Swiss National Bank

The Swiss National Bank (SNB) is an independent central bank that is bound by the nation’s Constitution to serve in the best interests of the country. The Constitution requires the Bank to ensure price stability and to provide a climate that promotes economic growth.

Origins of the Swiss National Bank

The Swiss National Bank was created by the Federal Act on the Swiss National Bank of 1906. The objectives and obligations of the SNB were further clarified by the National Bank Act implemented in 2003.

Swiss National Bank Ownership

The Swiss National Bank is listed on the Swiss Exchange (SWX) and is publically-owned, but shares are held mostly by Swiss banks. The share float is limited to 100,000 shares and each share is nominally valued at 250 CHF, for a total market value of 25 million CHF.^[1] As a joint-stock company, dividends are paid to shareholders but total dividend pay-outs must not exceed 6% of net SNB profits. In addition to the paying of dividends, the SNB must also divide two-thirds of all profits to the Cantons that comprise the Swiss confederation.

Cantons are much like States in the U.S. or Provinces in Canada – originally sovereign states unto themselves – the Cantons assembled together in a Confederation of member-states to form the country of Switzerland. There are twenty-six cantons in Switzerland, and the Swiss Constitution states that all matters falling outside the purvey of the Confederation are, by default, considered to be matters adjudicated by the individual Cantons.

Swiss National Bank Independence

The independence of the Swiss National Bank from matters of the state are guaranteed in the Swiss Constitution as well as in the founding National Bank Act. Essentially, the Constitution protects the SNB from undue political pressure and prohibits the Bank from taking direction from government bodies including the Federal Council. The financial independence afforded the SNB extends to its operational budget as well as oversight and exclusive control over the nation’s money supply. The Constitution also prevents the SNB from providing loans to the government.^[2]

In order to protect the members of the Governing Council, principals serve a fixed-term at the Bank and can only be stripped of their office if they have committed a serious offence. In other words, the government cannot simply remove a member of the Governing Council for not following the its wishes. The use of fixed-term appointments is a common approach employed by most central banks and governments to contribute to central bank independence.

Swiss National Bank Accountability

Despite these assurances of independence however, this is not to suggest a lack of accountability. The SNB is required to provide regular updates on the status of the nation’s economy to the Federal Council. The SNB also produces an annual report for the Federal Assembly with emphasis on the current monetary policy as well as progress with respect to mandated economic goals.

Mandate for Switzerland’s Central Bank

The mandate for the Swiss National Bank consists of a series of economic goals. The following table lists these primary goals together with an outline of the expected targets:^[3]

Financial System Stability

In addition to the specific tasks and goals listed in the table, the Swiss National Bank has the daunting responsibility of ensuring stability for the Swiss financial system. As stated in its mandate, the SNB is required to operate in a manner that best serves the interests of the country with price stability used as the primary approach to meet this goal.

In order to provide price stability, the SNB functions in cooperation with the Swiss Federal Banking Commission (SFBC). The SFBC is a government body working under the authority of the Confederation but operates independently of central government administration.^[4] A Memo of Understanding provides clear delineation of duties between the two bodies.

Overview of the Swiss Parliamentary System

It is necessary to understand the basic organization of the Swiss system of government before undertaking a discussion on how the accountability of the Swiss National Bank is structured. Please note that this is not intended to be an exhaustive examination of the Swiss political system; it is presented here simply to help you recognize the administrative bodies in order to better understand how the SNB remains accountable to government and, ultimately, the people of Switzerland.

To begin, the Federal Assembly is the equivalent of the Swiss parliament and consists of two elected bodies:

• National Council – The National Council contains 200 members which are elected by the citizens. Each Canton (equivalent to a province or state) sends their elected officials to the National Council and the number of seats is based on the population of the Canton.

• Council of States – There are 46 councilors elected to the Council of States. Each Canton sends either one or two councilors for their region.

The Federal Council> is the highest governing body in the Swiss federation and consists of seven members elected from the Federal Assembly. Each member of the Federal Council oversees one of the seven federal departments that administer the Swiss system of government. A member of the Federal Council is similar in responsibility as a Minister in the British and Canadian parliaments or a Secretary in the U.S. Cabinet.

Swiss National Bank Accountability

Federal Council

The Swiss National Bank meets regularly with the Federal Council to ensure that the senior government body is fully apprised of the progress and actions of the Bank.

Federal Assembly

For the larger Federal Assembly, the Swiss National Bank must produce an annual report that evaluates the progress the SNB has made with regards to meeting its monetary objectives.

Public Updates

The Swiss National Bank is also required to produce status reports that are made available to the public. Each quarter, the SNB is required to produce a report that encapsulates the economy and the actions of the SNB for the preceding quarter. This report also includes the Bank’s monetary policy for the next quarter.

