The Swiss National Bank (SNB) concluded the first half of the year with a substantial profit of nearly 57 billion francs, despite a loss of  2 billion francs in the second quarter. To properly understand this interim result, three points must be considered.

1. Financial Success and Market Conditions: The financial success of the SNB largely depends on the performance of stock markets, interest rates, the exchange rate of the Swiss franc, and the gold price. For example, the «profit from foreign currency positions» of  49 billion francs in the first half-year is attributed to the weaker franc (30 billion francs), the stock market boom (20 billion francs), interest earnings (6 billion francs), and dividends (2 billion francs). However, due to interest rate developments (higher long-term yields), bonds recorded a valuation loss of nearly 7 billion francs.
2. Impact of Small Price Changes: Even small percentage changes in prices result in large absolute amounts. The SNB's balance sheet total is enormous and grew by another 28 billion francs in the first half of the year to 823 billion francs, exceeding the annual value creation of the entire Swiss economy. On the asset side, foreign currency investments dominate with 731 billion francs, followed by gold as the second most important position with 70 billion francs. It's worth noting that the SNB is reluctant to comment on future balance sheet totals, a topic previously covered by finews.ch.
3. Financial Success vs. Mandate: The financial success says little about how well the SNB fulfills its mandate to ensure price stability. However, the size and composition of the balance sheet reflect how the SNB has implemented its monetary policy. Today's mountain of foreign currency investments is a legacy of repeated foreign exchange market interventions to curb the appreciation of the franc and ensure adequate monetary conditions. Whether such extensive foreign exchange purchases were truly necessary is another question.

Decline in Interest Income for Banks

What is less significant than the «profit from foreign currency positions» is the «profit from franc positions,» which was negative  4.5 billion francs in the first half of the year. However, this item also hides developments of great interest to banks.

Before the 2008 financial crisis, liquidity in the money market was generally scarce; the SNB provided banks with money through repo transactions for a fee, meaning it earned from implementing monetary policy, and banks paid for it.

Excess Liquidity in the System

Today, due to foreign exchange purchases financed with newly created francs, there is still a lot of liquidity in the system. Domestic banks hold 436 billion francs in sight deposits with the SNB, the largest item on the liability side of the central bank's balance sheet. To enforce the policy rate in the money market under such conditions, the SNB must bind or absorb excess liquidity, which incurs costs.

To do this, it pays interest on sight deposits and absorbs liquidity through its own debt securities (SNB Bills) and repo transactions. In the first half of the year, the corresponding expenses were  3.6 billion francs, 520 million francs, and  537 million francs. The interest on sight deposits goes directly to the banks, enhancing their interest income.

National Bank Reduces Interest Burden

Despite this, many banks' interest income in the first half of the year was lower than the previous year because the SNB unexpectedly lowered its policy rate in March and then again in June. Those who had positioned themselves for higher rates incurred losses. Moreover, bank customers have become more selective and no longer accept the long-standing practice of non-interest-bearing deposits.

Monetary policy has directly influenced the interest rates on sight deposits, with the policy rate serving as the benchmark. In the second half of 2023, banks were still able to collect 4.1 billion francs from the SNB.

Additionally, the SNB reduced its interest burden further in the spring by adjusting the minimum reserve requirement. The interest windfall for banks is thus a thing of the past.