Central Bank Folly Takes A Hit: Swiss National Bank Incurs $52 Billion Loss in 2015 First Half

By NEIL MACLUCAS at The Wall Street Journal

ZURICH—Switzerland’s central bank posted a loss in the first half of the year after its decision to scrap a long-standing cap on the strength of the Swiss franc caused the currency to soar, eroding the value of its euro reserves.

The Swiss National Bank on Friday reported a loss of 50.1 billion Swiss francs ($51.8 billion) in the six months through June 30, compared with a year-earlier profit of 16 billion francs. The loss in the second quarter amounted to 20 billion francs, following a first-quarter loss of 30 billion francs, which was the SNB’s largest since the second quarter of 2013.

The deficit was almost entirely caused by declines in the value of its huge foreign-currency positions, which are dominated by the euro, and which amounted to 47.2 billion francs. The bank also recorded a 3.2 billion franc loss on its gold holdings, which are denominated in dollars.

The SNB, like most other central banks, is mandated to secure price stability and isn’t obliged to make a book profit. But the bank’s profits are redistributed to its owners, which include Switzerland’s federal government and the country’s 26 cantons, which are akin to U.S. states. The bank, which is publicly traded, also has private shareholders.

The Swiss franc rocketed in value against the euro and other currencies in January after the SNB stunned markets by removing the cap on the franc, which had prevent the currency from climbing too high.

The central bank’s loss could jeopardize the customary payments it makes to Switzerland’s federal and regional governments. The payments are politically sensitive in Switzerland, where many of the country’s smaller cantons rely on them to help balance their budgets.

The SNB came in for criticism when it canceled the payments in 2013 for the first time in its history after posting an annual loss on falling gold prices.

Stopping the payments might add to pressure on the SNB, which has been criticized for imposing negative interest rates on deposits it holds as part of effort to blunt the strength of the franc. Critics say the minus 0.75% rate—an effective charge—penalizes savers, especially because it has been levied on government-run vocational pension funds and other private funds.

An SNB spokesman said it was too early to make assumptions about the central bank’s full-year result, but that if returns don’t improve then the payments and dividends could be suspended again.

Analysts said while the currency markets had moved against the SNB in the first half of the year, this could change in coming months if the dollar or the euro appreciate against the franc.

“If the dollar-franc gains by 1 cent the SNB could make an exchange rate profit of 2.2 billion francs, and given our expectations for a weaker franc and stronger equities, the SNB could make a second-half profit of around 23 billion francs,” said Lukas Gehrig, an analyst at Credit Suisse.

The cap on the franc was aimed at protecting the Swiss economy, which relies on exports, particularly to the 19-nation eurozone.

The franc gained versus the euro at the start of the year in anticipation of the European Central Bank launching its bond-buying program, weakening the euros and forcing the Swiss central to intervene again in the currency market. The SNB decided on Jan. 15 to scrap the cap to avoid amassing further reserves of euros, which had pushed its currency reserves to more than 500 billion francs.

Source: SNB Reports Huge Loss as Strength of Swiss Franc Erodes Value of Euro Reserves - WSJ

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