Swiss National Bank’s Governing Structure

The Swiss National Bank maintains two primary offices located in Berne and Zurich. Cash distribution facilities are located in Geneva and regional offices are maintained in Basel, Lausanne, Lugano, Lucerne, and St. Gallen.

Bank Council

The first of these organizations – the Bank Council – consists of eleven members, with six of these appointed by the Federal Council, including the Bank President and Vice President. The other five members of the Bank Council are elected at the annual shareholder’s meeting.

Governing Board

The Governing Board is the senior level of management for the Swiss National Bank. It holds complete responsibility for guiding the monetary policy for the Bank as well as overall strategic planning. The Federal Council appoints members to the Governing Board for six-year terms and members may be re-appointed at the end of their term.

Additional Operational Divisions

The Swiss National Bank is separated into three departments referred to simply as Department I, Department II, and Department III, with Departments I and III located in Zurich and Department II in Berne. Each department has specific areas of responsibilities:

• Department I – International, Economic, Legal and Administration, Human Resources, and Communications

• Department II – Cash and Finance, Financial Stability Oversight, and Security

• Department III – Money Market and Foreign Exchange, Asset Management, Risk Management, Banking Operations, and Information Technology

As of January1, 2007, the Swiss National Bank employed approximately 530 staff members in its various operations.

How the Swiss National Bank Implements Monetary Policy

The Swiss National Bank pursues a monetary policy consisting of three critical components:

1. Definition of acceptable price stability targets

2. Use of an inflation forecast to determine monetary policy decisions

3. Use of the 3-month LIBOR as a target for interest rate setting

Price Stability Target and Measurement

Unlike those jurisdictions that pursue an inflation target as the means to measure the success of the monetary policy, the Swiss National Bank defines price stability as its primary requirement. In order to measure price stability, the SNB has adopted a target based on the Consumer Price Index (CPI) to monitor how effectively the Bank is meeting its objectives. In this case, the Bank’s mandate is to limit year-to-year increases in the CPI to 2% or less each year.^[5]

Inflation Forecasting

Even though the SNB does not have a defined inflation target, it does use inflation as an indicator of future economic conditions. Specifically, it considers a medium-term projection of inflation expectations and uses this information to help define the most appropriate monetary policy adjustments required to meet its CPI objectives.

Based on inflation estimates, the Bank can determine if a policy of expansion or contraction is the best approach to keep CPI in the acceptable range. Note that even though the SNB may consider inflation projections, it has no mandate or responsibility to achieve a specific inflation target – for the Swiss National Bank, only the Consumer Price Index goal is a mandated requirement.

Interest Rate Setting

The Swiss National Bank uses its ability to influence interest rates to implement its monetary policy. This is very similar to the approach of other central banks including the Federal Reserve and the Bank of England that also use open market facilities to influence interest rates.

However, the SNB does differ from theses institutions in that it does not set any interest rates directly. While the Fed and the Bank of England are active in open market operations for their respective economies, the Fed does dictate the interest rate for the Discount Window program while the Bank of England establishes the rate at which it lends short-term funds to the commercial banks.

In both cases, the setting of these trend-setting rates sends a message to the markets, and inter-bank and commercial rates are soon adjusted accordingly. By contrast, the Swiss National Bank relies entirely on open market operations to manage the Swiss franc on the international currency markets and the forces of supply and demand determine the value of the franc on the forex markets.

This was not always the way in which the Bank implemented its monetary policy. Beginning in 1999, the SNB determined that it required greater flexibility to deal with economic changes without having to publically alter its monetary policy to react to changing economic conditions.^[6] It was at this time that the SNB adopted the 3-Month LIBOR as its benchmark for the setting of interest rates for the Swiss financial system. LIBOR – the London Inter-Bank Offered Rate – is the interest rate that funds are transacted in the London interbank market. The three-month projection provides the SNB with sufficient time to influence the current spot rate for the franc by buying and selling repo transactions to control the availability of the franc on the open market.

Using Bank Reserve Levels to Control Liquidity

In addition to controlling liquidity in the Swiss financial system through repo transactions, the SNB can also affect liquidity by mandating the amount that commercial banks must hold in the form of reserves. These reserves can be held as Swiss franc coins, banknotes, or sight deposits.^[7]

The Bank sets requirements for the value of these reserves based on a percentage of the holdings of each commercial bank. The maximum reserve amount that the Bank can impose is 4% of total holdings.

Related Links

Monetary Policy and the Role of the Central Bank

2008 Meeting Schedule - Swiss National Bank Governing Board

References

1. ↑ Swiss National Bank website
2. ↑ Swiss National Bank website
3. ↑ Swiss National Bank website
4. ↑ Swiss Federal Banking Commission
5. ↑ Swiss National Bank website
6. ↑ Swiss National Bank website
7. ↑ Sight deposits – funds which can be transferred between various accounts immediately and with no restrictions. These deposits can also be easily converted to cash.