On Monday (Jan. 9), the Swiss National Bank (SNB) announced an alarming loss of 132 billion Swiss francs ($143 billion) for fiscal 2022, citing early estimates.
This is the biggest loss of the central bank’s 116-year existence, amounting to nearly 18% of Switzerland’s 744.5 billion Swiss francs in Gross Domestic Product (GDP). It exceeds their earlier record deficit from 2015 by 23 billion francs.
Consequently, the Swiss government and member states will not receive their regular payouts from the bank, while shareholders may also be affected. In 2021, SNB reported 26 billion francs in profits.
As investors moved towards the safety of Swiss Francs due to turmoil in Europe, 131 billion francs were lost from foreign currency positions and an additional 1 billion was lost from its own Swiss Franc holdings. These losses demonstrate just how significantly volatility can affect a business’s bottom line.
As of June 2022, the Swiss franc has been trading higher than one euro – a level that had only been briefly achieved in 2015 after it cancelled its 1.20 peg to the EU’s single currency. Switzerland has long attempted to suppress its currency in light of an export-focused economy. Analysts, however, maintain that Swiss companies have managed to remain competitive despite the appreciation of their currency due to euro zone inflation.
In December, the Swiss National Bank increased interest rates to 1% – their third hike in 2022. This was to combat inflation of 3%, which is significantly lower than that of the euro zone where inflation remains over 10%.
Last year, the SNB faced losses in both its stock and bond portfolios due to global market instability. However, it recovered 400 million francs from gold investments that helped offset some of these losses.
Karsten Junius, lead economist of Swiss bank J.Safra Sarasin told CNBC that despite the losses the central bank may face, it would not have a bearing on its fiscal policy decisions; he further predicted another 100 basis point hikes this year which shall bring up interest rates to 2%.
“While the SNB will also need some time to rebuild its valuation reserves it will take less time to show profits than in the case of the European Central Bank,” Junius said- noting that inflation in Switzerland was more closely aligned with its 2% objective than in the euro zone.
The economist also pointe out that banking institutions are inherently profitable due to their ability to pay out lower rates of interest than the market. As such, the SNB will be able to profit from increased market yields this year in contrast with the ECB which is stuck holding its low-yielding bonds and as a result won’t make any profits for years ahead.
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