC.

    Is there any other central bank in the world that has or has had such a heavy share of foreigners or dual citizens on its main committee?

    • Would a Scotsman or two really be necessary to keep an eye on the two major Scottish banks as we know from recent history that they are well run, positive profit centres, well according to the Government’s official financial lexicon anyway.

      You could probably even get a ‘sound bite’ from that bastion of successful profitable investing, the Swiss Central Bank to confirm this.

    • An excellent point Andrew.It like picking a foreign manager for the England football team.We had Sven and that Italian chap.How did that work out?

      I realise that in the modern era,patriotic loyalty to one’s country is viewed as a weakness but I find it genuinely alarming that so many foreigners are eligible to run our CB when they likely wouldn’t be allowed to work for our security services and yet they’re in a position to do so much more damage.

    • Hi Andrew

      You make a good point and it is one which the UK establishment is touchy about because I remember that ToryTreasury on twitter was on my case when I pointed this out about Dr. Shafik. They went silent when I quoted one of her speeches which said she was Egyptian! So the response was ill-informed…

      As to other central banks I can only imagine the furore at the Bank of Japan! The ECB structure mostly excludes it by appointing the heads of the other national central banks in the main although it is not impossible for one to be from abroad of course. The US FOMC keeps a US bias with the regional members who are likely to be US citizens but has recently looked abroad to some extent.

      “Dr. Fischer was born in Lusaka, Zambia, in October 1943.”

  3. I should have thought CB’s can always print their way out of trouble (for themselves, not the economy and populace), how can they or the Bank of Zimbabwe go bust?

    • The SNB was buying Euro assets/Euros to maintain the peg.When they ended the peg,they were left with assets that had depreciated when converted back to Swissies.

      • and then, as I see it, they can print more swiss francs to make up the shortfall, so how can they go bust?

        • And if they print ChF50 billion that should weaken the currency.
          It might get to 1.20/€. If it doesn’t they can print even more.
          It’s magic!

        • Quite right Eric – but how can they go bus? Even the German Central Bank oof teh Weimark never went bust, although the country did.

        • I don’t see how a CB can go bust, Noo 2. It can however fill a country with worthless money.

          But why buy (too much) foreign currency and risk balance sheet losses? Why not just fill the SNB vaults with freshly printed sovereign Swiss francs? Or create hundreds of billions and buy all of Apple! A handle on value can be turned by creating or destroying money; can it not? Does this all stem from the time when gold and foreign currency was known as “Reserves”.

          Or are we really in Wonderland…. .?

    • If the local currency is so discredited/worthless that sellers refuse to accept it and the central bank has foreign currency debts greater than foreign currency assets then it is insolvent.

    • Hi Noo 2

      As other are no doubt mulling the same question let me give an illustration of how it has happened in the past. From Willem Buiter.

      “Central bank insolvency may become an issue again
      even in advanced industrial countries, if central banks
      were to assume too many foreign-currency denominated
      liabilities in an attempt to support or bail out private
      banks and other financial institutions deemed to be too
      large or too interconnected to fail. ”

      So we would expect foreign currency liabilities to be taken on and also a decline in the value of your base or own currency such that even printing doesn’t help or ends up making it worse.

        • I’m not sure I understand. Obviously not all CBs are created equal. I can see the point about foreign liabilities exceeding foreign assets creating real problems, but the subject was the SNB.
          Why didn’t the SNB print francs instead of buying €s in order to weaken the currency. ? It would have been less risky, surely.

        • Hi Eric, once printed/created the SNB has to introduce the francs into the financial system via bond purchases, equities or some other means to get them in circulation, thus driving down the value of the franc. This could have the effect of inflating the asset class they are purchasing, so what better (short – medium term) ploy than to purchase Euros or Euro denominated assets thereby effecting a double whammy of reducing the franc as there are more of them about and increasing the Euro against the franc as there is more demand for Euro.

          The reason I couldn’t see initially was because I was thinking of the CB and it’s country as a standalone area not indulging in international trade. If it doesn’t do international trade and avoids foreign asset purchases then it can’t go bust.

  4. Nice piece Shaun.Interesting that the SNB is 40% privately owned.I find that absolutely stunning.Unbelievable.

    I find it alarming that CB’s are allowed to purchase stocks/issue swap lines/maintain currency pegs and the like when they’ve been shown to do such harm to national balance sheets.

    The reality is that for CB’s to operate away from the long term interests of tax payers they need an acquiescent political class.

    It really might get interesting when the Euro starts to actually implode and we have 19 govts trying to get themselves through the fire exit first.

  5. Hi Shaun
    It is both puzzling and enlightening to know
    that anybody can own part of a central bank.

    Do you think that most of the central banks will
    have multi national board members to help planet ponzi
    continue and what set of circumstances might lead to
    a central bank of a G20 nation failing?

    Theres room at the top they are telling you still
    But first you must learn to smile as you kill
    If you want to be like the folks on the hill
    JW Lennon (Sheer brilliance)


    • Hi JRH

      I did know that some central banks had private shareholders but I have to confess I was surprised to discover that one individual owned over 6% of the SNB! As to JW Lennon he even has a song for central bankers.

      Now) And now my life has changed in oh so many ways
      (My independence) My independence seems to vanish in the haze
      (But) But every now (Every now and then) and then I feel so insecure
      (I know that I) I know that I just need you like I’ve never done before

      Help me if you can, I’m feeling down
      And I do appreciate you being ’round
      Help me get my feet back on the ground
      Won’t you please, please help me

  6. Interesting. If Swiss shop in Konstanz, they pay German VAT at 19%. And I’ve noticed another VAT quirk. I was looking on – there are heavily discounted new cars (over 20%) that are only available to German residents. An incentive to Germans to buy new and pay German VAT, and resell their secondhand German cars with high residual value to foreigners (who don’t pay VAT on used cars) -> ergo more VAT goes to Berlin. In theory restricting sales by residency is illegal – I’ll be finding out if the EC and/or my MEP follows up my complaint.

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