Swiss Central Bank Nowhere Near Neutral Enough
PUBLISHED
2023-03-13
Content
We’ve seen in the collapse of Silicon Valley Bank the dangers of crystalising unrealised losses on assets whose value has fallen - in this case, bonds and other fixed interest securities that fell in value as the Federal Reserve boosted interest rates in the past year.
For some, unexplained reason SVB and its advisers forgot the potential damage that selling underwater bonds at whacking great losses (in this case, $US1.8 billion) could have on investor and depositor confidence.
In the case of SVB the loss of confidence was so dramatic that it forced depositors to withdraw $US42 billion in a day and push the bank into the hands of regulators, which then got investors looking at companies holding bonds and other securities with unrealised losses.
But it’s not just commercial banks, real estate trusts, investment funds and other groups with potential losses - unrealised or realised. The surge in inflation after the Russian invasion of Ukraine and the subsequent rate rises, led by the Fed, has triggered massive unrealised losses among the top tier of banks - the central banks.
And while the Fed’s losses are huge, the most astonishing has been the massive blob of red ink all over the most conservative central bank of them all: the Swiss National Bank (or SNB).
Last week saw final confirmation that 2022 was the most disastrous year in its 115-year history with a loss of more than $US141 billion ($A207 billion).
The loss in local currency was 132.5 billion Swiss francs which was in line with the provisional calculations announced in January.
All the damage happened in the first nine months of the year when the loss was just over 142 billion francs. The bank just bumbled along for the final three months of the year, carrying this enormous weight which is nearly 18% of Switzerland’s GDP.
The culprits? The dramatic selloff in stockmarkets and rise in bond yields in major markets which reduced the value of the bank’s local and offshore investments.
On top of this, the rise in the value of the Swiss franc (it's a safe haven currency in times of stress, which once again proved to be a curse after the Russian invasion of Ukraine more than a year ago) cut returns from the SNB's foreign currency denominated investments when they were converted back into francs from other currencies.
The loss followed a profit of 26 billion francs in 2021, means there will be no payment by the SNB to the Swiss central or regional governments or dividend to investors for only the second time since it was established in 1907.
The bank indicated that most of 2022’s loss could be attributed to the 131.5 billion francs lost on foreign currency positions, with its bond holdings losing 72 billion francs in value and the value of its share portfolio fell 41 billion francs.
The SNB has a massive balance sheet of nearly 900 billion francs (more than $A1.4 trillion) as a result of buying foreign currencies as it has tried to stop the franc from appreciating to a point where its high value would cripple Swiss economic activity and society.
The impact of the loss was more dramatic than such as large amount seems. It more than wiped out the SNB's distribution reserve of 102.5 billion francs, meaning the central bank posted a net loss of 39.5 billion francs after using up the provision.
SNB said its gold holdings at December 31 stood at an unchanged 1,040 tonnes.
The SNB can’t go bankrupt because of its ability to create money (like the Reserve Bank here).
Other national banks are sitting on losses, including the central banks of Australia, Belgium, Canada, England and Japan. The European Central Bank is also warning of losses.
The RBA revealed an accounting loss of $A36.7 billion for the 2021-22 financial year. That was due to unrealised losses on bond holdings because of the rise in interest rates by the central bank.
The further rate rises since July 1 look like pushing the RBA to another big loss for the year to June 30 this year. There have been 8 rate rises so far in 2022-23.
The US Federal Reserve reported unrealised losses of $US330 billion in the first quarter of 2022. These losses will remain unrealised until interest rates and currency values normalise and the various securities mature.
These are marked-to-market paper losses, unlike SVB which chose to make its paper losses real and paid the price. But central banks like the SNB, RBA and the Fed can survive.