In essence, nothing much changed in respect to monetary policy and the Swiss National Bank (SNB) in 2019: The key interest rate remained at minus 0.75 percent, the same as in almost five years. The franc appreciated just short of 4 percent against the euro, a rise but not a dramatic one. And inflation is far off the 2 percent maximum set by the SNB – price stability being the key measure for policy makers apart from the valuation of the franc.

And yet, it’s been a while since the feathers were ruffled quite as much as in 2019. The debate about negative interest in Switzerland reached an intensity rarely witnessed in such matters – with the SNB becoming something of a bogeyman.

Swiss Banking Up in Arms

To recap: The SNB in January 2015 lifted the minimum rate for the franc against the euro and at the same time lowered the key interest rate by half a percentage point to minus 0.75 percent. Negative interest and interventions in the currency market had and still have the sole aim of preventing the franc from appreciating further.

Positions about this policy are deeply entrenched. Representatives of the Swiss banking industry (with the bankers’ association taking the lead) and pension funds claim that negative interest doesn’t do much good. The costs that arise for their industry cannot be justified with the benefit in any case.

And So the Discussion Moves on...

The SNB evidently disagrees and argues that the franc would rise rapidly if it were to remove negative interest and thus lift the Swiss key rate above the rate applied by the European Central Bank (ECB). Some banks, the trade unions and, first and foremost, the export industry are firmly behind the SNB on this.

As there can only be one winner from this discussion, the war of words has moved on somewhat. The opponents of negative interest are less-than-keen on having to pay a penalty on cash holdings – which generates about 2 billion francs for the SNB a year.

«Unholy Alliance» Backs Popular Bid

As more and more banks lowered the threshold over which their clients are asked to pay for their cash assets, the issue became more pressing and public in 2019. An unofficial alliance between trade unions and some representatives of the Swiss People’s Party now wants that money to be given straight to the state pension fund, which is chronically stretched.

The newly elected parliament will likely discuss the demand in 2020. Even though the SNB enjoys strong support among the political elite in Bern, the bid may prove popular, given that it wouldn’t do much lasting damage to the SNB and still alleviate the plight of the state pension fund.

Money for Nothing?

Deciding about the distribution of the SNB’s profits is another issue for 2020, not so dissimilar to the above-mentioned point of course. With its massive interventions in the currency markets in recent years, the SNB built up a substantial portfolio of assets denominated in foreign currency. It holds more than 150 billion francs in foreign equities, making it one of the world’s major investors. As share prices have risen, so have unrealized profits of the bank.

They have whet the appetite in many circles (Swiss state fund), even though there’s no way that the bank can divest those assets without hampering its own monetary policy. Selling foreign shares and buying Swiss francs with the proceeds would boost the value of the franc. The trade union federation with its new boss, Pierre-Yves Maillard, have made it plain that a sizeable proportion of the gains – money currently held in the so-called distribution reserve – should be handed over to the state pension fund.

Need to Explain

For sure, the profit the SNB generated in 2019 will likely be enormous, not least thanks to rising gold prices and, primarily, the surge in stock markets. The bank reported a profit of 51.5 billion francs for the first nine months of the year alone, and shares have rallied further since the end of September.

The SNB would do well not to underestimate popular sentiment and rely solely on a parliamentary majority to bat away the demands. And it doesn’t, with public appearances by the three directors, Thomas Jordan, Andréa Maechler and Fritz Zurbruegg a display of its willingness to explain the bank’s policy on interest, the currency and the distribution of profits generated.

The distribution of profit will soon be on the table as the agreement between the finance ministry and the SNB only covers one more year.

More Ecology in Asset Allocation?

The third area of contention is asset allocation. The SNB doesn’t want to be drawn into making politics by applying new stringent standards for companies it invests in. It doesn’t want to exclude companies from its portfolios that are engaged in oil and coal. The bank says it isn’t allowed to pursue a strategic economic policy and needs to ensure a high degree of liquidity for the purpose of monetary policy.

But of course, the SNB is faced with a greener parliament. While it is the centrist parties that hold the balance of power, the elections have provided a clear mandate for the government to follow ecological standards. But the main problem of the bank is the slightly skewed logic it uses for explaining its unwillingness to become more stringent in the asset allocation.

More Intense Discussion Are Guaranteed

The SNB is engaging in negative stock-picking already, as it identifies and excludes companies from its portfolios that make banned weapons or systematically cause severe environmental damage. This is a normative restriction and such restrictions could be tightened of course, despite protestations to the contrary.

In 2020, the SNB isn’t simply looking back over five years with the same (negative) interest rate. It also faces delicate discussions about asset allocation, distribution of profits and the penalties it receives for cash holdings.